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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-14120
ADVANTA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 23-1462070
(STATE OR OTHER JURISDICTION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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WELSH & MCKEAN ROADS, P. O. BOX 844,
SPRING HOUSE, PENNSYLVANIA 19477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE N/A
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
CLASS B COMMON STOCK, $.01 PAR VALUE
6 3/4% CONVERTIBLE CLASS B PREFERRED STOCK, SERIES 1995
(STOCK APPRECIATION INCOME LINKED SECURITIES (SAILS)(SM))
CLASS A RIGHT
CLASS B RIGHT
(TITLE OF EACH CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
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State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.)
$184,643,718 as of March 13, 1998 which amount excludes the value of all
shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the Company (however, this
does not constitute a representation or acknowledgment that any of such
individuals is an affiliate of the Registrant).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 13, 1998 there were 10,367,772 shares of the Registrant's Class
A Common Stock, $.01 par value, outstanding and 14,639,344 shares of the
Registrant's Class B Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(e) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
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DOCUMENT FORM 10-K REFERENCE
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Definitive Proxy Statement relating to the Registrant's 1998 Part III, Items 10-13
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A not later than 120 days following the end of
the Registrant's last fiscal year, and referred to herein as
the "Proxy Statement".
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. (the "Company," the "Registrant" or "Advanta") serves consumers
and small businesses through innovative products and services via direct and
indirect, cost effective delivery systems. In 1997, the Company primarily
originated and serviced credit cards, mortgages, small-ticket equipment leases,
auto loans, credit insurance and deposit products. The Company utilizes customer
information attributes including credit assessments, usage patterns, and other
characteristics enhanced by proprietary information to match customer profiles
with appropriate products. At year-end 1997 managed assets totaled $21.1 billion
and an additional $9.2 billion in assets were serviced for third parties.
On February 20, 1998, Advanta and certain of its direct and indirect
subsidiaries contributed substantially all of the assets of its consumer credit
card business to a newly formed Rhode Island limited liability company (the
"LLC") controlled by Fleet Financial Group, Inc. ("Fleet"). In the transaction
(the "Transaction"), completed under the terms of a Contribution Agreement
between Advanta and Fleet (the "Contribution Agreement") dated as of October 28,
1997, each of Advanta and certain of its direct and indirect subsidiaries and
Fleet and certain of its direct and indirect subsidiaries contributed
substantially all of the assets of their respective consumer credit card
businesses, subject to liabilities, to the LLC. Advanta acquired a minority
interest of 4.99% in the LLC. Following the Transaction, Advanta continues to
operate its mortgage, business services and insurance businesses, including its
depository institutions Advanta National Bank ("ANB") and Advanta Financial
Corp. ("AFC"). In addition, Advanta retained certain immaterial assets of its
consumer credit card business which are not required in the operation of such
business and certain liabilities related to its consumer credit card business,
including, among others, all reserves relating to its credit insurance business
and any liability or obligation relating to certain consumer credit card
accounts generated in specific programs which comprise a very small portion of
the Company's consumer credit card receivables. Subsequent to the consummation
of the Transaction, certain interim services are being provided by each of
Advanta and Fleet to the other in accordance with the terms of the Contribution
Agreement.
The Company was incorporated in Delaware in 1974 as Teachers Service
Organization, Inc., the successor to a business originally founded in 1951. In
January 1988, the Company's name was changed from TSO Financial Corp. to Advanta
Corp. The Company's principal executive office is located at Welsh & McKean
Roads, P. O. Box 844, Spring House, Pennsylvania 19477-0844. The Company's
telephone number at its principal executive office is (215) 657-4000. References
to the Company in this Report include its consolidated subsidiaries unless the
context otherwise requires.
ADVANTA PERSONAL FINANCE SERVICES
Advanta Personal Finance Services, a business unit of Advanta ("Advanta
Mortgage" or "personal finance"), capitalizes on numerous niche opportunities
primarily in the home equity industry by offering a broad range of services to
consumers, brokers and other originators of home equity loans throughout the
country. Advanta Mortgage originates, purchases, securitizes, and services
non-conforming credit first and second lien home equity loans, and home equity
lines of credit, directly through subsidiaries of Advanta, including ANB and
Advanta Mortgage Corp. USA. Loan production is generated through multiple
distribution channels. Home equity loans and home equity lines of credit are
originated directly from consumers using targeted direct mail and direct
response television techniques, and through a branch office system ("Advanta
Finance") of 56 branches throughout the country. First and second mortgage loans
are also originated through a broker network, correspondent relationships and
purchases from other financial institutions. In 1997, loans originated and
purchased by Advanta Mortgage amounted to $3.7 billion compared to $1.5 billion
in 1996.
In November 1996, Advanta Mortgage established its Corporate Finance
Services business to capitalize on new opportunities in the growing mortgage
industry. Corporate Finance Services solicits third-party originators who
believe it is more cost efficient to participate in securitizations sponsored by
Advanta Mortgage and such third-party originators receive an interest in the
Company sponsored securitizations. The
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Corporate Finance Services business has experienced significant growth in 1997.
Purchases of loans by this business, which totaled $40 million in 1996, totaled
$1.1 billion in 1997.
In addition to servicing and managing the loans it originates, Advanta
Mortgage contracts with third parties to service their home equity loans on a
sub-servicing basis. Advanta Mortgage's portfolio of third party loans serviced
for a fee totaled $9.2 billion at year-end 1997, an increase of $5.5 billion
from year-end 1996. The Company has experienced significant growth in this
portfolio over the past two years as a result of its favorable reputation in the
nonconforming mortgage market and anticipates continued expansion of its market
presence. The Company bears no credit risk on this portfolio. Subserviced loans
are not included in the Company's managed portfolio.
Advanta Mortgage generally funds the loans it originates and purchases
through sales or securitizations which have been structured to qualify as real
estate mortgage investment conduits ("REMICs") under the Internal Revenue Code.
In a securitization, Advanta Mortgage typically sells receivables to a trust for
cash while retaining an interest in the loans securitized. The cash purchase
price is generated through an offering of pass-through certificates by the
trust. The purchasers of the pass-through certificates are generally entitled to
the principal and a portion of the interest collected on the underlying loans
while Advanta Mortgage retains the servicing and an interest-only strip. The
retained interest-only strip represents the remaining interest collected from
the borrowers on the underlying loans after the payment of pass-through interest
to the certificate holders and the payment of a servicing fee to the Company in
its role as servicer and is partially offset by the estimated fair value of the
Company's recourse obligation for anticipated charge-offs. During 1997, Advanta
Mortgage securitized $3.4 billion of loans compared to $1.4 billion in 1996.
The cash flows from the interest-only strips are received over the life of
the loans. However, in accordance with generally accepted accounting principles
("GAAP"), Advanta Mortgage recognizes a gain at the time of the sale equal to
the excess of the fair value of the assets obtained, principally cash, over the
allocated cost of the assets sold and transaction costs. Other basic sources of
income to Advanta Mortgage are net interest income on loans outstanding pending
their sale and loan servicing income, including subservicing of loans which are
never owned by the Company. (See Note 1 to Consolidated Financial Statements.)
Advanta Mortgage's managed portfolio of receivables includes owned loans
(generally held for sale) and the loans it services in which it retains an
interest-only strip. At December 31, 1997, owned personal finance loans
receivable totaled $478 million while total managed receivables were $5.3
billion. In contrast to the subserviced loans described above, the performance
of the managed portfolio, including loans sold by the Company, can materially
impact ongoing income from personal finance activities. See Note 1 to
Consolidated Financial Statements. At December 31, 1997, the total serviced
portfolio, including the "subserviced" portfolio, was $14.5 billion compared to
$6.4 billion at December 31, 1996.
Approximately 92% of the managed portfolio is secured by first lien
position loans and the balance is secured by second lien position loans.
Approximately 63% of the managed portfolio is comprised of fixed rate loans
while the remainder represents adjustable rate loans and intermediate rate loans
which bear interest at a fixed rate for a period of two to three years and an
adjustable rate thereafter. At December 31, 1997, total
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personal finance loans managed, and the nonperforming loans included in these
totals, are concentrated in the following five states:
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PERCENT OF
PERSONAL PERCENT OF PERCENT OF NONPERFORMING
FINANCE TOTAL PORTFOLIO BY NONPERFORMING TO TOTAL
($ IN MILLIONS) LOANS NONPERFORMING STATE BY STATE LOANS
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<S> <C> <C> <C> <C> <C>
California $ 739.1 $ 26.3 13.9% 14.6% 0.5%
New York 383.4 15.3 7.2 8.5 0.3
Maryland 326.6 10.2 6.2 5.6 0.2
New Jersey 326.4 12.6 6.2 7.0 0.2
Pennsylvania 292.5 12.2 5.5 6.8 0.2
Other 3,240.8 103.7 61.0 57.5 2.0
-------- ------ ----- ----- ---
TOTAL $5,308.8 $180.3 100.0% 100.0% 3.4%
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</TABLE>
Geographic concentration carries a risk of increased delinquency and/or
loss if a specific area suffers an economic downturn. Advanta Mortgage monitors
economic conditions in those regions through market and trend analyses. A Credit
Policy Committee meets throughout the year to update lending policies based on
the results of analyses, which may include abandoning lending activities in
economically unstable areas of the country. The Company believes that the
concentrations of nonperforming loans reflected in the preceding table are not
necessarily reflective of general economic conditions in each region, but rather
reflect the credit risk inherent in the different grades of loans originated in
each area. The interest rate charged and the maximum loan-to-value ratio
permitted with respect to each grade of loans are adjusted to compensate for the
credit risk inherent in the loan grade.
Advanta Mortgage also engages in the indirect financing of automotive
purchases by consumers in the near-prime market, which are those consumers who
have experienced credit problems, are attempting to re-establish credit, may not
yet have sufficient credit history or do not wish to deal with traditional
sources of financing. Auto finance contracts are purchased from correspondent
originators on a flow basis or in bulk purchases. In 1996 and 1997, auto loans
purchased amounted to $104 million and $195 million, respectively.
In 1997, approximately 21% of the Company's total revenues net of provision
for credit losses were derived from Advanta Mortgage.
ADVANTA BUSINESS SERVICES
Advanta Business Services, a business unit of Advanta ("ABS" or "business loans
and leases"), offers flexible lease financing programs on small-ticket equipment
and corporate credit cards to small businesses. ABS is one of the nation's
leading providers of these products to small businesses.
The commercial equipment leasing business is generated primarily through
third party referrals from manufacturers or distributors of equipment as well as
independent brokers. Most contact with these referral sources is made from the
Company's ABS headquarters in Voorhees, New Jersey, using extensive direct
marketing operations. These operations include a staff of telephone sales
representatives who are assigned to specific industries, and are backed by the
Company's direct mail marketing program. Additional business is also generated
from direct contact with customers through these same channels.
The primary markets of the leasing business include office machinery,
security systems and computers. ABS has also expanded its presence into
additional market segments. The most significant of these are leasing programs
for certain industrial and agricultural equipment and programs for leasing
equipment to agencies of state and local governments. Additionally, ABS has
expanded its National Accounts program which seeks referral business from larger
distributors and manufacturers. Managed lease receivables at December 31, 1997
totaled approximately $595 million, an increase of approximately $75 million
from year end 1996.
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The business-purpose credit card operation grew from approximately 79,000
accounts with balances of $306 million in 1996 to approximately 170,000 accounts
with balances of $663 million as of December 31, 1997. Direct marketing
techniques, primarily direct mail to prospective customers, are the source of
new accounts. This marketing program is the result of extensive and ongoing
testing of various campaigns, with success of each campaign measured by both the
cost of acquisition of new business, and the credit performance of the resulting
business. The "Advanta Business Card" is marketed by ABS and issued by its
affiliate, AFC. (See "Government Regulation -- Advanta Financial Corp.")
ADVANTA INSURANCE COMPANIES
Advanta's insurance subsidiaries ("Advanta Insurance") make available, through
unaffiliated insurance carriers, specialty credit related insurance products and
services to Advanta's existing customer base. The focus of these products is on
the customers' ability to repay their debt in the event of certain
circumstances. These products include a combined credit life, disability and
unemployment program, an accidental death program and equipment insurance.
Enrollment in these programs is achieved through Advanta's direct mail or
telemarketing distribution channels. In consideration, the lending subsidiary of
Advanta that extends the loan to Advanta's customers receives as an expense
reimbursement, a percentage of insurance premiums collected by the unaffiliated
insurance carriers.
In addition, ANB (and its predecessors by merger) makes available to the
consumer credit card customers of APPS in certain states the option to purchase
debt cancellation products called Credit Protection Plus(R) and Credit
Protector(R). ANB (and its predecessors by merger) has purchased from Advanta
Insurance insurance protection against excess losses, as defined, incurred from
providing these services.
In certain circumstances, Advanta Insurance reinsures all or a portion of
certain risks associated with these products or services. Advanta Insurance's
reinsurance agreements provide for a proportional quota share of 100% of these
risks from the insurance carriers. In consideration for assumption of these
risks, Advanta Insurance receives reinsurance premiums equal to 100% of the net
premiums collected by the insurance carriers, less a ceding fee as defined by
the reinsurance treaties, and all acquisition expenses, premium taxes and loss
payments made by the carriers on these risks. Under the terms of certain
reinsurance agreements Advanta Insurance is either obligated to maintain in
trust for the benefit of an insurance carrier an amount equal to 100% of the
unearned premiums and all statutory reserves for future incurred loss payments.
Advanta Insurance has entered into an aggregate excess of loss reinsurance
treaty for its accidental death risks with an unaffiliated insurance carrier.
Under the terms of the treaty, losses in excess of a specified percentage of
earned premium levels will be reimbursed by the insurance carrier. In addition,
the treaty provides for certain experience refunds.
In connection with the contribution of Advanta's consumer credit card
business to the LLC, all of ANB's credit card customer relationships underlying
the insurance risks reinsured by Advanta Insurance were transferred to Fleet or
its subsidiaries. Following the closing under the Contribution Agreement on
February 20, 1998, Advanta Insurance no longer reinsures these insurance risks
and will not recognize any reinsurance revenues as provided under the
reinsurance agreements. Advanta Insurance is, however, responsible to reimburse
the unaffiliated insurance carriers for losses paid and maintain loss reserves
on losses incurred on risks assumed on or prior to February 20, 1998.
Additionally, following the Transaction with Fleet, ANB is responsible for
customers who request activation of their debt cancellation agreements for
events covered under these agreements occurring on or prior to February 20,
1998. ANB is responsible for all reserves for expenses related to these future
activations. Following the contribution of Advanta's consumer credit card
business to the LLC, Advanta Insurance continues to make its insurance products
available to the Company's personal finance and business loan and leasing
customers. However, a significant portion of Advanta Insurance's total revenues
in 1997 were derived from the sale of its combined insurance product and
services to consumer credit card customers of APPS.
Pursuant to a strategic alliance formed in 1996 with Progressive Casualty
Insurance Company ("Progressive"), Advanta Insurance is direct marketing
Progressive's automobile insurance policies nationwide. Advanta Insurance and
Progressive also entered into a quota share reinsurance agreement that provides
that
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Advanta's insurance subsidiary assumes 50% of all risks on automobile policies
written by Progressive under the insurance programs being jointly marketed.
Generally, automobile policies underwritten by Progressive provide for
automobile liability protection up to $500,000 and automobile physical damage
protection up to $100,000 as defined under specific policy and customer
requirements.
ADVANTA PARTNERS
Advanta Partners LP ("Advanta Partners") is a private venture capital equity
investment firm formed in 1994. The firm focuses primarily on growth capital
financings, restructurings and management buyouts in the financial services and
information services industries. The investment objective of Advanta Partners is
to earn attractive returns by building the long-term values of the businesses in
which it invests. Advanta Partners combines transaction expertise, management
skills and a broad contact base with strong industry-specific knowledge which is
further enhanced by its relationship with the Company.
ADVANTA PERSONAL PAYMENT SERVICES
Prior to the contribution of substantially all of the assets of the Company's
consumer credit card business to the LLC, the Company offered consumer credit
cards through Advanta Personal Payment Services, a business unit of Advanta
("APPS" or "consumer credit cards"). The Company, which had been in the credit
card business since 1983, issued gold (i.e., premium) and standard
MasterCard(R)* and VISA(R)* credit cards nationwide. APPS had built a
substantial cardholder base which, as of December 31, 1997, totaled 5.9 million
accounts and $11.2 billion in managed receivables. The primary method of account
acquisition was direct mail solicitation and APPS generally used credit scoring
by independent third parties and proprietary market segmentation and targeting
models to target its mailings to profitable segments of the market.
In 1982, the Company acquired Colonial National Bank USA, the name of which
was changed to Advanta National Bank USA ("AUS") in May 1996. In 1995, the
Company chartered Advanta National Bank ("Old ANB") to complement the credit
card activities of AUS. Old ANB was a limited purpose national bank known as a
"credit card bank" and its lending activities were limited to consumer credit
card lending. See "Government Regulation -- Advanta National Bank." Effective
June 30, 1997, Old ANB was merged into AUS and AUS was renamed Advanta National
Bank (previously defined herein as ANB). As national banks, AUS and Old ANB, and
now ANB, have had the ability to make loans to consumers without many of the
restrictions found in various state usury and licensing laws, to negotiate
variable rate loans, to generate funds economically in the form of deposits
insured by the Federal Deposit Insurance Corporation ("FDIC"), and to include in
their product mix both MasterCard and VISA credit card programs.
MasterCard and VISA license banks, such as ANB and other financial
institutions, to issue credit cards using their trademarks and to utilize their
interchange networks. Cardholders may use their cards to make purchases at
participating merchants or to obtain cash advances at participating financial
institutions. Cardholders may also use special credit line drafts issued by the
banks to draw against their VISA or MasterCard credit lines for cash, purchases
or balance transfers. Each credit card transaction is submitted to a merchant
bank which remits to the merchant the purchase amount less a merchant discount
fee, and submits the purchase to the card issuing bank for payment through the
appropriate settlement system. The card issuing bank receives an interchange fee
as compensation for the funding and credit and fraud risk that it takes when its
customers use its credit card. MasterCard or VISA sets the interchange fee as a
percentage of each card transaction (averaging approximately 1.4% in 1997).
APPS generated interest and other income from its credit card business
through finance charges assessed on outstanding loans, interchange income, cash
advance and other credit card fees, and securitization income as described
below. Credit card income also included fees paid by credit card customers for
product enhancements they selected, and revenues paid to ANB (and its
predecessors by merger) by third parties for the right to market their products
to the APPS credit card customers.
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* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.; VISA(R) is a federally registered servicemark of VISA,
U.S.A., Inc.
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Most of such MasterCard and VISA credit cards carried no annual fee, and
those credit cards which included an annual fee generally had lower fees than
those charged by many of APPS' competitors. The interest rates on the majority
of APPS' credit card receivables were variable, tied either to the prime rate or
the London interbank offered rate ("LIBOR"). This variable rate structure helped
APPS maintain net interest margins in both rising and declining interest rate
environments.
The following table shows the geographic distribution by state of total
managed consumer credit card receivables among the top five states, together
with the impaired credit card receivables in those states as of December 31,
1997:
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CONSUMER PERCENT OF PERCENT OF PERCENT OF
CREDIT TOTAL TOTAL IMPAIRED
CARD TOTAL PORTFOLIO IMPAIRED TO TOTAL
($ IN MILLIONS) RECEIVABLES IMPAIRED BY STATE BY STATE RECEIVABLES
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<S> <C> <C> <C> <C> <C>
California $ 1,633.3 $ 56.3 14.5% 18.5% 0.5%
New York 924.2 27.2 8.2 8.9 0.3
Texas 842.7 25.7 7.5 8.5 0.2
Florida 676.1 24.1 6.0 7.9 0.2
Illinois 451.8 10.6 4.0 3.5 0.1
Other 6,716.5 160.5 59.8 52.7 1.4
--------- ------ ----- ----- ---
TOTAL $11,244.6 $304.4 100.0% 100.0% 2.7%
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Since 1988, APPS, through ANB (and its predecessors by merger), has been
active in the consumer credit card securitization market. Through 1997 and up to
the closing of the Transaction with Fleet, the Company recognized income on a
monthly basis from the securitized receivables. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to
Consolidated Financial Statements.
On February 20, 1998, in connection with the contribution of the Company's
consumer credit card business to the LLC, the assets and liabilities relating to
ANB's consumer credit card securitizations and servicing capabilities and
obligations were transferred to the LLC.
Prior to the contribution of the consumer credit card business to the LLC,
the consumer credit card securitization program provided a number of benefits:
diversifying the funding base; providing liquidity; reducing regulatory capital
requirements; lowering the cost of funds; and providing a source of
variable-rate funding to complement the variable-rate credit card portfolio.
Additionally, until September 30, 1996, securitization was important in helping
to limit the on-balance sheet growth of AUS to less than 7% per annum. (See
"Government Regulation -- the Company.")
A credit card securitization involves the transfer of the receivables
generated by a pool of credit card accounts to a securitization trust.
Certificates issued by the trust and sold to investors represent undivided
ownership interests in receivables transferred to the trust. Accordingly, the
credit card securitizations resulted in removal of the related credit card
receivables from the Company's balance sheet for financial and regulatory
accounting purposes. For tax purposes, the investor certificates were
characterized as a collateralized debt financing of the Company.
In a credit card securitization, the trust receives finance and other
charges paid by the credit card customers and pays a rate of return on a monthly
or quarterly basis to the certificate holders. While in most cases the rate of
return paid to investors in the securitization trusts was variable in order to
match the pricing dynamics of the underlying receivables, the Company also used
fixed rate securitizations in certain circumstances. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management." APPS serviced the accounts for a fee
of approximately 2.0% of the securitized receivables. ANB (and its predecessors
by merger) retained an interest-only strip representing the remaining interest
and fees collected from credit card customers after the payment of pass-through
interest to the certificate holders and the payment of a servicing fee to ANB
(and its predecessors by merger) in its role
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as servicer and is partially offset by the estimated fair value of the ANB's
recourse obligation for anticipated charge-offs. Cash flows from the
interest-only strip were first retained in the securitization trusts to build up
a reserve fund to a certain level, after which amounts were remitted to ANB.
APPS' relationship with its credit card customers was not affected by its
securitizations.
Investors in the securitization trusts received payments only of interest
during the first three to eight and one-half years of the trust. Thereafter, an
amortization period (generally between six and ten months) commenced, during
which the certificate holders are entitled to payment of principal and interest.
Under the terms of ANB's credit card securitizations, the acceleration of the
commencement of the amortization period (which could occur in limited
circumstances) on a securitization would accelerate ANB's funding requirement.
Upon full repayment of principal to the certificate holders, whether as a result
of normal or accelerated amortization, the trust's lien on the accounts would
terminate and all related receivables and funds held in the trust, including the
reserve fund, would be transferred to ANB. On February 20, 1998, in connection
with the Transaction with Fleet, Fleet and its subsidiaries assumed ANB's
obligations as seller and servicer with respect to each of the credit card
securitization trusts.
In 1997, approximately 59% of the Company's total revenues net of provision
for credit losses were derived from APPS.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured deposit products as well as uninsured bank
notes through ANB (and previously through its predecessors by merger) and offers
uninsured investment products of Advanta through both direct and underwritten
sales of debt securities. In December 1996, Advanta Capital Trust I, a statutory
business trust established by the Company, issued $100,000,000 of 8.99% Capital
Securities, maturing in December 2026 (the "Capital Securities"). The Capital
Securities represent a preferred beneficial interest in the assets of the trust.
The proceeds of that offering were lent to the Company for general corporate
purposes (See Note 7 to Consolidated Financial Statements). In October 1995, the
Company ceased selling subordinated retail investment notes, and instead began
offering senior retail investment notes which (like the previous subordinated
notes) are marketed by print advertising and direct mail solicitations to
existing and prospective individual investors. In addition to the senior retail
investment note program, in July 1996 the Company filed a senior debt shelf
registration with the Securities and Exchange Commission covering $1.6 billion
of securities. As of December 31, 1997, $1.0 billion of debt securities had been
issued under this shelf. The Company also filed a "universal shelf" registration
statement in June 1995 for $500 million of debt and/or equity securities. In
July 1995, $92.5 million of 6 3/4% Convertible Class B Preferred Stock was
issued under that shelf.
Bank deposit products include demand deposits, money market savings,
statement savings accounts, retail certificates of deposit; and large
denomination certificates of deposit (certificates of $100,000 or more).
Consumer deposit business is generated from repeat sales to existing depositors
and from new depositors attracted by newspaper advertising and direct mail
solicitations.
In addition to the funding diversity provided by the debt issuance capacity
of the Company and the debt and deposit raising capabilities of ANB, AFC has
been taking deposits in the form of certificates of deposit since January 1992.
AFC is an FDIC-insured industrial loan corporation organized under the laws of
the State of Utah. As of December 31, 1997, funding provided by AFC was not
material to the Company.
GOVERNMENT REGULATION
THE COMPANY
The Company is not required to register as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company indirectly
owns ANB, which is a "bank" as defined under the BHCA as amended by the
Competitive Equality Banking Act of 1987 ("CEBA"). However, under certain
grandfathering provisions of CEBA, the Company is not required to register as a
bank holding company under the BHCA because ANB, which takes demand deposits but
does not make commercial loans,
8
<PAGE> 10
did not come within the BHCA's definition of the term "bank" prior to the
enactment of CEBA and it complies with certain restrictions set forth in CEBA,
such as limiting its activities to those in which it was engaged prior to March
5, 1987 and, prior to September 30, 1996, limiting its growth rate to not more
than 7% per annum.
Prior to June 30, 1997, the Company owned two banks, AUS and Old ANB. The
elimination of the growth cap of 7% under CEBA by amendment of the BHCA in
September 1996 created substantial new flexibility with respect to
asset/liability management for the Company's banks. Effective June 30, 1997, the
Company merged Old ANB into AUS. The new bank was then renamed Advanta National
Bank (previously defined herein as ANB). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management -- Liquidity and Capital Resources."
Continuing CEBA restrictions also prohibit ANB from cross-marketing
products or services of an affiliate that are not permissible for bank holding
companies under the BHCA. In addition, the Company complies with certain other
restrictions set forth in CEBA, such as not acquiring control of more than 5% of
the stock or assets of an additional "bank" or "savings association" as defined
for these purposes under the BHCA. Consequently, the Company is not subject to
examination by the Federal Reserve Board (other than for purposes of assuring
continued compliance with the CEBA restrictions referenced in this section).
Should the Company or ANB cease complying with the restrictions set forth in
CEBA, registration as a bank holding company under the BHCA would be required.
Registration as a bank holding company is not automatic. The Federal
Reserve Board may deny an application if it determines that control of a bank by
a particular company will cause undue interference with competition or that such
company lacks the financial or managerial resources to serve as a source of
strength to its subsidiary bank. While the Company believes that it meets the
Federal Reserve Board's managerial standards and that its ownership of ANB has
improved the bank's competitiveness, should the Company be required to apply to
become a bank holding company the outcome of any such application cannot be
certain.
Registration as a bank holding company would subject the Company and its
subsidiaries to inspection and regulation by the Federal Reserve Board. Although
the Company has no plans to register as a bank holding company at this time, the
Company believes that registration would not restrict, curtail, or eliminate any
of its activities at current levels, except that some portions of the current
business operations of the Company's insurance subsidiaries would have to be
discontinued, the effects of which would not be material. However, the Company
is actively exploring additional lines of business, some of which the Company
would not be able to pursue as a registered bank holding company under the BHCA.
Under CEBA, AFC is not considered a "bank" for purposes of the BHCA, and so
the Company's ownership of it does not impact the Company's exempt status under
the BHCA.
ADVANTA NATIONAL BANK
The Company acquired AUS in 1982, organized Old ANB in 1995, and merged the two
banks effective June 30, 1997. After the merger, the surviving entity ANB is a
national banking association organized under the laws of the United States of
America. The headquarters and sole branch of ANB are currently located in
Wilmington, Delaware. The Company conducts a large portion of its mortgage
lending business and it conducted a large portion of its consumer credit card
lending business through ANB (and its predecessors by merger). ANB is subject
primarily to regulation and periodic examination by the Office of the
Comptroller of the Currency (the "Comptroller"). Such regulation relates to the
maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices. As a national bank, ANB is subject to provisions of
federal law which restrict its ability to extend credit to its affiliates or pay
dividends to its parent company. (See "Dividends and Transfers of Funds.")
ANB is subject to capital adequacy guidelines issued by the Comptroller.
These guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations and consider
off-balance sheet exposures in determining capital adequacy. Under the rules and
regulations of the
9
<PAGE> 11
Comptroller, at least half of the total capital is to be comprised of common
equity, retained earnings and a limited amount of non-cumulative perpetual
preferred stock ("Tier I capital"). The remainder may consist of other preferred
stock, certain hybrid debt/equity instruments, a limited amount of term
subordinated debt or a limited amount of the reserve for possible credit losses
("Tier II capital"). The Comptroller has also adopted minimum leverage ratios
(Tier I capital divided by total average assets) for national banks. Recognizing
that the risk-based capital standards address only credit risk (and not interest
rate, liquidity, operational or other risks), many national banks are expected
to maintain capital in excess of the minimum standards.
In addition, pursuant to certain provisions of the FDIC Improvement Act of
1991 ("FDICIA") and regulations promulgated thereunder with respect to prompt
corrective action, FDIC-insured institutions such as ANB may only accept
brokered deposits without FDIC permission if they meet certain capital
standards, and are subject to restrictions with respect to the interest they may
pay on deposits unless they are "well-capitalized." To be "well-capitalized," a
bank must have a ratio of total capital (combined Tier I and Tier II capital) to
risk-weighted assets of not less than 10%, Tier I capital to risk-weighted
assets of not less than 6%, and a Tier I leverage ratio of not less than 5%.
As of December 31, 1997, ANB's Tier I capital ratio was 12.93%, its
combined Tier I and Tier II capital ratio was 16.39%, and its leverage ratio was
14.07%, each of which meets the requirements of the Comptroller and makes ANB
well-capitalized under the regulatory framework described above.
ADVANTA FINANCIAL CORP.
In January 1992, AFC opened for business and began accepting deposits. AFC is an
FDIC-insured industrial loan corporation organized under the laws of the State
of Utah and is subject to examination and regulation by both the FDIC and the
Utah Department of Financial Institutions. At December 31, 1997, AFC had
deposits of $195 million and total assets of $236 million. Currently, AFC's
principal activities consist of small ticket equipment lease financing and
issuance of the "Advanta Business Card" credit card marketed by ABS. The Company
anticipates that AFC's managed receivables base of Advanta Business Card loans
will continue to grow in 1998.
LENDING AND LEASING ACTIVITIES
The Company's activities as a lender are also subject to regulation under
various federal and state laws including the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Home Mortgage Disclosure Act, the Community
Reinvestment Act, the Electronic Funds Transfer Act, the Real Estate Settlement
Practices Act and the Fair Credit Reporting Act. Provisions of those statutes,
and related regulations, among other matters, require disclosure to borrowers of
finance charges in terms of an annual percentage rate, prohibit certain
discriminatory practices in extending credit, require the Company's FDIC-insured
depository institutions to serve the banking needs of their local communities
and regulate the dissemination and use of information relating to a borrower's
creditworthiness. Certain of these statutes and regulations also apply to the
Company's leasing activities. In addition, Advanta Mortgage, Advanta Finance and
their respective subsidiaries are subject to licensure and regulation in various
states as mortgage bankers, mortgage brokers, and originators, sellers and
servicers of mortgage loans.
DIVIDENDS AND TRANSFERS OF FUNDS
There are various legal limitations on the extent to which ANB or AFC can
finance or otherwise supply funds through dividends, loans or other means to the
Company and its affiliates. The prior approval of the Comptroller is required if
the total of all dividends declared by ANB in any calendar year exceeds that
institution's net profits (as defined) for that year combined with its retained
net profits for the preceding two years, less any required transfers to surplus
accounts. In addition, ANB is not permitted to pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. The Comptroller also has authority under the Financial Institutions
Supervisory Act to prohibit a national bank from engaging in any unsafe or
unsound practice in conducting its business. It is possible, depending upon the
10
<PAGE> 12
financial condition of the bank in question and other factors, that the
Comptroller could claim that a dividend payment might under some circumstances
be an unsafe or unsound practice.
ANB and AFC are also subject to restrictions under Sections 23A and 23B of
the Federal Reserve Act. These restrictions limit the transfer of funds by the
depository institution to the Company and certain other affiliates, as defined
in that Act, in the form of loans, extensions of credit, investments or
purchases of assets, and they require generally that the depository
institution's transactions with its affiliates be on terms no less favorable to
the bank than comparable transactions with unrelated third parties. These
transfers by any one institution to the Company or any single affiliate are
limited in amount to 10% of the depository institution's capital and surplus and
transfers to all affiliates are limited in the aggregate to 20% of the
depository institution's capital and surplus. Furthermore, such loans and
extensions of credit are also subject to various collateral requirements. In
addition, in order for the Company to maintain its grandfathered exemption under
CEBA, ANB is not permitted to make any loans to the Company or any of its
subsidiaries.
REGULATION OF INSURANCE
The Company's insurance subsidiaries are subject to the laws and regulations of,
and supervision by, the states in which they are domiciled or have obtained
authority to transact insurance business. These states have adopted laws and
regulations which govern all marketing, licensing, administration and financial
operations of an insurance company, including dividend payments and financial
solvency. In addition, the insurance subsidiaries have registered as an Arizona
Holding Company which requires an annual registration and the approval of
certain transactions between all affiliated entities.
The maximum dividend that any of the insurance subsidiaries can distribute
to its parent in any twelve month period without prior approval of the State of
Arizona Department of Insurance is the lesser of 10% of the subsidiary's
statutory surplus or for any given twelve-month period, its net income (if a
life insurance company) or net investment income (if a property and casualty
insurance company). In 1997, one of the Company's insurance subsidiaries applied
and received approval for an extraordinary dividend in the amount of $40.6
million payable to the Company, mainly consisting of common stock of another
insurance subsidiary as part of an ownership restructuring.
The State of Arizona has adopted minimum risk-based capital standards as
developed by the National Association of Insurance Commissioners. Risk-based
capital is the quantification of an insurer's investment, underwriting, reserve
and business risks in relation to its total adjusted capital and surplus. The
ratio of an insurer's total adjusted capital and surplus, as defined, is
compared to various levels of risk-based capital to determine what intervention,
if any, is required by either the insurance company or an insurance department.
The Company's insurance subsidiaries meet all risk-based capital standards and
require no action by any party.
The Company's insurance subsidiaries reinsure risks pursuant to
underwriting insurance practices and rates which are regulated in part or fully
by state insurance departments. These rates are continually being reviewed and
modified by the state insurance departments based on prior historical
experience. Any modifications may impact the future profitability of the
Company's insurance subsidiaries.
GENERAL
Because the banking and finance businesses in general are the subject of such
extensive regulation at both the state and federal levels, and because numerous
legislative and regulatory proposals are advanced each year which, if adopted,
could affect the Company's profitability or the manner in which the Company
conducts its activities, the Company cannot now predict the extent of the impact
of any such new laws or regulations.
Various legislative proposals have been or will be introduced in Congress,
including, among others, proposals relating to permitting affiliations between
banks and commercial or securities firms and statutory changes to the Real
Estate Settlement Practices Act and the Truth in Lending Act. It is impossible
to determine whether any of these proposals will become law and, if so, what
impact they will have on the Company.
11
<PAGE> 13
COMPETITION
As a marketer of credit products, the Company faces intense competition from
numerous providers of financial services. Many of these companies are
substantially larger and have more capital and other resources than the Company.
Competition among lenders can take many forms including convenience in obtaining
a loan, customer service, size of loans, interest rates and other types of
finance or service charges, duration of loans, the nature of the risk which the
lender is willing to assume and the type of security, if any, required by the
lender. Although the Company believes it is generally competitive in most of the
geographic areas in which it offers its services, there can be no assurance that
its ability to market its services successfully or to obtain an adequate yield
on its loans will not be impacted by the nature of the competition that now
exists or may develop.
Prior to the contribution of its consumer credit card business to the LLC,
in both domestic and international VISA and MasterCard markets, the Company
competed with national, regional, and local issuers. American Express and the
Discover Card represented additional competition in the general purpose credit
card markets in the United States. In recent years, a large segment of customers
have been attracted to credit card issuers largely on the basis of product
features, including price and credit limit; as such, customer loyalty may have
been limited. As a result, account and balance attrition have been significant
factors in the credit card industry.
In seeking investment funds from the public, the Company faces competition
from banks, savings institutions, money market funds, credit unions and a wide
variety of private and public entities which sell debt securities, some of which
are publicly traded. Many of the competitors are larger and have more capital
and other resources than the Company. Competition relates to such matters as
rate of return, collateral, insurance or guarantees applicable to the investment
(if any), the amount required to be invested, convenience and the cost to and
conditions imposed upon the investor in investing and liquidating his investment
(including any commissions which must be paid or interest forfeited on funds
withdrawn), customer service, service charges, if any, and the taxability of
interest.
EMPLOYEES
As of December 31, 1997, the Company had 4,498 employees, up from 3,541
employees at the end of 1996. On February 20, 1998, 2,204 employees of the
Company were transferred to the LLC in connection with the Transaction with
Fleet. The Company believes that it has good relationships with its employees.
None of its employees are represented by a collective bargaining unit.
CAUTIONARY STATEMENTS
Information or statements provided by the Company from time to time may contain
certain "forward-looking information" including information relating to
anticipated earnings per share, anticipated returns on equity, anticipated
growth in loans outstanding and credit card accounts, anticipated net interest
margins, anticipated operations costs and employment growth, anticipated
prepayment rates of outstanding loans, anticipated marketing expense or
anticipated delinquencies and charge-offs. The cautionary statements provided
below are being made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act") and with the intention of obtaining
the benefits of the "safe harbor" provisions of the Act for any such
forward-looking information. Many of the following important factors discussed
below as well as other factors have also been discussed in the Company's prior
public filings.
The Company cautions readers that any forward-looking information provided
by the Company is not a guarantee of future performance and that actual results
may differ materially from those in the forward-looking information as a result
of various factors, including but not limited to:
-- Increased credit losses (including increases due to a worsening of
general economic conditions), increased collection costs associated with
rising delinquency levels, costs associated with an increase in the
number of customers seeking protection under the bankruptcy laws,
resulting in accounts being charged off as uncollectible, and costs and
other effects of fraud by third parties or customers.
12
<PAGE> 14
-- Intense and increasing competition from numerous providers of financial
services who may employ various competitive strategies. The Company
faces competition from national, regional and local originators of
non-conforming mortgages and business equipment leases, some of which
have greater resources than the Company.
-- The effects of increased competition and changes in economic conditions
including interest rate fluctuations resulting in higher than
anticipated prepayments of outstanding loans.
-- The effects of interest rate fluctuations on the Company's net interest
margin and the value of its assets and liabilities; the continued legal
or commercial availability of techniques (including interest rate swaps
and similar financial instruments, loan repricing, hedging and other
techniques) used by the Company to manage the risk of such fluctuations
and the continuing operational viability of those techniques and the
accounting and regulatory treatment of such instruments.
-- Difficulties or delays in the securitization of the Company's
receivables and the resulting impact on the cost and availability of
such funding. Such difficulties and delays may result from changes in
the availability of credit enhancement in securitizations, the current
legal, regulatory, accounting and tax environment and adverse change in
the performance of the securitized assets.
-- Changes in the Company's aggregate accounts or loan balances and the
growth rate thereof, including changes resulting from factors such as
shifting product mix, amount of actual marketing investment made by the
Company, prepayment of loan balances and general economic conditions and
other factors beyond the control of the Company.
-- The impact of "seasoning" (the average age of a lender's portfolio) on
the Company's level of delinquencies and losses which may require a
higher allowance for loan losses for on-balance sheet assets, and may
adversely impact personal finance and business loan and lease
securitization income. The addition of account originations or balances
and the attrition of such accounts or balances could significantly
impact the seasoning of the overall portfolio.
-- The amount, and rate of growth in, the Company's expenses (including
employee and marketing expenses) as the Company's business develops or
changes and the Company expands into new market areas; the acquisition
of assets (interest-earning, fixed or other); the effects of changes
within the Company's organization or in its compensation and benefit
plans; and the impact of unusual items resulting from the Company's
ongoing evaluation of its business strategies, asset valuations and
organizational structures.
-- The amount, type and cost of financing available to the Company, and any
changes to that financing including any impact from changes in the
Company's debt ratings; and the activities of parties with which the
Company has agreements or understandings, including any activities
affecting any investment.
-- Difficulties or delays in the development, production, testing and
marketing of products or services, including, but not limited to, a
failure to implement new product or service programs when anticipated,
the failure of customers to accept these products or services when
planned, losses associated with the testing of new products or services
or financial, legal or other difficulties as may arise in the course of
such implementation.
-- The effects of, and changes in, monetary and fiscal policies, laws and
regulations (financial, consumer, regulatory or otherwise), other
activities of governments, agencies and similar organizations, and
social and economic conditions, such as inflation, and changes in
taxation of the Company's earnings.
-- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims and changes in those
items, developments or assertions by or against the Company or its
subsidiaries; adoptions of new, or changes in existing, accounting
policies and practices and the application of such policies and
practices.
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<PAGE> 15
-- The impact of the Company's costs to comply with requirements of the
Year 2000 Issue described herein as well as the effects of the
compliance or lack thereof by the Company's customers, suppliers and
partners.
ITEM 2. PROPERTIES.
In 1997, the Company owned four buildings totaling 308,278 square feet and
leased an additional 302,453 square feet in eight buildings in the Pennsylvania
suburbs of Philadelphia. This includes the Company's principal executive offices
located in Spring House, Pennsylvania. In the adjoining states of New Jersey,
Delaware and New York the Company owned two buildings totaling 177,196 square
feet and leased 62,352 square feet in three buildings. The Company leased seven
offices located in Utah, California and Colorado totaling 374,305 square feet.
In summary, the Company occupied 1,224,584 square feet of leased and owned space
in 24 buildings located in seven states. In addition, the Company leased office
space which averaged approximately 1,100 square feet per branch for each of its
56 Advanta Finance branches.
In connection with the contribution of the Company's consumer credit card
business to the LLC, the Company contributed three owned buildings totaling
218,278 square feet and leases on four buildings totaling 129,387 square feet in
the Pennsylvania suburbs of Philadelphia. In addition, the Company contributed
to the LLC one owned building totaling 121,000 square feet in Delaware and a
lease on one building totaling 155,655 square feet in Colorado.
ITEM 3. LEGAL PROCEEDINGS.
On June 30, 1997, purported shareholders of the Company who are represented by a
group of law firms filed a putative class action complaint against the Company
and several of its current and former officers and directors in the United
States District Court for the Eastern Division of Pennsylvania. A second,
similar complaint was filed in the same court a few days later by a different
group of law firms. Both complaints allege that the Company made
misrepresentations in certain of its public filings and statements in violation
of the Securities Exchange Act of 1934. The complaints seek damages of an
unspecified amount. Pursuant to stipulation, the complaints have been
consolidated into one action. The Company believes that the complaints are
without merit and will vigorously defend itself against the actions.
On August 25, 1997, a purported consumer credit cardholder of the Company
instituted a putative class action complaint against the Company and certain of
its subsidiaries in Delaware Superior Court for New Castle County. Subsequently,
on September 8, 10, and 12, October 2, 1997, November 7 and 12, 1997, and
December 2, 10, 15, and 18 (2 cases), similar actions were filed in Orange
County California Superior Court, the United States District Court for the
Eastern Division of Tennessee, Delaware Superior Court, the Circuit Court of
Covington County, Alabama, the United States District Court for the Northern
District of California, the United States District Court for the Central
District of California, the United States District Court for the Eastern
District of Pennsylvania, the District Court of Bexar County, Texas, the United
States District Court for the Northern District of Texas, the United States
District Court for the District of New Jersey and the Circuit Court of the Ninth
Judicial Circuit in and for Orange County, Florida, respectively. The complaints
allege that consumer credit cardholder accounts in a specific program were
improperly repriced to a higher percentage rate of interest. The complaints
assert various violations of federal and state law with regard to such
repricings, and each seeks damages of an unspecified amount. The program at
issue comprised a very small portion of the Company's consumer credit card
receivables. The Company believes that the complaints are without merit and will
vigorously defend itself against the actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers of the Company and its subsidiaries listed
below was elected by the applicable Board of Directors, to serve at the pleasure
of the Board in the capacities indicated.
<TABLE>
<CAPTION>
NAME AGE OFFICE DATE ELECTED
---- --- ------ ------------
<S> <C> <C> <C>
Dennis Alter 55 Chairman of the Board and Chief 1972
Executive Officer
William A. Rosoff 53 Vice Chairman and Director 1996
Olaf Olafsson 35 President and Director 1998 and 1997
Jeffrey D. Beck 49 Vice President and Treasurer 1992
John J. Calamari 43 Vice President, Finance 1988
Charles H. Podowski 51 Chief Executive Officer, President 1997 and 1995
and Director, Advanta Business
Services and President and
Director, Advanta Insurance
Companies
Milton Riseman 61 President and Director, Advanta 1994
Mortgage Corp. USA and
Subsidiaries
</TABLE>
Mr. Alter became Executive Vice President and a Director of the Company's
predecessor organization in 1967. He was elected President and Chief Executive
Officer in 1972, and Chairman of the Board of Directors in August 1985. Mr.
Alter has remained as Chairman of the Board since August 1985. In February 1986,
he relinquished the title of President, and in August 1995 he relinquished the
title of Chief Executive Officer. In October 1997, Mr. Alter resumed the title
of Chief Executive Officer.
Mr. Rosoff joined the Company in January 1996 as a Director and Vice Chairman.
Prior to joining the Company, Mr. Rosoff was a long time partner of the law firm
of Wolf, Block, Schorr and Solis-Cohen LLP, the Company's outside counsel, where
he advised the Company for over 20 years. While at Wolf, Block, Schorr and
Solis-Cohen LLP he served as Chairman of its Executive Committee and,
immediately before joining the Company, as a member of its Executive Committee
and Chairman of its Tax Department. Mr. Rosoff is a Trustee of Atlantic Realty
Trust, a publicly held real estate investment trust, and Chairman of the Board
of RMH Teleservices, Inc. a publicly held company that is a leading provider of
telemarketing services, on an outsourced basis, to Fortune 500 companies.
Mr. Olafsson joined the Company in September 1996 as Vice Chairman of Advanta
Information Services, Inc. ("AIS") and was elected as a Director of AIS in
October 1996. In December 1997, Mr. Olafsson became a Director of the Company
and in March 1998 he was elected as President of the Company. Prior to joining
the Company, he was president and chief executive officer of Sony Interactive
Entertainment, Inc., a business unit of Sony Corporation, which he founded in
1991.
Mr. Beck joined the Company in 1986 as Senior Vice President of Advanta National
Bank (formerly, Advanta National Bank USA) and was elected Vice President and
Treasurer of the Company in 1992. Prior to joining the Company, he was Vice
President at Fidelity Bank, N.A., responsible for asset/liability planning, as
well as for managing a portfolio of investment securities held at the bank. From
1970 through 1980, he served in various treasury and planning capacities for
Wilmington Trust Company.
Mr. Calamari joined the Company as Vice President, Finance in May 1988. From May
1985 through April 1988, Mr. Calamari served in various capacities in the
accounting departments of Chase Manhattan Bank, N.A. and its subsidiaries,
culminating in the position of Chief Financial Officer of Chase Manhattan of
Maryland. From 1976 until May 1985, Mr. Calamari was an accountant with the
public accounting firm of Peat, Marwick, Mitchell in New York.
Mr. Podowski was elected President of the Advanta Insurance Companies in April
1995 and Chief Executive Officer and President of Advanta Business Services in
September 1997. Prior to joining the Company, Mr. Podowski served CIGNA
Corporation in various capacities for seventeen years, most recently as Senior
Vice President in their International Division, with responsibility for CIGNA's
life insurance subsidiaries in Asia,
15
<PAGE> 17
Australia and New Zealand. Prior to joining CIGNA, Mr. Podowski worked for The
Chase Manhattan Bank, N.A.
Mr. Riseman came to the Company in June 1992 as Senior Vice President,
Administration. In February 1994, Mr. Riseman became President and Director of
Advanta Mortgage Corp. USA and its subsidiaries. Prior to joining the Company,
Mr. Riseman had 27 years of experience with Citicorp, most recently as Director
of Training and Development. Prior to that he held Citicorp positions as
Business Manager for the Long Island Region, Head of Policy and Administration
for New York's Retail Bank, and Chairman of Citicorp Acceptance Co. which was
involved in the financing and leasing of autos and financing of mobile homes.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market System of The
Nasdaq Stock Market, Inc. under the symbols ADVNB (Class B non-voting common
stock) and ADVNA (Class A voting common stock).
Following are the high, low and closing sale prices and cash dividends
declared for the last two years as they apply to each class of stock:
<TABLE>
<CAPTION>
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
-------------- ---- --- ----- ---------
<S> <C> <C> <C> <C>
CLASS B:
- ----------------------------------------------------------------------------------------------
March 1996 $ 49.25 $ 33.75 $ 47.50 $.108
June 1996 52.50 43.50 45.25 .108
September 1996 48.25 39.75 42.75 .108
December 1996 48.50 38.25 40.88 .132
March 1997 $ 53.63 $ 25.50 $ 25.88 $.132
June 1997 36.25 18.88 35.69 .132
September 1997 36.50 24.75 27.25 .132
December 1997 37.63 23.38 25.38 .132
CLASS A:
- ----------------------------------------------------------------------------------------------
March 1996 $ 53.50 $ 34.75 $ 52.00 $.090
June 1996 58.25 46.50 51.00 .090
September 1996 53.00 41.00 46.00 .090
December 1996 50.00 40.00 42.75 .110
March 1997 $ 53.25 $ 26.63 $ 26.88 $.110
June 1997 36.25 20.00 35.69 .110
September 1997 37.50 26.19 29.13 .110
December 1997 38.75 24.25 26.25 .110
</TABLE>
At December 31, 1997, the Company had approximately 1,100 and 430 holders
of record of Class B and Class A common stock, respectively.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT -----------------------------------------------------------------
PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net operating revenues(1) $ 938,197 $ 850,977 $ 615,914 $ 447,837 $ 334,224
Net interest income 93,060 78,265 72,900 70,381 78,644
Noninterest revenues 845,137 806,532 543,014 395,808 255,580
Provision for credit losses 210,826 96,862 53,326 34,198 29,802
Operating expenses 630,841 523,174 350,685 266,784 181,167
Income before income taxes and extraordinary items 96,530 264,761 211,903 165,207 123,255
Income before extraordinary items 71,625 175,657 136,677 106,063 77,920
Net income 71,625 175,657 136,677 106,063 76,647
- ----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income(2)(3)
Basic
Combined(4) $ 1.52 $ 4.15 $ 3.38 $ 2.72 $ 2.06
A 1.45 4.08 3.34 2.70 2.04
B 1.57 4.19 3.42 2.75 2.08
Dilutive
Combined(4) $ 1.50 $ 3.89 $ 3.20 $ 2.58 $ 1.92
A 1.43 3.86 3.18 2.56 1.90
B 1.54 3.91 3.22 2.60 1.94
Cash dividends declared
Class A .440 .380 .290 .217 .167
Class B .528 .456 .348 .260 .200
Book value 19.01 18.06 14.35 11.12 8.82
Closing stock price
Class A 26.25 42.75 38.25 26.25 33.25
Class B 25.38 40.88 36.38 25.25 29.00
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION -- YEAR END
Investments and money market instruments(5) $ 2,092,292 $ 1,653,384 $ 1,089,317 $ 671,661 $ 542,222
Gross receivables
Owned 3,398,090 2,656,641 2,762,927 1,964,444 1,277,305
Securitized 14,460,114 13,632,552 9,452,428 6,190,793 3,968,856
Managed 17,858,204 16,289,193 12,215,355 8,155,237 5,246,161
Total serviced receivables(6) 27,039,669 19,981,285 12,838,272 8,155,237 5,246,161
Total assets
Owned 6,686,132 5,583,959 4,524,259 3,113,048 2,140,195
Managed 21,146,246 19,216,511 13,976,687 9,303,841 6,109,051
Deposits 3,017,611 1,860,058 1,906,601 1,159,358 1,254,881
Long-term debt 1,438,358 1,393,095 587,877 666,033 368,372
Stockholders' equity 926,950 852,036 672,964 441,690 342,741
Capital securities(7) 100,000 100,000 0 0 0
Stockholders' equity, long-term debt and capital
securities 2,465,308 2,345,131 1,260,841 1,107,723 711,113
- ----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Return on average assets 1.09% 3.16% 4.06% 4.47% 3.91%
Return on average common equity 8.47 25.31 26.15 26.97 27.50
Return on average total equity(8) 8.12 22.07 24.75 26.97 27.50
Equity/managed assets(8) 4.86 4.95 4.81 4.75 5.61
Equity/owned assets(8) 15.36 17.05 14.87 14.19 16.01
Dividend payout 33.34 10.75 9.97 9.24 9.56
Managed net interest margin(9) 7.79 6.32 5.87 6.72 7.77
</TABLE>
18
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT -----------------------------------------------------------------
PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As a percentage of managed receivables:
Total loans 30 days or more delinquent(10) 6.0% 5.4% 3.3% 2.7% 3.6%
Net charge-offs(10) 5.3 3.2 2.2 2.3 2.9
Other operating expenses 3.4 2.9 2.9 3.7 4.1
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes gains on sales of credit card relationships in 1996 and 1994.
(2) All periods reflect adoption of FASB 128 (see Notes 1 and 22 to
Consolidated Financial Statements).
(3) Earnings per share before extraordinary items were the same for all years
except 1993. Basic earnings per share before extraordinary items for 1993
were $2.09, $2.07 and $2.11 for Combined, A and B, respectively. Dilutive
earnings per share before extraordinary items for 1993 were $1.95, $1.94
and $1.97 for Combined, A and B, respectively. (See Note 1 to Consolidated
Financial Statements.)
(4) Combined represents a weighted average of Class A and Class B (see Note 1
to Consolidated Financial Statements)
(5) Includes restricted interest-bearing deposits.
(6) Represents total managed receivables plus mortgage contract servicing
receivables.
(7) Represents Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated debentures of the Company.
(8) In 1997 and 1996, return on average total equity, equity/managed assets
and equity/owned assets include capital securities as equity. The ratios
without capital securities for 1997 were 8.33%, 4.38%, and 13.86%,
respectively and for 1996 were 22.31%, 4.43% and 15.26%, respectively.
(9) Combination of owned interest-earning assets/interest-bearing liabilities
and securitized credit card assets/liabilities.
(10) The 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to credit card bankruptcies (see
"Management's Discussion and Analysis -- Asset Quality").
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW
For the year ended December 31, 1997, the Company reported net income of $71.6
million or $1.50 per combined common share, assuming dilution, compared to
$175.7 million or $3.89 per combined diluted common share for the full year of
1996. (See Note 1 to Consolidated Financial Statements.)
The earnings reported for the full year of 1997 reflect an increase in
provision for credit losses of $114 million, primarily as a result of higher
credit losses in the consumer credit card portfolio. This portfolio was
subsequently transferred to the LLC in connection with the Transaction during
the first quarter of 1998 (see Note 11 to Consolidated Financial Statements). In
addition, 1996 earnings reflected a $33.8 million gain on the sale of credit
card relationships.
During 1997, net interest income and the owned net interest margin
increased $14.8 million and 7 basis points, respectively. These increases are
primarily a result of the substantial growth in the personal finance and
business loan and lease portfolios along with an increase in investments and
interest bearing deposits, offset by a reduction in the higher yielding credit
card portfolio. The owned personal finance portfolio grew from an average of
$242.9 million in 1996 to $586.2 million in 1997, a 141% increase. The business
loan and lease portfolio also showed strong growth, rising to an average of
$333.1 million during 1997 from $200.1 million during 1996. Noninterest revenues
excluding the $33.8 million gain on the sale of credit card relationships in
1996 increased $72.4 million to $845.1 million from $772.7 million in 1996. The
increase in other noninterest revenues for 1997 is a result of significant
increases in personal finance, business loan and lease noninterest revenues and
in other revenues. Personal finance noninterest revenues increased by almost 56%
to $170 million primarily as a result of the substantial increase in receivables
securitized. In 1997 the Company securitized $3.4 billion of personal finance
loans compared to $1.4 billion in 1996. The increase in business loan and lease
noninterest revenues also reflects an increase in securitization activity.
Business loan and lease receivables securitized in 1997 totalled $563 million
compared to $363 million in 1996. "Other" other noninterest revenues increased
almost $14.2 million due to an increase in other credit card revenues.
The increases in net interest income and noninterest revenues were offset
by increases in the provision for loan losses as previously mentioned, as well
as operating expenses. The provision for credit losses rose to $210.8 million in
1997 from $96.9 million in 1996. The increase in the provision for credit losses
experienced in 1997 resulted from a higher level of charge-offs and
delinquencies primarily in the consumer credit card portfolio, as well as
management's decision to increase the ratio of the loan loss allowance to
receivables to 4.1% at December 31, 1997 from 3.4% at the end of 1996. The
charge-off rate in the owned portfolio rose to 5.6% in 1997 from 2.3% in 1996.
The 30-day delinquency rate rose to 5.9% in 1997 from 5.5% in 1996. Operating
expenses increased to $630.8 million in 1997 from $523.2 million in 1996. The
1997 operating expense ratio increased to 3.4% from 2.9% in 1996. This increase
primarily reflects the addition of employees required to support increased
collection efforts related to the credit card portfolio and an increase in the
employees needed to support the growth in personal finance activities. Other
operating expenses also increased as a result of increased marketing and the
resources required to support current and future growth in the portfolios.
Net income for 1996 of $175.7 million was 29% higher than the $136.7
million reported for 1995. On a per combined share basis, assuming dilution, net
income was $3.89 compared to $3.20 for 1995. The growth in earnings in 1996 was
attributable primarily to a 49% increase in noninterest revenues to $806.5
million from $543.0 in 1995. The growth in noninterest revenues was a result of
substantial growth in average managed receivables which increased to $14.9
billion in 1996 from $9.5 billion in 1995. Noninterest revenues for 1996 also
reflect a $33.8 million gain on the sale of consumer credit card customer
relationships. 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 "Asset Quality"), the upward repricing of interest rates
and fees, increases in charge-offs and the related impact on the allowance for
loan losses, all of which had an approximate $50 million impact (earnings
increase) in 1996, as well as a 57% increase in average securitized receivables.
The increase in noninterest revenues was partially offset by increases in the
provision for credit
20
<PAGE> 22
losses reflecting an increase in the charge-off and delinquency rates in 1996 to
3.2% and 5.4% respectively from the 1995 levels of 2.2% and 3.3%, respectively.
The operating expense ratio was flat at 2.9% for both 1996 and 1995.
On February 20, 1998 the Company announced that it had completed the
Transaction with Fleet whereby the Company and certain of its subsidiaries and
Fleet and certain of its subsidiaries contributed substantially all of their
respective consumer credit card businesses, subject to liabilities, to the LLC.
Advanta has retained a minority membership interest in the LLC, which at the
closing date of the Transaction was valued at $20 million. The Transaction was
submitted to a vote of stockholders and was approved on February 20, 1998, the
closing date for the Transaction. (See Note 11 to Consolidated Financial
Statements.) The Company realized an after tax gain of approximately $530
million which was recorded in the first quarter of 1998. Concurrently with the
Transaction, the Company purchased 7,882,750 shares of its Class A Common Stock
and 12,482,850 of its Class B Common Stock at $40 per share net, and 1,078,930
of its depositary shares each representing one one-hundredth interest in a share
of 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciated
Income Linked Securities (SAILS)) at $32.80 per share net, through an issuer
tender offer. (See Notes 8 and 11 to Consolidated Financial Statements.)
Associated with the Transaction, the Company intends to substantially
reduce corporate expenses and expenses associated with business and product
development which are not directly associated with its mortgage and business
services companies.
Going forward, the Company will focus on providing innovative financial
products and services to consumers and small businesses through its rapidly
growing mortgage and business services companies.
NET INTEREST INCOME
Net interest income represents the excess of income generated from
interest-earning assets, including on balance-sheet receivables, investments and
money market instruments over the interest paid on interest-bearing liabilities,
primarily deposits and debt.
Net interest income of $93.1 million for 1997 increased $14.8 million or
18.9% from 1996 as a result of a $682.2 million or 15.3% increase in average
interest-earning assets and an increase in the owned net interest margin, which
rose to 1.91% in 1997 from 1.84% in 1996, partially offset by higher levels of
interest-bearing liabilities which increased 16.7% in 1997. The higher owned net
interest margin resulted from a 33 basis point increase in the yield on average
interest-earning assets primarily as a result of the repricing of the consumer
credit card portfolio. The increase in the owned net interest margin was
negatively impacted by the mix of earning assets reflecting the Company's
decision to maintain a conservative position in cash and cash equivalents on the
balance sheet. In 1997 the investment portfolio, which earned an average yield
of 5.73% represented 47.8% of total interest-earning assets, while the higher
yielding receivable balances represented only 52.2% of total owned
interest-earning assets. In 1996 investments earned a similar average yield of
5.72% but represented only 31.5% of total owned interest-earning assets;
receivable balances with an average yield of 8.90% represented 68.5% of total
owned interest-earning assets.
Net interest income of $78.3 million for 1996 increased $5.4 million or 7%
from 1995 as a result of a $1.7 billion or 63% increase in average owned
interest-earning assets, largely offset by a lower owned net interest margin,
which fell to 1.84% in 1996 from 2.80% in 1995. The lower owned net interest
margin primarily resulted from a 99 basis point decrease in the yield on average
interest-earning assets as a significant portion of consumer credit card
receivables on the balance sheet were at introductory rates, partially offset by
a 34 basis point decrease in the cost of funds.
Credit card, mortgage and other personal finance and business loan and
lease receivable securitization activity shifts revenues from interest income to
noninterest revenues. This ongoing securitization activity reduces the level of
higher-yielding receivables on the balance sheet while proportionately
increasing the balance sheet levels of new lower-yielding receivables and money
market assets. Net interest income on securitized credit card balances is
reflected in credit card securitization income. Net interest income on
securitized mortgage and other personal finance loans is reflected in income
from personal finance activities,
21
<PAGE> 23
and net interest income on securitized business loans and leases is reflected in
business loan and lease other revenues. All securitization income is included in
noninterest revenues. (See Note 1 to Consolidated Financial Statements.)
Average managed credit card receivables of $11.4 billion for 1997 decreased
$0.8 billion or 6.7% from 1996. In 1997, average owned credit card receivables
were $1.7 billion compared to $2.6 billion in 1996. This decrease is
attributable to a number of factors including increased competition in the
credit card industry, changes in consumer cardholder behavior and changes in
marketing strategy.
Average managed personal finance loans increased 83.7% to $3.9 billion in
1997, from $2.1 billion in 1996. The average balance of owned personal finance
loans increased to $586 million in 1997 from $243 million in 1996. Personal
finance loan originations of $3.7 billion in 1997 were up $2.2 billion or 144.4%
from 1996. Personal finance loans securitized in 1997 totalled $3.4 billion
compared to $1.4 billion in 1996. Yields on owned personal finance loans
decreased to 10.01% in 1997 from 10.62% in 1996 as a result of a different mix
of loans in the owned inventory from which the yield calculation is based.
Average managed business loans and leases of $1.1 billion increased $459
million or 76.1% from 1996. Average owned balances of business loans and leases
increased $133 million or 66.5% during 1997 primarily due to the success of the
business credit card, as those originations increased 107.1% from $519 million
in 1996 to $1.1 billion in 1997. Total business loan and lease originations were
$1.4 billion in 1997 compared to $856 million in 1996. Additionally, during
1997, the Company securitized $563 million of business loan and lease
receivables. Yields on owned business loans and leases increased to 12.26% in
1997 from 11.97% in 1996.
The owned average cost of funds increased to 6.31% in 1997 from 6.12% in
1996. The Company has utilized derivatives to manage interest rate risk. (See
discussion under "Derivatives Activities.")
The following table provides an analysis of both owned and managed interest
income and expense data, average balance sheet data, net interest spread (the
difference between the yield on interest-earning assets and the average rate
paid on interest-bearing liabilities), and net interest margin (the difference
between the yield on interest-earning assets and the average rate paid to fund
interest-earning assets) for 1995 through 1997. Average owned loan and lease
receivables and the related interest revenues include certain loan fees.
22
<PAGE> 24
INTEREST RATE ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ON-BALANCE SHEET
- -------------------------
Interest-earning assets:
Receivables:
Credit cards $ 1,728,039 $ 179,732 10.40% $ 2,594,997 $ 220,547 8.50%
Personal finance
loans(1) 586,228 58,704 10.01 242,946 25,812 10.62
Business loans and
leases(2) 333,080 40,851 12.26 200,052 23,951 11.97
Other loans 31,810 2,639 8.30 12,270 1,045 8.52
----------- ---------- ----------- ----------
Total receivables 2,679,157 281,926 10.52 3,050,265 271,355 8.90
Federal funds sold 345,404 18,659 5.40 166,454 8,853 5.32
Interest-bearing
deposits 893,773 55,116 6.17 524,505 34,154 6.51
Tax-free securities(3) 3,926 307 7.82 8,052 502 6.23
Taxable investments 1,213,897 66,663 5.49 704,641 36,808 5.22
----------- ---------- ----------- ----------
Total interest-earning
assets(4) $ 5,136,157 $ 422,671 8.23% $ 4,453,917 $ 351,672 7.90%
=========== ========== ===== =========== ========== =====
Interest-bearing
liabilities:
Deposits
Savings $ 402,893 $ 22,850 5.67% $ 302,125 $ 15,728 5.21%
Time deposits under
$100,000 1,018,163 63,473 6.23 582,887 34,430 5.91
Time deposits of
$100,000 or more 1,035,366 63,841 6.17 999,613 60,721 6.07
----------- ---------- ----------- ----------
Total deposits 2,456,422 150,164 6.11 1,884,625 110,879 5.88
Debt 2,127,241 136,497 6.42 1,856,034 118,612 6.39
Other borrowings 557,745 37,897 6.79 664,529 40,209 6.05
----------- ---------- ----------- ----------
Total interest-bearing
liabilities 5,141,408 324,558 6.31 4,405,188 269,700 6.12
Net noninterest-bearing
liabilities (5,251) 48,729
----------- -----------
Sources to fund interest-
earning assets $ 5,136,157 $ 324,558 6.32% $ 4,453,917 $ 269,700 6.06%
=========== ========== ===== =========== ========== =====
Net interest spread 1.92% 1.78%
===== =====
Net interest margin 1.91% 1.84%
===== =====
OFF-BALANCE SHEET
- -------------------------
Average balance on
securitized:
Credit cards $ 9,628,905 $ 9,574,549
Personal finance
loans(1) 3,332,012 1,890,101
Business loans and
leases(2) 729,976 403,745
----------- -----------
Total average securitized
receivables $13,690,893 $11,868,395
=========== ===========
Total average managed
receivables $16,370,050 $14,918,660
=========== ===========
MANAGED NET INTEREST
ANALYSIS(5)
- -------------------------
Interest-earning assets $14,965,531 $2,069,040 13.83% $14,028,466 $1,712,557 12.21%
Interest-bearing
liabilities 14,970,782 902,704 6.03 13,979,737 826,379 5.91
Net interest spread 7.80 6.30
Net interest margin 7.79 6.32
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) ---------------------------------
1995
---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
- ------------------------- ---------------------------------
<S> <C> <C> <C>
ON-BALANCE SHEET
- -------------------------
Interest-earning assets:
Receivables:
Credit cards $1,580,352 $ 163,637 10.35%
Personal finance
loans(1) 184,855 17,334 9.38
Business loans and
leases(2) 84,216 10,603 12.59
Other loans 5,979 446 7.46
---------- ----------
Total receivables 1,855,402 192,020 10.35
Federal funds sold 141,031 8,210 5.82
Interest-bearing
deposits 371,826 22,243 5.98
Tax-free securities(3) 60,412 3,654 6.05
Taxable investments 296,700 16,121 5.43
---------- ----------
Total interest-earning
assets(4) $2,725,371 $ 242,248 8.89%
========== ========== =====
Interest-bearing
liabilities:
Deposits
Savings $ 270,550 $ 17,728 6.55%
Time deposits under
$100,000 547,710 31,618 5.77
Time deposits of
$100,000 or more 380,918 23,466 6.16
---------- ----------
Total deposits 1,199,178 72,812 6.07
Debt 981,816 67,908 6.92
Other borrowings 388,340 25,312 6.52
---------- ----------
Total interest-bearing
liabilities 2,569,334 166,032 6.46
Net noninterest-bearing
liabilities 156,037
----------
Sources to fund interest-
earning assets $2,725,371 $ 166,032 6.09%
========== ========== =====
Net interest spread 2.43%
=====
Net interest margin 2.80%
=====
OFF-BALANCE SHEET
- -------------------------
Average balance on
securitized:
Credit cards $6,105,575
Personal finance
loans(1) 1,355,383
Business loans and
leases(2) 230,696
----------
Total average securitized
receivables $7,691,654
==========
Total average managed
receivables $9,547,056
==========
MANAGED NET INTEREST
ANALYSIS(5)
- -------------------------
Interest-earning assets $8,830,946 $1,081,779 12.25%
Interest-bearing
liabilities 8,674,909 563,385 6.49
Net interest spread 5.76
Net interest margin 5.87
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes mortgages and home equity loans for all years presented and auto
loans beginning in 1996.
(2) Includes leases for all years presented and business cards beginning in
1996.
(3) Interest and average rate computed on a tax equivalent basis using a
statutory rate of 35%.
(4) Includes assets held and available for sale, and nonaccrual loans and
leases.
(5) Combination of owned interest-earning assets/owned interest-bearing
liabilities and securitized credit card assets/liabilities.
23
<PAGE> 25
INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
<TABLE>
<CAPTION>
1997 VS. 1996 1996 VS. 1995
($ IN THOUSANDS) ----------------------------- ------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from:
Loan and lease receivables:
Credit cards $(83,534) $42,719 $(40,815) $ 78,867 $(21,957) $ 56,910
Personal finance loans(1) 34,455 (1,563) 32,892 5,968 2,510 8,478
Business loans and leases(2) 16,306 594 16,900 13,843 (495) 13,348
Other loans 1,622 (28) 1,594 528 71 599
Federal funds sold 9,671 135 9,806 1,227 (584) 643
Interest-bearing deposits 22,835 (1,873) 20,962 9,796 2,115 11,911
Tax-free securities (301) 106 (195) (3,264) 112 (3,152)
Taxable investments 27,860 1,995 29,855 21,286 (599) 20,687
-------- ------- -------- -------- -------- --------
Total interest income(3) 28,914 42,085 70,999 128,251 (18,827) 109,424
-------- ------- -------- -------- -------- --------
Interest expense on:
Deposits:
Savings 5,631 1,491 7,122 2,656 (4,656) (2,000)
Time deposits under $100,000 27,080 1,963 29,043 2,041 771 2,812
Time deposits of $100,000 or more 2,136 984 3,120 37,593 (338) 37,255
Debt 17,328 557 17,885 55,476 (4,772) 50,704
Other borrowings (6,897) 4,585 (2,312) 16,577 (1,680) 14,897
-------- ------- -------- -------- -------- --------
Total interest expense 45,278 9,580 54,858 114,343 (10,675) 103,668
-------- ------- -------- -------- -------- --------
Net interest income $(16,364) $32,505 $ 16,141 $ 13,908 $ (8,152) $ 5,756
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes mortgages and home equity loans for all years presented and auto
loans beginning in 1996.
(2) Includes leases for all years presented and business cards beginning in
1996.
(3) Includes income from assets held and available for sale.
24
<PAGE> 26
MANAGED PORTFOLIO DATA
The Company analyzes its financial results on a managed basis and also analyzes
data as reported under generally accepted accounting principles. The following
table provides selected information on a managed basis, as well as a Managed
Income Statement including the effects of credit card securitizations on
selected line items of the Company's Consolidated Income Statements for the past
three years.
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Average managed receivables $16,370,050 $14,918,660 $ 9,547,056
Managed receivables 17,858,204 16,289,193 12,215,355
Total managed assets 21,146,246 19,216,511 13,976,687
Managed net interest margin (on a fully tax
equivalent basis) 7.79% 6.32% 5.87%
As a percentage of gross managed receivables:
Total loans 30 days or more delinquent:
New methodology (see Asset Quality) 6.0% 5.4%
Prior methodology (pro forma) 5.2% 3.3%
Net charge-offs:
New methodology (see Asset Quality) 5.3% 3.2%
Prior methodology (pro forma) 3.5% 2.2%
MANAGED INCOME STATEMENT:
Net interest income $ 1,164,284 $ 882,471 $ 515,078
Provision for credit losses 869,737 483,581 211,061
Noninterest revenues 432,824 389,045 258,571
Operating expenses 630,841 523,174 350,685
- -----------------------------------------------------------------------------------------------
Income before income taxes $ 96,530 $ 264,761 $ 211,903
- -----------------------------------------------------------------------------------------------
</TABLE>
With respect to the Managed Income Statement, the individual line items are
stated as if the securitized credit card assets were still owned by the Company
and remained on the balance sheet. Net interest income includes the amount of
net interest income which has been reported as noninterest revenues. In
addition, the provision for credit losses includes the amount by which the
provision for credit losses would have been higher had the securitized
receivables remained as owned and the provision for credit losses been equal to
actual reported charge-offs (see "Asset Quality"). Noninterest revenues on the
managed income statement exclude the net interest income and credit losses
associated with the securitized credit card assets.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $210.8 million in 1997 increased $114.0
million or 117.7% from $96.9 million in 1996. The increase was due to higher
charge-offs on owned receivables, which increased 114.3% from $70.6 million in
1996 to $151.2 million in 1997 and higher levels of delinquencies which
continued to increase throughout the year. Consistent with this experience,
management's estimate of possible losses inherent in the loan portfolio at year
end increased, resulting in an increase in the ratio of the loss allowance to
receivables to 4.1% at the end of 1997 from 3.4% at year end 1996.
The provision for credit losses of $96.9 million in 1996 increased $43.5
million or 82% from $53.3 million in 1995. The increase was primarily due to an
increase in the desired level of the allowance given the increase in charge-offs
and impaired assets during 1996.
A description of the credit performance of the loan portfolio is set forth
under the section entitled "Credit Risk Management."
25
<PAGE> 27
NONINTEREST REVENUES
($ IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of credit cards $ 0 $ 33,820 $ 0
Other noninterest revenues:
Credit card securitization income 252,631 258,066 183,360
Credit card servicing income 176,061 176,567 117,369
Income from personal finance activities 169,973 109,167 50,541
Credit card interchange income 85,208 102,804 92,439
Business loan and lease other revenues 70,943 61,622 41,050
Credit card overlimit fees 46,447 16,465 4,755
Insurance revenues, net 37,816 38,175 30,146
Equity securities (losses) gains (11,426) 6,522 15,386
Other 17,484 3,324 7,968
- ---------------------------------------------------------------------------------------------
Total other noninterest revenues $845,137 $772,712 $543,014
- ---------------------------------------------------------------------------------------------
Total noninterest revenues $845,137 $806,532 $543,014
- ---------------------------------------------------------------------------------------------
</TABLE>
Noninterest revenues increased in 1997 to $845.1 million from $806.5
million in 1996. The 1996 figure includes a gain on the sale of credit card
customer relationships of $33.8 million. Excluding this gain, noninterest
revenues increased by $72.4 million or 9.4% in 1997. This increase was primarily
the result of income derived from increased securitization activity in the
personal finance and business loan and lease portfolios, as described below.
There were no new credit card securitization transactions in 1997 due to the
decrease in average managed credit card receivables during the period.
Due to prior period securitizations of credit card receivables, activity
from securitized account balances, which otherwise would be reported as net
interest income and charge-offs, is reported in securitization income and
servicing income, both of which are included in noninterest revenues. Credit
card securitization income was affected by the adoption in the third quarter of
1996 of a new charge-off methodology relating to bankruptcies (see "Asset
Quality"), the upward repricing of interest rates and fees, increases in
charge-offs and the related impact on the allowance for loan losses all of which
had an approximate $50 million impact (earnings increase) in 1996, as well as a
57% increase in average securitized receivables. See Note 1 to Consolidated
Financial Statements for further description of securitization income.
The Company 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. (See Note 1 to
Consolidated Financial Statements.) The adoption of SFAS 125 did not have a
material effect on the Company's financial statements.
Credit card servicing income, which represents fees paid to the Company for
continuing to service accounts which have been securitized, remained unchanged
in 1997 at $176.1 million compared to $176.6 million in 1996. Such fees
generally approximate 2% of securitized receivables and are consistent with the
$9.6 billion of average securitized receivables in both 1997 and 1996.
Interchange income represents fees that are payable by merchants to the
credit card issuer for sale transactions. Total interchange income, which
represents approximately 1.4% of credit card purchases, decreased to $85.2
million in 1997 from $102.8 million in 1996 reflecting the lower volume of
transactions experienced in 1997.
During 1997, the Company securitized $3.4 billion of mortgage and home
equity loans compared to $1.4 billion in 1996. As a result, income from personal
finance activities of $170.0 million for 1997 increased 55.7% from $109.2
million in 1996. The 1997 income reflects the use of higher prepayment
assumptions as well as a change in the mix of the loans securitized. See Note 1
to Consolidated Financial Statements for a description of income from personal
finance loans.
26
<PAGE> 28
Business loan and lease other revenues increased $9.3 million to $70.9
million in 1997 primarily due to an 80.8% growth in average securitized business
loans and leases from 1996. Credit card overlimit fees on the managed portfolio
increased significantly in 1997 as a result of the Company's risk based pricing
strategies. Insurance revenues, net, were $37.8 million in 1997, down slightly
from the $38.2 million reported in 1996. The decline is attributable to lower
receivable balances in the credit card portfolio.
Equity securities (losses) gains in 1997 reflect a decrease in carrying
value of portfolio investments in the Company's venture capital unit. "Other"
other noninterest revenues increased by $14.2 million due to an increase in
other credit card revenues.
Noninterest revenues of $806.5 million in 1996 increased $263.5 million or
49% from $543.0 million in 1995, primarily due to increases in credit card
securitization, servicing and interchange income, as well as higher personal
finance and business loan and lease revenues. Noninterest revenues for 1996 also
included a $33.8 million gain on the sale of credit card customer relationships.
OPERATING EXPENSES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of credit card deferred origination costs, net $ 69,344 $ 88,517 $ 72,258
Other operating expenses:
Salaries and employee benefits 247,287 182,666 116,681
Marketing 53,039 31,975 25,374
External processing 43,256 42,814 28,407
Professional/consulting fees 38,600 40,247 14,937
Equipment expense 37,712 22,752 12,751
Postage 29,039 25,700 18,518
Occupancy expense 23,097 14,827 9,254
Credit card fraud losses 22,287 23,611 20,029
Telephone expense 21,262 16,116 11,959
Credit and collection expense 20,017 13,784 9,039
Other 25,901 20,165 11,478
- ---------------------------------------------------------------------------------------------
Total other operating expenses $561,497 $434,657 $278,427
- ---------------------------------------------------------------------------------------------
Total operating expenses $630,841 $523,174 $350,685
- ---------------------------------------------------------------------------------------------
At year end:
Number of accounts managed (000's) 6,342 5,984 5,031
Number of employees 4,498 3,541 2,409
For the year:
Other operating expenses as a percentage of average
managed receivables 3.4% 2.9% 2.9%
- ---------------------------------------------------------------------------------------------
</TABLE>
The amortization of credit card deferred origination costs, net, decreased
to $69.3 million in 1997 from $88.5 million in 1996. This decrease reflects the
lower level of credit card originations in 1997 (See Note 1 to Consolidated
Financial Statements.)
Total other operating expenses of $561.5 million for 1997 were up $126.8
million or 29.2% from $434.7 million in 1996. The increase in total other
operating expenses is attributable, in part, to a $64.6 million or 35.4%
increase in salaries and employee benefits as a result of an increase in the
number of employees from 3,541 at year-end 1996 to 4,498 at year-end 1997,
including the addition of staff in the consumer credit card collection area and
additions to staff to support the growth in loan production and serviced
receivables in personal finance. Other factors affecting the increase in other
operating expenses were a $21.1 million or 65.9% increase in marketing expenses
relating to new business advertising for the personal finance and business loan
27
<PAGE> 29
products and increased advertising related to account retention initiatives for
the consumer credit card portfolio. External processing fees for 1997 reflect a
$10 million cash rebate related to prior periods' credit card processing
performance. Without the rebate, external processing costs would have increased
by $10.4 million or 24.4% over the $42.8 million reported in 1996. This increase
is primarily the result of customer retention and relationship management
programs in the credit card area. Other operating expenses, including equipment
and occupancy expenses reflected increases consistent with the current and
projected increase in employees and serviced customer accounts and the addition
of space and new technology required to support this growth. "Other" other
operating expenses increased by $5.7 million or 28.4% primarily as a result of a
full year of expenses associated with the mandatorily redeemable preferred
securities.
The amortization of credit card deferred origination costs increased by
$16.2 million to $88.5 million in 1996 from $72.3 million in 1995. The increase
reflects the growth in credit card originations experienced during the last half
of 1995 and in 1996.
Total other operating expenses increased by $156.3 million or 56% to $434.7
million in 1996 from $278.4 million in 1995. Part of the increase in total other
operating expenses resulted from a $66 million or 57% increase in salaries and
employee benefits. In addition, professional and other consulting fees increased
$25.3 million from $14.9 million in 1995 to $40.2 million in 1996.
INCOME TAXES
The Company's consolidated income tax expense was $24.9 million for 1997, or an
effective tax rate of 26% compared to tax expense of $89.1 million in 1996, or
an effective tax rate of 34%, and tax expense of $75.2 million in 1995, or an
effective rate of 36%. The decrease in the effective tax rate from 1996 to 1997
resulted from a higher level of insurance-related activities, and tax credits
from investments in combination with a lower level of pretax income.
ASSET/LIABILITY MANAGEMENT
The financial condition of Advanta Corp. is managed with a focus on maintaining
high credit quality standards, disciplined management of market risks and
prudent levels of leverage and liquidity.
MARKET RISK SENSITIVITY
Market risk is the potential for loss or diminished financial performance
arising from adverse changes in market forces such as interest rates and market
prices. Market risk sensitivity is the degree to which a financial instrument,
or a company that owns financial instruments is exposed to market forces. The
Company regularly evaluates its market risk profile and attempts to minimize the
impact of market risks on net interest income and net income.
The Company's exposure to foreign currency exchange rate risk, commodity
price risk, and equity price risk is immaterial relative to expected overall
financial performance. The Company's financial performance can, however, be
affected by fluctuations in interest rates, changes in economic conditions,
shifts in customer behavior, and other factors. Changes in economic conditions
and shifts in customer behavior are difficult to predict, and the financial
performance of the Company generally cannot be insulated from such forces.
Financial performance variability as a result of fluctuations in interest
rates is commonly called interest rate risk. Interest rate risk generally
evolves from mismatches in the timing of asset and liability repricing (gap
risk) and from differences between the repricing indices of assets and
liabilities (basis risk).
The Company attempts to analyze the impact of interest rate risk by
regularly evaluating the perceived risks inherent in its asset and liability
structure, including securitized instruments and off-balance sheet instruments.
Risk exposure levels vary continuously, as changes occur in the Company's
asset/liability mix, market interest rates, prepayment trends, and other factors
affecting the timing and magnitude of cash flows. Computer simulations are used
to generate expected financial performance in a variety of interest rate
environments. Those results are analyzed to determine if actions need to be
taken to mitigate the Company's interest rate risk.
28
<PAGE> 30
In managing interest rate risk exposure, the Company periodically
securitizes receivables, sells and purchases assets, alters the mix and term
structure of its funding base, changes its investment portfolio and uses
derivative financial instruments. Derivative instruments, by policy, are not
used for speculative purposes (see discussion under "Derivative Activities").
The Company has measured its interest rate risk using a rising rate
scenario and a declining rate scenario. Net interest income is estimated using a
third party software model that uses standard income modeling techniques. The
Company estimates that its net interest income over a twelve month period would
neither materially increase or decrease if interest rates were to rise or fall
by 200 basis points or less. Both increasing and decreasing rate scenarios
assume an instantaneous shift in rates and measure the corresponding change in
expected net interest income over one year. The scenario results reflect the
completed Transaction with Fleet. (See Note 11 to Consolidated Financial
Statements.) As a result of the Transaction with Fleet, the Company's interest
rate risk profile has changed; however, the sensitivity to changes in interest
rates is not material.
The above estimates of net interest income sensitivity alone do not provide
a comprehensive view of the Company's exposure to interest rate risk. The
quantitative risk information is limited by the parameters and assumptions
utilized in generating the results. Such analyses are useful only when viewed
within the context of the parameters and assumptions used. The above rate
scenarios in no way reflect management's expectation regarding the future
direction of interest rates, and they depict only two possibilities out of a
large set of possible scenarios.
In addition to interest rate risk, the Company has other financial
instruments, namely capitalized servicing rights and interest only strips, that
are subject to prepayment risk. Prepayments are principal payments in excess of
scheduled principal payments. Prepayments generally result from entire loan
payoffs due largely to refinancing a loan or selling a home. Actual or
anticipated prepayment rates are expressed in terms of a constant prepayment
rate ("CPR"), which represents the annual percentage of beginning loan balances
that prepay. To a degree, prepayment rates are related to market interest rates
and changes in those interest rates. The precise relationship between them,
however, is not known at this time. Accordingly, the Company believes it is
prudent to disclose the fair value sensitivity of these instruments based on
changes in prepayment rate assumptions rather that based on changes in interest
rates.
The Company's capitalized servicing rights and interest only strips derive
from both fixed and variable rate loans, the majority of which are fixed. Fixed
and variable rate loans are currently prepaying at different rates and are
expected to continue this behavior in the future. The Company has estimated the
fair value impact of prepayment changes of 2.5% CPR for fixed rate loans and 3%
CPR for variable rate loans. These key changes in prepayment assumptions could
result in an $18 million change in fair value. In addition, changes in the
interest rate environment generally affect the level of loan originations.
Prepayment assumptions are not the only assumptions in the fair value
calculation, but they are the most influential. Other key assumptions are not
directly impacted by market forces as defined earlier. The above prepayment
scenarios do not reflect management's expectation regarding the future direction
of prepayments, and they depict only two possibilities out of a large set of
possible scenarios.
LIQUIDITY AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, for both long-
and short-term needs, through active management of both assets and liabilities.
During 1997, the Company, through its subsidiaries, securitized $3.4 billion of
personal finance loans and $0.6 billion of business loan and lease receivables.
In addition, funds totalling approximately $996 million were raised during this
same period through the issuance of unsecured notes, other borrowings and an
increase in deposits at ANB (and its predecessors by merger). Cash generated
from these transactions was temporarily invested in short-term, high quality
investments at money market rates awaiting redeployment to pay down borrowings
and to fund future credit card, personal finance and business loan receivable
growth. Cash and equivalents exceeded amounts normally held to provide liquidity
protection subsequent to the Company's March 17, 1997 announcement relating to a
decrease in expected 1997 financial results. At December 31, 1997, the Company
had approximately $1.5 billion of loan
29
<PAGE> 31
and lease receivables and $1.3 billion of investments available for sale which
could be sold to generate additional liquidity.
The Company's funding strategy for 1998 relies heavily on the cash, cash
equivalents and investments released by the Transaction with Fleet as well as
deposit gathering activity at both ANB and AFC. As a result of the Transaction
with Fleet, approximately $1.3 billion in cash, cash equivalents and investments
which had previously been held by the Company in connection with its consumer
credit card business was no longer required in such business and became
available for general corporate purposes. The Company used approximately $850
million of such amount (before taking into account the exercise price of
options) to purchase 7,882,750 shares of its Class A Common Stock, 12,482,850 of
its Class B Common Stock, and 1,078,930 of its SAILS Depositary Shares through
an issuer tender offer which was completed on February 20, 1998. (See Notes 8
and 11 to the Consolidated Financial Statements.) Following the completion of
the Transaction with Fleet and the Company's tender offer, the Company expects
to benefit from a substantial cash position. However, the external sources
described below will remain in place both for contingency funding and for
continued future utilization.
Funding diversification has been an essential component of the Company's
liquidity and capital management. The Company and ANB have utilized both retail
and institutional on balance sheet funding sources issuing a variety of debt and
deposit products. The Company and ANB also have utilized a secured revolving
credit facility and off balance sheet securitization funding (described below).
The debt securities of Advanta and ANB (and its predecessors by merger) had
investment-grade ratings from all of the nationally recognized statistical
rating agencies throughout 1996. Beginning March 1997 through early 1998, the
various rating agencies lowered their ratings on the debt securities of each of
Advanta and its banking subsidiaries. As of March 1998, senior debt of Advanta
was rated investment grade by one agency and below investment grade by the other
four agencies; and debt of ANB was rated investment grade by two agencies and
below investment grade by the other three agencies.
On May 1, 1997, Advanta Mortgage Corp. USA and its subsidiaries entered
into a $500 million secured revolving credit facility, $250 million of which is
committed. Also, deposit sources proved readily expandable in 1997 as
demonstrated in the growth noted above. In addition, notwithstanding the
Company's current liquidity, efforts continue to develop new sources of funding,
both through previously untapped customer segments and through development of
new financing structures.
In December 1996, Advanta Capital Trust I, a newly formed statutory
business trust established by and wholly-owned by the Company (the "Trust"),
issued in a private offering $100 million of capital securities, representing
preferred beneficial interests in the assets of the Trust (the "Capital
Securities"). The Company used the proceeds from the sale for general corporate
purposes. The sole assets of the Trust consist of $100 million of 8.99% junior
subordinated debentures issued by the Company due December 17, 2026 (the "Junior
Subordinated Debentures"). The Capital Securities will be subject to mandatory
redemption under certain circumstances, including at any time on or after
December 17, 2006 upon the optional prepayment by the Company of the Junior
Subordinated Debentures. The obligations of the Company with respect to the
Junior Subordinated Debentures, when considered together with the obligations of
the Company under the Indenture relating to the Junior Subordinated Debentures,
the Amended and Restated Declaration of Trust relating to the Capital Securities
and the Capital Securities Guarantee issued by the Company with respect to the
Capital Securities will provide, in the aggregate, a full and unconditional
guarantee of payments of distributions and other amounts due on the Capital
Securities. In July, 1997, the Company and the Trust exchanged the outstanding
Capital Securities and Junior Subordinated Debentures for substantially
identical securities which were registered under the Securities Act of 1933, as
amended (the "Act"). The Company also exchanged the Capital Securities Guarantee
for a substantially identical guarantee which was also registered under the Act.
The Trust has no operations or assets separate from its investment in the Junior
Subordinated Debentures. Separate financial statements of the Trust are not
presented because management has determined that they would not be meaningful to
investors.
30
<PAGE> 32
In August 1995, in a public offering, the Company sold 2,500,000 depositary
shares each representing a one-hundredth interest in a share of Stock
Appreciation Income Linked Securities (SAILS). The SAILS constitute a series of
the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B
Preferred Stock, Series 1995 (SAILS). On September 15, 1999, unless either
previously redeemed by the Company or converted at the option of the holder,
each share of the SAILS will automatically convert into 100 shares of Class B
Common Stock. Proceeds from the offering, net of underwriting discount, were
approximately $90 million. The Company used the proceeds of the offering for
general corporate purposes, including financing the growth of its subsidiaries.
As of February 20, 1998, after giving effect to the purchase of shares through
an issuer tender offer made following the Transaction with Fleet, 1,421,070
shares of Class B Preferred Stock remain outstanding.
The Company also filed a shelf registration statement in 1996 with the
Securities and Exchange Commission which provides for the Company to sell up to
$1.6 billion of debt securities. The Company has issued approximately $1.0
billion of debt securities under this shelf.
In September 1995, ANB (and its predecessors by merger) established a $2.25
billion bank note program. Under this program, ANB may issue an aggregate of
$2.0 billion of senior bank notes and $250 million of subordinated bank notes.
These notes may have maturities ranging from seven days to fifteen years from
the date of issuance. In connection with the Transaction with Fleet, a
significant portion of bank notes issued under this program was transferred to
the LLC.
As of December 31, 1997, the Company and ANB had a $1 billion unsecured
revolving credit facility. Following the closing of the Transaction with Fleet
in 1998, the facility was terminated by the Company and ANB.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the past five
years.
COMPOSITION OF DEPOSIT BASE
<TABLE>
<CAPTION>
($ IN MILLIONS) AS OF DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 41.6 1% $ 28.3 1% $ 91.7 5% $ 64.5 5% $ 33.4 3%
Money market savings 506.8 17 329.7 18 277.5 14 301.7 26 220.7 17
Time deposits of $100,000 or
less 2,163.0 72 978.6 53 965.5 51 691.0 60 961.4 77
Time deposits of more than
$100,000 306.2 10 523.5 28 571.9 30 102.2 9 39.4 3
- ----------------------------------------------------------------------------------------------------------------
Total deposits $3,017.6 100% $1,860.1 100% $1,906.6 100% $1,159.4 100% $1,254.9 100%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
COMPOSITION OF DEBT AND OTHER BORROWINGS
<TABLE>
<CAPTION>
($ IN MILLIONS) AS OF DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Subordinated notes and
certificates $ 55.5 2% $ 71.1 3% $ 76.2 4% $ 282.1 20% $ 301.3 63%
Senior notes and
certificates 151.0 7 208.3 8 200.6 11 0 0 0 0
Short-term bank notes 242.0 11 309.3 13 25.0 1 85.0 6 0 0
Medium-term bank notes 669.5 29 835.6 34 322.7 18 0 0 0 0
5 1/8% notes, due 1996 0 0 0 0 150.0 8 149.9 11 149.9 32
Medium-term notes 1,099.5 48 880.8 36 504.7 28 359.7 25 15.0 3
Value notes 30.7 1 0 0 0 0 0 0 0 0
Term fed funds 0 0 10.0 0 443.0 25 309.0 22 0 0
Securities sold under
agreements to repurchase 0 0 0 0 0 0 86.5 6 0 0
Lines of credit and term
funding arrangements 3.9 0 40.0 0 0 0 50.0 4 7.5 2
Other borrowings 48.9 2 107.0 6 81.8 5 80.9 6 0 0
- ----------------------------------------------------------------------------------------------------------------
Total debt and other
borrowings $2,301.0 100% $2,462.1 100% $1,804.0 100% $1,403.1 100% $ 473.7 100%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Previously, as a grandfathered institution under the Competitive Equality
Banking Act of 1987 ("CEBA"), the Company had to limit AUS's average on-balance
sheet asset growth to 7% per annum. For the fiscal CEBA year ended September 30,
1996, AUS's average assets did not exceed the allowable amount and, accordingly,
AUS was in full compliance with CEBA growth limits. The timing and size of
securitizations, on-balance sheet liability structure and rapid changes in
balance sheet structure had frequently been due to the management of AUS's
balance sheet within this growth constraint. However, on September 30, 1996 this
growth rate provision of CEBA was repealed which has created substantial new
flexibility with respect to asset/liability management for AUS (and now ANB) and
ultimately the Company.
As of December 31, 1997 ANB's total deposits were $2.8 billion, and AFC, a
Utah state-chartered, FDIC-insured industrial loan corporation had total
deposits of $195.4 million. A significant portion of ANB's deposits were
contributed to the LLC in connection with the Transaction with Fleet.
ANB's combined Tier I and Tier II capital ratio at December 31, 1997 was
16.39%. At December 31, 1996, the combined Tier I and Tier II capital ratio was
15.84% for AUS and 17.20% for Old ANB. In each case, ANB, AUS and Old ANB met
the requirements of the Comptroller and qualified each of ANB, AUS and Old ANB
as well-capitalized.
In addition, the Company's insurance subsidiaries are subject to certain
capital, deposit and dividend rules and regulations as prescribed by state
jurisdictions in which they are authorized to operate. At December 31, 1997 and
1996 the insurance subsidiaries were in compliance with such rules and
regulations.
CAPITAL EXPENDITURES
The Company spent $83.4 million for capital expenditures in 1997, primarily for
the construction of buildings in Pennsylvania for the mortgage division and a
new office building in Delaware, leasehold improvements, additional space in
existing buildings, office and voice communication equipment and furniture and
fixtures. This compared to $78.4 million for capital expenditures in 1996 and
$20.6 million in 1995.
In 1998, the Company anticipates capital expenditures to be lower than in
1997 as a result of the decreased need of capital expenditures to support the
consumer credit card business contributed to the LLC.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not
32
<PAGE> 34
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. In connection with this issue (the "Year 2000 Issue"), the
Company has initiated a comprehensive assessment of its computer systems and
applications, managed by a team led by two senior information technology
managers and organized as a separate Year 2000 Project Office (the "Project
Office"). The Project Office has developed standards for its work based on work
of leading consultants in the field. The Project Office has developed a review
process featuring a "Year 2000 Score Card" that will be used to measure the
degree to which each of the Company's computer applications are impacted by the
Year 2000 Issue.
The Company has also initiated communications with all of its significant
outside service providers and some of its larger clients to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 Issue. There can be no assurance that the systems used by
outside service providers or other third parties upon which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The Company expects that its on-going evaluation of its systems and
applications and testing for the implementation of any modifications of existing
computer programs or conversions to new programs, to the extent necessary to
address the Year 2000 Issue, will be substantially completed by the end of 1998,
consistent with the Year 2000 guidelines issued by the Comptroller. The Company,
therefore, believes that the Year 2000 Issue will not pose significant
operational problems for the Company. The Company, however, has not completed
its evaluation of the costs of addressing the issue. While management does not
expect that the costs of evaluating and reprogramming these systems will be
significant, the Company cannot yet estimate the actual costs of the necessary
remediation program. Moreover, the Company notes that GAAP requires that the
costs of becoming Year 2000 compliant, including without limitation modifying
computer software or converting to new programs, be charged to expense as they
are incurred. The Company believes that the Year 2000 Issue will not have a
material adverse effect on the Company's future financial condition, liquidity
or results of operations during 1998 and in future periods.
DERIVATIVES ACTIVITIES
The Company utilizes derivative financial instruments for the purpose of
managing its exposure to interest rate and foreign currency risks. The Company
has a number of mechanisms in place that enable it to monitor and control both
market and credit risk from these derivatives activities. At the broader level,
all derivatives strategies are managed under a hedging policy approved by the
Board of Directors that details the use of such derivatives and the individuals
authorized to execute derivatives transactions. All derivatives strategies must
be approved by the Company's senior management.
As part of this approval process, a market risk analysis is completed to
determine the potential impact on the Company from severe negative (stressed)
movements in market rates. By policy, derivatives transactions may only be used
to manage the Company's exposure to interest rate and foreign currency risks or
for cost reduction and may not be used for speculative purposes. As such, the
impact of any derivatives transaction is calculated using the Company's
asset/liability model to determine its suitability.
The Company's Investment Committee (a management committee) has a
counterparty credit policy. This policy details the maximum credit exposure,
transaction limit and transaction term for counterparties based on an internally
assigned Investment Committee credit rating. Internal counterparty credit
ratings reflect the credit ratings from nationally recognized rating agencies,
as well as other significant credit factors where appropriate. Each
counterparty's credit quality is reviewed as new information becomes available,
and, in any case, at least quarterly. Activities with counterparties will be
suspended if there is reason to believe that their credit quality is below the
Company's set standards.
For each counterparty, credit exposure amounts are calculated in a stress
environment and represent the maximum aggregate credit exposure from derivatives
and other capital market transactions the Company is willing to accept from an
individually approved counterparty. To manage counterparty exposure, the Company
also uses negotiated agreements that establish threshold exposure amounts for
each counterparty above which the Company has the right to call for and receive
collateral for the amount of such excess, thereby limiting its
33
<PAGE> 35
exposure to the threshold amount. The threshold levels can be fixed or may
change as the credit rating of the counterparty changes, and in all cases, the
threshold levels are well below the maximum allowable exposure amounts described
above.
Counterparty master agreements and any collateral agreements, by policy,
must be signed prior to the execution of any derivatives transactions with a
counterparty. To date, substantially all master agreements with counterparties
have included bilateral collateral agreements. As such, the potential exposure
from a particular counterparty is limited to the maximum threshold level for
that counterparty.
The Company has a treasury middle office that is independent of the trading
function, which measures, monitors, and reports on credit, market, and liquidity
risk exposures from capital markets, hedging and derivative product activities.
It is the responsibility of this department to ensure compliance with respect to
the hedging policy, including the counterparty transaction limits, transaction
terms and trader authorizations. In addition, this department marks each
derivatives position to market on a weekly basis using both internal and
external models. These models have been benchmarked against a sample of
derivatives dealers' valuation models for accuracy. Position and counterparty
exposure reports are generated and used to manage collateral requirements of the
counterparty and the Company.
All of these procedures and processes are designed to provide reasonable
assurance that prior to and after the execution of any derivatives strategy,
market, credit and liquidity risks are fully analyzed and incorporated into the
Company's asset/liability and risk measurement models and the proper accounting
treatment for the transaction is identified and executed.
During 1996, the FASB issued its exposure draft for accounting for hedging
and derivatives. This draft, an attempt to standardize accounting treatment for
derivatives and hedging, would alter the accounting treatment for the use of
such instruments in the reduction of interest rate risk. The FASB is currently
reviewing comments on the exposure draft. The Company is unable to predict the
outcome of these deliberations at this time.
CREDIT RISK MANAGEMENT
Management regularly reviews the loan and lease portfolio in order to evaluate
the adequacy of the allowance for credit losses. The evaluation includes such
factors as the inherent credit quality of the loan portfolio, past experience,
current economic conditions and changes in the composition of the loan
portfolio. The allowance for credit losses is maintained for on-balance sheet
receivables. The on-balance sheet allowance is intended to cover all credit
losses inherent in the owned loan portfolio. With regard to securitized assets,
anticipated losses and related recourse liabilities are reflected in the
calculations of Securitization Income, Amounts due from Credit Card
Securitizations and Other Assets. Recourse liabilities are intended to cover all
probable credit losses over the life of the securitized receivables. Management
evaluates both its on-balance sheet and recourse requirements and, as
appropriate, effects additions to these accounts.
The allowance for credit losses on a consolidated basis was $137.8 million,
or 4.1% of owned receivables, at December 31, 1997, compared to $89.2 million,
or 3.4% of owned receivables, at December 31, 1996. The allowance for credit
losses on a consolidated basis was $53.5 million, or 1.9% of owned receivables,
in 1995.
ASSET QUALITY
Impaired assets include both nonperforming assets (personal finance loans and
business loans and leases past due 90 days or more, real estate owned, bankrupt,
decedent and fraudulent credit card accounts, and off-lease equipment) and
accruing loans past due 90 days or more on credit cards and leases. The carrying
value for real estate owned is based on fair value and costs of disposition and
is reflected in other assets.
Gross interest income that would have been recorded in 1997 and 1996 for
owned nonperforming assets, had interest been accrued throughout the year in
accordance with the assets' original terms, was approximately $2.1 million and
$3.7 million, respectively. The amount of interest on nonperforming assets
included in income for 1997 and 1996 was $0.4 million and $0.7 million,
respectively.
34
<PAGE> 36
In the third quarter of 1996, the Company 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. The 1997 and 1996 credit
statistics set forth in the following tables reflect this change in methodology.
The 1997 asset quality information reflects generally higher charge-off and
delinquency rates primarily in the credit card business which was consistent
with industry trends.
The total managed charge-off rate for 1997 was 5.3% for 1997 compared to
3.2% in 1996. The charge-off rate on managed credit cards increased from 3.7% in
1996 to 7.0% in 1997. The charge-off rate for managed personal finance loans
showed a slight increase, rising to 0.8% in 1997 from 0.7% in 1996. For 1997,
the charge-off rate for business loans and leases was 3.2% compared to 2.3% for
the prior year.
On the total owned portfolio the charge-off rate was 5.6% in 1997 compared
to 2.3% for 1996. The charge-off rate on the owned credit card portfolio rose to
7.9% from 2.5% one year earlier. The charge-off rate on owned personal finance
loans decreased from 1.3% in 1996 to 1.0% in 1997. The 1997 charge-off rate on
business loans and leases was 2.5% compared to 1.5% in 1996.
Nonperforming assets in the total managed portfolio rose to $328.8 million
or 1.8% of receivables in 1997 compared to $191.7 million or 1.2% at the end of
1996. In the managed credit card portfolio, nonperforming assets increased to
$101.3 million or 0.9% of receivables from $89.1 million or 0.7% in 1996. The
nonperforming assets in the managed personal finance portfolio totalled $200.6
million or 3.8% of receivables at the end of 1997, up from $93.1 million or 3.4%
at the end of 1996. In the managed business loan and lease portfolio,
nonperforming assets totalled $26.8 million or 2.1% of receivables in 1997
compared to $9.5 million or 1.2% at the end of 1996.
In the owned portfolio, nonperforming assets totalled $51.1 million or 1.5%
of receivables at the end of 1997 compared to $29.8 million or 1.1% of
receivables at the end of 1996. Nonperforming assets in the owned credit card
portfolio rose to $21.1 million or 0.8% of receivables compared to $13.9 million
or 0.7% at the end of 1996. In the owned personal finance portfolio,
nonperforming assets increased to $23.2 million or 4.9% of loans at year end
1997, up from $13.0 million or 3.5% at the end of 1996. Nonperforming assets
totalled $6.7 million or 2.2% of receivables in the business loan and lease
portfolio, at the end of 1997, up from $2.9 million or 1.4% at the end of 1996.
Loans delinquent 30 days or more in the total managed portfolio were $1.1
billion or 6.0% of receivables at year end 1997, up from $886.7 million or 5.4%
of receivables at December 31, 1996. In the managed credit card portfolio loans
delinquent 30 days or more totalled $594.4 million or 5.29% of receivables in
1997, compared to $632.1 million or 5.0% of receivables at year end 1996. In the
managed personal finance loan portfolio at year end 1997, loans 30 days or more
delinquent totalled $391.9 million or 7.4% of receivables, up from $194.4
million or 7.1% of receivables at December 31, 1996. Loans 30 days or more
delinquent in the managed business loan and lease portfolio were $81.7 million
or 6.5% of receivables at year end 1997 compared to $59.9 million or 7.3% at
year end 1996.
In the owned portfolio, loans delinquent 30 days or more at year end 1997
totalled $201.9 million or 5.9% of receivables, up from $145.6 million or 5.5%
at year end 1996. Loans 30 days or more delinquent in the owned credit card
portfolio totalled $141 million or 5.5% of loans at year end 1997, up from
$107.3 million or 5.2% at the end of 1996. At the end of 1997 loans delinquent
30 days or more in the owned personal finance portfolio totalled $42.9 million
or 9.0% of receivables compared to $28.5 million or 7.6% at the end of 1996.
Owned business loans and leases delinquent more than 30 days at year end 1997
totalled $17.8 million or 6.0% of receivables compared to $9.5 million or 4.4%
at the end of 1996.
Impaired assets in the total managed portfolio were $532 million at
December 31, 1997 or 3.0% of receivables compared to $420.5 million or 2.6% at
year end 1996. In the managed credit card portfolio, impaired assets totalled
$304.4 million or 2.7% of receivables at the end of 1997 compared to the 1996
level of $317.9 million or 2.5% of receivables. In the owned portfolio, total
impaired assets were $100.6 million or 3.0% of receivables in 1997, up from
$70.4 million or 2.7% at the end of 1996. In the owned credit card portfolio,
35
<PAGE> 37
impaired assets rose to $70.5 million or 2.7% of receivables in 1997 compared to
$54.5 million or 2.7% at the end of 1996.
Past due loans represent accruing loans that are past due 90 days or more
as to collection of principal and interest. Credit card receivables, except
those on bankrupt, decedent and fraudulent accounts, continue to accrue interest
until the time they are charged off at 186 days contractual delinquency. In
contrast, all personal finance loans and most business loans and leases are put
on nonaccrual status when they become 90 days past due.
During 1994, the Company implemented a new policy for the charge-off of
mortgage loans. Under this policy, when a nonperforming mortgage loan becomes
twelve months delinquent, the Company writes down the loan to its net realizable
value, regardless of anticipated collectibility. Consequently, in 1994, all
mortgage loans that had been twelve or more months delinquent, as well as any
mortgages that became twelve months delinquent during the year were written down
(through a recorded charge-off) to their net realizable value.
36
<PAGE> 38
The following tables provide a summary of impaired assets, delinquencies
and charge-offs for the past five years:
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED-MANAGED
Nonperforming assets $ 328,835 $191,668 $ 82,171 $ 61,587 $ 63,589
Accruing loans past due 90 days or more 203,117 228,845 84,892 40,837 31,514
Impaired assets 531,952 420,513 167,063 102,424 95,103
Total loans 30 days or more delinquent 1,068,183 886,717 404,072 220,390 186,297
As a percentage of gross receivables:
Nonperforming assets 1.8% 1.2% 0.7% 0.8% 1.2%
Accruing loans past due 90 days or more 1.1 1.4 0.7 0.5 0.6
Impaired assets 3.0 2.6 1.4 1.3 1.8
Total loans 30 days or more delinquent:
New methodology(1) 6.0 5.4
Prior methodology 5.2(2) 3.3 2.7 3.6
Net charge-offs:
Amount $ 860,098 $479,992 $212,865 $139,676 $122,715
As a percentage of gross receivables:
New methodology(1) 5.3% 3.2%
Prior methodology 3.5(2) 2.2% 2.3% 2.9%
- ---------------------------------------------------------------------------------------------------------
CREDIT CARDS-MANAGED
Nonperforming assets $ 101,298 $ 89,064 $ 20,516 $ 14,227 $ 10,881
Accruing loans past due 90 days or more 203,069 228,822 84,878 40,721 31,489
Impaired assets 304,367 317,886 105,394 54,948 42,370
Total loans 30 days or more delinquent 594,403 632,083 262,299 133,121 94,035
As a percentage of gross receivables:
Nonperforming assets 0.9% 0.7% 0.2% 0.2% 0.3%
Accruing loans past due 90 days or more 1.8 1.8 0.8 0.6 0.8
Impaired assets 2.7 2.5 1.1 0.8 1.1
Total loans 30 days or more delinquent:
New methodology(1) 5.3 5.0
Prior methodology 4.6(2) 2.6 2.0 2.4
Net charge-offs:
Amount $ 795,928 $451,239 $193,160 $115,218 $105,966
As a percentage of gross receivables:
New methodology(1) 7.0% 3.7%
Prior methodology 4.1(2) 2.5% 2.5% 3.5%
- ---------------------------------------------------------------------------------------------------------
PERSONAL FINANCE LOANS-MANAGED(3)(4)
Nonperforming assets $ 200,600 $ 93,101 $ 56,743 $ 44,678 $ 50,418
Total loans 30 days or more delinquent 391,929 194,412 106,223 65,966 75,747
As a percentage of gross receivables:
Nonperforming assets 3.8% 3.4% 3.2% 3.3% 4.4%
Total loans 30 days or more delinquent 7.4 7.1 5.9 4.9 6.6
Net charge-offs:
Amount $ 30,165 $ 14,981 $ 13,836 $ 20,709 $ 13,991
As a percentage of gross receivables .8% .7% .9% 1.7% 1.3%
- ---------------------------------------------------------------------------------------------------------
BUSINESS LOANS AND LEASES-MANAGED(5)
Nonperforming assets $ 26,782 $ 9,503 $ 4,912 $ 2,682 $ 2,290
Impaired assets 26,817 9,503 4,912 2,682 2,290
Total loans 30 days or more delinquent 81,675 59,880 35,274 20,972 16,476
As a percentage of receivables:
Nonperforming assets 2.1% 1.2% 1.3% 1.0% 1.3%
Impaired assets 2.1 1.2 1.3 1.0 1.3
Total loans 30 days or more delinquent 6.5 7.3 9.3 7.9 9.7
Net charge-offs:
Amount $ 34,002 $ 13,777 $ 5,846 $ 3,747 $ 2,759
As a percentage of receivables 3.2% 2.3% 1.9% 1.9% 1.9%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to credit card bankruptcies (see Asset
Quality).
(2) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
(3) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
(4) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(5) Includes leases for all years presented and business cards beginning in
1996.
37
<PAGE> 39
The following tables provide a summary of allowances, impaired assets,
delinquencies and charge-offs for the past five years:
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED-OWNED
Allowance for credit losses $137,773 $ 89,184 $53,494 $41,617 $31,227
Nonperforming assets 51,149 29,822 21,856 31,949 11,487
Accruing loans past due 90 days or more 49,458 40,597 17,399 11,354 11,038
Impaired assets 100,607 70,419 39,255 43,303 22,525
Total loans 30 days or more delinquent 201,891 145,613 76,859 67,904 43,616
As a percentage of gross receivables:
Allowance for credit losses 4.1% 3.4% 1.9% 2.1% 2.4%
Nonperforming assets 1.5 1.1 0.8 1.6 0.9
Accruing loans past due 90 days or more 1.5 1.5 0.6 0.6 0.9
Impaired assets 3.0 2.7 1.4 2.2 1.8
Total loans 30 days or more delinquent:
New methodology(1) 5.9 5.5
Prior methodology 5.3(2) 2.8 3.5 3.4
Net charge-offs:
Amount $151,222 $ 70,576 $42,549 $35,293 $26,776
As a percentage of gross receivables:
New methodology(1) 5.6% 2.3%
Prior methodology 2.5(2) 2.3% 2.6% 2.4%
- ---------------------------------------------------------------------------------------------------------------------
CREDIT CARDS-OWNED
Allowance for credit losses $118,420 $ 76,084 $36,289 $27,486 $25,859
Nonperforming assets 21,055 13,890 2,466 3,502 3,062
Accruing loans past due 90 days or more 49,410 40,574 17,385 11,238 11,013
Impaired assets 70,465 54,464 19,851 14,740 14,075
Total loans 30 days or more delinquent 141,000 107,263 50,651 35,156 31,106
As a percentage of gross receivables:
Allowance for credit losses 4.6% 3.7% 1.6% 1.6% 2.3%
Nonperforming assets 0.8 0.7 0.1 0.2 0.3
Accruing loans past due 90 days or more 1.9 2.0 0.7 0.6 1.0
Impaired assets 2.7 2.7 0.8 0.9 1.2
Total loans 30 days or more delinquent:
New methodology(1) 5.5 5.2
Prior methodology 5.0(2) 2.2 2.0 2.7
Net charge-offs:
Amount $137,017 $ 64,521 $35,425 $22,688 $23,623
As a percentage of gross receivables:
New methodology(1) 7.9% 2.5%
Prior methodology 2.7(2) 2.2% 1.9% 2.6%
- ---------------------------------------------------------------------------------------------------------------------
PERSONAL FINANCE LOANS-OWNED(3)(4)
Allowance for credit losses $ 5,822 $ 8,785 $ 3,360 $ 5,164 $ 2,706
Nonperforming assets 23,234 13,005 18,676 27,379 7,090
Total loans 30 days or more delinquent 42,916 28,546 20,348 23,958 6,744
As a percentage of gross receivables:
Allowance for credit losses 1.2% 2.3% 1.0% 3.6% 3.0%
Nonperforming assets 4.9 3.5 5.8 19.2 7.8
Total loans 30 days or more delinquent 9.0 7.6 6.3 16.8 7.4
Net charge-offs:
Amount $ 5,834 $ 3,059 $ 5,962 $11,689 $ 2,207
As a percentage of gross receivables 1.0% 1.3% 3.2% 9.7% 1.4%
- ---------------------------------------------------------------------------------------------------------------------
BUSINESS LOANS AND LEASES-OWNED(5)
Allowance for credit losses $ 9,798 $ 4,241 $ 1,577 $ 1,076 $ 1,826
Nonperforming assets 6,705 2,927 714 1,068 1,335
Impaired assets 6,740 2,927 714 1,068 1,335
Total loans 30 days or more delinquent 17,799 9,462 4,350 8,459 5,727
As a percentage of receivables:
Allowance for credit losses 3.3% 2.0% 1.7% 1.3% 3.6%
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming assets 2.2% 1.4% 0.8% 1.2% 2.6%
Impaired assets 2.3 1.4 0.8 1.2 2.6
Total loans 30 days or more delinquent 6.0 4.4 4.6 9.8 11.2
Net charge-offs:
Amount $ 8,368 $ 3,002 $ 1,139 $ 914 $ 947
As a percentage of receivables 2.5% 1.5% 1.4% 1.5% 1.6%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to credit card bankruptcies (see Asset
Quality).
(2) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
(3) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
(4) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(5) Includes leases for all years presented and business cards beginning in
1996.
39
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 57,953 $ 165,875
Federal funds sold 156,500 338,926
Restricted interest-bearing deposits 666,583 546,783
Investments available for sale 1,269,209 767,675
Loan and lease receivables, net:
Available for sale 1,452,560 1,476,146
Other loan and lease receivables, net 1,923,986 1,136,857
---------- ----------
Total loan and lease receivables, net 3,376,546 2,613,003
Premises and equipment (at cost, less accumulated
depreciation of $83,746 in 1997 and $53,979 in 1996) 152,215 108,130
Amounts due from credit card securitizations 208,330 399,359
Other assets 798,796 644,208
- --------------------------------------------------------------------------------------
TOTAL ASSETS $6,686,132 $5,583,959
- --------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 41,595 $ 28,302
Interest-bearing 2,976,016 1,831,756
---------- ----------
Total deposits 3,017,611 1,860,058
Long-term debt 1,438,358 1,393,095
Other borrowings 862,588 1,068,989
Other liabilities 340,625 309,781
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,659,182 4,631,923
- --------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
debentures of the Company 100,000 100,000
STOCKHOLDERS' EQUITY (See Note 8)
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;
Issued -- 25,000 shares in 1997 and 1996 0 0
Class A common stock, $.01 par value;
Authorized -- 214,500,000 shares;
Issued -18,193,885 shares in 1997 and 17,945,471 shares in
1996 182 179
Class B common stock, $.01 par value;
Authorized -- 230,000,000 shares;
Issued -- 26,564,546 shares in 1997 and 25,592,764 shares
in 1996 266 256
Additional paid-in capital, net 354,190 309,250
Retained earnings, net 585,709 541,383
Less: Treasury stock at cost, 418,286 Class B common
shares in 1997 and 1,231 Class B common shares in 1996 (14,407) (42)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 926,950 852,036
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,686,132 $5,583,959
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE> 42
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans and leases $ 276,982 $ 267,823 $189,983
Investments:
Taxable 140,436 79,640 46,574
Exempt from federal income tax 200 502 2,375
----------------------------------
Total investments 140,636 80,142 48,949
----------------------------------
Total interest income 417,618 347,965 238,932
----------------------------------
Interest expense:
Deposits 150,164 110,879 72,812
Debt 136,497 118,612 67,908
Other borrowings 37,897 40,209 25,312
----------------------------------
Total interest expense 324,558 269,700 166,032
----------------------------------
Net interest income 93,060 78,265 72,900
Provision for credit losses 210,826 96,862 53,326
----------------------------------
Net interest income after provision for credit losses (117,766) (18,597) 19,574
Noninterest revenues:
Gain on sale of credit cards 0 33,820 0
Other noninterest revenues 845,137 772,712 543,014
----------------------------------
Total noninterest revenues 845,137 806,532 543,014
----------------------------------
Operating expenses:
Amortization of credit card deferred origination costs,
net 69,344 88,517 72,258
Other operating expenses 561,497 434,657 278,427
----------------------------------
Total operating expenses 630,841 523,174 350,685
----------------------------------
Income before income taxes 96,530 264,761 211,903
Provision for income taxes 24,905 89,104 75,226
----------------------------------
Net income $ 71,625 $ 175,657 $136,677
- ---------------------------------------------------------------------------------------------
Basic earnings per common share (see Note 1)
- ---------------------------------------------------------------------------------------------
Class A $ 1.45 $ 4.08 $ 3.34
Class B 1.57 4.19 3.42
Combined 1.52 4.15 3.38
Diluted earnings per share (see Note 1)
- ---------------------------------------------------------------------------------------------
Class A $ 1.43 $ 3.86 $ 3.18
Class B 1.54 3.91 3.22
Combined 1.50 3.89 3.20
Basic weighted average common shares outstanding
- ---------------------------------------------------------------------------------------------
Class A 18,172 17,621 17,255
Class B 24,635 23,174 22,468
Combined 42,807 40,795 39,723
Weighted average common shares-assuming dilution
- ---------------------------------------------------------------------------------------------
Class A 18,235 18,031 17,867
Class B 25,266 27,042 24,803
Combined 43,501 45,073 42,670
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE> 43
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
CLASS A CLASS B CLASS A CLASS B ADDITIONAL INVESTMENT
PREFERRED PREFERRED COMMON COMMON PAID-IN DEFERRED HOLDING GAINS RETAINED
STOCK STOCK STOCK STOCK CAPITAL COMPENSATION (LOSSES) EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1994 $1,010 $0 $173 $231 $190,678 $(14,213) $(6,538) $270,349
Change in unrealized
appreciation of
investments, net 6,258
Preferred and common cash
dividends declared (15,501)
Exercise of stock options 2 3 2,049
Issuance of stock:
Public offering 88,927
Benefit plans 6 18,360 (16,523)
Amortization of deferred
compensation 7,661
Termination/tax benefit --
benefit plans 1,917 1,438
Net Income 136,677
- ------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1995 $1,010 $0 $175 $240 $301,931 $(21,637) $ (280) $391,525
Change in unrealized
appreciation of
investments, net (338)
Preferred and common cash
dividends declared (24,588)
Exercise of stock options 4 7 7,503
Issuance of stock:
Benefit plans 9 36,000 (33,815)
Amortization of deferred
compensation 11,960
Termination/tax benefit --
benefit plans 5,045 2,263
Foreign currency translation
adjustment (593)
Net Income 175,657
- ------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1996 $1,010 $0 $179 $256 $350,479 $(41,229) $ (618) $542,001
Change in unrealized
appreciation of
investments, net 466
Preferred and common cash
dividends declared (28,301)
Exercise of stock options 3 6 8,468
Issuance of stock:
Dividend reinvestment 857
Benefit plans 4 14,524 (11,159)
Amortization of deferred
compensation 11,343
Termination/tax benefit --
benefit plans 5,215 15,692
Foreign currency translation
adjustment 536
Net Income 71,625
- ------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $1,010 $0 $182 $266 $379,543 $(25,353) $ (152) $585,861
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------- ------------------------
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
- ---------------------------- ------------------------
<S> <C> <C>
Balance at Dec. 31, 1994 $ 0 $441,690
Change in unrealized
appreciation of
investments, net 6,258
Preferred and common cash
dividends declared (15,501)
Exercise of stock options 59 2,113
Issuance of stock:
Public offering 88,927
Benefit plans 1,296 3,139
Amortization of deferred
compensation 7,661
Termination/tax benefit --
benefit plans (1,355) 2,000
Net Income 136,677
- ---------------------------------------------------
Balance at Dec. 31, 1995 $ 0 $672,964
Change in unrealized
appreciation of
investments, net (338)
Preferred and common cash
dividends declared (24,588)
Exercise of stock options 7,514
Issuance of stock:
Benefit plans 2,228 4,422
Amortization of deferred
compensation 11,960
Termination/tax benefit --
benefit plans (2,270) 5,038
Foreign currency translation
adjustment (593)
Net Income 175,657
- ---------------------------------------------------
Balance at Dec. 31, 1996 $ (42) $852,036
Change in unrealized
appreciation of
investments, net 466
Preferred and common cash
dividends declared (28,301)
Exercise of stock options 8,477
Issuance of stock:
Dividend reinvestment 857
Benefit plans 1,297 4,666
Amortization of deferred
compensation 11,343
Termination/tax benefit --
benefit plans (15,662) 5,245
Foreign currency translation
adjustment 536
Net Income 71,625
- ---------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $(14,407) $926,950
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE> 44
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 71,625 $ 175,657 $ 136,677
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity securities losses/(gains) 11,426 (6,522) (15,386)
Depreciation and amortization of intangibles 35,280 19,335 10,802
Provision for credit losses 210,826 96,862 53,326
Change in other assets and amounts due from
securitizations (9,765) (302,608) (127,931)
Change in other liabilities 47,717 147,276 51,757
Gain on securitization of mortgages and leases (88,204) (75,033) (35,652)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 278,905 54,967 73,593
INVESTING ACTIVITIES
Purchase of investments available for sale (46,510,251) (30,770,841) (3,313,555)
Proceeds from sale of investments available for sale 1,736,050 1,121,679 1,692,544
Proceeds from maturing investments available for sale 44,263,776 29,388,538 1,430,276
Change in federal funds sold and interest-bearing
deposits 4,541 (303,435) (202,262)
Change in credit card receivables, excluding sales (628,015) (3,329,603) (4,179,735)
Proceeds from sales/securitizations of receivables 4,303,710 5,385,055 4,331,739
Purchase of personal finance loan/lease portfolios (141,687) (288,753) (214,094)
Principal collected on personal finance loans 84,423 60,544 30,945
Personal finance loans made to customers (3,559,875) (1,267,073) (608,064)
Purchase of premises and equipment (79,230) (84,167) (20,652)
Proceeds from sale of premises and equipment 227 574 20
Excess of cash collections over income recognized on
direct financing leases 37,476 78,282 38,910
Equipment purchased for direct financing lease contracts (319,543) (325,729) (235,773)
Change in business card receivables, excluding sales (598,486) (262,064) (43,684)
Net change in other loans (20,143) (11,553) (4,062)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,427,027) (608,546) (1,297,447)
FINANCING ACTIVITIES
Change in demand and savings deposits 190,493 (11,277) 3,023
Proceeds from deposits sold 0 0 30,018
Proceeds from sales of time deposits 1,934,081 1,481,557 1,322,388
Payments for maturing time deposits (967,021) (1,516,823) (608,186)
Change in repurchase agreements and term federal funds (10,000) (433,000) 47,545
Proceeds from issuance of subordinated/senior debt 24,787 41,076 59,256
Payments on redemption of subordinated/senior debt (97,609) (38,541) (64,642)
Proceeds from issuance of medium-term notes 511,217 720,545 165,052
Payments on maturity of medium-term notes (261,835) (494,400) (20,000)
Change in notes payable (269,612) 837,210 212,730
Proceeds from issuance of capital securities 0 100,000 0
Proceeds from issuance of stock 14,000 11,974 94,179
Cash dividends paid (28,301) (24,581) (15,501)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,040,200 673,740 1,225,862
- --------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash (107,922) 120,161 2,008
Cash at beginning of year 165,875 45,714 43,706
Cash at end of year $ 57,953 $ 165,875 $ 45,714
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Advanta Corp. (the "Company"), a Delaware corporation, is a financial services
company which provides a variety of products to consumers and small businesses.
The Company services approximately 6.3 million customers and manages receivables
in excess of $17.8 billion. The Company issues credit cards primarily through
its wholly owned subsidiary Advanta National Bank ("ANB"). References to ANB in
these Notes to Consolidated Financial Statements include, to the extent
applicable, ANB's predecessors by merger (see Note 18). Substantially all of the
Company's credit card processing is performed by a single outside third party
processor. Total managed credit card receivables at December 31, 1997 totaled
$11.2 billion. The Company also operates through other wholly owned subsidiaries
including: Advanta Mortgage Corp. USA ("AMC") which originates mortgage loans
secured by first or junior liens and automobile loans, Advanta Business Services
Corp. ("ABS") which provides small ticket equipment leases and markets credit
cards to businesses, and Advanta Life Insurance Company which reinsures or
writes various credit insurance products available to the Company's customers.
Managed receivables for AMC and ABS totaled approximately $5.3 billion and $1.3
billion, respectively, at December 31, 1997. On February 20, 1998 the Company
completed a transaction with Fleet Financial Group, Inc. ("Fleet") to contribute
substantially all of its consumer credit card receivables, subject to
liabilities, to a limited liability company controlled by Fleet. (See Note 11).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
BASIS OF PRESENTATION
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 financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
Certain prior-period amounts have been reclassified to conform with
current-year classifications.
CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES
Credit Card Origination Costs
The Company 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 and lease
origination fees and costs to be deferred and amortized over the life of a loan
or lease. 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 Company engages third parties to solicit and originate
credit card account relationships. Amounts deferred under these arrangements
approximated $89.2 million in 1997, $54.6 million in 1996 and $71.9 million in
1995.
The Company 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
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to be amortized over a 60 month period as was the Company's practice
prior to the EITF Issue 93-1 consensus.
CREDIT CARD SECURITIZATION INCOME
The Company 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
Company's financial statements.
Under SFAS 125, the Company allocates the previous carrying amount of the
credit card receivables securitized between the assets sold, and the retained
interests, principally an interest in the receivables and an interest-only strip
net of a recourse obligation, based on their relative estimated fair values at
the date of sale. A gain is recognized at the time of the sale equal to the
excess of the fair value of the assets obtained, principally cash, over the
allocated cost of the assets sold. Servicing assets associated with credit card
securitization transactions are immaterial as the benefits of servicing are not
expected to be more or less than adequate compensation (as defined below) to the
Company for performing the servicing. As all estimates used are influenced by
factors outside the Company'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 that are sold to the
trusts on a continuous basis to replenish the investors' interest in trust
receivables that have been repaid by the credit cardholders. As directed by SFAS
125, the retained interests in the receivables are measured in accordance with
the provisions of SFAS 115 as available-for-sale securities. At December 31,
1997, the carrying value of the retained interests in the credit card
receivables securitized approximated the market value.
Prior to January 1, 1997 the Company 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 Company'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 a recourse
liability 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 allowances, all of
which had in the aggregate an approximate $50 million impact (earnings increase)
in 1996, as well as a 57% increase in average securitized receivables.
INTEREST INCOME
The Company recognizes interest income using a method which approximates the
level yield method. Personal finance loans and business loans discontinue the
accrual of interest when the related receivable is 90 days or more past due.
Interest income is subsequently recognized only to the extent cash payments are
received. Credit card receivables, except bankrupt, decedent and fraudulent
accounts, continue to accrue interest until the time they charge-off at 186 days
contractually delinquent.
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE LOAN ORIGINATION FEES
The Company generally charges origination fees ("points") for mortgage loans
where permitted under state law. Origination fees, net of direct origination
costs, are deferred and amortized over the contractual life of the loan as an
adjustment to yield (interest income). However, upon the sale or securitization
of the loans, the unamortized portion of such fees is included in the
computation of the gain on sale.
LOAN AND LEASE RECEIVABLES AVAILABLE FOR SALE
Loan and lease receivables available for sale represent receivables currently on
the balance sheet that the Company 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.
INVESTMENTS AVAILABLE FOR SALE
Investments available for sale include securities that the Company sells from
time to time to provide liquidity and in response to changes in the market. Debt
and equity securities classified as Available for Sale are reported at market
value under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115,
unrealized gains and losses on these securities (except those held by the
Company's venture capital unit, Advanta Partners LP) are recorded as adjustments
to stockholders' equity, net of income taxes.
Changes in the fair value of Advanta Partners LP investments are reported
in noninterest revenues as equity securities gains or losses. The fair value of
publicly traded investments takes into account their quoted market prices with
adjustments made for liquidity or sale restrictions. For investments that are
not publicly traded, estimates of fair value have been made by management that
consider several factors including the investees' financial results, conditions
and prospects, and the values of comparable public companies. Because of the
nature of these investments, the equity method of accounting is not used in
situations where the Company has a greater than 20 percent ownership interest.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company 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. In order for derivatives to qualify for hedge
accounting treatment the following conditions must be met: 1) the underlying
item being hedged by derivatives exposes the Company to interest rate or foreign
currency risks, 2) the derivative used serves to reduce the Company's
sensitivity to interest rate or foreign currency risks, and 3) the derivative
used is designated and deemed effective in hedging the Company's exposure to
interest rate or foreign currency risks. In addition to meeting these
conditions, anticipatory hedges must demonstrate that the anticipated
transaction being hedged is probable to occur and the expected terms of the
transaction are identifiable.
For derivatives designated as hedges of interest rate exposure, gains or
losses are deferred and included in the carrying amounts of the related item
exposing the Company to interest rate risk and ultimately recognized in income
as part of those carrying amounts. For derivatives designated as hedges of
foreign currency exposure, gains or losses are reported in stockholders' equity.
Accrual accounting is applied for derivatives designated as synthetic
alterations with income and expense recorded in the same category as the related
underlying on-balance sheet or off-balance sheet item synthetically altered.
Gains or losses resulting from early terminations of derivatives are deferred
and amortized over the remaining term of the underlying balance sheet item or
the remaining term of the derivative, as appropriate.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in noninterest revenues. At December 31, 1997, 1996 and 1995, all the
Company's derivatives qualified as hedges or synthetic alterations.
INCOME FROM PERSONAL FINANCE LOANS
The Company, through its subsidiaries, sells mortgage, home equity and auto
loans through secondary market securitizations, typically with servicing
retained. Under SFAS 125, the Company allocates the previous carrying amount of
the receivables securitized between the assets sold and the retained interests,
principally servicing and an interest-only strip net of a recourse obligation,
based on their relative estimated fair values at the date of sale. A gain is
recognized at the time of the sale equal to the excess of the fair value of the
assets obtained, principally cash, over the allocated cost of the assets sold
and transaction costs. The retained interest-only strip represents the remaining
interest collected from the borrowers on the underlying loans after the payment
of pass-through interest to the certificate holders and the payment of a
servicing fee to the Company in its role as servicer and is partially offset by
the estimated fair value of the Company's recourse obligation for anticipated
charge-offs. SFAS 125 directs that the retained interest-only strips should be
subsequently classified and measured in accordance with the provisions of SFAS
115. The Company classifies the retained interest-only strips from the
securitization of mortgage and home equity loans as trading securities. These
assets are subsequently recorded at estimated fair value and the resulting
unrealized gain or loss from the valuation of the receivable is recorded in the
results of operations for the period. The Company estimates the fair value based
on a discounted cash flow analysis. The cash flows are estimated as the excess
of the weighted average coupon on each pool of the loans sold over the sum of
the pass-through interest rate plus the servicing fee, a trustee fee, credit
enhancement costs and an estimate of future credit losses over the life of the
loans. Management believes these cash flows are projected over the life of the
loans using prepayment, default, and interest rate assumptions that market
participants would use for similar financial instruments subject to prepayment,
credit and interest rate risk. Management also believes that the cash flows are
discounted using an interest rate that a purchaser unrelated to the seller of
such a financial instrument would demand. As all estimates used are influenced
by factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term.
Prior to January 1, 1997, the Company recorded a gain on the securitization
of personal finance loans at the time of sale, approximately equal to the
present value, using a risk adjusted discount rate, of the excess of the
anticipated future interest and fees paid by borrowers on the underlying loans
over the sum of the pass through rate of interest payable to the certificate
holders, a loan servicing fee which is paid to the Company in its role as
servicer, estimated credit losses and certain transaction related costs. The
Company recorded a corresponding excess spread asset at the time of sale equal
to the gain recognized. The excess spread asset was amortized, as a charge to
servicing fees and other income, in proportion to cash flows received over the
estimated lives of the underlying loans. The asset was carried at the lower of
amortized cost or net realizable value. The carrying value was evaluated
quarterly by the Company on a disaggregated basis to determine whether
prepayment and loan loss experience had impaired this carrying value. Reductions
in the value of the excess spread that are due to adverse prepayment and loan
loss experience were recognized as a charge to earnings, while increases were
not recognized. As all estimates used were influenced by factors outside the
Company's control, there was uncertainty inherent in these estimates, making it
reasonably possible that they could change in the near term. In addition to the
excess spread, the gain also included premiums on loans sold, nonrefundable fees
and gains or losses on hedging transactions structured to minimize the risk of
interest rate fluctuations. (See Notes 3 and 16).
Income from personal finance loans also includes negotiated loan servicing
fees on mortgage loan portfolios which were never owned by the Company
("contract servicing").
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME FROM BUSINESS LOAN AND LEASE SECURITIZATIONS
The Company, through its subsidiaries, sells business loans and leases through
secondary market securitizations. Under SFAS 125, the Company allocates the
previous carrying amount of the lease receivables securitized between the assets
sold and the retained interests, principally an interest in the receivables and
an interest-only strip net of a recourse obligation, based on their relative
estimated fair values at the date of sale. A gain is recognized at the time of
the sale equal to the excess of the fair value of the assets obtained,
principally cash, over the allocated cost of the assets sold. The Company
estimates the fair value based on a discounted cash flow analysis. The cash
flows are estimated as the excess of the weighted average yield on each pool of
the leases sold over the sum of the pass-through interest rate plus the
servicing fee and an estimate of future credit losses over the life of the
leases. Management believes that these cash flows are projected over the life of
the leases using prepayment, default, and interest rate assumptions that market
participants would use for similar financial instruments subject to prepayment,
credit and interest rate risk. Management also believes that the cash flows are
discounted using an interest rate that a purchaser unrelated to the seller of
such a financial instrument would demand. As all estimates used are influenced
by factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. As directed by SFAS 125, the retained interests in the receivables are
measured in accordance with the provisions of SFAS 115 as available-for-sale
securities. At December 31, 1997, unrecognized gains and losses on the retained
interests in the credit card receivables securitized was not material.
Prior to January 1, 1997, the Company recorded excess servicing income on
lease securitizations approximately equal to the present value of the
anticipated future cash flows, assuming an estimated prepayment rate, net of
anticipated charge-offs, partially offset by deferred initial direct costs,
transaction expenses, servicing fees, pass-through interest rate and estimated
credit losses under certain recourse requirements of the transactions. As these
estimates were influenced by factors outside the Company's control, there was
uncertainty inherent in these estimates, making it reasonably possible that they
could change in the near term. Also included in income was the difference
between the net sales proceeds and the carrying amount of the receivables sold.
Subsequent to the initial sale, securitization income was recorded in proportion
to the actual cash flows received from the trusts.
At December 31, 1997 and 1996, the Company's accounting for the
securitization of business card receivables was substantially the same as the
accounting for the securitization of credit card receivables discussed above.
(See Notes 3 and 16).
Servicing assets associated with business loan and lease securitization
transactions are immaterial as the benefits of servicing are not expected to be
more or less than adequate compensation (as defined below) to the Company for
performing the servicing.
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. Insurance premiums are earned
ratably over the period of insurance coverage provided. The cost of acquiring
new reinsurance is deferred and amortized over the respective periods in order
to match the expense with the anticipated revenue. Insurance loss reserves are
based on estimated settlement amounts for both reported losses and incurred but
not reported losses.
CREDIT LOSSES
The Company's charge-off policy, as it relates to consumer and business credit
card accounts, is to charge-off a receivable, if not paid, at 186 days
contractually delinquent. Accounts suspected of being fraudulent are written off
after a 90 day investigation period, unless the investigation shows no evidence
of fraud.
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the third quarter of 1996, the Company 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.
The Company charges-off expected losses on all non-performing personal
finance loans generally no later than when they have become twelve months
delinquent. Lease receivables are generally written-off when at 120 days
contractually delinquent.
PREMISES AND EQUIPMENT
Premises, equipment, computers and software are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Repairs and
maintenance are charged to expense as incurred.
CONTRACTUAL MORTGAGE SERVICING RIGHTS
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") which
requires the Company to recognize rights to service mortgage loans for others
based on their relative fair value as separate assets. Effective January 1,
1997, SFAS 125 superceded SFAS 122. Under SFAS 125, the Company capitalizes the
right to service mortgage loans based on the relative fair value of the
receivables that are sold. Management has estimated the fair value of
contractual mortgage servicing rights based on a discounted cash flow analysis.
The cash flows are estimated as the excess of the benefits of servicing,
principally revenues from contractually specified servicing fees, late charges,
and other ancillary sources, over adequate compensation. SFAS 125 defines
adequate compensation as the amount of benefits of servicing that would fairly
compensate a substitute servicer should one be required, which includes the
profit that would be demanded in the marketplace. The cost allocated to the
contractual mortgage servicing rights is amortized in proportion to, and over
the period of estimated net future servicing fee income.
JOINT VENTURE
In 1995, the Company formed a joint venture with The Royal Bank of Scotland, RBS
Advanta, to market, issue and service bankcards in the United Kingdom. As of
December 31, 1997 the Company owned 49% of the RBS Advanta joint venture, the
investment in which is accounted for under the equity method. In connection with
the Transaction described in Note 11, the Company contributed its economic
interest in the RBS Advanta joint venture to the Fleet LLC.
GOODWILL
Goodwill, representing the cost of investments in subsidiaries and affiliated
companies in excess of net assets acquired at acquisition, is amortized on a
straight-line basis for a period of up to 25 years.
STOCK-BASED COMPENSATION
The Company has elected to account for stock-based compensation following
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") as permitted by SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). The Company has adopted the disclosure only
provision of SFAS 123.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 utilizes the liability method
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
Earnings per share are calculated under the provisions of SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation and
disclosure of Basic Earnings Per Share and Diluted Earnings Per Share. Basic
Earnings Per Share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Income available to common stockholders is computed by deducting
Class A and Class B preferred stock dividends from net income. Diluted Earnings
Per Share is computed by dividing income available to common stockholders,
increased by dividends on dilutive Class B preferred stock for the period,
divided by the sum of average common shares outstanding plus dilutive common
shares for the period. Potentially dilutive common shares include stock options,
restricted stock issued under incentive plans and Class B preferred stock. Since
the cash dividends declared on the Company's Class B Common Stock were higher
than the dividends declared on the Class A Common Stock, Basic and Dilutive
Earnings Per Share have been calculated using the "two-class" method. The
two-class method is an earnings allocation formula that determines earnings per
share for each class of common stock according to dividends declared and
participation rights in undistributed earnings. The Company has also presented
"Combined Earnings Per Share," which represents a weighted average of Class A
Earnings Per Share and Class B Earnings Per Share. As required by SFAS 128, all
prior period earnings per share data presented have been restated.
CASH FLOW REPORTING
For purposes of reporting cash flows, cash includes cash on hand and amounts due
from banks. Cash paid during 1997, 1996 and 1995 for interest was $304.0
million, $241.1 million and $147.2 million, respectively. Cash paid or (refunds
received) for taxes during these periods was $(6.1) million, $45.1 million and
$43.9 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued the following Statements of Financial Accounting Standards:
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" was issued in July 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components. The main objective of the statement is to report a measure of all
changes in equity that result from transactions and other economic events of the
period other than transactions with owners. The Company adopted SFAS No. 130 on
January 1, 1998.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997, and is effective for periods beginning
after December 15, 1997. SFAS No. 131 introduces a new model for segment
reporting, called the "management approach." The management approach is based on
the way the chief operating decision maker organizes segments within a company
for making operating decisions and assessing performance. Reportable segments
are based on product and services, geography, legal structure, management
structure -- any manner in which management desegregates a company. The
management approach replaces the notion of industry and geographic segments in
current FASB standards. The Company intends to report information on two
segments as a result of the adoption of SFAS No. 131, Advanta Personal Finance
Services and Advanta Business Services.
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. LOAN AND LEASE RECEIVABLES
Loan and lease receivables consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Credit cards(A) $2,579,890 $2,045,219
Personal finance loans(B) 478,433 376,260
Business loans and leases(C) 298,789 214,327
Other loans 40,978 20,835
- --------------------------------------------------------------------------------------
Gross loan and lease receivables 3,398,090 2,656,641
- --------------------------------------------------------------------------------------
Add: Deferred origination costs, net of deferred fees(D) 116,229 45,546
Less: Allowance for credit losses:
Credit cards (118,420) (76,084)
Personal finance loans (5,822) (8,785)
Business loans and leases (9,798) (4,241)
Other (3,733) (74)
- --------------------------------------------------------------------------------------
Total allowance (137,773) (89,184)
- --------------------------------------------------------------------------------------
Net loan and lease receivables $3,376,546 $2,613,003
- --------------------------------------------------------------------------------------
</TABLE>
(A) Includes credit card receivables available for sale of $1.0 billion and $1.1
billion in 1997 and 1996, respectively.
(B) Includes personal finance loan receivables available for sale of $394.1
million and $337.3 million in 1997 and 1996, respectively and is net of
unearned income of $3.1 million in 1997.
(C) Includes business loans and leases available for sale of $43.8 million and
$71.9 million in 1997 and 1996, respectively, and is net of unearned income
of $20.7 million and $20.9 million in 1997 and 1996, respectively. Also
includes residual interest for both years.
(D) Includes approximately $7.0 million and $4.0 million in 1997 and 1996,
respectively, related to loan and lease receivables available for sale.
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables serviced for others consisted of the following items:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Credit cards $ 8,664,711 $10,646,177
Personal finance loans(A) 4,830,403 2,377,430
Business loans and leases 965,000 608,945
- ----------------------------------------------------------------------------------------
Total $14,460,114 $13,632,552
- ----------------------------------------------------------------------------------------
</TABLE>
(A) Excludes mortgage loans which were not originated by the Company, but which
the Company services for a fee ("contract servicing"). Contract servicing
receivables were $9.2 billion and $3.7 billion at December 31, 1997 and
1996, respectively.
The geographic concentration of managed receivables was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1997 1996
-------------------- --------------------
RECEIVABLES % RECEIVABLES %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California $ 2,545,282 14.3% $ 2,559,128 15.7%
New York 1,349,654 7.6 1,283,895 7.9
Florida 1,037,763 5.8 902,692 5.5
Texas 1,026,350 5.7 1,003,641 6.2
New Jersey 823,897 4.6 731,055 4.5
All other 11,075,258 62.0 9,808,782 60.2
- -----------------------------------------------------------------------------------------------
Total managed receivables $17,858,204 100.0% $16,289,193 100.0%
- -----------------------------------------------------------------------------------------------
</TABLE>
In the normal course of business, the Company makes commitments to extend
credit to its credit card customers. Commitments to extend credit are agreements
to lend to a customer subject to certain conditions established in the contract.
The Company does not require collateral to support this financial commitment. At
December 31, 1997 and 1996, the Company had $54.2 billion and $41.2 billion,
respectively, of commitments to extend credit outstanding for which there is
potential credit risk. The Company 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 Company's experience to date. At December 31,
1997 and 1996, outstanding managed consumer and business credit card receivables
represented 22% and 32%, respectively, of outstanding commitments.
NOTE 3. CREDIT CARD, PERSONAL FINANCE AND BUSINESS LOAN AND LEASE
SECURITIZATIONS
ANB had securitized credit card receivables outstanding of $8.7 billion at
December 31, 1997. 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. ANB retained a
participation interest in the trusts, reflecting the excess of the total amount
of receivables transferred to the trust over the portion represented by
certificates sold to investors. The retained participation interests in the
credit card trusts were $1.6 billion and $0.9 billion at December 31, 1997 and
1996, respectively. Although ANB 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.
ANB is subject to certain recourse obligations in connection with these
securitizations. At December 31, 1997 and 1996, ANB had liabilities of $338.3
million and $334.6 million, respectively, related to these recourse obligations.
These liabilities are netted against the amounts due from credit card
securitizations.
At December 31, 1997, ANB had amounts receivable from credit card
securitizations, including related interest-bearing deposits, of $647.2 million,
$438.8 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
52
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts awaiting distributions to investors. At December 31, 1996, the amounts
receivable were $733.3 million and amounts subject to lien (inclusive of amounts
due to investors) were $333.9 million.
At December 31, 1997, the Company had $4.8 billion of securitized personal
finance loan receivables outstanding which are subject to certain recourse
obligations. The Company had liabilities of $120.0 million and $64.4 million at
year end 1997 and 1996, respectively, related to these recourse obligations
which are netted against the retained interest-only strips (see Note 16). At
December 31, 1997, the Company had amounts receivable from mortgage loan sales
and securitizations of $402.6 million, $146.8 million of which was subject to
liens. At December 31, 1996, the amounts receivable and amounts subject to lien
were $260.2 million and $96.5 million, respectively.
At December 31, 1997, the Company had $965 million of securitized business
loans and leases outstanding which are subject to certain recourse obligations.
There were liabilities of $28.2 million and $22.2 million at year end 1997 and
1996, respectively, related to these recourse obligations which are netted
against the retained interest-only strips from business loan and lease
securitizations (see Note 16). The Company had amounts receivable from business
loan and lease securitizations of $6.3 million at year end 1997, none of which
was subject to liens and $27.6 million at year end 1996, of which $8.1 million
was subject to liens by providers of the credit enhancement facilities (see Note
16). Total interest in equipment residuals for lease assets sold was $42.7
million and $32.1 million at December 31, 1997 and 1996, respectively, and is
also subject to recourse obligations.
As indicated in Note 1, recourse liabilities 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 of the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term.
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses for lending and leasing transactions is
established to reflect losses anticipated from delinquencies that have already
occurred. In estimating the allowance, management relies on historical
experience by loan type adjusted for any known trends in the portfolio. As these
estimates are influenced by factors outside of the Company's control, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change in the near term.
Any adjustments to the allowance (net of transfers between on-and
off-balance sheet recourse liabilities) are reported in the Consolidated Income
Statements in the periods they become known.
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays five years of allowance history:
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 89,184 $ 53,494 $ 41,617 $ 31,227 $ 40,228
Provision for credit losses 210,826 96,862 53,326 34,198 29,802
Transfers from/(to) recourse
liabilities 0 3,000 1,100 11,485 (12,027)
Allowances on receivables
(sold)/purchased (11,015) 6,404 0 0 0
Gross credit losses:
Credit cards (155,528) (73,466) (41,779) (28,646) (33,805)
Personal finance loans (6,825) (3,473) (6,038) (11,731) (2,247)
Business loans and leases (9,583) (3,444) (1,413) (1,053) (1,376)
Other loans (4) (13) (38) (44) (93)
- ----------------------------------------------------------------------------------------------
Total credit losses (171,940) (80,396) (49,268) (41,474) (37,521)
Recoveries:
Credit cards 18,511 8,945 6,354 5,958 10,182
Personal finance loans 991 414 76 42 40
Business loans and leases 1,215 442 274 139 429
Other loans 1 19 15 42 94
- ----------------------------------------------------------------------------------------------
Total recoveries 20,718 9,820 6,719 6,181 10,745
- ----------------------------------------------------------------------------------------------
Net credit losses (151,222) (70,576) (42,549) (35,293) (26,776)
Balance at December 31 $ 137,773 $ 89,184 $ 53,494 $ 41,617 $ 31,227
- ----------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury &
other U.S.
Government
securities $1,083,848 $ 82 $(184) $1,083,746 $645,113 $ 21 $ (677) $644,457
State and municipal
securities 5,195 123 0 5,318 3,640 38 0 3,678
Collateralized
mortgage obligations 15,639 0 (151) 15,488 7,624 9 (108) 7,525
Asset-backed
securities 94,324 150 0 94,474 41,493 45 (464) 41,074
Equity securities(1) 69,092 0 (250) 68,842 69,830 440 (250) 70,020
Other 1,344 0 (3) 1,341 925 0 (4) 921
- -------------------------------------------------------------------------------------------------------------------------
Total $1,269,442 $355 $(588) $1,269,209 $768,625 $553 $(1,503) $767,675
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31,
- --------------------- ----------------------------------------------
1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury &
other U.S.
Government
securities $405,614 $ 70 $(286) $405,398
State and municipal
securities 24,239 52 0 24,291
Collateralized
mortgage obligations 8,066 0 (101) 7,965
Asset-backed
securities 36,599 0 (103) 36,496
Equity securities(1) 41,971 196 (250) 41,917
Other 16,167 0 (1) 16,166
- ---------------------------------------------------------------------
Total $532,656 $318 $(741) $532,233
- ---------------------------------------------------------------------
</TABLE>
(1) Includes investments of Advanta Partners LP.
At December 31, 1997 and 1996, investment securities with a book value of
$2,016 and $2,916, respectively, were pledged at the Federal Reserve Bank. At
December 31, 1997, 1996 and 1995, investment securities with a book value of
$5,370, $6,395 and $6,281, respectively, were deposited with insurance
regulatory authorities to meet statutory requirements or held by a trustee for
the benefit of primary insurance carriers. At December 31, 1997, $233 of net
unrealized losses on securities was included in investments available for sale.
During 1997, the net change in unrealized gains/losses on available for sale
securities included as a separate component of stockholders' equity was an
increase of $466.
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturity of investments available for sale at December 31, 1997 was as
follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Due in 1 year $1,035,095 $1,035,051
Due after 1 but within 5 years 51,128 51,112
Due after 5 but within 10 years 2,135 2,208
Due after 10 years 685 693
- --------------------------------------------------------------------------------------
Subtotal 1,089,043 1,089,064
Collateralized mortgage obligations 15,639 15,488
Asset-backed securities 94,324 94,474
Equity and other securities 70,436 70,183
- --------------------------------------------------------------------------------------
Total investments $1,269,442 $1,269,209
- --------------------------------------------------------------------------------------
</TABLE>
During 1997, proceeds from sales of available for sale securities were
$1,736,050. Gross gains of $3,867 and losses of $181 were realized on these
sales. Of the gross gains, $3,471 relates to investments held by the Company's
venture capital unit. Proceeds during 1996 were $1,121,679. Gross gains of
$2,492 and losses of $110 were realized on these sales. Of the gross gains,
$2,448 related to an investment held by the Company's venture capital unit.
Proceeds during 1995 were $1,692,544. Gross gains of $8,666 and losses of $320
were realized on these sales. Of the gross gains, $8,610 related to investments
held by the Company's venture capital unit. The specific identification method
was the basis used to determine the amortized cost in computing realized gains
and losses.
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
SENIOR DEBT
RediReserve certificates (4.17%) $ 3,611 $ 4,952
6 month senior notes (6.16%-6.53%) 3,523 4,857
12 month senior notes (6.06%-6.86%) 51,537 66,955
18 month senior notes (6.11%-6.95%) 6,795 7,855
24 month senior notes (5.87%-7.14%) 33,517 41,911
30 month senior notes (5.92%-7.56%) 14,441 13,599
48 month senior notes (5.60%-7.56%) 8,061 10,440
60 month senior notes (5.83%-9.00%) 21,999 48,108
Value notes, fixed (6.85%-7.85%) 30,755 0
Medium-term notes, fixed (6.38%-8.36%) 861,462 627,835
Medium-term notes, floating 238,000 253,000
Short-term bank notes, fixed (5.98%) 99,986 162,954
Short-term bank notes, floating 141,974 146,395
Medium-term bank notes, fixed (5.59%-7.18%) 408,651 530,086
Medium-term bank notes, floating 260,837 305,481
Other senior notes (5.97%-11.34%) 7,491 9,639
- --------------------------------------------------------------------------------------
Total senior debt 2,192,640 2,234,067
SUBORDINATED DEBT
Subordinated notes (5.60%-11.34%) 5,754 21,275
7% subordinated bank notes due 2003 49,778 49,739
- --------------------------------------------------------------------------------------
Total subordinated debt 55,532 71,014
- --------------------------------------------------------------------------------------
Total debt 2,248,172 2,305,081
Less short-term debt & certificates (809,814) (911,986)
- --------------------------------------------------------------------------------------
Long-term debt $1,438,358 $1,393,095
- --------------------------------------------------------------------------------------
</TABLE>
The Company's senior floating rate notes were priced based on a factor of
LIBOR. At December 31, 1997 the rates on these notes varied from 5.89% to 6.46%.
At December 31, 1997 and 1996, the Company used derivative financial instruments
to effectively convert certain fixed rate debt to a LIBOR based variable rate.
(See Note 23).
The annual maturities of long-term debt at December 31, 1997 for the years
ending December 31 are as follows: $407.8 million in 1999; $425.0 million in
2000; $448.0 million in 2001; $91.6 million in 2002; and $66.0 million
thereafter. The average interest cost of the Company's debt during 1997, 1996
and 1995 was 6.42%, 6.39%, and 6.92%, respectively.
NOTE 7. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1996, Advanta Capital Trust I, a newly formed statutory business
trust established by and wholly-owned by the Company (the "Trust"), issued in a
private offering $100 million of capital securities, representing preferred
beneficial interests in the assets of the Trust (the "Capital Securities"). The
Company used the proceeds from the sale for general corporate purposes. The sole
assets of the Trust consist of $100 million of 8.99% junior subordinated
debentures issued by the Company due December 17, 2026 (the "Junior Subordinated
Debentures"). The Capital Securities will be subject to mandatory redemption
under certain
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
circumstances, including at any time on or after December 17, 2006 upon the
optional prepayment by the Company of the Junior Subordinated Debentures at an
amount per Capital Security equal to 104.495% of the principal amount (declining
ratably on each December 17 thereafter to 100% on December 17, 2016), plus
accrued and unpaid distributions thereon. The obligations of the Company with
respect to the Junior Subordinated Debentures, when considered together with the
obligations of the Company under the Indenture relating to the Junior
Subordinated Debentures, the Amended and Restated Declaration of Trust relating
to the Capital Securities and the Capital Securities Guarantee issued by the
Company with respect to the Capital Securities will provide, in the aggregate, a
full and unconditional guarantee of payments of distributions and other amounts
due on the Capital Securities. In July, 1997, the Company and the Trust
exchanged the outstanding Capital Securities and Junior Subordinated Debentures
for substantially identical securities which were registered under the
Securities Act of 1933, as amended (the "Act"). The Company also exchanged the
Capital Securities Guarantee for a substantially identical guarantee which was
also registered under the Act. Dividends on the Capital Securities are
cumulative, payable semi-annually in arrears, and are deferrable at the
Company's option for up to ten consecutive semi-annual periods. The Company
cannot pay dividends on its preferred or common stocks during such deferments.
Dividends on the Capital Securities have been classified as a component of
noninterest expense in the Consolidated Income Statements. The Trust has no
operations or assets separate from its investment in the Junior Subordinated
Debentures. Separate financial statements of the Trust are not presented because
management has determined that they would not be meaningful to investors.
NOTE 8. CAPITAL STOCK
The number of shares of capital stock was as follows:
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING
DECEMBER 31,
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Class A preferred -- $1,000 par value; Authorized, 1,010 1 1
- ------------------------------------------------------------------------------------
Class B preferred -- $.01 par value; Authorized, 1,000,000 25 25
- ------------------------------------------------------------------------------------
Class A voting common stock -- $.01 par value;
Authorized, 214,500,000 18,194 17,945
Class B non-voting common stock -- $.01 par value;
Authorized, 230,000,000 26,564 25,593
Less treasury stock:
Class B 418 1
- ------------------------------------------------------------------------------------
Total common stock 44,340 43,537
- ------------------------------------------------------------------------------------
</TABLE>
The Class A Preferred Stock is entitled to 1/2 vote per share and a
non-cumulative dividend of $140 per share per year, which must be paid prior to
any dividend on the common stock. Dividends were declared on the Class A
Preferred Stock for the first time in 1989 and have continued through 1997 as
the Company paid dividends on its common stock. The redemption price of the
Class A Preferred Stock is equivalent to the par value.
In 1995, the Company sold 2,500,000 depositary shares each representing a
one-hundredth interest in a share of Stock Appreciation Income Linked Securities
("SAILS"). The SAILS constitute a series of the Company's Class B Preferred
Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995
(SAILS). The SAILS (and thereby the related depositary shares) are not
redeemable by the Company before September 15, 1998. The call price of each of
the depositary shares will be $37.6244 declining periodically to $37.00 at
September 15, 1999 (the mandatory conversion date). On September 15, 1999,
unless either previously redeemed by the Company or converted at the option of
the holder, each share of the SAILS will automatically convert into 100 shares
of Class B Common Stock. The SAILS pay an annual dividend of $249.75 per share
and must be paid prior to any dividend on the common stock. Proceeds from the
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offering, net of underwriting discount, were approximately $90 million. The
Company used the proceeds of the offering for general corporate purposes,
including financing the growth of its subsidiaries.
On February 20, 1998, the Company purchased 7,882,750 shares of its Class A
Common Stock, 12,482,850 of its Class B Common Stock at $40 per share net, and
1,078,930 of its depositary shares each representing one one-hundredth interest
in a share of SAILS at $32.80 per share net through an issuer tender offer.
NOTE 9. INCOME TAXES
Income tax expense (benefit) consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 5,953 $78,037 $55,184
State (651) 5,346 4,943
- -------------------------------------------------------------------------------------------
5,302 83,383 60,127
- -------------------------------------------------------------------------------------------
Deferred:
Federal 16,950 5,800 14,316
State 2,653 (79) 783
- -------------------------------------------------------------------------------------------
19,603 5,721 15,099
- -------------------------------------------------------------------------------------------
Total tax expense $24,905 $89,104 $75,226
- -------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of the statutory federal income tax to the consolidated
tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax $33,786 $92,740 $74,166
State income taxes, net of federal income tax benefit 1,302 3,423 3,722
Nontaxable investment income (560) (443) (984)
Insurance income (8,707) (4,492) 0
Tax credits (5,271) (1,231) 0
Other 4,355 (893) (1,678)
- -------------------------------------------------------------------------------------------
Consolidated tax expense $24,905 $89,104 $75,226
- -------------------------------------------------------------------------------------------
</TABLE>
Deferred taxes are determined based on the estimated future tax effects 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
asset/(liability) is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred taxes:
Gross assets $ 84,676 $112,861
Gross liabilities (118,655) (83,226)
- -----------------------------------------------------------------------------------
Total deferred taxes $ (33,979) $ 29,635
- -----------------------------------------------------------------------------------
</TABLE>
The Company concluded that a valuation allowance against deferred tax
assets at December 31, 1997 and 1996 was not necessary. Realization of the
deferred tax asset is dependent on generating sufficient future taxable income.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized.
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
SFAS 91 $(24,655) $(17,870)
Loan losses 45,224 26,851
Mortgage banking income (4,176) 6,623
Securitization income (34,367) (35,415)
Leasing income (10,772) 56,447
Other (5,233) (7,001)
- ----------------------------------------------------------------------------------
Net deferred tax (liability)/assets $(33,979) $ 29,635
- ----------------------------------------------------------------------------------
</TABLE>
NOTE 10. BENEFIT PLANS
The Company has adopted several management incentive plans designed to provide
incentives to participating employees to remain in the employ of the Company and
devote themselves to its success. Under these plans, eligible employees 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
(with each plan covering three performance years). To the extent that such
elections were made (or, for executive officers, were required by the terms of
such plans), restricted shares were issued to employees, with the number of
shares granted to employees 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 the Company prior to
vesting. Restricted shares vest 10 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 the Company met or meet their respective performance goals for
a given plan performance year. When newly eligible employees elect to
participate in a plan, the number of shares issued to them with respect to their
"target" bonus payments for the relevant plan performance years is determined
based on the average market price of the stock for the 90 days prior to
eligibility.
The following table summarizes the Company's incentive plans:
<TABLE>
<CAPTION>
RESTRICTED
PLAN PERFORMANCE ORIGINAL SHARES
PLAN YEARS COVERED STOCK PRICE OUTSTANDING
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AMIPWISE III 1996-1998 $17.00 488,800
AMIPWISE IV 1999-2001 $25.00 706,137
- -----------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of shares issued on or after January 1,
1995 are: $35 for 77,517 AMIPWISE III shares and $26 for 450,321 AMIPWISE IV
shares issued in 1995, $42 for both 277,219 AMIPWISE III shares and 281,931
AMIPWISE IV shares issued in 1996, and $39 for 99,494 AMIPWISE III shares and
$38 for 158,958 AMIPWISE IV shares in 1997.
At December 31, 1997, a total of 1,334,434 shares issued under these and
the predecessor plans to AMIPWISE III were subject to restrictions and were
included in the number of shares outstanding.
At December 31, 1997 the Company had two stock option plans and accounts
for these plans under APB 25, under which no compensation expense has been
recognized.
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income
As reported $71,625 $175,657 $136,677
Pro forma 58,576 168,193 119,718
Basic Earnings per share (See Note 1.)
As reported
Combined $ 1.52 $ 4.15 $ 3.38
A 1.45 4.08 3.34
B 1.57 4.19 3.42
Pro forma
Combined $ 1.22 $ 3.97 $ 2.95
A 1.15 3.90 2.91
B 1.27 4.01 2.98
Dilutive Earnings per share
As reported
Combined $ 1.50 $ 3.89 $ 3.20
A 1.43 3.86 3.18
B 1.54 3.91 3.22
Pro forma
Combined $ 1.20 $ 3.73 $ 2.80
A 1.14 3.70 2.77
B 1.24 3.75 2.82
- ---------------------------------------------------------------------------------------------
</TABLE>
Because SFAS 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years. During 1997, the Company changed the
exercise price of certain options granted during 1996 and 1997 to the current
market price on the date of the modification. No other modifications were made
to these awards, and this modification would not have resulted in additional
compensation expense under the accounting prescribed by SFAS 123.
The Company's two stock option plans together authorize the grant to
employees and directors of options to purchase an aggregate of 10.2 million
shares of common stock. The Company presently intends only to issue options to
purchase Class B common stock. Options generally vest over a four-year period
and expire 10 years after the date of grant.
60
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares available for future grant were approximately 2.8 million at
December 31, 1997, and 3.2 million at December 31, 1996. Transactions under the
plans for the three years ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
(SHARES IN THOUSANDS) ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 4,109 $25 4,381 $21 3,415 $14
Granted 967 27 578 39 1,363 34
Exercised (774) 11 (699) 9 (300) 6
Terminated (368) 33 (151) 30 (97) 27
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at end of
year 3,934 27 4,109 25 4,381 21
- ---------------------------------------------------------------------------------------------------------------------
Options exercisable at
year-end 2,003 2,138 2,015
- ---------------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the year $22.90 $19.87 $19.34
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31,1997:
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
------------------------------------------------- ------------------------------
<C> <C> <S> <C> <C> <C>
1 to 10 162 2.5 years $ 3 162 $ 3
11 to 20 515 4.1 12 515 12
21 to 30 1,814 7.5 26 737 26
31 to 40 1,287 6.1 35 531 35
40 to 52 156 8.1 43 58 43
- ----------------------------------------------------------------------------------------------------
3,934 6.4 27 2,003 23
- ----------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rates of 6.7%, 6.0% and 6.7% for 1997, 1996
and 1995, respectively; expected dividend yields of 1 percent; expected lives of
10 years; expected volatility of 40% for 1997 and 41% for 1996 and 1995.
The Company also has outstanding options to purchase 25 thousand shares of
common stock at a price of $4.75 per share, which were not issued pursuant to
either of the stock option plans. All of these shares were issued prior to
January 1, 1995 and were vested at December 31, 1997.
The Company has an Employee Stock Purchase Plan which allows employees and
directors to purchase Class B common stock at a 15% discount from the market
price without paying brokerage fees. The Company reports this 15% discount as
compensation expense and incurred expense of $339, $248 and $145 in 1997, 1996
and 1995, respectively. During 1996, shares were issued under the plan from
unissued stock or from treasury stock at the average market price on the day of
purchase.
The Company has a tax-deferred employee savings plan which provides
employees savings and investment opportunities, including the ability to invest
in the Company's Class B common stock. The employee savings plan provides for
discretionary Company contributions equal to a portion of the first 5% of an
employee's compensation contributed to the plan. For the three years ended
December 31, 1997, 1996 and 1995, the Company contributions equaled 100% of the
first 5% of participating employees' compensation contributed to the plan. The
expense for this plan totaled $3,494, $2,546 and $2,027 in 1997, 1996, and 1995,
respectively. All shares purchased by the plan for the three years ended
December 31, 1997, 1996 and 1995
61
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were acquired from the Company at the market price on each purchase date or were
purchased on the open market.
The Company offers an elective, nonqualified deferred compensation plan to
qualified executives and nonemployee directors, which allows them to defer a
portion of their cash compensation on a pretax 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. The Company
has purchased life insurance contracts with a face value of $53.4 million to
fund this plan.
NOTE 11. DISPOSITION OF CREDIT CARD ASSETS (UNAUDITED)
Pursuant to the terms of a contribution agreement, dated as of October 28, 1997,
as amended February 20, 1998, by and between the Company and Fleet Financial
Group, Inc. ("Fleet"), the Company and certain of its subsidiaries and Fleet and
certain of its subsidiaries each contributed certain assets and liabilities of
their respective consumer credit card businesses in exchange for an ownership
interest in the LLC (the "Transaction"). The Transaction was consummated on
February 20, 1998. Concurrent with the Transaction the Company purchased
7,882,750 shares of its Class A Common Stock, 12,482,850 of its Class B Common
Stock at $40 per share net, and 1,078,930 of its depositary shares each
representing one one-hundredth interest in a share of SAILS at $32.80 per share
net through an issuer tender offer (the "Offer") which was completed on February
20, 1998.
The following pro forma unaudited consolidated financial information is
based on historical information which has been adjusted to reflect the
Transaction and the purchase pursuant to the Offer. The pro forma consolidated
income statements were prepared assuming that the Transaction and purchase
pursuant to the Offer had occurred January 1, 1997 and January 1, 1996 for the
years ended December 31, 1997 and 1996 respectively. The pro forma consolidated
balance sheets were prepared assuming that the Transaction and purchase pursuant
to the Offer had occurred on December 31, 1997 and 1996.
The pro forma unaudited consolidated financial information presented below
does not purport to represent what the results of operations or financial
position would actually have been if the Transaction and purchase pursuant to
the Offer had occurred on the dates referred to above. Also, the pro forma
unaudited consolidated financial information is 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 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 or similar charges related to the planned reduction in corporate expenses
or transaction expenses associated with the Transaction and purchase pursuant to
the Offer. The restructuring charge or similar charges and transaction expenses
will be incurred during the first quarter of 1998. The Pro Forma Adjustments are
based upon available information and certain assumptions that the Company
believes are reasonable.
62
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
ADVANTA CORP. TRANSACTION TENDER OFFER ADVANTA CORP.
AND SUBSIDIARIES PRO FORMA PRO FORMA AND SUBSIDIARIES
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $276,982 $(179,732)[A] $ -- $ 97,250
Investments 140,636 (28,363)[A] (50,584)[E] 61,689
-------- --------- -------- --------
Total interest income 417,618 (208,095) (50,584) 158,939
-------- --------- -------- --------
Total interest expense 324,558 (191,431)[B] -- 133,127
-------- --------- -------- --------
NET INTEREST INCOME 93,060 (16,664) (50,584) 25,812
-------- --------- -------- --------
Provision for credit losses 210,826 (185,379)[A] -- 25,447
-------- --------- -------- --------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR CREDIT LOSSES (117,766) 168,715 (50,584) 365
-------- --------- -------- --------
Noninterest revenues:
Gain on sale of credit cards -- --[A] -- --
Other noninterest revenues 845,137 (622,242)[A] -- 222,895
-------- --------- -------- --------
Total noninterest revenues 845,137 (622,242) -- 222,895
-------- --------- -------- --------
Operating expenses:
Amortization of credit card deferred
origination costs, net 69,344 (64,566)[A] -- 4,778
Other operating expenses 561,497 (284,856)[C] 19,318[E] 295,959
-------- --------- -------- --------
Total operating expenses 630,841 (349,422) 19,318 300,737
-------- --------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 96,530 (104,105) (69,902) (77,477)
-------- --------- -------- --------
Provision (benefit) for income taxes 24,905 (36,437)[D] (24,466)[D] (35,998)
-------- --------- -------- --------
NET INCOME (LOSS) $ 71,625 $ (67,668) $(45,436) $(41,479)
- ------------------------------------------------------------------------------------------------------------
Basic earnings per common share
combined (see Note 1) $ 1.52 $ (1.89)[F]
Dilutive earnings per common share
combined (see Note 1) $ 1.50 $ (1.89)[F]
Basic average common shares
outstanding 42,807 (19,128) 23,679
Dilutive average common shares
outstanding 43,501 (19,822) 23,679
Ratio of earnings to fixed charges 1.29x --[G]
- ------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED INCOME STATEMENT
[A] The pro forma consolidated income statement reflects the elimination of
income and expense related to the results of operations of the Advanta
consumer credit card business (the "Business") as if the Transaction had
occurred for the periods presented.
[B] The pro forma consolidated income statement reflects (1) interest expense of
the Business, and (2) an adjustment of approximately $75.7 million to
reflect approximately $1.3 billion of additional interest bearing
liabilities to be transferred in the Transaction above the amount of
interest bearing liabilities of the Business. The $1.3 billion of additional
interest bearing liabilities will be transferred from Advanta National Bank
(ANB), where a large portion 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 of the Business
had the Transaction occurred for the periods presented (2) $532 thousand of
additional depreciation expense for fixed assets to be transferred to Fleet
LLC that were not dedicated to the Business and (3) $4.6 million of
operating expenses for an Advanta Corp. support group whose operations will
be transferred to Fleet 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.
[E] The pro forma consolidated income statement reflects the purchase of
approximately $850 million of shares of Advanta's outstanding capital stock
through the Offer as if the purchase had occurred for the periods presented.
The pro forma consolidated income statement reflects (1) the reduction of
interest income by approximately $50.6 million to reflect the sale of $820
million of investments to purchase shares of Advanta Class A Common Stock,
Class B Common Stock (together with the Class A Common Stock, the "Common
Shares") and depositary shares each representing one one-hundredth interest
in a share of SAILS (the "SAILS Depositary Shares") and (2) the increase in
compensation expense related to the tender of Common Shares underlying
options granted under the Advanta's stock option plans. The $820 million of
investments sold reflects $850 million of shares at the applicable purchase
price per share primarily net of the difference between $40 per share and
the option exercise price of options anticipated to be exercised in
connection with the Offer.
[F] Pro forma earnings per share (1) includes a $3.1 million increase to net
income for the excess of the carrying value of the SAILS Depositary Shares
redeemed over the amount paid upon redemption and (2) reflects $6.4 million
of preferred stock dividends.
[G] For the year ended December 31, 1997, pro forma earnings were inadequate to
cover pro forma fixed charges. The deficiency was approximately $77.5
million.
64
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------
ADVANTA CORP. TRANSACTION TENDER OFFER ADVANTA CORP.
AND SUBSIDIARIES PRO FORMA PRO FORMA AND SUBSIDIARIES
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $ 267,823 $ (220,745)[A] $ -- $ 47,078
Investments 80,142 (14,657)[A] (46,557)[E] 18,928
---------- ----------- --------- ----------
Total interest income 347,965 (235,402) (46,557) 66,006
Total interest expense 269,700 (230,642)[B] -- 39,058
----------------------------------------------------------------------
NET INTEREST INCOME 78,265 (4,760) (46,557) 26,948
----------------------------------------------------------------------
Provision for credit losses 96,862 (104,128)[A] -- (7,266)
----------------------------------------------------------------------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR CREDIT LOSSES (18,597) 99,368 (46,557) 34,214
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] 27,703[E] 215,893
---------- ----------- --------- ----------
Total operating expenses 523,174 (332,555) 27,703 218,322
----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 264,761 (206,897) (74,260) (16,396)
- ----------------------------------------------------------------------------------------------------------------
Provision for income taxes 89,104 (72,414)[D] (25,991)[D] (9,301)
----------------------------------------------------------------------
NET INCOME $ 175,657 $ (134,483) $ (48,269) $ (7,095)
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per common share
combined (see Note 1) $ 4.15 $ (0.30)[F]
Dilutive earnings per common share
combined (see Note 1) 3.89 $ (0.30)[F]
Basic average common shares
outstanding 40,794 (17,358) 23,436
Dilutive average common shares
outstanding 45,073 (21,637) 23,436
Ratio of earnings to fixed charges 1.97x --[G]
</TABLE>
65
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED INCOME STATEMENT
[A] The pro forma consolidated income statement reflects the elimination of
income and expense related to the results of operations of the Advanta
consumer credit card business (the "Business") as if the Transaction had
occurred for the periods presented.
[B] The pro forma consolidated income statement reflects (1) interest expense
of the Business, 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 Transaction above the amount of
interest bearing liabilities of the Business. The $1.3 billion of
additional interest bearing liabilities will be transferred from Advanta
National Bank (ANB), where a large portion 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 of the Business
had the Transaction occurred for the periods presented (2) $302 thousand of
additional depreciation expense for fixed assets to be transferred to Fleet
LLC that were not dedicated to the Business and (3) $3.9 million of
operating expenses for an Advanta Corp. support group whose operations will
be transferred to Fleet 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.
[E] The pro forma consolidated income statement reflects the purchase of
approximately $850 million of shares of Advanta's outstanding capital stock
through the Offer as if the purchase had occurred for the periods
presented. The pro forma consolidated income statement reflects (1) the
reduction of interest income by approximately $46.6 million to reflect the
sale of $813 million of federal funds sold, interest-bearing deposits and
investments to purchase shares of Advanta Class A Common Stock, Class B
Common Stock (together with the Class A Common Stock, the "Common Shares")
and depositary shares each representing one one-hundredth interest in a
share of SAILS (the "SAILS Depositary Shares") and (2) the increase in
compensation expense related to the tender of Common Shares underlying
options granted under the Advanta's stock option plans. The $813 million of
federal funds sold, interest-bearing deposits and investments sold reflects
$850 million of shares at the applicable purchase price per share primarily
net of the difference between $40 per share and the option exercise price
of options anticipated to be exercised in connection with the Offer.
[F] Pro forma earnings per share (1) includes a $3.9 million increase to net
income for the excess of the carrying value of the SAILS Depositary Shares
redeemed over the amount paid upon redemption and (2) reflects $3.8 million
of preferred stock dividends.
[G] For the year ended December 31, 1996, pro forma earnings were inadequate to
cover pro forma fixed charges. The deficiency was approximately $16.4
million.
66
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------------
ADVANTA CORP. TRANSACTION TENDER OFFER ADVANTA CORP.
AND SUBSIDIARIES PRO FORMA PRO FORMA AND SUBSIDIARIES
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 57,953 $ (55,943)[B] $ -- $ 2,010
Federal funds sold and
interest-bearing deposits with banks 823,083 (464,838)[B] -- 358,245
Investments available for sale 1,269,209 (819,844)[I] 449,365
Loan and lease receivables, net:
Available for sale 1,452,560 (874,637)[C] -- 577,923
Other loan and lease receivables,
net 1,923,986 (1,541,322)[A] -- 382,664
-----------------------------------------------------------------
Total loan and lease receivables, net 3,376,546 (2,415,959) -- 960,587
Premises and equipment, net 152,215 (84,243)[D] -- 67,972
Amounts due from credit card
securitizations 208,330 (208,330)[A] -- --
Other assets 798,796 (238,099)[E] -- 560,697
- -----------------------------------------------------------------------------------------------------------
Total assets $6,686,132 $(3,467,412) $(819,844) $2,398,876
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits $3,017,611 $(2,893,258)[F] $ -- $ 124,353
Debt and other borrowings 2,300,946 (1,056,072)[F] -- 1,244,874
Other liabilities 340,625 (48,082)[G] (6,761)[I] 285,782
- -----------------------------------------------------------------------------------------------------------
Total liabilities 5,659,182 (3,997,412) (6,761) 1,655,009
- -----------------------------------------------------------------------------------------------------------
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 1,010 -- -- 1,010
Class B preferred stock -- -- -- --
Class A common stock 182 -- (79)[J] 103
Class B common stock 266 -- (113)[J] 153
Additional paid-in capital, net 354,190 -- (160,716)[J] 193,474
Retained earnings, net 585,709 530,000[H] (652,175)[J] 463,534
Less: Treasury stock at cost, (14,407) -- -- (14,407)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 926,950 530,000 (813,083) 643,867
- -----------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $6,686,132 $(3,467,412) $(819,844) $2,398,876
- -----------------------------------------------------------------------------------------------------------
Common shares outstanding at end of
period 44,038 24,910
Book value per common share $ 19.01 $ 23.78
</TABLE>
67
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
[A] Represents the contribution to Fleet LLC of assets and liabilities of
Advanta consumer credit card business (the "Business") had the Transaction
occurred at the balance sheet date.
[B] Represents (1) the contribution to Fleet LLC of cash, federal funds sold
and interest bearing deposits dedicated to the Business and (2) a $10
million redemption of federal funds sold that were not dedicated to the
Business.
[C] Represents the contribution to Fleet LLC of loans available for sale
dedicated to the Business except for a very small portion of consumer credit
card receivables generated in a specific program that will not initially be
contributed to Fleet LLC.
[D] Represents (1) the contribution to Fleet LLC of property and equipment
dedicated to the Business and (2) approximately $8 million of fixed assets
to be contributed to Fleet LLC that were not dedicated to the Business.
[E] Represents (1) the contribution to Fleet LLC of other assets dedicated to
the Business except for $8.8 million of Credit Insurance Business related
assets that will not be contributed to Fleet LLC and (2) Advanta's
membership interest in Fleet LLC valued at $20 million.
[F] Represents the contribution to Fleet LLC of deposits, debt and other
borrowings by an amount equaling total assets of the Business plus,
approximately, an additional $510 million of liabilities representing a
portion of the premium received by Advanta, less other liabilities
contributed to Fleet LLC in accordance with the Contribution Agreement.
[G] Represents the contribution to Fleet LLC of (1) other liabilities related to
the Business had the Transaction occurred at the balance sheet date and (2)
$29.1 million of accrued interest payable on the deposits, debt and other
borrowings discussed in [E] above, net of (3) $16.4 million of Credit
Insurance Business related liabilities that will not be contributed to Fleet
LLC.
[H] Represents the increase in retained earnings resulting from the gain on the
Transaction of approximately $530 million, consisting of liabilities in
excess of assets contributed of approximately $510 million and Advanta's
membership interest in Fleet LLC valued at $20 million.
[I] Represents the sale of $820 million of investments to purchase the Common
Shares, the SAILS Depositary Shares and options to purchase Common Shares,
and the tax benefit related to the tender of Common Shares underlying
options granted under the Advanta's stock option plans. The $820 million of
investments sold reflects $850 million of shares at the applicable purchase
price per share primarily net of the difference between $40 per share and
the option exercise price of options anticipated to be exercised in
connection with the Offer.
[J] Represents (1) the purchase of approximately 7.9 million Class A Common
Stock and approximately 11.3 million Class B Common Stock at $40 per share;
(2) the purchase of approximately 1.1 million SAILS Depositary Shares at
$32.80 per share and (3) the tender of approximately 1.2 million of Common
Shares underlying options at a cost to the Company of the amount by which
$40 per share exceeds the option exercise price.
68
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------
ADVANTA CORP. TRANSACTION TENDER OFFER ADVANTA CORP.
AND SUBSIDIARIES PRO FORMA PRO FORMA AND SUBSIDIARIES
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 165,875 $ (161,982)[B] $ -- $ 3,893
Federal funds sold and
interest-bearing deposits with
banks 885,709 (338,923)[B] (338,317)[H] 208,469
Investments available for sale 767,675 -- (474,990)[H] 292,685
Loan and lease receivables, net:
Available for sale 1,476,146 (1,062,930)[A] -- 413,216
Other loan and lease receivables,
net 1,136,857 (941,157)[A] -- 195,700
--------------------------------------------------------------------
Total loan and lease receivables,
net 2,613,003 (2,004,087) -- 608,916
Premises and equipment, net 108,130 (73,022)[C] -- 35,108
Amounts due from credit card
securitizations 399,359 (399,359)[A] -- --
Other assets 644,208 (185,382)[D] -- 458,826
- ---------------------------------------------------------------------------------------------------------
Total assets $5,583,959 $(3,162,755) $(813,307) $1,607,897
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits $1,860,058 $(1,809,337)[E] $ -- $ 50,721
Debt and other borrowings 2,462,084 (1,804,598)[E] -- 657,486
Other liabilities 309,781 (78,820)[F] (9,696)[H] 221,265
- ---------------------------------------------------------------------------------------------------------
Total liabilities 4,631,923 (3,692,755) (9,696) 929,472
- ---------------------------------------------------------------------------------------------------------
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 1,010 -- -- 1,010
Class B preferred stock -- -- -- --
Class A common stock 179 -- (77)[I] 102
Class B common stock 256 -- (110)[I] 146
Additional paid-in capital, net 309,250 -- (147,288)[I] 161,962
Retained earnings, net 541,383 530,000[G] (656,136)[I] 415,247
Less: Treasury stock at cost, (42) -- -- (42)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 852,036 530,000 (803,611) 578,425
- ---------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $5,583,959 $(3,162,755) $(813,307) $1,607,897
- ---------------------------------------------------------------------------------------------------------
Common shares outstanding at end of
period 42,198 22,027
Book value per common share $18.06 $23.92
</TABLE>
69
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
[A] Represents the contribution to Fleet LLC of assets and liabilities of
Advanta consumer credit card business (the "Business") had the Transaction
occurred at the balance sheet date.
[B] Represents (1) the contribution to Fleet LLC of cash, federal funds sold
and interest bearing deposits dedicated to the Business and (2) a $5
million redemption of federal funds sold that were not dedicated to the
Business.
[C] Represents (1) the contribution to Fleet LLC of property and equipment
dedicated to the Business and (2) approximately $8 million of fixed assets
to be contributed to Fleet LLC that were not dedicated to the Business.
[D] Represents (1) the contribution to Fleet LLC of other assets dedicated to
the Business except for $10.2 million of Credit Insurance Business related
assets that will not be contributed to Fleet LLC and (2) Advanta's
membership interest in Fleet LLC valued at $20 million.
[E] Represents the contribution to Fleet LLC of deposits, debt and other
borrowings by an amount equaling total assets of the Business plus,
approximately, an additional $510 million of liabilities representing a
portion of the premium received by Advanta, less other liabilities
contributed to Fleet LLC in accordance with the Contribution Agreement.
[F] Represents the contribution to Fleet LLC of (1) other liabilities related
to the Business had the Transaction occurred at the balance sheet date and
(2) $34.7 million of accrued interest payable on the deposits, debt and
other borrowings discussed in [E] above, net of (3) $11.1 million of Credit
Insurance Business related liabilities that will not be contributed to
Fleet LLC.
[G] Represents the increase in retained earnings resulting from the gain on the
Transaction of approximately $530 million, consisting of liabilities in
excess of assets contributed of approximately $510 million and Advanta's
membership interest in Fleet LLC valued at $20 million.
[H] Represents the sale of $813 million of federal funds sold, interest-bearing
deposits and investments to purchase the Common Shares, the SAILS Depositary
Shares and options to purchase Common Shares, and the tax benefit related to
the tender of Common Shares underlying options granted under the Advanta's
stock option plans. The $813 million of investments sold reflects $850
million of shares at the applicable purchase price per share primarily net
of the difference between $40 per share and the option exercise price of
options anticipated to be exercised in connection with the Offer.
[I] Represents: (1) the purchase of approximately 7.7 million Class A Common
Stock and approximately 11.0 million Class B Common Stock at $40 per share;
(2) the purchase of approximately 1.1 million SAILS Depositary Shares at
$32.80 per share and (3) the tender of approximately 1.4 million of Common
Shares underlying options at a cost to the Company of the amount by which
$40 per share exceeds the option exercise price.
70
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. CREDIT CARD SALES
In June 1996, the Company, through its subsidiary ANB (and its predecessors by
merger), sold certain consumer 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 Company's managed credit
card portfolio as of June 30, 1996. The Company recorded a $33.8 million net
gain related to this transaction.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In May 1997, the Company's Board of Directors approved the Office of the
Chairman Supplemental Compensation Program. Under the program, each of the
Chairman and Vice Chairman received $5 million as a result of the Transaction
described in Note 11. In addition, the restrictions on 50,000 shares of Class B
Common Stock previously granted to the Vice Chairman under his employment
agreement were removed and certain previously agreed to benefits related to
these shares were accelerated as a result of the Transaction described in Note
11. These amounts were recognized in connection with the Transaction in the
first quarter of 1998.
On June 30, 1997 and July 8, 1997 the Company and several of its current
and former officers and directors were named as defendants in lawsuits brought
by shareholders claiming to represent shareholders that purchased shares of the
Company's common stock during the periods between August 13, 1996 and March 17,
1997, and October 17, 1996 and March 17, 1997, respectively. In December 1997,
these lawsuits were consolidated in an action styled In Re Advanta Corp.
Securities Litigation pending in federal court in Pennsylvania. The class action
complaints allege that the Company made misrepresentations in certain of its
public filings and statements in violation of the Securities Exchange Act of
1934 and seek damages of an unspecified amount although management believes that
the allegations are without merit. In the opinion of management, the ultimate
resolution of these complaints is not expected to have a material adverse effect
on the financial position or future operating results of the Company.
Between August 25, 1997 and December 18, 1997, the Company and certain
other subsidiaries were named as defendants in lawsuits by cardholders claiming
to represent cardholders in a specific program. The class action complaints
allege that cardholder accounts in the specific program were improperly repriced
to a higher percentage rate of interest. The complaints assert various
violations of federal and state law with regard to such repricings, and each
seeks damages of an unspecified amount although management believes that the
allegations are without merit. In the opinion of management, the ultimate
resolution of these complaints is not expected to have a material adverse effect
on the financial position or future operating results of the Company.
Prior to the closing of the Transaction described in Note 11, certain
holders of the Company's Medium Term Notes (the "Holders") questioned whether
the Transaction would require their consent. At the request of such Holders, the
trustee under the indenture and under the indenture for the Company's Junior
Subordinated Debentures and the related declaration of trust for the Capital
Securities called a meeting of holders of the Company's Medium Term Notes, Value
Notes, and Capital Securities for January 15, 1998, and formally notified all
holders of the Company's Senior Investment Notes and RediReserve Certificates of
the Transaction and the question raised by such Holders. No action was taken at
the meeting and, to date, no holders of such instruments have commenced any
legal action. While there is no assurance that the holders of such instruments
will not pursue legal remedies, including seeking a determination that the
maturity of such instruments should be accelerated upon consummation of the
Transaction, Advanta believes that the Transaction did not require the consent
of the holders of such instruments, and further believes that the holders would
not be successful in the pursuit of such remedies.
The Company leases office space in several states under leases accounted
for as operating leases. Total rent expense for all of the Company's locations
for the years ended December 31, 1997, 1996 and 1995 was
71
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$11.3 million, $8.5 million and $4.9 million, respectively. The future minimum
lease payments of all non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
Year Ended December 31,
1998 $ 9,327
1999 6,024
2000 5,351
2001 3,994
2002 3,447
Thereafter 11,922
</TABLE>
NOTE 14. OTHER BORROWINGS
Certain of the Company's personal finance subsidiaries had a line of credit of
$500 million at December 31, 1997. There is no facility fee related to this line
of credit. At December 31, 1997, there was $3.9 million of outstanding borrowing
on this line of credit. The Company is subject to various loan covenants,
including the maintenance of certain profit levels at the borrowing
subsidiaries, limitations on mergers and acquisitions, and limitations on liens
on property and other assets. This line of credit expires on May 1, 1998.
Management expects to obtain a new line of credit under substantially similar
terms and conditions. Through May 1997, the Company had money market bid lines
of $265 million under which the Company had borrowed $40 million at December 31,
1996. Through February 20, 1998, the Company had a revolving credit facility of
$1.0 billion. There was a quarterly facility fee of up to 35 basis points on the
total amount of the revolving credit facility. There were no borrowings
outstanding under this facility at December 31, 1997 and 1996. Following the
closing of the Transaction described in Note 11, the Company terminated this
facility.
The composition of other borrowings was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Term fed funds $ 0 $ 10,000
Short-term debt 809,814 911,986
Lines of credit 3,857 40,000
Other borrowings 48,917 107,003
- ------------------------------------------------------------------------------------
Total $862,588 $1,068,989
- ------------------------------------------------------------------------------------
</TABLE>
The following table displays information related to selected types of
short-term borrowings:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At year end:
Securities sold under repurchase
agreements $ 0 0% $ 0 0% $ 0 0%
Term fed funds 0 0 10,000 5.42 443,000 5.83
- --------------------------------------------------------------------------------------------------
Total $ 0 0% $ 10,000 5.42% $443,000 5.83%
- --------------------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase
agreements $ 9,796 5.66% $ 149,791 5.31% $ 25,008 5.97%
Term fed funds and fed funds purchased 11,925 5.71 100,793 5.71 199,166 6.10
- --------------------------------------------------------------------------------------------------
Total $ 21,721 5.69% $ 250,584 5.47% $224,174 6.09%
- --------------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under repurchase
agreements $149,130 $1,027,695 $ 29,813
Term fed funds and fed funds purchased 65,000 263,000 455,250
- --------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average interest rates were calculated by dividing the
interest expense for the period for such borrowings by the average amount of
short-term borrowings outstanding during the period.
NOTE 15. SELECTED INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
NONINTEREST REVENUES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of credit cards $ 0 $ 33,820 $ 0
Other noninterest revenues:
Credit card securitization income 252,631 258,066 183,360
Credit card servicing income 176,061 176,567 117,369
Income from personal finance activities 169,973 109,167 50,541
Credit card interchange income 85,208 102,804 92,439
Business loan and lease other revenues 70,943 61,622 41,050
Credit card overlimit fees 46,447 16,465 4,755
Insurance revenues, net 37,816 38,175 30,146
Equity securities (losses)/gains (11,426) 6,522 15,386
Other 17,484 3,324 7,968
- ---------------------------------------------------------------------------------------------
Total other noninterest revenues $845,137 $772,712 $543,014
- ---------------------------------------------------------------------------------------------
Total noninterest revenues $845,137 $806,532 $543,014
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPERATING EXPENSES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of credit card deferred origination costs, net $ 69,344 $ 88,517 $ 72,258
Other operating expenses:
Salaries and employee benefits 247,287 182,666 116,681
Marketing 53,039 31,975 25,374
External processing 43,256 42,814 28,407
Professional/consulting fees 38,600 40,247 14,937
Equipment expense 37,712 22,752 12,751
Postage 29,039 25,700 18,518
Occupancy expense 23,097 14,827 9,254
Credit card fraud losses 22,287 23,611 20,029
Telephone expense 21,262 16,116 11,959
Credit and collection expense 20,017 13,784 9,039
Other 25,901 20,165 11,478
- ---------------------------------------------------------------------------------------------
Total other operating expenses $561,497 $434,657 $278,427
- ---------------------------------------------------------------------------------------------
Total operating expenses $630,841 $523,174 $350,685
- ---------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
INTEREST-BEARING DEPOSITS DECEMBER 31,
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Amounts due from credit card trusts(A) $438,838 $333,923
Amounts due from mortgage trusts(A) 146,772 96,460
Amounts due from business loan and leasing trusts(A) 0 8,099
Other interest-bearing deposits 80,973 108,301
- ----------------------------------------------------------------------------------
Total interest-bearing deposits $666,583 $546,783
- ----------------------------------------------------------------------------------
</TABLE>
(A) Represents initial deposits and subsequent excess collections up to the
required amount on each of the credit card, mortgage and business loan and
lease securitizations. Also includes amounts to be distributed to investors.
<TABLE>
<CAPTION>
OTHER ASSETS DECEMBER 31,
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Retained interest-only strip, net -- personal finance loans $205,868 $138,265
Prepaid assets 131,305 117,934
Accrued interest receivable 99,167 101,021
Deferred costs 48,332 42,252
Due from trustees -- mortgage 25,383 14,298
Investments in operating leases 12,432 17,276
Due from trustees -- business loans and leasing 6,736 5,326
Goodwill 5,134 5,795
Other real estate(A) 689 2,513
Current and deferred federal income taxes 0 28,169
Other 263,750 171,359
- ----------------------------------------------------------------------------------
Total other assets $798,796 $644,208
- ----------------------------------------------------------------------------------
</TABLE>
(A) Carried at the lower of cost or fair market value less selling costs.
At December 31, 1997 and 1996, the Company had $208.3 million and $399.4
million, respectively, of amounts due from credit card securitizations. These
amounts include retained interest-only strips, net of recourse liabilities,
accrued interest receivable and other amounts related to these securitizations.
<TABLE>
<CAPTION>
OTHER LIABILITIES DECEMBER 31,
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses $100,380 $ 59,432
Accrued interest payable 73,103 55,320
Current and deferred federal and state income taxes 40,461 10,300
Deferred fees and other reserves 28,050 86,877
Other 98,631 97,852
- ----------------------------------------------------------------------------------
Total other liabilities $340,625 $309,781
- ----------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. CONTRACTUAL MORTGAGE SERVICING RIGHTS
The activity in the contractual mortgage servicing rights asset is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $11,153 $ 4,075 $ --
Servicing rights acquired 17,461 8,485 4,367
Amortization (4,068) (1,407) (292)
- ------------------------------------------------------------------------------------------
Balance, end of year $24,546 $11,153 $4,075
- ------------------------------------------------------------------------------------------
</TABLE>
The Company periodically evaluates the potential impairment of contractual
mortgage servicing rights. The Company stratifies these rights based on two of
the predominant risk characteristics of the underlying loans, such as the year
of origination and the type of loan (i.e., fixed or adjustable rate loan).
Impairment is recognized through a valuation allowance for each individual
stratum. The amount of impairment recognized is the amount by which the
contractual mortgage servicing rights for a stratum exceed their estimated fair
value.
NOTE 18. CASH, DIVIDEND AND LOAN RESTRICTIONS
In the normal course of business, the Company and its subsidiaries enter into
agreements, or are subject to regulatory requirements, that result in cash, debt
and dividend restrictions.
Effective June 30, 1997 the Company's credit card bank, Advanta National
Bank ("Old ANB"), was merged with Advanta National Bank USA ("AUS") and AUS was
renamed Advanta National Bank ("ANB"). The combined bank is subject to the
following restrictions. FDIC-insured banks are subject to certain provisions of
the Federal Reserve Act which impose various legal limitations on the extent to
which such banks can finance or otherwise supply funds to certain of their
affiliates. In particular, ANB is subject to certain restrictions on any
extensions of credit to, or other covered transactions, such as certain
purchases of assets, with the Company or its affiliates. Such restrictions
prevent ANB from lending to the Company and its affiliates unless such
extensions of credit are secured by U.S. Government obligations or other
specified collateral. Further, such secured extensions of credit by ANB are
limited in amount: (a) as to the Company or any such affiliate, to 10 percent of
the bank's capital and surplus, and (b) as to the Company and all such
affiliates in the aggregate, to 20 percent of the bank's capital and surplus.
Under certain grandfathering provisions of the Competitive Equality Banking
Act of 1987, the Company is not required to register as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so long as
the Company and ANB continue to comply with certain restrictions on their
activities. These restrictions include limiting the scope of its activities to
those in which it was engaged prior to March 5, 1987. Since ANB was not making
commercial loans at that time, it must continue to refrain from making
commercial loans -- which would include any loans to the Company or any of its
subsidiaries -- in order for the Company to maintain its grandfathered exemption
under the BHCA. The Company has no present plans to register as a bank holding
company under the BHCA. ANB is also subject to various legal limitations on the
amount of dividends that can be paid to its parent, the Company. ANB is eligible
to declare a dividend provided that it is not greater than the current year's
net profits plus net profits of the preceding two years, as defined. During
1997, ANB did not pay dividends to the Company, while $107 million of dividends
were paid during 1996. At December 31, 1997, total stockholders' equity of the
Company's banking and insurance affiliates approximated $828.5 million, of which
$59.5 million was available for payment of dividends under applicable regulatory
guidelines.
75
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. PARENT COMPANY FINANCIAL STATEMENTS
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 94,887 $ 93,019
Investments available for sale 29,046 32,960
Other assets, principally investments in and advances to
wholly owned subsidiaries 2,314,852 2,023,559
- --------------------------------------------------------------------------------------
Total assets $2,438,785 $2,149,538
- --------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses and other liabilities $ 121,797 $ 43,984
Subordinated debt and other borrowings 1,390,038 1,253,518
---------- ----------
Total liabilities 1,511,835 1,297,502
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 448 435
Other stockholders' equity 925,492 850,591
- --------------------------------------------------------------------------------------
Total stockholders' equity 926,950 852,036
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,438,785 $2,149,538
- --------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 12,300 $135,006 $ 76,000
Interest 81,656 62,144 53,745
Other 39,044 40,107 27,130
--------------------------------
Total income 133,000 237,257 156,875
--------------------------------
Expenses:
General and administrative 74,405 86,425 59,129
Interest 97,067 72,219 69,105
--------------------------------
Total expenses 171,472 158,644 128,234
--------------------------------
(Loss)/income before income taxes and equity
in subsidiaries (38,472) 78,613 28,641
--------------------------------
Income tax benefit 20,677 24,784 20,469
--------------------------------
(Loss)/income before equity in undistributed net profit
of subsidiaries (17,795) 103,397 49,110
--------------------------------
Equity in undistributed net profit of subsidiaries 89,420 72,260 87,567
- ---------------------------------------------------------------------------------------------
Net income $ 71,625 $175,657 $136,677
- ---------------------------------------------------------------------------------------------
</TABLE>
The Parent Company Only Statements of Changes in Stockholders' Equity are
the same as the Consolidated Statements of Changes in Stockholders' Equity. (See
page 42).
77
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 71,625 $ 175,657 $ 136,677
Adjustments to reconcile net income to net cash used by
operating activities:
Equity in net profit of subsidiaries (101,719) (207,266) (163,567)
Dividends received from subsidiaries 12,300 135,006 76,000
Depreciation and amortization of intangibles 5,083 1,375 964
Change in other assets (154,043) (265,658) (159,599)
Change in accrued liabilities 94,401 51,853 8,387
- ----------------------------------------------------------------------------------------------
Net cash (used)/provided by operating activities (72,353) (109,033) (101,138)
INVESTING ACTIVITIES
Net change in premises & equipment (8,793) (9,408) (1,901)
Purchase of investments available for sale (87,324) (3,754,047) (637,917)
Proceeds from sales of investments available for sale 49,946 77,404 340,177
Proceeds from maturing investments available for sale 25,000 3,771,981 373,410
- ----------------------------------------------------------------------------------------------
Net cash (used)/provided by investing activities (21,171) 85,930 73,769
FINANCING ACTIVITIES
Change in lines of credit (40,000) 40,000 (50,000)
Proceeds from issuance of subordinated/senior debt 24,747 41,036 147,200
Payments on redemption of subordinated/senior debt (97,609) (38,541) (152,626)
Change in repurchase agreements 0 0 (52,975)
Increase in affiliate borrowings (26,827) (324,341) (35,444)
Proceeds from issuance of medium-term notes 511,255 720,545 165,052
Payments on maturity of medium-term notes (261,873) (494,400) (20,000)
Proceeds from issuance of affiliate subordinated
debentures 0 103,093 0
Cash dividends paid (28,301) (24,581) (15,501)
Issuance of stock 14,000 11,974 94,179
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 95,392 34,785 79,885
- ----------------------------------------------------------------------------------------------
Net increase in cash 1,868 11,682 52,516
Cash at beginning of year 93,019 81,337 28,821
Cash at end of year $ 94,887 $ 93,019 $ 81,337
- ----------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20. CAPITAL RATIOS
ANB is, and the former Advanta National Bank ("Old ANB") and Advanta National
Bank USA ("AUS") were subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the institutions' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the institution must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The institution's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the institution to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that as of December 31, 1997, ANB meets
all capital adequacy requirements to which it is subject.
As of December 31, 1997 the Office of the Comptroller of the Currency
categorized ANB and as of December 31, 1996 categorized Old ANB and AUS, as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized an institution must maintain minimum total
risk-based and Tier I risk-based capital and Tier I leverage ratios as set forth
in the following table. There are no conditions or events since those
notifications that management believes have changed such categorizations.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ----------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital (to Risk Weighted Assets)
AUS $179,649 15.84% $ 90,820 greater% $113,525 greater%
than or than or
equal to equal
8.0 to
10.0
Old ANB 241,534 17.20 112,359 greater 140,449 greater
than or than or
equal to equal
8.0 to
10.0
Tier I Capital (to Risk Weighted
Assets)
AUS 115,237 10.15 45,410 greater 68,115 greater
than or than or
equal to equal
4.0 to 6.0
Old ANB 156,287 11.13 112,359 greater(1) 112,359 greater(1)
than or than or
equal to equal
8.0 to 8.0
Tier I Capital (to Average Assets)
AUS 115,237 7.35 47,064 greater 78,440 greater
than or than or
equal to equal
3.0 to 5.0
Old ANB 156,287 7.15 65,578 greater 109,296 greater
than or than or
equal to equal
3.0 to 5.0
AS OF DECEMBER 31, 1997 FOR ANB
Total Capital (to Risk Weighted Assets) $824,801 16.39% $402,640 greater% $503,300 greater%
than or than or
equal to equal
8.0 to
10.0
Tier I Capital (to Risk Weighted
Assets) 650,911 12.93 201,320 greater 301,980 greater
than or than or
equal to equal
4.0 to 6.0
Tier I Capital (to Average Assets) 650,911 14.07 185,015 greater 231,269 greater
than or than or
equal to equal
4.0 to 5.0
</TABLE>
- --------------------------------------------------------------------------------
(1) In connection with the formation of Old ANB, supplementary agreement with
the OCC required Old ANB to maintain a Tier I capital ratio of at least 8%
during its first three years of operation as well as a minimum Tier I
capital level of $50 million.
79
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 57,953 $ 57,953 $ 165,875 $ 165,875
Federal funds sold 156,500 156,500 338,926 338,926
Restricted interest-bearing deposits 666,583 666,583 546,783 546,783
Investments available for sale 1,269,209 1,269,209 767,675 767,675
Loans, net of allowance for credit
losses 3,376,546 3,412,823 2,613,003 2,629,797
Amounts due from credit card
securitizations 208,330 208,330 399,359 399,359
Retained interest-only strips-personal
finance loans 205,868 205,868 138,265 139,998
Contract mortgage servicing rights 24,546 24,546 11,153 11,153
Financial liabilities:
Demand and savings deposits $ 548,440 $ 549,333 $ 358,429 $ 358,469
Time deposits and debt 4,717,343 4,693,887 3,806,710 3,813,634
Other borrowings 52,774 53,411 157,003 156,984
Off-balance sheet financial instruments --
Asset/(Liability):
Interest rate swaps and swaptions $ 0 $ 8,323 $ 0 $ 9,788
Interest rate options:
Caps purchased 360 596 273 1,766
Caps written (1,350) (616) (2,111) (1,845)
Corridors/collars 0 0 831 (748)
Forward contracts 0 (522) 0 573
</TABLE>
The above values do not necessarily reflect the premium or discount that
could result from offering for sale at one time the Company'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 Company's off-balance sheet financial instruments
relate to managing the interest rate sensitivity position as described in Note
23.
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, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable estimate
of the fair value.
INVESTMENTS
For investment securities held to maturity and those available for sale, the
fair values are based on quoted market prices, dealer quotes or estimated using
quoted market prices for similar securities.
80
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOANS, NET OF ALLOWANCE FOR CREDIT LOSSES
For consumer credit card receivables, business card receivables and mortgage
loans, the fair value is estimated using quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics. The
fair value for these loans also includes the estimated value of the portion of
the retained interest-only strip and, for mortgage loans, servicing, which are
not sold with the securities backed by these types of loans. The value of the
retained interest-only strips and, for mortgage loans, servicing is estimated
based on a discounted cash flow analysis. The cash flows are estimated as the
excess of the weighted average yield on each pool of the loans sold over the sum
of the pass-through interest rate plus the servicing fee and an estimate of
future credit losses over the life of the loans and other amounts as described
in Note 1. The value of direct finance lease receivables and other loans is
estimated based on the market prices of similar receivables with similar
characteristics.
AMOUNTS DUE FROM CREDIT CARD SECURITIZATIONS AND RETAINED
INTEREST-ONLY STRIPS-PERSONAL FINANCE LOANS
The fair values of the retained interest-only strips component of amounts due
from credit card securitizations and retained interest-only strips from personal
finance loan securitizations are estimated based on discounted flow analyses as
described in Note 1. For the other components of amounts due from credit card
securitizations, the carrying amount is a reasonable estimate of the fair value.
For purposes of estimating the fair value of the retained interest-only strip
from credit card securitizations, management has assumed a discount rate of 12%,
a principal payment rate of 10% and a loss rate of 7.8% for December 31, 1997
and assumed a discount rate of 12%, a principal payment rate of 10% and a loss
rate of 6.5% for December 31, 1996. For purposes of estimating the fair value of
the retained interest-only strip from personal finance loan securitizations,
management has assumed a discount rate of 14%, a prepayment rate of 24% CPR for
fixed rate loans and 29% for adjustable rate loans and a loss rate of 80 basis
points for December 31, 1997 and assumed a discount rate of 14%, a prepayment
rate of 21% CPR for fixed rate loans and 25% CPR for adjustable rate loans and a
loss rate of 80 basis points for December 31, 1996.
CONTRACT MORTGAGE SERVICING RIGHTS
The fair value of these rights is estimated by discounting future cash flows,
adjusted for prepayments, using rates available for instruments with similar
terms and remaining maturities.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. This fair value does not
include any benefit that may result from the low cost of funding provided by
these deposits compared to the cost of borrowing funds in the market.
TIME DEPOSITS AND DEBT
The fair value of fixed-maturity certificates of deposit and notes is estimated
using the rates currently offered for deposits and notes of similar remaining
maturities.
OTHER BORROWINGS
The other borrowings are all at variable interest rates and therefore the
carrying value approximates a reasonable estimate of the fair value.
INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS
The fair value of interest rate swaps, options and forward contracts (used for
managing interest rate and foreign currency risks) is the estimated amount that
the Company would pay or receive to terminate the agreement at the reporting
date, taking into account current interest and foreign exchange rates and the
current creditworthiness of the counterparty.
81
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS TO EXTEND CREDIT
Although the Company had $42.1 billion of unused commitments to extend credit,
there is no market value associated with these commitments, as any fees charged
are consistent with the fees charged by other companies at the reporting date to
enter into similar agreements.
NOTE 22. CALCULATION OF EARNINGS PER COMMON SHARE
The following table shows the calculation of basic earnings per share and
diluted earnings per share for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 71,625 $175,657 $136,677
less: Preferred "A" dividends (141) (141) (141)
less: Preferred "B" dividends, net (6,409) (6,403) (2,065)
- ---------------------------------------------------------------------------------------------
Income available to common shareholders $ 65,075 $169,113 $134,471
less: Class A dividends declared (7,997) (6,703) (5,073)
less: Class B dividends declared (13,754) (11,334) (8,222)
- ---------------------------------------------------------------------------------------------
Undistributed Earnings $ 43,324 $151,076 $121,176
Basic Shares
A 18,172 17,621 17,255
B 24,635 23,174 22,468
Combined 42,807 40,795 39,723
Options A 63 410 507
Options B 532 1,293 1,148
AMIP B 99 507 551
Preferred B 0(1) 2,068 741
Dilutive Shares
A 18,235 18,031 17,867
B 25,266 27,042 24,803
Combined 43,501 45,073 42,670
Basic Earnings Per Share
A $ 1.45 $ 4.08 $ 3.34
B 1.57 4.19 3.42
Combined(2) 1.52 4.15 3.38
Dilutive Earnings Per Share
A $ 1.43 $ 3.86 $ 3.18
B 1.54 3.91 3.22
Combined(2) 1.50 3.89 3.20
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) 25,000 shares of the Company's Class B convertible preferred stock were
outstanding during 1997 but were not included in the computation of diluted
earnings per share for the year ended December 31, 1997 because they were
antidilutive for that period.
(2) Combined represents a weighted average of Class A and Class B. (See Note 1).
NOTE 23. DERIVATIVE FINANCIAL INSTRUMENTS
In managing its interest rate sensitivity and foreign currency positions, the
Company may use derivative financial instruments. These instruments are used for
the express purpose of managing its interest rate and foreign currency exposures
and are not used for any trading or speculative activities. As of December 31,
1997
82
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1996, all of the Company's derivatives were designated as hedges or
synthetic alterations and were accounted for as such.
The following table summarizes by notional amounts the Company's
derivatives instruments as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $2,111,711 $1,560,444
Swaptions 0 153,000
Interest rate options:
Caps written 1,018,781 1,413,222
Caps purchased 328,781 365,000
Corridors/collars 0 500,000
Forward contracts 400,437 386,680
- --------------------------------------------------------------------------------------
$3,859,710 $4,378,346
- --------------------------------------------------------------------------------------
</TABLE>
The notional amounts of derivatives do not represent amounts exchanged by
the counterparties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives
contracts.
Credit risk associated with derivatives arises from the potential for a
counterparty to default on its obligations. The Company attempts to limit credit
risk by only transacting with highly creditworthy counterparties and requiring
master netting and collateral agreements for all interest rate swap and interest
rate option contracts. All derivative counterparties are associated with
organizations having securities rated as investment grade by independent rating
agencies. The list of eligible counterparties, setting of counterparty limits,
and monitoring of credit exposure is controlled by the Investment Committee, a
management committee. The Company's credit exposure to derivatives, with the
exception of caps written, is represented by contracts with a positive fair
value without giving consideration to the value of any collateral exchanged.
(See Note 21). For caps written, credit exposure does not exist since the
counterparty has performed its obligation to pay the Company a premium payment.
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments without the exchange of the underlying notional
amount on which the interest payments are calculated. Based on its interest rate
sensitivity analyses, the Company enters into interest rate swaps to more
effectively manage the impact of fluctuating interest rates on its net interest
income and noninterest revenues. The Company has used interest rate swaps to
synthetically alter the cash flows on certain deposit, debt, and off-balance
sheet credit card and leasing securitizations.
As of December 31, 1997, the Company used interest rate swaps for the
following purposes: $1.0 billion to effectively convert fixed rate debt to a
LIBOR based variable rate, and $1.1 billion to effectively convert certain
off-balance sheet variable pass-through rate home equity and leasing
securitizations to a fixed rate. In 1997, as part of its asset/liability risk
management process, the Company chose to effectively convert $598 million of
fixed rate off-balance sheet credit card securitizations to a LIBOR based
variable rate through the use of interest rate swaps. The Company elected to
terminate all of these interest rate swap positions after a 7 month period and
realized a gain of $16.3 million. Gains or losses resulting from these interest
rate swap terminations are deferred and amortized to other noninterest revenues
over the remaining life of the underlying fixed rate credit card securitization.
As of December 31, 1997, the unamortized gain amounted to $15.6 million with the
remaining amortization period of 4.2 years. As of December 31, 1996, the Company
used interest rate swaps and swaptions for the following purposes; $976.3
million to effectively convert fixed rate debt to a LIBOR based variable rate,
and $737.1 million to effectively convert certain off-balance sheet variable
pass-through rate home equity and leasing securitizations to a fixed rate.
83
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes by notional amounts the Company's interest
rate swap and swaption activity by major category for the periods presented:
<TABLE>
<CAPTION>
RECEIVE PAY
FIXED RATE FIXED RATE TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at 1/1/95 $ 459,735 $ 0 $ 459,735
Additions 30,000 625,962 655,962
Net accretion 0 38,038 38,038
Terminations (285,900) 0 (285,900)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/95 203,835 664,000 867,835
Additions 635,000 594,804 1,229,804
Net accretion 0 41,805 41,805
Maturities (26,000) (400,000) (426,000)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/96 812,835 900,609 1,713,444
Additions 967,250 472,496 1,439,746
Net amortization 0 (142,894) (142,894)
Maturities (136,835) (10,500) (147,335)
Swaptions exercised 0 (153,000) (153,000)
Terminations (598,250) 0 (598,250)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/97 $1,045,000 $1,066,711 $2,111,711
- -----------------------------------------------------------------------------------------------
</TABLE>
Interest rate options are contracts that grant the purchaser, for a premium
payment, the right to either purchase or sell a financial instrument at a future
date for a specified price from the writer of the option. Interest rate caps and
floors are option-like contracts that require the seller (writer) to pay the
purchaser at specified future dates the amount by which a specified market
interest rate exceeds the cap rate or falls below the floor rate, multiplied
against a notional amount. A corridor is also an option-like contract which is
the simultaneous purchase and sale of separate interest rate caps where each cap
is referenced to a different interest rate index. A collar is an option-like
contract which is the simultaneous purchase of an interest rate cap and the sale
of an interest rate floor using the same reference interest rate index.
As part of managing its balance sheet and liquidity position, the Company
periodically securitizes and sells credit cards, business loans and leases. For
credit enhancement purposes, certain variable pass-through rate credit card and
business loan and lease securitizations were issued with embedded or purchased
interest rate caps. These rate caps, however, were not needed to satisfy
asset/liability management strategies. In order to achieve its desired interest
rate sensitivity structure and further reduce the effective pass-through rate of
the securitization, the Company has synthetically altered the interest rate
structure on certain off-balance sheet credit card, business loan and lease
securitizations by writing interest rate caps to offset the embedded and
purchased rate caps attached to them.
The premiums received or paid for writing or purchasing such cap contracts
with third parties are included in other assets and are amortized to noninterest
revenues over the life of the contract. Any obligations which may arise under
these contracts are recorded in noninterest revenues on an accrual basis. As of
December 31, 1997, unamortized premiums for caps written and purchased amounted
to $1.3 million and $360 thousand, respectively. The weighted average maturities
for caps written and purchased were 3.3 years and 4.6 years, respectively. As of
December 31, 1996, unamortized premiums for caps written and purchased amounted
to $2.1 million and $273 thousand, respectively. The weighted average maturities
for caps written and purchased were 2.7 years and 4.3 years, respectively.
When the Company periodically securitized and sold credit card receivables,
the receivables sold to the securitization trust carried rates which were
indexed to the prime rate, whereas the securitization certificates issued from
the trust may have been priced at a spread over LIBOR. The Company is exposed to
interest rate
84
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk to the extent that these two rate indices react differently to changes in
market interest rates. The Company may have chosen to hedge its credit card
interest-only strips from the risk of spread compression between the prime rate
and LIBOR by entering into corridor transactions which effectively fixed a
prime/ LIBOR spread. In addition, variable rate receivables sold to a variable
pass-through rate securitization trust may have contained introductory fixed
rates which expose the Company to interest rate risk during the receivables'
introductory period. The Company may have chosen to hedge the risk of interest
rate spread compression by entering into collar transactions which effectively
locked in a minimum interest rate spread in a changing interest rate
environment.
Premiums paid or received for entering into corridor and collar
transactions are included in other assets or other liabilities and are amortized
to noninterest revenues over the life of the contract. Any obligations which may
arise under these contracts are recorded to noninterest revenues on an accrual
basis. As of December 31, 1997, the Company had no corridor or collar
transactions outstanding. During 1997, substantially all of the Company's credit
cards were indexed to LIBOR eliminating the need to hedge credit card
interest-only strips from the risk of spread compression between the prime rate
and LIBOR. Accordingly, the Company chose to terminate $500 million of corridor
transactions and recorded a net gain of $429 thousand to income. As of December
31, 1996, unamortized premiums received for corridor and collar transactions
amounted to $831 thousand. As of December 31, 1996, the weighted average
maturities of corridor and collar transactions were 2.2 years.
Forward contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and may be settled in cash or
through delivery of the underlying financial instrument. The Company regularly
securitizes and sells fixed rate mortgage, business loan and lease receivables.
The Company may choose to hedge the changes in the market value of its fixed
rate loans and commitments designated for anticipated securitizations by selling
U.S. Treasury securities for forward settlement. The maximum and average terms
of hedges of anticipated mortgage loan sales is four and two months,
respectively. Gains and losses from forward sales are deferred and included in
the measurement of the dollar basis of the loans sold. Realized gains of $4.2
million and $3.4 million were deferred as of December 31, 1997 and 1996,
respectively.
In addition, the Company periodically issues fixed pass-through rate credit
card securitizations, fixed rate bank notes and capital securities. The Company
is exposed to interest rate risk to the extent that rates rise before the
issuance of the anticipated fixed rate obligations. The Company may choose to
hedge the interest costs associated with anticipated obligations by selling
securities for forward settlement. Gains or losses resulting from these hedges
are deferred and amortized to interest expense over the life of the underlying
obligation. The maximum and average terms of these types of anticipatory hedges
is two months. As of December 31, 1997 and 1996, unamortized losses on hedges of
anticipated fixed interest rate obligations amounted to $1.2 million and $1.7
million, respectively and the remaining weighted average amortization period was
2.4 years and 3.3 years, respectively.
The Company also had foreign currency risk to the extent that its net
investment in the joint venture with the Royal Bank of Scotland is not funded
with local currency. The Company hedged its foreign exchange risk by selling
foreign currency for forward settlement. The maximum and average terms of hedges
of foreign currency exposure is thirty days. Gains/(losses) from foreign
currency forward contracts are included in stockholders' equity and amounted to
$1.2 million and $(2.3) million as of December 31, 1997 and December 31, 1996,
respectively.
85
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table discloses the Company's interest rate swaps by major
category, notional value, weighted average interest rates, and annual maturities
for the periods presented.
<TABLE>
<CAPTION>
BALANCES MATURING IN:
BALANCE AT ---------------------------------------------------------------
12/31/97 1998 1999 2000 2001 2002 2003
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable:
Notional Value $1,066,711 $ 0 $ 82,893 $ 28,977 $223,603 $434,302 $ 74,248
Weighted Average Pay Rate 6.03% 0.00% 5.80% 5.72% 6.04% 5.98% 6.46%
Weighted Average Receive
Rate 5.90 0.00 5.86 5.86 5.89 5.90 5.87
Receive Fixed/Pay Variable:
Notional Value $1,045,000 $249,000 $141,000 $124,000 $406,000 $ 60,000 $ 50,000
Weighted Average Receive
Rate 6.47% 6.16% 6.46% 6.32% 6.62% 6.60% 6.90%
Weighted Average Pay Rate 5.78 5.80 5.82 5.78 5.77 5.85 5.69
Total Notional Value $2,111,711(A) $249,000 $223,893 $152,977 $629,603 $494,302 $124,248
Total Weighted Average Rates
on Swaps:
Pay Rate 5.91% 5.80% 5.81% 5.77% 5.86% 5.96% 6.15%
Receive Rate 6.18 6.16 6.24 6.23 6.36 5.98 6.28
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
BALANCES MATURING IN:
--------------------------
2004 2005 2006
<S> <C> <C> <C>
Pay Fixed/Receive Variable:
Notional Value $ 0 $222,688 $ 0
Weighted Average Pay Rate 0.00% 6.12% 0.00%
Weighted Average Receive
Rate 0.00 5.97 0.00
Receive Fixed/Pay Variable:
Notional Value $ 0 $ 0 $15,000
Weighted Average Receive
Rate 0.00% 0.00% 6.71%
Weighted Average Pay Rate 0.00 0.00 5.72
Total Notional Value $ 0 $222,688 $15,000
Total Weighted Average Rates
on Swaps:
Pay Rate 0.00% 6.12% 5.72%
Receive Rate 0.00 5.97 6.71
- -------------------------------------------------------------------
</TABLE>
(A) A portion of the Company's interest rate swaps were contributed to the Fleet
LLC in connection with the Transaction described in Note 11.
86
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Advanta Corp.:
We have audited the accompanying consolidated balance sheets of Advanta
Corp. (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanta
Corp. and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA
February 27, 1998
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING
To the Stockholders of Advanta Corp.:
The management of Advanta Corp. and its subsidiaries is responsible for the
preparation, content, integrity and objectivity of the financial statements
contained in this Annual Report. These financial statements have been prepared
in accordance with generally accepted accounting principles and as such must, by
necessity, include amounts based upon estimates and judgments made by
management. The other financial information in the Annual Report was also
prepared by management and is consistent with the financial statements.
Management maintains a system of internal controls that provides reasonable
assurance as to the integrity and reliability of the financial statements. This
control system includes: (l) organizational and budgetary arrangements which
provide reasonable assurance that errors or irregularities would be detected
promptly, (2) careful selection of personnel and communications programs aimed
at assuring that policies and standards are understood by employees, (3) a
program of internal audits, and (4) continuing review and evaluation of the
control program itself.
The financial statements in this Annual Report have been audited by Arthur
Andersen LLP, independent public accountants. Their audits were conducted in
accordance with generally accepted auditing standards and considered the
Company's system of internal controls to the extent they deemed necessary to
determine the nature, timing and extent of their audit tests. Their report is
printed herewith.
<TABLE>
<S> <C> <C>
/s/ Dennis Alter /s/ William A. Rosoff /s/ John J. Calamari
- ---------------------------- ---------------------------- ----------------------------
Chairman of the Board Vice Chairman Vice President,
and Chief Executive Officer Finance
</TABLE>
87
<PAGE> 89
SUPPLEMENTAL SCHEDULES
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
($ IN THOUSANDS) 1997
- ----------------------------------------------------------------------------
<S> <C>
Maturity:
3 months or less $221,011
Over 3 months through 6 months 136,851
Over 6 months through 12 months 169,194
Over 12 months 184,022
- ----------------------------------------------------------------------------
Total $711,078
- ----------------------------------------------------------------------------
</TABLE>
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market tier of The Nasdaq
Stock Market under the symbols ADVNB (Class B non-voting common stock) and ADVNA
(Class A voting common stock). Following are the high, low and closing sale
prices and cash dividends declared for the last two years as they apply to each
class of stock:
<TABLE>
<CAPTION>
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B:
- ------------------------------------------------------------------------------------------------
March 1996 $49.25 $33.75 $47.50 $.108
June 1996 52.50 43.50 45.25 .108
September 1996 48.25 39.75 42.75 .108
December 1996 48.50 38.25 40.88 .132
March 1997 $53.63 $25.50 $25.88 $.132
June 1997 36.25 18.88 35.69 .132
September 1997 36.50 24.75 27.25 .132
December 1997 37.63 23.38 25.38 .132
- ------------------------------------------------------------------------------------------------
Class A:
- ------------------------------------------------------------------------------------------------
March 1996 $53.50 $34.75 $52.00 $.090
June 1996 58.25 46.50 51.00 .090
September 1996 53.00 41.00 46.00 .090
December 1996 50.00 40.00 42.75 .110
March 1997 $53.25 $26.63 $26.88 $.110
June 1997 36.25 20.00 35.69 .110
September 1997 37.50 26.19 29.13 .110
December 1997 38.75 24.25 26.25 .110
- ------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had approximately 1,100 and 430 holders
of record of Class B and Class A common stock, respectively.
88
<PAGE> 90
QUARTERLY DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income $ 86,034 $133,324 $101,194 $ 97,066
Interest expense 84,885 88,414 79,797 71,462
-------- -------- -------- --------
Net interest income 1,149 44,910 21,397 25,604
Provision for credit losses 51,940 48,243 50,279 60,364
-------- -------- -------- --------
Net interest income after provision for
credit losses (50,791) (3,333) (28,882) (34,760)
Noninterest revenues:
Gain on sale of credit cards 0 0 0 0
Other noninterest revenues 284,129 209,397 194,749 156,862
-------- -------- -------- --------
Total noninterest revenues 284,129 209,397 194,749 156,862
Operating expenses 174,562 148,904 158,564 148,811
-------- -------- -------- --------
Income (loss) before income taxes 58,776 57,160 7,303 (26,709)
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 43,612 $ 42,412 $ 5,419 $(19,818)
- ----------------------------------------------------------------------------------------------------
Basic earnings (loss) per share
A $ .96 $ .94 $ .07 $ (.52)
B .99 .96 .09 (.49)
Combined(1) .98 .95 .09 (.51)
- ----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
A $ .94 $ .91 $ .07 $ (.52)
B .95 .92 .09 (.49)
Combined(1) .95 .92 .09 (.51)
- ----------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic
A 18,201 18,188 18,178 18,129
B 24,802 24,687 24,594 24,392
Combined(1) 43,003 42,875 42,772 42,521
- ----------------------------------------------------------------------------------------------------
Weighted average common shares -- assuming
dilution
Dilutive
A 18,250 18,245 18,239 18,129
B 27,775 27,870 24,969 24,392
Combined(1) 46,025 46,115 43,208 42,521
- ----------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE> 91
QUARTERLY DATA (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income $ 90,754 $101,118 $ 83,447 $ 72,646
Interest expense 68,736 77,697 67,332 55,935
-------- -------- -------- --------
Net interest income 22,018 23,421 16,115 16,711
Provision for credit losses 29,899 24,230 27,651 15,082
-------- -------- -------- --------
Net interest income after provision for
credit losses (7,881) (809) (11,536) 1,629
Noninterest revenues:
Gain on sale of credit cards 0 0 33,820 0
Other noninterest revenues 218,832 209,338 173,513 171,029
-------- -------- -------- --------
Total noninterest revenues 218,832 209,338 207,333 171,029
Operating expenses 143,925 141,309 127,445 110,495
-------- -------- -------- --------
Income before income taxes 67,026 67,220 68,352 62,163
- ----------------------------------------------------------------------------------------------------
Net income $ 45,151 $ 44,356 $ 45,120 $ 41,030
- ----------------------------------------------------------------------------------------------------
Basic earnings per share
A $ 1.04 $ 1.03 $ 1.05 $ .96
B 1.07 1.06 1.08 .98
Combined(1) 1.06 1.05 1.07 .97
- ----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
A $ .99 $ .97 $ .99 $ .90
B 1.00 .99 1.00 .91
Combined(1) 1.00 .98 1.00 .91
- ----------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic
A 17,752 17,631 17,600 17,512
B 23,403 23,187 23,125 22,981
Combined(1) 41,155 40,818 40,725 40,493
- ----------------------------------------------------------------------------------------------------
Weighted average common shares -- assuming
dilution
Dilutive
A 18,084 18,014 18,027 17,988
B 27,161 27,167 27,212 26,887
Combined(1) 45,245 45,181 45,239 44,875
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 1 to Consolidated Financial Statements.
90
<PAGE> 92
SUPPLEMENTAL SCHEDULES
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Credit cards $118,420 86% $76,084 85% $36,889 69% $27,486 66% $25,859 83%
Personal finance loans(1) 5,822 4 8,785 10 3,360 6 5,164 12 2,706 9
Business loans and leases(2) 9,798 7 4,241 5 977 2 1,076 3 1,826 6
Other 3,733 3 74 -- 12,268 23 7,891 19 836 2
- --------------------------------------------------------------------------------------------------------------------------
Total $137,773 100% $89,184 100% $53,494 100% $41,617 100% $31,227 100%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPOSITION OF GROSS RECEIVABLES
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Credit cards $2,579,890 76% $2,045,219 77% $2,338,280 85% $1,730,176 88% $1,131,367 89%
Personal finance loans(1) 478,433 14 376,260 14 321,711 12 142,874 7 91,340 7
Business loans and
leases(2) 298,789 9 214,327 8 93,660 3 86,157 5 51,008 4
Other loans 40,978 1 20,835 1 9,276 -- 5,237 -- 3,590 --
- ----------------------------------------------------------------------------------------------------------------------------
Total $3,398,090 100% $2,656,641 100% $2,762,927 100% $1,964,444 100% $1,277,305 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(2) Includes leases for all years presented and business cards beginning in
1996.
91
<PAGE> 93
YIELD AND MATURITY OF INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
$ IN THOUSANDS MATURING
- -------------------------------------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
------------------- ----------------- ---------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
securities $1,034,735 5.83% $ 49,011 5.84% $ 0 0.00% $ 0 0.00%
State and municipal securities(A) 316 3.85 2,101 4.15 2,208 5.42 693 5.52
Other(B) 5 9.06 48,949 6.62 7,933 7.03 53,352 6.68
- -------------------------------------------------------------------------------------------------------------------------
Total $1,035,056 5.83% $100,061 6.19% $10,141 6.68% $54,045 6.67%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Yield computed on a taxable equivalent basis using a statutory rate of 35%.
(B) Equity investments and other securities without a stated maturity are
excluded from this table.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
92
<PAGE> 94
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" are hereby
incorporated by reference, as is the text in Part I of this Report under the
caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive Compensation,"
"Compensation Committee Report on Executive Compensation" and "Election of
Directors -- Committees, Meetings and Compensation of the Board of Directors,"
"-- Compensation Committee Interlocks and Insider Participation in Compensation
Decisions" and "-- Other Matters" are hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The text of the Proxy Statement under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" are hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the Proxy Statement under the captions "Election of
Directors -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Financial Statements, Schedules, and Other Information of the
Registrant and its subsidiaries are included in this Form 10-K:
<TABLE>
<S> <C>
(a)(1) Financial Statements.
1. Consolidated Balance Sheets at December 31, 1997 and 1996.
2. Consolidated Income Statements for each of the three years
in the period ended December 31, 1997.
3. Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December 31,
1997.
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997.
5. Notes to Consolidated Financial Statements.
(a)(2) Schedules.
1. Other statements and schedules are not being presented
either because they are not required or the information
required by such statements and schedules is presented
elsewhere in the financial statements.
(a)(3) Exhibits
</TABLE>
93
<PAGE> 95
<TABLE>
<S> <C>
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994) , as
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS)) (incorporated
by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated August 15, 1995, as further amended
by the Certificate of Designations, Preferences, Rights and
Limitations of the Registrant's Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to the Registrant's Registration Statement on Form
8-A, dated March 17, 1997.
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K dated March 17, 1997).
3-c Rights Agreement, dated as of March 14, 1997, by and between
the Registrant and the Rights Agent, which includes as
Exhibit B thereto the Form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A dated March 17, 1997).
4-a* Trust Indenture dated April 22, 1981 between Registrant and
Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as
Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of
Class B Common Stock Certificate (incorporated by reference
to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8
and Exhibit 1 to Registrant's Form 8-A, respectively, both
dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the
Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form
S-3 (No. 33-50883), filed November 2, 1993).
4-d Specimen of 6 3/4% Convertible Class B Preferred Stock,
Series 1995 (Stock Appreciation Income Linked Securities
(SAILS)) Certificate (incorporated by reference to Exhibit
4.2 to the Registrant's Current Report on Form 8-K dated
August 15, 1995, filed the same date).
4-e Deposit Agreement, dated as of August 15, 1995, among
Advanta Corp. and Mellon Securities Trust Company and the
Holders from Time to Time of the Depositary Receipts
Described Therein in Respect of the 6 3/4% Convertible Class
B Preferred Stock, Series 1995 (Stock Appreciation Income
Linked Securities (SAILS)) (with form of Depositary Receipt
as an exhibit thereto) (incorporated by reference to Exhibit
4.10 to the Company's Current Report on Form 8-K dated
August 15, 1995, filed the same date).
4-f Senior Trust Indenture, dated as of October 23, 1995,
between the Registrant and Mellon Bank, N.A., as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-3 (File No.
33-62601), filed September 13, 1995).
4-g Indenture dated as of December 17, 1996 between Advanta
Corp. and The Chase Manhattan Bank, as trustee relating to
the Junior Subordinated Debentures. (incorporated by
reference to Exhibit 4-g to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
4-h Declaration of Trust dated as of December 5, 1996 of Advanta
Capital Trust I. (incorporated by reference to Exhibit 4-h
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
4-i Amended and Restated Declaration of Trust dated as of
December 17, 1996 for Advanta Capital Trust I. (incorporated
by reference to Exhibit 4-I to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
4-j Series A Capital Securities Guarantee Agreement dated as of
December 17, 1996. (incorporated by reference to Exhibit 4-j
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by
reference to Exhibit 10-b to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989).+
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).+
10-c Advanta Management Incentive Plan, as amended (incorporated
by reference to Exhibit 10-c to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).+
10-d* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National Bank USA
on March 25, 1983.
</TABLE>
94
<PAGE> 96
<TABLE>
<S> <C>
10-e* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement
executed by Colonial National Bank USA on March 25, 1983.
10-f* Indenture of Trust dated May 11, 1984 between Linda Alter, as settlor, and Dennis Alter, as trustee.
10-f(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture
of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda Alter,
and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i)
to the Registrant's Registration Statement on Form S-3 (File No. 33-58660), filed February 23, 1993).
10-g Agreement dated as of March 5, 1998 between the Registrant and Olaf Olafsson (filed herewith).+
10-h Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to
Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (File No. 33-33350), filed
February 21, 1990).+
10-i Advanta Corp. Executive Deferral Plan (incorporated by reference to the Exhibit 10-j to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995).+
10-j Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by reference to Exhibit 10-K to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+
10-k Advanta Management Incentive Plan With Stock Election II (incorporated by reference to Exhibit 10-o to
the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991).+
10-l Advanta Management Incentive Plan With Stock Election III, as amended (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).+
10-m Life Insurance Benefit for Certain Key Executives and Directors (filed herewith).+
10-n Advanta Management Incentive Plan With Stock Election IV, as amended (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10-o Amended and Restated Agreement of Limited Partnership of Advanta Partners LP, dated as of October 1, 1996
(incorporated by reference to Exhibit 10-o to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10-p Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated by
reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).+
10-q Pooling and Servicing Agreement, dated as of June 1, 1996, among Advanta Business Receivables Corp.,
Advanta Financial Corp. and First National Bank of Chicago, as Trustee (filed herewith).
10-r Master Loan and Security Agreement dated as of May 1, 1997 among Advanta Mortgage Holding Company and
certain of its subsidiaries and Morgan Stanley Mortgage Capital, Inc. (incorporated by reference to
Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
10-s Master Business Receivables Asset-Backed Financing Facility Agreement, dated as of May 1, 1997, by and
among Advanta Business Service Corp., Advanta Leasing Receivables Corp. III and The Chase Manhattan Bank
(incorporated by reference to Advanta Business Services Corp.'s Registration Statement on Form S-1 (File
No. 333-38575)).
10-t Contribution Agreement, dated as of October 28, 1997, by and between Advanta Corp. and Fleet Financial
Group (incorporated by reference to Exhibit (c)(2) to the Registrant's Schedule 13E-4, dated January 20,
1998), as amended by the First Amendment to the Contribution Agreement, dated as of February 20, 1998, by
and among Advanta Corp., Fleet Financial Group and Fleet Credit Card, LLC (incorporated by reference to
Exhibit 2.2 to the Registrant's Current Report on Form 8-K, filed March 6, 1998).
11 Inapplicable.
12 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of Independent Public Accountants (filed herewith).
</TABLE>
95
<PAGE> 97
<TABLE>
<S> <C>
24 Powers of Attorney (included on the signature page hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
</TABLE>
- ---------------
* Incorporated by reference to the Exhibit with corresponding number
constituting part of the Registrant's Registration Statement on Form S-2 (No.
33-00071), filed on September 4, 1985.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the Company on October 15, 1997
regarding consolidated earnings of the Company and its subsidiaries for
the fiscal quarter ended September 30, 1997. Summary earnings and
balance sheet information as of that date were filed with such report.
2. A Report on Form 8-K was filed by the Company on October 28, 1997
reporting certain announcements made by the Company that day.
3. A Report on Form 8-K was filed by the Company on December 3, 1997
regarding earnings guidance for the Company and its subsidiaries for the
1998 fiscal year.
96
<PAGE> 98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to the
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
ADVANTA CORP.
Dated: April 17, 1998 By: /s/ ELIZABETH H. MAI
------------------------------------
Elizabeth H. Mai, Senior Vice
President, Secretary and
General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment to the Annual Report on Form 10-K has been signed by the following
persons on behalf of the Registrant and in the capacities indicated on the
17th day of April, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
* Chief Executive Officer and Chairman of the Board
- ------------------------------------------
Dennis Alter
* Vice Chairman and Director
- ------------------------------------------
William A. Rosoff
* President and Director
- ------------------------------------------
Olaf Olafsson
* Vice President and Treasurer
- ------------------------------------------
Jeffrey D. Beck
* Vice President, Finance and Chief Accounting Officer
- ------------------------------------------
John J. Calamari
* Director
- ------------------------------------------
Arthur P. Bellis
* Director
- ------------------------------------------
Max Botel
* Director
- ------------------------------------------
William C. Dunkelberg
* Director
- ------------------------------------------
Dana Becker Dunn
</TABLE>
97
<PAGE> 99
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
* Director
- ------------------------------------------
Robert C. Hall
* Director
- ------------------------------------------
James E. Ksansnak
* Director
- ------------------------------------------
Ronald Lubner
</TABLE>
*By: /s/ Elizabeth H. Mai
-------------------------------------
Elizabeth H. Mai, Attorney-in-Fact
Pursuant to Powers of Attorney
previously filed as part of this
Annual Report on Form 10-K
98
<PAGE> 1
EXHIBIT 10-G
March 5, 1998
Mr. Olaf Olafsson
23 East 94th Street
New York, NY 10128
RE: Employment Agreement
Dear Olaf:
This letter, when signed by you and Advanta Corp. (the "Company"),
shall constitute the agreement relating to your employment with the Company as
follows:
1. Title and Duties. Your title will be President of the Company
and you will serve as a member of the Office of the Chairman. In that capacity
you will perform such senior executive duties on a full-time basis consistent
with your position as the Company and you reasonably determine. You have been
elected by the Board to be a member of the Board until the 2000 Annual Meeting.
If you remain employed with the Company at the Company's 2000 Annual Meeting,
the Board shall nominate you to be elected by the shareholders for a three year
term as director at that Annual Meeting. We shall at all times maintain
officers' and directors' liability insurance in an amount not less than $5
million.
2. Start Date. Your employment in your new role will commence on
or about March 5, 1998, or at such earlier time as is feasible and mutually
agreed to ("Start Date").
3. Base Salary. Your annual base salary will not be less than
$595,000, payable in periodic installments in accordance with the Company's
regular payroll practices in effect from time to time.
4. Annual Bonus. You will join Dennis Alter and William Rosoff
in the "A" compensation category and you shall be eligible to participate in
Advanta's Management Incentive Plan ("AMIP"). Your target bonus will be at
least 75% of your Base Salary each year. The maximum bonus is currently 200%
of target. Normally, bonus awards will be based upon
<PAGE> 2
both your personal performance and the performance of the Company and you will
be paid such awards at the same time as the other members as the Office of the
Chairman which is ordinarily during the first quarter of the year following the
year in which the bonuses are earned. Currently, AMIP calls for annual payment
of any amount up to your initial target bonus in freely tradeable shares of
Class B common stock and any amounts in excess of such initial target bonus in
cash.
5. Advanta Restricted Stock Award. Upon the Start Date, as
specified in Paragraph 2 above, Advanta will grant and convey to you 200,000
shares of Class B restricted stock (the "Bonus Shares"). The Bonus Shares
shall vest (i.e., become free of restrictions and freely tradeable) at the rate
of 50,000 shares on each of the first four anniversaries of the Start Date
provided you are still employed by the Company on the anniversary date. You
will receive non-preferential cash dividends (so long as Advanta is paying
dividends on Class B Shares) on all of the Bonus Shares both before and after
they vest. While any Bonus Shares remain restricted, the restricted Bonus
Shares (and any securities received as a dividend or distribution with respect
to such restricted Bonus Shares) may not be sold, transferred, pledged or
hypothecated by you (other than to a family member or family trust to
facilitate your estate planning goals in which case such restrictions will
apply to the Bonus Shares held by such family member or family trust). While
Bonus Shares remain restricted, the stock certificates for such shares shall be
held by Advanta, and copies thereof shall be delivered to you (as is our
practice with respect to all restricted shares under the AMIP bonus plan).
Such restricted shares shall bear a restrictive legend indicating that they are
subject to the restrictions described above and, in certain circumstances (as
more fully set forth below) to forfeiture and return to Advanta without the
payment to you of any consideration therefor. As Bonus Shares vest,
certificates for the vested shares (and for any securities received as a
dividend or distribution with respect thereto), free of the restrictive legend
described in the preceding sentences shall be delivered to you. Provisions for
accelerated vesting are set forth in paragraph 7. Any Bonus Shares which have
not vested pursuant to this Agreement at or before the time you cease to be
employed by the Company shall be forfeited by you and returned to Advanta
without payment of any consideration. Except as described above, it is
specifically understood that the Bonus Shares shall vest without regard to your
personal performance or the performance of the Company during the term of your
services.
6. Options. In connection with the delivery of this letter, the
Stock Option Committee under the Company's 1992 Stock Option Plan has granted
to you, effective upon the Start Date, an option to purchase 100,000 shares of
Class B common stock which will be registered pursuant to a Form S-8 (the
"Original Options") in accordance with the Advanta Corp. 1992 Stock Option Plan
("ACSOP"). The price of these shares shall be equal to the closing sale price
on the Start Date. Your right to exercise the Original Options shall, in the
ordinary course, vest 25% per year on each of the first four anniversaries of
the Start Date. Provisions for accelerated vesting are set forth in Paragraph
7. Any of the Original Options that do not vest pursuant to this Agreement at
or before the time you cease to be employed by the Company shall be forfeited
and terminated without payment of any consideration. In the event of a
termination of your employment (under circumstances in which the accelerated
vesting provisions of
<PAGE> 3
Paragraph 7 apply) the time to exercise the Original Options shall be two years
commencing as of the date of your departure from the Company, after which the
Original Options shall expire, unless in any case a longer period of time to
exercise is customarily accorded to senior management executives, in which case
you shall also be accorded such longer time to exercise. Shortly after the
Start Date, we will furnish to you a Stock Option Agreement in the form
attached hereto as Exhibit A. The Company shall also award you additional
options in accordance with ACSOP on an annual basis, subject to Board
discretion. Generally, these grants, if made, are made in February of each
year, recognizing that option grants for all senior executives are ultimately
determined by the Stock Option Committee of the Board of Directors. The terms
and conditions of such annual option grants shall be the same as the terms and
conditions of the annual options granted to other senior management executives
of the Company.
7. Accelerated Vesting. The Bonus Shares and Original Options
will vest immediately and entirely upon the occurrence of any of the following
events:
(a) Upon the Company's termination of your employment for
any reason other than "Cause" as defined below.
(b) In the event of your death, Disability, retirement or
departure from the Company except for a voluntary departure by you (not
solicited by us). For purposes of this Agreement, a Disability shall mean any
physical or mental condition which in the Company's reasonable judgment makes
you unable to perform your essential duties hereunder, with or without
reasonable accommodation.
(c) In the event of a change of control of the Company
(as defined in the Stock Option Agreement attached hereto as Exhibit A) all of
your Bonus Shares and Original Options shall immediately vest. For purposes of
this Agreement, the transaction with Fleet Financial Group, Inc. which was
announced be the Company on October 28, 1997 will not be a change of control of
the Company, nor shall it extend the time for you to exercise the Original
Options as provided in paragraph 6.
(d) You terminate your employment for "Good Reason" which
shall mean (1) any material breach by the Company of the terms of this
agreement; or (2) the requirement that you undertake duties that are materially
(i) inconsistent or (ii) not commensurate with your title, provided, however,
that before you can terminate for "Good Reason" you must provide the Company
with written notice of the basis for your belief that "Good Reason" has
occurred and you must first give the Company thirty (30) days after receipt of
such notice to cure the event which you believe constitutes "Good Reason"
pursuant to this paragraph. Your voluntary departure from the company (not
solicited by us) shall not accelerate the vesting of the Bonus Shares or the
Original Options, unless you terminate for "Good Reason."
<PAGE> 4
8. Place of Employment and Expense Reimbursement. Your services
shall be performed on average three days a week in the Philadelphia,
Pennsylvania metropolitan region, and the remainder in the New York, New York
metropolitan region, subject to reasonable domestic and overseas travel on our
behalf. We will pay or reimburse you for all transportation, hotel and other
expenses incurred by you on business trips outside the metropolitan New York,
New York area and for all other ordinary out-of-pocket expenses incurred by you
in the conduct of business on our behalf, on submission of appropriate expenses
documentation in accordance with normal Company practice. Notwithstanding
anything to the contrary, the Company recognizes that you will continue to
author books and other literary works and will make appropriate accommodations
to you for such purposes.
9. Life Insurance. During the period of your employment, we
shall maintain in effect, at our sole expense (except for taxes on the bonus
payments equal to your share of split dollar premiums) one or more insurance
policies on your life aggregating Five Million Dollars $5,000,000 of life
insurance, as to which your designee shall be the beneficiary. The policy (the
"Trust Policy") providing such benefit will, if you so request, be owned by
your designee or a trust (the "Owner"), and otherwise shall be owned by us;
provided however, that if the Trust Policy is owned by the Owner, it shall be
collaterally assigned to and held by us to secure any repayment obligations
described below. The Owner of the Trust Policies shall enter into a Split
Dollar Insurance Agreement and Collateral Assignment Agreement which are in the
forms attached hereto as Exhibits B and C.
10. Benefits. You shall receive such medical and other benefits
(other than life insurance benefits which are governed by Paragraph 9), as are
accorded to other senior management executives, including disability insurance
coverage and participation in any pension program we may establish. Currently,
our disability plan provides for coverage at the rate of sixty (60%) percent of
an employee's base salary and target AMIP bonus (subject to a maximum benefit
of $25,000 per month, or a base salary and target AMIP bonus maximum of
$500,000) until the age of sixty-five (65). We shall furnish to you an
automobile and related expenditures consistent with those accorded to other
senior management executives and we shall pay your initiation fee and annual
dues to belong to the country club of your choice. We shall also furnish to
you certain financial planning services consistent with other senior management
executives, at no cost to you (other than applicable taxes on this benefit).
You shall be entitled to annual vacations, which may be taken at any time
mutually agreed to by you and us.
11. Term; Termination for Cause. Although you and we are entering
into this agreement with the hope and expectation that this will be a
multi-year partnership, either you or we may terminate your services at any
time upon thirty (30) days prior written notice to the other. We may, by
notice to you, terminate your employment for "Cause" or without cause. As used
herein, "Cause"shall mean: (a) your willful refusal or failure to perform a
material and substantial part of your duties hereunder, it being understood
that "Cause" shall not exist unless and until you have received written notice
from us detailing the alleged willful refusal or failure, and you have been
accorded at least at least thirty (30) days to cure; or (b) your commission of
a felony, or of any act of fraud, misappropriation or criminal conduct
involving or relating in any
<PAGE> 5
material way to the Company, or of personal dishonesty materially injurious to
the Company. If you cease to be employed by the Company for any reason,
including without limitation, a termination by us for "Cause", you (or your
estate in the case of death) shall be entitled to receive your Base Salary and
accrual benefits until the date you cease to be employed and your AMIP Bonus,
pro-rated through the date you cease to be employed, which AMIP Bonus shall be
subject to the discretion of the Board. The foregoing is without limitation to
any rights you have at the time you cease to be employed by the Company (apart
from Base Salary, accrued benefits and AMIP Bonus) where applicable, such as
accelerated vesting to the extent provided in Paragraph 7.
12. Miscellaneous.
(a) The Company has the right to obtain key-man insurance
on your life, at the Company's sole cost and expense. You agree to cooperate
with the Company in obtaining any such insurance and to submit to the usual and
customary medical and other examinations and to sign all requisite applications
therefor.
(b) You represent and warrant to the Company that there
are no restrictions, agreements or understandings whatsoever to which you are
party that would prevent or make unlawful your execution or performance of this
agreement.
(c) You understand that the services to be rendered and
the duties to be performed by you hereunder are of a special, unique and
personal nature and that you may not assign your rights or delegate your
obligations under this agreement.
(d) You shall be considered an employee of the Company
within the meaning of all federal, state, and local laws and regulations
governing unemployment, insurance, workers' compensation, industrial accident,
labor and taxes.
(e) The Company may deduct and withhold from your
compensation, and from any option or stock awards hereunder, any taxes required
to be deducted or withheld under any applicable law.
(f) This agreement represents the entire understanding
between the parties with respect to this relationship and supersedes all prior
oral and written agreements and negotiations relating to the subject matter of
this agreement, and supersedes your prior employment agreement with Advanta
Information Inc. Additionally, you have agreed to relinquish the shares of
common stock of Advanta Information Inc. previously awarded to you pursuant to
paragraph 4 of the August 15, 1996 Agreement between you and Advanta
Information Inc.
(g) All clauses and covenants contained in this agreement
are severable, and in the event any of them shall be held to be invalid by any
court, such clauses or covenants shall be limited as permitted under applicable
law or, if they are not susceptible to
<PAGE> 6
such limitation, this agreement shall be interpreted as if such invalid clauses
or covenants were not contained herein.
(h) This agreement shall be governed by and interpreted
in accordance with the laws of the Commonwealth of Pennsylvania, without regard
to principles of conflicts of law.
(i) All notice of any kind which either party may be
required or may desire to serve upon the other party hereunder shall be in
writing and sent by hand delivery or nationally recognized overnight courier
service providing receipt of delivery, or by certified or registered mail,
return receipt requested, postage prepaid. Notice to the Company shall be sent
to the above address or any address, as may be provided hereafter. Notice to
you shall be sent to the above address or any address, as made provided
hereafter and with a copy to David Alexander, Peyser & Alexander Management,
Inc., 500 Fifth Avenue, Suite 2700, New York, NY 10110.
(j) Nothing in this agreement shall preclude the Company
from consolidating or merging into or with, or transferring all or
substantially all of its assets to another entity that assumes this agreement
and all obligations of the Company hereunder, subject to your rights hereunder
if such a transaction is consummated, as discussed above. Thereafter, the term
"Company" shall mean such other entity and this agreement shall continue in
full force and effect. This provision is not applicable to the Fleet
Transaction.
Assuming the foregoing accurately reflects our understanding, please
indicate your acceptance of its terms below. We both agree that we intend to
be legally bound by this agreement.
Very truly yours,
ADVANTA CORP.
By:
-----------------------
--------------------------
Accepted and Agreed this By:
-----------------------
day of , 1998
- --- ------------ --------------------------
- --------------------------------
<PAGE> 7
ADVANTA CORP.
NON-QUALIFIED STOCK OPTION
THIS NON-QUALIFIED STOCK OPTION (the "Option") is granted as of
[_______________], 199_ by ADVANTA Corp., a Delaware corporation (the
"Company"), to _______________(the "Optionee"), pursuant to the Company's 1992
Stock Option Plan (the "Plan").
W I T N E S S E T H:
1. Grant. The Company hereby grants to the Optionee an Option to
purchase, subject to the terms and conditions hereinafter set forth, all or any
part of an aggregate of One Hundred Thousand (100,000) Shares of the Company's
Class B Common Stock, par value $0.01 per share (the "Option Shares"), at the
purchase price of $_____ per share (the "Option Price"). This Option is not
intended to be an "incentive stock option" within the meaning of Section 422A
of the Internal Revenue Code of 1986, as amended (the "Code").
2. Term. The Option granted hereunder shall expire at 5:00 p.m.
(local Philadelphia, Pennsylvania time) on the earliest to occur of the
following:
(a) [__________], 200_ (the "Expiration Date") [10 years
from grant];
(b) The last day the Optionee's employment or service
with the Company or its Affiliates, where said employment or service is
terminated in circumstances where the accelerated vesting provisions of
paragraph 7 of that certain letter agreement (the "Letter Agreement") between
the Company and Optionee dated [__________], 199_ do not apply; or
(c) Expiration of two (2) years from the date the
Optionee's employment or service with the Company or its Affiliates terminates
if the termination occurs under circumstances in which the accelerated vesting
provision of paragraph 7 of the Letter Agreement apply.
3. Vesting. This Option shall vest over a period of four years,
beginning from the date first written above (the "Date of Grant"). This Option
may be exercised only to the extent that it has vested. Beginning on the first
anniversary of the Date of Grant, 25% of the Option shall vest (i.e., 25% of
the Option Shares covered by the Option shall become eligible for purchase).
Beginning on each of the second through fourth anniversaries of the Date of
Grant, an additional 25% of the Option shall vest, so that on the fourth
anniversary of the Date of Grant, this Option shall be 100% vested.
Notwithstanding the foregoing, in the event of: (i) a Change in Control of the
Company (as defined in Section 8); or (ii) upon Optionee's death, disability,
retirement or departure from the Company the Option shall be vested to the
extent provided in the Letter Agreement.
Exhibit A
<PAGE> 8
4. General Rules. To the extent otherwise exercisable, this
Option may be exercised in whole or in part except that this Option may in no
event be exercised (a) with respect to fractional shares or (b) after the
expiration of the Option term set forth under paragraph 2 hereof.
5. Transfers. The Option is not transferable by the Optionee
otherwise than by will or pursuant to the laws of descent and distribution in
the event of the Optionee's death, in which event the Option may be exercised
by the heirs or legal representatives of the Optionee. The Option may be
exercised during the lifetime of the Optionee only by the Optionee. Any
attempt at assignment, transfer, pledge or disposition of the Option contrary
to the provisions hereof or the levy of any execution, attachment or similar
process upon the Option shall be null and void and without effect.
Notwithstanding the foregoing, the Option may be transferred pursuant to the
terms of a "qualified domestic relations order," within the meaning of Sections
401(a)(13) and 414(p) of the Code or within the meaning of Title I of the
Employee Retirement Income Security Act of 1974, as amended. Any exercise of
the Option by a person other than the Optionee shall be accompanied by
appropriate proofs of the right of such person to exercise the Option.
6. Method of Exercise and Payment.
(a) When exercisable under Paragraphs 2, 3 and 4, the
Option may be exercised by written notice, pursuant to Paragraph 9, to the
Company's Secretary specifying the number of Option Shares to be purchased and,
unless the Option Shares are covered by a then current registration statement
or a Notification under Regulation A under the Securities Act of 1933 (the
"Act"), containing the Optionee's acknowledgment, in form and substance
satisfactory to the Company, that (i) such Option Shares are being purchased
for investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company, may be
made without violating the registration provisions of the Act), (ii) the
Optionee has been advised and understands that (A) the Option Shares have not
been registered under the Act and are "restricted securities" within the
meaning of Rule 144 under the Act and are subject to restrictions on transfer
and (B) the Company is under no obligation to register the Option Shares under
the Act or to take any action which would make available to the Optionee any
exemption from such registration, (iii) such Option Shares may not be
transferred without compliance with all applicable federal and state securities
laws, and (iv) an appropriate legend referring to the foregoing restrictions on
transfer and any other restrictions imposed under the Option may be endorsed on
the certificates. Notwithstanding the foregoing, if the Company determines
that issuance of the Option Shares should be delayed pending (A) registration
under federal or state securities laws, (B) the receipt of an opinion that an
appropriate exemption from such registration is available, (C) the listing or
inclusion of the Option Shares on any securities exchange or an automated
quotation system or (D) the consent or approval of any governmental regulatory
body whose consent or approval is necessary in connection with the issuance of
such Shares, the Company may defer exercise of any Option granted hereunder
until any of the events described in this Subsection 6(a) has occurred.
(b) The notice shall be accompanied by payment of the
aggregate Option Price of the Option Shares being purchased (i) in cash, (ii)
by certified or cashier's check payable to the order of the Company, or (iii)
by such other mode of payment as the Committee
<PAGE> 9
may approve. Such exercise shall be effective upon the actual receipt by the
Company's Secretary of such written notice and payment.
(c) The Company shall have the right to require the
Optionee to remit or otherwise make available to the Company an amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for Option Shares. The Company's obligation to make any delivery
or transfer of Option Shares shall be conditioned on the Optionee's compliance
with any withholding requirement to the Company's satisfaction.
7. Adjustments Upon Changes in Common Stock. In the event that,
prior to the delivery by the Company of all of the Option Shares in respect of
which the Option is granted, there shall be a stock dividend, stock split,
recapitalization or other change in the number or class of issued and
outstanding equity securities of the Company resulting from a subdivision or
consolidation of the Common Stock and/or, if appropriate, other outstanding
equity securities or a recapitalization or other capital adjustment affecting
the Common Stock which is effected without receipt of consideration by the
Company, the Committee designated under the Plan shall make appropriate
adjustments with respect to the aggregate number of shares and class or classes
of shares issuable upon exercise of the Option in lieu of the remaining number
of Option Shares and with respect to the Option Price hereunder. The Committee
shall have the authority to determine the adjustments to be made pursuant to
this Section, and any such determination by the Committee shall be final,
binding and conclusive.
8. Definition of "Change of Control". A "Change of Control"
shall be deemed to have occurred upon the earliest to occur of the following
events: (i) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) approve a plan or other
arrangement pursuant to which the Company will be dissolved or liquidated, or
(ii) the date the stockholders of the Company (or the Board of Directors, if
stockholder action is not required) approve a definitive agreement to sell or
otherwise dispose of substantially all of the assets of the Company, or (iii)
the date the stockholders of the Company (or the Board of Directors, if
stockholder action is not required) and the stockholders of the other
constituent corporation (or its Board of Directors, if stockholder action is
not required) have approved a definitive agreement to merge or consolidate the
Company with or into such other corporation, other than, in either case, a
merger or consolidation of the Company in which holders of shares of the
Company's Class A Common Stock immediately prior to the merger or consolidation
will have at least a majority of the voting power of the surviving
corporation's voting securities immediately after the merger or consolidation,
which voting securities are to be held in the same proportion as such holders'
ownership of Class A Common Stock of the Company immediately before the merger
or consolidation, or (iv) the date any entity, person or group, within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act
of 1934, as amended, (other than (A) the Company or any of its subsidiaries or
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries or (B) any person who, on the date the Plan
is effective, shall have been the beneficial owner of or have voting control
over shares of Common Stock of the Company possessing more than twenty-five
percent (25%) of the aggregate voting power of the Company's Common Stock)
shall have become the beneficial owner of, or shall have obtained voting
control over, more than twenty-five percent (25%) of the outstanding shares of
the
<PAGE> 10
Company's Class A Common Stock, or (v) the first day after the date this Plan
is effective when directors are elected such that a majority of the Board of
Directors shall have been members of the Board of Directors for less than two
(2) years, unless the nomination for election of each new director who was not
a director at the beginning of such two (2) year period was approved by a vote
of at least two thirds of the directors then still in office who were directors
at the beginning of such period. Notwithstanding the foregoing, the
transaction with Fleet Financial Group, Inc. which was announced on October 28,
1997 will not be a change of control for purposes of this Paragraph or
Agreement.
9. Administration. This Option has been granted pursuant to the
Company's 1992 Stock Option Plan, and is subject to the terms and provisions
thereof. Capitalized terms herein which are not otherwise defined have the
meaning specified in the Plan. All questions of interpretation and application
of the Plan and this Option shall be determined by the Committee designated
under the Plan, and such determination shall be final, binding and conclusive.
10. Notices. Any notice to be given to the Company shall be
addressed to the Secretary of the Company at its principal operating office,
and any notice to be given to the Optionee shall be addressed to the Optionee
at the address then appearing on the records of the Company, or at such other
address as either party hereafter may designate in writing to the other. Any
such notice shall be deemed to have been duly given only when actually received
by the Company.
11. Continued Service. Nothing herein contained shall affect the
right of the Company to terminate the Optionee's employment or the Optionee's
services, responsibilities, duties, or authority to represent the Company as a
member of its Board of Directors, or to discontinue the Optionee's services to
the Company in any capacity at any time for any reason whatsoever.
<PAGE> 11
IN WITNESS WHEREOF, the Company has granted this Option as of the day
and year first above written.
ADVANTA CORP.
By:
----------------------------------
Dennis Alter, Chairman
Attest:
------------------------------
Elizabeth H. Mai, Secretary
<PAGE> 12
SPLIT DOLLAR INSURANCE AGREEMENT
SPLIT DOLLAR INSURANCE AGREEMENT dated as of ________, 1998, by and
between __________________________ ("Owner"), and ADVANTA CORP. ("Company").
The parties hereto in consideration of the agreements and covenants
hereinafter set forth and intending to be legally bound, agree as follows:
1. This agreement relates to Policy No. ___________ ("Policy") on
the life of OLAF OLAFSSON ("Insured") issued by ______________________________
("Insurer"). Subject to the conditions hereinafter set forth, the Owner shall
be the sole owner of the Policy.
2. The Company has heretofore and shall continue to pay the
portion of the annual premiums on the Policy equal to: (i) the annual net
premiums, minus (ii) the value of the death benefits to which the Owner is then
entitled, determined by using the lesser of (a) the applicable one-year term
premium cost computed under Revenue Ruling 55-747, 1955-2 C.B. 228 (or any
superseding ruling thereto) or (b) the applicable premium rates charged by the
Insurer for initial issue one-year term insurance. The Owner shall pay to the
Company in connection with the Policy, or directly to the Insurers, the amount
described in clause (ii) above, and such payments shall continue to be made to
the Company notwithstanding the fact that there are no annual net premiums on
the Policy or that the Company's obligation to pay premiums is satisfied by
distributions from the Policy. In any year, the "annual net premiums" shall
equal the gross premiums less policy dividends which are not used to purchase
additional insurance. The aggregate of such Company payments, reduced by
amounts received by the Company with respect to the Policy, is hereinafter
referred to as the Company's "Cash Investment" in the Policy. The Company
shall also pay to or on behalf of OLAF OLAFSSON a bonus equal to the amount
described in clause (ii) above.
3. In consideration of the payments made pursuant to paragraph 2
hereof, the Company shall receive from the proceeds of the Policy, upon the
death of the Insured (or upon the surrender of the Policy during the Insured's
lifetime) an amount equal to the Company's Cash Investment in the Policy, as
calculated under paragraph 2 hereof. The balance of the proceeds, if any,
shall be paid as provided by the Owner in the Policy.
Exhibit B
<PAGE> 13
4. To secure the Cash Investment, the Owner shall assign to the
Company a security interest in the Policy equal in amount to the Cash
Investment and such security interest shall be limited to the Company's right
to receive such amount out of the proceeds of the Policy.
5. The assignment to the Company provided for in this agreement
shall be effectuated by the execution of a Collateral Assignment Agreement
substantially in the form attached hereto as Exhibit "A".
6. The Owner shall notify the Insurer of the Collateral
Assignment Agreement and shall take no action that would impair the security
interest of the Company under the Collateral Assignment Agreement.
7. Each and every right, interest or incident of ownership
associated with the Policy which are not expressly assigned to the Company by
the Collateral Assignment Agreement shall be retained by the Owner, including,
but not limited to, the right to designate and change the beneficiaries of the
Policy, the right to transfer the Policy subject to the rights assigned to the
Company, the right to surrender the Policy subject to the rights assigned to
the Company, and the right to exercise any option provided in the Policy.
8. Subject to taking notice of the Collateral Assignment
Agreement when it is filed at its home office, the Insurer shall have no
obligation except as set forth in the Policy. The Insurer shall not be bound
to inquire into or take notice of any of the covenants herein contained. Upon
the Insured's death (or upon surrender of the Policy prior to the death of the
Insured), the Insurer shall be discharged from its obligations upon payment of
the proceeds in accordance with the provisions of the Policy and the Collateral
Assignment Agreement and without regard to this agreement or any amendment
hereof.
9. For purposes of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Company is the "Named Fiduciary" and
"Administrator" within the meaning of sections 402(a) and 3(16)(A) of ERISA,
respectively, and the fiduciary for deciding claims. All claims shall be
resolved under procedures which comply with regulations promulgated under
section 503 of ERISA.
10. This agreement may be terminated at any time while the Insured
is living by written notice thereof by either the Company or the Owner to the
other. As of the date of
<PAGE> 14
such termination, the Company shall be repaid its Cash Investment solely to the
extent of funds available from the Policy, the Company shall have no further
rights in the Policy and the Collateral Assignment Agreement shall be
terminated.
11. Amendments may be made to this agreement by a writing signed
by each of the parties and attached hereto.
12. All matters respecting the validity, effect and interpretation
of this agreement shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania.
13. This agreement shall be binding upon the parties hereto and
their successors and assigns.
IN WITNESS WHEREOF, this agreement has been executed as of the date
first above written.
ADVANTA CORP. [OWNER]
By: By: (SEAL)
------------------------------------ ------------------------
Attest:
--------------------------------
[Corporate Seal]
<PAGE> 15
COLLATERAL ASSIGNMENT AGREEMENT
COLLATERAL ASSIGNMENT AGREEMENT dated as of _________, 1998, by and
between _____________________________________("Owner"), and ADVANTA CORP.
("Company").
This Agreement relates to _________________________ ("Insurer")
Policy No. _______, ("Policy") on the life of OLAF OLAFSSON ("Insured").
The parties have entered into a Split Dollar Insurance Agreement
("Insurance Agreement") contemporaneously with this Collateral Assignment
Agreement.
Pursuant to the Insurance Agreement, the Owner has agreed to assign to
the Company a security interest in the Policy in order to provide for the
payment to the Company of the Cash Investment, as defined in the Insurance
Agreement.
The parties hereto, in consideration of the foregoing and the
agreements and covenants hereinafter set forth and intending to be legally
bound hereby, agree as follows:
1. The Owner hereby assigns to the Company a security interest in
the Policy in order to secure for the Company the payment of the Cash
Investment in the Policy, consisting of the following rights:
(a) Upon the death of the Insured, the Company shall have
the right to receive so much of the proceeds payable under the Policy as is
equal to the Cash Investment, determined as of the date of the Insured's death.
The Company may collect such portion of the proceeds directly from the Insurer.
(b) In the event the Policy is surrendered by the Owner
prior to the death of the Insured, the Company shall have the right to receive
so much of the proceeds received as is equal to the Cash Investment, determined
as of the date of surrender. The Company may collect such portion of the
proceeds on surrender of the Policy directly from the Insurer.
2. The Insurer is authorized to rely solely on the written
statement of the Company and the Owner for the exercise of any rights under the
Policy assigned herein and as to the amount of the Cash Investment as of any
date. The Insurer is hereby authorized to recognize such statement without
investigation or the giving of any notice. The written acknowledgment
Exhibit C
<PAGE> 16
of receipt by the Company for any sums paid to it by the Insurer pursuant to
the written statement of the Cash Investment in the Policy shall be a full
discharge and release of the Insurer with respect to the Company's interest in
the Policy. Payment of the Cash Investment shall be made to the exclusive order
of the Company.
3. Each and every right, interest or incident of ownership
associated with the Policy which is not expressly assigned to the Company by
this Collateral Assignment Agreement is retained by the Owner, including, but
not limited to, the right to designate and change the beneficiaries of the
Policy, the right to transfer the Policy subject to the rights assigned to the
Company, the right to surrender the Policy subject to the rights assigned to
the Company, and the right to exercise any option provided in the Policy.
4. Each of the undersigned declares that no proceedings in
bankruptcy are pending against it or them and that its or their property is not
subject to any assignment for the benefit of creditors.
5. All matters respecting the validity, effect and interpretation
of this Collateral Assignment Agreement shall be determined in accordance with
the laws of the Commonwealth of Pennsylvania.
6. This Collateral Assignment Agreement shall be binding upon the
parties hereto and their successors and assigns.
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals as of the date first above written.
ADVANTA CORP. [OWNER]
By: By: (SEAL)
------------------------------------ ------------------------
Attest:
--------------------------------
[Corporate Seal]
<PAGE> 1
EXHIBIT 10-M
As a taxable executive benefit, the Company pays the premiums for life insurance
policies on the lives of non-employee Directors and certain key executives. The
executive or Board member has the right to designate the beneficiary under the
applicable life insurance policy. Messrs. Alter and Rosoff are each covered by a
$5,000,000 policy. Messrs.Riseman and Podowski are each covered by a $1,000,000
policy. Each non-employee Director is covered by a $500,000 policy. All of the
life insurance policies are owned by the Company, with the exception of the
policy providing coverage for Mr. Riseman which is owned by him. Upon
termination of employment, each executive (other than Mr. Riseman) is entitled
to acquire the insurance policy from the Company upon payment to the Company of
an amount equal to the cash value of the policy at that time. The policies
insuring the non-employee Directors are term life insurance policies, on which
there is no build-up in cash value.
<PAGE> 1
EXHIBIT 10-Q
ADVANTA BUSINESS RECEIVABLES CORP.,
Transferor,
ADVANTA FINANCIAL CORP.,
Master Servicer,
and
THE FIRST NATIONAL BANK OF CHICAGO,
Trustee
ADVANTA BUSINESS CARD MASTER TRUST
POOLING AND SERVICING AGREEMENT
Dated as of June 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I Definitions
Section 1.01. Definitions.......................................................................1
Section 1.02. Other Definitional Provisions................................................... 20
ARTICLE II Trust Assets
Section 2.01. Conveyance of Trust Assets...................................................... 22
Section 2.02. Acceptance by Trustee........................................................... 23
Section 2.03. Representations and Warranties of the Transferors Relating to the Transferors... 24
Section 2.04. Representations and Warranties of each Transferor Relating to
the Agreement and Any Supplement and the Receivables............................ 26
Section 2.05. Reassignment of Ineligible Receivables.......................................... 28
Section 2.06. Reassignment of Receivables in Trust Portfolio.................................. 29
Section 2.07. Covenants of the Transferor(s) With Respect to Interests in Receivables......... 30
Section 2.08. Covenants of The Transferor(s) with Respect to the
Participation Agreement or Receivables Purchase Agreement........................ 31
Section 2.09. Addition of Designated Assets................................................... 33
Section 2.10. Removal of Accounts and Participation Interests................................. 35
Section 2.11. Account Allocations............................................................. 37
Section 2.12. Discount Option................................................................. 37
ARTICLE III Administration and Servicing of Receivables
Section 3.01. Acceptance of Appointment and Other Matters Relating to the Master Servicer..... 39
Section 3.02. Servicing Compensation.......................................................... 40
Section 3.03. Representations, Warranties and Covenants of the Master Servicer................ 41
Section 3.04. Reports and Records for the Trustee............................................. 44
Section 3.05. Annual Certificate of Master Servicer........................................... 44
Section 3.06. Annual Servicing Report of Independent Public Accountants;
Copies of Reports Available..................................................... 44
Section 3.07. Tax Treatment................................................................... 45
Section 3.08. Notices to Trustee.............................................................. 45
Section 3.09. Adjustments..................................................................... 45
Section 3.10. Reports to the Commission....................................................... 46
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE IV Rights of Certificateholders and Allocation and Application of Collections
Section 4.01. Rights of Certificateholders.................................................... 47
Section 4.02. Establishment of Collection Account and Excess Funding Account.................. 47
Section 4.03. Collections and Allocations..................................................... 49
Section 4.04. Shared Principal Collections.................................................... 50
Section 4.05. Allocation of Trust Assets to Series or Groups.................................. 51
ARTICLE V Distributions and Reports to Certificateholders
ARTICLE VI The Certificates
Section 6.01. The Certificates................................................................ 53
Section 6.02. Authentication of Certificates.................................................. 53
Section 6.03. New Issuances................................................................... 53
Section 6.04. Registration of Transfer and Exchange of Certificates........................... 55
Section 6.05. Mutilated, Destroyed, Lost or Stolen Certificates............................... 58
Section 6.06. Persons Deemed Owners........................................................... 58
Section 6.07. Appointment of Paying Agent..................................................... 59
Section 6.08. Access to List of Registered Certificateholders' Names and Addresses............ 59
Section 6.09. Authenticating Agent............................................................ 60
Section 6.10. Book-Entry Certificates......................................................... 61
Section 6.11. Notices to Clearing Agency...................................................... 62
Section 6.12. Definitive Certificates......................................................... 62
Section 6.13. Meetings of Certificateholders.................................................. 62
Section 6.14. Uncertificated Classes.......................................................... 64
ARTICLE VII Other Matters Relating to the Transferors
Section 7.01. Liability of the Transferors.................................................... 65
Section 7.02. Merger or Consolidation of, or Assumption of the Obligations
of, the Transferors............................................................. 65
Section 7.03. Limitations on Liability of the Transferors..................................... 66
Section 7.04. Operation of Business........................................................... 66
Section 7.05. Classification of Accounts...................................................... 66
Section 7.06. Ownership of Accounts, No Right of Set-Off...................................... 66
Section 7.07. Liabilities..................................................................... 67
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE VIII Other Matters Relating to the Master Servicer
Section 8.01. Liability of the Master Servicer................................................ 68
Section 8.02. Merger or Consolidation of, or Assumption of the Obligations
of, the Master Servicer......................................................... 68
Section 8.03. Limitation on Liability of the Master Servicer and Others....................... 68
Section 8.04. Master Servicer Indemnification of the Trust and the Trustee.................... 69
Section 8.05. The Master Servicer Not To Resign............................................... 69
Section 8.06. Access to Certain Documentation and Information Regarding the Receivables....... 70
Section 8.07. Delegation of Duties............................................................ 70
Section 8.08. Examination of Records.......................................................... 70
ARTICLE IX Pay Out Events
Section 9.01. Trust Pay Out Events............................................................ 71
Section 9.02. Additional Rights Upon the Occurrence of Certain Events......................... 71
ARTICLE X Servicer Defaults
Section 10.01. Servicer Defaults............................................................... 73
Section 10.02. Trustee To Act, Appointment of Successor........................................ 75
Section 10.03. Notification to Certificateholders.............................................. 77
ARTICLE XI The Trustee
Section 11.01. Duties of Trustee............................................................... 78
Section 11.02. Certain Matters Affecting the Trustee........................................... 80
Section 11.03. Trustee Not Liable for Recitals in Certificates................................. 81
Section 11.04. Trustee May Own Certificates.................................................... 81
Section 11.05. The Transferors To Pay Trustee's Fees and Expenses.............................. 81
Section 11.06. Eligibility Requirements for Trustee............................................ 81
Section 11.07. Resignation or Removal of Trustee............................................... 82
Section 11.08. Successor Trustee............................................................... 82
Section 11.09. Merger or Consolidation of Trustee.............................................. 83
Section 11.10. Appointment of Co-Trustee or Separate Trustee................................... 83
Section 11.11. Tax Returns..................................................................... 84
Section 11.12. Trustee May Enforce Claims Without Possession of Certificates................... 85
Section 11.13. Suits for Enforcement........................................................... 85
Section 11.14. Rights of Certificateholders To Direct Trustee.................................. 86
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 11.15. Representations and Warranties of Trustee....................................... 86
Section 11.16. Maintenance of Office or Agency................................................. 87
Section 11.17. Trustee Indemnification of the Master Servicer and the Transferors.............. 87
Section 11.18. Obligor Claims.................................................................. 87
Section 11.19. Liabilities to Obligors......................................................... 88
ARTICLE XII Termination
Section 12.01. Termination of Trust............................................................ 89
Section 12.02. Final Distribution.............................................................. 89
Section 12.03. Transferors' Termination Rights................................................. 90
Section 12.04. Defeasance...................................................................... 91
Section 12.05. Optional Purchase............................................................... 92
ARTICLE XIII Miscellaneous Provisions
Section 13.01. Amendment; Waiver of Past Defaults.............................................. 93
Section 13.02. Protection of Right, Title and Interest to Trust................................ 94
Section 13.03. Limitation on Rights of Certificateholders...................................... 95
Section 13.04. GOVERNING LAW................................................................... 96
Section 13.05. Notices; Payments............................................................... 96
Section 13.06. Rule 144A Information........................................................... 97
Section 13.07. Severability of Provisions...................................................... 97
Section 13.08. Certificates Nonassessable and Fully Paid....................................... 97
Section 13.09. Further Assurances.............................................................. 97
Section 13.10. Nonpetition Covenant............................................................ 97
Section 13.11. No Waiver; Cumulative Remedies.................................................. 97
Section 13.12. Counterparts.................................................................... 98
Section 13.13. Third-Party Beneficiaries....................................................... 98
Section 13.14. Actions by Certificateholders................................................... 98
Section 13.15. Merger and Integration.......................................................... 98
Section 13.16. Headings........................................................................ 98
Section 13.17. Construction of Agreement....................................................... 98
Section 13.18. Successors and Assigns.......................................................... 99
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
Exhibit A Form of ABRC Certificate
Exhibit B Form of Assignment of Receivables in Additional Designated Assets
Exhibit C Form of Reassignment of Receivables in Removed Accounts
Exhibit D Form of Annual Master Servicer's Certificate
Exhibit E-1 Private Placement Legend
Exhibit E-2 Form of Undertaking Letter
Exhibit E-3 ERISA Legend
Exhibit F-1 Form of Certificate of Foreign Clearing Agency
Exhibit F-2 Form of Alternate Certificate to be delivered to Foreign Clearing Agency
Exhibit F-3 Form of Certificate to be delivered to Foreign Clearing Agency
Exhibit G-1 Form of Opinion of Counsel with respect to Amendments
Exhibit G-2 Form of Opinion of Counsel with respect to Accounts
</TABLE>
SCHEDULES
Schedule 1 List of Accounts [Deemed Incorporated]
v
<PAGE> 7
POOLING AND SERVICING AGREEMENT dated and effective as of June
1, 1996, by and among ADVANTA BUSINESS RECEIVABLES CORP., a
Nevada corporation, as Transferor, ADVANTA FINANCIAL CORP., a
Utah industrial loan corporation, as Master Servicer, and THE
FIRST NATIONAL BANK OF CHICAGO, a national banking
association, as Trustee.
In consideration of the mutual agreements herein contained,
each party agrees as follows for the benefit of the other parties, the
Certificateholders and any Series Enhancer to the extent provided herein and in
any Supplement (as such terms are defined below):
ARTICLE I
Definitions
Section 1.01. Definitions. Whenever used in this Agreement, the
following words and phrases shall have the following meanings, and the
definitions of such terms are applicable to the singular as well as the plural
forms of such terms and to the masculine as well as to the feminine and neuter
genders of such terms.
"ABRC" shall mean Advanta Business Receivables Corp., a Nevada
corporation.
"ABRC Certificate" shall mean the certificate executed by ABRC and
authenticated by or on behalf of the Trustee, substantially in the form of
Exhibit A, as the same may be modified in accordance with subsection 2.09(e).
"Account" shall mean each MasterCard(R) and VISA(R)(1) business
revolving credit card account established pursuant to a Cardholder Agreement and
the Receivables in which or a Participation Interest in the Receivables in which
has been conveyed pursuant to this Agreement, but shall exclude any Account in
which all of the Receivables are either reassigned or assigned to a Transferor
or its designee or the Master Servicer in accordance with the terms of this
Agreement. The term "Account" shall include those additional Accounts designated
pursuant to subsection 2.09(a), (b) or (d) only from and after the Addition Date
with respect thereto, and the term "Account" shall be deemed to refer to any
Removed Account only prior to the Removal Date with respect thereto. Nothing in
this definition shall be construed to convey ownership of the Accounts to the
Transferor or the Trust. The Seller shall continue to maintain the exclusive
ownership interest in the Accounts.
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(1) MasterCard and VISA are registered trademarks of MasterCard
International Incorporated and of VISA USA, Inc., respectively.
<PAGE> 8
"Accumulation Period" shall mean, with respect to any Series, or any
Class within a Series, a period following the Revolving Period, which shall be
the accumulation or other period in which Collections of Principal Receivables
are accumulated in an account for the benefit of the Investor Certificateholders
of such Series, or a Class within such Series, in each case as defined for such
Series, or Class within such Series, in the related Supplement.
"ACH" shall mean automated clearing house, a clearing and settlement
facility for the interchange of electronic debits and credits among financial
institutions.
"Act" shall mean the Securities Act of 1933, as amended from time to
time.
"Addition" shall mean the designation of additional Eligible Accounts
to be included as Accounts or of Participation Interests to be included as Trust
Assets pursuant to subsection 2.09(a), (b) or (d).
"Additional Designated Assets" shall mean (i) the Receivables generated
from each Account designated pursuant to subsection 2.09(a), (b) or (d) to be
included as an Account and is identified by account number and by the Receivable
balance in a computer file or microfiche list or (ii) each Participation
Interest described in Section 2.09(a) or (b), in each case delivered to the
Trustee by the applicable Transferor pursuant to Sections 2.01 and 2.09.
"Additional Transferor" shall have the meaning specified in subsection
2.09(e).
"Addition Cut-Off Date" shall mean, with respect to any Additional
Designated Assets to be included in the Trust, the date specified in the related
Assignment.
"Addition Date" shall mean with respect to Additional Designated
Assets, (i) the date on which Additional Designated Assets described in clause
(i) of the definition thereof are conveyed to the Trust pursuant to subsection
2.09(a), (b) or (d) or (ii) the date from and after which Participation
Interests are to be included as Trust Assets pursuant to subsection 2.09(a) or
(b).
"Adverse Effect" shall mean, with respect to any action, that such
action will (a) result in the occurrence of a Pay Out Event with respect to any
Series or (b) materially adversely affect the amount or timing of distributions
to be made to the Investor Certificateholders of any Series or Class pursuant to
this Agreement and the related Supplement.
"AFC" shall mean Advanta Financial Corp., a Utah industrial loan
corporation.
"Affiliate" shall mean, with respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" shall mean the power to
direct the management and policies of a Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
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"Aggregate Investor Amount" shall mean, as of any date of
determination, the sum of (i) the aggregate Investor Amounts of all Series of
Certificates issued and outstanding on such date of determination and (ii) the
sum of the Enhancement Investor Amounts, if any, for all outstanding Series on
such date of determination.
"Aggregate Series Percentage" shall mean, with respect to Principal
Receivables, Defaulted Receivables and Finance Charge and Administrative
Receivables on any date of determination, the sum of the Series Percentages for
such categories of Receivables for all outstanding Series on such date of
determination; provided, however, that the Aggregate Series Percentage shall not
exceed 100%.
"Agreement" shall mean this Pooling and Servicing Agreement and all
amendments hereof, including, with respect to any Series or Class, the related
Supplement.
"Amortization Period" shall mean, with respect to any Series, or any
Class within a Series, a period following the Revolving Period, which shall be
the controlled amortization period, the principal amortization period, the rapid
amortization period, the optional amortization period, the limited amortization
period or other amortization period, in each case as defined with respect to
such Series, or such Class within a Series in the related Supplement.
"Applicants" shall have the meaning specified in Section 6.08.
"Appointment Date" shall have the meaning specified in subsection
9.02(a).
"Assignment" shall have the meaning specified in subsection
2.09(c)(vi).
"Authorized Newspaper" shall mean any newspaper or newspapers of
general circulation in the Borough of Manhattan, The City of New York, or
Philadelphia, Pennsylvania, printed in the English language (and, with respect
to any Series or Class, if and so long as the Investor Certificates of such
Series are listed on the Luxembourg Stock Exchange and such Exchange shall so
require, in Luxembourg, printed in any language satisfying the requirements of
such Exchange) and customarily published on each business day at such place,
whether or not published on Saturdays, Sundays or holidays.
"Automatic Additional Designated Assets" shall have the meaning
specified in subsection 2.09(d)(i).
"Bearer Certificates" shall have the meaning specified in Section 6.01.
"Benefit Plan" shall have the meaning specified in subsection
6.04(c)(i) .
"Book-Entry Certificates" shall mean Investor Certificates registered
in the name of a Clearing Agency or its nominee as described in Section 6.10.
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"Business Day" shall mean any day other than (a) a Saturday or Sunday
or (b) any other day on which banks in New York, New Jersey, Utah or Nevada (or,
with respect to any Series, any additional city specified in the related
Supplement) or any other State in which the principal executive offices of AFC,
the Corporate Trust Office or any Additional Transferor are located, are
authorized or obligated by law, executive order or governmental decree to be
closed.
"Cardholder Agreement" shall mean, with respect to an Account, the
agreements between a Seller and the related Obligor, governing the terms and
conditions of such Account, as such agreements may be amended, modified or
otherwise changed from time to time in accordance with the Credit Card
Guidelines and as distributed (including any amendments and revisions thereto)
to Obligors of such Account.
"Cash Advance Fees" shall have the meaning specified in the Cardholder
Agreement applicable to each Account for cash advance fees or similar terms.
"CEDEL" shall mean Centrale de Livraison de Valeurs Mobilieres S.A.
"Certificate" shall mean any one of the Investor Certificates or the
Transferor Certificates.
"Certificateholder" or "Holder" shall mean an Investor
Certificateholder or a Person in whose name any one of the Transferor
Certificates is registered.
"Certificateholders' Interest" shall have the meaning specified in
Section 4.01.
"Certificate Owner" shall mean, with respect to a Book-Entry
Certificate, the Person who is the owner of such Book-Entry Certificate, as
reflected on the books of the Clearing Agency, or on the books of a Person
maintaining an account with such Clearing Agency (directly or as an indirect
participant, in accordance with the rules of such Clearing Agency).
"Certificate Rate" shall mean, with respect to any Series or Class, the
certificate rate specified in the related Supplement.
"Certificate Register" shall mean the register maintained pursuant to
Section 6.04, providing for the registration of the Registered Certificates and
the Transferor Certificates and transfers and exchanges thereof.
"Class" shall mean, with respect to any Series, any one of the classes
of Investor Certificates of that Series.
"Clearing Agency" shall mean an organization registered as a "clearing
agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended.
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"Clearing Agency Participant" shall mean a broker, dealer, bank, other
financial institution or other Person for whom from time to time a Clearing
Agency effects book entry transfers and pledges of securities deposited with the
Clearing Agency.
"Closing Date" shall mean, with respect to any Series, the closing date
specified in the related Supplement.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collection Account" shall have the meaning specified in Section 4.02.
"Collections" shall mean all payments by or on behalf of Obligors for
the payment of Principal Receivables and Finance Charge and Administrative
Receivables in the form of cash, checks (to the extent collected), wire
transfers, electronic transfers, ATM transfers or other forms of payment in
accordance with the Cardholder Agreements in effect from time to time. All
Recoveries will be treated as Collections of Finance Charge and Administrative
Receivables. Collections with respect to any Monthly Period shall include a
portion, calculated pursuant to subsection 2.08(d), of Interchange paid to the
Trust with respect to such Monthly Period, to be applied as if such amounts were
Collections of Finance Charge and Administrative Receivables for all purposes.
As specified in any Participation Agreement or Supplement, Collections shall
include amounts received with respect to Participation Interests.
"Commission" shall have the meaning specified in subsection 3.01(b).
"Companion Series" shall mean (i) each Series which has been paired
with another Series (which Series may be prefunded or partially prefunded), such
that the reduction of the Investor Amount of such Series results in the increase
of the Investor Amount of such other Series, as described in the related
Supplements, and (ii) such other Series.
"Contractually Delinquent" with respect to an Account, shall mean an
Account as to which the required minimum payment set forth on the related
billing statement has not been received by the due date thereof.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee at which, at any particular time, its corporate trust business shall
be administered, which office at the date hereof is located at One First
National Plaza, Suite 0126, Chicago, Illinois 60670-0126, Attention: Corporate
Trust Services Division, except that for purposes of Section 6.04(b), 6.07 or
11.16, such term shall mean the office or agency of the Trustee in the Borough
of Manhattan, The City of New York, which office at the date hereof is located
at 14 Wall Street, Eighth Floor, New York, New York 10005.
"Coupon" shall have the meaning specified in Section 6.01.
"Credit Card Guidelines" shall mean the written policies and procedures
of AFC or a Seller, as the case may be, relating to the operation of its
business revolving credit card
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business, including, without limitation, the written policies and procedures for
determining the creditworthiness of credit card account customers and the
extension of credit to credit card account customers and relating to the
maintenance of Accounts and collection of Receivables with respect thereto, as
such policies and procedures may be amended, modified, or otherwise changed from
time to time.
"Cut-Off Date" shall mean, with respect to the Initial Designated
Assets, the Trust CutOff Date, and with respect to any Additional Designated
Assets, the related Addition Cut-Off Date.
"Date of Processing" shall mean, with respect to any transaction or
receipt of Collections, the Business Day such transaction or receipt of
Collections is first recorded on the Master Servicer's computer file of Accounts
(without regard to the effective date of such recordation).
"Defaulted Amount" shall mean, with respect to any Monthly Period, an
amount (which shall not be less than zero) equal to (a) the amount of Principal
Receivables which became Defaulted Receivables in such Monthly Period, minus (b)
the amount of any Defaulted Receivables included in any Account in which a
Transferor or the Master Servicer became obligated to accept reassignment or
assignment of the Receivables in accordance with the terms of this Agreement
during such Monthly Period; provided, however, that, if an Insolvency Event
occurs with respect to any Transferor, the amount of such Defaulted Receivables
which are subject to reassignment to such Transferor in accordance with the
terms of this Agreement shall not be subtracted as set forth above; and
provided, further, that, if any of the events described in subsection 10.01(d)
occur with respect to the Master Servicer, the amount of such Defaulted
Receivables which are subject to reassignment or assignment to the Master
Servicer in accordance with the terms of this Agreement shall not be subtracted
as set forth above.
"Defaulted Receivables" shall mean, with respect to any Monthly Period,
all Principal Receivables which are charged off as uncollectible in such Monthly
Period in accordance with the Credit Card Guidelines and the Master Servicer's
customary and usual servicing procedures for servicing business revolving credit
card and other revolving credit account receivables comparable to the
Receivables. A Principal Receivable shall become a Defaulted Receivable on the
day on which such Principal Receivable is recorded as charged off on the Master
Servicer's computer master file of Accounts but, in any event, shall be deemed a
Defaulted Receivable no later than the day the related Account becomes 150 days
Contractually Delinquent unless the Obligor cures such default by making a
partial payment which satisfies the criteria for curing delinquencies set forth
in the applicable Credit Card Guidelines.
"Defeasance" shall have the meaning specified in subsection 12.04(a).
"Defeased Series" shall have the meaning specified in subsection
12.04(a).
"Definitive Certificates" shall have the meaning specified in Section
6.10.
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"Depositaries" shall mean the Person(s), if any, specified in the
applicable Supplement, in its capacity as depositary for the respective accounts
of any Clearing Agency or any Foreign Clearing Agencies.
"Depository Agreement" shall mean, if applicable with respect to any
Series or Class, the agreement among the Transferors, the Trustee and a Clearing
Agency, or as otherwise provided in the related Supplement.
"Designated Assets" shall mean either the Initial Designated Assets and
any Additional Designated Assets, which, in the case of a Participation
Interest, shall include the related Transferor's interest in the related
Participating Receivables.
"Determination Date" shall mean, unless otherwise specified in the
related Supplement, with respect to any Distribution Date, the third Business
Day preceding such Distribution Date.
"Discount Option Date" shall mean each date on which a Discount
Percentage designated by the Transferors pursuant to Section 2.12 takes effect.
"Discount Option Receivables" shall have the meaning specified in
Section 2.12. The aggregate amount of Discount Option Receivables outstanding on
any Date of Processing occurring on or after a Discount Option Date shall equal
the sum of (a) the aggregate Discount Option Receivables at the end of the prior
Date of Processing (which amount, prior to the initial Discount Option Date,
shall be zero) plus (b) any new Discount Option Receivables created on such Date
of Processing minus (c) any Discount Option Receivables Collections received on
such Date of Processing. Discount Option Receivables created on any Date of
Processing shall mean the product of the amount of any Principal Receivables
created on such Date of Processing (without giving effect to the proviso in the
definition of Principal Receivables) and the Discount Percentage.
"Discount Option Receivable Collections" shall mean on any Date of
Processing occurring in any Monthly Period succeeding the Monthly Period in
which the Discount Option Date occurs, the product of (a) a fraction the
numerator of which is the Discount Option Receivables and the denominator of
which is the sum of the Principal Receivables and the Discount Option
Receivables, in each case (for both the numerator and the denominator) at the
end of the preceding Monthly Period and (b) Collections of Principal Receivables
on such Date of Processing (without giving effect to the proviso in the
definition of Principal Receivables).
"Discount Percentage" shall mean the percentages, if any, designated by
the Transferors pursuant to Section 2.12.
"Distribution Date" shall mean, unless otherwise defined in a
Supplement with respect to a Series, the fifteenth day of each calendar month
or, if such fifteenth day is not a Business Day, the next succeeding Business
Day.
"Dollars", "$" or "U.S. $" shall mean United States Dollars.
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"Eligible Account" shall mean an Account identified by a Seller as
having the following characteristics as of the related Cut-Off Date:
(a) is in existence and maintained by a Seller;
(b) is payable in Dollars;
(c) has not been identified as an Account the credit card or
cards with respect to which have been reported to AFC or the applicable
Seller as having been lost or stolen;
(d) the Obligor of which has provided, as his or her billing
address, an address located in the United States (or its territories or
possessions or a military address);
(e) has an Obligor who has not been identified by AFC or the
applicable Seller as an employee of AFC or such Seller or any Affiliate
of either thereof;
(f) has an Obligor who has not been identified by AFC or the
applicable Seller as being involved in a voluntary or involuntary
bankruptcy proceeding; and
(g) does not have any Receivables which have been identified
by AFC, or the applicable Seller or the relevant Obligor as having been
incurred as a result of the fraudulent use of any related credit card.
"Eligible Deposit Account" shall mean either (a) a segregated account
with an Eligible Institution or (b) a segregated trust account with the
corporate trust department of a depository institution organized under the laws
of the United States or any one of the states thereof, including the District of
Columbia (or any domestic branch of a foreign bank), and acting as a trustee for
funds deposited in such account, so long as any of the securities of such
depository institution shall have a credit rating from each Rating Agency in one
of its generic credit rating categories which signifies investment grade.
"Eligible Institution" shall mean the Trustee or any other depository
institution organized under the laws of the United States or any one of the
states thereof, including the District of Columbia (or any domestic branch of a
foreign bank), which other depository institution at all times (a) is a member
of the FDIC and (b) has (i) a long-term unsecured debt rating acceptable to each
Rating Agency or (ii) a certificate of deposit rating acceptable to each Rating
Agency. Notwithstanding the previous sentence, any institution the appointment
of which satisfies the Rating Agency Condition shall be considered an Eligible
Institution. If so qualified, the Master Servicer may be considered an Eligible
Institution for the purposes of this definition.
"Eligible Investments" shall mean book-entry securities, negotiable
instruments or securities represented by instruments in bearer or registered
form which evidence:
(a) direct obligations of, and obligations fully guaranteed as
to timely payment of principal and interest by, the United States of
America;
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(b) demand deposits, time deposits or certificates of deposit
(having original maturities of no more than 365 days) of depository
institutions or trust companies incorporated under the laws of the
United States of America or any state thereof (or domestic branches of
foreign banks) and subject to supervision and examination by federal or
state banking or depository institution authorities; provided, that at
the time of the Trust's investment or contractual commitment to invest
therein, the short-term debt rating of such depository institution or
trust company shall be in the highest investment category of each
Rating Agency;
(c) commercial paper or other short-term obligations having,
at the time of the Trust's investment or contractual commitment to
invest therein, a rating from each Rating Agency in its highest
investment category;
(d) notes or bankers' acceptances (having original maturities
of no more than 365 days) issued by any depository institution or trust
company referred to in (b) above;
(e) investments in money market or common trust funds rated in
the highest investment category by each Rating Agency or otherwise
approved in writing by each Rating Agency;
(f) time deposits, other than as referred to in clause (e)
above, with a Person the commercial paper of which has a credit rating
from each Rating Agency in its highest investment category; or
(g) any other investments approved in writing by each Rating
Agency.
An Eligible Investment may be issued or sponsored by the Master Servicer, the
Trustee, or their Affiliates.
"Eligible Receivable" shall mean each Receivable:
(a) which has arisen under an Eligible Account;
(b) which was created in compliance in all material respects
with all Requirements of Law applicable to the institution which owned
such Receivable at the time of its creation and pursuant to a
Cardholder Agreement which complies in all material respects with all
Requirements of Law applicable to the related Seller;
(c) with respect to which all material consents, licenses,
approvals or authorizations of, or registrations or declarations with,
any Governmental Authority required to be obtained, effected, or given
in connection with the creation of such Receivable or the execution,
delivery and performance by the related Seller, as the case may be, of
its obligations, if any, under the related Cardholder Agreement have
been duly obtained, effected, or given and are in full force and
effect;
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(d) as to which, at the time of the transfer of such
Receivable to the Trust, such Transferor or the Trust will have good
and marketable title thereto, free and clear of all Liens (other than
any Lien for municipal or other local taxes if such taxes are not then
due and payable or if such Transferor is then contesting the validity
thereof in good faith by appropriate proceedings and has set aside on
its books adequate reserves with respect thereto);
(e) which has been the subject of either a valid transfer and
assignment from such Transferor to the Trust of all such Transferor's
right, title and interest therein (including any proceeds thereof) or
the grant of a first priority perfected security interest therein (and
in the proceeds thereof), effective until the termination of the Trust;
(f) which will at all times be the legal, valid and binding
payment obligation of the Obligor thereon, enforceable against such
Obligor in accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws, now or hereafter in effect, affecting
the enforcement of creditors' rights in general and except as such
enforceability may be limited by general principles of equity (whether
considered in a suit at law or in equity);
(g) which constitutes either an "account" or a "general
intangible" under and as defined in Article 9 of the UCC as then in
effect in any state where the filing of a financing statement is
required to perfect an interest in the Receivables and the proceeds
thereof;
(h) which, at the time of its transfer to the Trust, has not
been waived or modified except as permitted in accordance with the
Credit Card Guidelines and which waiver or modification is reflected in
the Master Servicer's computer file of revolving credit card accounts;
(i) which, at the time of its transfer to the Trust, is not
subject to any right of rescission, setoff, counterclaim or any other
defense of the Obligor (including defenses arising out of violations of
usury laws), other than defenses arising out of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights in general and general principles
of equity (whether considered in a suit at law or equity) or as to
which the Master Servicer is required by Section 3.09 to make an
adjustment;
(j) as to which, at the time of its transfer to the Trust,
such Transferor has satisfied all obligations to be fulfilled by such
Transferor at the time it is transferred to the Trust; and
(k) as to which, at the time of its transfer to the Trust,
such Transferor has not taken any action which would impair, or omitted
to take any action the omission of which would impair, the rights of
the Trust or the Certificateholders therein.
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"Eligible Servicer" shall mean AFC, the Trustee, or any of its
Affiliates or if the Trustee or any of its Affiliates is not acting as Successor
Servicer, an entity which, at the time of its appointment as Master Servicer,
(a) is servicing a portfolio of revolving credit card accounts, (b) is legally
qualified and has the capacity to service the Accounts, (c) is qualified to use
the software that is then being used to service the Accounts or obtains the
right to use software, or has its own software, which is adequate to perform its
duties under this Agreement, (d) has demonstrated the ability to professionally
and competently service a portfolio of accounts similar to the Accounts in
accordance with high standards of skill and care, and (e) has a net worth of at
least $10,000,000 as of the end of its most recent fiscal quarter.
"Enhancement Agreement" shall mean any agreement, instrument or
document governing the terms of any Series Enhancement or pursuant to which any
Series Enhancement is issued or outstanding.
"Enhancement Investor Amount" shall have the meaning, if applicable
with respect to any Series, specified in the related Supplement.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"Euroclear Operator" shall mean Morgan Guaranty Trust Company of New
York, Brussels office, as operator of the Euroclear System.
"Excess Funding Account" shall have the meaning specified in Section
4.02.
"Excess Funding Amount" shall mean the amount on deposit in the Excess
Funding Account.
"FDIC" shall mean the Federal Deposit Insurance Corporation or any
successor.
"Finance Charge and Administrative Receivables" shall mean all amounts
billed to the Obligors on any Account in respect of (i) Periodic Finance
Charges, (ii) Late Fees, (iii) Overlimit Fees, if any, (iv) Cash Advance Fees,
if any, (v) amounts deemed to be Discount Option Receivables, if any, in
accordance with Section 2.12 and (vi) all other fees and charges with respect to
the Accounts designated by the Transferor to be included as Finance Charge and
Administrative Receivables. All Recoveries will be treated as Collections of
Finance Charge and Administrative Receivables. Collections of Finance Charge and
Administrative Receivables with respect to any Monthly Period shall be deemed to
include Interchange as calculated pursuant to the related Supplement for any
Series. Finance Charge and Administrative Receivables shall also include the
interest portion of Participation Interests as shall be determined pursuant to
the applicable Participation Agreement or Supplement.
"FIRREA" shall mean the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, as amended from time to time.
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"Fixed Amount" shall mean the dollar amount or fixed percentage of
Receivables required to be maintained in a Participation Interest pursuant to a
Participation Agreement.
"Foreign Clearing Agency" shall mean CEDEL and the Euroclear Operator.
"Governmental Authority" shall mean the United States of America, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Group" shall mean, with respect to any Series, the group of Series, if
any, in which the related Supplement specifies such Series is to be included.
"Included Account" with respect to any Account relating to a
Participation Interest, shall have the meaning set forth in the related
Participation Agreement.
"Ineligible Receivables" shall have the meaning specified in subsection
2.05(a).
"Initial Closing Date" shall mean June 27, 1996.
"Initial Designated Assets" shall mean the Participation Interest
described in the Master Participation Agreement dated as of June 1, 1996 between
ABRC as Transferor and AFC as Master Servicer.
"Insolvency Event" shall have the meaning specified in subsection
9.01(a).
"Insolvency Proceeds" shall have the meaning specified in subsection
9.02(b).
"Insurance Proceeds" shall mean any amounts recovered by any Master
Servicer pursuant to any credit insurance policies covering any Obligor with
respect to Receivables under such Obligor's Account.
"Interchange" shall mean interchange fees payable to AFC, or any other
Seller, in its capacity as credit card issuer, through VISA or MasterCard or any
other similar entity or organization with respect to any type of revolving
credit card accounts included as Accounts in connection with cardholder charges
for goods, services, and cash advances, as calculated pursuant to the related
Supplement for any Series.
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended from time to time.
"Investor Amount" shall mean, with respect to any Series and for any
date, an amount equal to the Investor Amount specified in the related
Supplement.
"Investor Certificateholder" shall mean the Person in whose name a
Registered Certificate is registered in the Certificate Register or the bearer
of any Bearer Certificate or Coupon.
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"Investor Certificates" shall mean any certificated or uncertificated
interest in the Trust designated as, or deemed to be, an "Investor Certificate"
in the related Supplement.
"Late Fees" shall have the meaning specified in the Cardholder
Agreement applicable to each Account for late fees or similar terms.
"Lien" shall mean any mortgage, deed of trust, pledge, hypothecation,
assignment, deposit arrangement, participation or equity interest, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever, including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substantially the same economic
effect as any of the foregoing and the filing of any financing statement under
the UCC or comparable law of any jurisdiction to evidence any of the foregoing;
provided, however, that any assignment or transfer pursuant to subsection
6.03(c) or (d) or Section 7.02 shall not be deemed to constitute a Lien.
"Master Servicer" shall mean initially AFC and its permitted successors
and assigns, in its capacity as Master Servicer pursuant to this Agreement, and
from the time of its appointment, any Person appointed Successor Servicer as
herein provided.
"MasterCard" shall mean MasterCard International Incorporated.
"Monthly Period" shall mean, with respect to each Distribution Date,
unless otherwise provided in a Supplement, the period from and including the
first day of the preceding calendar month to and including the last day of such
calendar month; provided, however, that the initial Monthly Period with respect
to any Series will commence on the Closing Date with respect to such Series.
"Monthly Servicing Fee" shall have the meaning specified in Section
3.02.
"Moody's" shall mean Moody's Investors Service, Inc., or its successor.
"Notice of Servicer Default" shall have the meaning set forth in
Section 10.01 of this Agreement.
"Notices" shall have the meaning specified in subsection 13.05(a).
"Obligor" shall mean, with respect to any Account, the Person or
Persons obligated to make payments with respect to such Account, including any
guarantor thereof, but excluding any merchant.
"Officer's Certificate" shall mean, unless otherwise specified in this
Agreement, a certificate delivered to the Trustee signed by the Chairman of the
Board, President, any Vice President or the Treasurer of a Transferor or the
Master Servicer, as the case may be.
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"Opinion of Counsel" shall mean a written opinion of counsel, who may
be counsel for, or an employee of, the Person providing the opinion and who
shall be reasonably acceptable to the Trustee; provided, that (i) any Tax
Opinion shall be rendered by an independent law firm of nationally recognized
standing on such matters, and (ii) any opinion rendered pursuant to Section 8.05
shall be issued by an independent law firm.
"Overlimit Fees" shall have the meaning specified in the Cardholder
Agreement applicable to each Account for overlimit fees or similar terms if such
fees are provided for with respect to such Account.
"Participating Receivables" shall have the meaning specified in Section
2.05 of this Agreement.
"Participation Agreement" shall mean each participation agreement
pursuant to which a Participation Interest is conveyed by a Seller to a
Transferor.
"Participation Interest" shall mean a participation (including a 100%
participation) representing undivided interests in a pool of assets primarily
consisting of business revolving credit card receivables, and any interests in
the foregoing, including securities representing or backed by such receivables,
owned by a Transferor or any Affiliate of any Transferor and collections
thereon.
"Paying Agent" shall mean any paying agent and co-paying agent
appointed pursuant to Section 6.07 and shall initially be the Trustee; provided,
that if the Supplement for a Series so provides, a Paying Agent may be appointed
with respect to such Series.
"Pay Out Event" shall mean, with respect to each Series, a Trust Pay
Out Event or a Series Pay Out Event.
"Performance Guaranty" shall mean the performance guaranty issued by
Advanta Corp. dated as of June 1, 1996.
"Periodic Finance Charges" shall have the meaning specified in the
Cardholder Agreement applicable to each Account for finance charges (due to
periodic rate) or any similar term.
"Person" shall mean any legal person, including any individual,
corporation, partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, governmental entity or other entity of
similar nature.
"Principal Receivable" shall mean all amounts charged by Obligors for
merchandise and services, cash advances and any balance transfers, but shall not
include Finance Charge and Administrative Receivables or Defaulted Receivables;
provided, however, that after the Discount Option Date, Principal Receivables on
any Date of Processing thereafter shall mean Principal Receivables as otherwise
determined pursuant to this definition minus the amount of any
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Discount Option Receivables. Principal Receivables shall also include the
Principal Receivables portion of Participation Interests as shall be determined
pursuant to the applicable Participation Agreement or Supplement. In calculating
the aggregate amount of Principal Receivables on any day, the amount of
Principal Receivables shall be reduced by the aggregate amount of credit
balances in the Accounts on such day. Any Receivables which the related
Transferor is unable to transfer as provided in Section 2.10 shall not be
included in calculating the aggregate amount of Principal Receivables, except to
the extent so provided in Section 2.10.
"Principal Sharing Series" shall mean a Series that, pursuant to the
Supplement therefor, is entitled to receive Shared Principal Collections.
"Principal Shortfalls" shall have the meaning specified in Section
4.04.
"Principal Terms" shall mean, with respect to any Series, (i) the name
or designation; (ii) the Initial Investor Amount, the Series Investor Amount and
the Series Invested Amount (or method for calculating such amounts); (iii) the
Certificate Rate (or method for the determination thereof); (iv) the payment
date or dates and the date or dates from which interest shall accrue; (v) the
method for allocating Collections to Certificateholders of such Series; (vi) the
designation of any Series Accounts and the terms governing the operation of any
such Series Accounts; (vii) the method of calculating the Servicing Fee with
respect thereto; (viii) the terms of any form of Series Enhancement with respect
thereto; (ix) the terms on which the Investor Certificates of such Series may be
exchanged for Investor Certificates of another Series, repurchased by the
Transferors or remarketed to other investors; (x) the Series Termination Date;
(xi) the number of Classes of Investor Certificates of such Series and, if such
Series consists of more than one Class, the rights and priorities of each such
Class; (xii) whether the Investor Certificates of such Series may be issued as
Bearer Certificates and any limitations imposed thereon; (xiii) the priority of
such Series with respect to any other Series; (xiv) the Group, if any, to which
such Series belongs; (xv) whether or not such Series is a Principal Sharing
Series; and (xvi) any other terms of such Series.
"Rating Agency" shall mean, with respect to any outstanding Series or
Class, each statistical rating agency, if any, selected by the Transferors to
rate the Investor Certificates of such Series or Class, as specified in the
related Supplement.
"Rating Agency Condition" shall mean, with respect to any action, that
each Rating Agency shall have notified the Trustee and the Transferors in
writing that such action will not result in a reduction or withdrawal of the
rating of any outstanding Series or Class with respect to which it is a Rating
Agency.
"Reassignment" shall have the meaning specified in Section 2.10.
"Receivable" shall mean amounts (i) owing by an the Obligor from time
to time for Principal Receivables and Finance Charge and Administrative
Receivables, and (ii) calculated as Interchange with respect thereto. A
Receivable shall be deemed to have been created at the end of the day on the
Date of Processing of such Receivable. Receivables which become
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Defaulted Receivables shall not be shown on a Master Servicer's records as
amounts payable (and shall cease to be included as Receivables) on the day on
which they become Defaulted Receivables.
"Receivables Purchase Agreement" shall mean an agreement whereby
Receivables are conveyed from a Seller to a Transferor.
"Record Date" shall mean, with respect to any Distribution Date, the
last Business Day of the preceding Monthly Period, except as otherwise provided
with respect to a Series in the related Supplement.
"Recoveries" shall mean all amounts, including Insurance Proceeds,
received by a Master Servicer with respect to Receivables which have previously
become Defaulted Receivables, net of any out-of-pocket costs and expenses of
collection (including attorneys fees and expenses deducted therefrom).
"Registered Certificateholder" shall mean the Holder of a Registered
Certificate.
"Registered Certificates" shall have the meaning specified in Section
6.01.
"Removal Cut-Off Date" shall have the meaning specified in subsection
2.10(b).
"Removal Date" shall have the meaning specified in subsection 2.10(a).
"Removal Notice Date" shall have the meaning specified in subsection
2.10(a).
"Removed Accounts" shall have the meaning specified in Section 2.10.
"Required Designation Date" shall have the meaning specified in
subsection 2.09(a).
"Required Principal Balance" shall mean, as of any date of
determination, (a) the sum of the Series Investor Amounts for each Series
outstanding on such date, minus (b) the Excess Funding Amount.
"Required Transferor Amount" shall mean the sum of each of the amounts
specified as such in the applicable Supplement.
"Requirements of Law" with respect to any Person shall mean the
certificate of incorporation or articles of association and by-laws or other
organizational or governing documents of such Person, and any law, treaty, rule
or regulation, or determination of an arbitrator or Governmental Authority, in
each case applicable to or binding upon such Person or to which such Person is
subject, whether Federal, state or local (including, without limitation, usury
laws, the Federal Truth in Lending Act and Regulation Z and Regulation B of the
Board of Governors of the Federal Reserve System) and rules, regulations and
bylaws of MasterCard
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International Incorporated, VISA USA, Inc., or any other similar entity or
organization applicable to or binding upon such Person.
"Responsible Officer" shall mean any officer within the Corporate Trust
Office (or any successor group of the Trustee) including any Vice President, any
Assistant Secretary, any Assistant Treasurer, or any other officer of the
Trustee customarily performing functions similar to those performed by any of
the above-designated officers and also, with respect to a particular matter, any
other officer to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject.
"Revolving Period" shall mean, with respect to any Series, the period
specified as such in the related Supplement.
"RTC" shall mean the Resolution Trust Corporation or any successor.
"Rule 144A" shall mean Rule 144A under the Act, as such Rule may be
amended from time to time.
"Seller" shall mean AFC, a Utah industrial loan corporation or any
other entity which is the issuer of the credit card relating to an Account
pursuant to a Cardholder Agreement.
"Seller's Interest" shall mean (i) the aggregate principal amount of
the participation interests in the related Receivables retained by the Seller as
set forth in the related Participation Agreement and (ii) the Transferor's
Interest.
"Series" shall mean any series of Investor Certificates established
pursuant to a Supplement.
"Series Account" shall mean any deposit, trust, escrow or similar
account maintained for the benefit of any Series or Class, as specified in any
Supplement.
"Series Enhancement" shall mean the rights and benefits provided to the
Investor Certificateholders of any Series or Class pursuant to any letter of
credit, surety bond, cash collateral account, cash collateral guaranty, spread
account, guaranteed rate agreement, maturity liquidity facility, tax protection
agreement, interest rate swap agreement, interest rate cap agreement or other
similar arrangement. The subordination of any Series or Class to another Series
or Class shall be deemed to be a Series Enhancement.
"Series Enhancer" shall mean the Person or Persons providing any Series
Enhancement, other than the Investor Certificateholders of any Series or Class
which is subordinated to another Series or Class.
"Series Enhancer Default" shall have, with respect to any Series, the
meaning specified in the related Supplement, if any.
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"Series Invested Amount" shall have, with respect to any Series, the
meaning, if any, specified in the related Supplement.
"Series Investor Amount" shall have, with respect to any Series, the
meaning, if any, specified in the related Supplement.
"Series Pay Out Event" shall mean, with respect to any Series, each
event, if any, specified in the Supplement as a Series Pay Out Event with
respect to such Series.
"Series Percentage" shall have, with respect to Principal Receivables,
Finance Charge and Administrative Receivables and Defaulted Receivables, and any
Series of Certificates, the meaning, if any, stated in the related Supplement.
"Series Termination Date" shall mean, with respect to any Series, the
termination date for such Series specified in the related Supplement.
"Servicer Default" shall have the meaning specified in Section 10.01.
"Servicing Fee" shall have the meaning specified in Section 3.02.
"Servicing Fee Rate" shall mean, with respect to any Series, the
servicing fee rate specified in the related Supplement.
"Servicing Officer" shall mean any officer of the Master Servicer, or
any attorney-in-fact of the Master Servicer, involved in, or responsible for,
the administration and servicing of the Receivables whose name appears on a list
of servicing officers furnished to the Trustee by the Master Servicer, as such
list may from time to time be amended.
"Shared Principal Collections" shall have the meaning specified in
Section 4.04.
"Standard & Poor's" shall mean Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, or its successor.
"Successor Servicer" shall have the meaning specified in subsection
10.02(a).
"Supplement" shall mean, with respect to any Series, a Supplement to
this Agreement, executed and delivered in connection with the original issuance
of the Investor Certificates of such Series pursuant to Section 6.03, and all
amendments thereof and supplements thereto.
"Supplemental Certificate" shall have the meaning specified in
subsection 6.03(c).
"Tax Opinion" shall mean, with respect to any action, an Opinion of
Counsel to the effect that, (a) for Federal income tax purposes, such action
will not adversely affect the tax characterization as debt of Investor
Certificates of any outstanding Series or Class that were characterized as debt
at the time of their issuance, (b) following such action the Trust will not
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be deemed to be an association (or publicly traded partnership) taxable as a
corporation and (c) such action will not cause or constitute an event in which
gain or loss would be recognized by any Investor Certificateholder or the Trust.
"Termination Notice" shall have the meaning specified in Section 10.01.
"Termination Proceeds" shall have the meaning specified in Section
12.02(c).
"Transfer Agent and Registrar" shall have the meaning specified in
Section 6.04.
"Transfer Date" shall mean the Business Day immediately preceding each
Distribution Date.
"Transfer Restriction Event" shall have the meaning specified in
Section 2.11.
"Transferors" shall mean ABRC and any Additional Transferor, and their
successors and permitted assigns.
"Transferor Amount" shall mean, on any date of determination, an amount
equal to (i) the sum of (a) the aggregate amount of Principal Receivables at the
end of the day immediately prior to such date of determination, and (b) the
Excess Funding Amount at the end of the day immediately prior to such date of
determination, and minus (ii) the sum of the Series Invested Amounts for each
Series outstanding on such date at the end of such day.
"Transferor Certificates" shall mean, collectively, the ABRC
Certificate and any outstanding Supplemental Certificates.
"Transferors' Interest" shall have the meaning specified in Section
4.01.
"Transferor Percentage" shall mean, on any date of determination, when
used with respect to Principal Receivables, Finance Charge and Administrative
Receivables and Defaulted Receivables, a percentage equal to 100% minus the
Aggregate Series Percentage with respect to such categories of Receivables.
"Trust" shall mean the Advanta Business Card Master Trust created by
this Agreement.
"Trust Assets" shall have the meaning specified in Section 2.01.
"Trust Cut-Off Date" shall mean the opening of business on June 1,
1996.
"Trust Pay Out Event" shall mean each event specified in subsection
9.01(a).
"Trustee" shall mean The First National Bank of Chicago, in its
capacity as trustee on behalf of the Trust, or its successor in interest, or any
successor trustee appointed as herein provided.
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"UCC" shall mean the Uniform Commercial Code, as amended from time to
time, as in effect in the State of Nevada or any other state or states where the
filing of a financing statement is required to perfect the Trust's interest in
the Receivables and the proceeds thereof or in any other specified jurisdiction.
"United States" shall mean the United States of America (including the
states and the District of Columbia), its territories, its possessions and other
areas subject to its jurisdiction.
"Vice President" when used with respect to the Trustee, a Transferor or
the Master Servicer shall mean any vice president thereof whether or not
designated by a number or word or words added before or after the title "vice
president".
"VISA" shall mean VISA USA, Inc.
Section 1.02. Other Definitional Provisions.
(a) With respect to any Series, all terms used herein and not otherwise
defined herein shall have meanings ascribed to them in the related Supplement.
(b) All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.
(c) As used in this Agreement and in any certificate or other document
made or delivered pursuant hereto or thereto, accounting terms not defined in
this Agreement or in any such certificate or other document, and accounting
terms partly defined in this Agreement or in any such certificate or other
document to the extent not defined, shall have the respective meanings given to
them under generally accepted accounting principles or regulatory accounting
principles, as applicable. To the extent that the definitions of accounting
terms in this Agreement or in any such certificate or other document are
inconsistent with the meanings of such terms under generally accepted accounting
principles or regulatory accounting principles, the definitions contained in
this Agreement or in any such certificate or other document shall control.
(d) The agreements, representations and warranties of ABRC, AFC or any
Seller and any Additional Transferor in this Agreement in each of their
respective capacities as Transferors or as Sellers and, in the case of AFC, as
Master Servicer, shall be deemed to be the agreements, representations and
warranties of ABRC or AFC and such Additional Transferor or Seller solely in
each such capacity for so long as ABRC or AFC and such Additional Transferor or
Seller act in each such capacity under this Agreement.
(e) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; references to any Section,
Schedule or Exhibit are references to
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Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified; and the term "including" means "including without limitation."
(f) Unless otherwise specifically provided herein, the failure of this
Agreement to specify the meaning of a term or the applicability of a provision
to any Series shall not preclude the meaning of such term or the applicability
of such provision with respect to such Series being set forth in the Supplement
therefor.
[END OF ARTICLE I]
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ARTICLE II
Trust Assets
Section 2.01. Conveyance of Trust Assets. By execution hereof or of the
applicable amendment pursuant to Section 13.01(a), each Transferor does hereby
or shall covenant and agree to sell, transfer, assign, set over and otherwise
convey to the Trustee, on behalf of the Trust, for the benefit of the
Certificateholders, all its right, title and interest in, to and under the
Initial Designated Assets, and on each Addition Date, the Additional Designated
Assets, and in each case thereafter created from time to time until the
termination of the Trust, all Interchange and Recoveries allocable to the Trust
as provided herein, all moneys due or to become due and all amounts received
with respect thereto and all proceeds (including "proceeds" as defined in the
UCC) thereof; provided, that, nothing in this Agreement shall be construed to
convey ownership of the Accounts to the Transferor or the Trust. The related
Seller shall continue to maintain the exclusive ownership interest in the
Accounts which generate the Receivables. Such property, together with all moneys
on deposit in the Collection Account, the Excess Funding Account, the Series
Accounts and any Series Enhancement shall constitute the assets of the Trust
(the "Trust Assets"). The foregoing does not constitute and is not intended to
result in the creation or assumption by the Trust, the Trustee, any Investor
Certificateholder or any Series Enhancer of any obligation of any Seller, the
Master Servicer, the Transferor, or any Additional Transferor or any other
Person in connection with the Accounts or the Receivables or under any agreement
or instrument relating thereto, including any obligation to Obligors, merchant
banks, merchant clearance systems, VISA, MasterCard or insurers. The foregoing
sale, transfer, assignment, set over and conveyance to the Trust shall be made
to the Trustee, on behalf of the Trust, and each reference in this Agreement to
such sale, transfer, assignment, set over and conveyance shall be construed
accordingly. Each Transferor shall assign to the Trustee, as collateral
security, in connection with each transfer of Designated Assets, its rights
under the related Receivables Purchase Agreement or Participation Agreement.
Each Transferor agrees to record and file, at its own expense,
financing statements (and continuation statements when applicable) with respect
to the Designated Assets conveyed by such Transferor now existing and hereafter
created meeting the requirements of applicable state law in such manner and in
such jurisdictions as are necessary to perfect, and maintain the perfection of,
the sale and assignment of the Designated Assets to the Trust, and to deliver a
file stamped copy of each such financing statement or other evidence of such
filing (which may, for purposes of this Section 2.01, consist of telephone
confirmation of such filing) to the Trustee on or prior to the Initial Closing
Date, with respect to the Initial Designated Assets, and (if any additional
filing is so necessary) the applicable Addition Date, with respect to Additional
Designated Assets. The Trustee shall be under no obligation whatsoever to file
such financing or continuation statements or to make any other filing under the
UCC in connection with such sale and assignment.
Each Transferor further agrees, at its own expense, (a) on or prior to
(x) the Initial Closing Date, in the case of the Initial Designated Assets, (y)
the applicable Addition Date, in the case of Additional Designated Assets, and
(z) the applicable Removal Date, in the case of
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Removed Accounts, to indicate in the appropriate computer files that Receivables
created in connection with the Accounts (other than Removed Accounts),
Participating Receivables or Participation Interests in the related Receivables
have been conveyed to the Trust pursuant to this Agreement for the benefit of
the Certificateholders (or conveyed to the Transferors or their designees in the
case of Removed Accounts) by including (or deleting in the case of Removed
Accounts) in such computer files the code "20," (or any other code specified in
an Assignment) in the PORTF_CD field of such computer files, and (b) on or prior
to the Initial Closing Date, each Addition Date and each Removal Date, as
applicable, to deliver to the Trustee a computer file or microfiche list
containing a true and complete list of all such Accounts specifying for each
such Account, as of the Trust Cut-Off Date, in the case of the Initial
Designated Assets, the applicable Addition Cut-Off Date, in the case of
Additional Designated Assets, and the applicable Removal Cut-Off Date, in the
case of Removed Accounts, its account number, the aggregate amount outstanding
in such Account and the aggregate amount of Principal Receivables outstanding in
such Account. Such file or list, as supplemented from time to time to reflect
Additional Designated Assets and Removed Accounts, shall be marked as Schedule 1
to this Agreement and is hereby incorporated into and made a part of this
Agreement. The Transferor agrees not to alter the codes or field referenced in
clause (a) above with respect to any Account during the term of this Agreement
unless and until such Accounts become Removed Accounts or unless and until (i)
the Transferors shall give written notice of any such alteration to the Trustee,
such written notice to be as of the date of its receipt by the Trustee
incorporated into and made part of this Agreement, and (ii) the Trustee and the
Transferors shall execute and file any UCC financing statement or amendment
thereof necessitated by such alteration.
It is the intention of the parties hereto that the
arrangements with respect to the Designated Assets shall constitute a purchase
and sale of such Designated Assets and not a loan. In the event, however, that a
court of competent jurisdiction were to hold that the transactions evidenced
hereby constitute a loan and not a purchase and sale, it is the intention of the
parties hereto that the Agreement shall constitute a security agreement under
applicable law, and that each Transferor shall be deemed to have granted, and
hereby grants, to the Trust a first priority perfected security interest in all
of such Transferor's right, title and interest in, to and under the Designated
Assets and the other Trust Assets. Nothing in this Agreement shall be construed
to convey ownership of the Accounts to the Trust. The related Seller shall
continue to maintain the exclusive ownership interest in the Accounts.
Section 2.02. Acceptance by Trustee.
(a) The Trustee hereby acknowledges its acceptance, on behalf of the
Trust, of all right, title and interest to the property, now existing and
hereafter created, conveyed to the Trust pursuant to Section 2.01 and declares
that it shall maintain such right, title and interest, upon the trust herein set
forth, for the benefit of all Certificateholders. The Trustee further
acknowledges that, prior to or simultaneously with the execution and delivery of
this Agreement, the Transferor delivered to the Trustee the computer file or
microfiche list relating to the Initial Designated Assets described in the
penultimate paragraph of Section 2.01.
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(b) The Trustee hereby agrees not to disclose to any Person (or to any
other department or operating division of the Trustee, other than the Corporate
Trust Office of the Trustee or, if the Trustee shall be appointed the Successor
Servicer, such other departments or operating divisions of the Trustee as shall
be necessary to fulfill its duties as Master Servicer), any of the account
numbers or other information contained in the computer files or microfiche lists
marked as Schedule 1 or otherwise delivered to the Trustee from time to time,
except (i) to a Successor Servicer or as required by a Requirement of Law
applicable to the Trustee, (ii) in connection with the performance of the
Trustee's duties hereunder, (iii) in enforcing the rights of Certificateholders
or (iv) after consultation with the Transferors, as requested by any Person in
connection with the financing statements filed pursuant to this Agreement. The
Trustee also agrees not to use any of the foregoing information for any purpose
other than for the purposes provided for in this Agreement. The Trustee agrees
to take such measures as shall be reasonably requested by the Transferors to
protect and maintain the security and confidentiality of such information and,
in connection therewith, will allow the Transferors to inspect the Trustee's
security and confidentiality arrangements from time to time during normal
business hours. The Trustee shall provide the Transferors with notice five
Business Days prior to any disclosure pursuant to this subsection 2.02(b).
(c) The Trustee shall have no power to create, assume or incur
indebtedness or other liabilities in the name of the Trust other than as
contemplated in this Agreement or any Supplement.
Section 2.03. Representations and Warranties of the Transferors
Relating to the Transferors. Each of the Transferors hereby severally represents
and warrants to the Trust as of each Closing Date that:
(a) Organization and Good Standing. Such Transferor is a corporation
duly organized and validly existing in good standing under the laws of the
jurisdiction of its organization or incorporation, and has full corporate power,
authority and legal right to own its properties and conduct its business
revolving credit card business as such properties are presently owned and such
business is presently conducted, to execute, deliver and perform its obligations
under this Agreement and each Supplement and to execute and deliver to the
Trustee the Certificates pursuant hereto.
(b) Due Qualification. Such Transferor is duly qualified to do business
and is in good standing as a foreign corporation (or is exempt from such
requirements), and has obtained all necessary licenses and approvals with
respect to such Transferor, in each jurisdiction in which failure to so qualify
or to obtain such licenses and approvals would render any Cardholder Agreement
relating to an Account owned by such Transferor or any Receivable transferred to
the Trust by such Transferor unenforceable by such Transferor, the Master
Servicer or the Trustee or would have a material adverse effect on the interests
of the Certificateholders hereunder or under any Supplement; provided, however,
that no representation or warranty is made with respect to any qualification,
licenses or approvals which the Trustee has or may be required at any time to
obtain, if any, in connection with the transactions contemplated hereby.
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(c) Due Authorization. The execution, delivery and performance of this
Agreement and each Supplement by such Transferor and the execution and delivery
to the Trustee of the Certificates and the consummation by such Transferor of
the transactions provided for in this Agreement and each Supplement have been
duly authorized by such Transferor by all necessary corporate action on the part
of such Transferor and this Agreement and each Supplement will remain, from the
time of its execution, an official record of such Transferor.
(d) No Conflict. The execution and delivery by such Transferor of this
Agreement, each Supplement and the Certificates, the performance by such
Transferor of the transactions contemplated by this Agreement and each
Supplement and the fulfillment by such Transferor of the terms hereof and
thereof will not conflict with, result in any breach of any of the material
terms and provisions of, or constitute (with or without notice or lapse of time
or both) a material default under, any indenture, contract, agreement, mortgage,
deed of trust, or other instrument to which such Transferor is a party or by
which it or any of its properties are bound.
(e) No Violation. The execution and delivery by such Transferor of this
Agreement, each Supplement and the Certificates, the performance by such
Transferor of the transactions contemplated by this Agreement and each
Supplement and the fulfillment by such Transferor of the terms hereof and
thereof will not conflict with or violate any Requirements of Law applicable to
such Transferor.
(f) No Proceedings. There are no proceedings or investigations pending
or, to the best knowledge of such Transferor, threatened against such
Transferor, before any Governmental Authority (i) asserting the invalidity of
this Agreement, any Supplement or the Certificates, (ii) seeking to prevent the
issuance of the Certificates or the consummation of any of the transactions
contemplated by this Agreement, any Supplement or the Certificates, (iii)
seeking any determination or ruling that, in the reasonable judgment of such
Transferor, would materially and adversely affect the performance by such
Transferor of its obligations under this Agreement or any Supplement, (iv)
seeking any determination or ruling that would materially and adversely affect
the validity or enforceability of this Agreement, any Supplement or the
Certificates or (v) seeking to affect adversely the income tax attributes of the
Trust under the Federal, Nevada or Utah income or franchise tax systems.
(g) All Consents Required. All approvals, authorizations, consents,
orders or other actions of any Person or of any governmental body or official
required in connection with the execution and delivery by such Transferor of
this Agreement, each Supplement and the Certificates, the performance by such
Transferor of the transactions contemplated by this Agreement and each
Supplement and the fulfillment by such Transferor of the terms hereof and
thereof, have been obtained; provided, however, that such Transferor makes no
representation or warranty regarding state securities or "blue sky" laws in
connection with the distribution of the Certificates.
(h) Insolvency. No Insolvency Event with respect to such Transferor has
occurred and the transfer of the Receivables by such Transferor to the Trust has
not been made in contemplation of the occurrence thereof.
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(i) FDIC Insurance. Such Transferor is either an insured institution
for purposes of the Federal Deposit Insurance Act or such Transferor shall at
all times comply with the covenants and restriction in its Articles of
Incorporation and Bylaws and will not amend such Bylaws except upon delivery to
the Trustee of an opinion by nationally recognized bankruptcy counsel
reconfirming the conclusion set forth in the opinion delivered at the initial
closing regarding the true sale of the Designated Assets and the substantive
non-consolidation of ABRC and AFC.
The representations and warranties of each Transferor set forth in this
Section 2.03 shall survive the transfer and assignment by such Transferor of the
respective Receivables to the Trust. Upon discovery by such Transferor, the
Master Servicer or the Trustee of a breach of any of the representations and
warranties by such Transferor set forth in this Section 2.03, the party
discovering such breach shall give prompt written notice to the others. Such
Transferor agrees to cooperate with the Master Servicer and the Trustee in
attempting to cure any such breach. For purposes of the representations and
warranties set forth in this Section 2.03, each reference to a Supplement shall
be deemed to refer only to those Supplements in effect as of the relevant
Closing Date.
Section 2.04. Representations and Warranties of each Transferor
Relating to the Agreement and Any Supplement and the Receivables.
(a) Representations and Warranties. Each of the Transferors hereby
severally represents and warrants to the Trust as of the initial Closing Date
and, with respect to Additional Designated Assets, as of the related Addition
Date that:
(i) this Agreement, each Supplement and any Assignment, as the
case may be, each constitutes a legal, valid and binding obligation of
such Transferor enforceable against such Transferor in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect affecting the enforcement of creditors'
rights in general and the rights of creditors of national banking
associations and except as such enforceability may be limited by
general principles of equity (whether considered in a suit at law or in
equity);
(ii) the Designated Assets which are being transferred by such
Transferor to the Trust as listed on Schedule 1 to this Agreement and
as supplemented on such date, is an accurate and complete listing in
all material respects of all the designated Accounts in connection with
such Designated Assets as of the Trust Cut-Off Date or such Addition
Cut-Off Date, as the case may be, and the information contained therein
with respect to the identity of such Accounts (including Included
Accounts) and the Receivables existing in such Accounts is true and
correct in all material respects as of the Trust Cut-Off Date or such
Addition Cut-Off Date, as the case may be;
(iii) each of the Designated Assets conveyed to the Trust by
such Transferor has been conveyed to the Trust free and clear of any
Lien of any Person claiming through or under such Transferor or any of
its Affiliates (other than Liens permitted
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under subsection 2.07(b)) and in compliance, in all material respects,
with all Requirements of Law applicable to such Transferor;
(iv) all authorizations, consents, orders or approvals of or
registrations or declarations with any Governmental Authority required
to be obtained, effected or given in connection with the conveyance by
such Transferor of Designated Assets to the Trust have been duly
obtained, effected or given and are in full force and effect; provided,
however, that such Transferor makes no representation or warranty
regarding state securities or "blue sky" laws in connection with the
distribution of the Certificates.
(v) either this Agreement or any Assignment, as the case may
be, constitutes a valid sale, transfer and assignment to the Trust of
all right, title and interest of such Transferor in the Designated
Assets conveyed to the Trust by such Transferor and the proceeds
thereof or, if this Agreement or any Assignment does not constitute a
sale of such property, it constitutes a grant of a "security interest"
(as defined in the UCC) in such property to the Trust, which, in the
case of the Initial Designated Assets and the proceeds thereof, is
enforceable upon execution and delivery of this Agreement or, with
respect to Additional Designated Assets, as of the applicable Addition
Date, which will be enforceable with respect to such Additional
Designated Asset and the proceeds thereof. Upon the filing of the
financing statements pursuant to Sections 2.01 and 2.09 and, in the
case of the Designated Assets and the proceeds thereof, upon the
creation thereof, the Trust shall have a first priority perfected
security or ownership interest in such property and proceeds except for
(x) Liens permitted under subsection 2.07(b), (y) the interests of the
Transferors as Holders of the ABRC Certificate or any Supplemental
Certificate, and (z) the Transferors' right, if any, to interest
accruing on and investment earnings, if any, in respect of the
Collection Account or any Series Account, as provided in this Agreement
or the related Supplement; provided, however, that the Transferors make
no representation or warranty with respect to the effect of Section
9-306 of the UCC on the rights of the Trustee to proceeds held by any
Transferor;
(vi) except as otherwise expressly provided in this Agreement
or any Supplement, neither such Transferor nor any Person claiming
through or under such Transferor has any claim to or interest in the
Collection Account, the Excess Funding Account, any Series Account or
any Series Enhancement;
(vii) on the Trust Cut-Off Date, each Initial Designated Asset
relates to Eligible Accounts and, on the applicable Addition Cut-Off
Date, each related Additional Designated Asset relates to Eligible
Accounts;
(viii) on the Trust Cut-Off Date, each Participating
Receivable is an Eligible Receivable and, on the applicable Addition
Cut-Off Date, each Receivable (including any Participating Receivable)
relating to any related Additional Designated Assets owned by the
related Seller is an Eligible Receivable;
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(ix) as of the date of the creation of any new Receivable in
an Account, such Receivable is an Eligible Receivable; and
(x) no selection procedure has been utilized by such
Transferor which such Transferor reasonably believes would result in a
selection of Initial Designated Assets or Additional Designated Assets
(from among the available Eligible Accounts on the Trust Cut-Off Date
or the applicable Addition Cut-Off Date, as the case may be) that would
be materially adverse to the interests of the Investor
Certificateholders.
(b) Notice of Breach. The representations and warranties of each
Transferor set forth in this Section 2.04 shall survive the transfer and
assignment by such Transferor of Designated Assets to the Trust. Upon discovery
by such Transferor, the Master Servicer or the Trustee of a breach of any of the
representations and warranties by such Transferor set forth in this Section
2.04, the party discovering such breach shall give prompt written notice to the
others. Such Transferor agrees to cooperate with the Master Servicer and the
Trustee in attempting to cure any such breach. For purposes of the
representations and warranties set forth in this Section 2.04, each reference to
a Supplement shall be deemed to refer only to those Supplements in effect as of
the date of the relevant representations or warranties.
Section 2.05. Reassignment of Ineligible Receivables.
(a) Reassignment of Receivables. In the event (i) any representation or
warranty of a Transferor contained in subsection 2.04(a)(ii), (iii), (iv),
(vii), (viii), (ix) or (x) is not true and correct in any material respect as of
the date specified therein with respect to any Designated Asset transferred to
the Trust or any Receivables in which a Participation Interest is transferred to
the Trust (the "Participating Receivables") by such Transferor or with respect
to an Account designated by such Transferor and as a result of such breach any
Receivables or Participating Receivables in the related Account become Defaulted
Receivables or the Trust's rights in, to or under such Designated Asset or
Participating Receivables or the proceeds of such Designated Asset or
Participating Receivables are impaired or such proceeds are not available for
any reason to the Trust free and clear of any Lien, unless cured within 60 days
(or such longer period, not in excess of 150 days, as may be agreed to by the
Trustee and if such Transferor shall deliver to the Trustee an Officer's
Certificate stating that such breach is capable of being cured and describing
the method by which such breach is to be cured) after the earlier to occur of
the discovery thereof by such Transferor or receipt by such Transferor of notice
thereof given by the Trustee, or (ii) it is so provided in subsection 2.07(a)
with respect to any Designated Asset or Participating Receivables transferred to
the Trust by such Transferor, then such Transferor shall accept reassignment of
the related Receivables, Participation Interest or Participating Receivables in
the related Account ("Ineligible Receivables") on the terms and conditions set
forth in paragraph (b) below; provided, however, that such Receivables,
Participation Interest or Participating Receivables will not be deemed to be
Ineligible Receivables and will not be reassigned to such Transferor if, on any
day prior to the end of such 60-day or longer period, (x) either (A) in the case
of an event described in clause (i) above the relevant representation and
warranty shall be true and correct in all material respects as if made on such
day or (B) in the case of an event described in clause (ii) above the
circumstances causing such Receivable,
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Participation Interest or Participating Receivable to become an Ineligible
Receivable shall no longer exist and (y) such Transferor shall have delivered to
the Trustee an Officer's Certificate describing the nature of such breach and
the manner in which the relevant representation and warranty became true and
correct.
(b) Price of Reassignment. The Master Servicer shall deduct the portion
of the Ineligible Receivables reassigned to a Transferor which are Principal
Receivables from the aggregate amount of Principal Receivables used to calculate
the Transferor Amount, the Series Percentages and any other percentage used to
allocate within or among Series that is applicable to any Series. In the event
that, following the exclusion of such Principal Receivables from the calculation
of the Transferor Amount, the Transferor Amount would be less than the Required
Transferor Amount, not later than 12:00 noon, New York City time, on the first
Distribution Date following the Monthly Period in which such reassignment
obligation arises, the relevant Transferor shall make a deposit into the Excess
Funding Account in immediately available funds in an amount equal to the amount
by which the Transferor Amount would be reduced below the Required Transferor
Amount (up to the amount of such Principal Receivables).
Upon the deposit, if any, required to be made to the Excess Funding
Account as provided in this Section and the reassignment of Ineligible
Receivables, the Trustee, on behalf of the Trust, shall automatically and
without further action be deemed to sell, transfer, assign, set over and
otherwise convey to the relevant Transferor or its designee, without recourse,
representation or warranty, all of the right, title and interest of the Trust in
and to such Ineligible Receivables, all moneys due or to become due and all
amounts received with respect thereto and all proceeds thereof. The Trustee
shall execute such documents and instruments of transfer or assignment and take
such other actions as shall reasonably be requested by the relevant Transferor
to effect the conveyance of Ineligible Receivables pursuant to this Section. The
obligation of a Transferor to accept reassignment of any Ineligible Receivables,
and to make the deposits, if any, required to be made to the Excess Funding
Account as provided in this Section, shall constitute the sole remedy respecting
the event giving rise to such obligation available to Certificateholders (or the
Trustee on behalf of the Certificateholders).
Section 2.06. Reassignment of Designated Assets in Trust Portfolio. In
the event any representation or warranty of a Transferor set forth in subsection
2.03(a) or (c) or subsection 2.04(a)(i), (v) or (vi) is not true and correct in
any material respect and such breach has a material adverse effect on the
Certificateholders' Interest in the Designated Assets or Participating
Receivables transferred to the Trust by such Transferor, then either the Trustee
or the Holders of Investor Certificates evidencing more than 50% of the
Aggregate Investor Amount, by notice then given to such Transferor and the
Master Servicer (and to the Trustee if given by the Investor
Certificateholders), may direct such Transferor to accept a reassignment of the
Designated Assets or Participating Receivables transferred to the Trust by such
Transferor if such breach and any material adverse effect caused by such breach
is not cured within 60 days of such notice (or within such longer period, not in
excess of 150 days, as may be specified in such notice or if such notice is
issued by the Trustee, as may be permitted by Investor Certificate- holders
holding Certificates representing 50% or more of the Aggregate Investor
Amount)), and upon those conditions such Transferor shall be obligated to accept
such
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reassignment on the terms set forth below; provided, that, if the Trustee
directs such Transferor to accept reassignment of the Designated Assets or
Participating Receivables, the Trustee shall deliver an Officer's Certificate
stating that the Trustee has not taken any action with respect to such
Designated Assets or Participating Receivables which would result in the
creation of any liens or encumbrances on the Designated Assets or Participating
Receivables (other than those liens and encumbrances authorized by this
Agreement) provided, however, that such Designated Assets or Participating
Receivables will not be reassigned to such Transferor if, on any day prior to
the end of such 60-day or longer period (i) the relevant representation and
warranty shall be true and correct in all material respects as if made on such
day and (ii) such Transferor shall have delivered to the Trustee a certificate
of an authorized officer describing the nature of such breach and the manner in
which the relevant representation and warranty became true and correct.
The relevant Transferor shall deposit in the Collection Account in
immediately available funds or by ACH not later than 12:00 noon, New York City
time, on the first Distribution Date following the Monthly Period in which such
reassignment obligation arises, in payment for such reassignment, an amount
equal to the sum of the amounts specified therefor with respect to each
outstanding Series in the related Supplement. Notwithstanding anything to the
contrary in this Agreement, such amounts shall be distributed on such
Distribution Date in accordance with Article IV and the terms of each
Supplement.
Upon the deposit, if any, required to be made to the Collection Account
as provided in this Section and the reassignment of the Designated Assets or
Participating Receivables, the Trustee, on behalf of the Trust, shall
automatically and without further action be deemed to sell, transfer, assign,
set over and otherwise convey to the relevant Transferor or its designee,
without recourse, representation or warranty, all of the right, title and
interest of the Trust in and to such Designated Assets or Participating
Receivables, all moneys due or to become due and all amounts received with
respect thereto and all proceeds thereof. The Trustee shall execute such
documents and instruments of transfer or assignment and take such other actions
as shall reasonably be requested by the relevant Transferor to effect the
conveyance of such Designated Assets or Participating Receivables pursuant to
this Section. The obligation of a Transferor to accept reassignment of any
Designated Assets or Participating Receivables, and to make the deposits, if
any, required to be made to the Collection Account as provided in this section,
shall constitute the sole remedy respecting the event giving rise to such
obligation available to Certificateholders (or the Trustee on behalf of the
Certificateholders) or any Series Enhancer.
Section 2.07. Covenants of the Transferor(s) With Respect to Interests
in Receivables. Each Transferor hereby covenants as follows:
(a) Receivables to be Accounts or General Intangibles. Except in
connection with the enforcement or collection of a Receivable or Participating
Receivable, such Transferor will take no action to cause any Receivable or
Participating Receivable transferred by it to the Trust to be evidenced by any
instrument or chattel paper (as defined in the UCC) and, if any such Receivable
or Participating Receivable is so evidenced, it shall be deemed to be an
Ineligible
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Receivable in accordance with subsection 2.05(a) and shall be reassigned to such
Transferor in accordance with subsection 2.05(b); provided, however, that
Receivables or Participating Receivable evidenced by notes taken from Obligors
in the ordinary course of business of the Master Servicer's collection efforts
shall not be deemed Ineligible Receivables solely as a result thereof.
(b) Security Interests. Except for the conveyances hereunder, such
Transferor will not sell, pledge, assign or transfer to any other Person, or
grant, create, incur, assume or suffer to exist any Lien on any Designated
Assets transferred by it to the Trust, whether now existing or hereafter
created, or any interest therein; such Transferor will immediately notify the
Trustee of the existence of any Lien on any such Designated Assets; and such
Transferor shall defend the right, title and interest of the Trust in, to and
under such Designated Assets, whether now existing or hereafter created, against
all claims of third parties claiming through or under such Transferor; provided,
however, that nothing in this subsection 2.07(b) shall prevent or be deemed to
prohibit such Transferor from suffering to exist upon any of the Designated
Assets transferred by it to the Trust any Liens for municipal or other local
taxes if such taxes shall not at the time be due and payable or if such
Transferor shall currently be contesting the validity thereof in good faith by
appropriate proceedings and shall have set aside on its books adequate reserves
with respect thereto.
(c) Transferors' Interest. Except for the conveyances hereunder, in
connection with any transaction permitted by Section 7.02 and as provided in
Sections 2.09(e) and 6.03, such Transferor agrees not to transfer, assign,
exchange or otherwise convey or pledge, hypothecate or otherwise grant, add or
create a Lien in the Transferors' Interest represented by the ABRC Certificate
or any Supplemental Certificate and any such attempted transfer, assignment,
exchange, conveyance, pledge, hypothecation or grant shall be void.
(d) Delivery of Collections. In the event that such Transferor receives
Collections, such Transferor agrees to pay the Master Servicer all such
Collections as soon as practicable after receipt thereof but in any event no
later than two Business Days after the date of receipt by the Transferor.
(e) Notice of Liens. Such Transferor shall notify the Trustee promptly
after becoming aware of any Lien on any Designated Assets other than the
conveyances hereunder or Liens permitted under subsection 2.07(b).
Section 2.08. Covenants of The Transferor(s) with Respect to the
Participation Agreement or Receivables Purchase Agreement. Each Transferor in
its capacity, if any, as purchaser of the Designated Assets from a Seller
pursuant to the applicable Participation Agreement or Receivables Purchase
Agreement hereby covenants that such Transferor will at all times enforce the
covenants and agreements of such Seller in the related agreement, including,
without limitation, covenants to the effect set forth below only to the extent
to which they apply to such Seller pursuant to such Participation Agreement or
Receivables Purchase Agreement:
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(a) Periodic Finance Charges. (i) Except (x) as otherwise required by
any Requirements of Law or (y) as is deemed by the related Seller, to be
necessary in order for it to maintain its credit card business or a program
operated by such credit card business on a competitive basis based on a good
faith assessment by it of the nature of the competition with respect to the
credit card business or such program, it shall not at any time take any action
to reduce the annual percentage rate of the Periodic Finance Charges assessed on
the Receivables transferred by it to the Trust or other fees charged on any of
the Accounts owned by it, if (i) as a result of such reduction, such Seller's
reasonable expectation is that such reduction will cause a Pay Out Event to
occur or (ii) such reduction is not also applied to any comparable segments of
business revolving credit card accounts owned by such Seller which have
characteristics the same as, or substantially similar to, such Accounts.
(b) Credit Card Agreements and Credit Card Guidelines. Subject to
compliance with all Requirements of Law and paragraph (a) above, each Seller may
change the terms and provisions of the applicable Cardholder Agreements or the
applicable Credit Card Guidelines in any respect (including the calculation of
the amount or the timing of charge-offs and the Periodic Finance Charges to be
assessed thereon). Notwithstanding the above, unless required by Requirements of
Law or as permitted by Section 2.08(a), no Seller will take any action with
respect to the applicable Cardholder Agreements or the applicable Credit Card
Guidelines, which, at the time of such action, such Seller reasonably believes
will have a material adverse effect on the Investor Certificateholders. Each
Seller shall comply with and perform its obligations under the Cardholder
Agreements relating to the Accounts owned by it and the Credit Card Guidelines
and all applicable rules and regulations of MasterCard and Visa or their
respective substantial equivalents except insofar as any failure so to comply or
perform would not materially and adversely affect the rights of the Trust or the
Certificateholders hereunder.
(c) MasterCard and VISA. Each Seller shall, to the extent applicable to
Accounts owned or serviced by it, use its best efforts to remain, either
directly or indirectly, a member in good standing of the MasterCard system, the
VISA system and any other similar entity's or organization's system relating to
any other type of business revolving credit card accounts included as Accounts.
(d) Interchange. With respect to any Distribution Date, on or prior to
the Distribution Date, each Seller shall deposit into the Collection Account by
ACH or in immediately available funds the amount of Interchange to be so
included as Collections of Finance Charge and Administrative Receivables with
respect to such Monthly Period.
Each Transferor further covenants that the Transferor will not enter
into any amendments to any Participation Agreement or Receivables Purchase
Agreement unless the Rating Agency Condition, if any, has been satisfied. In the
event that any Additional Transferor is a Seller, such Additional Transferor
agrees to perform the covenants and agreements as set forth in clauses (a)
through (d) of this Section 2.08 with respect to such Accounts.
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Section 2.09. Addition of Designated Assets
(a) Required Additions. (i) If on any Determination Date, as of the
close of business on the last Business Day of the preceding Monthly Period,
either (x) the Transferor Amount is less than the Required Transferor Amount or
(y) the aggregate amount of Principal Receivables is less than the Required
Principal Balance, the Transferors shall on or prior to the close of business on
the 10th Business Day following such Determination Date (the "Required
Designation Date"), unless the Transferor Amount exceeds the Required Transferor
Amount or the aggregate amount of Principal Receivables exceeds the Required
Principal Balance, as the case may be, in either case as of the close of
business on any day after the last Business Day of such Monthly Period and prior
to the Required Designation Date, either (i) cause to be designated additional
Eligible Accounts to be included as Accounts, as of the Required Designation
Date or any earlier date in a sufficient amount (or such lesser amount as shall
represent all Eligible Accounts then available to the Transferor under the
Receivables Purchase Agreement or the Participation Agreement) or (ii) as
required by a Participation Agreement, increase the Fixed Amount of the
Participation Interest such that, after giving effect to such addition or
increase, the Transferor Amount as of the close of business on the applicable
Addition Date is at least equal to the Required Transferor Amount on such date
and the aggregate amount of Principal Receivables is at least equal to the
Required Principal Balance on such date. The failure of any condition set forth
in paragraph (c) below, as the case may be, shall not relieve the Transferors of
their obligation pursuant to this paragraph; provided, however, that the failure
of the Transferors to transfer Receivables to the Trust solely as a result of
the unavailability of a sufficient amount of Eligible Receivables shall not
constitute a breach of this Agreement; provided, further, that any such failure
which has not been timely cured may nevertheless result in the occurrence of a
Pay Out Event.
(b) Restricted Additions. Each Transferor may from time to time, at its
sole discretion, subject to the conditions specified below, designate Additional
Designated Assets relating to additional Eligible Accounts to be included as
Trust Assets as of the applicable Addition Date.
(c) Conditions to Required and Restricted Additions. On the Addition
Date with respect to any Additional Designated Assets designated pursuant to
subsection 2.09(a) or (b), the Trust shall purchase such Additional Designated
Assets as of the close of business on the applicable Addition Date, subject to
the satisfaction of the following conditions:
(i) on or before the fifth Business Day immediately preceding
the Addition Date, each Transferor which owns any such Additional
Designated Assets shall have given the Trustee, the Master Servicer and
each Rating Agency written notice (unless such notice requirement is
otherwise waived) that such Additional Designated Assets will be
included and specifying the applicable Addition Date, the Addition
Cut-Off Date, and the approximate number of Accounts expected to be
added and the approximate aggregate balances of Receivables expected to
be outstanding in the Accounts to be added or that an increase to the
Fixed Amount of a Participation Interest has been completed;
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(ii) with respect to Additional Designated Assets, each
Transferor shall have delivered to the Trustee copies of UCC-1
financing statements covering such Additional Designated Assets, if
necessary, to perfect the Trust's interest in the Receivables arising
therein;
(iii) as of each of the Addition Cut-Off Date and the Addition
Date, no Insolvency Event with respect to the Transferor shall have
occurred nor shall the transfer of the Receivables arising in the
Additional Designated Assets to the Trust have been made in
contemplation of the occurrence thereof;
(iv) except in the case of an Addition pursuant to subsection
2.09(a), the Rating Agency Condition shall have been satisfied;
(v) each Transferor shall have delivered to the Trustee an
Officer's Certificate, dated the Addition Date, stating that (x) with
respect to Additional Designated Assets, as of the applicable Addition
Cut-Off Date, the Additional Designated Assets relate to Eligible
Accounts, (y) to the extent applicable, the conditions set forth in
clauses (ii) through (iv) above have been satisfied and (z) such
Transferor reasonably believes that (A) the addition by such Transferor
of the Receivables (including Participating Receivables) relating to
the Additional Designated Assets to the Trust will not, based on the
facts known to such officer at the time of such addition, then or
thereafter cause a Pay Out Event to occur with respect to any Series
and (B) no selection procedure was utilized by such Transferor which
would result in a selection of Accounts (from among the available
Eligible Accounts owned by such Transferor) that would be materially
adverse to the interests of the Investor Certificateholders of any
Series as of the Addition Date; and
(vi) with respect to the designation of Additional Designated
Assets, the Transferors shall have delivered to the Trustee (x) the
computer file or microfiche list required to be delivered pursuant to
Section 2.01 with respect to such Additional Designated Assets and (y)
a duly executed, written assignment (including an acceptance by the
Trustee for the benefit of the Certificateholders), substantially in
the form of Exhibit B (the "Assignment").
(vii) the Transferors shall have delivered to the Trustee and
each Rating Agency an Opinion of Counsel, which counsel shall be
outside counsel, dated the Addition Date, in accordance with subsection
13.02(d).
(d) Automatic Account Additions.
(i) Each Transferor may from time to time, at its sole
discretion, subject to the applicable conditions specified in clause
(v) below, designate Eligible Accounts (which Accounts may be Included
Accounts) to be included as Accounts as of the applicable Addition Date
(the "Automatic Additional Designated Assets"). For purposes of this
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paragraph, Eligible Accounts shall be deemed to include only Accounts
which are originated by a Seller or any Affiliate of a Seller.
(ii) The Transferors shall have delivered to the Trustee
copies of UCC-1 financing statements covering such Automatic Additional
Designated Assets, if necessary, to perfect the Trust's interest in the
Receivables arising therein.
(iii) As of each of the Addition Cut-Off Date and the Addition
Date, no Insolvency Event with respect to any Transferor shall have
occurred nor shall the transfer of the Automatic Additional Designated
Assets to the Trust have been made in contemplation of the occurrence
thereof.
(iv) Each Transferor shall have delivered to the Trustee an
Officer's Certificate, dated the Addition Date, stating that (x) as of
the applicable Addition Cut-Off Date, such Automatic Additional
Designated Assets are all from Eligible Accounts, (y) to the extent
applicable, the conditions set forth in clauses (ii) through (v) of
Section 2.09(c) have been satisfied and (z) such Transferor reasonably
believes that (A) the addition by such Transferor of the Automatic
Additional Designated Assets will not, based on the facts known to such
officer at the time of such addition, then or thereafter cause a Pay
Out Event to occur with respect to any Series and (B) no selection
procedure was utilized by such Transferor which would result in a
selection of Accounts (from among the available Eligible Accounts owned
by such Seller) that would be materially adverse to the interests of
the Investor Certificateholders of any Series as of the Addition Date.
(v) Such Transferor shall have delivered to the Trustee (x)
the computer file or microfiche list required to be delivered pursuant
to Section 2.01 with respect to such Automatic Additional Designated
Assets and (y) a duly executed Assignment.
(vi) Such Transferor shall have delivered to the Trustee and
each Rating Agency an Opinion of Counsel, dated the Addition Date, in
accordance with subsection 13.02(d).
(e) Additional Transferors. ABRC may designate Affiliates of ABRC to be
included as Transferors ("Additional Transferors") under this Agreement by an
amendment hereto pursuant to subsection 13.01(a) and, in connection with such
designation, the Transferors shall surrender the Transferors' Certificate to the
Trustee in exchange for a newly issued ABRC Certificate modified to reflect such
Additional Transferor's interest in the Transferors' Interest in accordance with
Section 6.03(c) provided, that if any Series of Investor Certificates are
outstanding that were characterized as debt at the time of their issuance, the
Transferors shall have delivered to the Trustee and each Rating Agency, a Tax
Opinion, dated the date of such transfer.
Section 2.10. Removal of Accounts and Participation Interests. (a) On
any day of any Monthly Period each Transferor shall have the right to require
the reassignment to it or its designee of all of the Trust's right, title and
interest in, to and under any Receivables or Participating Receivables then
existing and thereafter created, all moneys due or to become due
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and all amounts received with respect thereto and all proceeds thereof in or
with respect to the Accounts designated by such Transferor (the "Removed
Accounts") or Participation Interests designated by the Transferor, upon
satisfaction of the following conditions:
(i) on or before the fifth Business Day immediately preceding the
Removal Date (the "Removal Notice Date"), such Transferor shall have given the
Trustee, the Master Servicer, each Rating Agency, if applicable, and any Series
Enhancer written notice of such removal, specifying the date for removal of the
Removed Accounts or Participation Interests (the "Removal Date");
(ii) with respect to Removed Accounts, such Transferor shall have
represented and warranted as of the Removal Date that the list of Removed
Accounts to be delivered pursuant to paragraph (c) below, as of the Removal
Cut-Off Date, will be true and complete in all material respects;
(iii) the Rating Agency Condition shall have been satisfied with
respect to such removal; and
(iv) such Transferor shall have delivered to the Trustee an Officer's
Certificate, dated the Removal Date, to the effect that such Transferor
reasonably believes that (i) such removal will not, based on the facts known to
such officer at the time of such certification, then or thereafter cause a Pay
Out Event to occur and (ii) no selection procedure was utilized by such
Transferor which would result in a selection of Removed Accounts or
Participation Interests that would be materially adverse to the interests of the
Investor Certificateholders of any Series as of the Removal Date.
(b) Upon satisfaction of the above conditions, the Trustee shall
execute and deliver to the relevant Transferor or its designee a written
reassignment in substantially the form of Exhibit C (the "Reassignment") and
shall, without further action, be deemed to sell, transfer, assign, set over and
otherwise convey to such Transferor or its designee, effective as of the Removal
Date, without recourse, representation or warranty, all the right, title and
interest of the Trust in and to the Participation Interests or in and to the
Receivables generated from the Removed Accounts, all moneys due and to become
due and all amounts received with respect thereto and all proceeds thereof
provided, that, the Trustee delivers an Officer's Certificate stating that the
Trustee has not taken any action with respect to such Participation Interests or
Receivables which would result in the creation of any liens or encumbrances on
the Participation Interests or Receivables (other than those liens and
encumbrances authorized by this Agreement). In addition, the Trustee shall
execute such other documents and instruments of transfer or assignment and take
such other actions as shall reasonably be requested by the relevant Transferor
to effect the conveyance of Participation Interests or Receivables pursuant to
this Section 2.10.
(c) Within ten Business Days after each Removal Date, such Transferor
shall amend Schedule 1 by delivering to the Trustee a computer file or
microfiche list containing a true and complete list of the Removed Accounts
specifying for each such Account, as of the last day of
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the Monthly Period preceding the Removal Notice Date (the "Removal Cut-Off
Date"), its account number, the aggregate amount outstanding in such Account and
the aggregate amount of Principal Receivables outstanding in such Account.
Section 2.11. Account Allocations. In the event that any Transferor is
unable for any reason to transfer Receivables to the Trust in accordance with
the provisions of this Agreement, including by reason of the application of the
provisions of Section 9.02 or any order of any Governmental Authority (a
"Transfer Restriction Event"), then, in any such event, (a) such Transferor and
the Master Servicer agree (except as prohibited by any such order) to allocate
and pay to the Trust, after the date of such inability, all Collections of
Receivables transferred to the Trust by such Transferor, including Collections
of Receivables transferred to the Trust by such Transferor prior to the
occurrence of such event, and all amounts which would have constituted
Collections but for such Transferor's inability to transfer Receivables (up to
an aggregate amount equal to the amount of Receivables transferred to the Trust
by such Transferor in the Trust on such date), (b) such Transferor and the
Master Servicer agree that such amounts will be applied as Collections in
accordance with Article IV and the terms of each Supplement and (c) for so long
as the allocation and application of all Collections and all amounts that would
have constituted Collections are made in accordance with clauses (a) and (b)
above, Principal Receivables and all amounts which would have constituted
Principal Receivables but for such Transferor's inability to transfer
Receivables to the Trust which are written off as uncollectible in accordance
with this Agreement shall continue to be allocated in accordance with Article IV
and the terms of each Supplement. If such Transferor or the Master Servicer is
unable pursuant to any Requirements of Law to allocate Collections as described
above, such Transferor and the Master Servicer agree that, after the occurrence
of such event, payments on each Account owned by such Transferor with respect to
the principal balance of such Account shall be allocated first to the oldest
principal balance of such Account and shall have such payments applied as
Collections in accordance with Article IV and the terms of each Supplement. The
parties hereto agree that Finance Charge and Administrative Receivables,
whenever created, accrued in respect of Principal Receivables which have been
conveyed to the Trust shall continue to be a part of the Trust notwithstanding
any cessation of the transfer of additional Principal Receivables to the Trust
and Collections with respect thereto shall continue to be allocated and paid in
accordance with Article IV and the terms of each Supplement.
Section 2.12. Discount Option. (a) The Transferors shall have the
option to designate at any time and from time to time a percentage or
percentages, which may be a fixed percentage or a variable percentage based on a
formula (the "Discount Percentage"), of all or any specified portion of
Principal Receivables created after the Discount Option Date to be treated as
Finance Charge and Administrative Receivables ("Discount Option Receivables").
The Transferor shall also have the option of reducing or withdrawing the
Discount Percentage, at any time and from time to time, on and after such
Discount Option Date. The Transferors shall provide to the Master Servicer, the
Trustee and any Rating Agency 30 days prior written notice of the Discount
Option Date, and such designation shall become effective on the Discount Option
Date (i) unless such designation in the reasonable belief of the Transferors
would cause a Pay Out Event with respect to any Series to occur, or an event
which, with notice or lapse of time or both, would
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constitute a Pay Out Event with respect to any Series and (ii) only if the
Rating Agency Condition shall have been satisfied with respect to such
designation.
(b) After the Discount Option Date, the Transferors shall treat
Discount Option Receivable Collections as Collections of Finance Charge and
Administrative Receivables.
[END OF ARTICLE II]
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ARTICLE III
Administration and Servicing
of Receivables
Section 3.01. Acceptance of Appointment and Other Matters Relating to
the Master Servicer.
(a) The Transferor hereby appoints AFC as Master Servicer. AFC agrees
to act as the Master Servicer under this Agreement and the Certificateholders by
their acceptance of Certificates consent to AFC acting as Master Servicer.
(b) The Master Servicer shall service and administer the Receivables,
shall collect payments due under the Receivables and shall charge off as
uncollectible Receivables, all in accordance with its customary and usual
servicing procedures for servicing business revolving credit card receivables
comparable to the Receivables and in accordance with the Credit Card Guidelines.
The Master Servicer shall have full power and authority, acting alone or through
any party properly designated by it hereunder, to do any and all things in
connection with such servicing and administration which it may deem necessary or
desirable. Without limiting the generality of the foregoing, subject to Section
10.01 and provided AFC is the Master Servicer, the Master Servicer or its
designee (rather than the Trustee) is hereby authorized and empowered (i) to
make withdrawals and payments or to instruct the Trustee to make withdrawals and
payments from the Collection Account, the Excess Funding Account and any Series
Account, as set forth in this Agreement or any Supplement, and (ii) to take any
action required or permitted under any Series Enhancement, as set forth in this
Agreement or any Supplement. Without limiting the generality of the foregoing
and subject to Section 10.01, the Master Servicer or its designee is hereby
authorized and empowered to make any filings, reports, notices, applications and
registrations with, and to seek any consents or authorizations from, the
Securities and Exchange Commission (the "Commission") and any state securities
authority on behalf of the Trust as may be necessary or advisable to comply with
any Federal or state securities laws or reporting requirements. The Trustee
shall furnish the Master Servicer with any powers of attorney or other documents
necessary or appropriate to enable the Master Servicer to carry out its
servicing and administrative duties hereunder.
(c) The Master Servicer shall not be obligated to use separate
servicing procedures, offices, employees or accounts for servicing the
Receivables from the procedures, offices, employees and accounts used by the
Master Servicer in connection with servicing other credit card receivables.
(d) The Master Servicer shall comply with and perform its servicing
obligations with respect to the Accounts and Receivables in accordance with the
Cardholder Agreements relating to the Accounts and the Credit Card Guidelines
and all applicable rules and regulations of VISA, MasterCard and any other
similar entity or organization relating to any other type of business revolving
credit card accounts included as Accounts, except insofar as any failure to so
comply or perform would not materially and adversely affect the Trust or the
Investor Certificateholders.
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(e) The Master Servicer shall pay out of its own funds, without
reimbursement, all expenses incurred in connection with the Trust and the
servicing activities hereunder including expenses related to enforcement of the
Receivables, fees and disbursements of any Transfer Agent and Registrar
(including the reasonable fees and expenses of its counsel) and independent
accountants and all other fees and expenses, including the costs of filing UCC
financing and continuation statements and the costs and expenses relating to
obtaining and maintaining the listing of any Investor Certificates on any stock
exchange, that are not expressly stated in this Agreement to be payable by the
Trust or the Transferors (other than Federal, state, local and foreign income,
franchise and other taxes, if any, or any interest or penalties with respect
thereto, assessed on the Trust).
(f) The Master Servicer agrees that upon a request by the Transferors
it will use its reasonable best efforts to obtain and maintain the listing of
the Investor Certificates of any Series or Class on any specified security
exchange. If any such request is made, the Master Servicer shall give notice to
the Transferors and the Trustee on the date on which such Investor Certificates
are approved for such listing and within three Business Days following receipt
of notice by the Master Servicer of any actual, proposed or contemplated
delisting of such Investor Certificates by any such securities exchange. The
Trustee or the Master Servicer, each in its sole discretion, may terminate any
listing on any such securities exchange at any time subject to the notice
requirements set forth in the preceding sentence. The relationship of the Master
Servicer (and of any Successor Servicer other than the Trustee) to the Trustee
under this Agreement is intended by the parties to be that of independent
contractor and not that of a joint venturer, partner, or agent of the Trustee.
Section 3.02. Servicing Compensation. As full compensation for its
servicing activities hereunder and as reimbursement for any expense incurred by
it in connection therewith, the Master Servicer shall be entitled to receive a
servicing fee (the "Servicing Fee") with respect to each Monthly Period, payable
monthly on the related Distribution Date, in an amount equal to one-twelfth of
the product of (a) the weighted average of the Servicing Fee Rates with respect
to each outstanding Series (based upon the Servicing Fee Rate for each Series
and the Investor Amount (or such other amount as specified in the related
Supplement) of such Series, in each case as of the last day of the prior Monthly
Period) and (b) the amount of Principal Receivables on the last day of the prior
Monthly Period. The share of the Servicing Fee allocable to (i) the
Certificateholders' Interest of a particular Series with respect to any Monthly
Period (the "Monthly Servicing Fee"), (ii) the Enhancement Investor Amount, if
any, of a particular Series with respect to any Monthly Period, (iii) the
Transferor's Interest and (iv) the Seller's Interest, if any, with respect to
any Monthly Period will each be determined in accordance with the relevant
Supplement. The portion of the Servicing Fee with respect to any Monthly Period
not specifically allocated to the Certificateholders' Interest, the Seller's
Interest, the Transferor's Interest or the Enhancement Investor Amount, if any,
of a particular Series shall be paid by the Holders of the Transferor
Certificates on the related Distribution Date and in no event shall the Trust,
the Trustee, the Investor Certificateholders of any Series or any Series
Enhancer be liable for the share of the Servicing Fee with respect to any
Monthly Period to be paid by the Holders of the Transferor Certificates.
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Section 3.03. Representations, Warranties and Covenants of the Master
Servicer. AFC, as initial Master Servicer, hereby makes, and any Successor
Servicer by its appointment hereunder shall make, on each Closing Date (and as
to any Successor Servicer, to the extent applicable to it on the date of any
such appointment), the following representations, warranties and covenants:
(a) Organization and Good Standing. The Master Servicer is an
industrial loan corporation duly organized, validly existing and in good
standing under the laws of Utah or a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation, and
has full corporate power, authority and legal right to execute, deliver and
perform its obligations under this Agreement and each Supplement and, in all
material respects, to own its properties and conduct its business as such
properties are presently owned and as such business is presently conducted.
(b) Due Qualification. The Master Servicer is duly qualified to do
business and is in good standing as a foreign corporation (or is exempt from
such requirements), and has obtained all necessary licenses and approvals in
each jurisdiction in which failure to so qualify or to obtain such licenses and
approvals would have a material adverse effect on the interests of the Investor
Certificateholders hereunder or under any Supplement.
(c) Due Authorization. The execution, delivery, and performance of this
Agreement and each Supplement have been duly authorized by the Master Servicer
by all necessary corporate action on the part of the Master Servicer and this
Agreement and each Supplement will remain, from the time of its execution, an
official record of the Master Servicer.
(d) Binding Obligation. This Agreement and each Supplement constitutes
a legal, valid and binding obligation of the Master Servicer, enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect, affecting the enforcement of creditors' rights in general
and the rights of creditors of national banking associations and except as such
enforceability may be limited by general principles of equity (whether
considered in a suit at law or in equity).
(e) No Violation. The execution and delivery of this Agreement and each
Supplement by the Master Servicer, the performance of the transactions
contemplated by this Agreement and each Supplement and the fulfillment of the
terms hereof and thereof applicable to the Master Servicer will not conflict
with, violate, result in any breach of any of the material terms and provisions
of, or constitute (with or without notice or lapse of time or both) a default
under, any Requirement of Law applicable to the Master Servicer or any
indenture, contract, agreement, mortgage, deed of trust or other instrument to
which the Master Servicer is a party or by which it or any of its properties are
bound.
(f) No Proceedings. There are no proceedings or investigations pending
or, to the best knowledge of the Master Servicer, threatened against the Master
Servicer before any Governmental Authority seeking to prevent the issuance of
the Certificates or the consummation
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of any of the transactions contemplated by this Agreement or any Supplement,
seeking any determination or ruling that, in the reasonable judgment of the
Master Servicer, would materially and adversely affect the performance by the
Master Servicer of its obligations under this Agreement or any Supplement, or
seeking any determination or ruling that would materially and adversely affect
the validity or enforceability of this Agreement or any Supplement.
(g) Compliance with Requirements of Law. The Master Servicer shall duly
satisfy all obligations on its part to be fulfilled under or in connection with
the Receivables and the related Accounts, will maintain in effect all
qualifications required under Requirements of Law in order to service the
Receivables and the related Accounts properly and will comply in all material
respects with all other Requirements of Law in connection with servicing the
Receivables and the related Accounts, the failure to comply with which would
have a material adverse effect on the interests of the Certificateholders.
(h) No Rescission or Cancellation. Subject to Section 3.09, the Master
Servicer shall not permit any rescission or cancellation of a Receivable except
as ordered by a court of competent jurisdiction or required by Requirements of
Law, or as ordered by a court of law, or other Governmental Authority or in the
ordinary course of its business and in accordance with the Credit Card
Guidelines.
(i) Protection of Certificateholders' Rights. The Master Servicer shall
take no action which, nor omit to take any action the omission of which, would
substantially impair the rights of Certificateholders in any Receivable or
Account, nor shall it, except in the ordinary course of its business and in
accordance with the Credit Card Guidelines, reschedule, revise or defer
Collections due on the Receivables.
(j) Receivables Not To Be Evidenced by Promissory Notes. Except in
connection with its enforcement or collection of a Receivable, the Master
Servicer will take no action to cause any Receivable to be evidenced by any
instrument (as defined in the UCC) and, if any Receivable is so evidenced, it
shall be reassigned or assigned to the Master Servicer as provided in this
Section; provided, however, that Receivables evidenced by notes taken from
Obligors in the ordinary course of business of the Master Servicer's collection
efforts shall not be deemed Ineligible Receivables solely as a result thereof.
(k) All Consents Required. All approvals, authorizations, consents,
orders or other actions of any Person or of any governmental body or official
required in connection with the execution and delivery by the Master Servicer of
this Agreement and each Supplement, the performance by the Master Servicer of
the transactions contemplated by this Agreement and each Supplement and the
fulfillment by the Master Servicer of the terms hereof and thereof, have been
obtained; provided, however, that the Master Servicer makes no representation or
warranty regarding state securities or "blue sky" laws in connection with the
distribution of the Certificates.
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For purposes of the representations and warranties set forth in this
Section 3.03, each reference to a Supplement shall be deemed to refer only to
those Supplements in effect as of the relevant Closing Date or the date of
appointment of a Successor Servicer, as applicable.
In the event any of the representations, warranties or covenants of the
Master Servicer contained in paragraph (g), (h), (i) or (j) with respect to any
Receivable or the related Account is breached, and as a result of such breach
the Trust's rights in, to or under any Receivable in the related Account or the
proceeds of such Receivable are impaired or such proceeds are not available for
any reason to the Trust free and clear of any Lien, then no later than the
expiration of 60 days (or such longer period, not in excess of 150 days, as may
be agreed to by the Trustee and if such Transferor shall deliver to the Trustee
an Officer's Certificate stating that such breach is capable of being cured and
describing the method by which such breach is to be cured from the earlier to
occur of the discovery of such event by the Master Servicer, or receipt by the
Master Servicer of notice of such event given by the Trustee, all Receivables in
the Account or Accounts to which such event relates shall be reassigned or
assigned to the Master Servicer on the terms and conditions set forth below;
provided, however, that such Receivables will not be reassigned or assigned to
the Master Servicer if, on any day prior to the end of such 60-day or longer
period, (i) the relevant representation and warranty shall be true and correct,
or the relevant covenant shall have been complied with, in all material respects
and (ii) the Master Servicer shall have delivered to the Trustee a certificate
of an authorized officer describing the nature of such breach and the manner in
which such breach was cured.
If AFC is the Master Servicer, such reassignment or assignment shall be
accomplished in the manner set forth in subsection 2.05(b) as if the reassigned
or assigned Receivables were Ineligible Receivables (including the requirement,
if applicable, to reduce the aggregate amount of Principal Receivables used to
calculate the Transferor Amount, the Series Percentages and any other percentage
used to allocate within or among Series applicable to any Series and to make
deposits into the Excess Funding Account). If AFC is not the Master Servicer,
the Master Servicer shall effect such assignment by making a deposit into the
Collection Account in immediately available funds on the Transfer Date following
the Monthly Period in which such assignment obligation arises in an amount equal
to the amount of such Receivables, which deposit shall be considered a
Collection of Principal Receivables and shall be applied in accordance with
Article IV and the terms of each Supplement.
Upon each such reassignment or assignment to the Master Servicer, the
Trustee, on behalf of the Trust, shall automatically and without further action
be deemed to sell, transfer, assign, set over and otherwise convey to the Master
Servicer, without recourse, representation or warranty, all right, title and
interest of the Trust in and to such Receivables, all moneys due or to become
due and all amounts received with respect thereto and all proceeds thereof. The
Trustee shall execute such documents and instruments of transfer or assignment
substantially in the form of Exhibit C and take such other actions as shall be
reasonably requested by the Master Servicer to effect the conveyance of any such
Receivables pursuant to this Section. The obligation of the Master Servicer to
accept reassignment or assignment of such Receivables, and to make the deposits,
if any, required to be made to the Collection Account or the Excess Funding
Account as provided in the preceding paragraph, shall constitute the sole remedy
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respecting the event giving rise to such obligation available to
Certificateholders (or the Trustee on behalf of Certificateholders) or any
Series Enhancer.
Section 3.04. Reports and Records for the Trustee.
(a) Daily Records. On each Business Day, the Master Servicer, with
prior written notice by the Trustee shall make or cause to be made available at
the office of the Master Servicer on any Business Day during normal business
hours for inspection by the Trustee a record setting forth (i) the Collections
in respect of Principal Receivables and in respect of Finance Charge and
Administrative Receivables processed by the Master Servicer on the second
preceding Business Day in respect of the Accounts and (ii) the amount of
Receivables as of the close of business on the second preceding Business Day.
The Master Servicer shall, at all times, maintain its computer files with
respect to the Accounts in such a manner so that the Accounts may be
specifically identified.
(b) Monthly Servicer's Certificate. Not later than the Determination
Date immediately preceding each Distribution Date, the Master Servicer shall,
with respect to each outstanding Series, deliver to the Trustee, the Paying
Agent and each Rating Agency a certificate of a Servicing Officer in
substantially the form set forth in the related Supplement.
Section 3.05. Annual Certificate of Master Servicer. The Master
Servicer shall deliver to the Trustee and each Rating Agency, on or before
December 31 of each calendar year, beginning with December 31, 1996, an
Officer's Certificate (with appropriate insertions) substantially in the form of
Exhibit D, for the one-year period ending on the preceding September 30.
Section 3.06. Annual Servicing Report of Independent Public
Accountants; Copies of Reports Available.
(a) On or before December 31 of each calendar year, beginning with
December 31, 1996, the Master Servicer shall cause a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer or the Transferors) to furnish a report (addressed to the
Trustee) to the Trustee, the Master Servicer and each Rating Agency certifying
the Master Servicer's compliance with the terms and conditions set forth in
Articles III and Article IV and Section 8.08 of this Agreement and the
applicable provisions of each Supplement, except for such exceptions as they
believe to be immaterial and such other exceptions as shall be set forth in such
statement, for the one-year period ending on the preceding September 30. Such
report shall set forth the agreed upon procedures performed.
(b) On or before December 31 of each calendar year, beginning with
December 31, 1996, the Master Servicer shall cause a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer or the Transferors) to furnish a report (addressed to the
Trustee) to the Trustee, the Master Servicer and each Rating Agency to the
effect that they have, for the one-year period ending on the preceding September
30, applied certain procedures agreed upon with the Master Servicer to compare
the
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mathematical calculations of certain amounts set forth in the Master Servicer's
certificates delivered pursuant to subsection 3.04(b) during the period covered
by such report with the Master Servicer's computer reports which were the source
of such amounts and that on the basis of such agreed-upon procedures and
comparison, such accountants are of the opinion that such amounts are in
agreement, except for such exceptions as they believe to be immaterial and such
other exceptions as shall be set forth in such statement.
(c) A copy of each certificate and report provided pursuant to Section
3.04(b), 3.05 or 3.06 may be obtained by any Investor Certificateholder or
Person certifying its status as a Certificate Owner by a written request to the
Trustee addressed to the Corporate Trust Office.
Section 3.07. Tax Treatment. Unless otherwise specified in a Supplement
with respect to a particular Series, the Transferors have entered into this
Agreement, and the Certificates will be issued, with the intention that, for
Federal, state and local income and franchise tax purposes only, the Investor
Certificates of each Series which are characterized as indebtedness of the
Transferors at the time of their issuance will qualify as indebtedness secured
by the Receivables. The Transferors, by entering into this Agreement, and each
Certificateholder, by the acceptance of any such Certificate (and each
Certificate Owner, by its acceptance of an interest in the applicable
Certificate), agree to treat such Investor Certificates for Federal, state and
local income and franchise tax purposes as indebtedness of the Transferors. Each
Holder of such Investor Certificate agrees that it will cause any Certificate
Owner acquiring an interest in a Certificate through it to comply with this
Agreement as to treatment as indebtedness of the Transferors under applicable
tax law, as described in this Section 3.07.
Section 3.08. Notices to Trustee. In the event that AFC is no longer
acting as Master Servicer, any Successor Servicer shall deliver to the Trustee
each certificate and report required to be provided thereafter pursuant to
Section 3.04(b), 3.05 or 3.06.
Section 3.09. Adjustments.
(a) If the Master Servicer adjusts downward the amount of any
Receivable because of a rebate, refund, unauthorized charge or billing error to
an account holder, or because such Receivable was created in respect of
merchandise which was refused or returned by an account holder, or if the Master
Servicer otherwise adjusts downward the amount of any Receivable without
receiving Collections therefor or charging off such amount as uncollectible,
then, in any such case, the amount of Principal Receivables used to calculate
the Transferor Amount, the Series Percentages and any other percentage used to
allocate within or among Series applicable to any Series will be reduced by the
amount of the adjustment. Similarly, the amount of Principal Receivables used to
calculate the Transferor Amount, the Series Percentages and any other percentage
used to allocate within or among Series applicable to any Series will be reduced
by the amount of any Receivable which was discovered as having been created
through a fraudulent or counterfeit charge. Any adjustment required pursuant to
either of the two preceding sentences shall be made on or prior to the end of
the Monthly Period in which such adjustment obligation arises. In the event
that, following the exclusion of such Principal Receivables from the calculation
of the Transferor Amount, the Transferor Amount would be
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less than the Required Transferor Amount, or the aggregate amount of Principal
Receivables is less than the Required Principal Balance, not later than 12:00
noon, New York City time, on the Distribution Date following the Monthly Period
in which such adjustment obligation arises, the Transferor which transferred
such Principal Receivables to the Trust shall make a deposit into the Excess
Funding Account in immediately available funds in an amount equal to the amount
by which the (i) Transferor Amount would be below the Required Transferor Amount
(up to the amount of such Principal Receivables) or (ii) the aggregate amount of
Principal Receivables would be below the Required Principal Balance.
(b) If (i) the Master Servicer makes a deposit into the Collection
Account in respect of a Collection of a Receivable and such Collection was
received by the Master Servicer in the form of a check which is not honored for
any reason or (ii) the Master Servicer makes a mistake with respect to the
amount of any Collection and deposits an amount that is less than or more than
the actual amount of such Collection, the Master Servicer shall appropriately
adjust the amount subsequently deposited into the Collection Account to reflect
such dishonored check or mistake. Any Receivable in respect of which a
dishonored check is received shall be deemed not to have been paid.
Section 3.10. Reports to the Commission. The Transferor shall, on
behalf of the Trust, cause to be filed with the Commission any periodic reports
required to be filed in accordance with the provisions of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder. The Transferor shall, at the expense of the Master
Servicer, cooperate in any reasonable request of the Master Servicer in
connection with such filings.
[END OF ARTICLE III]
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ARTICLE IV
Rights of Certificateholders and
Allocation and Application of Collections
Section 4.01. Rights of Certificateholders. The Investor Certificates
shall represent fractional undivided interests in the Trust, which, with respect
to each Series, shall consist of the right to receive, to the extent necessary
to make the required payments with respect to the Investor Certificates of such
Series at the times and in the amounts specified in the related Supplement, the
portion of Collections allocable to Investor Certificateholders of such Series
pursuant to this Agreement and such Supplement, funds on deposit in the
Collection Account and the Excess Funding Account allocable to
Certificateholders of such Series pursuant to this Agreement and such
Supplement, funds on deposit in any related Series Account and funds available
pursuant to any related Series Enhancement (collectively, with respect to all
Series, the "Certificateholders' Interest"), it being understood that the
Investor Certificates of any Series or Class shall not represent any interest in
any Series Account or Series Enhancement for the benefit of any other Series or
Class. The Transferor Certificates shall represent the ownership interest in the
remainder of the Trust Assets not allocated pursuant to this Agreement or any
Supplement to the Certificateholders' Interest, including the right to receive
Collections with respect to the Receivables and other amounts at the times and
in the amounts specified in this Agreement or any Supplement to be paid to the
Holders of the Transferor Certificates (the "Transferors' Interest"); provided,
however, that the Transferor Certificates shall not represent any interest in
the Collection Account, the Excess Funding Account, any Series Account or any
Series Enhancement, except as specifically provided in this Agreement or any
Supplement; provided, further, that the foregoing shall not be construed to
limit the Trustee's obligations to make payments to the Holders of the
Transferor Certificates, the Transferors and the Master Servicer as and when
required under this Agreement and any Supplement.
Section 4.02. Establishment of Collection Account and Excess Funding
Account. The Master Servicer, for the benefit of the Certificateholders, shall
establish and maintain in the name of the Trustee, on behalf of the Trust, an
Eligible Deposit Account (or Eligible Deposit Accounts) bearing a designation
clearly indicating that the funds deposited therein are held for the benefit of
the Certificateholders (the "Collection Account"). The Trustee shall possess all
right, title and interest in all funds on deposit from time to time in the
Collection Account and in all proceeds thereof. The Collection Account shall be
under the sole dominion and control of the Trustee for the benefit of the
Certificateholders. Except as expressly provided in this Agreement, the Master
Servicer agrees that it shall have no right of setoff or banker's lien against,
and no right to otherwise deduct from, any funds held in the Collection Account
for any amount owed to it by the Trustee, the Trust, any Certificateholder or
any Series Enhancer. If, at any time, the Collection Account ceases to be an
Eligible Deposit Account, the Trustee (or the Master Servicer on its behalf)
shall within ten Business Days (or such longer period, not to exceed 30 calendar
days) establish a new Collection Account meeting the conditions specified above,
transfer any cash or any investments to such new Collection Account and from the
date such new Collection Account is established, it shall be the "Collection
Account."
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Pursuant to the authority granted to the Master Servicer in subsection
3.01(b), the Master Servicer shall have the power, revocable by the Trustee, to
make withdrawals and payments from the Collection Account for the purposes of
carrying out the Master Servicer's or the Trustee's duties hereunder. The Master
Servicer shall reduce deposits into the Collection Account payable by the
Transferor on any Deposit Date to the extent the Transferor is entitled to
receive funds from the Collection Account on such Deposit Date.
Funds on deposit in the Collection Account (other than amounts
deposited pursuant to Section 2.06, 9.02, 10.01 or 12.02) shall at the direction
of the Master Servicer be invested by the Trustee in Eligible Investments
selected by the Master Servicer. All such Eligible Investments shall be held by
the Trustee for the benefit of the Certificateholders. The Trustee shall
maintain for the benefit of the Certificateholders possession of the negotiable
instruments or securities, if any, evidencing such Eligible Investments.
Investments of funds representing Collections collected during any Monthly
Period shall be invested in Eligible Investments that will mature so that funds
will be available at the close of business on the Transfer Date following such
Monthly Period. Unless directed by the Master Servicer, funds deposited in the
Collection Account on a Transfer Date with respect to the next following
Distribution Date are not required to be invested overnight. For purposes of
determining the availability of funds or the balances in the Collection Account
for any reason under this Agreement, all investment earnings net of investment
expenses and losses on such funds shall be deemed not to be available or on
deposit.
The Master Servicer, for the benefit of the Certificateholders, will
establish and maintain in the name of the Trustee, on behalf of the Trust, an
Eligible Deposit Account bearing a designation clearly indicating that the funds
deposited therein are held for the benefit of the Certificateholders (the
"Excess Funding Account"). The Trustee shall possess all right, title and
interest in all funds on deposit from time to time in the Excess Funding Account
and in all proceeds thereof. The Excess Funding Account shall be under the sole
dominion and control of the Trustee for the benefit of the Certificateholders.
Except as expressly provided in this Agreement, the Master Servicer agrees that
it shall have no right of setoff or banker's lien against, and no right to
otherwise deduct from, any funds held in the Excess Funding Account for any
amount owed to it by the Trustee, the Trust, any Certificateholder or any Series
Enhancer. If, at any time, the Excess Funding Account ceases to be an Eligible
Deposit Account, the Trustee (or the Master Servicer on its behalf) shall within
10 Business Days (or such longer period, not to exceed 30 calendar days)
establish a new Excess Funding Account meeting the conditions specified above,
transfer any cash or any investments to such new Excess Funding Account and from
the date such new Excess Funding Account is established, it shall be the "Excess
Funding Account."
Funds on deposit in the Excess Funding Account shall at the direction
of the Master Servicer be invested by the Trustee in Eligible Investments
selected by the Master Servicer. All such Eligible Investments shall be held by
the Trustee for the benefit of the Certificateholders. The Trustee shall
maintain for the benefit of the Certificateholders possession of the negotiable
instruments or securities, if any, evidencing such Eligible Investments. Funds
on deposit in the Excess Funding Account on any date (after giving effect to any
withdrawals from the Excess
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Funding Account on such date) will be invested in Eligible Investments that will
mature so that funds will be available at the close of business on the Transfer
Date following such date. Unless directed by the Master Servicer, funds
deposited in the Excess Funding Account on a Transfer Date with respect to the
next following Distribution Date are not required to be invested overnight. On
each Transfer Date, the Master Servicer shall instruct the Trustee to withdraw
on the related Distribution Date from the Excess Funding Account and deposit in
the Collection Account all interest and other investment earnings (net of losses
and investment expenses) on funds on deposit in the Excess Funding Account, for
application as Collections of Finance Charge and Administrative Receivables with
respect to the prior Monthly Period. Interest (including reinvested interest)
and other investment income and earnings on funds on deposit in the Excess
Funding Account shall not be considered part of the Excess Funding Amount for
purposes of this Agreement. On any Transfer Date on which no Series is in an
Accumulation Period or Amortization Period, the Master Servicer shall determine
the amount by which the Transferor Amount exceeds the Required Transferor Amount
on such date and shall instruct the Trustee to withdraw such amount from the
Excess Funding Account on the related Distribution Date and pay such amount to
the Holders of the Transferor Certificates. On any Transfer Date on which one or
more Series is in an Accumulation Period or Amortization Period, the Master
Servicer shall determine the aggregate amount of Principal Shortfalls, if any,
with respect to each such Series that is a Principal Sharing Series (after
giving effect to the allocation and payment provisions in the Supplement with
respect to each such Series), and the Master Servicer shall instruct the Trustee
to withdraw such amount (up to the Excess Funding Amount) from the Excess
Funding Account on the succeeding Distribution Date and allocate such amount
among each such Series as Shared Principal Collections as specified herein and
in each related Supplement.
Section 4.03. Collections and Allocations.
(a) Collections. The Master Servicer will apply or will instruct the
Trustee to apply all funds on deposit in the Collection Account as described in
this Article IV and in each Supplement. Except as otherwise provided below or as
expressly provided in any Supplement with respect to Collections allocated to
the related Series, the Master Servicer shall deposit Collections into the
Collection Account no later than the second Business Day following the Date of
Processing of such Collections. Subject to the express terms of any Supplement,
but notwithstanding anything else in this Agreement to the contrary, for so long
as AFC remains the Master Servicer and no Pay Out Event has occurred and (x)
maintains a long-term rating of BBB-or better by Standard & Poor's and Baa3 by
Moody's (or such other rating below BBB-or Baa3, as the case may be, which is
satisfactory to each Rating Agency or, if a Series is not rated, each Investor
Certificateholder), or (y) Advanta Corp. has provided to the Trustee a
Performance Guaranty covering collection risk of the Master Servicer satisfying
the Rating Agency Condition or (z) the Master Servicer delivers to the Trustee a
letter of credit or other guaranty covering such collection risk and the Rating
Agency Condition is satisfied, the Master Servicer need not make the daily
deposits of Collections into the Collection Account as provided in the preceding
sentence, but may make a single deposit in the Collection Account by ACH by the
day before the Distribution Date or in immediately available funds by not later
than 12:00 noon, New York City time, on the Transfer Date following the Monthly
Period with respect to
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which such deposit was made. Subject to the express terms of any Supplement, but
notwithstanding anything else in this Agreement to the contrary, with respect to
any Monthly Period, whether the Master Servicer is required to make deposits of
Collections pursuant to the first or the second preceding sentence, and prior to
the occurrence of any Pay Out Event and so long as AFC maintains the ratings set
forth in (x) in the preceding sentence (i) the Master Servicer will only be
required to deposit Collections into the Collection Account up to the aggregate
amount of Collections required to be deposited into any Series Account or,
without duplication, distributed on or prior to the related Distribution Date to
Investor Certificateholders or to any Series Enhancer pursuant to the terms of
any Supplement or Enhancement Agreement and (ii) if at any time prior to such
Distribution Date the amount of Collections deposited in the Collection Account
exceeds the amount required to be deposited pursuant to clause (i) above, the
Master Servicer will be permitted to withdraw the excess from the Collection
Account.
(b) Allocations for the Transferor Certificates. Throughout the
existence of the Trust, unless otherwise stated in any Supplement, the Master
Servicer shall allocate to the Holders of the Transferor Certificates an amount
equal to the product of (A) the Transferor Percentage and (B) the aggregate
amount of such Collections allocated to Principal Receivables and Finance Charge
and Administrative Receivables, respectively, in respect of each Monthly Period.
Notwithstanding anything in this Agreement to the contrary, unless otherwise
stated in any Supplement, the Master Servicer need not deposit this amount or
any other amounts so allocated to the Transferor Certificates pursuant to any
Supplement into the Collection Account and shall pay, or be deemed to pay, such
amounts as collected to the Holders of the Transferor Certificates.
The payments to be made to the Holders of the Transferor Certificates
pursuant to this subsection 4.03(b) do not apply to deposits to the Collection
Account or other amounts that do not represent Collections, including payment of
the purchase price for Receivables pursuant to Section 2.06 or 10.01, proceeds
from the sale, disposition or liquidation of Receivables pursuant to Section
9.02 or 12.02 or payment of the purchase price for the Certificateholders'
Interest of a specific Series pursuant to the related Supplement.
Section 4.04. Shared Principal Collections. On each Distribution Date,
(a) the Master Servicer shall allocate Shared Principal Collections to each
Principal Sharing Series, pro rata, in proportion to the Principal Shortfalls,
if any, with respect to each such Series and (b) the Master Servicer shall
withdraw from the Collection Account and pay to the Holders of the Transferor
Certificates an amount equal to the excess, if any, of (x) the aggregate amount
for all outstanding Series of Collections of Principal Receivables which the
related Supplements or this Agreement specify are to be treated as "Shared
Principal Collections" for such Distribution Date over (y) the aggregate amount
for all outstanding Principal Sharing Series which the related Supplements
specify are "Principal Shortfalls" for such Distribution Date; provided,
however, that if, on any Distribution Date the Transferor Amount is less than or
equal to the Required Transferor Amount, the Master Servicer will not distribute
to the Holders of the Transferor Certificates any Shared Principal Collections
that otherwise would be distributed to the Holders of the Transferor
Certificates, but shall deposit such funds in the Excess Funding Account.
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Section 4.05. Allocation of Trust Assets to Series or Groups. To the
extent so provided in the Supplement for any Series or in an amendment to this
Agreement executed pursuant to subsection 13.01(a), Designated Assets conveyed
to the Trust pursuant to Section 2.01 and Designated Assets conveyed to the
Trust pursuant to Section 2.09, and all Collections received with respect to
such Receivables or Participation Interests, may be allocated in whole or in
part to one or more Series or Groups as may be provided in such Supplement or
amendment; provided, however, that any such allocation shall be effective only
upon satisfaction of the following conditions:
(i) on or before the fifth Business Day immediately preceding
such allocation, the Master Servicer shall have given the Trustee and
each Rating Agency written notice of such allocation;
(ii) the Rating Agency Condition shall have been satisfied
with respect to such allocation; and
(iii) the Master Servicer shall have delivered to the Trustee
an Officer's Certificate, dated the date of such allocation, to the
effect that the Master Servicer reasonably believes that such
allocation will not have an Adverse Effect.
Any such Supplement or amendment may provide that (i) such
allocation to one or more particular Series or Groups may terminate upon the
occurrence of certain events specified therein and (ii) that upon the occurrence
of any such event, such assets and any Collections with respect thereto, shall
be reallocated to other Series or Groups or to all Series, all as shall be
provided in such Supplement or amendment.
[END OF ARTICLE IV]
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ARTICLE V
Distributions and Reports to
Certificateholders
Distributions shall be made to, and reports shall be provided to,
Certificateholders as set forth in the applicable Supplement.
[END OF ARTICLE V]
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ARTICLE VI
The Certificates
Section 6.01. The Certificates. The Investor Certificates of any Series
or Class may be issued in bearer form ("Bearer Certificates") with attached
interest coupons and any other applicable coupon (collectively, the "Coupons")
or in fully registered form (but which may be uncertificated) ("Registered
Certificates") and shall, to the extent represented by physical certificates, be
substantially in the form of the exhibits with respect thereto attached to the
applicable Supplement. The ABRC Certificate will be issued in registered form,
substantially in the form of Exhibit A, and shall upon issue be executed and
delivered by the Transferor to the Trustee for authentication and redelivery as
provided in Section 6.02. The Transferors shall prepare any modifications to the
ABRC Certificate required by Section 2.09(e), upon which Exhibit A will be so
amended. Except as otherwise provided in Section 6.03 or in any Supplement,
Bearer Certificates shall be issued in minimum denominations of $100,000 and
Registered Certificates shall be issued in minimum denominations of $1,000 and
in integral multiples of $1,000 in excess thereof. The ABRC Certificate shall be
a single certificate and shall initially represent the entire Transferors'
Interest. Each Certificate shall be executed by manual or facsimile signature on
behalf of the Transferor by its respective President or any Vice President.
Certificates bearing the manual or facsimile signature of an individual who was,
at the time when such signature was affixed, authorized to sign on behalf of the
Transferor shall not be rendered invalid, notwithstanding that such individual
ceased to be so authorized prior to the authentication and delivery of such
Certificates or does not hold such office at the date of such Certificates. No
Certificates shall be entitled to any benefit under this Agreement, or be valid
for any purpose, unless there appears on such Certificate a certificate of
authentication substantially in the form provided for herein executed by or on
behalf of the Trustee by the manual signature of a duly authorized signatory,
and such certificate upon any Certificate shall be conclusive evidence, and the
only evidence, that such Certificate has been duly authenticated and delivered
hereunder. Bearer Certificates shall be dated the related Closing Date. All
Registered Certificates and Transferor Certificates shall be dated the date of
their authentication.
Section 6.02. Authentication of Certificates. The Trustee shall
authenticate and deliver the Investor Certificates of each Series and Class that
are issued upon original issuance to or upon the written order of the
Transferors. The Trustee shall authenticate and deliver the ABRC Certificate to
the Transferor simultaneously with its delivery of the Investor Certificates of
the first Series to be issued hereunder.
Section 6.03. New Issuances.
(a) The Transferors may from time to time direct the Trustee, on behalf
of the Trust, to authenticate one or more new Series of Investor Certificates.
The Investor Certificates of all outstanding Series shall be equally and ratably
entitled as provided herein to the benefits of this Agreement without
preference, priority or distinction, all in accordance with the terms and
provisions of this Agreement and the applicable Supplement except, with respect
to any Series or Class, as provided in the related Supplement.
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(b) On or before the Closing Date relating to any new Series, the
parties hereto will execute and deliver a Supplement which will specify the
Principal Terms of such new Series. The terms of such Supplement may modify or
amend the terms of this Agreement solely as applied to such new Series. The
obligation of the Trustee to authenticate the Investor Certificates of such new
Series and to execute and deliver the related Supplement is subject to the
satisfaction of the following conditions:
(i) on or before the fifth day immediately preceding the
Closing Date, the Transferors shall have given the Trustee and the
Master Servicer notice of such issuance and the Closing Date; and on or
before the tenth day immediately preceding the Closing Date, the
Transferors shall have given each Rating Agency notice of such
issuance;
(ii) the Transferors shall have delivered to the Trustee the
related Supplement, in form satisfactory to the Trustee, executed by
each party thereto;
(iii) the Transferors shall have delivered to the Trustee any
related Enhancement Agreement executed by each of the parties thereto,
other than the Trustee;
(iv) the Rating Agency Condition shall have been satisfied
with respect to such issuance;
(v) the Transferors shall have delivered to the Trustee an
Officer's Certificate, dated the Closing Date, to the effect that such
Transferor reasonably believes that such issuance will not, based on
the facts known to such officer at the time of such certification, then
or thereafter cause a Pay Out Event to occur with respect to any
Series; and
(vi) if any Series of Investor Certificates are outstanding
that were characterized as debt at the time of their issuance, the
Transferors shall have delivered to the Trustee and each Rating Agency
a Tax Opinion, dated the Closing Date, with respect to such issuance.
Upon satisfaction of the above conditions, the Trustee shall execute the
Supplement and authenticate the Investor Certificates of such Series upon
execution thereof by the Transferors.
(c) The Transferors may surrender the ABRC Certificate to the Trustee
in exchange for a newly issued ABRC Certificate and one or more additional
certificates (each a "Supplemental Certificate"), the terms of which shall be
defined in a supplement to this Agreement (which supplement shall be subject to
subsection 13.01(a) only to the extent that it amends any of the terms of this
Agreement), to be delivered to or upon the order of the Transferors (or the
Holder of a Supplemental Certificate, in the case of the transfer or exchange
thereof, as provided below), upon satisfaction of the following conditions:
(i) the Transferors shall have given written notice to each
Rating Agency of such exchange and the Rating Agency Condition shall
have been satisfied;
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(ii) the Transferor Amount (excluding the interest represented
by any Supplemental Certificate) shall not be less than 2% of the total
amount of Principal Receivables as of the date of, and after giving
effect to, such exchange; and
(iii) if any Series of Investor Certificates are outstanding
that were characterized as debt at the time of their issuance, the
Transferors shall have delivered to the Trustee and each Rating Agency
a Tax Opinion, dated the date of such exchange (or transfer or exchange
as provided below), with respect thereto.
Any Supplemental Certificate may be transferred or exchanged only upon
satisfaction of the conditions set forth in clause (ii) above.
(d) The ABRC Certificate (or any interest therein) may be transferred
to a Person which is a member of the "affiliated group" of which Advanta Corp.
is the "common parent" (as such terms are defined in Section 1504(a) of the
Code); provided that (i) if any Series of Investor Certificates are outstanding
that were characterized as debt at the time of their issuance, the Transferors
shall have delivered to the Trustee and each Rating Agency a Tax Opinion, dated
the date of such transfer, with respect thereto, and (ii) any such transferee
shall be deemed to be a "Transferor" for purposes of Sections 7.04 and 9.02.
Section 6.04. Registration of Transfer and Exchange of Certificates.
(a) The Trustee shall cause to be kept at the office or agency to be
maintained in accordance with the provisions of Section 11.16 a register (the
"Certificate Register") in which, subject to such reasonable regulations as it
may prescribe, a transfer agent and registrar (which may be the Trustee) (the
"Transfer Agent and Registrar") shall provide for the registration of the
Registered Certificates and of transfers and exchanges of the Registered
Certificates as herein provided. The Transfer Agent and Registrar shall
initially be the Trustee and any co-transfer agent and co-registrar chosen by
the Transferors and acceptable to the Trustee, including, if and so long as any
Series or Class is listed on the Luxembourg Stock Exchange and such exchange
shall so require, a co-transfer agent and co-registrar in Luxembourg. Any
reference in this Agreement to the Transfer Agent and Registrar shall include
any co-transfer agent and co-registrar unless the context requires otherwise.
The Trustee may revoke such appointment and remove any Transfer Agent
and Registrar if the Trustee determines in its sole discretion that such
Transfer Agent and Registrar failed to perform its obligations under this
Agreement in any material respect. Any Transfer Agent and Registrar shall be
permitted to resign as Transfer Agent and Registrar upon 30 days' notice to the
Transferors, the Trustee and the Master Servicer; provided, however, that such
resignation shall not be effective and such Transfer Agent and Registrar shall
continue to perform its duties as Transfer Agent and Registrar until the Trustee
has appointed a successor Transfer Agent and Registrar reasonably acceptable to
the Transferors.
Subject to paragraph (c) below, upon surrender for registration of
transfer of any Registered Certificate at any office or agency of the Transfer
Agent and Registrar maintained
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for such purpose, one or more new Registered Certificates (of the same Series
and Class) in authorized denominations of like aggregate fractional undivided
interests in the Certificateholders' Interest shall be executed, authenticated
and delivered, in the name of the designated transferee or transferees.
At the option of a Registered Certificateholder, Registered
Certificates (of the same Series and Class) may be exchanged for other
Registered Certificates of authorized denominations of like aggregate fractional
undivided interests in the Certificateholders' Interest, upon surrender of the
Registered Certificates to be exchanged at any such office or agency; Registered
Certificates, including Registered Certificates received in exchange for Bearer
Certificates, may not be exchanged for Bearer Certificates. At the option of the
Holder of a Bearer Certificate, subject to applicable laws and regulations,
Bearer Certificates may be exchanged for other Bearer Certificates or Registered
Certificates (of the same Series and Class) of authorized denominations of like
aggregate fractional undivided interests in the Certificateholders' Interest,
upon surrender of the Bearer Certificates to be exchanged at an office or agency
of the Transfer Agent and Registrar located outside the United States. Each
Bearer Certificate surrendered pursuant to this Section shall have attached
thereto all unmatured Coupons; provided that any Bearer Certificate so
surrendered after the close of business on the Record Date preceding the
relevant payment date after the expected final payment date need not have
attached the Coupon relating to such payment date (in each case, as specified in
the applicable Supplement).
Whenever any Investor Certificates are so surrendered for exchange, the
Transferor shall execute, the Trustee shall authenticate and the Transfer Agent
and Registrar shall deliver (in the case of Bearer Certificates, outside the
United States) the Investor Certificates which the Investor Certificateholder
making the exchange is entitled to receive. Every Investor Certificate presented
or surrendered for registration of transfer or exchange shall be accompanied by
a written instrument of transfer in a form satisfactory to the Trustee or the
Transfer Agent and Registrar duly executed by the Investor Certificateholder or
the attorney-in-fact thereof duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Investor Certificates, but the Transfer Agent and Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any such transfer or exchange.
All Investor Certificates (together with any Coupons) surrendered for
registration of transfer and exchange or for payment shall be canceled and
disposed of in a manner satisfactory to the Trustee.
The Transferor shall execute and deliver to the Trustee Bearer
Certificates and Registered Certificates in such amounts and at such times as
are necessary to enable the Trustee to fulfill its responsibilities under this
Agreement, each Supplement and the Certificates.
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(b) The Transfer Agent and Registrar will maintain at its expense in
each of the Borough of Manhattan, The City of New York, and, if and so long as
any Series or Class is listed on the Luxembourg Stock Exchange, Luxembourg, an
office or agency where Investor Certificates may be surrendered for registration
of transfer or exchange (except that Bearer Certificates may not be surrendered
for exchange at any such office or agency in the United States).
(c)(i) Registration of transfer of Investor Certificates containing a
legend substantially to the effect set forth on Exhibit E-1 shall be
effected only if such transfer (x) is made pursuant to an effective
registration statement under the Act, or is exempt from the
registration requirements under the Act, and (y) is made to a Person
which is not an employee benefit plan, trust or account, including an
individual retirement account, that is subject to ERISA or that is
described in Section 4975(e)(1) of the Code or an entity whose
underlying assets include plan assets by reason of a plan's investment
in such entity (a "Benefit Plan"). In the event that registration of a
transfer is to be made in reliance upon an exemption from the
registration requirements under the Act, the transferor or the
transferee shall deliver, at its expense, to the Transferors, the
Master Servicer and the Trustee, an investment letter from the
transferee, substantially in the form of the investment and ERISA
representation letter attached hereto as Exhibit E-2, and no
registration of transfer shall be made until such letter is so
delivered.
Investor Certificates issued upon registration or transfer of,
or Investor Certificates issued in exchange for, Investor Certificates
bearing the legend referred to above shall also bear such legend unless
the Transferors, the Master Servicer, the Trustee and the Transfer
Agent and Registrar receive an Opinion of Counsel, satisfactory to each
of them, to the effect that such legend may be removed.
Whenever an Investor Certificate containing the legend
referred to above is presented to the Transfer Agent and Registrar for
registration of transfer, the Transfer Agent and Registrar shall
promptly seek instructions from the Master Servicer regarding such
transfer and shall be entitled to receive instructions signed by a
Servicing Officer prior to registering any such transfer. The
Transferors hereby agree to indemnify the Transfer Agent and Registrar
and the Trustee and to hold each of them harmless against any loss,
liability or expense incurred without negligence or bad faith on their
part arising out of or in connection with actions taken or omitted by
them in relation to any such instructions furnished pursuant to this
clause (i).
(ii) Registration of transfer of Investor Certificates
containing a legend to the effect set forth on Exhibit E-3 shall be
effected only if such transfer is made to a Person which is not a
Benefit Plan. By accepting and holding any such Investor Certificate,
an Investor Certificateholder shall be deemed to have represented and
warranted that it is not a Benefit Plan. By acquiring any interest in a
Book-Entry Certificate which contains such legend, a Certificate Owner
shall be deemed to have represented and warranted that it is not a
Benefit Plan and any purported acquisition, sale, pledge or other
disposition of such beneficial ownership interest in any such
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Certificate that does not comply with the foregoing transfer
restriction shall be deemed absolutely null and void ab initio and the
transferor shall in the event of such noncompliance remain the
beneficial owner of such interest in such Certificates.
(iii) If so requested by the Transferors, the Trustee
will make available to any prospective purchaser of Investor
Certificates who so requests, a copy of a letter provided to the
Trustee by or on behalf of the Transferors relating to the
transferability of any Series or Class to a Benefit Plan.
Section 6.05. Mutilated, Destroyed, Lost or Stolen Certificates. If (a)
any mutilated Certificate (together, in the case of Bearer Certificates, with
all unmatured Coupons (if any) appertaining thereto) is surrendered to the
Transfer Agent and Registrar, or the Transfer Agent and Registrar receives
evidence to its satisfaction of the destruction, loss or theft of any
Certificate and (b) there is delivered to the Transfer Agent and Registrar, any
Paying Agent and the Trustee such security or indemnity as may be required by
them to save each of them harmless, then, in the absence of notice to the
Trustee that such Certificate has been acquired by a bona fide purchaser, the
Transferor shall execute, the Trustee shall authenticate and the Transfer Agent
and Registrar shall deliver (in the case of Bearer Certificates, outside the
United States), in exchange for or in lieu of any such mutilated, destroyed,
lost or stolen Certificate, a new Certificate (of the same Series and Class) of
like tenor and aggregate fractional undivided interest. In connection with the
issuance of any new Certificate under this Section, the Trustee or the Transfer
Agent and Registrar may require the payment by the Certificateholder of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Trustee and Transfer Agent and Registrar) connected therewith. Any duplicate
Certificate issued pursuant to this Section shall constitute complete and
indefeasible evidence of ownership in the Trust, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be found at any
time.
Section 6.06. Persons Deemed Owners. The Trustee, the Paying Agent, the
Transfer Agent and Registrar and any agent of any of them may (a) prior to due
presentation of a Registered Certificate for registration of transfer, treat the
Person in whose name any Registered Certificate is registered as the owner of
such Registered Certificate for the purpose of receiving distributions pursuant
to the terms of the applicable Supplement and for all other purposes whatsoever,
and (b) treat the bearer of a Bearer Certificate or Coupon as the owner of such
Bearer Certificate or Coupon for the purpose of receiving distributions pursuant
to the terms of the applicable Supplement and for all other purposes whatsoever;
and, in any such case, neither the Trustee, the Paying Agent, the Transfer Agent
and Registrar nor any agent of any of them shall be affected by any notice to
the contrary. Notwithstanding the foregoing, in determining whether the Holders
of the requisite Investor Certificates have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Certificates
owned by any of the Transferors, the Master Servicer, any other Holder of a
Transferor Certificate, the Trustee or any Affiliate thereof, shall be
disregarded and deemed not to be outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Certificates which the
Trustee actually knows to be so owned shall be so disregarded. Certificates so
owned which have been pledged
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in good faith shall not be disregarded and may be regarded as outstanding if the
pledgee establishes to the satisfaction of the Trustee the pledgee's right so to
act with respect to such Certificates and that the pledgee is not any
Transferor, the Master Servicer, any other Holder of a Transferor Certificate or
any Affiliate thereof.
Section 6.07. Appointment of Paying Agent. The Paying Agent shall make
distributions to Investor Certificateholders from the Collection Account or any
applicable Series Account pursuant to the provisions of the applicable
Supplement and shall report the amounts of such distributions to the Trustee.
Any Paying Agent shall have the revocable power to withdraw funds from the
Collection Account or any applicable Series Account for the purpose of making
the distributions referred to above. The Trustee may revoke such power and
remove the Paying Agent if the Trustee determines in its sole discretion that
the Paying Agent shall have failed to perform its obligations under this
Agreement or any Supplement in any material respect. The Paying Agent shall
initially be the Trustee and any co-paying agent chosen by the Transferors and
acceptable to the Trustee, including, if and so long as any Series or Class is
listed on the Luxembourg Stock Exchange and such exchange so requires, a
co-paying agent in Luxembourg or another western European city. Any Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' notice to the
Trustee. In the event that any Paying Agent shall resign, the Trustee shall
appoint a successor to act as Paying Agent. The Trustee shall cause each
successor or additional Paying Agent to execute and deliver to the Trustee an
instrument in which such successor or additional Paying Agent shall agree with
the Trustee that it will hold all sums, if any, held by it for payment to the
Investor Certificateholders in trust for the benefit of the Investor
Certificateholders entitled thereto until such sums shall be paid to such
Investor Certificateholders. The Paying Agent shall upon written request return
all unclaimed funds to the Trustee and upon resignation or removal shall also
return all funds in its possession to the Trustee. The provisions of Sections
11.01, 11.02, 11.03 and 11.05 shall apply to the Trustee also in its role as
Paying Agent, for so long as the Trustee shall act as Paying Agent. Any
reference in this Agreement to the Paying Agent shall include any co-paying
agent unless the context requires otherwise.
Section 6.08. Access to List of Registered Certificateholders' Names
and Addresses. The Trustee will furnish or cause to be furnished by the Transfer
Agent and Registrar to the Master Servicer or the Paying Agent, within five
Business Days after receipt by the Trustee of a request therefor, a list in such
form as the Master Servicer or the Paying Agent may reasonably require, of the
names and addresses of the Registered Certificateholders. If any Holder or group
of Holders of Investor Certificates of any Series or all outstanding Series, as
the case may be, evidencing not less than 10% of the aggregate unpaid principal
amount of such Series or all outstanding Series, as applicable (the
"Applicants"), apply to the Trustee, and such application states that the
Applicants desire to communicate with other Investor Certificateholders with
respect to their rights under this Agreement or any Supplement or under the
Investor Certificates and is accompanied by a copy of the communication which
such Applicants propose to transmit, then the Trustee, after having been
adequately indemnified by such Applicants for its costs and expenses, shall
afford or shall cause the Transfer Agent and Registrar to afford such Applicants
access during normal business hours to the most recent list of Registered
Certificateholders of such Series or all outstanding Series, as applicable, held
by the Trustee,
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within five Business Days after the receipt of such application. Such list shall
be as of a date no more than 45 days prior to the date of receipt of such
Applicants' request.
Every Registered Certificateholder, by receiving and holding a
Registered Certificate, agrees with the Trustee that neither the Trustee, the
Transfer Agent and Registrar, nor any of their respective agents, shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Registered Certificateholders hereunder, regardless of the
sources from which such information was derived.
Section 6.09. Authenticating Agent.
(a) The Trustee may appoint one or more authenticating agents with
respect to the Certificates which shall be authorized to act on behalf of the
Trustee in authenticating the Certificates in connection with the issuance,
delivery, registration of transfer, exchange or repayment of the Certificates.
Whenever reference is made in this Agreement to the authentication of
Certificates by the Trustee or the Trustee's certificate of authentication, such
reference shall be deemed to include authentication on behalf of the Trustee by
an authenticating agent and certificate of authentication executed on behalf of
the Trustee by an authenticating agent. Each authenticating agent must be
acceptable to the Transferors and the Master Servicer.
(b) Any institution succeeding to the corporate agency business of an
authenticating agent shall continue to be an authenticating agent without the
execution or filing of any power or any further act on the part of the Trustee
or such authenticating agent. An authenticating agent may at any time resign by
giving notice of resignation to the Trustee and to the Transferors. The Trustee
may at any time terminate the agency of an authenticating agent by giving notice
of termination to such authenticating agent and to the Transferors. Upon
receiving such a notice of resignation or upon such a termination, or in case at
any time an authenticating agent shall cease to be acceptable to the Trustee or
the Transferors, the Trustee promptly may appoint a successor authenticating
agent. Any successor authenticating agent upon acceptance of its appointment
hereunder shall become vested with all the rights, powers and duties of its
predecessor hereunder, with like effect as if originally named as an
authenticating agent. No successor authenticating agent shall be appointed
unless acceptable to the Trustee and the Transferors. The Transferors agree to
pay to each authenticating agent from time to time reasonable compensation for
its services under this Section. The provisions of Sections 11.01, 11.02 and
11.03 shall be applicable to any authenticating agent.
(c) Pursuant to an appointment made under this Section, the
Certificates may have endorsed thereon, in lieu of the Trustee's certificate of
authentication, an alternate certificate of authentication in substantially the
following form:
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This is one of the Certificates described in the Pooling and Servicing
Agreement.
----------------------------
----------------------------
as Authenticating Agent
for the Trustee,
by
---------------------------
Authorized Officer
Section 6.10. Book-Entry Certificates. Unless otherwise specified in
the related Supplement for any Series or Class, the Investor Certificates, upon
original issuance, shall be issued in the form of one or more typewritten
Investor Certificates representing the Book-Entry Certificates, to be delivered
to the Clearing Agency, by, or on behalf of, the Transferors. The Investor
Certificates shall initially be registered on the Certificate Register in the
name of the Clearing Agency or its nominee, and no Certificate Owner will
receive a definitive certificate representing such Certificate Owner's interest
in the Investor Certificates, except as provided in Section 6.12. Unless and
until definitive, fully registered Investor Certificates ("Definitive
Certificates") have been issued to the applicable Certificate Owners pursuant to
Section 6.12 or as otherwise specified in any such Supplement:
(a) the provisions of this Section shall be in full force and effect;
(b) the Transferors, the Master Servicer and the Trustee may deal with
the Clearing Agency and the Clearing Agency Participants for all purposes
(including the making of distributions) as the authorized representatives of the
respective Certificate Owners;
(c) to the extent that the provisions of this Section conflict with any
other provisions of this Agreement, the provisions of this Section shall
control; and
(d) the rights of the respective Certificate Owners shall be exercised
only through the Clearing Agency and the Clearing Agency Participants and shall
be limited to those established by law and agreements between such Certificate
Owners and the Clearing Agency or the Clearing Agency Participants. Pursuant to
the Depository Agreement, unless and until Definitive Certificates are issued
pursuant to Section 6.12, the Clearing Agency will make book-entry transfers
among the Clearing Agency Participants and receive and transmit distributions of
principal and interest on the related Investor Certificates to such Clearing
Agency Participants.
For purposes of any provision of this Agreement requiring or permitting
actions with the consent of, or at the direction of, Investor Certificateholders
evidencing a specified percentage
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of the aggregate unpaid principal amount of Investor Certificates, such
direction or consent may be given by Certificate Owners (acting through the
Clearing Agency and the Clearing Agency Participants) owning Investor
Certificates evidencing the requisite percentage of principal amount of Investor
Certificates.
Section 6.11. Notices to Clearing Agency. Whenever any notice or other
communication is required to be given to Investor Certificateholders of any
Series or Class with respect to which Book-Entry Certificates have been issued,
unless and until Definitive Certificates shall have been issued to the related
Certificate Owners, the Trustee shall give all such notices and communications
to the applicable Clearing Agency.
Section 6.12. Definitive Certificates. If Book-Entry Certificates have
been issued with respect to any Series or Class and (a) the Transferors advise
the Trustee that the Clearing Agency is no longer willing or able to discharge
properly its responsibilities under the Depository Agreement with respect to
such Series or Class and the Trustee or the Transferors are unable to locate a
qualified successor, (b) the Transferors, at their option, advise the Trustee
that they elect to terminate the book-entry system with respect to such Series
or Class through the Clearing Agency or (c) after the occurrence of a Servicer
Default, Certificate Owners of such Series or Class evidencing more than 50% of
the aggregate unpaid principal amount of such Series or Class advise the Trustee
and the Clearing Agency through the Clearing Agency Participants that the
continuation of a book-entry system with respect to the Investor Certificates of
such Series or Class through the Clearing Agency is no longer in the best
interests of the Certificate Owners with respect to such Certificates, then the
Trustee shall notify all Certificate Owners of such Certificates, through the
Clearing Agency, of the occurrence of any such event and of the availability of
Definitive Certificates to Certificate Owners requesting the same. Upon
surrender to the Trustee of any such Certificates by the Clearing Agency,
accompanied by registration instructions from the Clearing Agency for
registration, the Transferors shall execute and the Trustee shall authenticate
and the Transfer Agent and Registrar shall deliver such Definitive Certificates.
Neither the Transferors nor the Trustee shall be liable for any delay in
delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon the issuance of such Definitive
Certificates, all references herein to obligations imposed upon or to be
performed by the Clearing Agency shall be deemed to be imposed upon and
performed by the Trustee, to the extent applicable with respect to such
Definitive Certificates, and the Trustee shall recognize the Holders of such
Definitive Certificates as Investor Certificateholders hereunder.
Section 6.13. Meetings of Certificateholders.
(a) If at the time any Bearer Certificates are issued and outstanding
with respect to any Series or Class to which any meeting described below
relates, the Master Servicer or the Trustee may at any time call a meeting of
Investor Certificateholders of any Series or Class or of all Series, to be held
at such time and at such place as the Master Servicer or the Trustee, as the
case may be, shall determine, for the purpose of approving a modification of or
amendment to, or obtaining a waiver of any covenant or condition set forth in,
this Agreement, any Supplement or the Investor Certificates or of taking any
other action permitted to be taken
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by Investor Certificateholders hereunder or under any Supplement. Notice of any
meeting of Investor Certificateholders, setting forth the time and place of such
meeting and in general terms the action proposed to be taken at such meeting,
shall be given in accordance with Section 13.05, the first mailing and
publication to be not less than 20 nor more than 180 days prior to the date
fixed for the meeting. To be entitled to vote at any meeting of Investor
Certificateholders a person shall be (i) a Holder of one or more Investor
Certificates of the applicable Series or Class or (ii) a person appointed by an
instrument in writing as proxy by the Holder of one or more such Investor
Certificates. The only persons who shall be entitled to be present or to speak
at any meeting of Investor Certificateholders shall be the persons entitled to
vote at such meeting and their counsel and any representatives of the
Transferors, the Master Servicer and the Trustee and their respective counsel.
(b) At a meeting of Investor Certificateholders, persons entitled to
vote Investor Certificates evidencing a majority of the aggregate unpaid
principal amount of the applicable Series or Class or all outstanding Series, as
the case may be, shall constitute a quorum. No business shall be transacted in
the absence of a quorum, unless a quorum is present when the meeting is called
to order. In the absence of a quorum at any such meeting, the meeting may be
adjourned for a period of not less than 10 days; in the absence of a quorum at
any such meeting, such adjourned meeting may be further adjourned for a period
of not less than 10 days; at the reconvening of any meeting further adjourned
for lack of a quorum, the persons entitled to vote Investor Certificates
evidencing at least 25% of the aggregate unpaid principal amount of the
applicable Series or Class or all outstanding Series, as the case may be, shall
constitute a quorum for the taking of any action set forth in the notice of the
original meeting. Notice of the reconvening of any adjourned meeting shall be
given as provided above except that such notice must be given not less than five
days prior to the date on which the meeting is scheduled to be reconvened.
Notice of the reconvening of an adjourned meeting shall state expressly the
percentage of the aggregate principal amount of the outstanding applicable
Investor Certificates which shall constitute a quorum.
(c) Any Investor Certificateholder who has executed an instrument in
writing appointing a person as proxy shall be deemed to be present for the
purposes of determining a quorum and be deemed to have voted; provided that such
Investor Certificateholder shall be considered as present or voting only with
respect to the matters covered by such instrument in writing. Subject to the
provisions of Section 13.01, any resolution passed or decision taken at any
meeting of Investor Certificateholders duly held in accordance with this Section
shall be binding on all Investor Certificateholders whether or not present or
represented at the meeting.
(d) The holding of Bearer Certificates shall be proved by the
production of such Bearer Certificates or by a certificate, satisfactory to the
Master Servicer, executed by any bank, trust company or recognized securities
dealer, wherever situated, satisfactory to the Master Servicer. Each such
certificate shall be dated and shall state that on the date thereof a Bearer
Certificate bearing a specified serial number was deposited with or exhibited to
such bank, trust company or recognized securities dealer by the Person named in
such certificate. Any such certificate may be issued in respect of one or more
Bearer Certificates specified therein. The holding by the Person named in any
such certificate of any Bearer Certificate specified therein
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shall be presumed to continue for a period of one year from the date of such
certificate unless at the time of any determination of such holding (i) another
certificate bearing a later date issued in respect of the same Bearer
Certificate shall be produced, (ii) the Bearer Certificate specified in such
certificate shall be produced by some other Person or (iii) the Bearer
Certificate specified in such certificate shall have ceased to be outstanding.
The appointment of any proxy shall be proved by having the signature of the
Person executing the proxy guaranteed by any bank, trust company or recognized
securities dealer satisfactory to the Trustee.
(e) The Trustee shall appoint a temporary chairman of the meeting. A
permanent chairman and a permanent secretary of the meeting shall be elected by
vote of the Holders of Investor Certificates evidencing a majority of the
aggregate unpaid principal amount of Investor Certificates of the applicable
Series or Class or all outstanding Series, as the case may be, represented at
the meeting. No vote shall be cast or counted at any meeting in respect of any
Investor Certificate challenged as not outstanding and ruled by the chairman of
the meeting to be not outstanding. The chairman of the meeting shall have no
right to vote except as an Investor Certificateholder or proxy. Any meeting of
Investor Certificateholders duly called at which a quorum is present may be
adjourned from time to time, and the meeting may be held as so adjourned without
further notice.
(f) The vote upon any resolution submitted to any meeting of Investor
Certificateholders shall be by written ballot on which shall be subscribed the
signatures of Investor Certificateholders or proxies and on which shall be
inscribed the serial number or numbers of the Investor Certificates held or
represented by them. The permanent chairman of the meeting shall appoint two
inspectors of votes who shall count all votes cast at the meeting for or against
any resolution and who shall make and file with the secretary of the meeting
their verified written reports in duplicate of all votes cast at the meeting. A
record in duplicate of the proceedings of each meeting of Investor
Certificateholders shall be prepared by the secretary of the meeting and there
shall be attached to said record the original reports of the inspectors of votes
on any vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that said notice was published as provided above. The record shall be
signed and verified by the permanent chairman and secretary of the meeting and
one of the duplicates shall be delivered to the Master Servicer and the other to
the Trustee to be preserved by the Trustee, the latter to have attached thereto
the ballots voted at the meeting. Any record so signed and verified shall be
conclusive evidence of the matters therein stated.
Section 6.14. Uncertificated Classes. Notwithstanding anything to the
contrary contained in this Article VI or in Article XII, unless otherwise
specified in any Supplement, any provisions contained in this Article VI and in
Article XII relating to the registration, form, execution, authentication,
delivery, presentation, cancellation and surrender of Certificates shall not be
applicable to any uncertificated Certificates.
[END OF ARTICLE VI]
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ARTICLE VII
Other Matters Relating to the Transferors
Section 7.01. Liability of the Transferors. Each Transferor (including
any Additional Transferors) shall be severally, and not jointly liable in all
respects for the obligations, covenants, representations and warranties of such
Transferor arising under or related to this Agreement or any Supplement. A
Transferor shall be liable only to the extent of the obligations specifically
undertaken by it in its capacity as Transferor.
Section 7.02. Merger or Consolidation of, or Assumption of the
Obligations of, the Transferors.
(a) None of the Transferors shall consolidate with or merge into any
other corporation or convey or transfer its properties and assets substantially
as an entirety to any Person unless:
(i) the corporation formed by such consolidation or into which
such Transferor is merged or the Person which acquires by conveyance or
transfer the properties and assets of such Transferor substantially as
an entirety shall be, if such Transferor is not the surviving entity, a
corporation organized and existing under the laws of the United States
of America or any State or the District of Columbia, and shall be a
savings and loan association, a national banking association, a bank or
other entity which is not subject to Title 11 of the United States Code
or a bankruptcy remote corporation and, if such Transferor is not the
surviving entity, such corporation shall expressly assume, by an
agreement supplemental hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, the performance of every covenant
and obligation of such Transferor hereunder, including its obligations
under Section 7.04; and (y) such Transferor has delivered to the
Trustee an Officer's Certificate and an Opinion of Counsel each stating
that such consolidation, merger, conveyance or transfer and such
supplemental agreement comply with this Section, that such supplemental
agreement is a valid and binding obligation of such surviving entity
enforceable against such surviving entity in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally from time to time in effect and except as
such enforceability may be limited by general principles of equity
(whether considered in a suit at law or in equity), and that all
conditions precedent herein provided for relating to such transaction
have been complied with; and
(ii) the Rating Agency Condition shall have been satisfied
with respect to such consolidation, merger, conveyance or transfer.
(iii) if any Series of Investor Certificates are outstanding
that were characterized as debt at the time of their issuance, the
relevant Transferor shall have delivered to the Trustee and each Rating
Agency a Tax Opinion dated the date of such consolidation, merger,
conveyance or transfer, with respect thereto.
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(b) Except as permitted by subsection 2.07(c), the obligations, rights
or any part thereof of each Transferor hereunder shall not be assignable nor
shall any Person succeed to such obligations or rights of any Transferor
hereunder except (i) for conveyances, mergers, consolidations, assumptions,
sales or transfers in accordance with the provisions of the foregoing paragraph
and (ii) for conveyances, mergers, consolidations, assumptions, sales or
transfers to other entities (1) which such Transferor and the Master Servicer
determine will not result in an Adverse Effect and (2) which meet the
requirements of clause (ii) of the preceding paragraph.
Section 7.03. Limitations on Liability of the Transferors. Subject to
Sections 7.01 and 7.04, none of the Transferors nor any of the directors,
officers, employees or agents of any of the Transferors acting in their
capacities as Transferors shall be under any liability to the Trust, the
Trustee, the Certificateholders, the Certificate Owners, any Series Enhancer or
any other Person for any action taken or for refraining from the taking of any
action in good faith in their capacities as Transferors pursuant to this
Agreement, it being expressly understood that such liability is expressly waived
and released as a condition of, and consideration for, the execution of this
Agreement and any Supplement and the issuance of the Certificates; provided,
however, that this provision shall not protect any Transferor or any such Person
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties hereunder. The
Transferors and any director, officer, employee or agent of any of the
Transferors may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person (other than the Transferors)
respecting any matters arising hereunder.
The other parties hereto and each Certificateholder, by acceptance of
its Certificate, hereby covenant and agree that, prior to the date which is one
year and four days after the termination of the Trust, they will not institute
against ABRC, or join in any institution against ABRC of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings under any applicable bankruptcy or similar law in connection with
this Agreement.
Section 7.04. Liabilities. Each Transferor shall indemnify and hold
harmless the Trust and the Trustee, its officers, directors, employees and
agents from and against any reasonable loss, liability, expense, damage or
injury suffered or sustained by reason of any acts, omissions or alleged acts or
omissions arising out of or based upon the arrangement created by this Agreement
or any Supplement, as though this Agreement or such Supplement created a
partnership under the New York Uniform Partnership Law in which the Transferors
are general partners; provided, however, that the Transferors shall not
indemnify the Trustee if such acts, omissions or alleged acts or omissions
constitute or are caused by fraud, negligence, or willful misconduct by the
Trustee; provided, further, that the Transferors shall not indemnify the Trust,
the Investor Certificateholders or the Certificate Owners for any liabilities,
costs or expenses of the Trust with respect to any action taken by the Trustee
at the request of the Investor Certificateholders; provided, further, that the
Transferors shall not indemnify the Trust, the Investor Certificateholders or
the Certificate Owners as to any losses, claims or damages incurred by any of
them in their capacities as investors, including, without limitation, losses
incurred as a result of Defaulted Receivables; and provided, further, that the
Transferors shall
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not indemnify the Trust, the Investor Certificateholders or the Certificate
Owners for any liabilities, costs or expenses of the Trust, the Investor
Certificateholders or the Certificate Owners for any liabilities, costs or
expenses of the Trust, the Trustee or the Investor Certificateholders arising
under any tax law relating to any Federal, state, local or foreign income or
franchise taxes or any other tax imposed on or measured by income (or any
interest or penalties with respect thereto or arising from a failure to comply
therewith) required to be paid by the Trust, the Investor Certificateholders or
the Certificate Owners in connection herewith to any taxing authority. Any such
indemnification shall not be payable from the Trust Assets. The provisions of
this indemnity shall run directly to and be enforceable by an injured party
subject to the limitations hereof.
[END OF ARTICLE VII]
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ARTICLE VIII
Other Matters Relating to the Master Servicer
Section 8.01. Liability of the Master Servicer. The Master Servicer
shall be liable under this Article only to the extent of the obligations
specifically undertaken by the Master Servicer in its capacity as Master
Servicer.
Section 8.02. Merger or Consolidation of, or Assumption of the
Obligations of, the Master Servicer. The Master Servicer shall not consolidate
with or merge into any other corporation or convey or transfer its properties
and assets substantially as an entirety to any Person, unless:
(a)(i) the corporation or bank formed by such consolidation or
into which the Master Servicer is merged or the Person which acquires
by conveyance or transfer the properties and assets of the Master
Servicer substantially as an entirety shall be, if the Master Servicer
is not the surviving entity, a corporation or bank organized and
existing under the laws of the United States of America or any State or
the District of Columbia and, if the Master Servicer is not the
surviving entity, such corporation or bank shall expressly assume, by
an agreement supplemental hereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, the performance of every
covenant and obligation of the Master Servicer hereunder;
(ii) the Master Servicer has delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel each stating that such
consolidation, merger, conveyance or transfer and such supplemental
agreement comply with this Section, that such supplemental agreement is
a valid and binding obligation of such surviving entity enforceable
against such surviving entity in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally from time to time in effect and except as
such enforceability may be limited by general principles of equity
(whether considered in a suit at law or in equity), and that all
conditions precedent herein provided for relating to such transaction
have been complied with;
(b) the Rating Agency Condition shall have been satisfied with respect
to such assignment and succession; and
(c) the corporation or bank formed by such consolidation or into which
the Master Servicer is merged or the Person which acquires by conveyance or
transfer the properties and assets of the Master Servicer substantially as an
entirety shall be an Eligible Servicer.
Section 8.03. Limitation on Liability of the Master Servicer and
Others. Except as provided in Section 8.04, neither the Master Servicer nor any
of the directors, officers, employees or agents of the Master Servicer in its
capacity as Master Servicer shall be under any liability to the Trust, the
Trustee, the Certificateholders, any Series Enhancer or any other
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Person for any action taken or for refraining from the taking of any action in
good faith in its capacity as Master Servicer pursuant to this Agreement;
provided, however, that this provision shall not protect the Master Servicer or
any such Person against any liability which would otherwise be imposed by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties or by reason of reckless disregard of obligations and duties hereunder.
The Master Servicer and any director, officer, employee or agent of the Master
Servicer may rely in good faith on any document of any kind prima facie properly
executed and submitted by any Person (other than the Master Servicer) respecting
any matters arising hereunder. The Master Servicer shall not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its duties as Master Servicer in accordance with this Agreement
and which in its reasonable judgment may involve it in any expense or liability.
The Master Servicer may, in its sole discretion, undertake any such legal action
which it may deem necessary or desirable for the benefit of the
Certificateholders with respect to this Agreement and the rights and duties of
the parties hereto and the interests of the Certificateholders hereunder.
Section 8.04. Master Servicer Indemnification of the Trust and the
Trustee. The Master Servicer shall indemnify and hold harmless the Trust and the
Trustee (including its directors, officers, employees, agents and affiliates.)
from and against any loss, liability, expense, damage or injury suffered or
sustained by reason of any acts or omissions of the Master Servicer with respect
to the Trust pursuant to this Agreement, including any judgment, award,
settlement, reasonable attorneys' fees and other costs or expenses incurred in
connection with the defense of any action, proceeding or claim; provided,
however, that the Master Servicer shall not indemnify the Trustee if such acts,
omissions or alleged acts or omissions constitute or are caused by fraud, gross
negligence, or willful misconduct by the Trustee; provided, further, that the
Master Servicer shall not indemnify the Trust, the Investor Certificateholders
or the Certificate Owners for any liabilities, costs or expenses of the Trust
with respect to any action taken by the Trustee at the request of the Investor
Certificateholders; provided, further, that the Master Servicer shall not
indemnify the Trust, the Investor Certificateholders or the Certificate Owners
as to any losses, claims or damages incurred by any of them in their capacities
as investors, including without limitation losses incurred as a result of
Defaulted Receivables unless such losses, claims or damages are directly caused
by the fraud, gross negligence or willful misconduct of the Master Servicer; and
provided, further, that the Master Servicer shall not indemnify the Trust, the
Investor Certificateholders or the Certificate Owners for any liabilities, costs
or expenses of the Trust, the Investor Certificateholders or the Certificate
Owners arising under any tax law, including without limitation, any Federal,
state, local or foreign income or franchise taxes or any other tax imposed on or
measured by income (or any interest or penalties with respect thereto or arising
from a failure to comply therewith) required to be paid by the Trust, the
Investor Certificateholders or the Certificate Owners in connection herewith to
any taxing authority. Indemnification pursuant to this Section shall not be
payable from the Trust Assets. The provisions of this indemnity shall run
directly to and be enforceable by an injured party subject to the limitations
hereof.
Section 8.05. The Master Servicer Not To Resign. The Master Servicer
shall not resign from the obligations and duties hereby imposed on it except
upon determination that (i) the
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performance of its duties hereunder is no longer permissible under any
Requirement of Law and (ii) there is no reasonable action which the Master
Servicer could take to make the performance of its duties hereunder permissible
under any such Requirements of Law. Any determination permitting the resignation
of the Master Servicer shall be evidenced by an Opinion of Counsel to such
effect delivered to the Trustee. No resignation shall become effective until the
Trustee or a Successor Servicer shall have assumed the responsibilities and
obligations of the Master Servicer in accordance with Section 10.02. If within
120 days of the date of the determination that the Master Servicer may no longer
act as Master Servicer the Trustee is unable to appoint a Successor Servicer,
the Trustee shall serve as Successor Servicer. Notwithstanding the foregoing,
the Trustee shall, if it is legally unable so to act, petition a court of
competent jurisdiction to appoint any established institution that is an
Eligible Servicer as the Successor Servicer hereunder. The Trustee shall give
prompt notice to each Rating Agency upon the appointment of a Successor
Servicer.
Section 8.06. Access to Certain Documentation and Information Regarding
the Receivables. The Master Servicer shall provide to the Trustee access to the
documentation regarding the Accounts and the Receivables in such cases where the
Trustee is required in connection with the performance of its duties under this
Agreement or by applicable statutes or regulations to review such documentation,
such access being afforded without charge but only (a) upon reasonable request,
(b) during normal business hours, (c) subject to the Master Servicer's normal
security and confidentiality procedures and (d) at reasonably accessible offices
in the continental United States designated by the Master Servicer. Nothing in
this Section shall derogate from the obligation of the Transferors, the Trustee
and the Master Servicer to observe any applicable law prohibiting disclosure of
information regarding the Obligors and the failure of the Master Servicer to
provide access as provided in this Section as a result of such obligation shall
not constitute a breach of this Section.
Section 8.07. Delegation of Duties. In the ordinary course of business,
the Master Servicer may at any time delegate any duties hereunder to any Person
who agrees to conduct such duties in accordance with the Credit Card Guidelines
and this Agreement. Any such delegations shall not relieve the Master Servicer
of its liability and responsibility with respect to such duties, and shall not
constitute a resignation within the meaning of Section 8.05.
Section 8.08. Examination of Records. The Master Servicer shall clearly
and unambiguously indicate in its computer files or other records that the
Designated Assets arising in the Accounts have been conveyed to the Trustee, on
behalf of the Trust, pursuant to this Agreement for the benefit of the
Certificateholders. The Master Servicer shall, prior to the sale or transfer to
a third party of any receivables held in its custody, examine its computer and
other records to determine that such receivables are not Designated Assets.
[END OF ARTICLE VIII]
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ARTICLE IX
Pay Out Events
Section 9.01. Trust Pay Out Events. If any one of the following events
shall occur with respect to the Trust ("Trust Pay Out Events"):
(a) any of the Transferors shall consent to the appointment of
a conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings of
or relating to such Transferor or of or relating to all or
substantially all of its property, or a decree or order of a court or
agency or supervisory authority having jurisdiction in the premises for
the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against such Transferor; or any of the
Transferors shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make any assignment
for the benefit of its creditors or voluntarily suspend payment of its
obligations (any such event, an "Insolvency Event");
(b) the Trust shall become subject to regulation by the
Commission as an "investment company" within the meaning of the
Investment Company Act; or
(c) a Transfer Restriction Event shall occur;
then, a Pay Out Event shall occur with respect to each Series without any notice
or other action on the part of the Trustee or the Investor Certificateholders,
immediately upon the occurrence of such event.
Section 9.02. Additional Rights Upon the Occurrence of Certain Events.
(a) If an Insolvency Event occurs with respect to any of the
Transferors, the Transferors shall on the day any such Insolvency Event occurs
(the "Appointment Date"), immediately cease to transfer Principal Receivables to
the Trust and shall promptly give notice to the Trustee thereof. Notwithstanding
any cessation of the transfer to the Trust of additional Principal Receivables,
Principal Receivables transferred to the Trust prior to the occurrence of such
Insolvency Event and Collections in respect of such Principal Receivables and
Finance Charge and Administrative Receivables whenever created, accrued in
respect of such Principal Receivables, shall continue to be a part of the Trust.
Within 15 days after receipt of such notice by the Trustee of the occurrence of
such Insolvency Event, the Trustee shall (i) publish a notice in an Authorized
Newspaper that an Insolvency Event has occurred and that the Trustee intends to
sell, dispose of or otherwise liquidate the Receivables on commercially
reasonable terms and in a commercially reasonable manner and (ii) give notice to
the Investor Certificateholders describing the provisions of this Section and
requesting instructions from such Holders. Unless the Trustee shall have
received instructions within 90 days from the date notice pursuant to
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clause (i) above is first published from (x) Holders of Investor Certificates
evidencing more than 50% of the Investor Amount of each Series or, with respect
to any Series with two or more Classes, of each Class, to the effect that such
Investor Certificateholders disapprove of the liquidation of the Receivables and
wish to continue having Principal Receivables transferred to the Trust as before
such Insolvency Event, and (y) each of the Transferors (other than the
Transferor that is the subject of such Insolvency Event), including any
Additional Transferor, any Holder of a Supplemental Certificate and any
permitted assignee or successor under Section 7.02, to such effect, the Trustee
shall promptly sell, dispose of or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms, which shall
include the solicitation of competitive bids. The Trustee may obtain a prior
determination from any such conservator, receiver or liquidator that the terms
and manner of any proposed sale, disposition or liquidation are commercially
reasonable. The provisions of Sections 9.01 and 9.02 shall not be deemed to be
mutually exclusive.
(b) The proceeds from the sale, disposition or liquidation of the
Receivables pursuant to paragraph (a) ("Insolvency Proceeds") shall be
immediately deposited in the Collection Account. The Trustee shall determine
conclusively the amount of the Insolvency Proceeds which are deemed to be
Finance Charge and Administrative Receivables and Principal Receivables. The
Insolvency Proceeds shall be allocated to Finance Charge and Administrative
Receivables and Principal Receivables in the same proportion as the amount of
Finance Charge and Administrative Receivables and Principal Receivables bear to
one another on the prior Determination Date. The Insolvency Proceeds shall be
allocated and distributed to Investor Certificateholders in accordance with
Article IV and the terms of each Supplement and the Trust shall terminate
immediately thereafter.
(c) The Trustee may appoint an agent or agents (including any of its
Affiliates) to assist with its responsibilities pursuant to this Article IX with
respect to competitive bids.
[END OF ARTICLE IX]
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ARTICLE X
Servicer Defaults
Section 10.01. Servicer Defaults. If any one of the following events (a
"Servicer Default") shall occur and be continuing:
(a) any failure by the Master Servicer to make any payment, transfer or
deposit or to give instructions or notice to the Trustee pursuant to the terms
of this Agreement or any Supplement on or before the date occurring five
Business Days after the date such payment, transfer or deposit or such
instruction or notice is required to be made or given, as the case may be, under
the terms of this Agreement or any Supplement;
(b) failure on the part of the Master Servicer duly to observe or
perform in any material respect any other covenants or agreements of the Master
Servicer set forth in this Agreement or any Supplement which has an Adverse
Effect on the interests hereunder of the Investor Certificateholders of any
Series or Class and which continues unremedied for a period of 60 days after the
date on which written notice of such failure, requiring the same to be remedied,
and stated to be a "Notice of Servicer Default," shall have been given to the
Master Servicer by the Trustee, or to the Master Servicer and the Trustee by
Holders of Investor Certificates evidencing more than 25% of the Aggregate
Investor Amount (or, with respect to any such failure that does not relate to
all Series, 25% of the aggregate Investor Amount of all Series to which such
failure relates); or the Master Servicer shall delegate its duties under this
Agreement, except as permitted by Section 8.02 or 8.07, and a Responsible
Officer of the Trustee has actual knowledge of such delegation and such
delegation continues unremedied for 15 days after the date on which written
notice thereof, requiring the same to be remedied, and stated to be a "Notice of
Servicer Default," shall have been given to the Master Servicer by the Trustee,
or to the Master Servicer and the Trustee by Holders of Investor Certificates
evidencing more than 25% of the Aggregate Investor Amount;
(c) any representation, warranty or certification made by the Master
Servicer in this Agreement or any Supplement or in any certificate delivered
pursuant to this Agreement or any Supplement shall prove to have been incorrect
when made, which has an Adverse Effect on the rights of the Investor
Certificateholders of any Series or Class and which continues to be incorrect in
any material respect for a period of 60 days after the date on which written
notice of such failure, requiring the same to be remedied, and stated to be a
"Notice of Servicer Default," shall have been given to the Master Servicer by
the Trustee, or to the Master Servicer and the Trustee by the Holders of
Investor Certificates evidencing more than 25% of the Aggregate Investor Amount
(or, with respect to any such representation, warranty or certification that
does not relate to all Series, 25% of the aggregate Investor Amount of all
Series to which such representation, warranty or certification relates); or
(d) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Master Servicer or of or relating to all or substantially
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all of its property, or a decree or order of a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been entered against the
Master Servicer, and such decree or order shall have remained in force
undischarged or unstayed for a period of 60 days; or the Master Servicer shall
admit in writing its inability to pay its debts generally as they become due,
file a petition to take advantage of any applicable insolvency or reorganization
statute, make any assignment for the benefit of its creditors or voluntarily
suspend payment of its obligations;
then, in the event of any Servicer Default, so long as the Servicer Default
shall not have been remedied or waived, either the Trustee or the Holders of
Investor Certificates evidencing more than 50% of the Aggregate Investor Amount,
by notice then given to the Master Servicer (and to the Trustee if given by the
Investor Certificateholders) (a "Termination Notice"), may terminate all but not
less than all the rights and obligations of the Master Servicer as Master
Servicer under this Agreement and in and to the Receivables and the proceeds
thereof; provided, however, if within 60 days of receipt of a Termination Notice
the Trustee does not receive any bids from Eligible Servicers in accordance with
subsection 10.02(c) to act as a Successor Servicer and receives an Officer's
Certificate of the Master Servicer to the effect that the Master Servicer cannot
in good faith cure the Servicer Default which gave rise to the Termination
Notice, the Trustee shall offer the Transferors the right at their option to
purchase the Certificateholders' Interest on the Distribution Date next
succeeding 60 days after the receipt by the Master Servicer of a Termination
Notice. A Termination Notice shall not release any liability which arose prior
to the time of the Master Servicer's termination. The purchase price for the
Certificateholders' Interest shall be equal to the sum of the amounts specified
therefor with respect to each outstanding Series in the related Supplement. The
Transferors shall notify the Trustee prior to the Record Date for the
Distribution Date of the purchase if they are exercising such option. If any of
the Transferors exercise such option, such Transferors shall deposit the
purchase price into the Collection Account not later than 12:00 noon, New York
City time, on such Distribution Date in immediately available funds. The
purchase price shall be allocated and distributed to Investor Certificateholders
in accordance with Article IV and the terms of each Supplement.
After receipt by the Master Servicer of such Termination Notice, and on
the date that a Successor Servicer shall have been appointed by the Trustee
pursuant to Section 10.02, all authority and power of the Master Servicer under
this Agreement shall, subject to Section 10.02, pass to and be vested in a
Successor Servicer; and, without limitation, the Trustee is hereby authorized
and empowered (upon the failure of the Master Servicer to cooperate) to execute
and deliver, on behalf of the Master Servicer, as attorney-in-fact or otherwise,
all documents and other instruments upon the failure of the Master Servicer to
execute or deliver such documents or instruments, and to do and accomplish all
other acts or things necessary or appropriate to effect the purposes of such
transfer of servicing rights. The Master Servicer agrees to cooperate with the
Trustee and such Successor Servicer in effecting the termination of the
responsibilities and rights of the Master Servicer to conduct servicing
hereunder including, without limitation, the transfer to such Successor Servicer
of all authority of the Master Servicer to service the
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Receivables provided for under this Agreement, including, without limitation,
all authority over all Collections which shall on the date of transfer be held
by the Master Servicer for deposit, or which have been deposited by the Master
Servicer, in the Collection Account, or which shall thereafter be received with
respect to the Receivables, and in assisting the Successor Servicer and in
enforcing all rights to Insurance Proceeds. The Master Servicer shall within 10
Business Days transfer its electronic records relating to the Receivables to the
Successor Servicer in such electronic form as the Successor Servicer may
reasonably request and shall promptly transfer to the Successor Servicer all
other records, correspondence and documents necessary for the continued
servicing of the Receivables in the manner and at such times as the Successor
Servicer shall reasonably request. To the extent that compliance with this
Section 10.01 shall require the Master Servicer to disclose to the Successor
Servicer information of any kind which the Master Servicer reasonably deems to
be confidential, the Successor Servicer shall be required to enter into such
customary licensing and confidentiality agreements as the Master Servicer shall
deem necessary to protect its interests. The Master Servicer being terminated
shall bear all reasonable costs and expenses in connection with a transfer of
duties and obligations to a Successor Servicer.
Notwithstanding the foregoing, any delay in or failure of performance
under subsection 10.01(a) for a period of 5 Business Days or under subsection
10.01(b) or (c) for a period of 60 days (in addition to any period provided in
subsection 10.01(a), (b) or (c)) shall not constitute a Servicer Default until
the expiration of such additional 5 Business Days or 60 days, respectively, if
such delay or failure could not be prevented by the exercise of reasonable
diligence by the Master Servicer and such delay or failure was caused by an act
of God or the public enemy, acts of declared or undeclared war, terrorism,
public disorder, rebellion or sabotage, epidemics, landslides, lightning, fire,
hurricanes, earthquakes, floods or similar causes. The preceding sentence shall
not relieve the Master Servicer from using its best efforts to perform its
respective obligations in a timely manner in accordance with the terms of this
Agreement and any Supplement and the Master Servicer shall provide the Trustee,
each Rating Agency, the Holders of the Transferor Certificates and the Investor
Certificateholders with an Officer's Certificate giving prompt notice of such
failure or delay by it, together with a description of its efforts to so perform
its obligations.
Section 10.02. Trustee To Act, Appointment of Successor.
(a) On and after the receipt by the Master Servicer of a Termination
Notice pursuant to Section 10.01, or the Master Servicer's resignation pursuant
to Section 8.05, the Master Servicer shall continue to perform all servicing
functions under this Agreement until the date specified in the Termination
Notice or otherwise specified by the Trustee or until a date mutually agreed
upon by the Master Servicer and Trustee. The Trustee shall as promptly as
possible after the giving of a Termination Notice appoint an Eligible Servicer
as a successor servicer (the "Successor Servicer"), and such Successor Servicer
shall accept its appointment by a written assumption in a form acceptable to the
Trustee. In the event that a Successor Servicer has not been appointed or has
not accepted its appointment at the time when the Master Servicer ceases to act
as Master Servicer, the Trustee without further action shall automatically be
appointed the Successor Servicer. The Trustee may delegate any of its servicing
obligations to an Affiliate of
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the Trustee or agent in accordance with Section 3.01(b) and 8.07.
Notwithstanding the foregoing, the Trustee shall, if it is legally unable so to
act, petition a court of competent jurisdiction to appoint any established
institution qualifying as an Eligible Servicer as the Successor Servicer
hereunder. The Trustee shall give prompt notice to each Rating Agency upon the
appointment of a Successor Servicer.
(b) Upon its appointment, the Successor Servicer shall be the successor
to the Master Servicer with respect to servicing functions under this Agreement
and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Master Servicer by the terms and provisions
hereof, and all references in this Agreement to the Master Servicer shall be
deemed to refer to the Successor Servicer. Notwithstanding the above, or
anything in this Section to the contrary, the Trustee, if it becomes Successor
Servicer pursuant to this Section, shall have no responsibility or obligation
(i) to repurchase or substitute any Account or Receivable and (ii) for any act
or omission of either a predecessor or Successor Servicer other than the
Trustee. The Trustee may conduct any activity required of it as Master Servicer
hereunder through an Affiliate or through an agent provided, that, (i) such
Affiliate or agent is an Eligible Servicer and (ii) the Transferor provides
written consent of its approval of such Affiliate of the Trustee. Neither the
Trustee nor any other Successor Servicer shall be deemed to be in default
hereunder due to any act or omission of a predecessor Master Servicer,
including, but not limited to, failure to timely deliver to the Trustee any
Monthly Servicer's Certificate, any funds required to be deposited to the Trust
Fund, or any breach of a predecessor Master Servicer's duty to cooperate with a
transfer of servicing as required by Section 10.01.
(c) In connection with any Termination Notice, the Trustee will review
any bids which it obtains from Eligible Servicers and shall be permitted to
appoint any Eligible Servicer submitting such a bid as a Successor Servicer for
servicing compensation not in excess of the aggregate Servicing Fees for all
Series; provided, however, that the Holders of the Transferor Certificates shall
be responsible for payment of the Transferors' portion of such aggregate
Servicing Fees and that no such monthly compensation paid out of Collections
shall be in excess of such aggregate Servicing Fees. Each Holder of a Transferor
Certificate agrees that, if AFC (or any Successor Servicer) is terminated as
Master Servicer hereunder, the portion of the Collections in respect of Finance
Charge and Administrative Receivables that such Holders are entitled to receive
pursuant to this Agreement or any Supplement shall be reduced by an amount
sufficient to pay such Holders' share (determined by reference to the
Supplements with respect to any outstanding Series) of the compensation of the
Successor Servicer.
(d) All authority and power granted to the Successor Servicer under
this Agreement shall automatically cease and terminate upon termination of the
Trust pursuant to Section 12.01 and shall pass to and be vested in the
Transferors and, without limitation, the Transferors are hereby authorized and
empowered to execute and deliver, on behalf of the Successor Servicer, as
attorney-in-fact or otherwise, all documents and other instruments, and to do
and accomplish all other acts or things necessary or appropriate to effect the
purposes of such transfer of servicing rights. The Successor Servicer agrees to
cooperate with the Transferors in effecting the termination of the
responsibilities and rights of the Successor Servicer to conduct servicing on
the Receivables. The Successor Servicer shall transfer its electronic records
relating to the
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Receivables to the Transferors in such electronic form as the Transferors may
reasonably request and shall transfer all other records, correspondence and
documents to the Transferors in the manner and at such times as the Transferors
shall reasonably request. To the extent that compliance with this Section 10.02
shall require the Successor Servicer to disclose to the Transferors information
of any kind which the Successor Servicer deems to be confidential, the
Transferors shall be required to enter into such customary licensing and
confidentiality agreements as the Successor Servicer shall deem necessary to
protect its interests.
Section 10.03. Notification to Certificateholders. Within two Business
Days after the Master Servicer becomes aware of any Servicer Default, the Master
Servicer shall give notice thereof to the Trustee and each Rating Agency and the
Trustee shall give notice to the Investor Certificateholders unless the Master
Servicer has done so pursuant to Section 10.01. Upon any termination or
appointment of a Successor Servicer pursuant to this Article, the Trustee shall
give prompt notice thereof to the Investor Certificateholders.
[END OF ARTICLE X]
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ARTICLE XI
The Trustee
Section 11.01. Duties of Trustee.
(a) The Trustee, prior to the occurrence of a Servicer Default and
after the remediation or waiver of all Servicer Defaults which may have
occurred, undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement. If a Responsible Officer has received
written notice that a Servicer Default has occurred (which has not been remedied
or waived) the Trustee shall exercise such rights and powers vested in it by
this Agreement, and use the same degree of care and skill in its exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs. If the Trustee is acting as Successor Servicer, it shall use
the same degree of care and skill in the exercise of its duties in such capacity
as the Master Servicer is required under this Agreement. The permissive rights
of the Trustee shall not be construed as duties under this Agreement.
(b) Except as may be required by subsection 11.01(a) hereof, the
Trustee shall not be required to make any initial or periodic examination of any
documents or records related to the Receivables or the Accounts for the purpose
of establishing the presence or absence of defects, the compliance by any
Transferor with its representations and warranties, or for any other purpose.
(c) The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Trustee that are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
substantially conform on their face to the requirements of this Agreement. The
Trustee shall give prompt written notice to the Transferor and Master Servicer
of any material lack of conformity of any such instrument to the applicable
requirements of this Agreement discovered by the Trustee which would entitle a
specified percentage of Investor Certificateholders to take any action pursuant
to this Agreement.
(d) Subject to subsection 11.01(a), no provision of this Agreement
shall be construed to relieve the Trustee from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct;
provided, however, that:
(i) the Trustee shall not be personally liable for an error of
judgment made in good faith by a Responsible Officer or Responsible
Officers of the Trustee, unless it shall be proved that the Trustee was
negligent in ascertaining the pertinent facts;
(ii) the Trustee shall not be personally liable with respect
to any action taken, suffered or omitted to be taken by it in good
faith in accordance with the direction of any Series Enhancer or the
Holders of Investor Certificates evidencing more than 50% of the
Investor Amount of any Series relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any
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trust or power conferred upon the Trustee in relation to such Series,
under this Agreement; and
(iii) the Trustee shall not be charged with knowledge of any
failure by the Master Servicer referred to in clauses (a) and (b) of
Section 10.01 unless a Responsible Officer of the Trustee obtains
actual knowledge of such failure or the Trustee receives written notice
of such failure from the Master Servicer or any Holders of Investor
Certificates evidencing not less than 10% of the Investor Amount of any
Series adversely affected thereby.
(e) The Trustee shall not be required to expend or risk its own funds
or otherwise incur financial liability in the performance of any of its duties
hereunder or in the exercise of any of its rights or powers, if there is
reasonable ground for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it, and
none of the provisions contained in this Agreement shall in any event require
the Trustee to perform, or be responsible for the manner of performance of, any
of the obligations of (i) the Master Servicer under this Agreement except during
such time, if any, as the Trustee shall be the Successor Servicer in accordance
with the terms of this Agreement or (ii) any Transferor under any circumstance.
(f) Except for actions expressly authorized by this Agreement, the
Trustee shall take no action reasonably likely to (i) impair the interests of
the Trust in any Receivable now existing or hereafter created or (ii) impair the
value of any Receivable now existing or hereafter created.
(g) The Trustee shall have no power to vary the corpus of the Trust,
except as expressly provided in this Agreement.
(h) In the event that the Paying Agent or the Transfer Agent and
Registrar shall fail to perform any obligation, duty or agreement in the manner
or on the day required to be performed by the Paying Agent or the Transfer Agent
and Registrar, as the case may be, under this Agreement, the Trustee shall be
obligated, promptly upon knowledge of a Responsible Officer thereof, to
terminate any such agency and perform such obligation, duty or agreement in the
manner so required except that it shall not be obligated to remit any payment
other than from funds deposited with such Paying Agent for that purpose.
(i) If any of the Transferors has agreed to transfer any of its
business revolving credit card receivables (other than the Receivables) to
another Person, upon the written request of such Transferor, the Trustee will
enter into such intercreditor agreements with the transferee of such receivables
as are customary and necessary to separately identify the rights, if any, of the
Trust and such other Person in such Transferor's business revolving credit card
receivables; provided, that the Trustee shall not be required to enter into any
intercreditor agreement which could have an Adverse Effect upon the interests of
the Certificateholders and, upon the request of the Trustee, such Transferor
will deliver an Opinion of Counsel on any matters relating to such intercreditor
agreement, reasonably requested by the Trustee and provided, further, that the
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Trustee shall not be liable for interest or other compensation on uninvested
funds held under this Agreement except as may be expressly agreed to in writing.
Section 11.02. Certain Matters Affecting the Trustee. Except as
otherwise provided in Section 11.01:
(a) the Trustee may rely on and shall be protected in acting on, or in
refraining from acting in accord with, and without independent verification of
the contents or computations therein, any Assignment, the initial report, the
annual Servicer's certificate, the monthly payment instructions and notification
to the Trustee, the monthly Certificateholder's statement, any resolution,
Officer's Certificate, certificate of auditors or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond or other paper or document believed by it to be genuine and to
have been signed or presented to it pursuant to this Agreement by the proper
party or parties;
(b) the Trustee may consult with counsel, and any advice or Opinion of
Counsel shall be full and complete authorization and protection in respect of
any action taken or suffered or omitted by it hereunder in good faith and in
accordance with such advice or Opinion of Counsel;
(c) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement or any Enhancement Agreement, or
to institute, conduct or defend any litigation hereunder or in relation hereto,
at the request, order or direction of any of the Certificateholders, or any
Enhancement Provider, pursuant to the provisions of this Agreement or any
Enhancement Agreement, unless such Certificateholders or any Enhancement
Provider shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby; provided, that, nothing contained herein shall relieve the Trustee of
the obligations, upon the occurrence of any Servicer Default (which has not been
remedied or waived), to exercise such of the rights and powers vested in it by
this Agreement and any Series Enhancement, and to use the same degree of care
and skill in its exercise, as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs;
(d) the Trustee shall not be personally liable for any action taken,
suffered or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this Agreement;
(e) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any Assignment, the annual Servicer's certificate,
the monthly payment instructions and notification to the Trustee, the monthly
Certificateholder's statement, any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond or
other paper or document, unless requested in writing so to do by Holders of
Investor Certificates evidencing more than 50% of the Investor Amount of any
Series which could be adversely affected if the Trustee does not perform such
acts; and
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(f) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents ,
Affiliates or attorneys or a custodian, and the Trustee shall not be responsible
for any misconduct or negligence on the part of any such agent, Affiliates
attorney or custodian appointed with due care by it hereunder.
Section 11.03. Trustee Not Liable for Recitals in Certificates. The
Trustee assumes no responsibility for the correctness of the recitals contained
herein and in the certificates (other than the certificate of authentication on
the Certificates). Except as set forth in Section 11.15, the Trustee makes no
representations as to the validity or sufficiency of this Agreement or any
Supplement or of the Certificates (other than the certificate of authentication
on the Certificates) or of any Receivable or related document. The Trustee shall
not be accountable for the use or application by the Transferors of any of the
Certificates or of the proceeds of such Certificates, or for the use or
application of any funds paid to the Transferors or the Holders of the
Transferor Certificates in respect of the Receivables or deposited in or
withdrawn from the Collection Account, the Excess Funding Account or any Series
Account by the Master Servicer. The Trustee may transact business with the
Master Servicer, the Transferor, any Series Enhancer or their respective
Affiliates with the "same rights" it would have were it not the Trustee
hereunder.
Section 11.04. Trustee May Own Certificates. Subject to Section 6.06,
the Trustee in its individual or any other capacity may become the owner or
pledgee of Investor Certificates or Supplemental Certificates with the same
rights as it would have if it were not the Trustee.
Section 11.05. The Transferors To Pay Trustee's Fees and Expenses. In
consideration of receiving the Servicing Fee, the Master Servicer covenants and
agrees to pay to the Trustee from time to time, and the Trustee shall be
entitled to receive, reasonable compensation (which shall not be limited by any
provision of law in regard to the compensation of a trustee of an express trust)
for all services rendered by it in the execution of the trust hereby created and
in the exercise and performance of any of the powers and duties hereunder of the
Trustee, and, subject to Section 7.04, the Transferors will pay or reimburse the
Trustee (without reimbursement from the Collection Account or otherwise) upon
its request for all reasonable expenses, disbursements and advances (if any)
incurred or made by the Trustee (including the fees and expenses of Trustee's
counsel) in accordance with any of the provisions of this Agreement except any
such expense, disbursement or advance as may arise from its own negligence or
bad faith and except as provided in the following sentence. If the Trustee is
appointed Successor Servicer pursuant to Section 10.02, the provisions of this
Section 11.05 shall not apply to expenses, disbursements and advances made or
incurred by the Trustee solely in its capacity as Successor Servicer. The
obligations of the Transferors under Section 7.04 and this Section 11.05 shall
survive the termination of the Trust and the resignation or removal of the
Trustee.
Section 11.06. Eligibility Requirements for Trustee. The Trustee
hereunder shall at all times be a bank or a corporation organized and doing
business under the laws of the United States of America or any state thereof and
subject to supervision or examination by Federal or state authority and
authorized under such laws to exercise corporate trust powers that either
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(x) has a long-term unsecured debt or deposit rating of at least Baa3 by Moody's
and BBB- by Standard & Poor's and, in the case of an entity that is subject to
risk-based capital adequacy requirements, risk-based capital of at least
$50,000,000 or, in the case of an entity that is not subject to risk-based
capital adequacy requirements, a combined capital and surplus of at least
$50,000,000 or (y) shall otherwise satisfy the Rating Agency Condition. If such
bank or corporation publishes reports of condition at least annually, pursuant
to law or to the requirements of the aforesaid supervising or examining
authority, then for the purpose of this Section 11.06, the combined capital and
surplus of such bank or corporation shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 11.06, the Trustee shall resign immediately in the
manner and with the effect specified in Section 11.07.
Section 11.07. Resignation or Removal of Trustee.
(a) The Trustee may at any time resign and be discharged from the trust
hereby created by giving written notice thereof to the Master Servicer. Upon
receiving such notice of resignation, the Master Servicer shall promptly appoint
a successor trustee by written instrument, in duplicate, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the
successor trustee. If no successor trustee shall have been so appointed and have
accepted within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
(b) If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 11.06 and shall fail to resign after written
request therefor by the Master Servicer or the Transferors, or if at any time
the Trustee shall be legally unable to act, or shall be adjudged a bankrupt or
insolvent, or a receiver of the Trustee or of its property shall be appointed,
or any public officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the Master Servicer or Transferors may, but shall not be
required to, remove the Trustee and promptly appoint a successor trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor trustee.
(c) Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section 11.07 shall
not become effective until acceptance of appointment by the successor trustee as
provided in Section 11.08 and any liability of the resigning Trustee arising
hereunder shall survive such resignation or removal, but shall in no event be
attributable to any successor trustee.
Section 11.08. Successor Trustee.
(a) Any successor trustee appointed as provided in Section 11.07 shall
execute, acknowledge and deliver to the Transferors, to the Master Servicer and
to its predecessor Trustee an instrument accepting such appointment hereunder,
and thereupon the resignation or removal of the predecessor Trustee shall become
effective and such successor trustee, without
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any further act, deed or conveyance, shall become fully vested with all the
rights, powers, duties and obligations of its predecessor hereunder, with the
like effect as if originally named as Trustee herein. The predecessor Trustee
shall deliver to the successor trustee all documents and statements held by it
hereunder, and the Transferors and the predecessor Trustee shall execute and
deliver such instruments and do such other things as may reasonably be required
for fully and certainly vesting and confirming in the successor trustee all such
rights, powers, duties and obligations.
(b) No successor trustee shall accept appointment as provided in this
Section 11.08 unless at the time of such acceptance such successor trustee shall
be eligible under the provisions of Section 11.06.
(c) Upon acceptance of appointment by a successor trustee as provided
in this Section 11.08, such successor trustee shall provide notice of such
succession hereunder to all Investor Certificateholders and the Master Servicer
shall provide such notice to each Rating Agency and any Series Enhancer entitled
thereto pursuant to the relevant Supplement.
Section 11.09. Merger or Consolidation of Trustee. Any Person into
which the Trustee may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any Person succeeding to
the corporate trust business of the Trustee, shall be the successor of the
Trustee hereunder, provided such corporation shall be eligible under the
provisions of Section 11.06, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding.
Section 11.10. Appointment of Co-Trustee or Separate Trustee.
(a) Notwithstanding any other provisions of this Agreement, at any
time, for the purpose of meeting any legal requirements of any jurisdiction in
which any part of the Trust may at the time be located, the Trustee shall have
the power and may execute and deliver all instruments to appoint one or more
Persons to act as a co-trustee or co-trustees, or separate trustee or separate
trustees, of all or any part of the Trust, and to vest in such Person or
Persons, in such capacity and for the benefit of the Certificateholders, such
title to the Trust, or any part thereof, and, subject to the other provisions of
this Section 11.10, such powers, duties, obligations, rights and trusts as the
Trustee may consider necessary or desirable; provided, however, that the Trustee
shall exercise due care in the appointment of any co-trustee. No co-trustee or
separate trustee hereunder shall be required to meet the terms of eligibility as
a successor trustee under Section 11.06 and no notice to Certificateholders of
the appointment of any co-trustee or separate trustee shall be required under
Section 11.08.
(b) Every separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following provisions and
conditions:
(i) all rights, powers, duties and obligations conferred or
imposed upon the Trustee shall be conferred or imposed upon and
exercised or performed by the Trustee
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and such separate trustee or co-trustee jointly (it being understood
that such separate trustee or co-trustee is not authorized to act
separately without the Trustee joining in such act) except to the
extent that under any laws of any jurisdiction in which any particular
act or acts are to be performed (whether as Trustee hereunder or as
successor to the Master Servicer hereunder) the Trustee shall be
incompetent or unqualified to perform such act or acts, in which event
such rights, powers, duties and obligations (including the holding of
title to the Trust or any portion thereof in any such jurisdiction)
shall be exercised and performed singly by such separate trustee or
co-trustee, but solely at the direction of the Trustee;
(ii) no trustee hereunder shall be personally liable by reason
of any act or omission of any other trustee hereunder; and
(iii) the Trustee may at any time accept the resignation of or
remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article XI. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Trustee or separately, as
may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Master Servicer.
(d) Any separate trustee or co-trustee may at any time constitute the
Trustee as its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect to this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor trustee.
Section 11.11. Tax Returns. In the event the Trust shall be required to
file tax returns, the Master Servicer, as soon as practicable after it is made
aware of such requirement, shall prepare or cause to be prepared any tax returns
required to be filed by the Trust and, to the extent possible, shall file such
returns at least five days before such returns are due to be filed. The Trustee
is hereby authorized to sign any such return on behalf of the Trust. The Master
Servicer shall prepare or shall cause to be prepared all tax information
required by law to be distributed to Certificateholders and shall deliver such
information to the Trustee at least five days prior to the date it is required
by law to be distributed to Certificateholders. The Master Servicer, upon
request, will furnish the Trustee with all such information known to the Master
Servicer as may be reasonably required in connection with the preparation of all
tax returns of the Trust. In no event shall the Trustee or the Master Servicer
be liable for any liabilities, costs
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or expenses of the Trust, the Investor Certificateholders or the Certificate
Owners arising under any tax law, including without limitation federal, state,
local or foreign income or excise taxes or any other tax imposed on or measured
by income (or any interest or penalty with respect thereto or arising from a
failure to comply therewith).
Section 11.12. Trustee May Enforce Claims Without Possession of
Certificates. All rights of action and claims under this Agreement or any Series
of Certificates may be prosecuted and enforced by the Trustee without the
possession of any of the Certificates or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee. Any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of any Series of Certificates in respect of which such judgment
has been obtained.
Section 11.13. Suits for Enforcement.
(a) If a Servicer Default shall occur and be continuing, the Trustee,
in its discretion may, subject to the provisions of Sections 10.01 and 11.14,
proceed to protect and enforce its rights and the rights of any Series of
Certificates under this Agreement by a suit, action or proceeding in equity or
at law or otherwise, whether for the specific performance of any covenant or
agreement contained in this Agreement or in aid of the execution of any power
granted in this Agreement or for the enforcement of any other legal, equitable
or other remedy as the Trustee, being advised by counsel, shall deem most
effectual to protect and enforce any of the rights of the Trustee or any Series
of Certificates.
(b) If the FDIC, the RTC or any equivalent governmental agency or
instrumentality or any designee or any other Governmental Authority of any of
them shall have been appointed as receiver, conservator, assignee, trustee in
bankruptcy or reorganization, liquidator, sequestrator or custodian with respect
to any Transferor (the "Receiver"), the Trustee shall, irrespective of whether
the principal of any Series or Class of Certificates shall then be due and
payable;
(i) unless prohibited by applicable law or regulation or
unless under FIRREA the Receiver is required to participate in the
process as a defendant or otherwise, promptly take or cause to be taken
any and all necessary or advisable commercially reasonable action as a
secured creditor on behalf of the Certificateholders to recover,
repossess, collect or liquidate the Receivables or any other Trust
Assets on a "self-help" basis or otherwise and exercise any rights or
remedies of a secured party under the applicable UCC and take any other
appropriate action to protect and enforce the rights and remedies of
the Trustee and the Certificateholders;
(ii) promptly, and in any case within any applicable claims
bar period specified under FIRREA or otherwise, file and prove a claim
or claims under FIRREA or otherwise, by filing proofs of claim,
protective proofs of claim or otherwise, for the whole amount of unpaid
principal and interest in respect of the Certificates and to file
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such other papers or documents as may be necessary or advisable in
order to have the claims of the Trustee and the Certificateholders
allowed in any judicial, administrative, corporate or other proceedings
relating to such Transferor, its creditors or its property, including
any actions relating to the preservation of deficiency claims or for
the protection against loss of any claim in the event the Trustee's or
the Certificateholders' status as secured creditors are successfully
challenged; and
(iii) collect and receive any moneys or other property payable
or deliverable on any such claims and distribute all amounts with
respect to the claims of the Certificateholders to the
Certificateholders.
(c) Nothing herein contained shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Certificateholder
any plan of reorganization, arrangement, adjustment or composition affecting the
Certificates or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Certificateholder in any such proceeding.
Section 11.14. Rights of Certificateholders To Direct Trustee. Holders
of Investor Certificates evidencing more than 50% of the Aggregate Investor
Amount (or, with respect to any remedy, trust or power that does not relate to
all Series, 50% of the aggregate Investor Amount of all Series to which such
remedy, trust or power relates) shall have the right to direct the time, method,
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee; provided, however,
that, subject to Section 11.01, the Trustee shall have the right to decline to
follow any such direction if the Trustee being advised by counsel determines
that the action so directed may not lawfully be taken, or if the Trustee in good
faith shall, by a Responsible Officer or Responsible Officers of the Trustee,
determine that the proceedings so directed would be illegal or involve it in
personal liability or be unduly prejudicial to the rights of Certificateholders
not parties to such direction; and provided, further, that nothing in this
Agreement shall impair the right of the Trustee to take any action deemed proper
by the Trustee and which is not inconsistent with such direction of such Holders
of Investor Certificates.
Section 11.15. Representations and Warranties of Trustee. The Trustee
represents and warrants as of each Closing Date that:
(a) the Trustee is a national banking association organized, existing
and in good standing under the laws of the United States of America;
(b) the Trustee has full power, authority and right to execute, deliver
and perform this Agreement and each Supplement, and has taken all necessary
action to authorize the execution, delivery and performance by it of this
Agreement and each Supplement; and
(c) this Agreement and each Supplement has been duly executed and
delivered by the Trustee.
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(d) the Trustee meets the eligibility requirements set forth in Section
11.06.
Section 11.16. Maintenance of Office or Agency. For purposes of this
Section, the Trustee will maintain at its expense the Corporate Trust Office
where notices and demands to or upon the Trustee in respect of the Certificates
and this Agreement may be served (a) in the Borough of Manhattan, The City of
New York, which shall initially be located at 14 Wall Street, Eighth Floor, New
York, New York 10005, in the case of Registered Certificates and Holders
thereof, and (b) in London or Luxembourg, in the case of Bearer Certificates and
Holders thereof, if and for so long as any Bearer Certificates are outstanding.
The Trustee will give prompt notice to the Master Servicer and to Investor
Certificateholders of any change in the location of the Certificate Register or
any such office or agency.
Section 11.17. Trustee Indemnification of the Master Servicer and the
Transferors. The Trustee shall indemnify and hold harmless the Master Servicer
and the Transferors (including their respective directors, officers, employees,
and agents) from and against any reasonable loss, liability, expense, damage or
injury suffered or sustained by reason of any acts or omissions of the Trustee
caused by its fraud, gross negligence, or willful misconduct with respect to the
performance of its duties pursuant to this Agreement, including any judgment,
award, settlement, reasonable attorneys' fees and other costs or expenses
incurred in connection with the defense of any action, proceeding or claim.
Section 11.18. Obligor Claims. In connection with any offset defenses,
or affirmative claims for recovery, asserted in legal actions brought by
Obligors under one or more Receivables based upon provisions therein or upon
other rights or remedies arising from any Requirements of Law applicable to the
Receivables:
(a) The Trustee is the holder of the Receivables only as trustee on
behalf of the holders of the Certificates, and not or in its individual or
personal capacity.
(b) The Trustee shall not be personally liable for, or obligated to pay
Obligors, any affirmative claims asserted thereby, or responsible to holders of
the Certificates for any offset defense amounts applied against Receivable
payments, pursuant to such legal actions provided, that this subsection 11.18(b)
shall not be construed to relieve the Trustee of liability pursuant to Section
11.17 of this Agreement.
(c) The Trustee will pay, solely from available Trust money,
affirmative claims for recovery by Obligors only pursuant to final judicial
orders or judgments, or judicially-approved settlement agreements, resulting
from such legal actions.
(d) The Trustee will comply with judicial orders and judgments which
require its action or cooperation in connection with any Obligor's legal actions
to recover affirmative claims against holders of the Investor Certificates.
(e) The Trustee will cooperate with and assist the Transferors, the
Master Servicer, or holders of the Certificates in their defense of legal
actions by Obligors to recover affirmative
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claims if such cooperation and assistance is not contrary to the interests of
the Trustee as a party to such legal actions and if the Trustee is
satisfactorily indemnified for all liability, costs and expenses arising
therefrom.
(f) The Master Servicer hereby agrees to indemnify, hold harmless and
defend the Trustee from and against any and all liability, loss, costs and
expenses of the Trustee resulting from any affirmative claims for recovery
asserted or collected by Obligors under the Receivables.
Section 11.19. Liabilities to Obligors. No liability to any Obligor
under any of the Receivables arising out of any act or omission of the Master
Servicer or any Transferor in servicing the Receivables is intended to be
assumed by the Trust or the Trustee under, or as a result of, this Agreement and
the transactions contemplated hereby and, to the maximum extent permitted under
the law, the Trust and the Trustee expressly disclaim such assumption of
liability.
[END OF ARTICLE XI]
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ARTICLE XII
Termination
Section 12.01. Termination of Trust. The Trust and the respective
obligations and responsibilities of the Transferors, the Master Servicer and the
Trustee created hereby (other than the obligation of the Trustee to (i) make
payments to Investor Certificateholders as hereinafter set forth and (ii)
indemnify the Transferor and the Master Servicer (including their respective
directors, officers, employees, and agents) pursuant to Section 11.17 of this
Agreement) shall terminate, except with respect to the duties described in
Sections 7.04, 8.04 and 12.02(b), upon the earliest of (i) the day following the
payment date on which the Investor Amount and the Enhancement Investor Amount,
if any, for each Series is zero (provided that the Transferors have delivered a
written notice to the Trustee electing to terminate the Trust) and (ii) the time
provided in subsection 9.02(b); provided, however, that in no event shall the
Trust created by the Agreement continue beyond the expiration of 21 years from
the death of the last descendant of J. Danforth Quayle of the State of Indiana
living on the date of the Agreement.
Section 12.02. Final Distribution.
(a) The Master Servicer shall give the Trustee at least 30 days prior
notice of the payment date on which the Investor Certificateholders of any
Series or Class may surrender their Investor Certificates for payment of the
final distribution on and cancellation of such Investor Certificates (or, in the
event of a final distribution resulting from the application of Section 2.06,
9.02 or 10.01, notice of such payment date promptly after the Master Servicer
has determined that a final distribution will occur, if such determination is
made less than 30 days prior to such payment date). Such notice shall be
accompanied by an Officer's Certificate setting forth the information specified
in Section 3.05 covering the period during the then-current calendar year
through the date of such notice. Not later than the fifth day of the month in
which the final distribution in respect of such Series or Class is payable to
Investor Certificateholders, the Trustee shall provide notice to Investor
Certificateholders of such Series or Class specifying (i) the date upon which
final payment of such Series or Class will be made upon presentation and
surrender of Investor Certificates of such Series or Class at the office or
offices therein designated, (ii) the amount of any such final payment and (iii)
that the Record Date otherwise applicable to such payment date is not
applicable, payments being made only upon presentation and surrender of such
Investor Certificates at the office or offices therein specified (which, in the
case of Bearer Certificates, shall be outside the United States). The Trustee
shall give such notice to the Transfer Agent and Registrar and the Paying Agent
at the time such notice is given to Investor Certificateholders.
(b) Notwithstanding a final distribution to the Investor
Certificateholders of any Series or Class (or the termination of the Trust),
except as otherwise provided in this paragraph, all funds then on deposit in the
Collection Account and any Series Account allocated to such Investor
Certificateholders shall continue to be held in trust for the benefit of such
Investor Certificateholders and the Paying Agent or the Trustee shall pay such
funds to such Investor Certificateholders upon surrender of their Investor
Certificates (and any excess shall be paid in
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accordance with the terms of any relevant Enhancement Agreement). In the event
that all such Investor Certificateholders shall not surrender their Investor
Certificates for cancellation within six months after the date specified in the
notice from the Trustee described in paragraph (a), the Trustee shall give a
second notice to the remaining such Investor Certificateholders to surrender
their Investor Certificates for cancellation and receive the final distribution
with respect thereto (which surrender and payment, in the case of Bearer
Certificates, shall be outside the United States). If within one year after the
second notice all such Investor Certificates shall not have been surrendered for
cancellation, the Trustee may take appropriate steps, or may appoint an agent to
take appropriate steps, to contact the remaining such Investor
Certificateholders concerning surrender of their Investor Certificates, and the
cost thereof shall be paid out of the funds in the Collection Account or any
Series Account held for the benefit of such Investor Certificateholders. The
Trustee and the Paying Agent shall upon written request pay to the Transferors
any moneys held by them for the payment of principal or interest that remains
unclaimed for two years. After payment to the Transferors, Investor
Certificateholders entitled to the money must look to the Transferors for
payment as general creditors unless an applicable abandoned property law
designates another Person. The Trustee's obligations pursuant to Section 11.17
of this Agreement shall survive final distribution and cancellation of such
Investors Certificates as set forth in this Section 12.02.
(c) In the event that the Investor Amount with respect to any Series is
greater than zero on its Series Termination Date or such earlier date as is
specified in the related Supplement (after giving effect to deposits and
distributions otherwise to be made on such date), the Trustee will sell or cause
to be sold on such Series Termination Date, in accordance with the procedures
and subject to the conditions described in such Supplement, Principal
Receivables or Participation Interests and the related Finance Charge and
Administrative Receivables (or interests therein) in an amount equal to 100% of
the Investor Amount and accrued and unpaid interest thereon with respect to such
Series on such date (after giving effect to such deposits and distributions;
provided, however, that in no event shall such amount exceed such Series'
Percentages of Receivables on such Series Termination Date). The proceeds (the
"Termination Proceeds") from any such sale shall be allocated and distributed in
accordance with the terms of the applicable Supplement.
Section 12.03. Transferors' Termination Rights. Upon the termination of
the Trust pursuant to Section 12.01 and the surrender of the Transferor
Certificates, the Trustee shall sell, assign and convey to the Holders of the
Transferor Certificates or their designee, without recourse, representation or
warranty, all right, title and interest of the Trust in the Receivables, whether
then existing or thereafter created, all moneys due or to become due and all
amounts received with respect thereto and all proceeds thereof, except for
amounts held by the Trustee pursuant to subsection 12.02(b). The Trustee shall
execute and deliver such instruments of transfer and assignment, in each case
without recourse, as shall be reasonably requested by the Holders of the
Transferor Certificates to vest in the Holders of the Transferor Certificates or
their designee all right, title and interest which the Trust had in the
Receivables and such other related assets.
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Section 12.04. Defeasance. Notwithstanding anything to the contrary in
this Agreement or any Supplement:
(a) The Transferor may at its option be discharged from its obligations
hereunder with respect to any Series or all outstanding Series (the "Defeased
Series") on the date the applicable conditions set forth in subsection 12.04(c)
are satisfied (a "Defeasance"); provided, however, that the following rights,
obligations, powers, duties and immunities shall survive with respect to the
Defeased Series until otherwise terminated or discharged hereunder: (i) the
rights of the Holders of Investor Certificates of the Defeased Series to
receive, solely from the trust fund provided for in subsection 12.04(c),
payments in respect of principal of and interest on such Investor Certificates
when such payments are due; (ii) the Transferors' obligations with respect to
such Certificates under Sections 6.04 and 6.05; (iii) the rights, powers,
trusts, duties, and immunities of the Trustee, the Paying Agent and the
Registrar hereunder; and (iv) this Section 12.04.
(b) Subject to subsection 12.04(c), the Transferors at their option may
cause Collections allocated to the Defeased Series and available to purchase
additional Receivables to be applied to purchase Eligible Investments rather
than additional Receivables.
(c) The following shall be the conditions to Defeasance under
subsection 12.04(a):
(i) the Transferors irrevocably shall have deposited or caused
to be deposited with the Trustee (such deposit to be made from other
than the Transferors' or any Affiliate of the Transferors' funds),
under the terms of an irrevocable trust agreement in form and substance
satisfactory to the Trustee, as trust funds in trust for making the
payments described below, (A) Dollars in an amount, or (B) Eligible
Investments which through the scheduled payment of principal and
interest in respect thereof will provide, not later than the due date
of payment thereon, money in an amount, or (C) a combination thereof,
in each case sufficient to pay and discharge (without relying on income
or gain from reinvestment of such amount), and which shall be applied
by the Trustee to pay and discharge, all remaining scheduled interest
and principal payments on all outstanding Investor Certificates of the
Defeased Series on the dates scheduled for such payments in this
Agreement and the applicable Supplements and all amounts owing to the
Series Enhancers with respect to the Defeased Series;
(ii) a statement from a firm of nationally recognized
independent public accountants (who may also render other services to
the Transferors) to the effect that such deposit is sufficient to pay
the amounts specified in clause (i) above;
(iii) prior to its first exercise of its right pursuant to
this Section 12.04 with respect to a Defeased Series to substitute
money or Eligible Investments for Receivables, if any Series of
Investor Certificates are outstanding that were characterized as debt
at the time of their issuance, the Transferor shall have delivered to
the Trustee a Tax Opinion with respect to such deposit and termination
of obligations, and (in any case) an Opinion of Counsel to the effect
that (A) such deposit and termination of obligations will
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not result in the Trust being required to register as an "investment
company" within the meaning of the Investment Company Act and (B) if
the Transferors' short-term deposit or long-term unsecured debt
obligations are not rated at least P-3 or Baa3, respectively, by
Moody's, such deposit and termination of obligations would not be a
fraudulent conveyance (based in reliance on certain certificates to the
effect that the Receivables and termination of obligations constitute
fair value for consideration paid therefor and as to the solvency of
the Transferors);
(iv) the Transferors shall have delivered to the Trustee an
Officer's Certificate of the Transferors stating that the Transferors
reasonably believe that such deposit and termination of obligations
will not, based on the facts known to such officer at the time of such
certification, then cause a Pay Out Event with respect to any Series or
any event that, with the giving of notice or the lapse of time, would
result in the occurrence of a Pay Out Event with respect to any Series;
(v) the Rating Agency Condition shall have been satisfied.
Section 12.05. Optional Purchase.
(a) If so provided in any Supplement, the Transferors may, but shall
not be obligated to, cause a final distribution to be made in respect of the
related Series of Investor Certificates on a specified Distribution Date or when
the Investor Amount reaches a specified level or under any circumstances
specified in such Supplement by depositing into the Collection Account or the
applicable Series Account, not later than the Transfer Date preceding such
Distribution Date, for application in accordance with Section 12.02, the amount
specified in such Supplement. In connection with any such deposit the
Transferor(s) shall deliver an Opinion of Counsel that such deposit does not
constitute a fraudulent conveyance.
(b) The amount deposited pursuant to subsection 12.05(a) shall be paid
to the Investor Certificateholders of the related Series pursuant to Section
12.02 on the related Distribution Date following the date of such deposit. All
Certificates of a Series which are purchased by the Transferors pursuant to
subsection 12.05(a) shall be delivered by the Transferors upon such purchase to,
and be cancelled by, the Transfer Agent and Registrar and be disposed of in a
manner satisfactory to the Trustee and the Transferor. The Investor Amount of
each Series which is purchased by the Transferors pursuant to subsection
12.05(a) shall, for the purposes of the definitions of "Series Invested Amount"
and "Transferor Amount," be deemed to be equal to zero on the Distribution Date
following the making of the deposit, and the Transferor Amount shall thereupon
be deemed to have been increased by the Series Invested Amount of such Series.
[END OF ARTICLE XII]
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ARTICLE XIII
Miscellaneous Provisions
Section 13.01. Amendment; Waiver of Past Defaults.
(a) This Agreement or any Supplement may be amended from time to time
(including in connection with (x) the provision of additional Series Enhancement
for the benefit of the Certificateholders of any Series (or the reduction of
such Series Enhancement), (y) the addition of a Participation Interest to the
Trust or (z) the designation of an Additional Transferor) by the Master
Servicer, the Transferors (including, if applicable, any Additional Transferor
being designated) and the Trustee without the consent of or notice to any of the
Certificateholders, provided that (i) each Transferor shall have delivered to
the Trustee an Officer's Certificate to the effect that such Transferor
reasonably believes that such action will not have an Adverse Effect and (ii)
the Rating Agency Condition shall be satisfied.
(b) This Agreement or any Supplement may also be amended from time to
time by the Master Servicer, the Transferors and the Trustee, with the consent
of the Holders of Investor Certificates evidencing not less than 66-2/3% of the
aggregate Investor Amount of the Investor Certificates of all adversely affected
Series, for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement or any Supplement or of
modifying in any manner the rights of the Certificateholders; provided, however,
that no such amendment shall (i) reduce in any manner the amount of or delay the
timing of any distributions to be made to Investor Certificateholders or
deposits of amounts to be so distributed or the amount available under any
Series Enhancement without the consent of each affected Certificateholder, (ii)
change the definition of or the manner of calculating the interest of any
Investor Certificateholder without the consent of each affected Investor
Certificateholder, (iii) reduce the aforesaid percentage required to consent to
any such amendment without the consent of each Investor Certificateholder or
(iv) adversely affect the rating of any Series or Class by each Rating Agency
without the consent of the Holders of Investor Certificates of such Series or
Class evidencing not less than 66-2/3% of the aggregate Investor Amount of the
Investor Certificates of such Series or Class. Any amendment to be effected
pursuant to this paragraph shall be deemed not to adversely affect any
outstanding Series if the Transferors deliver an Opinion of Counsel, addressed
and delivered to the Trustee, that such action will not, in such counsel's
reasonable opinion, have an Adverse Effect with respect to such Series.
(c) Promptly after the execution of any such amendment or consent
(other than an amendment pursuant to paragraph (a)), the Trustee shall furnish
notification of the substance of such amendment to each Investor
Certificateholder, and the Master Servicer shall furnish notification of the
substance of such amendment to each Rating Agency.
(d) It shall not be necessary for the consent of Investor
Certificateholders under this Section to approve the particular form of any
proposed amendment, but it shall be sufficient if such consent shall approve the
substance thereof. The manner of obtaining such consents and
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of evidencing the authorization of the execution thereof by Investor
Certificateholders shall be subject to such reasonable requirements as the
Trustee may prescribe.
(e) Any Supplement executed in accordance with the provisions of
subsection 6.03(b) shall not be considered an amendment to this Agreement for
the purposes of this Section.
(f) The Holders of Investor Certificates evidencing more than 66-2/3%
of the aggregate Investor Amount of the Investor Certificates of each Series, or
with respect to any Series with two or more Classes, of each Class (or with
respect to any default or Servicer Default that does not relate to all Series,
66-2/3% of the aggregate Investor Amount of the Investor Certificates of each
Series to which such default relates or, with respect to any such Series with
two or more Classes, of each Class) may, on behalf of all Certificateholders,
waive any default or Servicer Default by the Transferors or the Master Servicer
in the performance of their obligations hereunder and its consequences, except
the failure to make any distributions required to be made to Investor
Certificateholders or to make any required deposits of any amounts to be so
distributed. Upon any such waiver of a past default or Servicer Default, such
default or Servicer Default shall cease to exist, and any default or Servicer
Default arising therefrom shall be deemed to have been remedied for every
purpose of this Agreement. No such waiver shall extend to any subsequent or
other default or Servicer Default or impair any right consequent thereon except
to the extent expressly so waived.
Section 13.02. Protection of Right, Title and Interest to Trust.
(a) The Master Servicer shall cause this Agreement, all amendments and
Supplements hereto and all financing statements and continuation statements and
any other necessary documents covering the Certificateholders' and the Trustee's
right, title and interest to the Trust to be promptly recorded, registered and
filed, and at all times to be kept recorded, registered and filed, all in such
manner and in such places as may be required by law fully to preserve and
protect the right, title and interest of the Certificateholders and the Trustee
hereunder to all property comprising the Trust. The Master Servicer shall
deliver to the Trustee file-stamped copies of, or filing receipts for, any
document recorded, registered or filed as provided above, as soon as available
following such recording, registration or filing. The Transferors shall
cooperate fully with the Master Servicer in connection with the obligations set
forth above and will execute any and all documents reasonably required to
fulfill the intent of this paragraph.
(b) Within 30 days after any of the Transferors makes any change in its
name, identity or corporate structure which would make any financing statement
or continuation statement filed in accordance with paragraph (a) seriously
misleading within the meaning of Section 9-402(7) (or any comparable provision)
of the UCC, such Transferor shall give the Trustee notice of any such change and
shall file such financing statements or amendments as may be necessary to
continue the perfection of the Trust's security interest in the Receivables and
the proceeds thereof.
(c) Each Transferor and the Master Servicer will give the Trustee
prompt notice of any relocation of any office from which it services Receivables
or keeps records concerning the
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Receivables or of its principal executive office and whether, as a result of
such relocation, the applicable provisions of the UCC would require the filing
of any amendment of any previously filed financing or continuation statement or
of any new financing statement and shall file such financing statements or
amendments as may be necessary to perfect or to continue the perfection of the
Trust's security interest in the Receivables and the proceeds thereof. Each
Transferor and the Master Servicer will at all times maintain each office from
which it services Receivables and its principal executive offices within the
United States.
(d) The Master Servicer will deliver to the Trustee: (i) upon the
execution and delivery of each amendment of this Agreement or any Supplement, an
Opinion of Counsel to the effect specified in Exhibit G-1; (ii) on or before
December 31 of each year, beginning with December 31, 1996, an Opinion of
Counsel substantially in the form of Exhibit G-2 and (iii) on each Addition Date
on which any additional Accounts are to be designated pursuant to subsection
2.09 (a), (b) or (d), an Opinion of Counsel substantially in the form or Exhibit
G-2.
Section 13.03. Limitation on Rights of Certificateholders.
(a) The death or incapacity of any Certificateholder shall not operate
to terminate this Agreement or the Trust, nor shall such death or incapacity
entitle such Certificateholders' legal representatives or heirs to claim an
accounting or to take any action or commence any proceeding in any court for a
partition or winding up of the Trust, nor otherwise affect the rights,
obligations and liabilities of the parties hereto or any of them.
(b) No Investor Certificateholder shall have any right to vote (except
as expressly provided in this Agreement) or in any manner otherwise control the
operation and management of the Trust, or the obligations of the parties hereto,
nor shall anything herein set forth, or contained in the terms of the
Certificates, be construed so as to constitute the Investor Certificateholders
from time to time as partners or members of an association, nor shall any
Investor Certificateholder be under any liability to any third person by reason
of any action taken by the parties to this Agreement pursuant to any provision
hereof.
(c) No Investor Certificateholder shall have any right by virtue of any
provisions of this Agreement to institute any suit, action or proceeding in
equity or at law upon or under or with respect to this Agreement, unless such
Investor Certificateholder previously shall have made, and unless the Holders of
Investor Certificates evidencing more than 50% of the aggregate unpaid principal
amount of all Investor Certificates (or, with respect to any such action, suit
or proceeding that does not relate to all Series, 50% of the aggregate unpaid
principal amount of the Investor Certificates of all Series to which such
action, suit or proceeding relates) shall have made, a request to the Trustee to
institute such action, suit or proceeding in its own name as Trustee hereunder
and shall have offered to the Trustee such reasonable indemnity as it may
require against the costs, expenses and liabilities to be incurred therein or
thereby, and the Trustee, for 60 days after such request and offer of indemnity,
shall have neglected or refused to institute any such action, suit or
proceeding; it being understood and intended, and being expressly covenanted by
each Investor Certificateholder with every other Investor Certificateholder and
the Trustee, that no one or more Investor Certificateholders shall
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have any right in any manner whatever by virtue or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Investor Certificates, or to
obtain or seek to obtain priority over or preference to any other such Investor
Certificateholder, or to enforce any right under this Agreement, except in the
manner herein provided and for the equal, ratable and common benefit of all
Investor Certificateholders except as otherwise expressly provided in this
Agreement. For the protection and enforcement of the provisions of this Section,
each and every Investor Certificateholder and the Trustee shall be entitled to
such relief as can be given either at law or in equity.
SECTION 13.04. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 13.05. Notices; Payments.
(a) All demands, notices, instructions, directions and communications
(collectively, "Notices") under this Agreement shall be in writing and shall be
deemed to have been duly given if personally delivered at, mailed by registered
mail, return receipt requested, or sent by facsimile transmission (i) in the
case of the Transferor, to Advanta Business Receivables Corp., 1325 Airmotive
Way, Reno, Nevada 89502, (ii) in the case of the Master Servicer, to Advanta
Financial Corp., 11850 South Election Drive, Draper, Utah 84020, (iii) in the
case of the Trustee, to the Corporate Trust Office, (iv) in the case of Moody's,
to 99 Church Street, New York, New York 10007, Attn: ABS Monitoring Department,
4th Floor (facsimile no. 212-553- 4600), (v) in the case of Standard & Poor's,
to 26 Broadway, New York, New York 10004, Attn: Asset Backed Group, 15th Floor
(facsimile no. 212-412-0323), (vi) in the case of the Paying Agent or the
Transfer Agent and Registrar, to the Corporate Trust Office and (vii) in the
case of Notices sent under clauses (i) and (ii) above, an informational copy of
such Notice shall also be sent to Advanta Business Services Corp., P.O. Box
1228, 1020 Laurel Oaks Road, Voorhees, NJ 08043-1228, Attn: Treasurer, and
(viii) to any other Person as specified in any Supplement; or, as to each party,
at such other address or facsimile number as shall be designated by such party
in a written notice to each other party.
(b) Any Notice required or permitted to be given to a Holder of
Registered Certificates shall be given by first-class mail, postage prepaid, at
the address of such Holder as shown in the Certificate Register. No Notice shall
be required to be mailed to a Holder of Bearer Certificates or Coupons but shall
be given as provided below. Any Notice so mailed within the time prescribed in
this Agreement shall be conclusively presumed to have been duly given, whether
or not the Investor Certificateholder receives such Notice. In addition, (a) if
and so long as any Series or Class is listed on the Luxembourg Stock Exchange
and such Exchange shall so require, any Notice to Investor Certificateholders
shall be published in an Authorized Newspaper of general circulation in
Luxembourg within the time period prescribed in this Agreement and (b) in the
case of any Series or Class with respect to which any Bearer Certificates are
outstanding, any Notice required or permitted to be given to Investor
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Certificateholders of such Series or Class shall be published in an Authorized
Newspaper within the time period prescribed in this Agreement.
Section 13.06. Rule 144A Information. For so long as any of the
Investor Certificates of any Series or Class are "restricted securities" within
the meaning of Rule 144(a)(3) under the Act, each of the Transferors, the
Trustee, the Master Servicer and any Series Enhancer agree to cooperate with
each other to provide to any Investor Certificateholders of such Series or Class
and to any prospective purchaser of Certificates designated by such an Investor
Certificateholder, upon the request of such Investor Certificateholder or
prospective purchaser, any information required to be provided to such holder or
prospective purchaser to satisfy the condition set forth in Rule 144A(d)(4)
under the Act.
Section 13.07. Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall for any
reason whatsoever be held invalid, then such provisions shall be deemed
severable from the remaining provisions of this Agreement and shall in no way
affect the validity or enforceability of the remaining provisions or of the
Certificates or the rights of the Certificateholders.
Section 13.08. Certificates Nonassessable and Fully Paid. It is the
intention of the parties to this Agreement that the Certificateholders shall not
be personally liable for obligations of the Trust, that the interests in the
Trust represented by the Certificates shall be nonassessable for any losses or
expenses of the Trust or for any reason whatsoever and that Certificates upon
authentication thereof by the Trustee pursuant to Section 6.02 are and shall be
deemed fully paid.
Section 13.09. Further Assurances. The Transferors and the Master
Servicer agree to do and perform, from time to time, any and all acts and to
execute any and all further instruments required or reasonably requested by the
Trustee more fully to effect the purposes of this Agreement, including the
execution of any financing statements or continuation statements relating to the
Receivables for filing under the provisions of the UCC of any applicable
jurisdiction.
Section 13.10. Nonpetition Covenant. Notwithstanding any prior
termination of this Agreement, the Master Servicer, the Trustee, each
Transferor, each Series Enhancer and each Holder of a Transferor Certificate
shall not, prior to the date which is one year and one day after the termination
of this Agreement with respect to the Trust, acquiesce, petition or otherwise
invoke or cause the Trust to invoke the process of any Governmental Authority
for the purpose of commencing or sustaining a case against the Trust under any
Federal or state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of the Trust or any substantial part of its property or ordering the winding-up
or liquidation of the affairs of the Trust.
Section 13.11. No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Trustee or the
Certificateholders, any right, remedy, power or privilege under this Agreement
shall operate as a waiver thereof; nor shall any single or partial
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exercise of any right, remedy, power or privilege under this Agreement preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege. The rights, remedies, powers and privileges provided
under this Agreement are cumulative and not exhaustive of any rights, remedies,
powers and privileges provided by law.
Section 13.12. Counterparts. This Agreement may be executed in two or
more counterparts (and by different parties on separate counterparts), each of
which shall be an original, but all of which together shall constitute one and
the same instrument.
Section 13.13. Third-Party Beneficiaries. This Agreement will inure to
the benefit of and be binding upon the parties hereto, the Certificateholders,
any Series Enhancer (to the extent provided in this Agreement and the related
Supplement and so long as no Series Enhancer Default shall be continuing) and
their respective successors and permitted assigns. Except as otherwise expressly
provided in this Agreement, no other Person will have any right or obligation
hereunder.
Section 13.14. Actions by Certificateholders.
(a) Wherever in this Agreement a provision is made that an action may
be taken or a Notice given by Certificateholders, such action or Notice may be
taken or given by any Certificateholder, unless such provision requires a
specific percentage of Certificateholders.
(b) Any Notice, request, authorization, direction, consent, waiver or
other act by the Holder of a Certificate shall bind such Holder and every
subsequent Holder of such Certificate and of any Certificate issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done or omitted to be done by the Trustee or the Master
Servicer in reliance thereon, whether or not notation of such action is made
upon such Certificate.
Section 13.15. Merger and Integration. Except as specifically stated
otherwise herein, this Agreement sets forth the entire understanding of the
parties relating to the subject matter hereof, and all prior understandings,
written or oral, are superseded by this Agreement. This Agreement may not be
modified, amended, waived or supplemented except as provided herein.
Section 13.16. Headings. The headings herein are for purposes of
reference only and shall not otherwise affect the meaning or interpretation of
any provision hereof.
Section 13.17. Construction of Agreement. The Transferors hereby grant
a security interest to (i) the Trustee for the benefit of the Certificateholders
and (ii) any Series Enhancer to the extent of the Enhancement Investor Amount,
if any, provided for in the relevant Supplement (which interest, in the case of
any Series Enhancer will be subordinated to the interest of the Investor
Certificateholders), in all of the Transferors' right, title and interest in, to
and under the Receivables now existing and hereafter created, all moneys due or
to become due and all amounts received with respect thereto and all "proceeds"
thereof and any other Trust Assets, to secure all the Transferors' and Master
Servicer's obligations hereunder, including,
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without limitation, the Transferors' obligation to sell or transfer Receivables
hereafter created to the Trust and the Master Servicer's obligation to remit
Collections hereunder (collectively, the "Obligations"). This Agreement shall
constitute a security agreement under applicable law.
Section 13.18 Successors and Assigns. All covenants and agreements in
this Agreement by any party hereto shall bind its successors and assigns,
whether so expressed or not.
Section 13.19. Assignment. Notwithstanding anything to the contrary
contained herein, except as provided in Sections 7.02 and 8.02 and as provided
in the provisions of this Agreement concerning the resignation of the Master
Servicer, this Agreement may not be assigned by the Master Servicer or the
Transferors without the prior written consent of the Trustee and the holders of
Certificates evidencing more than 50% of the Aggregate Investor Amount.
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IN WITNESS WHEREOF, the Transferor, the Master Servicer and
the Trustee have caused this Agreement to be duly executed by their respective
officers as of the day and year first above written.
ADVANTA FINANCIAL CORP.,
Master Servicer,
by
--------------------------------
Name: Larry L. Richards
Title: President
THE FIRST NATIONAL BANK OF
CHICAGO,
Trustee,
by
--------------------------------
Name: Jeffrey L. Kinney
Title: Assistant Vice President
ADVANTA BUSINESS RECEIVABLES
CORP., Transferor,
by
--------------------------------
Name: Daniel P. Dyer
Title: President
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EXHIBIT A
FORM OF ABRC CERTIFICATE
THIS ABRC CERTIFICATE HAS NOT BEEN REGISTERED UNDER SECURITIES
ACT OF 1933, AS AMENDED. NEITHER THIS ABRC CERTIFICATE NOR ANY PORTION HEREOF OR
ANY INTEREST HEREIN MAY BE OFFERED OR SOLD EXCEPT IN COMPLIANCE WITH THE
REGISTRATION PROVISIONS OF SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
SUCH REGISTRATION PROVISIONS.
THIS ABRC CERTIFICATE IS NOT PERMITTED TO BE TRANSFERRED,
ASSIGNED, EXCHANGED OR OTHERWISE PLEDGED OR CONVEYED EXCEPT IN COMPLIANCE WITH
THE TERMS OF THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.
No. ____ One Unit
ADVANTA BUSINESS CARD MASTER TRUST
ABRC CERTIFICATE
THIS CERTIFICATE REPRESENTS AN INTEREST IN CERTAIN
ASSETS OF THE ADVANTA BUSINESS CARD MASTER TRUST
Evidencing an interest in a trust, the corpus of which consists primarily of
receivables generated from time to time in the ordinary course of business in a
portfolio of business revolving credit card accounts originated or acquired by
Advanta Financial Corp. (the "Seller"), or participation interests therein, and,
in certain circumstances, certain Additional Transferors (as defined in the
Pooling and Servicing Agreement referred to below).
(Not an interest in or obligation of the Transferors or any affiliate
thereof)
This certifies that ABRC is the registered owner of an
interest in the assets of a trust (the "Trust") not allocated to the
Certificateholders' Interest or the interest of any holder of a Supplemental
Certificate pursuant to the Pooling and Servicing Agreement dated as of June 1,
1996 (the "Agreement"), among Advanta Financial Corp., a Utah industrial loan
corporation, as Master Servicer (the "Master Servicer"), ABRC, a Nevada
corporation, as Transferor (the "Transferor"), and The First National Bank of
Chicago, a national banking association, as trustee (the "Trustee"). The corpus
of the Trust consists of (i) a portfolio of all receivables (the "Receivables")
existing in the revolving credit card accounts identified under the Agreement
from time to time (the "Accounts"), (ii) all Interchange and Recoveries
allocable to the Trust
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<PAGE> 108
as provided in the Agreement, (iii) all monies due or to become due and all
amounts received with respect thereto and all proceeds (including "proceeds" as
defined in the UCC) of and Collections of such Receivables (iv) all funds which
are from time to time on deposit in the Collection Account, the Excess Funding
Account and in the Series Accounts, (v) the benefits of any Series Enhancements
issued and to be issued by Series Enhancers with respect to one or more Series
of Investor Certificates and (vi) all other assets and interests constituting
the Trust.
Although a summary of certain provisions of the Agreement is
set forth below, this Certificate does not purport to summarize the Agreement
and reference is made to the Agreement for information with respect to the
interests, rights, benefits, obligations, proceeds and duties evidenced hereby
and the rights, duties and obligations of the Trustee. A copy of the Agreement
may be requested from the Trustee by writing to the Trustee at the Corporate
Trust Office. To the extent not defined herein, the capitalized terms used
herein have the meanings ascribed to them in the Agreement.
This Certificate is issued under and is subject to the terms,
provisions and conditions of the Agreement, to which Agreement, as amended and
supplemented from time to time, ABRC by virtue of the acceptance hereof assents
and is bound.
The Receivables consist of Principal Receivables which arise
generally from the purchase of merchandise and services and amounts advanced to
cardholders as cash advances and Finance Charge and Administrative Receivables
which arise generally from Periodic Finance Charges, Cash Advance Fees, Late
Fees and other fees and charges with respect to the Accounts.
This Certificate is the ABRC Certificate, which represents the
Transferor's interest in certain assets of the Trust, including the right to
receive a portion of the Collections and other amounts at the times and in the
amounts specified in the Agreement. The aggregate interest represented by the
ABRC Certificate at any time in the Receivables in the Trust shall not exceed
the Transferor's Interest at such time. In addition to the ABRC Certificate, (i)
Investor Certificates will be issued to investors pursuant to the Agreement,
which will represent the Certificateholders' Interest, and (ii) Supplemental
Certificates may be issued pursuant to the Agreement, which will represent that
portion of the Transferor's Interest not allocated to the Transferor. This ABRC
Certificate shall not represent any interest in the Collection Account, the
Excess Funding Account or the Series Accounts, except as expressly provided in
the Agreement, or any Series Enhancements.
ABRC has entered into the Agreement, and this Certificate is
issued, with the intention that, except as otherwise provided for in any
Supplement, for Federal, state and local income and franchise tax purposes only,
the Investor Certificates will qualify as indebtedness secured by the
Receivables. ABRC, by entering into the Agreement and by the acceptance of this
Certificate, agrees to treat such Investor Certificates for Federal, state and
local income and franchise tax purposes as indebtedness.
A-2
<PAGE> 109
Unless the certificate of authentication hereon has been
executed by or on behalf of the Trustee, by manual or facsimile signature, this
Certificate shall not be entitled to any benefit under the Agreement or be valid
for any purpose.
IN WITNESS WHEREOF, Advanta Business Receivables Corp. has
caused this Certificate to be duly executed.
ADVANTA BUSINESS RECEIVABLES
CORP.
By:
--------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is the ABRC Certificate described in the within-mentioned
Agreement.
THE FIRST NATIONAL BANK OF CHICAGO,
as Trustee
By:
------------------------------
Authorized Officer
A-3
<PAGE> 110
EXHIBIT B
FORM OF ASSIGNMENT OF ADDITIONAL DESIGNATED ASSETS
ASSIGNMENT No.____ OF ADDITIONAL DESIGNATED ASSETS, dated as
of ____________ ___, _____ by and among Advanta Financial Corp., a Utah
industrial loan corporation as seller, (the "Seller"), and as Master Servicer
(the "Master Servicer"), Advanta Business Receivables Corp., a Nevada
corporation, as Transferor (the "Transferor), an Additional Transferor]
([_______________] and, together with Advanta Business Receivables Corp., the
"Transferor(s)") and The First National Bank of Chicago, a national banking
association organized and existing under the laws of the United States (the
"Trustee"), pursuant to the Pooling and Servicing Agreement referred to below.
W I T N E S S E T H :
WHEREAS the Transferor(s), the Master Servicer, and the
Trustee are parties to the Pooling and Servicing Agreement, dated as of June 1,
1996 (hereinafter as such agreement may have been, or may from time to time be,
amended, supplemented or otherwise modified, the "Agreement");
WHEREAS pursuant to the Agreement, the Transferor(s) wish[es]
to designate [additional Accounts/additional Participation Interests] and to
convey Additional Designated Assets, whether now existing or hereafter created,
to the Trust as part of the corpus of the Trust (as each such term is defined in
the Agreement);
WHEREAS the Trustee is willing to accept such designation and
conveyance subject to the terms and conditions hereof; and
WHEREAS the Master Servicer is willing to service the
Additional Designated Assets hereby conveyed under the terms and conditions
specified in the Agreement and herein.
NOW, THEREFORE, the Transferor(s), the Master Servicer and the
Trustee hereby agree as follows:
1. Defined Terms. All capitalized terms used herein shall have
the meanings ascribed to them in the Agreement unless otherwise defined herein.
"Addition Cut-Off Date" shall mean ____________ ______,
__________.
"Addition Date" shall mean, with respect to the Additional
Designated Assets designated hereby, ________________, _____, _____.
"Notice Date" shall mean, with respect to the Additional
Designated Assets designated hereby, the fifth Business Day prior to the
Addition Date.
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2. Designation of Additional Designated Assets. The Master
Servicer does hereby deliver herewith a computer file or microfiche list
containing a true and complete schedule identifying all the Additional
Designated Assets designated hereby, specifying for each such Account, as of the
Addition Cut-Off Date, its account number, its collection status, the aggregate
amount of Receivables outstanding in such Account and the aggregate amount of
Principal Receivables in such Account. Such computer file or microfiche list
shall be, as of the date of this Assignment, incorporated into and made part of
this Assignment and the Agreement and is marked as Schedule 1 to this
Assignment.
3. Conveyance of Additional Designated Asset.
(a) Each of the Transferor(s) do[es] hereby sell, transfer,
assign, set over and otherwise convey to the Trustee, on behalf of the Trust,
for the benefit of the Certificateholders, without recourse, all of its right,
title and interest in and to (i) the Additional Designated Asset, (ii) all
monies due or to become due and all amounts received with respect to such
Additional Designated Asset and (iii) all proceeds (including "proceeds" as
defined in the UCC) of such Additional Designated Asset, including Insurance
Proceeds, and (iv) to the extent not otherwise included in such Additional
Designated Asset, Interchange allocable to the Trust pursuant to the Agreement.
The foregoing transfer, assignment, set over and conveyance does not constitute
and is not intended to result in a creation or an assumption by the Trust, the
Trustee or any Investor Certificateholder of any obligation of the Master
Servicer, the Transferor(s) or any other Person in connection with the Accounts,
the Receivables or under any agreement or instrument relating thereto,
including, without limitation, any obligation to any Obligors, VISA, MasterCard
or insurers.
(b) In connection with such transfer, assignment, set over and
conveyance, [the/each] Transferor agrees to record and file, at its own expense,
any financing statements (and continuation statements with respect to such
financing statements when applicable) with respect to the Receivables now
existing and hereafter created in connection with the Additional Designated
Assets designated hereby (as defined in Section 9-106 of the UCC as in effect in
[the State of ________ and including credit device accounts, as defined in
Section 9-105 of the UCC as in effect in the State of ________]) meeting the
requirements of applicable state law in such manner and in such jurisdictions as
are necessary to perfect the transfer and assignment of such Receivables to the
Trust, and to deliver a file-stamped copy of such financing statement or other
evidence of such filing (which may, for purposes of this Section 3, consist of a
telecopy of a file-stamped copy of such financing statement, with the original
of such file-stamped financing statement delivered within 24 hours) to the
Trustee on or prior to the date of this Assignment. The Trustee shall be under
no obligation whatsoever to file such financing statement, or a continuation
statement to such financing statement, or make any other filing under the UCC in
connection with such transfer. The foregoing transfer, assignment, set over and
conveyance to the Trust shall be made to the Trustee, on behalf of the Trust,
and such reference in this Assignment and the Agreement to such transfer,
assignment, set over and conveyance shall be construed accordingly.
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(c) In connection with such conveyance, the Master Servicer
has, at its own expense, on or prior to the Addition Date, indicated and
identified in its books and records (including its computer files) that all
Receivables created in connection with the Additional Designated Assets
designated hereby have been conveyed to the Trust pursuant to this Assignment
for the benefit of the Certificateholders, by identifying such Additional
Designated Assets in the Transferor's computer files by including the
Transferor's Code "________" or "________" in the PORTF_CD field of the
Transferor's computer files (the "Code"). [The/Each] Transferor agrees not to
alter the Code or the field referenced above with respect to any such Additional
Designated Assets during the term of this Assignment and the Agreement unless
and until such Additional Designated Assets become Removed Accounts or unless
and until (i) such Transferor shall give written notice of any such alteration
to the Trustee, such written notice to be as of the date of its receipt by the
Trustee incorporated into and made part of this assignment and the Agreement,
and (ii) the Trustee and such Transferor shall execute and file any UCC
financing statement or amendment thereof necessitated by such alteration;
provided, that such Transferor may alter the Code of any such Additional
Designated Assets from "________" to "________" during the term of this
Assignment and the Agreement without providing any notice to the Trustee or
filing any UCC financing statements.
(d) The parties intend that if, and to the extent that, the
foregoing conveyance is not deemed to be a sale, [the/each] Transferor hereby
grants to the Trustee a first priority perfected security interest in all of
such Transferor's right, title and interest in and to (i) the Receivables now
existing and hereafter created and arising in connection with the Additional
Designated Assets designated hereby, (ii) all monies due or to become due and
all amounts received with respect thereto (including all Finance Charge and
Administrative Receivables), (iii) all proceeds (including "proceeds" as defined
in the UCC) of and Collections of such Receivables, including Insurance Proceeds
and Recoveries relating thereto, (iv) to the extent not otherwise included in
the Receivables, Interchange allocable to the Trust pursuant to the Agreement
and (v) all amounts on deposit in the Collection Account (other than net
investment earnings thereon), the Excess Funding Account and any Series Account
and that this Assignment shall constitute a security agreement under applicable
law.
4. Acceptance by Trustee. Subject to the satisfaction of the
conditions set forth in Section 6 of this Assignment, the Trustee hereby
acknowledges its acceptance on behalf of the Trust of all right, title and
interest in and to the property, now existing and hereafter created, conveyed to
the Trust pursuant to subsection 3(a) of this Assignment, and declares that it
shall maintain such right, title and interest, upon the Trust set forth in the
Agreement for the benefit of all the Investor Certificateholders. The Trustee
further acknowledges that, prior to or simultaneously with the execution and
delivery of this Assignment, the Transferors delivered to the Trustee the
computer file or microfiche list described in Section 2 of this Agreement.
5. Representations and Warranties of the Transferor(s).
[The/Each] Transferor hereby represents and warrants to the Trustee, on behalf
of the Trust as of the date of this Assignment and as of the Addition Date, that
B-3
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(a) Legal, Valid and Binding Obligation. This Assignment
constitutes a legal, valid and binding obligation of such Transferor,
enforceable against such Transferor in accordance with its terms, except as such
enforceability may be subject to bankruptcy, insolvency, reorganization,
moratorium or similar laws of general applicability relating to or affecting
creditors' rights, and to general principles of equity;
(b) List of Accounts. As of the Addition Date, the computer
file or microfiche list of designated Accounts complies with the requirements of
Section 2 hereof.
(c) Eligibility of Receivables. As of the Addition Cut-Off
Date, each Receivable in the related Additional Designated Assets is an Eligible
Receivable in all material respects;
(d) Selection Procedures. No selection procedures believed by
such Transferor to be adverse to the interests of Investor Certificateholders of
any Series was utilized in selecting the Additional Designated Assets designated
hereby from the available Eligible Accounts owned by such Transferor;
(e) Insolvency. Such Transferor is not insolvent and will not
be made insolvent by the transfer of the Receivables of such Additional
Designated Assets, and such transfer has not been made after the commission of
an act of insolvency or in contemplation thereof [or with a view to prevent the
application of the assets of such Transferor prescribed in the National Bank
Act], with a view to the preference of one creditor over another or with the
intent to hinder, delay or defraud such Transferor or any creditor of such
Transferor;
(f) Security Interest. This Assignment constitutes either (i)
a valid transfer and assignment to the Trust of all right, title and interest of
such Transferor in and to the Additional Designated Assets designated by such
Transferor now existing and hereafter created therein, and all proceeds (as
defined in the UCC) thereof and Insurance Proceeds relating thereto, and such
Addition Designated Assets and any proceeds thereof and Insurance Proceeds
relating thereto will be held by the Trust free and clear of any Lien of any
Person claiming through or under such Transferor or any of its Affiliates except
for (x) Liens permitted under subsection 2.07(b) of the Agreement, (y) the
interests of the Transferors as Holders of the Transferor Certificates and (z)
the right of the Transferors to receive interest and investment earnings (net of
losses and investment expenses) in respect of the Collection Account or any
Series Account as provided in the Agreement; or (ii) a valid grant of a
"security interest" (as defined in the UCC) in such property to the Trust, which
in the case of existing Additional Designated Assets from the Accounts
designated hereby and the proceeds thereof, including Insurance Proceeds and
Recoveries, is enforceable upon the conveyance of such Receivables to the Trust,
and which will be enforceable with respect to the Receivables hereafter created
in respect of Additional Designated Assets designated hereby and the proceeds
thereof upon such creation. If this Assignment constitutes the grant of a
security interest (as defined in the UCC) to the Trust in such property, free
and clear of any Lien upon the filing of the financing statements described in
Section 3 of this Assignment and, in the case of the Receivables of such
Additional Designated Assets thereafter created and the proceeds thereof, upon
such creation, the Trust shall have a first priority perfected security interest
(as defined in the UCC) in such property,
B-4
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except for (i) Liens permitted under subsection 2.07(b) of the Agreement, (ii)
the interests of the Transferors as Holders of the Transferor Certificates and
(iii) the right to receive interest and investment earnings (net of losses and
investment expenses) in respect of the Collection Account or any Series Account
as provided in the Agreement; provided, however, that such Transferor makes no
representation or warranty with respect to the effect of Section 9-306 of the
UCC on the rights of the Trust to proceeds held by such Transferor;
(g) No Pay Out Event. The addition of any Receivable in the
Additional Designated Assets from Accounts designated hereby on the Addition
Date will not, in the reasonable belief of such Transferor, cause a Pay Out
Event to occur.
(h) The representations and warranties in Section 2.03 and
2.04 of the Agreement are incorporated herein as though fully set forth herein,
and such representations and warranties are true and correct as of the date
hereof.
6. Conditions Precedent. The acceptance of the Trustee set
forth in Section 4 of this Assignment and the amendment of the Agreement as set
forth in Section 7 of this Assignment are subject to the satisfaction, on or
prior to the Addition Date, of the following conditions precedent:
(a) Representations and Warranties. Each of the
representations and warranties made by the Transferor(s) in Section 5 of this
Assignment shall be true and correct as of the Addition Date.
(b) Officer's Certificate. The Transferor(s) shall have
delivered to the Trustee an Officer's Certificate confirming the items set forth
in subsections 2.09(c)(ii) through (vi) of the Agreement.
7. Amendment of the Agreement. The Agreement is hereby amended
by providing that all references to the "Pooling and Servicing Agreement", to
"this Agreement" and "herein" shall be deemed from and after the Addition Date
to be a dual reference to the Agreement as supplemented by this Assignment.
Except as expressly amended hereby, all of the representations, warranties,
terms, covenants and conditions of the Agreement shall remain unamended and
shall continue to be and shall remain in full force and effect in accordance
with its terms and except as expressly provided herein shall not constitute or
be deemed to constitute a waiver of compliance with or consent to noncompliance
with any term or provision of the Agreement.
8. Counterparts. This Assignment may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument.
9. Governing Law. This Assignment shall be construed in
accordance with the laws of the State of New York, without reference to its
conflict of law provisions, and the obligation, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.
B-5
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IN WITNESS WHEREOF, the undersigned have caused this
Assignment of Additional Designated Assets to be duly executed and delivered by
their respective duly authorized officers on the day and the year first above
written.
ADVANTA FINANCIAL CORP.
Master Servicer
By:
--------------------------------
Title:
[-------------------------------],
Transferor,
By:
--------------------------------
Title:
THE FIRST NATIONAL BANK OF
CHICAGO,
Trustee
By:
--------------------------------
Title:
B-6
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EXHIBIT C
FORM OF REASSIGNMENT OF RECEIVABLES IN REMOVED ACCOUNTS
REASSIGNMENT No. ________ OF RECEIVABLES dated as of
____________, _____,(1) by and among Advanta Financial Corp., a Utah industrial
loan Corporation, as Master Servicer, Advanta Business Receivables Corp., a
Nevada corporation, as Transferor (the "Transferor"), [____________], an
Additional Transferor ([____________] and, together with Advanta Business
Receivables Corp., the "Transferors"), and The First National Bank of Chicago, a
national banking association (the "Trustee"), pursuant to the Pooling and
Servicing Agreement referred to below.
WITNESSETH:
WHEREAS the Transferors, [____________] and the Trustee are
parties to the Pooling and Servicing Agreement dated as of June 1, 1996 (the
"Agreement");
WHEREAS pursuant to the Agreement, the Transferors wish to
remove from the Trust all Receivables in certain designated Accounts owned by
the Transferors, or included in Participation Interests owned by the Transferors
(the "Removed Accounts") and to cause the Trustee to reconvey the Receivables of
such Removed Accounts, whether now existing or hereafter created, from the Trust
to the Transferors; and
WHEREAS the Trustee is willing to accept such designation and
to reconvey the Receivables in the Removed Accounts subject to the terms and
conditions hereof;
NOW, THEREFORE, the Transferors and the Trustee hereby agree
as follows:
1. Defined Terms. All terms defined in the Agreement and used
herein shall have such defined meanings when used herein, unless otherwise
defined herein.
"Removal Date" shall mean, with respect to the Removed
Accounts designated hereby, ________ ___, ____.
"Removal Notice Date" shall mean, with respect to the Removed
Accounts,____________ ___,____ .
- --------
(1) To be dated as of the Removal Date.
C-1
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2. Designation of Removed Accounts. On or before the date that
is 10 Business Days after the Removal Date, the Transferors will deliver to the
Trustee a computer file or microfiche list containing a true and complete
schedule identifying all Accounts in which the Receivables are being removed
from the Trust, specifying for each such Account, as of the Removal Notice Date,
its account number, the aggregate amount outstanding in such Account and the
aggregate amount of Principal Receivables in such Account, which computer file
or microfiche list shall supplement Schedule 1 to the Agreement.
3. Conveyance of Receivables. (a) The Trustee does hereby
transfer, assign, set over and otherwise convey to each Transferor, without
recourse, on and after the Removal Date, all right, title and interest of the
Trust in, to and under the Receivables existing at the close of business on the
Removal Date and thereafter created from time to time in the Removed Accounts
designated hereby which are owned by such Transferor, all monies due or to
become due and all amounts received with respect thereto and all proceeds
thereof but excluding all Recoveries relating thereto but in each case without
recourse, representation or warranty of any kind.
(b) In connection with such transfer, the Transferors shall
prepare and the Trustee agrees to execute and deliver to the Transferors on or
prior to the date this Reassignment is delivered, applicable termination
statements with respect to the Receivables existing at the close of business on
the Removal Date and thereafter created from time to time in the Removed
Accounts reassigned hereby and the proceeds thereof evidencing the release by
the Trust of its interest in the Receivables in the Removed Accounts, and
meeting the requirements of applicable state law, in such manner and such
jurisdictions as are necessary to terminate such interest.
4. Representations and Warranties of the Transferors. Each of
the Transferors hereby severally represents and warrants to the Trustee, on
behalf of the Trust, as of the Removal Date:
(a) Legal, Valid and Binding Obligation. This Reassignment
constitutes a legal, valid and binding obligation of such Transferor,
enforceable against such Transferor in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
affecting the enforcement of creditors' rights in general and the rights of
creditors of national banking associations] and except as such enforceability my
be limited by general principles of equity (whether considered in a suit at law
or in equity);
(b) Pay Out Event. Such Transferor reasonably believes that
(A) the removal of the Receivables existing in the Removed Accounts will not,
based on the facts known to such Transferor, then or thereafter cause a Pay Out
Event to occur with respect to any Series and (B) no selection procedure was
utilized by such Transferor which would result in a selection of Removed
Accounts that would be materially adverse to the interests of the Investor
Certificateholders of any Series as of the Removal Date.
C-2
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(c) List of Removed Accounts. The list of Removed Accounts
delivered pursuant to subsection 2.09(b) of the Agreement, as of the Removal
Date is true and complete in all material respects.
5. Ratification of Agreement. As supplemented by this
Reassignment, the Agreement is in all respects ratified and confirmed and the
Agreement as so supplemented by this Reassignment shall be read, taken and
construed as one and the same instrument.
6. Counterparts. This Reassignment may be executed in two or
more counterparts, and by different parties on separate counterparts, each of
which shall be an original, but all of which shall constitute one and the same
instrument.
7. GOVERNING LAW. THIS REASSIGNMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
C-3
<PAGE> 119
IN WITNESS WHEREOF, the Transferors and the Trustee have
caused this Reassignment to be duly executed by their respective officers as of
the day and year first above written.
ADVANTA BUSINESS RECEIVABLES
CORP., Transferor
By:
---------------------------
Title:
[-------------------------],
Transferor,
By:
---------------------------
Title:
THE FIRST NATIONAL BANK OF
CHICAGO, Trustee
By:
----------------------------
Title:
C-4
<PAGE> 120
EXHIBIT D
FORM OF ANNUAL MASTER SERVICER'S CERTIFICATE
(To be delivered on or before December 31 of
each calendar year beginning with December 31, 1996,
pursuant to Section 3.05 of the Pooling and
Servicing Agreement referred to below)
ADVANTA FINANCIAL CORP.
----------------------------------------
ADVANTA BUSINESS CARD MASTER TRUST
----------------------------------------
The undersigned, a duly authorized representative of Advanta
Financial Corp., ("AFC"), pursuant to the Pooling and Servicing Agreement dated
as of June 1, 1996 (the "Agreement"), among AFC, as Master Servicer, Advanta
Business Receivables Corp. as Transferor, and The First National Bank of
Chicago, as Trustee, does hereby certify that:
1. AFC is, as of the date hereof, the Master Servicer under
the Agreement. Capitalized terms used in this Certificate have their respective
meanings as set forth in the Agreement.
2. The undersigned is a Servicing Officer who is duly
authorized pursuant to the Agreement to execute and deliver this Certificate to
the Trustee.
3. A review of the activities of the Master Servicer during
the period ended September 30, ____, and of its performance under the Agreement
was conducted under my supervision.
4. Based on such review, the Master Servicer has, to the best
of my knowledge, performed in all material respects its obligations under the
Agreement throughout such year and no default in the performance of such
obligations has occurred or is continuing except as set forth in paragraph 5
below.
5. The following is a description of each default in the
performance of the Master Servicer's obligations under the provisions of the
Agreement known to me to have been made by the Master Servicer during the period
ended September 30, ____, which sets forth in detail
D-1
<PAGE> 121
(i) the nature of each such default, (ii) the action taken by the Master
Servicer, if any, to remedy each such default and (iii) the current status of
each such default: [If applicable, insert "None."]
6. To the best of my knowledge, AFC, as Master Servicer, is in
compliance with Articles III and IV and Section 8.08 of the Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate this day of , .
----- -------- ----
ADVANTA FINANCIAL CORP.
Master Servicer,
By:
--------------------------------
Name:
Title:
D-2
<PAGE> 122
EXHIBIT E-1
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"). NEITHER THIS CERTIFICATE NOR ANY
INTEREST HEREIN MAY BE OFFERED OR SOLD EXCEPT IN COMPLIANCE WITH THE
REGISTRATION PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE PROVISIONS OF ANY
STATE BLUE SKY OR SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
SUCH REGISTRATION PROVISIONS. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO
CERTAIN CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT REFERRED TO
HEREIN.
THIS CERTIFICATE MAY NOT BE ACQUIRED BY OR FOR THE ACCOUNT OF
A BENEFIT PLAN (AS DEFINED BELOW).
E-1-1
<PAGE> 123
EXHIBIT E-2
FORM OF UNDERTAKING LETTER
[Date]
The First National Bank of Chicago
14 Wall Street, 8th Floor
New York, New York 10005
Attention:
Advanta Financial Corp.
c/o Advanta Business Services Corp.
P.O. Box 1228
Voorhees, N.J. 08043-1228
Attention: Michael Witt, General Counsel
Re: Purchase of $____________ principal amount of Advanta
Business Card Master Trust, [_____%] [Floating Rate]
Asset Backed Certificates, Series [_____]
Dear Sirs:
In connection with our purchase of the above [___%] [Floating
Rate] Asset Backed Certificates (the "Certificates") we confirm that:
(i) we understand that the Certificates are not being
registered under the Securities Act of 1933, as amended (the "1933
Act"), and are being sold to us in a transaction that is exempt from
the registration requirements of the 1933 Act;
(ii) any information we desire concerning the Certificates or
any other matter relevant to our decision to purchase the Certificates
is or has been made available to us;
(iii) we have such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of
an investment in the Certificates, and we (and any account for which we
are purchasing under paragraph (iv) below) are able to bear the
economic risk of an investment in the Certificates; we (and any account
for which we are purchasing under paragraph (iv) below) are an
"accredited investor" (as such term is defined in Rule 501(a)(1), (2)
or (3) of Regulation D under the 1933 Act); and we are not, and none of
such accounts is, a Benefit Plan;
E-2-1
<PAGE> 124
(iv) we are acquiring the Certificates for our own account or
for accounts as to which we exercise sole investment discretion and not
with a view to any distribution of the Certificates, subject
nevertheless to the understanding that the disposition of our property
shall at all times be and remain within our control;
(v) we agree that the Certificates must be held indefinitely
by us unless subsequently registered under the 1933 Act or an exemption
is available from any registration requirements of that Act and any
applicable state securities law;
(vi) we agree that in the event that at some future time we
wish to dispose of or exchange any of the Certificates (such
disposition or exchange not being currently foreseen or contemplated),
we will not transfer or exchange any of the Certificates unless:
(A)(1) the sale is to an Eligible Purchaser (as defined
below), (2) a letter to substantially the same effect as
paragraphs (i), (ii), (iii), (iv), (v) and (vi) of this letter
is executed promptly by the purchaser and (3) all offers or
solicitations in connection with the sale, whether directly or
through any agent acting on our behalf, are limited only to
Eligible Purchasers and are not made by means of any form of
general solicitation or general advertising whatsoever; or
(B) the Certificates are transferred pursuant to Rule
144 under the 1933 Act by us after we have held them for more
than three years; or
(C) the Certificates are sold in any other transaction
that does not require registration under the 1933 Act and, if
the Transferors, the Master Servicer, the Trustee or the
Transfer Agent and Registrar so requests, we therefore have
furnished to such party an opinion of counsel satisfactory to
such party, in form and substance satisfactory to such party,
to such effect; or
(D) the Certificates are transferred pursuant to an
exception from the registration requirements of the 1933 Act
under Rule 144A under the 1933 Act; and
(vii) we understand that the Certificates will bear a legend
to substantially the following effect:
"THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"). NEITHER THIS CERTIFICATE NOR ANY
INTEREST HEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE REGISTRATION PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE
PROVISIONS OF ANY STATE BLUE SKY OR SECURITIES LAWS OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH PROVISIONS. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO
E-2-2
<PAGE> 125
CERTAIN CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT
REFERRED TO HEREIN."
"THIS CERTIFICATE MAY NOT BE ACQUIRED BY OR FOR THE
ACCOUNT OF A BENEFIT PLAN (AS DEFINED BELOW)."
The first paragraph of this legend may be removed if the Transferors, the Master
Servicer, the Trustee and the Transfer Agent and Registrar have received an
opinion of counsel satisfactory to them, in form and substance satisfactory to
them, to the effect that such paragraph may be removed.
"Eligible Purchaser" means either an Eligible Dealer or a
corporation, partnership or other entity which we have reasonable grounds to
believe and do believe can make representations with respect to itself to
substantially the same effect as the representations set forth herein. "Eligible
Dealer" means any corporation or other entity the principal business of which is
acting as a broker or dealer in securities. "Benefit Plan" means any employee
benefit plan, trust or account, including an individual retirement account, that
is subject to the Employee Retirement Income Security Act of 1974, as amended,
or that is described in Section 4975(e)(l) of the Internal Revenue Code of 1986,
as amended, or an entity whose underlying assets include plan assets by reason
of a plan's investment in such entity. Capitalized terms used but not defined
herein shall have the meanings given to such terms in the Pooling and Servicing
Agreement dated as of June 1, 1996, between Advanta Financial Corp, as Master
Servicer, Advanta Business Receivables Corp., as Transferor, and The First
National Bank of Chicago, as Trustee.
Very truly yours,
-------------------------------
(Name of Purchaser)
by
-------------------------------
(Authorized Officer)
E-2-3
<PAGE> 126
EXHIBIT E-3
THIS CERTIFICATE MAY NOT BE ACQUIRED BY OR FOR THE
ACCOUNT OF A BENEFIT PLAN (AS DEFINED BELOW).(2)
- --------
(2) The following text should be included in any Certificate in which the
above legend appears:
The [Certificates] may not be acquired by or for the account of any
employee benefit plan, trust or account, including an individual retirement
account, that is subject to the Employee Retirement Income Security Act of 1974,
as amended, or that is described in Section 4975(e)(1) of the Internal Revenue
Code of 1986, as amended, or an entity whose underlying assets include plan
assets by reason of a plants investment in such entity (a "Benefit Plan"). By
accepting and holding this Certificate, the Holder hereof shall be deemed to
have represented and warranted that it is not a Benefit Plan. By acquiring any
interest in this Certificate, the applicable Certificate Owner or Owners shall
be deemed to have represented and warranted that it or they are not Benefit
Plans.
E-3-1
<PAGE> 127
EXHIBIT F-1
FORM OF CERTIFICATE TO BE DELIVERED
TO EUROCLEAR OR CEDEL
BY [INSERT NAME OF MANAGER]
WITH RESPECT TO REGISTERED CERTIFICATES SOLD TO
QUALIFIED INSTITUTIONAL BUYERS
ADVANTA BUSINESS CARD MASTER TRUST,
[_____%] Floating Rate Asset Backed Certificates, Series [_____]
In connection with the initial issuance and placement of the
above referenced Asset Backed Certificates (the "Certificates"), an
institutional investor in the United States ("institutional investor") is
purchasing U.S. $__________ aggregate principal amount of the Certificates held
in our account at [Morgan Guaranty Trust Company of New York, Brussels office,
as operator of the Euroclear System] [Cedel S.A.] on behalf of such investor.
We reasonably believe that such institutional investor is a
qualified institutional buyer as such term is defined under Rule 144A of the
Securities Act of 1933, as amended.
[We understand that this certificate is required in connection
with United States laws. We irrevocably authorize you to produce this
certificate or a copy hereof to any interested party in any administrative or
legal proceedings or official inquiry with respect to the matters covered by
this certificate.]
The Definitive Certificates in respect of this certificate are
to be issued in registered form in the minimum denomination of U.S. $_______ and
such Definitive Certificates (and, unless the Pooling and Servicing Agreement or
Supplement relating to the Certificates otherwise provides, any Certificates
issued in exchange or substitution for or on registration of transfer of
Certificates) shall bear the following legend:
"THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933. NEITHER THIS CERTIFICATE NOR ANY
PORTION HEREOF MAY BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY,
IN THE UNITED STATES OR TO U.S. PERSONS (EACH AS DEFINED HEREIN),
EXCEPT IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF SUCH
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH
REGISTRATION PROVISIONS. THE TRANSFER OF THIS CERTIFICATE IS
SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE POOLING AND
SERVICING AGREEMENT REFERRED TO HEREIN. THIS CERTIFICATE
CANNOT BE EXCHANGED FOR A BEARER CERTIFICATE."
Dated: ________ ___, _____ [_________________________]
by_________________________
Authorized Officer
F-1-1
<PAGE> 128
EXHIBIT F-2
[FORM OF CERTIFICATE TO BE DELIVERED
TO EUROCLEAR OR CEDEL BY A BENEFICIAL OWNER
OF CERTIFICATES, OTHER THAN A QUALIFIED INSTITUTIONAL BUYER]
ADVANTA BUSINESS CARD MASTER TRUST,
[_____%] [Floating Rate] Asset Backed Certificates, Series [____]
This is to certify that as of the date hereof and except as
provided in the third paragraph hereof, the above-captioned Certificates held by
you for our account (i) are owned by a person that is a United States person, or
(ii) are owned by a United States Person that is (A) the foreign branch of a
United States financial institution (as defined in U.S. Treasury Regulations
Section 1.165-12(c)(1)(v)) (a "financial institution") purchasing for its own
account or for resale, or (B) a United States person who acquired the
Certificates through the foreign branch of a financial institution and who holds
the Certificates through the financial institution on the date hereof (and in
either case (A) or (B), the financial institution hereby agrees to comply with
the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by
a financial institution for purposes of resale during the Restricted Period (as
defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)). In
addition, financial institutions described in clause (iii) of the preceding
sentence (whether or not also described in clause (i) or (ii)) certify that they
have not acquired the Certificates for purposes of resale directly or indirectly
to a United States Person or to a person within the United States or its
possessions.
We undertake to advise you by facsimile if the above statement
as to beneficial ownership is not correct on the date of delivery of the
above-captioned Certificates in bearer form with respect to such of said
Certificates as then appear in your books as being held for our account.
We understand that this certificate is required in connection
with certain securities and tax laws of the United States of America. If
administrative or legal proceedings are commenced or threatened, in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate or a copy thereof to any interested party in
such proceedings. As used herein, "United States" means the United States of
America (including the States and the District of Columbia), its territories,
its possessions and other areas subject to its jurisdiction; and "United States
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of
F-2-1
<PAGE> 129
the United States, or any political subdivision thereof, or an estate or trust
the income of which is subject to United States federal income taxation
regardless of its source.
Dated: , (1) By
------------ ---- -------------------------
--------------------------
As, or as agent for, the
beneficial owner(s) of the
interest in the
Certificates to which this
certificate relates.
- --------
(1) This Certificate must be dated on the earlier of the date of the first
actual payment of interest in respect of the Certificates and the date
of delivery of the Certificates in definitive form.
F-2-2
<PAGE> 130
EXHIBIT G-1
FORM OF OPINION OF COUNSEL
WITH RESPECT TO AMENDMENTS
Provisions to be included in
Opinion of Counsel to be delivered pursuant
to Section 13.02(d)(i)
The opinions set forth below may be subject to all the
qualifications, assumptions, limitations and exceptions taken or made in the
Opinions of Counsel delivered on any applicable Closing Date.
(i) The amendment to the [Pooling and Servicing Agreement],
[Supplement], attached hereto as Schedule 1 (the "Amendment"), has been duly
authorized, executed and delivered by the Transferors and constitutes the legal,
valid and binding agreement of the Transferors, enforceable in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws from time to
time in effect affecting creditors' rights generally or the rights of creditors
of national banking associations. The enforceability of the Transferors'
obligations is also subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(ii) The Amendment has been entered into in accordance with
the terms and provisions of Section 13.01 of the Pooling and Servicing
Agreement.
G-1-1
<PAGE> 131
EXHIBIT G-2
FORM OF OPINION OF COUNSEL
WITH RESPECT TO ACCOUNTS
Provisions to be included in
Opinion of Counsel to be
delivered pursuant to
Section 13.02(d)(ii)
The opinions set forth below may be subject to all the
qualifications, assumptions, limitations and exceptions taken or made in the
Opinions of Counsel delivered on any applicable Closing Date.
1. A court would hold that the transfer to the Transferor of
the Additional Designated Assets was a true sale or absolute
assignment of such interests by the Seller to the Transferor
rather than a pledge of collateral by the Seller to the
Transferor.
2. The Trustee has a valid perfected first priority security
interest with respect to the Transferor's right, title and
interest in and to the Additional Designated Assets.
G-2-1
<PAGE> 132
SCHEDULE 1
List of Accounts
[Original list delivered to Trustee]
<PAGE> 1
Exhibit 12
ADVANTA Corp.
and Subsidiaries
Statements setting forth details of computation of ratio
of earnings to fixed charges
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings $ 71,625 $175,657 $136,677 $106,063 $ 77,920
Federal and state income taxes 24,905 89,104 75,226 59,144 45,335
-------- -------- -------- -------- --------
Earnings before income taxes 96,530 264,761 211,903 165,207 123,255
-------- -------- -------- -------- --------
Fixed charges:
Interest 324,558 269,700 166,032 94,758 79,303
One-third of all rentals 3,492 2,834 1,641 1,809 1,591
Preferred stock
dividend of subsidiary
trust 8,990 350 0 0 0
-------- -------- -------- -------- --------
Total fixed charges 337,040 272,884 167,673 96,567 80,894
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $433,570 $537,645 $379,576 $261,774 $204,149
-------- -------- -------- -------- --------
Ratio of earnings to fixed
charges(1) 1.29x 1.97x 2.26x 2.71x 2.52x
</TABLE>
(1) For purposes of computing these ratios, "earnings" represent income before
income taxes plus fixed charges, and "fixed charges" consist of interest
expense, one-third (the proportion deemed representative of the interest
factor) of rental expense on operating leases, and preferred stock dividends
of subsidiary trust.
<PAGE> 1
EXHIBIT 21
CURRENT LIST OF SUBSIDIARIES OF REGISTRANT
Advanta Corp. (DE)
Advanta Residual Holding Corp. (DE)
Advanta National Corp. (DE)
Advanta National Bank
Advanta Financial Corp. (UT)
Advanta GP Corp. (DE)
Advanta 101 GP Corp. (DE)
Advanta Investment Corp. (DE)
Advanta Investment Corp. II (DE)
Advanta Information Services, Inc. (DE)
Great Expectations Northwest, Inc. (DE)
Advanta International Corporation I (DE)
Advanta International Corporation II (DE)
Advanta UK (Scotland)*
Advanta Leasing Holding Corp. (DE)
Advanta Business Services Corp. (DE)
Advanta Leasing Receivables Corp. (DE)
Advanta Leasing Receivables Corp. II (DE)
Advanta Leasing Receivables Corp. III (NV)
Advanta Business Receivables LLC (NV)
Advanta Leasing Receivables Corp. IV
Advanta Leasing Receivables Corp. V
Advanta Business Receivables Corp. (NV)
Advanta Commercial Credit Corp. (NV)
Mt. Vernon Leasing, Inc. (NJ)
Service Partners I Corp. (NV)
Service Partners II Corp. (NV)
Colorado Credit Card Service, LLC (CO)**
Advanta Service Corp. (DE)
Coltex Leverage Lease Corporation I (DE)
Advanta Properties I Corp.
Advanta Properties II Corp.
Advanta Life Insurance Company (AZ)
TSO National Life Insurance Company (AZ)
Direct National Life Insurance Company (AZ)
Advanta Insurance Company (AZ)
Advanta Insurance Agency Inc. (DE)
First Advanta Insurance Agency Inc. (PA)
AICM, Inc. (AZ)
Advanta Name Corp. (DE)
Advanta Advertising, Inc. (DE)
ADVANTENNIS Corp. (DE)
Advanta Mortgage Holding Company (DE)
Advanta Auto Finance Corporation (NV)
Advanta Auto Receivables Corp. I (NV)
Advanta Mortgage Corp. USA (DE)
Advanta Finance Corp. (NV)
Advanta Finance Residential Mortgage Corp. (NV)
Advanta Finance Residual Corporation (NV)
Advanta Mortgage Corp. Midatlantic (PA)
Advanta Mortgage Corp. Midatlantic II (PA)
Advanta Mortgage Corp. New Jersey (NJ)
Advanta Mortgage Corp. Northeast (NY)
Advanta Mortgage Corp. Midwest (PA)
Advanta Nominee Services, Inc. (DE)
Advanta Mortgage Conduit Services, Inc. (DE)
Advanta Conduit Receivables, Inc. (NV)
Advanta Mortgage Receivables Inc. (DE)
Advanta Mortgage Funding Corp. (DE)
* Advanta International Corp. I and Advanta International Corp. II each owns
50% of Advanta UK.
** The Managing Member of Colorado Credit Card Service, LLC is Service
Partners I Corp. and Service Partners II Corp. is also a Member.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements; File No. 33-12510, No. 33-19290, No. 33-31456, No.
33-32969, No. 33-33350, No. 33-39331, No. 33-47308, No. 33-47305, No. 33-50256,
No. 33-50254, No. 33-50258, No. 33-55492, No. 33--57516, No. 33-53205, No.
33-53475, No. 33-54991, No. 33-58029, No. 33-59219, No. 33-61555, No. 33-60419,
No. 333-01681, No. 333-01833, No. 333-04471, No. 333-04465, No. 333-04468,
No. 333-04469, No. 333-05701, No. 333-18993, and No. 333-28291.
Arthur Andersen LLP
Philadelphia, PA
April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 57953
<INT-BEARING-DEPOSITS> 666583
<FED-FUNDS-SOLD> 156500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1269209
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3514319
<ALLOWANCE> 137773
<TOTAL-ASSETS> 6686132
<DEPOSITS> 3017611
<SHORT-TERM> 862588
<LIABILITIES-OTHER> 340625
<LONG-TERM> 1438350
0
1010
<COMMON> 448
<OTHER-SE> 925492
<TOTAL-LIABILITIES-AND-EQUITY> 6686132
<INTEREST-LOAN> 276982
<INTEREST-INVEST> 140636
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 417618
<INTEREST-DEPOSIT> 150164
<INTEREST-EXPENSE> 174394
<INTEREST-INCOME-NET> 93060
<LOAN-LOSSES> 210826
<SECURITIES-GAINS> 3625
<EXPENSE-OTHER> 630841
<INCOME-PRETAX> 96530
<INCOME-PRE-EXTRAORDINARY> 96530
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71625
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 1.91
<LOANS-NON> 51149
<LOANS-PAST> 49458
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 89184
<CHARGE-OFFS> 171940
<RECOVERIES> 20718
<ALLOWANCE-CLOSE> 137773
<ALLOWANCE-DOMESTIC> 134040
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3733
</TABLE>
