-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JHnyvmL08xLwHfi970PAK676liABQVSUQoavk3iHQBTw0qzOqUrc9QqKtgNInbu9 o9mvztUVU+IDfpi+rCoaRQ== 0000893220-98-000640.txt : 19980401 0000893220-98-000640.hdr.sgml : 19980401 ACCESSION NUMBER: 0000893220-98-000640 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14120 FILM NUMBER: 98584014 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19044 BUSINESS PHONE: 2156574000 MAIL ADDRESS: STREET 1: BRANDYWINE CORPORATE CENTER STREET 2: 650 NAAMANS ROAD CITY: CLAYMONT STATE: DE ZIP: 19703 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-K 1 FORM 10-K FOR ADVANTA CORP. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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) DELAWARE 23-1462070 (STATE OR OTHER JURISDICTION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- NONE N/A
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 [ ]. ================================================================================ 2 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).
DOCUMENT FORM 10-K REFERENCE -------- ------------------- 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".
1 3 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 2 4 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 3 5 personal finance loans managed, and the nonperforming loans included in these totals, are concentrated in the following five states:
PERCENT OF PERSONAL PERCENT OF PERCENT OF NONPERFORMING FINANCE TOTAL PORTFOLIO BY NONPERFORMING TO TOTAL LOANS NONPERFORMING STATE BY STATE LOANS - -------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) 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% ======== ====== ===== ===== ===
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 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. 4 6 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, the 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 5 7 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. - --------------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc.; VISA(R) is a federally registered servicemark of VISA, U.S.A., Inc. 6 8 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:
CONSUMER PERCENT OF PERCENT OF PERCENT OF CREDIT TOTAL TOTAL IMPAIRED CARD TOTAL PORTFOLIO IMPAIRED TO TOTAL RECEIVABLES IMPAIRED BY STATE BY STATE RECEIVABLES - ---------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) 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% ========= ====== ===== ===== ===
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 7 9 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 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 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 Comptroller, at least half of the total capital is to be comprised of common equity, retained earnings and a 9 11 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 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. 10 12 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 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 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. 13 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. 14 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.
NAME AGE OFFICE DATE ELECTED ---- --- ------ ------------ 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
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 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 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:
CASH DIVIDENDS QUARTER ENDED: HIGH LOW CLOSE DECLARED -------------- ---- --- ----- --------- 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
At December 31, 1997, the Company had approximately 1,100 and 430 holders of record of Class B and Class A common stock, respectively. 17 19 ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT ----------------------------------------------------------------- PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- 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
18 20 FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT ----------------------------------------------------------------- PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------
(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"). * Not meaningful. 19 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 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 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 $563 million of business loan and lease receivables. Yields on owned business loans and leases increased to 12.26% in 1997 from 11.97% in 1996. The owned average cost of funds increased to 6.31% in 1997 from 6.12% in 1996. The Company has utilized derivatives to manage interest rate risk (see discussion under "Derivatives Activities"). The following table provides an analysis of both owned and managed interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets) for 1995 through 1997. Average owned loan and lease receivables and the related interest revenues include certain loan fees. 22 24 INTEREST RATE ANALYSIS
YEAR ENDED DECEMBER 31, ($ IN THOUSANDS) ----------------------------------------------------------------------- 1997 1996 ---------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE - -------------------------------------------------------------------------------------------------- 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% YEAR ENDED DECEMBER 31, ($ IN THOUSANDS) --------------------------------- 1995 --------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE - ------------------------- --------------------------------- 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%
- -------------------------------------------------------------------------------- (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 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.
1997 VS. 1996 1996 VS. 1995 ($ IN THOUSANDS) ----------------------------- ------------------------------ INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ----------------------------- ------------------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL - ------------------------------------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- (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 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.
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------
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 $53.3 million in 1995. The increase was primarily due to an increase in the desired level of the allowance given the increase in charge-offs and impaired assets during 1996. A description of the credit performance of the loan portfolio is set forth under the section entitled "Credit Risk Management." 25 27 NONINTEREST REVENUES ($ IN THOUSANDS) - --------------------------------------------------------------------------------
1997 1996 1995 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
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 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)
- --------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------- 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% - ---------------------------------------------------------------------------------------------
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 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 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 rate 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 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 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 $1 billion unsecured revolving credit facility. Following the closing of the Transaction with Fleet in 1998, the facility was terminated by the Company and ANB. The following tables detail the composition of the deposit base and the composition of debt and other borrowings at year end for each of the past five years. COMPOSITION OF DEPOSIT BASE
($ IN MILLIONS) AS OF DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- -------------- -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------------- 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% $1,254.9 100% - ----------------------------------------------------------------------------------------------------------------
31 33 COMPOSITION OF DEBT AND OTHER BORROWINGS
($ IN MILLIONS) AS OF DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- -------------- -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------------- 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% - ----------------------------------------------------------------------------------------------------------------
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 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 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 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 37 impaired assets rose to $70.5 million or 2.7% of receivables in 1997 compared to $54.5 million or 2.7% at the end of 1996. Past due loans represent accruing loans that are past due 90 days or more as to collection of principal and interest. Credit card receivables, except those on bankrupt, decedent and fraudulent accounts, continue to accrue interest until the time they are charged off at 186 days contractual delinquency. In contrast, all personal finance loans and most business loans and leases are put on nonaccrual status when they become 90 days past due. During 1994, the Company implemented a new policy for the charge-off of mortgage loans. Under this policy, when a nonperforming mortgage loan becomes twelve months delinquent, the Company writes down the loan to its net realizable value, regardless of anticipated collectibility. Consequently, in 1994, all mortgage loans that had been twelve or more months delinquent, as well as any mortgages that became twelve months delinquent during the year were written down (through a recorded charge-off) to their net realizable value. 36 38 The following tables provide a summary of impaired assets, delinquencies and charge-offs for the past five years:
($ IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- 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% .7% .8% 1.2% Accruing loans past due 90 days or more 1.1 1.4 .7 .5 .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 .9% .7% .2% .2% .3% Accruing loans past due 90 days or more 1.8 1.8 .8 .6 .8 Impaired assets 2.7 2.5 1.1 .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% - ---------------------------------------------------------------------------------------------------------
(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 39 The following tables provide a summary of allowances, impaired assets, delinquencies and charge-offs for the past five years:
($ IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- 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%
38 40
($ IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- 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% - ---------------------------------------------------------------------------------------------------------------------
(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 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 40 42 CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------- 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
See Notes to Consolidated Financial Statements. 41 43 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ($ IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------ - ---------------------------- ------------------------ TOTAL TREASURY STOCKHOLDERS' STOCK EQUITY - ---------------------------- ------------------------ 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) $926,950 - ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 42 44 CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 43 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 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 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 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 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 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 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 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2. LOAN AND LEASE RECEIVABLES Loan and lease receivables consisted of the following:
DECEMBER 31, - -------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
(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 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Receivables serviced for others consisted of the following items:
DECEMBER 31, - ---------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------
(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:
DECEMBER 31, - ----------------------------------------------------------------------------------------------- 1997 1996 -------------------- -------------------- RECEIVABLES % RECEIVABLES % - ----------------------------------------------------------------------------------------------- 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% - -----------------------------------------------------------------------------------------------
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 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 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table displays five years of allowance history:
ALLOWANCE FOR CREDIT LOSSES YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
NOTE 5. INVESTMENTS AVAILABLE FOR SALE Investments available for sale consisted of the following:
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------------- ---------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, - --------------------- ---------------------------------------------- 1995 ---------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE - --------------------- ---------------------------------------------- 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 - ---------------------------------------------------------------------
(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 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maturity of investments available for sale at December 31, 1997 was as follows:
AMORTIZED MARKET COST VALUE - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
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 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6. DEBT Debt consisted of the following:
DECEMBER 31, - -------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
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 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:
ISSUED AND OUTSTANDING DECEMBER 31, - ------------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------------ (IN THOUSANDS) 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 - ------------------------------------------------------------------------------------
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 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:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
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:
DECEMBER 31, - ----------------------------------------------------------------------------------- 1997 1996 - ----------------------------------------------------------------------------------- Deferred taxes: Gross assets $ 84,676 $112,861 Gross liabilities (118,655) (83,226) - ----------------------------------------------------------------------------------- Total deferred taxes $ (33,979) $ 29,635 - -----------------------------------------------------------------------------------
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 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows:
DECEMBER 31, - ---------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------
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:
RESTRICTED PLAN PERFORMANCE ORIGINAL SHARES PLAN YEARS COVERED STOCK PRICE OUTSTANDING - ----------------------------------------------------------------------------------------------------- AMIPWISE III 1996-1998 $17.00 488,800 AMIPWISE IV 1999-2001 $25.00 706,137 - -----------------------------------------------------------------------------------------------------
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 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:
1997 1996 1995 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
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 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:
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) ------------------------------------------------------------------------------------------ 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 - ---------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31,1997:
(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 ------------------------------------------------- ------------------------------ 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 - ----------------------------------------------------------------------------------------------------
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 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 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)
- ------------------------------------------------------------------------------------------------------------ ADVANTA CORP. TRANSACTION TENDER OFFER ADVANTA CORP. AND SUBSIDIARIES PRO FORMA PRO FORMA AND SUBSIDIARIES HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA - ------------------------------------------------------------------------------------------------------------ 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] - ------------------------------------------------------------------------------------------------------------
63 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 $77.5 million. 64 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. AND SUBSIDIARIES PRO FORMA UNAUDITED CONSOLIDATED INCOME STATEMENT YEAR ENDED DECEMBER 31, 1996
($ 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 - ---------------------------------------------------------------------------------------------------------------- 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]
65 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 $16.4 million. 66 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. AND SUBSIDIARIES PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
($ 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 - ----------------------------------------------------------------------------------------------------------- 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
67 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 $40 per share exceeds the option exercise price. 68 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. AND SUBSIDIARIES PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
($ 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 - --------------------------------------------------------------------------------------------------------- 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
69 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 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 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: Year Ended December 31, 1998 $ 9,327 1999 6,024 2000 5,351 2001 3,994 2002 3,447 Thereafter 11,922
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:
DECEMBER 31, - ------------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------
The following table displays information related to selected types of short-term borrowings:
1997 1996 1995 - -------------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE - -------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------
72 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
NONINTEREST REVENUES YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
OPERATING EXPENSES YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
73 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16. SELECTED BALANCE SHEET INFORMATION
INTEREST-BEARING DEPOSITS DECEMBER 31, - ---------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------
(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.
OTHER ASSETS DECEMBER 31, - ---------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------
(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.
OTHER LIABILITIES DECEMBER 31, - ---------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------
74 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:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------
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 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19. PARENT COMPANY FINANCIAL STATEMENTS ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
(IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
76 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS) YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
The Parent Company Only Statements of Changes in Stockholders' Equity is the same as the Consolidated Statements of Changes in Stockholders' Equity (see page 42). 77 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. (PARENT COMPANY ONLY) STATEMENTS OF CASH FLOWS
(IN THOUSANDS) YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
78 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.
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS - ---------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- (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 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:
1997 1996 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------ 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
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 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 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.
1997 1996 1995 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
(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 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:
1997 1996 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
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 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:
RECEIVE PAY FIXED RATE FIXED RATE TOTAL - ----------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------
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 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 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.
BALANCES MATURING IN: BALANCE AT --------------------------------------------------------------- 12/31/97 1998 1999 2000 2001 2002 2003 - ----------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------- BALANCES MATURING IN: -------------------------- 2004 2005 2006 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
(A) A portion of the Company's interest rate swaps were contributed to the Fleet LLC in connection with the Transaction described Note 11. 86 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. /s/ Dennis Alter /s/ William A. Rosoff /s/ John J. Calamari - ---------------------------- ---------------------------- ---------------------------- Chairman of the Board Vice Chairman Vice President, and Chief Executive Officer Finance
87 89 SUPPLEMENTAL SCHEDULES MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, (IN THOUSANDS) 1997 - ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
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:
CASH DIVIDENDS QUARTER ENDED: HIGH LOW CLOSE DECLARED - ------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------
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 90 QUARTERLY DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 - ---------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ---------------------------------------------------------------------------------------------------- (UNAUDITED) 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 - ----------------------------------------------------------------------------------------------------
89 91 QUARTERLY DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 - ---------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ---------------------------------------------------------------------------------------------------- (UNAUDITED) 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 - ----------------------------------------------------------------------------------------------------
(1) See Note 1 to Consolidated Financial Statements. 90 92 SUPPLEMENTAL SCHEDULES ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
($ IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- ------------- ------------- ------------- ------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - -------------------------------------------------------------------------------------------------------------------------- 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% $31,227 100% - --------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF GROSS RECEIVABLES
($ IN THOUSANDS) DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------- ---------------- ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------------------------- 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% - ----------------------------------------------------------------------------------------------------------------------------
(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 93 YIELD AND MATURITY OF INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1997
$ 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 - ------------------------------------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------------------------------------
(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 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: (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. Schedule I -- Condensed Financial Information of Registrant. 2. Schedule II -- Valuation and Qualifying Accounts. 3. Report of Independent Public Accountants on Supplemental Schedules. 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
93 95 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.
94 96 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)). 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).
95 97 24 Powers of Attorney (included on the signature page hereof). 27 Financial Data Schedule (filed herewith). 28 Inapplicable. 99 Inapplicable.
- --------------- * 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 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 report to be signed on its behalf by the undersigned, thereunto duly authorized. ADVANTA CORP. Dated: March 30, 1998 By: /s/ OLAF OLAFSSON ------------------------------------ Olaf Olafsson, President and Director KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby constitute and appoint Dennis Alter, William A. Rosoff, Olaf Olafsson, John J. Calamari, Jeffrey D. Beck and Elizabeth H. Mai, or any of them (with full power to each of them to act alone), his or her true and lawful attorney in-fact and agent, with full power of substitution, for him or her and on his or her behalf to sign, execute and file an Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1997 relating to Advanta Corp. and any or all amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 30th day of March, 1998.
NAME TITLE ---- ----- /s/ DENNIS ALTER Chief Executive Officer and Chairman of the Board - ------------------------------------------ Dennis Alter /s/ WILLIAM A. ROSOFF Vice Chairman and Director - ------------------------------------------ William A. Rosoff /s/ OLAF OLAFSSON President and Director - ------------------------------------------ Olaf Olafsson /s/ JEFFREY D. BECK Vice President and Treasurer - ------------------------------------------ Jeffrey D. Beck /s/ JOHN J. CALAMARI Vice President, Finance and Chief Accounting Officer - ------------------------------------------ John J. Calamari /s/ ARTHUR P. BELLIS Director - ------------------------------------------ Arthur P. Bellis /s/ MAX BOTEL Director - ------------------------------------------ Max Botel /s/ WILLIAM C. DUNKELBERG Director - ------------------------------------------ William C. Dunkelberg /s/ DANA BECKER DUNN Director - ------------------------------------------ Dana Becker Dunn
97 99
NAME TITLE ---- ----- /s/ ROBERT C. HALL Director - ------------------------------------------ Robert C. Hall /s/ JAMES E. KSANSNAK Director - ------------------------------------------ James E. Ksansnak /s/ RONALD LUBNER Director - ------------------------------------------ Ronald Lubner
98 EX-10.G 2 AGREEMENT BETWEEN REGISTRANT AND OLAF OLAFSSON 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 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 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." 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 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 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 - --- ------------ -------------------------- - -------------------------------- 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 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 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 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. 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 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 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 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] 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 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] EX-10.M 3 LIFE INSURANCE BENEFIT 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. EX-10.Q 4 POOLING AND SERVICING AGREEMENT 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 2 TABLE OF CONTENTS
Page 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
i 3
Page 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
ii 4
Page 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
iii 5 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
iv 6
EXHIBITS 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
SCHEDULES Schedule 1 List of Accounts [Deemed Incorporated] v 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. - -------- (1) MasterCard and VISA are registered trademarks of MasterCard International Incorporated and of VISA USA, Inc., respectively. 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. 2 9 "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. 3 10 "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. 4 11 "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 5 12 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. 6 13 "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. 7 14 "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; 8 15 (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; 9 16 (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. 10 17 "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. 11 18 "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. 12 19 "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. 13 20 "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 14 21 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 15 22 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 16 23 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. 17 24 "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 18 25 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. 19 26 "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 20 27 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] 21 28 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 22 29 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. 23 30 (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. 24 31 (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. 25 32 (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 26 33 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; 27 34 (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, 28 35 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 29 36 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 30 37 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: 31 38 (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. 32 39 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; 33 40 (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 34 41 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 35 42 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 36 43 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 37 44 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] 38 45 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. 39 46 (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. 40 47 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 41 48 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. 42 49 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 43 50 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 44 51 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 45 52 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] 46 53 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." 47 54 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 48 55 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 49 56 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. 50 57 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] 51 58 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] 52 59 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. 53 60 (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; 54 61 (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 55 62 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. 56 63 (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 57 64 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 58 65 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, 59 66 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: 60 67 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 61 68 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 62 69 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 63 70 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] 64 71 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. 65 72 (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 66 73 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] 67 74 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 68 75 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 69 76 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] 70 77 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 71 78 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] 72 79 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 73 80 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 74 81 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 75 82 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 76 83 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] 77 84 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 78 85 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 79 86 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 80 87 (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 81 88 (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 82 89 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 83 90 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 84 91 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 85 92 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. 86 93 (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 87 94 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] 88 95 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 89 96 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. 90 97 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 91 98 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] 92 99 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 93 100 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 94 101 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 95 102 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 96 103 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 97 104 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, 98 105 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. 99 106 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 100 107 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 A-1 108 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-2 109 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-3 110 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. B-1 111 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. B-2 112 (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-3 113 (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-4 114 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-5 115 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-6 116 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-1 117 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-2 118 (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-3 119 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-4 120 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-1 121 (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-2 122 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-1-1 123 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-2-1 124 (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-2-2 125 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-2-3 126 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-3-1 127 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-1-1 128 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-2-1 129 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-2-2 130 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-1-1 131 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-2-1 132 SCHEDULE 1 List of Accounts [Original list delivered to Trustee] EX-12 5 COMPUTATION OF RATIO OF EARNINGS 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)
For The Years Ended December 31, ------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) 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
(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. EX-21 6 SUBSIDIARIES OF THE REGISTRANT 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. EX-23 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 March 31, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1997 DEC-31-1997 57953 666583 156500 0 1269209 0 0 3514319 137773 6686132 3017611 862588 340625 1438350 0 1010 448 925492 6686132 276982 140636 0 417618 150164 174394 93060 210826 3625 630841 96530 96530 0 0 71625 1.52 1.50 1.91 51149 49458 0 0 89184 171940 20718 137773 134040 0 3733
-----END PRIVACY-ENHANCED MESSAGE-----