1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Advanta Corp.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement (if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
N/A
------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
N/A
------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$1,021,632,000
------------------------------------------------------------------
(Amount represents estimated proceeds based on the purchase and
sale agreement provisions applied to the September 30, 2000 book
value of assets and liabilities in the proposed transaction.)
(4) Proposed maximum aggregate value of transaction:
$1,021,632,000
------------------------------------------------------------------
(5) Total fee paid:
$204,327
------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form of schedule and the date of its filing.
(1) Amount previously paid:
------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------
2
(4) Date Filed:
------------------------------------------------------------------
3
[ADVANTA LOGO]
WELSH AND MCKEAN ROADS
P.O. BOX 844
SPRING HOUSE, PENNSYLVANIA 19477-0844
---------------
JANUARY 24, 2001
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Advanta Corp. to be held on February 27, 2001, at 1:00 p.m., local time, at our
corporate headquarters, Welsh and McKean Roads, Spring House, Pennsylvania.
At this important meeting, you will be asked to consider and to vote upon a
proposal to approve the purchase and sale agreement that provides for the sale,
transfer and assignment to Chase Manhattan Mortgage Corporation of substantially
all of the assets associated with our mortgage business. A copy of the purchase
and sale agreement is attached to the accompanying proxy statement as Annex I.
Following the transaction, we will no longer operate a mortgage business. We
will continue to operate our other financial services businesses, the products
of which include business credit cards, insurance, and deposit products, and to
make venture capital investments through our affiliates, including Advanta
Partners LP. Based on the conclusion of the strategic alternatives process for
our small ticket equipment leasing business, we have decided to cease
originating new leases. We will continue to manage and service our existing
lease portfolio.
We urge you to read the accompanying proxy statement which includes details
about the proposed sale of our mortgage business and other important information
about us, including pro forma financial information.
Our board of directors has carefully reviewed and considered the terms and
conditions of the proposed sale of our mortgage business and has received the
opinion of its financial advisor, Salomon Smith Barney, as to the fairness of
the consideration to be received by Advanta Corp. from a financial point of
view.
The proposed sale of our mortgage business described in the accompanying
proxy statement will be completed only if it is approved by a majority of the
votes that are entitled to be cast by holders of shares of our Class A Common
Stock and Class A Preferred Stock, voting together as a single class. Whether or
not you plan to attend the meeting, we urge you to complete, sign, date and
return the enclosed proxy card promptly in the accompanying postage-paid
envelope. You may, of course, attend the meeting and vote in person, even if you
have previously returned your proxy.
OUR BOARD OF DIRECTORS HAS APPROVED THE PURCHASE AND SALE AGREEMENT AND THE
TRANSACTIONS PROVIDED FOR IN THE PURCHASE AND SALE AGREEMENT ON THE TERMS
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE PURCHASE AND SALE AGREEMENT AND THE TRANSACTIONS PROVIDED FOR IN
THE PURCHASE AND SALE AGREEMENT. The sale of our mortgage business represents an
important step in our efforts to deliver value to our stockholders.
Sincerely,
/s/ DENNIS ALTER
--------------------------------------
Dennis Alter
Chairman of the Board and
Chief Executive Officer
4
[ADVANTA LOGO]
WELSH AND MCKEAN ROADS
P.O. BOX 844
SPRING HOUSE, PENNSYLVANIA 19477-0844
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
JANUARY 24, 2001
We will hold a special meeting of stockholders of Advanta Corp. on February
27, 2001 at 1:00 p.m., local time, at our headquarters, Welsh and McKean Roads,
Spring House, Pennsylvania for the following purpose:
To consider and vote upon a proposal to approve the purchase and sale
agreement, dated as of January 8, 2001, by and between Advanta Corp. and
Chase Manhattan Mortgage Corporation, and the transactions provided for in
the purchase and sale agreement.
The purchase and sale agreement provides for the sale, transfer and
assignment of substantially all of the assets and operating liabilities
associated with our mortgage business, which liabilities consist primarily of
our contractual obligations and other liabilities that appear on our balance
sheet, as well as specified contingent liabilities arising out of our operation
of the mortgage business before closing that are identified in the purchase and
sale agreement. A copy of the purchase and sale agreement is attached as Annex I
to the proxy statement that accompanies this notice.
Only holders of record of our Class A Common Stock and our Class A
Preferred Stock at the close of business on January 22, 2001 are entitled to
notice of, and to vote at, the meeting and any adjournment or postponement of
the meeting.
We describe the proposal in more detail in the accompanying proxy
statement, which you should read carefully before you vote. THE ENCLOSED PROXY
IS SOLICITED BY OUR BOARD OF DIRECTORS. We urge you to date, sign and return the
enclosed proxy promptly. We are enclosing a postage-paid reply envelope for your
convenience. You are cordially invited to attend the meeting in person. The
return of the enclosed proxy will not affect your right to vote if you attend
the meeting in person.
Under the Delaware General Corporation Law, stockholders will not have any
right in connection with the proposed transaction to dissent and seek appraisal
of their shares of our capital stock.
By Order of the Board of Directors,
/s/ ELIZABETH H. MAI
--------------------------------------
Elizabeth H. Mai
Senior Vice President, Secretary and
General Counsel
Dated: January 24, 2001
5
PROXY STATEMENT
We are furnishing this proxy statement to the holders of shares of our
Class A Common Stock and Class A Preferred Stock in connection with the
solicitation of proxies by our board of directors for use at a special meeting
of stockholders to be held on February 27, 2001, at 1:00 p.m. local time, at our
corporate headquarters, Welsh and McKean Roads, Spring House, Pennsylvania and
at any adjournment or postponement of the meeting.
All references in this proxy statement to "we," "us," "our" or "Advanta"
mean Advanta Corp., or, where the context indicates, Advanta Corp. and its
subsidiaries.
The date of this proxy statement is January 24, 2001. We are first mailing
this proxy statement, the attached notice and the enclosed proxy card to
stockholders on or about January 30, 2001.
6
TABLE OF CONTENTS
PAGE
----
SUMMARY TERM SHEET.......................................... -1-
THE SPECIAL MEETING......................................... -8-
Date, Time and Place of Special Meeting of Stockholders... -8-
Record Date and Outstanding Shares........................ -8-
Voting Rights; Quorum and Vote Required................... -8-
Proxies................................................... -8-
Solicitation of Proxies and Expenses...................... -9-
THE TRANSACTION............................................. -9-
General................................................... -9-
Background of the Transaction............................. -10-
Recommendation of the Board of Directors and Reasons for
the Transaction........................................ -12-
Opinion of Our Financial Advisor.......................... -13-
Precedent Transactions Analysis........................ -14-
Discounted Cash Flow Analysis.......................... -15-
Comparable Company Analysis............................ -15-
Structure of the Transaction.............................. -17-
Effects of the Transaction; Conduct of Our Business after
the Transaction........................................ -18-
Interest of Certain Persons in Matters to Be Acted Upon... -18-
Statement of Accounting Treatment......................... -19-
Certain Federal Income Tax Consequences................... -19-
No Appraisal Rights....................................... -20-
THE PURCHASE AND SALE AGREEMENT............................. -20-
Purchase and Purchase Price............................... -20-
The Closing............................................... -21-
Ancillary Agreements...................................... -21-
Conditions to the Transaction............................. -21-
Conditions to Our Obligation to Close.................. -21-
Conditions to Buyer's Obligation to Close.............. -22-
Representations and Warranties............................ -24-
Covenants................................................. -24-
Our Conduct of Business................................ -25-
Conduct of Buyer....................................... -25-
Regulatory Agreements.................................. -25-
No Solicitation........................................ -25-
Regulatory Matters; Other Consents..................... -26-
Employment Matters..................................... -26-
Taxes.................................................. -27-
Real Estate Matters.................................... -27-
Non-Competition and Non-Solicitation................... -27-
i
7
PAGE
----
Servicing Agreements................................... -28-
Sale of Mortgage Loans to Buyer........................ -28-
Buyer to Perform Obligations under Corporate Finance
Program............................................... -28-
Insurance Related Activities.............................. -29-
Termination............................................... -29-
Indemnification........................................... -30-
Litigation Management..................................... -31-
Fees and Expenses......................................... -31-
Assignment................................................ -31-
OWNERSHIP OF ADVANTA SHARES................................. -32-
Security Ownership Of Certain Beneficial Owners........... -32-
Security Ownership of Management.......................... -33-
SELECTED FINANCIAL DATA..................................... -36-
UNAUDITED PRO FORMA FINANCIAL INFORMATION................... -40-
UNAUDITED FINANCIAL STATEMENTS OF ADVANTA MORTGAGE.......... -45-
INFORMATION ABOUT ADVANTA................................... -68-
INFORMATION ABOUT BUYER..................................... -68-
REGULATORY AND OTHER APPROVALS.............................. -68-
INDEPENDENT PUBLIC ACCOUNTANTS.............................. -68-
WHERE YOU CAN FIND MORE INFORMATION -- INCORPORATION OF
INFORMATION BY REFERENCE.................................. -69-
STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING OF ADVANTA
STOCKHOLDERS.............................................. -69-
FORWARD-LOOKING STATEMENTS.................................. -70-
ii
8
SUMMARY TERM SHEET
This summary term sheet highlights some of the important information
contained in this proxy statement. It may not contain all of the information
that is important to you. To fully understand the sale of our mortgage business
to Chase Manhattan Mortgage Corporation, and for a more complete description of
the legal terms and conditions of the transaction, you should read carefully
this entire proxy statement and the documents to which we refer you, including
the purchase and sale agreement included as Annex I to this proxy statement. See
"Where You Can Find More Information -- Incorporation of Information by
Reference."
ADVANTA CORP................................. We are a nationwide provider of financial
WELSH AND MCKEAN ROADS services. We offer diverse and innovative
P.O. BOX 844 products to consumers and small businesses.
SPRING HOUSE, PENNSYLVANIA 19477-0844 Our consumer products include first and
(215) 657-4000 second lien non-conforming residential
mortgage loans. Our mortgage loans are
considered "non-conforming" because we
underwrite loans with credit characteristics
that do not meet the underwriting guidelines
of federal mortgage agencies, such as the
Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. We
service all of the mortgage loans that we
originate. We also service the non-conforming
mortgage loans of third parties for a fee.
In addition, we offer business credit cards.
Our basic business card product is an
unsecured MasterCard(R)* business credit
card. Until recently, we also offered
equipment leases to small businesses. Based
on the conclusion of the strategic
alternatives process for our leasing
business, as of January 23, 2001 we ceased
originating new leases. We will continue to
manage and service our existing lease
portfolio.
We offer deposit products and operate Advanta
Insurance, which offers a variety of credit
related insurance products. We also make ven-
ture capital investments through our
affiliates, including Advanta Partners LP.
See "Information About Advanta."
CHASE MANHATTAN MORTGAGE CORPORATION......... The buyer, Chase Manhattan Mortgage Corpo-
343 THORNALL STREET ration, and its affiliates are engaged in the
EDISON, NEW JERSEY 08837 origination and servicing of residential
(732) 205-0600 mortgage products, including prime and
subprime mortgages and home equity and
manufactured housing loans. The buyer is a
subsidiary of J.P. Morgan Chase & Co., which
is a premier global financial services firm.
See "Information About Buyer."
- ---------------
* MasterCard(R) is a federally registered servicemark of MasterCard International, Inc.
1
9
TIME AND PLACE OF SPECIAL STOCKHOLDER We will hold the meeting on February 27,
MEETING...................................... 2001, at 1:00 p.m., local time, at our
corporate headquarters located at Welsh and
McKean Roads, Spring House, Pennsylvania.
PROPOSAL..................................... At the meeting, you will be asked to consider
and vote on a proposal to approve the
purchase and sale agreement, dated as of
January 8, 2001, by and between Advanta Corp.
and the buyer and the transactions provided
for in the purchase and sale agreement.
The purchase and sale agreement provides for
the sale, transfer and assignment to the
buyer and its affiliates of substantially all
of the assets and operating liabilities
associated with our mortgage business, which
liabilities consist primarily of our
contractual obligations and other liabilities
that appear on our balance sheet, as well as
specified contingent liabilities arising out
of our operation of the mortgage business
before closing that are identified in the
purchase and sale agreement. See "The
Transaction."
VOTING....................................... You may vote at the meeting if you owned of
record shares of our Class A Common Stock or
Class A Preferred Stock at the close of
business on January 22, 2001. You will be
entitled to cast one vote for each share of
Class A Common Stock and one half vote for
each share of Class A Preferred Stock that
you owned at that time. See "The Special
Meeting -- Record Date and Outstanding
Shares" and "-- Voting Rights; Quorum and
Vote Required."
Delaware law does not require that we obtain
stockholder approval of the purchase and sale
agreement and the transactions provided for
in the purchase and sale agreement. The
purchase and sale agreement provides that the
closing under the purchase and sale agreement
is conditioned upon us obtaining the approval
by the affirmative vote of a majority of the
votes entitled to be cast by the holders of
our Class A Common Stock and our Class A
Preferred Stock, voting together as a single
class. The sale of some loans receivable
currently on our balance sheet and a small
portion of our residual assets to the buyer
or its affiliates, which sale is not
contingent upon stockholder approval, is
expected to occur before the closing under
the purchase and sale agreement.
2
10
Under applicable Delaware law, abstentions
and broker non-votes will have the same
effect as votes against the proposal. See
"The Special Meeting -- Voting Rights; Quorum
and Vote Required."
PROXIES AND REVOCATION OF PROXIES............ You may vote your shares by attending the
meeting and voting in person, or by marking
the enclosed proxy card with your vote,
signing it and returning it in the enclosed
postage-paid return envelope. In order to
revoke your proxy, you must:
- deliver to the Secretary of Advanta Corp.
before the meeting, or at the meeting and
before your shares have been voted, a writ-
ten notice of revocation bearing a later
date than the proxy;
- deliver to the Secretary of Advanta Corp.
before the meeting, or at the meeting and
before your shares have been voted, a new
proxy bearing a later date than the
original proxy; or
- attend the meeting and vote in person.
Simply attending the meeting will not revoke
your proxy. See "The Special Meeting -- Prox-
ies."
RECOMMENDATION OF THE BOARD OF DIRECTORS; Our board of directors recommends that stock-
OPINION OF FINANCIAL ADVISOR................. holders vote for the proposal to approve the
purchase and sale agreement and the transac-
tions provided for in the purchase and sale
agreement.
The reasons for the board's recommendation
are discussed in "The Transaction -- Recom-
mendation of the Board of Directors and Rea-
sons for the Transaction" and "-- Opinion of
Our Financial Advisor."
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE Some of our executive officers, other than
ACTED UPON................................... our Chairman and Vice Chairman, as well as
other of our employees will receive bonuses
or severance benefits as a result of the
closing of this transaction. In addition,
some of our directors, executive officers and
other employees may receive other direct or
indirect benefits upon the closing of this
transaction as a result of amendments to
outstanding stock option and stock
appreciation right grants. See "The
3
11
Transaction -- Interest of Certain Persons in
Matters to Be Acted Upon."
THE TRANSACTION.............................. At the closing of the transaction we will
sell, transfer and assign to the buyer
substantially all of the assets and operating
liabilities associated with our mortgage
business, which liabilities consist primarily
of our contractual obligations and other
liabilities that appear on our balance sheet,
as well as specified contingent liabilities
arising out of our operation of the mortgage
business before closing that are identified
in the purchase and sale agreement. We will
retain contingent liabilities, primarily
relating to litigation, arising out of our
operation of the mortgage business before
closing that are not specifically assumed by
the buyer. We expect that we will complete
the sale of some loans receivable currently
on our balance sheet and a small portion of
our residual assets to the buyer or its
affiliates before the closing under the
purchase and sale agreement. See "The
Transaction -- Structure of the Transac-
tion."
At closing, the buyer will assign some of the
assets it is acquiring to one or more of its
affiliates. In addition, the buyer may assign
all of its rights, interests and obligations
under the purchase and sale agreement to one
of its affiliates. The buyer will retain its
obligations to us under the purchase and sale
agreement even if it makes any of the
permitted assignments to its affiliates. See
"The Purchase and Sale
Agreement -- Assignments."
The purchase price for the assets, net of the
related operating liabilities that appear on
our balance sheet and that are associated
with our mortgage business, will be
approximately $1,021,632,000. This net
purchase price will result in a gain before
transaction expenses of approximately
$59,670,000. This gain will be reduced by a
charge of approximately $19,670,000
associated with equipment, facilities and
derivative instruments related to hedging
activities which will not be purchased by the
buyer. We also anticipate restructuring
expenses associated with our intention to
substantially reduce corporate expenses after
closing.
The net purchase price reflected above
includes the expected proceeds from the sale
to the
4
12
buyer of some loans receivable currently on
our balance sheet and a small portion of our
residual assets. We anticipate that this
sale, which is not contingent on stockholder
approval, will occur on or about February 9,
2001, before the closing under the purchase
and sale agreement. If this sale is not
completed before closing under the purchase
and sale agreement, it will occur
simultaneously with that closing.
The purchase and sale agreement also contains
provisions for adjustments to the purchase
price before, on and after closing. See "The
Purchase and Sale Agreement -- Purchase and
Purchase Price" for a detailed description of
the purchase price and the provisions that
govern adjustments to the purchase price.
After the transaction, we will no longer
operate a mortgage business. We will continue
to:
- operate our other financial services busi-
nesses, the products of which include busi-
ness credit cards, insurance, and deposit
products;
- make venture capital investments through
our affiliates, including Advanta Partners
LP; and
- manage and service the portfolio for our
small ticket equipment leasing business,
although as of January 23, 2001 we ceased
originating new leases.
See "The Transaction -- Effects of the
Transaction; Conduct of Advanta's Business
after the Transaction."
CONDITIONS TO CLOSING........................ In addition to stockholder approval, as de-
scribed above, the completion of the transac-
tion depends upon other customary closing
conditions, including third party consents,
regulatory approvals, the expiration of
applicable statutory waiting periods and the
execution of ancillary agreements. See "The
Purchase and Sale Agreement -- Conditions to
the Transaction" and "Regulatory and Other
Approvals."
TERMINATION.................................. The purchase and sale agreement may be
terminated at any time before closing, among
other things:
- by the agreement of the parties;
5
13
- by either party, if the transactions
described in the purchase and sale
agreement have not been completed by March
31, 2001, as that date may be extended by
agreement; or
- after the occurrence or non-occurrence of
specified events or actions, by one of the
parties acting independently.
Under limited circumstances, a termination of
the purchase and sale agreement would require
us to pay to the buyer a termination fee of
$1,000,000. See "The Purchase and Sale Agree-
ment -- Termination."
FEES AND EXPENSES............................ Generally, all costs and expenses incurred in
connection with the transaction will be paid
by the party incurring the expenses. However,
we will be responsible for all costs and
expenses incurred in connection with:
- the assignments of contracts to the buyer;
and
- the purchase and sale of personal property.
See "The Purchase and Sale Agreement -- Fees
and Expenses."
EMPLOYEE MATTERS............................. The purchase and sale agreement contains
covenants relating to compensation and other
benefits to be provided by the buyer to our
employees who are employed by the buyer as of
the closing date of the transaction.
COVENANTS.................................... The purchase and sale agreement contains
covenants, including, among others, covenants
that:
- require us to conduct our mortgage business
in the ordinary course of business pending
the closing under the purchase and sale
agreement;
- prohibit any solicitation or other action
by us to facilitate the acquisition of our
mortgage business by any person other than
the buyer;
- require that we provide the buyer with
access to information related to the mortgage
business;
- require that we and the buyer use commer-
cially reasonable efforts to obtain all
necessary governmental approvals; and
- require that we not compete with our former
mortgage business after closing.
See "The Purchase and Sale Agreement --
Covenants."
INDEMNIFICATION.............................. We will indemnify the buyer and its
affiliates for losses from the breach of any
representation, warranty or covenant provided
by us in the purchase and sale agreement and
any of our liabilities associated with our
mortgage business that are not expressly
assumed by the buyer under the purchase and
sale agreement. We will not have any
indemnification obligation under the purchase
and sale agreement until the buyer's
aggregate losses for which indemnification is
provided exceed $1,000,000, and then we will
be obligated to indemnify the buyer only for
the amount by which the losses exceed the
initial $1,000,000. The buyer has similar
indemnification obligations to us. See "The
Purchase and Sale Agreement -- Indemni-
fication."
ACCOUNTING TREATMENT......................... The transaction will be accounted for under
generally accepted accounting principles as a
sale of:
- financial assets, including cash, loans,
retained interests in securitizations, and
other receivables; and
- non-financial assets and liabilities,
including contractual mortgage servicing
rights, prop-
6
14
erty and equipment, prepaid assets and con-
tractual obligations.
See "The Transaction -- Statement of Account-
ing Treatment."
FEDERAL INCOME TAX CONSEQUENCES.............. We will not distribute any of the proceeds
from the sale to our stockholders, and the
sale should not have any direct federal
income tax consequences to our stockholders.
However, the sale will be a taxable event.
Although the transaction will result in a
gain for financial reporting purposes, we
will recognize a loss for tax purposes. For
this reason, we expect that we will not be
required to pay any material federal income
tax as a result of the sale. See "The
Transaction -- Certain Federal Income Tax
Consequences."
NO APPRAISAL RIGHTS.......................... Under Delaware law, you will not have any
right in connection with the transaction to
dissent and seek appraisal of your shares.
See "The Transaction -- No Appraisal Rights."
SELECTED FINANCIAL INFORMATION............... For financial information about us, including
historical combined financial statements of
our mortgage business unit, Advanta Mortgage,
and pro forma financial information about us,
see "Selected Financial Data," "Unaudited Pro
Forma Financial Information" and "Unaudited
Financial Statements of Advanta Mortgage."
7
15
THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING OF STOCKHOLDERS
We will hold a special meeting of stockholders on February 27, 2001, at
1:00 p.m., local time, at our corporate headquarters, which are at Welsh and
McKean Roads in Spring House, Pennsylvania.
RECORD DATE AND OUTSTANDING SHARES
Holders of record of the outstanding shares of our Class A Common Stock and
Class A Preferred Stock at the close of business on January 22, 2001, the record
date fixed for the meeting, are entitled to notice of and to vote at the
meeting. At the close of business on the record date, there were 10,040,235
issued and outstanding shares of Class A Common Stock held by 290 holders of
record, and 1,010 issued and outstanding shares of Class A Preferred Stock held
by one holder of record.
VOTING RIGHTS; QUORUM AND VOTE REQUIRED
On all matters to be voted upon at the meeting and any adjournment or
postponement of the meeting, the holders of the Class A Common Stock and Class A
Preferred Stock will vote together as a single class. Each record holder of
Class A Common Stock is entitled to one vote per share, and each record holder
of Class A Preferred Stock is entitled to one-half vote per share. The presence,
either in person or by properly executed proxy, of holders of a majority of the
outstanding shares entitled to vote will constitute a quorum for the conduct of
business at the meeting. For purposes of determining the presence or absence of
a quorum only, we intend to count as present at the meeting and entitled to
vote, stockholders of record who are present at the meeting in person or by
proxy and who abstain, including brokers holding customers' shares of record who
cause abstentions to be recorded at the meeting.
Although stockholder approval of the transaction is not required by
Delaware law, the purchase and sale agreement provides that the closing under
the purchase and sale agreement and the transactions provided for in the
purchase and sale agreement are conditioned upon us obtaining the approval by
the affirmative vote of a majority of the votes that are entitled to be cast by
holders of the issued and outstanding shares of our Class A Common Stock and
Class A Preferred Stock, voting together as a single class. Under applicable
Delaware law, abstentions and broker non-votes will have the same effect as
votes against the proposal to approve the purchase and sale agreement and the
transactions provided for in the purchase and sale agreement. We also expect to
sell some loans receivable on our balance sheet and a small portion of our
residual assets, which is not contingent upon stockholder approval, to Chase
Manhattan Mortgage Corporation ("Buyer") or its affiliates before the closing
under the purchase and sale agreement.
PROXIES
You may vote your shares by attending the meeting and voting in person or
by marking the enclosed proxy card with your vote and dating, signing and
returning it in the enclosed postage-prepaid return envelope. The individuals
named as proxy holders on the enclosed proxy card will vote all shares of Class
A Common Stock and Class A Preferred Stock represented at the meeting by
properly executed proxies that are timely received and not revoked according to
the instructions marked on the proxies. If you do not mark your instructions on
your proxy, the proxy holder(s) will vote your proxy for approval of the
purchase and sale agreement and the transactions contemplated by the purchase
and sale agreement, except as otherwise provided in this proxy statement. THE
PROXIES ARE SOLICITED ON BEHALF OF OUR BOARD OF DIRECTORS.
You may revoke your proxy at any time before it is voted. To revoke your
proxy you must:
- deliver to the Secretary of Advanta before the meeting, or at the meeting
and before your shares have been voted, a written notice of revocation
bearing a later date than the proxy;
8
16
- properly execute a new proxy relating to the same shares which bears a
later date than the original proxy and deliver it to the Secretary of
Advanta before the meeting, or at the meeting and before your shares have
been voted; or
- attend the meeting and vote in person, although attending the meeting
will not in and of itself constitute revocation of your proxy.
You should deliver any written notice or subsequently dated proxy which is
intended to revoke an earlier proxy to the principal executive offices of
Advanta Corp., Welsh and McKean Roads, Spring House, Pennsylvania 19477,
Attention: Secretary.
The board of directors does not know of any matters other than those
described in the notice of the meeting that are to come before the meeting. If
any other business is properly brought before the meeting, including among other
things, a motion to adjourn or postpone the meeting to another time and/or place
for the purpose of soliciting additional proxies in favor of the proposal to
approve the purchase and sale agreement and the transactions provided for in the
purchase and sale agreement or to permit dissemination of information about
important developments relating to the purchase and sale agreement and the
transactions provided for in the purchase and sale agreement or otherwise
related to the meeting, one or more proxy holders named in the proxy card will
vote the shares represented by the proxy on those matters as determined in their
discretion.
SOLICITATION OF PROXIES AND EXPENSES
We will bear the entire cost of soliciting proxies from our stockholders.
We will furnish to brokerage houses, fiduciaries and custodians holding in their
names shares beneficially owned by others copies of solicitation material to
forward to the beneficial owners. Upon request, we will reimburse persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to the beneficial owners. We may supplement original
solicitation of proxies by mail with telephone or personal solicitations by
directors, officers or other regular employees of Advanta. We will not pay any
additional compensation to our directors or officers or our other regular
employees for these services.
In addition, we have retained D.F. King & Co., Inc. to assist in the search
for, and distribution of proxies to and solicitation of proxies from, beneficial
owners of our Class A Common Stock held in street name or by other nominees. For
its services, we will pay D. F. King & Co., Inc. a fee of $7,500 and reimburse
it for its direct out-of-pocket expenses.
We will furnish all proxy materials, other than the proxy card itself, to
beneficial owners of shares of Class B Common Stock, although holders of Class B
Common Stock are not entitled to notice of or to vote at the meeting. We will
also bear the expenses of this additional mailing.
THE TRANSACTION
GENERAL
Our mortgage business consists of originating, marketing, purchasing,
selling, servicing, subservicing and securitizing non-conforming credit first
and second lien residential mortgage loans, including home equity lines of
credit, and the issuance of related non-conforming mortgage insurance products.
In addition to servicing and managing the mortgage loans that we originate or
purchase, we service the home equity loans of unaffiliated third parties through
our subservicing business which is part of our mortgage business. Our mortgage
business, as described above, is referred to in this proxy statement as the
"Mortgage Business."
For purposes of this proxy statement, "Selling Subsidiaries" means: (a)
Advanta Mortgage Holding Corp. ("AMHC"), its wholly-owned subsidiary, Advanta
Mortgage Corp. USA ("AMCUSA") and all of AMCUSA's subsidiaries; (b) Advanta
National Bank ("ANB"); (c) Advanta Bank Corp.
9
17
("ABC"); and (d) any affiliates of AMHC, AMCUSA and its subsidiaries, ANB and
ABC, or any of them, that sell assets or transfer liabilities under the purchase
and sale agreement.
The purchase and sale agreement provides that we will, and will cause each
of the Selling Subsidiaries, as defined below, to sell, transfer and assign to
Buyer substantially all of the assets and operating liabilities associated with
the Mortgage Business, which liabilities consist primarily of our contractual
obligations and other liabilities that appear on our balance sheet, as well as
specified contingent liabilities arising out of our operation of the Mortgage
Business before the closing that are identified in the purchase and sale
agreement. The assets being sold are referred to collectively as the "Assets."
The sale, transfer and assignment of these Assets and liabilities by us, all in
accordance with the purchase and sale agreement, together with all of the other
transactions provided for in the purchase and sale agreement are referred to in
this proxy statement collectively as the "Transaction."
The purchase price for the assets, net of the related operating liabilities
that appear on our balance sheet associated with our mortgage business, will be
approximately $1,021,632,000. This net purchase price will result in a gain
before transaction expenses of approximately $59,670,000. This gain will be
reduced by a charge of approximately $19,670,000 associated with certain
equipment, facilities and derivative instruments related to hedging activities
which will not be purchased by Buyer. We also anticipate restructuring expenses
associated with our intention to substantially reduce corporate expenses after
closing.
We expect that we will complete the sale of some loans receivable currently
on our balance sheet and a small portion of our residual assets to Buyer or its
affiliates before the closing under the purchase and sale agreement. The net
purchase price reflected above includes the expected proceeds from the sale to
Buyer of these loans receivable currently on our balance sheet and a small
portion of our residual assets. We anticipate that this sale, which is not
contingent on stockholder approval, will occur on or about February 9, 2001,
before the closing under the purchase and sale agreement. If this sale is not
completed before the closing under the purchase and sale agreement, it will
occur simultaneously with that closing. See "The Purchase and Sale
Agreement -- Purchase of Assets and Purchase Price" for a detailed description
of the purchase price and the provisions that govern post-closing adjustments to
the purchase price.
Following the Transaction, we will no longer operate a mortgage business.
However, we will retain contingent liabilities, primarily relating to
litigation, arising out of our operation of the Mortgage Business before closing
that are not specifically being assumed by Buyer, as described above. We will
continue to operate our other financial services businesses, the products of
which include business credit cards, insurance and deposit products, and to make
venture capital investments through our affiliates, including Advanta Partners
LP. Based on the conclusion of the strategic alternatives process for our small
ticket equipment leasing business, we have decided to cease originating new
leases. We will continue to manage and service our existing lease portfolio.
BACKGROUND OF THE TRANSACTION
On May 17, 2000, we announced that we would explore strategic alternatives
to unlock the unrecognized value of our mortgage and leasing businesses. We
stated that we wanted to fulfill our objective to maximize value for our
stockholders. At that time, we had reported five quarters of increased earnings,
positive cash flow and improved expense ratios and we were not receiving what we
deemed to be appropriate market valuation for these results. Thus, we determined
to pursue strategic alternatives to try to accelerate the realization of the
intrinsic value of our mortgage and leasing businesses. We further wanted to
focus on our greatly expanding and profitable business of issuing business
credit cards to small businesses in the United States.
On May 17, 2000 we also announced that we had retained Salomon Smith Barney
to assist us in studying possible strategic alternatives for our mortgage and
leasing businesses as part of our plan to realize the unrecognized value of
these businesses and to focus on our business credit card
10
18
operations. We provided a number of financial services companies with
information about our mortgage business, after we received appropriate signed
confidentiality agreements.
From May 17, 2000 through early July 2000, Salomon Smith Barney contacted
48 companies to determine their level of interest in the Mortgage Business.
Twenty of these companies executed confidentiality agreements and received our
offering memorandum for the Mortgage Business. We eliminated several companies
from further consideration during this phase because they expressed interest in
acquiring only portions of the Mortgage Business.
During June and July 2000, five companies attended presentations on the
Mortgage Business by members of our senior management. Of the five companies,
two indicated that they were not interested in acquiring the entire Mortgage
Business operation and, therefore, they were eliminated from further
consideration.
We set July 14, 2000 as the deadline for preliminary indications of
interest. The remaining three companies submitted initial indications of
interest in acquiring the entire Mortgage Business. We invited these companies
to conduct additional due diligence and participate in additional meetings with
members of the management team for our Mortgage Business. As part of the due
diligence, Advanta representatives met with representatives of each of the
companies to determine whether a sale of the Mortgage Business to the particular
interested party would be in the best interests of Advanta and its stockholders.
In addition, we provided each of the three companies with access to our
facilities and to a data room containing extensive information and documents
related to the Mortgage Business.
After the additional due diligence and meetings of our representatives and
members of management with the representatives of the interested parties, two of
the three companies, including Buyer, submitted final proposals to acquire the
entire Mortgage Business on or before the deadline that we had established. The
third company was unable to submit its final proposal within the established
time frame.
On October 16, 2000, our board of directors met, received an updated report
on, and discussed the strategic alternatives process and the status of the two
final proposals that we received within the time frame. Our board determined
that the proposal from Buyer offered the best overall value to us and our
stockholders. We suspended discussions with the other remaining parties at that
time because we considered the potential transaction with Buyer to be the
superior alternative.
The board's decision was based on its consideration of the following
principal factors:
- our results of operations, business and prospects, relating to the
Mortgage Business and the other businesses in which we are presently
engaged;
- information about the financial services industry in which we operate and
our financial, operating and stock price history;
- the environment in which we operate, including the political, regulatory,
competitive and economic environments;
- earnings forecasts prepared by our management;
- consideration of alternative transactions with other possible parties
involving all or a portion of the assets and liabilities of the Mortgage
Business and the indications of interest from other parties in a possible
transaction with us, including indications of interest following the
other parties' respective due diligence investigations of the Mortgage
Business; and
- the terms and conditions of the proposals submitted, including the
overall value to us and our stockholders, the likelihood of completing a
transaction and the opportunities to our employees.
11
19
On October 24, 2000 we announced that we had accepted Buyer's written
proposal to sell the Mortgage Business to Buyer in a cash transaction for a
price in excess of book value.
During October and through December 2000, we had extensive discussions with
Buyer concerning the purchase and sale agreement and related agreements,
exhibits and schedules.
On December 22, 2000, our board of directors met to consider the
Transaction. A representative of our outside legal counsel attended this meeting
of our board of directors. Our Vice Chairman described the then current status
of the Transaction to our board of directors and he and our General Counsel
described the material terms of the purchase and sale agreement and related
ancillary agreements and reported that open items remained to be resolved. Our
legal counsel described to and discussed with the board the expected fairness
opinion to be delivered to the board by Salomon Smith Barney based on the
material financial terms of the Transaction remaining substantially consistent
with the then current status of the Transaction. After discussion, all of the 10
members of our board who were present at the meeting approved the Transaction,
subject to the agreement by the parties substantially on the terms described in
the board meeting. Our board of directors authorized our Chairman and our Vice
Chairman to negotiate the open issues with representatives of Buyer and to
execute an agreement consistent with the terms and conditions of Buyer's written
proposal to us, dated October 13, 2000, and the discussions of the board,
subject to any changes approved by our Chairman and Vice Chairman. One of our 11
directors, Olaf Olafsson, was not present at the December 22, 2000 meeting, but
Mr. Olafsson indicated that he approved of the Transaction based on the
information available to him before the meeting. Mr. Olafsson later confirmed
his approval of the Transaction. Following the meeting of our board of
directors, we and Buyer negotiated resolutions to the open issues, consistent
with the authorization of our board. Salomon Smith Barney subsequently delivered
its fairness opinion, dated January 8, 2001. We and Buyer executed the purchase
and sale agreement on January 8, 2001.
RECOMMENDATION OF THE BOARD OF DIRECTORS AND REASONS FOR THE TRANSACTION
On December 22, 2000, the board of directors met and:
- resolved that the sale of the Assets according to a purchase and sale
agreement containing terms and conditions substantially similar to those
contained in Buyer's written proposal to us dated October 13, 2000 is
desirable and in the best interest of Advanta;
- designated the Chairman and Vice Chairman of Advanta Corp. to negotiate
the open issues relating to the purchase and sale agreement and the
Transaction;
- authorized and approved a purchase and sale agreement consistent with
Buyer's October 13, 2000 written proposal to us and the discussions of
the board, subject to those changes approved by the Chairman or Vice
Chairman of Advanta Corp.; and
- recommended that stockholders vote in favor of the purchase and sale
agreement and the Transaction.
In addition to the factors considered and discussed at the October 16, 2000
meeting of the board of directors, the board's approval was based on its
consideration of the following factors:
- the expected receipt of an opinion of Salomon Smith Barney as to the
fairness of the consideration to be received from a financial point view;
- the terms and conditions of the purchase and sale agreement;
- the board's belief that the Transaction, together with the continued
operation of our other businesses, would offer opportunities to our
employees; and
- the fact that we would have the opportunity to further develop other
areas of our business and bring value to stockholders through their
continued ownership interest in Advanta Corp.
12
20
This discussion of the information and factors that the board of directors
considered is not intended to be exhaustive, but we believe that it includes all
of the material factors considered by the board of directors. In view of the
variety of factors considered in connection with its evaluation of the
Transaction, the board of directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the board of
directors may have given different weights to different factors.
OPINION OF OUR FINANCIAL ADVISOR
We retained Salomon Smith Barney to act as our exclusive financial advisor
in connection with, among other things, a possible sale of Advanta's Mortgage
Business. Pursuant to Salomon Smith Barney's engagement letter, Salomon Smith
Barney rendered a written opinion to Advanta's board of directors dated January
8, 2001 to the effect that, based upon and subject to the considerations set
forth in the opinion, as of such date, the aggregate consideration to be
received by Advanta in the proposed sale of the assets constituting the Mortgage
Business was fair, from a financial point of view, to Advanta.
Annex II contains the full text of Salomon Smith Barney's opinion, which
sets forth the assumptions made, general procedures followed, matters considered
and limits on the review undertaken. This summary of Salomon Smith Barney's
opinion is qualified in its entirety by the full text of such opinion. ADVANTA
STOCKHOLDERS ARE URGED TO READ THE SALOMON SMITH BARNEY OPINION CAREFULLY AND
COMPLETELY.
Although Salomon Smith Barney evaluated the fairness, from a financial
point of view, of the aggregate consideration to be received by Advanta in the
proposed transaction, the price was determined by Advanta and Buyer through
arm's-length negotiations. Neither Advanta nor the Advanta board of directors
imposed any limitations with respect to the investigations made or procedures
followed by Salomon Smith Barney in rendering its opinion.
In the process of rendering its opinion, Salomon Smith Barney, among other
things:
- reviewed the Purchase and Sale Agreement;
- held discussions with senior officers, directors and other
representatives and advisors of Advanta concerning the businesses,
operations and prospects of the Mortgage Business; and
- examined financial forecasts and other information and data for the
Mortgage Business which were provided to or otherwise discussed with
Salomon Smith Barney by management of Advanta.
Salomon Smith Barney reviewed the financial terms of the proposed
transaction in relation to, among other things; current and historical market
prices of other companies that Salomon Smith Barney believed to be generally
comparable in a relevant way to the Mortgage Business and the trading markets of
such other companies, the historical and projected revenues and other operating
data of the Mortgage Business, and the historical and projected capitalization
and financial condition of the Mortgage Business. Salomon Smith Barney
considered, to the extent publicly available, the financial terms of other
similar transactions recently effected that it considered relevant in evaluating
the consideration to be received in the proposed transaction. Salomon Smith
Barney also considered the results of Advanta's efforts to solicit proposals for
the acquisition of the Mortgage Business from third parties and conducted other
analyses and examinations and considered other information and financial,
economic and market criteria as it deemed appropriate.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney, including the determination
of the net investment in the Mortgage Business and the gain on
13
21
the Transaction. Salomon Smith Barney also relied upon the assurances of
management of Advanta that they were not aware of any facts that would make any
of the information reviewed by Salomon Smith Barney inaccurate or misleading.
Management of Advanta have advised Salomon Smith Barney that the financial
forecasts and other information and data provided to or otherwise reviewed by,
or discussed with, Salomon Smith Barney were reasonably prepared based on the
best currently available estimates and judgments of the management of Advanta as
to the future financial performance of the Mortgage Business and the strategic
implications and operational benefits anticipated to result from the proposed
transaction. Salomon Smith Barney assumed that such financial forecasts will be
realized in the amounts and in the time periods currently estimated by Advanta
management. Salomon Smith Barney expressed no view with respect to these
forecasts and other information and data or the assumptions on which they were
based. Salomon Smith Barney did not make and was not provided with an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of the Mortgage Business nor did Salomon Smith Barney make any
physical inspection of the properties or assets of the Mortgage Business.
Salomon Smith Barney are not experts in the evaluation of allowances for loan
losses, and did not make an independent evaluation of the adequacy for loan
losses of the Mortgage Business nor did it review any individual credit files.
Salomon Smith Barney assumed that the aggregate allowances for loan losses are
adequate to cover such losses. Salomon Smith Barney also assumed that the
transaction will be consummated in accordance with the terms of the Purchase and
Sale Agreement without waiver of any of the conditions precedent to the
transaction contained in the agreement.
Salomon Smith Barney did not participate in the discussions and
negotiations among representatives of Advanta and Buyer with respect to the
final terms of the proposed transaction. Salomon Smith Barney was not requested
to consider, and its opinion does not address, the relative merits of the
proposed transaction as compared to any alternative business strategies that
might exist for Advanta or the effect of any other transaction in which Advanta
might engage. Salomon Smith Barney's opinion necessarily was based upon
information available to it and financial, stock market and other conditions and
circumstances existing and disclosed to it as of the date of the opinion.
SALOMON SMITH BARNEY'S ADVISORY SERVICES AND OPINION WERE PROVIDED FOR THE
INFORMATION OF ADVANTA'S BOARD OF DIRECTORS IN ITS EVALUATION OF THE PROPOSED
TRANSACTION AND DID NOT CONSTITUTE A RECOMMENDATION OF THE TRANSACTION TO
ADVANTA OR A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD
VOTE ON ANY MATTERS RELATING TO THE PROPOSED TRANSACTION.
The following is a summary of analyses performed by Salomon Smith Barney in
the course of evaluating the fairness of the aggregate consideration to be paid
in the proposed transaction. To the extent earnings forecasts for the Mortgage
Business were used in its analysis, Salomon Smith Barney relied on estimates
prepared by Advanta's management. The following quantitative information, to the
extent it is based on market data, is, except as otherwise indicated, based on
market data as it existed at or prior to January 5, 2001, and is not necessarily
indicative of current or future market conditions.
The summary of certain of the financial analyses includes information
presented in tabular format. IN ORDER TO UNDERSTAND FULLY THE FINANCIAL ANALYSES
USED BY SALOMON SMITH BARNEY, THESE TABLES MUST BE READ TOGETHER WITH THE TEXT
OF EACH SUMMARY. THE TABLES ALONE ARE NOT A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSES.
Precedent Transactions Analysis
Using publicly available information, Salomon Smith Barney reviewed
transaction multiples for the following five acquisitions of home equity and
sub-prime auto lenders that Salomon Smith Barney deemed relevant in evaluation
of the proposed transaction:
- Management buyout of BNC Mortgage;
- Associates First Capital Corporation/Arcadia Financial Ltd.;
14
22
- Washington Mutual, Inc./Long Beach Financial Corporation;
- Conseco Finance Corp./Green Tree Financial Corporation; and
- First Union Corporation/The Money Store, Inc.
For the selected comparable transactions, Salomon Smith Barney calculated
the multiples of price to latest twelve months net income, forward twelve months
net income, and book value. Salomon Smith Barney also derived the premium in
each of the transactions to the acquired company's managed receivables. The
following table sets forth the results of this analysis:
RANGE MEDIAN
------------- ------
MULTIPLE OF PRICE TO:
Latest twelve months net income..................... 6.0x - 24.5x 12.8x
Forward twelve months net income.................... 6.2x - 21.2x 11.8x
Book value.......................................... 0.87x - 5.55x 3.23x
PREMIUM TO MANAGED RECEIVABLES...................... (0.6)% - 21.7% 9.8%
Based on this analysis and using projected financial information provided
by management of Advanta, Salomon Smith Barney derived a range of value for the
Advanta Mortgage Business of $250 million to $325 million based upon the
multiples derived for the Associates First/Arcadia and BNC Mortgage transactions
plus or minus 10%. Salomon Smith Barney noted that, based on information
provided by Advanta management, the aggregate net asset equivalent purchase
price to be paid in the proposed transaction was anticipated to be approximately
$310 million based upon Advanta's net investment in the Mortgage Business plus
the gain on the Transaction. See "The Transaction -- Structure of the
Transaction." Advanta's aggregate market capitalization as of January 5, 2001
was approximately $212.4 million.
Discounted Cash Flow Analysis
Salomon Smith Barney used a discounted cash flow methodology to derive
ranges of value for the Advanta Mortgage Business. Salomon Smith Barney
performed this analysis for the Mortgage Business on a stand-alone basis and
also taking into account the funding advantages brought to the business by an
acquirer with a higher credit rating than Advanta. In these analyses, Salomon
Smith Barney assumed discount rates ranging from 13.0% to 21.0% to derive the
present value of (1) projected net income for the six fiscal years from 2000
through 2005, plus (2) the terminal value of the Mortgage Business at the end of
fiscal 2005. Terminal values for the Mortgage Business were based on a range of
0.50x to 1.50x 2005 projected book value and a range of 4.0x to 12.0x projected
net income for 2006. Based upon this analysis, Salomon Smith Barney derived a
range of value for the Mortgage Business of $165 million to $220 million on a
stand-alone basis and a range of value of $300 million to $360 million taking
into account the funding advantages brought to the business by an acquirer with
a higher credit rating than Advanta.
Comparable Company Analysis
Salomon Smith Barney reviewed publicly available financial and operating
information for four home equity lenders and for four sub-prime auto lenders.
The home equity lenders were New Century Financial Corporation, Amresco Inc.,
Delta Financial Corporation and Aames Financial Corporation. The sub-prime auto
lenders were AmeriCredit Corp., Credit Acceptance Corporation, Onyx Acceptance
Corporation and First Investors Financial Services Group, Inc. Salomon Smith
Barney considered certain of the business segments in which these companies
operate to be reasonably similar to certain of the business segments in which
Advanta's Mortgage Business operates, but noted that none of these companies has
the same management, makeup, size, direct marketing capabilities or combination
of businesses, including subservicing, as Advanta's Mortgage
15
23
Business. Comparable company net income projections were based upon median
I/B/E/S International, Inc. estimates as of December 13, 2000.
For each of these companies, Salomon Smith Barney derived the ratio of
stock price as of January 5, 2001 to each of:
- Year 2000 estimated net income;
- Year 2001 estimated net income;
- Book value; and
- Tangible book value.
The following table sets forth the results of these analyses.
RANGE MEDIAN
------------- ------
RATIO OF PRICE TO:
Year 2000 estimated net income...................... 0.9x - 12.7x 7.7x
Year 2001 estimated net income...................... 10.1x - 10.2x 10.2x
Book value.......................................... 0.05x - 3.10x 0.54x
TANGIBLE BOOK VALUE................................. 0.05x - 3.10x 0.54x
Based on this analysis and using projected financial information provided
by management of Advanta, Salomon Smith Barney derived a range of value for the
Advanta Mortgage Business of $180 million to $220 million based upon the
multiples derived for New Century Financial Corporation plus or minus 10%.
The preceding discussion is a summary of the material financial analyses
performed by Salomon Smith Barney in the course of evaluating the fairness of
the aggregate consideration to be paid in the proposed transaction, but it does
not purport to be a complete description of all the analyses performed by
Salomon Smith Barney. The preparation of financial analyses and fairness
opinions is a complex process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary description. Salomon
Smith Barney made no attempt to assign specific weights to particular analyses
or factors considered, but rather made qualitative judgments as to the
significance and relevance of all the analyses and factors considered and
determined to give its fairness opinion as described above. Accordingly, Salomon
Smith Barney believes that its analyses, and the summary set forth above, must
be considered as a whole, and that selecting portions of the analyses and of the
factors considered by Salomon Smith Barney, without considering all of the
analyses and factors, could create a misleading or incomplete view of the
processes underlying the analyses conducted by Salomon Smith Barney and its
opinion. With regard to the comparable companies analyses summarized above,
Salomon Smith Barney selected comparable public companies on the basis of
various factors, including the size and similarity of the line of business;
however, no company utilized as a comparison in these analyses is identical to
Advanta's Mortgage Business. As a result, these analyses are not purely
mathematical, but also take into account differences in financial and operating
characteristics of the subject companies and other factors that could affect the
transaction or public trading value of the subject companies to which the
Mortgage Business was compared. In its analyses, Salomon Smith Barney made
numerous assumptions with respect to the Mortgage Business, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Advanta. Any estimates
contained in Salomon Smith Barney's analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by these analyses.
Estimates of values of companies do not purport to be appraisals or necessarily
to reflect the prices at which companies may actually be sold. Because these
estimates are inherently subject to uncertainty, none of Advanta, Buyer, the
Advanta board of directors, Salomon Smith Barney or any other person assumes
responsibility if future results or actual values differ materially
16
24
from the estimates. Salomon Smith Barney's analyses were prepared solely as part
of Salomon Smith Barney's analysis of the fairness of the aggregate
consideration to be paid in the proposed transaction. The opinion of Salomon
Smith Barney was only one of the factors taken into consideration by Advanta's
board of directors in making its determination to approve the merger agreement
and the merger. See "The Transaction -- Recommendation of the Board of Directors
and Reasons for the Transaction."
Salomon Smith Barney is an internationally recognized investment banking
firm engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Advanta selected Salomon
Smith Barney to act as its financial advisor on the basis of Salomon Smith
Barney's international reputation and Salomon Smith Barney's familiarity with
Advanta. In the ordinary course of its business, Salomon Smith Barney and its
affiliates may actively trade or hold the securities of both Advanta and J.P.
Morgan Chase & Co. for its own account and for the account of customers and,
accordingly, may at any time hold a long or short position in those securities.
Salomon Smith Barney and its affiliates, including Citigroup Inc. and its
affiliates, may maintain relationships with Advanta and J.P. Morgan Chase & Co.
and their respective affiliates.
Pursuant to Salomon Smith Barney's engagement letter, Advanta agreed to pay
Salomon Smith Barney a fee of approximately $2.8 million for its services
rendered in connection with the proposed transaction, of which $100,000 has
already been paid and the balance of which is payable on completion of the
Transaction. Advanta has also agreed to reimburse Salomon Smith Barney for its
reasonable travel and other out-of-pocket expenses incurred in connection with
its engagement, including the reasonable fees and disbursements of its counsel,
and to indemnify Salomon Smith Barney against specific liabilities and expenses
relating to or arising out of its engagement, including liabilities under the
federal securities laws.
STRUCTURE OF THE TRANSACTION
The Transaction is structured as a sale of substantially all of the assets
of the Mortgage Business and the related operating liabilities that appear on
our balance sheet. Under the purchase and sale agreement, we and the Selling
Subsidiaries will sell, transfer and assign to Buyer, and Buyer will purchase
and accept, the Assets. In consideration of the transfer of the Assets to Buyer,
Buyer will assume the operating liabilities associated with the Mortgage
Business, which liabilities consist primarily of our contractual obligations and
other liabilities that appear on our balance sheet and pay us in cash an amount
equal to the purchase price, as described below.
The purchase price, which is payable by Buyer to us in cash, for the Assets
net of the related operating liabilities that appear on our balance sheet
associated with our mortgage business, will be approximately $1,021,632,000.
This net purchase price will result in a gain before transaction expenses of
approximately $59,670,000. This gain will be reduced by a charge of
approximately $19,670,000 associated with equipment, facilities and derivative
instruments related to hedging activities which will not be purchased by Buyer.
We also anticipate restructuring expenses associated with our intention to
substantially reduce corporate expenses after closing. Buyer will not assume the
interest bearing liabilities that we use to fund the Mortgage Business or
acquire our net equity investment in the Mortgage Business. See "The Purchase
and Sale Agreement -- Purchase and Purchase Price" for a detailed description of
the purchase price and the provisions that govern adjustments to the purchase
price.
The net purchase price reflected above includes the expected proceeds from
the sale to Buyer of some loans receivable and a small portion of our residual
assets. We anticipate that this sale, which is not contingent on stockholder
approval, will occur on or about February 9, 2001, before the
17
25
closing under the purchase and sale agreement. If this sale is not completed
before the closing under the purchase and sale agreement, it will occur
simultaneously with that closing.
On the closing date, we will enter into agreements to lease to Buyer two
facilities and related building improvements, equipment and technology assets.
EFFECTS OF THE TRANSACTION; CONDUCT OF OUR BUSINESS AFTER THE TRANSACTION
After the Transaction is completed, we will no longer operate a mortgage
business. We will continue to:
- operate our other financial services businesses, the products of which
include business credit cards, insurance, and deposit products;
- make venture capital investments through our affiliates, including
Advanta Partners LP; and
- manage and service the portfolio for our small ticket equipment leasing
business, although as of January 23, 2001 we ceased originating new
leases.
We will use the net cash proceeds we receive upon the closing of the
Transaction to repay debt and to provide for the working capital needs of our
continuing businesses.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
In considering the recommendation of our board of directors with respect to
the purchase and sale agreement and the Transaction, holders of our Class A
Common Stock and Class A Preferred Stock should be aware that some of our
executive officers, other than the Chairman and the Vice Chairman, as well as
other of our employees will receive bonuses or severance benefits as a result of
the closing of the Transaction. In addition, some of our directors, executive
officers and other employees may receive other direct or indirect benefits upon
the closing of the Transaction as a result of amendments to outstanding stock
option and stock appreciation right grants.
The purchase and sale agreement provides that Buyer will employ in
comparable positions and at the same salaries and compensation in effect when
employed by us, most of our employees who are primarily engaged in the Mortgage
Business. In connection with the Transaction, our board of directors and/or the
Compensation Committee of the board of directors has adopted or will adopt
amendments to the Advanta Senior Management Change of Control Severance Plan and
the Advanta Employees Change of Control Severance Plan (together, the "Plans").
The amendments provide that Buyer will not assume the Plans, since Buyer will
provide coverage for severance benefits to the employees whom it hires under
Buyer's plans and has agreed to make a supplemental payment in specific
circumstances to reflect the differences in benefit levels between our Plans and
Buyer's plans. We will maintain responsibility to provide severance benefits
under the Plans to our employees who are not hired by Buyer or to employees
hired by Buyer, offset by benefits payable by Buyer, subject to all
qualification requirements in the Plans. While the amount of severance benefits
to be paid by us to employees who are primarily engaged in the Mortgage Business
but are not hired by Buyer is not known, the maximum aggregate severance
benefits that could be payable to such employees will not exceed approximately
$8.5 million, of which a maximum of approximately $460,000 could be payable to
one of our executive officers.
In addition, specified employees (including executive officers other than
the Chairman and Vice Chairman) may receive bonuses upon completion of the
transaction in recognition of their efforts on behalf of Advanta in connection
with the strategic alternatives process related to the Mortgage Business. The
purchase and sale agreement provides that Buyer will pay 100% of the bonus
payments in the aggregate maximum amount of approximately $10.5 million to those
Advanta employees who are primarily engaged in the Mortgage Business on the
closing date and are otherwise entitled to receive such bonuses, including
approximately $460,000 on behalf of one of our executive officers, as specified
in the purchase and sale agreement. We will pay any such
18
26
bonuses to other employees who are otherwise entitled to receive such bonuses,
in the aggregate maximum amount of approximately $9 million, including
approximately $850,000 on behalf of one of our executive officers.
In connection with the Transaction, we may accelerate the vesting of stock
options, including stock appreciation rights, held by our directors and
employees, including executive officers. If implemented, the terms of stock
options outstanding under our 2000 Omnibus Stock Incentive Plan, including
options owned by directors and executive officers, would be amended to provide
that 32% of outstanding options which are not otherwise exercisable at the time
of the closing under the purchase and sale agreement will become immediately
exercisable. In addition, the stock options may be amended to provide that with
respect to employees primarily engaged in the Mortgage Business who become
employees of Buyer in connection with the Transaction and other employees who
cease to be our employees solely as a result of the Transaction, such options
would remain exercisable for six months after the closing under the purchase and
sale agreement. Both the acceleration of vesting of, and the extension of the
exercise periods for, our stock options under the terms described above are
likely to result in a cost to us, although the amount of such cost will not be
known until after the closing under the purchase and sale agreement. The maximum
number of stock options that could be subject to accelerated vesting is 748,535,
of which 74,468 are held by our directors and executive officers. No decision as
to whether vesting will be accelerated or exercise periods will be extended has
been made at this time.
STATEMENT OF ACCOUNTING TREATMENT
The Transaction will be accounted for under generally accepted accounting
principles as a sale of:
- financial assets, including cash, loans, retained interests in
securitizations and other receivables; and
- the sale of non-financial assets and liabilities, including contractual
mortgage servicing rights, property and equipment, prepaid assets and
contractual obligations.
The financial assets and non-financial assets and liabilities of the Mortgage
Business will be removed from Advanta's balance sheet. Advanta will record a
gain on the Transaction in an amount equal to the excess of the cash proceeds
received by Advanta over the book value of the net assets sold less transaction
expenses. Shortly after the closing of the Transaction, it is expected that a
restructuring charge will be incurred related to a planned reduction of
corporate expenses. The pro forma adjustments made in connection with the
development of the pro forma financial information appearing elsewhere in this
proxy statement are preliminary and have been made solely for purposes of
developing the pro forma financial information to comply with the disclosure
requirements of the SEC.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
We will not distribute to stockholders any of the proceeds received by us
upon the closing of the Transaction and the Transaction should not have any
direct federal income tax consequences to our stockholders. However, the sale of
the Assets will constitute a taxable event. Although the transaction will result
in a gain for financial reporting purposes, we will recognize a loss for tax
purposes. For this reason, we expect that Advanta will not be required to pay
any material federal income tax as a result of the Transaction.
We have based our discussion in the preceding paragraph on the provisions
of the Internal Revenue Code, Treasury Department Regulations issued under the
Internal Revenue Code and published rulings and court decisions in effect as of
the date of this proxy statement, all of which are subject to change. This
discussion does not take into account possible changes in these laws or
19
27
interpretations or the possibility that any changes will have a retroactive
effect or may adversely affect the conclusions expressed in the discussion.
NO APPRAISAL RIGHTS
Advanta Corp. is a Delaware corporation and Delaware law governs
stockholders' rights in connection with the Transaction. Under the Delaware
General Corporation Law, our stockholders will not have any right in connection
with the Transaction to dissent and seek appraisal of their shares of capital
stock.
THE PURCHASE AND SALE AGREEMENT
The following is a brief summary of selected provisions of the purchase and
sale agreement. The description is qualified in its entirety by reference to the
complete text of the purchase and sale agreement, which is incorporated by
reference and attached to this proxy statement as Annex I. We urge you to read
carefully the entire purchase and sale agreement.
PURCHASE AND PURCHASE PRICE
Under the terms of the purchase and sale agreement, Buyer will purchase and
we will sell the Assets. In consideration of the transfer of the Assets to
Buyer, Buyer will assume the related operating liabilities and pay us in cash on
the closing date an amount equal to the purchase price less an amount that will
be withheld from the purchase price equaling less than 1% of the total purchase
price. A portion of the amounts withheld from the purchase price at closing will
be repaid to us after closing if conditions that are specified in the purchase
and sale agreement are satisfied in the future.
The purchase price for the Assets, net of the related operating liabilities
associated with the Mortgage Business that appear on our balance sheet, will be
approximately $1,021,632,000. This net purchase price will result in a gain
before transaction expenses of approximately $59,670,000. This gain will be
reduced by a charge of approximately $19,670,000 associated with equipment,
facilities and derivative instruments related to hedging activities which will
not be purchased by Buyer. We also anticipate restructuring expenses associated
with our intention to substantially reduce corporate expenses after closing.
The net purchase price reflected above includes the expected proceeds from
the sale to Buyer or its affiliates of some loans receivable currently on our
balance sheet and a small portion of our residual assets. The proceeds from the
sale of these assets could be subject to adjustment; however, our obligation to
close is conditioned upon any adjustment not reducing the proceeds from this
sale by more than $10,000,000. See "The Purchase and Sale
Agreement -- Conditions to Closing." We anticipate that this sale, which is not
contingent on stockholder approval, will occur on or about February 9, 2001,
before the closing under the purchase and sale agreement. If this sale is not
completed before closing under the purchase and sale agreement, it will occur
simultaneously with that closing.
Prior to closing, Buyer has the option to elect not to purchase a limited
number of specific assets. If Buyer elects not to purchase some or all of these
assets, the purchase price will be adjusted. The total adjustment to the
purchase price related to these assets will not reduce the total purchase price
by more than $4,000,000.
The portion of the purchase price related to the sale of our retained
interests in mortgage loan securitizations could be increased or decreased if
prepayment rates or delinquency levels within our term mortgage loan
securitizations on the date of closing under the purchase and sale agreement are
outside the parameters established in the purchase and sale agreement. The
purchase and sale agreement also contains provisions for adjustments to the
purchase price after closing related to the accuracy of the balance sheet and
the calculation of the purchase price. If any post-closing
20
28
adjustment requires a reduction to the purchase price, then we will pay to Buyer
the amount of the post-closing adjustment, with interest. If any post-closing
adjustment requires an increase to the purchase price, then Buyer will pay to us
the amount of the post-closing adjustment, with interest.
THE CLOSING
We expect that the Transaction will close in the first quarter of 2001.
However, the Transaction will not be completed unless all conditions to closing
of the purchase and sale agreement have been satisfied or waived. See "The
Purchase and Sale Agreement -- Conditions to Closing."
In no event will the closing take place after March 31, 2001 unless both we
and Buyer consent.
ANCILLARY AGREEMENTS
In addition to the purchase and sale agreement, we and Buyer have agreed to
use commercially reasonable efforts to negotiate ancillary agreements provided
for in the purchase and sale agreement relating to the Transaction and various
services that will be provided by either Buyer or us to the other for limited
periods of time following the closing. These ancillary agreements must be
executed and delivered by the proper parties at closing.
CONDITIONS TO THE TRANSACTION
Conditions to Our Obligation to Close
Our obligations to effect the purchase and sale depend on the satisfaction
or waiver before or at the time of the closing, of each of the following
conditions, among others:
- Buyer must have performed in all material respects all agreements and
covenants contained in or contemplated by the purchase and sale agreement
and the ancillary agreements that it is required to perform at or before
the closing;
- each of the representations and warranties of Buyer provided in the
purchase and sale agreement and the ancillary agreements must be true and
correct in all material respects (a) on and as of the date of the
purchase and sale agreement as to the representations and warranties made
at signing, and (b) on and as of the closing date as to the supplements
to be provided at closing, except for representations and warranties that
expressly apply only to a specific date or time which need only be true
as of that specified date and time, and except to the extent the failures
to be true and correct would not, individually or in the aggregate, have
a material adverse effect on the Transaction;
- no statute, rule or regulation will have been enacted by any governmental
authority that prohibits the completion of the Transaction and the
transactions contemplated by any ancillary agreement;
- there must be no order, judgment or decree of a United States federal or
state court or other governmental or regulatory authority in effect
precluding or making illegal the completion of the Transaction and the
transactions contemplated by any ancillary agreement;
- the terms and conditions of the ancillary agreements must be agreed upon
by us and Buyer, and be executed and delivered by Buyer on or before
closing;
- we must have received a favorable opinion of counsel to Buyer, subject to
customary qualifications, limitations and assumptions as to matters
specified in the purchase and sale agreement;
- all filings with regulators must have been made and all regulatory and
other approvals required to be obtained to complete the Transaction and
the transactions contemplated by the ancillary agreements (including
approval of applicable bank regulatory authorities for
21
29
ANB and ABC to distribute to Advanta Corp. or a non-banking subsidiary of
Advanta Corp., by dividend or otherwise, their proceeds from the sale of
the Assets) must:
- have been obtained;
- not be subject to the satisfaction of any condition required to be
satisfied at or before closing that has not been satisfied or waived;
and
- remain in full force and effect;
and all statutory waiting periods in respect of such approvals must have
expired and no such approvals may contain any conditions or restrictions
that our board of directors reasonably determines in good faith are
unsatisfactory;
- the purchase and sale agreement and the Transaction must have been
approved by a majority of the votes entitled to be cast by the holders of
the issued and outstanding shares of our Class A Common Stock and Class A
Preferred Stock, voting together as a single class;
- all consents and approvals required for the assignment of those contracts
that are identified in the purchase and sale agreement must have been
obtained and acceptable renegotiations of selected information technology
contracts must have been completed;
- there shall not have occurred any event that would materially and
adversely affect the ability of Buyer to complete the Transaction;
- the total purchase price for the loans receivable and a small portion of
our residual assets that we expect to sell to Buyer prior to the closing,
shall not be more than $10 million less than the purchase price for the
mortgage loans calculated on the pricing cut-off date, as described in a
letter agreement between us and Buyer dated as of the same date as the
purchase and sale agreement; and
- there shall be an arrangement satisfactory to us related to a specific
litigation matter.
Conditions to Buyer's Obligation to Close
Buyer's obligations to effect the purchase and sale depend on the
satisfaction or waiver before or at the time of the closing, of each of the
following conditions:
- we must have performed in all material respects all agreements and
covenants contained in or provided for by the purchase and sale agreement
and the ancillary agreements that we are required to perform at or before
the closing;
- each of our representations and warranties in the purchase and sale
agreement and the ancillary agreements must be true and correct in all
material respects (a) on and as of the date of the purchase and sale
agreement as to the representations and warranties made at signing, and
(b) on and as of the closing date as to the supplements to be provided at
closing, except for representations and warranties that expressly apply
only to a specific date or time which need only be true as of that
specified date and time, and except to the extent the failures to be true
and correct would not, individually or in the aggregate, have a material
adverse effect on the Transaction;
- all filings with regulators and all regulatory and other approvals
required to be made or obtained by Buyer to complete the Transaction and
the transactions contemplated by the ancillary agreements, including any
required approval of applicable bank authorities, must:
- have been obtained;
- not be subject to the satisfaction of any condition required to be
satisfied at or before closing that has not been satisfied or waived;
and
22
30
- remain in full force and effect;
and all statutory waiting periods in respect of such approvals must have
expired and no such approvals may contain any conditions or restrictions
that the board of directors of Buyer reasonably determines in good faith
are unsatisfactory;
- no statute, rule or regulation will have been enacted by any governmental
authority that prohibits the completion of the Transaction or the
transactions contemplated by any ancillary agreement;
- there must be no order, judgment or decree of a United States federal or
state court or other governmental or regulatory authority in effect
precluding or making illegal the completion of the Transaction or the
transactions contemplated by any ancillary agreements;
- the terms and conditions of the ancillary agreements must be agreed upon
by us and Buyer, and be executed and delivered by us on or before
closing;
- Buyer must have received a favorable opinion of our counsel, subject to
customary qualifications, limitations and assumptions as to matters
specified in the purchase and sale agreement;
- all consents and approvals of any persons, other than Buyer or its
affiliates, required in connection with the assignment of the contracts
identified in the purchase and sale agreement must have been obtained and
acceptable renegotiations of selected information technology contracts
must have been completed;
- the purchase and sale agreement and the Transaction must have been
approved by the affirmative vote of the holders of a majority of the
votes entitled to be cast by the holders of our Class A Shares and our
Class A Preferred Shares, voting together as a single class;
- there shall be an arrangement satisfactory to Buyer related to a specific
litigation matter;
- specific employment criteria relating to employees engaged primarily in
the Mortgage Business must have been met;
- none of the following events shall have occurred:
- the enactment of legislation by the United States preventing the
conduct of the Mortgage Business in any material respect or generally
prohibiting the deductibility of interest on home mortgage loans;
- the issuance of any order or decree by a bank authority that would
impose upon Buyer the obligation to comply with any of our agreements
with bank regulators, solely because the Transaction was completed;
- any other event which would, on an objective basis, adversely impact
Buyer in its conduct of the Mortgage Business as much or more than
that set forth in the two immediately preceding subparagraphs; or
- the filing by us or a good faith filing against us of a bankruptcy
petition or similar filing or proceeding, or our admission of
inability to pay our debts as they become due;
- the total dollar amount of unpaid principal balance of loans with
delinquencies in excess of 30 days in our term mortgage loan
securitizations must not have increased by more than 25% between December
31, 2000 and the end of the month prior to the month in which the closing
occurs under the purchase and sale agreement; and
- no specified event of default on our or the Selling Subsidiaries' part
shall have been declared which has not been waived or cured under any of
our term mortgage loan securitizations.
23
31
REPRESENTATIONS AND WARRANTIES
We have given various representations and warranties in the purchase and
sale agreement including, among others, representations and warranties relating
to:
- our and the Selling Subsidiaries' organization, good standing and
corporate power and authority to enter into and consummate the
Transaction;
- absence of conflicts with organizational documents or certain material
agreements;
- our and the Selling Subsidiaries' conduct of the Mortgage Business in the
ordinary course of business and subject to and in accordance with our
agreements with bank regulators;
- loan servicing and securitization matters;
- necessary consents and approvals;
- absence of any untrue statement regarding or omission of any material
fact;
- litigation;
- title to and condition of the Assets;
- the intellectual property used in the Mortgage Business;
- identification of, compliance with and enforceability of significant
contracts relating to the Mortgage Business;
- environmental matters;
- identification of and interests in real property;
- compliance with laws;
- tax matters;
- employee matters, including employee benefit plans and labor relations;
- existence of inter-company debt, guarantees and transactions with
affiliates; and
- assets necessary to operate the Mortgage Business as it is currently
operated by us.
The purchase and sale agreement contains representations and warranties of
Buyer and its affiliates including, among others, representations and warranties
relating to:
- Buyer's and its affiliates' organization, good standing and corporate
power and authority to enter into and consummate the Transaction;
- absence of conflicts with organizational documents or certain material
agreements;
- necessary consents and approvals;
- litigation; and
- Buyer's lack of awareness of any facts or circumstances which would cause
us or the Selling Subsidiaries to be in breach of our representations and
warranties relating to our or our Selling Subsidiaries' contracts with
Buyer or its affiliates.
COVENANTS
The purchase and sale agreement contains covenants customary for
transactions like the Transaction including, among others, those described
below.
24
32
Our Conduct of Business
The purchase and sale agreement provides that, from the date the purchase
and sale agreement was signed until the closing date, unless we first obtain
Buyer's written consent, which is not to be unreasonably withheld, conditioned
or delayed, or except as expressly provided for by the purchase and sale
agreement:
- we will use, and we will cause the Selling Subsidiaries to use,
commercially reasonable efforts to operate the Mortgage Business in the
ordinary course of business; and
- subject to specific exceptions in the purchase and sale agreement, we
will not and we will cause each of the Selling Subsidiaries not to engage
in identified conduct, practices and actions relating to, among other
things:
- employee matters;
- our employee benefit plans;
- dispositions and acquisitions of assets;
- capital expenditures; and
- our contractual relationships.
Conduct of Buyer
The purchase and sale agreement provides that, from the date of the
purchase and sale agreement until the closing date, Buyer will:
- cooperate with us in our efforts to operate the Mortgage Business in the
ordinary course of business and preserve current operations of the
Mortgage Business; and
- take no action that would interfere with our obligations under any
provision of the purchase and sale agreement, except in the ordinary
course of Buyer's pre- existing business relationship with us or its
fulfillment of its obligations under the purchase and sale agreement.
Regulatory Agreements
The purchase and sale agreement provides that none of the covenants
described above will preclude us or the Selling Subsidiaries from performing any
action required or necessary to comply with our agreements with regulators.
No Solicitation
In the purchase and sale agreement, we agreed that, until the earlier of
the closing or the termination of the purchase and sale agreement, we will not
directly or indirectly take any action to:
- solicit, engage in discussions, furnish information to, or negotiate with
any person, whether the discussions or negotiations are initiated by us
or otherwise, or take any other action intended or designed to facilitate
the efforts of any person other than Buyer relating to the possible
direct or indirect acquisition of the Mortgage Business (any such efforts
by any such person, including a firm proposal to make such an
acquisition, to be referred to as an "Alternative Acquisition"); or
- enter into an agreement with any person, other than Buyer, providing for
a possible Alternative Acquisition. However, we may give information
about the Mortgage Business to a person other than Buyer and may
negotiate with that person if our counsel advises our board of directors,
or a committee of the board, that the failure to furnish the information
or
25
33
negotiate with that person could subject the board of directors or any of
our directors to liability for breach of their fiduciary duties.
The purchase and sale agreement further provides that we must immediately
cease any of our activities, discussions or negotiations conducted before the
date of the purchase and sale agreement with any parties other than Buyer
related to any of the foregoing. If we receive a written proposal for an
Alternative Acquisition, we must promptly:
- notify the person making the proposal of the terms of the no solicitation
covenant;
- inform Buyer of our receipt of the proposal and the substance of the
proposal, including the identity of the person making the proposal; and
- advise Buyer of any developments related to the Alternative Acquisition.
Regulatory Matters; Other Consents
The purchase and sale agreement provides that we and Buyer will act
promptly to make all necessary filings with government authorities and give all
notices reasonably required to obtain all government approvals and clearances
required to complete the Transaction or the transactions contemplated by any of
the ancillary agreements.
In addition, the purchase and sale agreement requires that we and Buyer
will diligently and in good faith exercise reasonable commercial efforts toward
obtaining consents required by, and satisfying any conditions imposed in
connection with, our material contracts and critical information technology
contracts.
Employment Matters
The purchase and sale agreement provides that Buyer will employ, in
comparable positions and at the same salaries and compensation as in effect when
employed by us, most of our employees who are primarily engaged in the Mortgage
Business. Those employees who become employees of Buyer after closing are
referred to in this proxy statement as the "Employees." Buyer's obligation to
employ any of the Employees is conditioned upon the closing taking place and
such employment will take effect as of the Employment Transfer Time, as defined
below. In this proxy statement, "Employment Transfer Time" means 11:59 p.m.
local time on the closing date at each location where Employees are employed or
the later date of hire with respect to inactive employees. The purchase and sale
agreement also provides that each Employee will be employed at a location within
a thirty mile radius of the location where the Employee is employed on the
closing date.
The purchase and sale agreement provides that, as of the Employment
Transfer Time, the Employees will be eligible to participate in Buyer's employee
benefit plans and other fringe benefits that Buyer has in effect on the same
basis as Buyer offers the plans and benefits to its similarly situated, existing
employees. Buyer will recognize any prior service with us as if it had been
service with Buyer to the extent that the service would have been recognized
under our applicable employee benefits plans, except as to certain retirement
benefits that we do not offer our employees. See also "The
Transaction -- Interests of Certain Persons in Matters to Be Acted Upon" for a
discussion of amendments to our severance plans and bonuses that may be paid in
connection with the Transaction.
Except as described elsewhere in this proxy statement, we will remain
responsible for all benefits accrued under, or claims against, our employee
benefit plans with respect to the Employees prior to the Employment Transfer
Time. See "The Transaction -- Interests of Certain Persons in Matters to Be
Acted Upon" for a discussion of certain payments to be made by Buyer. Buyer will
not, except as otherwise specifically provided in the purchase and sale
agreement, at any time assume any liability for the benefits of any active or
any terminated, vested or retired participant in our retirement plans.
26
34
We will make lump sum distributions available to Employees under the
Advanta Corp. Employee Savings Plan (the "Savings Plan") and we will provide
Employees with the information and forms necessary for them to elect to transfer
their account balances to a defined contribution plan of Buyer. Buyer will
permit, and will cause its plan to permit, the transfer of Employees' lump sum
distributions from the Savings Plan directly to Buyer's plan. Buyer will accept,
as part of the transfer, the portion of an Employee's account balance that
consists of a participant loan, and will continue to treat the participant loan
in a manner that is consistent with the terms of the documentation for the loan.
We and Buyer will cooperate in all matters related to these transfers, including
making appropriate amendments to the plans involved. Buyer will assume all
liabilities for, and will provide under the applicable Buyer plan, retirement
benefits to any Employee upon the transfer by the Employee to Buyer's plan of a
Savings Plan account balance otherwise held for the benefit of the Employee.
We will pay to each Employee all amounts payable under our bonus plans or
arrangements with respect to the Employee's employment by us for the year 2000,
as determined by us in accordance with the provisions of the bonus plans or
arrangements and we will also pay a proportionate amount of any amounts payable
under those plans or arrangements for any portion of year 2001 in which the
Employee remained employed by us. Until the time that they become employees of
Buyer, we will continue to make available to those Employees their existing
benefit arrangements, including medical, dental and other welfare benefits
plans.
Taxes
Under the purchase and sale agreement, we and Buyer have agreed that all
state and local transfer, sales and use, notarial or similar taxes or fees
arising from or relating to the Transaction will be borne by the party that is
legally responsible for them. We also have agreed that Buyer, as our agent, will
be responsible for the filing of any tax information return and the mailing of
any related notice for all transactions in the period from and after January 1,
2001.
Real Estate Matters
The purchase and sale agreement provides that we will lease our premises at
800 and 850 Ridgeview Road, Horsham, Pennsylvania (together, the "Ridgeview
Property") to Buyer for a term of two years, with a one-year renewal option, for
rent in the amount of $4,076,982 per year for the initial two-year term and
$4,174,053 per year for the one-year renewal term.
Buyer also will assume some of our leases and subleases, with rents and
other amounts payable under those leases to be apportioned on a per diem basis
as of the close of business on the closing date. In addition, we and Buyer will
cooperate to obtain consents from landlords necessary for our assignment of the
leases referred to above.
Also at closing, we will enter into agreements to lease to Buyer building
improvements related to the Ridgeview Property, selected equipment and
technology assets.
Non-Competition and Non-Solicitation
Under the purchase and sale agreement, we have agreed that, for five years
following closing, except in certain circumstances, neither we nor any of our
subsidiaries will directly or indirectly engage in the business of originating,
marketing, servicing or subservicing, purchasing, selling and securitizing
residential mortgage loans, which business is in competition with the Mortgage
Business.
27
35
Subject to the exceptions identified in the purchase and sale agreement,
for a period of two years following closing, neither we nor any of our
subsidiaries will, directly or indirectly:
- employ, solicit for employment, or induce to terminate employment with
Buyer or any of its subsidiaries any Employees who are then or within the
preceding six months were, employed by Buyer or any of its subsidiaries;
- take any action intended to cause any client, customer or supplier of the
Mortgage Business to terminate its relationships with Buyer or any of its
affiliates; or
- disclose or use for a purpose that is prohibited by the non-compete
provision described above any confidential information relating primarily
to the Mortgage Business.
In addition, the purchase and sale agreement provides that for a period of
five years following closing, neither we nor any of our subsidiaries will
directly or indirectly target or solicit the customers listed as mortgage
customers on the loan servicing platforms for our or the Selling Subsidiaries'
owned, securitized and subserviced mortgage portfolios. However, the purchase
and sale agreement provides that promotions or other marketing activities that
are not based on the mortgage customer list or an excerpt of the mortgage
customer list, including targeted marketing campaigns, marketing campaigns
directed at the general public and advertising campaigns through various media,
will not constitute solicitation for purposes of this provision.
Buyer has agreed that for two years following closing, subject to the
exceptions identified in the purchase and sale agreement, Buyer will not
directly or indirectly employ, solicit for employment, or induce to terminate
employment with us or any of our subsidiaries, any of our employees who are
employed by us or our subsidiaries on the closing date or within the preceding
six months in collections, decision support or marketing, except for employees
who were terminated by us or our affiliates.
Servicing Agreements
The purchase and sale agreement provides that Buyer and its affiliates will
perform the obligations of the servicer or subservicer under the mortgage
servicing agreements it assumes in the Transaction, including, without
limitation, the obligation to make servicing and delinquency advances, manage
litigation, and manage borrowers' defaults. Buyer and its affiliates will
perform obligations that relate to the period before closing to the extent
required of the then current servicer or subservicer under the applicable
servicing agreement. However, neither Buyer nor its affiliates will assume any
liability for our acts or omissions or alleged acts or omissions which occurred
on or before the closing date. In performing its obligations as servicer or
subservicer, Buyer will seek full recovery, including costs and expenses and
indemnification for claims relating to servicing, to the extent reasonably
permissible under the servicing agreements. If the terms of the applicable
servicing agreement do not permit recovery for litigation, Buyer and its
affiliates must exceed the applicable threshold for indemnification before
seeking recovery against us.
Sale of Mortgage Loans to Buyer
At the time of the signing of the purchase and sale agreement, we signed a
separate letter agreement with Buyer providing that, prior to closing, we will
sell to Buyer some loans receivable and a small portion of our residual assets.
Any of these assets not sold to Buyer before the closing under the purchase and
sale agreement will be sold to Buyer at that closing.
Buyer to Perform Obligations under Corporate Finance Program
We and Buyer will enter into a separate agreement pursuant to which, on and
after closing, Buyer, acting as our agent, will perform all of our or the
Selling Subsidiaries' obligations under our agreements with third parties
relating to our corporate finance program, including obligations with respect to
making of payments, maintenance of reserves, providing monthly reports,
maintaining
28
36
confidentiality, and obligations not to solicit for refinancing mortgagors of
mortgage loans sold subject to the program.
INSURANCE RELATED ACTIVITIES
Under the purchase and sale agreement, our rights and obligations arising
from agreements, relationships, and other assets related to ongoing programs of
insurance provided to mortgage customers and identified in the purchase and sale
agreement will be transferred to and assumed by Buyer. In the case of programs
no longer offered to mortgage customers, Buyer will perform only subservicing
and administrative functions.
TERMINATION
The purchase and sale agreement may be terminated and the Transaction may
be abandoned at any time before closing:
- by mutual written consent;
- by either Buyer or us if:
- the Transaction has not been completed by March 31, 2001, or a later
date agreed upon by us and Buyer;
- any court or other governmental body shall have issued an order,
decree or ruling or taken any other action in effect permanently
restraining, enjoining or otherwise prohibiting consummation of the
Transaction and the transactions contemplated by the ancillary
agreements and the order, decree, ruling or other action shall have
become final and non-appealable; or
- by Buyer if:
- Buyer discovers that any representation or warranty made by us in the
purchase and sale agreement was untrue at the time the representation
or warranty was made or, except for those representations and
warranties made as of a particular date which need only be true and
correct as of such date, is not true and correct as of the closing
date, under the purchase and sale agreement, except where the failure
to be so true and correct individually or in the aggregate would not
have a material adverse effect on the Transaction, provided that if
any such failure to be so true and correct is capable of being cured
before March 31, 2001, then Buyer may not terminate the purchase and
sale agreement under this paragraph until March 31, 2001, and Buyer
must provide notice to us, at or before the date originally scheduled
for closing specifying in reasonable detail the untruthfulness in the
representations or warranties claimed by Buyer and in no event may
Buyer terminate the purchase and sale agreement under this paragraph
if the failure is corrected before March 31, 2001; or
- there has been a breach of any covenant or agreement on our part under
the purchase and sale agreement resulting in a material adverse effect
on the Assets, which cannot be cured before March 31, 2001.
- by us if:
- we discover that any representation or warranty made by Buyer in the
purchase and sale agreement was untrue at the time the representation
or warranty was made or, except for those representations and
warranties made as of a particular date which need only be true and
correct as of the date, is not true and correct as of the closing date
under the purchase and sale agreement, except where the failure to be
so true and correct would not have a material adverse effect on the
Transaction, provided that if any such failure to be so true and
correct is capable of being cured before March 31, 2001, then we may
not
29
37
terminate the purchase and sale agreement under this paragraph until
March 31, 2001, and we must provide notice to Buyer, at or prior to
the date originally scheduled for closing specifying in reasonable
detail the untruthfulness in the representations and warranties
claimed by us, and in no event may we terminate the purchase and sale
agreement under this paragraph if the failure is corrected before
March 31, 2001; or
- there has been a material breach of any covenant or agreement in the
purchase and sale agreement on the part of Buyer which cannot be cured
before March 31, 2001;
If the purchase and sale agreement is terminated, it will become void,
without liability on the part of any party, except as provided in the following
paragraph and except for some matters relating to access of information and
payment of expenses.
If any person or group proposes an Alternative Acquisition and the purchase
and sale agreement is later terminated for any other reason, other than by
reason of the breach of the purchase and sale agreement by Buyer, and a
definitive agreement relating to the Alternative Acquisition is executed within
one year after the termination, we must pay to Buyer a termination fee of
$1,000,000.
INDEMNIFICATION
We and the Selling Subsidiaries will indemnify and hold Buyer harmless from
and against any losses suffered, incurred or sustained by Buyer as a result of:
- any breach by us of any representation or warranty under the purchase and
sale agreement;
- any breach by us of, or our failure to satisfy, any covenant or agreement
under the purchase and sale agreement; or
- any liability relating to acts, omissions or obligations of ours or a
Selling Subsidiary on or before the closing date relating to the Mortgage
Business or its operations which is not assumed by Buyer under the
purchase and sale agreement.
Buyer has agreed to indemnify and hold us and the Selling Subsidiaries
harmless from and against any losses suffered, incurred or sustained by us as a
result of:
- any breach on the part of Buyer of any representation or warranty under
the purchase and sale agreement;
- any breach on the part of Buyer of any covenant or agreement under the
purchase sale agreement; or
- any liability assumed by Buyer under the purchase and sale agreement.
Any losses for which indemnification is provided will be computed on a net
basis, after taking into account any amounts received or receivable by us or
Buyer under any insurance policies and any tax deductions taken or other tax
benefits received as a result of the losses.
Neither we nor Buyer will have any indemnification obligation under the
purchase and sale agreement until the other party's aggregate losses for which
indemnification is provided exceed $1,000,000, and then the breaching party will
be obligated to indemnify the other party only for the amount by which the
losses exceed the initial $1,000,000.
The indemnification provided for in the purchase and sale agreement does
not cover, and in no event will any party be liable for, any consequential or
incidental damages.
30
38
LITIGATION MANAGEMENT
Except for litigation expressly assumed by Buyer under the purchase and
sale agreement, neither Buyer nor any of its affiliates will assume liability
for litigation arising before or after the closing and relating to events that
occurred before closing.
Under the purchase and sale agreement Buyer will manage, in its role as
servicer or subservicer under the mortgage servicing agreements it assumes, the
defense and ultimate resolution of the litigation matters referred to in a
separate litigation management agreement that we will negotiate with Buyer. That
litigation management agreement will provide that, to the extent Buyer seeks and
does not obtain full recovery under the relevant mortgage servicing agreement,
Buyer will incur the first $1,000,000 of expenses in connection with the
litigation managed by Buyer.
FEES AND EXPENSES
Except as otherwise specifically provided in the purchase and sale
agreement, all costs and expenses incurred in connection with the Transaction
will be paid by the party incurring the expenses. However, we will be solely
responsible for all costs and expenses, including transfer fees, consent fees,
penalty fees, recording fees, documentary stamps and sales taxes, incurred in
connection with:
- the assignments of the contracts or agreements related to the Mortgage
Business; and
- the purchase and sale of our personal property.
The purchase and sale agreement does provide that Buyer will solely be
responsible for all filing fees associated with the premerger notification
filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
ASSIGNMENT
By its terms, the purchase and sale agreement is not assignable by either
party without the consent of the other party, except that Buyer may assign any
or all of its rights, interests or obligations under the purchase and sale
agreement to:
- one or more of its affiliates listed below, provided that the affiliate
agrees in writing to be bound by all of the terms, conditions and
provisions of the purchase and sale agreement; or
- any post-closing purchaser of all or substantially all of the Assets,
but any such assignment will not relieve Buyer of its obligations under the
purchase and sale agreement.
The parties have agreed that, at closing, Buyer will assign its rights,
interests and obligations with respect to some of the Assets, including
servicing Assets, retained interests in mortgage loan securitization
transactions, insurance Assets and home equity lines of credit, to one or more
of the following affiliates of Buyer, Chase Mortgage Company, Chase Home
Mortgage Corporation of the Southeast, Chase Manhattan Bank, U.S.A., N.A., and
Chase Insurance Agency, Inc. which are permitted under the laws, regulations and
contracts that apply to the ownership of and dealings with those Assets. In
addition, Buyer may assign its rights, interests and obligations as to the
purchase and sale agreement to an affiliate. In either case, as noted above,
Buyer will remain liable for its obligations under the purchase and sale
agreement.
31
39
OWNERSHIP OF ADVANTA SHARES
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information provided in the following table is furnished as of December
31, 2000 (unless otherwise specified), for any person (including any "group" as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") who is known to us to be the beneficial owner of
more than 5% of any class of our voting securities.
AMOUNT
AND
NATURE OF
BENEFICIAL PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------- ------------------------------------ ---------- --------
Class A Preferred Gisela Alter(1)........................... 1,010 100.00%
Class A Common Dennis Alter(1)........................... 3,046,067(2)(3)(4)(5) 30.34%
Advanta Corp. Employee Stock Ownership 1,000,000 9.96%
Plan(6)...................................
Kestrel Investment Management 874,646 8.71%
Corporation(7)............................
Legg Mason, Inc.(8)....................... 615,900 6.13%
Dimensional Fund Advisors Inc.(9)......... 776,246 7.73%
- ---------------
(1) The address for Gisela Alter and Dennis Alter is c/o Advanta Corp., Welsh
and McKean Roads, P.O. Box 844, Spring House, Pennsylvania, 19477-0844.
(2) Includes 551,695 shares owned by a trust, the beneficiary of which is Linda
Alter, the sister of Dennis Alter, and pursuant to which Dennis Alter is
sole trustee. Mr. Alter disclaims beneficial ownership of these shares.
(3) Includes 82,798 shares held by a charitable foundation established by Mr.
Alter, as to which Mr. Alter shares voting and dispositive powers, and
41,399 shares held by a trust established by Mr. Alter, through which he has
made certain charitable gifts of shares and as to which Mr. Alter has sole
voting and dispositive powers. Also includes 571,905 shares held by a
charitable foundation established by Mr. Alter, as to which Mr. Alter and
his wife share voting and dispositive powers. Mr. Alter disclaims beneficial
ownership of all such shares.
(4) Does not include 1,010 shares of Class A Preferred Stock owned by Gisela
Alter, the wife of Dennis Alter.
(5) Does not include shares held in trust for the benefit of employees of
Advanta participating in the Advanta Corp. Employee Stock Ownership Plan
(the "ESOP") as to which Mr. Alter is a trustee. As of December 31, 1999,
the ESOP held 1,000,000 shares as follows: 34,771 shares allocated to ESOP
participants who direct the vote of such shares and as to which the ESOP
trustees have no beneficial ownership; and 965,229 shares which, as of
December 31, 1999, had not been allocated to ESOP participants as to which
the ESOP trustees may be deemed beneficial owners under Rule 13d of the 1934
Act ("Rule 13d"). Shares of Class A Common Stock held by the ESOP, but not
yet allocated or as to which ESOP participants have not made timely voting
directions, are voted by the ESOP trustees in the same proportions as shares
for which directions are received (subject to each trustee's fiduciary
responsibilities under Section 404 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")). Mr. Alter disclaims beneficial
ownership of the 965,229 unallocated shares held by the ESOP.
(6) The ESOP has sole voting power as to 965,229 unallocated shares and shared
voting power as to 34,771 shares that have been allocated to ESOP
participants. The allocated shares are voted by the ESOP trustees as
directed by ESOP participants. Shares of Class A Common Stock held by the
ESOP, but not yet allocated or as to which ESOP participants have not made
timely voting directions, are voted by the ESOP trustees in the same
proportions as shares for which
32
40
directions are receive (subject to each trustee's fiduciary responsibilities
under Section 404 of ERISA). The address of the ESOP is P.O. Box 844, Welsh
and McKean Roads, Spring House, PA 19477.
(7) Information as to shares held by Kestrel Investment Management Corporation
("Kestrel"), David J. Steirman ("Mr. Steirman") and Abbott J. Keller ("Mr.
Keller") is based solely on a Schedule 13G filed with the SEC on February
14, 2000. According to the Schedule 13G, Messrs. Steirman and Keller are the
only shareholders of Kestrel, an investment advisor; Kestrel is deemed to be
the beneficial owner for purposes of Rule 13d of 874,646 shares, or 8.69% of
the class, having sole voting power of 740,951 shares and sole dispositive
power of 874,646 shares; each of Messrs. Steirman and Keller also is deemed
to be the beneficial owner for purposes of Rule 13d of the 874,646 shares,
having sole voting power of 740,951 shares and sole dispositive power of
874,646 shares pursuant to their ownership interests in Kestrel. The address
of Kestrel and Messrs. Steirman and Keller is 411 Borel Avenue, Suite 403,
San Mateo, CA 94402.
(8) Information as to shares held by Legg Mason, Inc. ("Legg") is based solely
on a Schedule 13G filed with the SEC on February 14, 2000. According to its
Schedule 13G, Legg shares voting and dispositive power with respect to a
total 615,900 shares, or 6.12% of the class, owned by its subsidiaries Legg
Mason Wood Walker, Inc., which owns 3,381 shares, and Brandywine Asset
Management, Inc., which owns 612,519 shares. The address of Legg is 100
Light Street, Baltimore, Maryland 21202.
(9) Information as to shares held by Dimensional Fund Advisors Inc.
("Dimensional") is based solely on a Schedule 13G filed with the SEC on
February 3, 2000. According to its Schedule 13G, Dimensional is deemed to be
the beneficial owner of the above- reported shares for purposes of Rule 13d
because it has the power to vote or direct the vote of and/or shares
dispositive power with respect to these shares. Dimensional is deemed to be
the beneficial owner of 776,246 shares, or 7.71% of the class, and has sole
voting and dispositive power with respect to these shares. The address of
Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the Class A
Common Stock and Class B Common Stock as of December 31, 2000 beneficially owned
by: (a) each director of Advanta; (b) each person who served as Advanta's Chief
Executive Officer and each of Advanta's four other most highly compensated
executive officers whose compensation exceeded $100,000 during 1999 and one
additional person who would have been included among the four referred to above
had he been serving as an executive officer of Advanta at December 31, 2000; and
(c) all directors and executive officers as a group. Shares issuable upon the
exercise of stock options are included in the table below if the options are
currently exercisable or will become exercisable by March 2, 2001. None of
Advanta's executive officers or directors beneficially owns any shares of the
Class A Preferred Stock.
CLASS A COMMON CLASS B COMMON
---------------------- ----------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
BENEFICIAL PERCENT BENEFICIAL PERCENT
NAME OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- ---- ---------- -------- ---------- --------
EXECUTIVE OFFICERS/DIRECTORS
Dennis Alter(1)(2)(3)(4)(5)................. 3,046,067 30.33% 1,498,971 8.44%
William A. Rosoff(4)(6)(7).................. 82,798 * 463,222 2.60%
EXECUTIVE OFFICERS
Philip M. Browne(8)(9)...................... 37,500 * 124,821 *
James L. Shreero(10)........................ 0 * 33,091 *
33
41
CLASS A COMMON CLASS B COMMON
---------------------- ----------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
BENEFICIAL PERCENT BENEFICIAL PERCENT
NAME OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- ---- ---------- -------- ---------- --------
DIRECTORS
Arthur P. Bellis(4)(11)..................... 26,058 * 74,018 *
Max Botel(12)............................... 3,030 * 34,507 *
William C. Dunkelberg(13)................... 1,656 * 51,611 *
Dana Becker Dunn(14)........................ 0 * 36,000 *
Robert C. Hall(15).......................... 0 * 20,232 *
James E. Ksansnak(16)....................... 0 * 21,861 *
Ronald Lubner(17)........................... 0 * 32,073 *
Olaf Olafsson(4)(18)........................ 27,800 * 98,000 *
Michael Stolper(4)(19)...................... 0 * 18,000 *
All officers and directors as a group (14
persons)(1)(2)(3)(4)(6)(9)(20)............ 3,142,111 31.29% 2,506,407 14.10%
- ---------------
* Represents less than 1% of the indicated class of Advanta's Common Stock
outstanding as of December 31, 2000.
(1) Includes 551,695 shares of Class A Common Stock owned by a trust, the
beneficiary of which is Linda Alter, the sister of Dennis Alter, and
pursuant to which Mr. Alter is sole trustee. Mr. Alter disclaims beneficial
ownership of these shares.
(2) Includes 82,798 shares of Class A Common Stock and 40,768 shares of Class B
Common Stock held by a charitable foundation established by Mr. Alter, as
to which Mr. Alter shares voting and dispositive powers, and 41,399 shares
of Class A Common Stock and 12,285 shares of Class B Common Stock, held by
a trust established by Mr. Alter, through which he has made certain
charitable gifts of shares and as to which Mr. Alter has sole voting and
dispositive powers. Also includes 571,905 shares of Class A Common Stock
and 36,400 shares of Class B Common Stock held by a charitable foundation
established by Mr. Alter, as to which Mr. Alter and his wife share voting
and dispositive powers. Mr. Alter disclaims beneficial ownership of all
such shares.
(3) Does not include 1,010 shares of Class A Preferred Stock owned by the wife
of Dennis Alter.
(4) Does not include shares held in trust for the benefit of employees of
Advanta participating in the ESOP as to which Messrs. Alter, Rosoff,
Olafsson, Bellis and Stolper are trustees. As of December 31, 1999, the
ESOP held 1,000,000 shares of Class A Common Stock as follows: 34,771
shares allocated to ESOP participants who direct the vote of such shares
and as to which the ESOP trustees have no beneficial ownership and 965,229
shares which, as of December 31, 1999, had not been allocated to ESOP
participants as to which the ESOP trustees may be deemed beneficial owners
under Rule 13d. Shares of Class A Common Stock held by the ESOP, but not
yet allocated or as to which ESOP participants have not made timely voting
direction, are voted by the ESOP trustees in the same proportions as shares
for which directions are received (subject to each trustee's fiduciary
responsibilities under Section 404 of ERISA). Each of Messrs. Alter,
Rosoff, Olafsson, Bellis and Stolper disclaims beneficial ownership of the
965,229 unallocated shares held by the ESOP.
(5) Includes options to purchase 183,459 shares of Class B Common Stock
pursuant to Advanta's 2000 Omnibus Stock Incentive Plan.
(6) Includes 82,798 shares of Class A Common Stock and 40,768 shares of Class B
Common Stock owned by a charitable foundation established by Mr. Alter as
to which Mr. Rosoff has shared voting and dispositive power. These shares
are also reflected in the ownership table under Mr. Alter's name.
34
42
(7) Includes options to purchase 218,666 shares of Class B Common Stock
pursuant to Advanta's 2000 Omnibus Stock Incentive Plan.
(8) Includes options to purchase 50,000 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(9) Includes options to purchase 6,717 shares of Class B Common Stock held by
Mr. Browne's wife pursuant to Advanta's 2000 Omnibus Stock Incentive Plan.
(10) Includes options to purchase 15,562 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(11) Includes options to purchase 13,965 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(12) Includes options to purchase 1,530 shares of Class A Common Stock and
27,433 shares of Class B Common Stock pursuant to Advanta's 2000 Omnibus
Stock Incentive Plan.
(13) Includes options to purchase 49,611 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(14) Includes options to purchase 36,000 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(15) Includes options to purchase 19,688 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(16) Includes options to purchase 20,098 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(17) Includes options to purchase 32,073 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(18) Includes options to purchase 6,000 shares of Class B Common stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(19) Includes options to purchase 18,000 shares of Class B Common Stock pursuant
to Advanta's 2000 Omnibus Stock Incentive Plan.
(20) Includes options to purchase 1,530 shares of Class A Common Stock and
697,272 shares of Class B Common Stock pursuant to Advanta's 2000 Omnibus
Stock Incentive Plan.
35
43
SELECTED FINANCIAL DATA
The following table contains certain consolidated historical financial
information of Advanta Corp. and its subsidiaries. We derived the historical
information from the audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999
Annual Report"), and from the unaudited consolidated financial statements
included in our Quarterly Report on Form 10-Q for the period ended September 30,
2000 (the "2000 Third Quarter Report") and other information and data contained
in the 1999 Annual Report and the 2000 Third Quarter Report. More comprehensive
financial information is included in these reports and the financial information
which follows is qualified in its entirety by reference to such reports and all
of the financial statements and related notes contained in them, copies of which
may be obtained as provided below.
36
44
FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF OPERATIONS(1)
Noninterest revenues........ $ 95,324 $ 290,350 $ 326,297 $ 417,392 $ 825,895 $ 799,570 $ 532,380
Interest revenues........... 249,207 185,700 246,226 245,340 436,860 354,927 249,566
Interest expense............ 151,490 128,529 167,676 184,275 324,558 269,700 166,032
Gain on transfer of consumer
credit card business...... 0 0 0 541,288 0 0 0
Provision for credit
losses.................... 59,858 28,007 42,647 67,193 210,826 96,862 53,326
Minority interest in income
of consolidated
subsidiary................ 6,660 6,660 8,880 8,880 8,880 222 0
Operating expenses.......... 286,405 251,314 337,061 379,764 621,961 522,952 350,685
Unusual charges(2).......... 0 6,713 16,713 125,072 0 0 0
Net income (loss)........... (159,882) 33,263 49,818 447,880 71,625 175,657 136,677
PER COMMON SHARE DATA
Net income (loss)
Basic
Combined(3)............... $ (6.38) $ 1.31 $ 1.99 $ 16.65 $ 1.52 $ 4.15 $ 3.38
Class A................... (6.41) 1.28 1.95 16.62 1.45 4.08 3.34
Class B................... (6.36) 1.33 2.02 16.68 1.57 4.19 3.42
Diluted
Combined(3)............... (6.38) 1.30 1.96 15.71 1.50 3.89 3.20
Class A................... (6.41) 1.26 1.93 15.69 1.43 3.86 3.18
Class B................... (6.36) 1.31 1.99 15.73 1.54 3.91 3.22
Cash dividends declared
Class A................... .189 .189 .252 .252 .440 .380 .290
Class B................... .227 .227 .302 .302 .528 .456 .348
Book value-combined......... 16.81 22.65 23.14 21.26 19.01 18.06 14.35
Closing stock price
Class A................... 11.25 14.63 18.25 13.25 26.25 42.75 38.25
Class B................... 8.14 11.75 14.06 11.06 25.38 40.88 36.38
FINANCIAL CONDITION -- YEAR
END
Investments and money market
instruments(4)............ $ 1,460,887 $ 1,788,603 $ 1,387,655 $ 1,662,343 $ 2,092,292 $ 1,653,384 $ 1,089,317
Gross receivables
Owned..................... 920,991 962,959 1,480,305 1,120,360 3,352,236 2,618,392 2,732,933
Securitized............... 9,662,170 9,127,126 8,760,918 8,659,797 14,505,968 13,670,801 9,482,422
----------- ----------- ----------- ----------- ----------- ----------- -----------
Managed................... 10,583,161 10,090,085 10,241,223 9,780,157 17,858,204 16,289,193 12,215,355
Total serviced
receivables(5)............ 23,299,071 20,573,310 22,142,890 18,058,485 27,039,669 19,981,285 12,838,272
Total assets
Owned..................... 3,119,306 3,525,594 3,689,662 3,721,420 6,655,915 5,583,959 4,524,259
Managed................... 12,139,809 12,206,235 11,977,045 12,065,183 20,945,748 19,141,467 13,943,506
37
45
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deposits.................... 1,530,285 1,704,176 1,512,359 1,749,790 3,017,611 1,860,058 1,906,601
Long-term debt.............. 759,900 849,815 788,508 1,030,147 2,248,172 2,305,081 1,279,190
Capital securities(6)....... 100,000 100,000 100,000 100,000 100,000 100,000 0
Stockholders' equity........ 432,769 577,224 589,631 560,304 926,950 852,036 672,964
SELECTED FINANCIAL RATIOS
Return on average assets.... (5.59)% 1.16% 1.34% 11.95% 1.09% 3.16% 4.06%
Return on average common
equity.................... (40.91) 7.84 8.82 82.76 8.47 25.31 26.15
Return on average total
equity(7)................. (33.31) 7.52 8.30 64.81 8.12 22.07 24.75
Equity/managed assets(7).... 4.39 5.55 5.76 5.47 4.90 4.95 4.81
Equity/owned assets(7)...... 17.08 19.21 18.69 17.74 15.43 17.05 14.87
Dividend payout............. N/M(9) 17.54 15.67 1.62 33.34 10.75 9.97
As a percentage of managed
receivables:
Total loans 30 days or
more delinquent(8)
New methodology......... 8.3
Prior methodology....... 8.6 7.6 8.2 7.7 6.0 5.4 3.3
Net charge-offs(8)
New methodology......... 2.5
Prior methodology....... 2.0 1.5 1.6 2.5 5.3 3.2 2.2
Operating expenses........ 3.4 3.3 3.3 3.6 3.4 2.9 2.9
- ---------------
(1) Results through February 1998 include the results of the consumer credit
card unit.
(2) 1999 amounts included charges associated with cost reduction initiatives in
the first quarter and additional costs associated with products exited in
the first quarter of 1998. 1998 amounts included severance and outplacement
costs associated with workforce reduction, option exercises and other
employee costs associated with the Consumer Credit Card Transaction/Tender
Offer; and expenses associated with exited businesses/products and asset
impairment.
(3) Combined represents a weighted average of Class A and Class B.
(4) Includes federal funds sold, restricted interest-bearing deposits, trading
investments, investments available for sale and subordinated trust assets.
(5) Represents total managed receivables plus contract servicing receivables.
(6) Represents company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures of Advanta.
(7) In 2000, 1999, 1998, 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 1999 were 8.82%, 4.92% and
15.98%, respectively, for 1998 were 74.75%, 4.64% and 15.06%, respectively,
for 1997 were 8.33%, 4.43% and 13.93%, respectively and for 1996 were
22.31%, 4.45% and 15.26%, respectively. For the nine month period ending
September 30, 2000, the ratios without capital securities were (40.79)%,
3.56% and 13.87%, respectively, and for the same period in 1999, the ratios
were 7.82%, 4.73% and 16.37%, respectively.
(8) Beginning in the second quarter of 2000, charge-off and delinquency
statistics reflect the adoption of new charge-off policies for mortgage
loans and leases. Under the new policy, mortgage loans are generally
charged-off at the earlier of foreclosure or 180 days delinquent. The
previous policy was the earlier of foreclosure or 12 months delinquent.
Leases are generally charged-off at 121 days delinquent, however, under the
new policy, the timing of the delinquency measurement was changed from
mid-month to month end in the second quarter of
38
46
2000. Cumulative catch-up adjustments included in second quarter charge-off
amounts are not annualized when calculating the annualized charge-off rate
under the new methodology. Beginning in 1996, charge-off rates reflect a
change in consumer credit card charge-off methodology. This new policy
provided up to a 90-day investigative period following notification of the
bankruptcy petition prior to charge-off.
(9) The dividend payout ratio for the nine months ended September 30, 2000 is
negative and therefore, not meaningful.
39
47
UNAUDITED PRO FORMA FINANCIAL INFORMATION
We prepared the following pro forma financial information to illustrate the
estimated effects of the proposed transaction as described under "The
Transaction" in this proxy statement. The following tables present:
- The historical consolidated income statements for the nine months ended
September 30, 2000 (unaudited) and the year ended December 31, 1999, and
the unaudited historical consolidated balance sheet as of September 30,
2000 for Advanta Corp. and its subsidiaries; and
- The unaudited pro forma consolidated income statements for the nine
months ended September 30, 2000 and the year ended December 31, 1999, and
the unaudited pro forma consolidated balance sheet as of September 30,
2000 for Advanta Corp. and its subsidiaries giving effect to the
described pro forma adjustments
We prepared the pro forma consolidated income statements assuming that the
proposed transaction had occurred January 1, 1999. The pro forma consolidated
balance sheet was prepared assuming that the proposed transaction had occurred
September 30, 2000.
The unaudited pro forma consolidated financial statements presented below
do not purport to represent what the results of operations or financial position
would actually have been if the proposed transaction had occurred on the dates
referred to above. Also, the unaudited pro forma consolidated financial
statements are not indicative of the future results of operations or financial
position of Advanta Corp. and its subsidiaries to be expected in future periods.
A substantial portion of corporate expenses incurred in the past have been to
support the operations to be sold in the proposed transaction. Upon completion
of the proposed transaction, we intend to substantially reduce corporate
expenses not directly associated with our business card and other ongoing
businesses. No pro forma adjustments have been reflected associated with our
plans to reduce these expenses. Further, the pro forma adjustments do not
reflect a restructuring charge related to the planned reduction in corporate
expenses or transaction expenses associated with the proposed transaction. The
pro forma adjustments also do not reflect any impact for the use of the proceeds
from the proposed transaction. The restructuring charge and transaction expenses
will be incurred in the period the proposed transaction is consummated. The pro
forma adjustments are based upon available information and assumptions that we
believe are reasonable.
40
48
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
ADVANTA ADVANTA ADVANTA
CORP. AND MORTGAGE CORP. AND
SUBSIDIARIES PRO FORMA SUBSIDIARIES
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
REVENUES:
Interest income.................................... $ 249,207 $(131,487)(A) $117,720
Securitization income (loss)....................... (99,484) 134,325(A) 34,841
Servicing revenues................................. 119,273 (100,504)(A) 18,769
Other revenues, net................................ 75,535 (3,337)(A) 72,198
--------- --------- --------
Total revenues................................ 344,531 (101,003) 243,528
--------- --------- --------
EXPENSES:
Operating expenses................................. 286,405 (162,631)(B) 123,774
Interest expense................................... 151,490 (75,469)(C) 76,021
Provision for credit losses........................ 59,858 (23,408)(A) 36,450
Minority interest in income of consolidated
subsidiary....................................... 6,660 -- 6,660
--------- --------- --------
Total expenses................................ 504,413 (261,508) 242,905
--------- --------- --------
Income (loss) before income taxes.................. (159,882) 160,505 623
Income tax expense................................. -- 218(D) 218
--------- --------- --------
Net income (loss).................................. $(159,882) $ 160,287 $ 405
========= ========= ========
Basic earnings (loss) per combined share........... $ (6.38) $ 0.01
========= ========
Diluted earnings (loss) per combined share......... $ (6.38) $ 0.01
========= ========
Basic weighted average combined shares
outstanding...................................... 25,093 25,093
========= ========
Diluted weighted average combined shares
outstanding...................................... 25,093 25,372
========= ========
- ---------------
(A) The pro forma consolidated income statement reflects the elimination of
income and expense of the Advanta Mortgage business unit, as reflected in
the Unaudited Historical Combined Financial Statements, as if the proposed
transaction had occurred as of January 1, 1999, adjusted for the results of
auto operations which are not part of the proposed transaction.
(B) The pro forma consolidated income statement reflects the elimination of the
operating expenses of Advanta Mortgage, adjusted by (1) $3.0 million of auto
expenses as described in (A); and (2) $29.4 million of indirect operating
expenses allocated to Advanta Mortgage by Advanta Corp. that would continue
to be incurred subsequent to the proposed transaction if there was no
corporate restructuring.
(C) The pro forma consolidated income statement reflects the elimination of
interest expense of Advanta Mortgage, as adjusted by (1) auto interest
expense of $1.3 million as described in (A); and (2) $863 thousand which
represents the difference between interest expense allocated to Advanta
Mortgage by Advanta Corp. and interest expense calculated based on the
specific costs of funding the assets being sold.
(D) The effective tax rate of the consolidated company and Advanta Mortgage was
0% for 2000 due to valuation adjustments recorded on Advanta Mortgage assets
in the second quarter of 2000 and an increase in a tax valuation allowance.
Excluding these mortgage valuation adjustments, tax expense would have been
recognized by Advanta Corp. The pro forma tax adjustment represents the tax
expense on pro forma income at the federal statutory rate of 35%.
41
49
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
ADVANTA ADVANTA ADVANTA
CORP. AND MORTGAGE CORP. AND
SUBSIDIARIES PRO FORMA SUBSIDIARIES
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
REVENUES:
Interest income.................................... $246,226 $(126,203)(A) $120,023
Securitization income.............................. 124,514 (88,548)(A) 35,966
Servicing revenues................................. 119,300 (95,855)(A) 23,445
Other revenues, net................................ 82,483 (4,078)(A) 78,405
-------- --------- --------
Total revenues................................ 572,523 (314,684) 257,839
-------- --------- --------
EXPENSES:
Operating expenses................................. 337,061 (200,639)(B) 136,422
Interest expense................................... 167,676 (82,325)(C) 85,351
Provision for credit losses........................ 42,647 (16,391)(A) 26,256
Minority interest in income of consolidated
subsidiary....................................... 8,880 -- 8,880
Unusual charges.................................... 16,713 -- 16,713
-------- --------- --------
Total expenses................................ 572,977 (299,355) 273,622
-------- --------- --------
Income (loss) before income taxes.................. (454) (15,329) (15,783)
Income tax expense (benefit)....................... (50,272) (5,365)(D) (55,637)
-------- --------- --------
Net income......................................... $ 49,818 $ (9,964) $ 39,854
======== ========= ========
Basic earnings per combined share.................. $ 1.99 $ 1.57
======== ========
Diluted earnings per combined share................ $ 1.96 $ 1.55
======== ========
Basic weighted average combined shares
outstanding...................................... 23,572 23,572
======== ========
Diluted weighted average combined shares
outstanding...................................... 23,929 23,929
======== ========
- ---------------
(A) The pro forma consolidated income statement reflects the elimination of
income and expense of the Advanta Mortgage business unit, as reflected in
the Unaudited Historical Combined Financial Statements, as if the proposed
transaction had occurred as of January 1, 1999, adjusted for the results of
auto operations which are not part of the proposed transaction.
(B) The pro forma consolidated income statement reflects the elimination of the
operating expenses of Advanta Mortgage, adjusted by (1) $5.5 million of auto
expenses as described in (A); and (2) $35.7 million of indirect operating
expenses allocated to Advanta Mortgage by Advanta Corp. that would continue
to be incurred subsequent to the proposed transaction if there was no
corporate restructuring.
(C) The pro forma consolidated income statement reflects the elimination of
interest expense of Advanta Mortgage, as adjusted by (1) auto interest
expense of $3.3 million as described in (A); and (2) $7.2 million which
represents the difference between interest expense allocated to Advanta
Mortgage by Advanta Corp. and interest expense calculated based on the
specific costs of funding the assets being sold.
(D) The pro forma consolidated income statement reflects the net effects of the
pro forma adjustments at the statutory federal tax rate of 35%.
42
50
ADVANTA CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(UNAUDITED)
ADVANTA ADVANTA ADVANTA
CORP. AND MORTGAGE CORP. AND
SUBSIDIARIES PRO FORMA SUBSIDIARIES
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ------------
($ IN THOUSANDS)
ASSETS
Cash................................................ $ 77,067 $ 981,068(A) $1,058,135
Federal funds sold.................................. 107,046 -- 107,046
Restricted interest-bearing deposits................ 42,556 --(B) 42,556
Investments available for sale...................... 800,567 -- 800,567
Loan and lease receivables, net:
Held for sale..................................... 580,578 (267,866)(B) 312,712
Other............................................. 292,459 (37,661)(B) 254,798
---------- --------- ----------
Total loan and lease receivables, net............... 873,037 (305,527) 567,510
Retained interests in securitizations............... 432,253 (423,671)(B) 8,582
Contractual mortgage servicing rights............... 95,954 (95,954)(B) --
Premises and equipment (at cost, less accumulated
depreciation)..................................... 96,639 (26,127)(C) 70,512
Other assets........................................ 594,187 (127,903)(D) 466,284
---------- --------- ----------
Total assets................................... $3,119,306 $ 1,886 $3,121,192
========== ========= ==========
LIABILITIES
Deposits:
Noninterest-bearing............................... $ 17,338 $ -- $ 17,338
Interest-bearing.................................. 1,512,947 -- 1,512,947
---------- --------- ----------
Total Deposits................................. 1,530,285 -- 1,530,285
Long-term debt...................................... 759,900 --(E) 759,900
Other borrowings.................................... 6,030 -- 6,030
Other liabilities................................... 290,322 (38,114)(F) 252,208
---------- --------- ----------
Total liabilities.............................. 2,586,537 (38,114) 2,548,423
---------- --------- ----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of Advanta................ 100,000 -- 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding -- 1,010
shares......................................... 1,010 -- 1,010
Class A voting common stock, $.01 par value:
Authorized -- 214,500,000 shares; Issued --
10,040,230 shares.............................. 100 -- 100
Class B non-voting common stock, $.01 par value:
Authorized -- 230,000,000 shares; Issued --
17,708,494 shares.............................. 177 -- 177
Additional paid-in capital.......................... 221,486 -- 221,486
Deferred compensation............................... (10,131) -- (10,131)
Unearned ESOP shares................................ (11,818) -- (11,818)
Accumulated other comprehensive loss................ (6,317) -- (6,317)
Retained earnings................................... 256,227 40,000(G) 296,227
Less: Treasury stock at cost, 0 Class A and 527,168
Class B common shares............................. (17,965) -- (17,965)
---------- --------- ----------
Total stockholders' equity..................... 432,769 40,000 472,769
---------- --------- ----------
Total liabilities and stockholders' equity..... $3,119,306 $ 1,886 $3,121,192
========== ========= ==========
43
51
- ---------------
(A) Represents the receipt of proceeds on the sale of net assets of Advanta
Mortgage reduced by the sale of Advanta Mortgage business unit cash, as
reflected in the Unaudited Historical Combined Financial Statements, had the
sale occurred at the balance sheet date, with the exception of $1.0 million
of cash accounts that are not part of the proposed transaction.
(B) Represents the sale of assets and liabilities of the Advanta Mortgage
business unit, as reflected in the Unaudited Historical Combined Financial
Statements, had the sale occurred at the balance sheet date, adjusted for
auto assets and liabilities that are not part of the proposed transaction.
(C) Represents the reduction of premises and equipment of Advanta Mortgage had
the sale occurred on the balance sheet date, with the exception of auto
assets as noted in (B) and $35.4 million of facilities and related building
improvements, equipment and technology assets that are not part of the
proposed transaction.
(D) Represents the reduction of other assets of Advanta Mortgage had the sale
occurred on the balance sheet date, with the exception of auto assets as
noted in (B) and $2.1 million of accrued interest on derivatives and certain
prepaids that are not part of the proposed transaction.
(E) One of the potential alternatives for the use of a portion of the proceeds
from the proposed transaction is the defeasance or prepayment of all
outstanding medium-term notes. A pro forma adjustment for the defeasance or
prepayment is not shown above, since the defeasance or prepayment is
contingent upon receiving approval from our banking regulators for an
Advanta National Bank dividend to Advanta Corp. There were $365.6 million of
medium-term notes outstanding at September 30, 2000.
(F) Represents the reduction of other liabilities of Advanta Mortgage had the
sale occurred on the balance sheet date, with the exception of auto
liabilities as noted in (B) and $25.1 million of liabilities related to
exited businesses, certain other accruals, and payroll related expenses that
are not part of the proposed transaction.
(G) Represents the increase in retained earnings resulting from the gain, before
transaction expenses, of $59.7 million on the proposed transaction, reduced
by a charge of approximately $19.7 million associated with equipment,
facilities and derivative instruments related to hedging activities that
will not be purchased in the proposed transaction. Prior to closing, the
buyer has the option to elect not to purchase a limited number of specific
assets. If the buyer elects not to purchase some or all of these assets, the
purchase price will be adjusted. The total adjustment to the purchase price
will not reduce the total purchase price by more than $4 million.
44
52
UNAUDITED FINANCIAL STATEMENTS OF ADVANTA MORTGAGE
Provided below are:
- The unaudited historical combined balance sheets as of September 30,
2000, December 31, 1999 and December 31, 1998;
- The unaudited historical combined income statements for the nine months
ended September 30, 2000 and September 30, 1999 and the years ended
December 31, 1999, December 31, 1998 and December 31, 1997;
- The unaudited historical combined statements of changes in business unit
capital for the nine months ended September 30, 2000 and the years ended
December 31, 1999, December 31, 1998 and December 31, 1997; and
- The unaudited historical combined statements of cash flows for the nine
months ended September 30, 2000 and September 30, 1999 and the years
ended December 31, 1999, December 31, 1998 and December 31, 1997, for
Advanta Mortgage, the business unit which conducts our mortgage
operations
45
53
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
COMBINED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------- ------------ ------------
($ IN THOUSANDS)
ASSETS
Cash............................................ $ 41,611 $ 20,540 $ 12,004
Restricted interest-bearing deposits............ 6,225 35,810 25,283
Loans
Held for sale................................. 267,866 508,693 462,924
Other......................................... 39,435 517,648 358,152
---------- ---------- ----------
Total loans, net................................ 307,301 1,026,341 821,076
Retained interests in securitizations........... 432,253 515,789 501,038
Contractual mortgage servicing rights........... 95,954 92,636 74,425
Premises and equipment (at cost, less
accumulated depreciation of $31,888 in 2000,
$18,738 in 1999 and $12,188 in 1998).......... 61,542 22,990 17,845
Other assets.................................... 130,279 127,541 301,496
---------- ---------- ----------
Total Assets............................... $1,075,165 $1,841,647 $1,753,167
========== ========== ==========
LIABILITIES AND BUSINESS UNIT CAPITAL
Amounts due to Advanta Corp. and affiliates..... $ 761,874 $1,319,994 $1,491,643
Other borrowings................................ 0 76,435 18,517
Other liabilities............................... 63,291 79,618 49,607
---------- ---------- ----------
Total liabilities.......................... 825,165 1,476,047 1,559,767
---------- ---------- ----------
Business unit capital...................... 250,000 365,600 193,400
---------- ---------- ----------
Total liabilities and business unit
capital.................................. $1,075,165 $1,841,647 $1,753,167
========== ========== ==========
See Notes to Combined Financial Statements
46
54
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
COMBINED INCOME STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------
2000 1999 1999 1998 1997
--------- -------- -------- -------- --------
($ IN THOUSANDS)
Interest income................... $ 133,762 $ 99,345 $131,496 $123,550 $ 94,499
Securitization income (loss)...... (134,325) 105,115 88,548 132,369 72,019
Servicing revenues................ 102,056 72,123 99,235 86,416 61,753
Other revenues, net............... 3,385 3,126 4,174 21,581 (3,261)
--------- -------- -------- -------- --------
Total revenues............... 104,878 279,709 323,453 363,916 225,010
Operating expenses................ 195,019 181,313 241,822 224,611 130,911
Interest expense.................. 75,878 60,142 78,461 75,296 51,825
Provision for credit losses....... 23,508 9,145 16,731 25,577 7,851
--------- -------- -------- -------- --------
Total expenses............... 294,405 250,600 337,014 325,484 190,587
--------- -------- -------- -------- --------
Pretax income (loss).............. (189,527) 29,109 (13,561) 38,432 34,423
Income tax expense (benefit)...... 0 11,444 (5,412) 11,470 1,107
--------- -------- -------- -------- --------
Net income (loss)................. $(189,527) $ 17,665 $ (8,149) $ 26,962 $ 33,316
========= ======== ======== ======== ========
See Notes to Combined Financial Statements
47
55
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
COMBINED STATEMENTS OF CHANGES IN BUSINESS UNIT CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(UNAUDITED)
($ IN THOUSANDS)
BALANCE, JANUARY 1, 1997.................................... $ 83,623
Changes in business unit capital............................ 44,277
Net income.................................................. 33,316
---------
BALANCE, DECEMBER 31, 1997.................................. 161,216
Changes in business unit capital............................ 5,222
Net income.................................................. 26,962
---------
BALANCE, DECEMBER 31, 1998.................................. 193,400
Changes in business unit capital............................ 180,349
Net loss.................................................... (8,149)
---------
BALANCE, DECEMBER 31, 1999.................................. 365,600
Changes in business unit capital............................ 73,927
Net loss.................................................... (189,527)
---------
BALANCE, SEPTEMBER 30, 2000................................. $ 250,000
=========
See Notes to Combined Financial Statements
48
56
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)...................... $ (189,527) $ 17,665 $ (8,149) $ 26,962 $ 33,316
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 7,530 5,948 6,715 6,160 3,534
Provision for credit losses.......... 23,508 9,145 16,731 25,577 7,851
Valuation adjustment for loans held
for sale.......................... 6,307 -- -- -- --
Origination of loans held for sale... (1,226,914) (1,904,436) (2,227,559) (4,927,070) (3,443,116)
Proceeds from sale of loans held for
sale.............................. 1,583,995 2,246,196 2,424,402 4,719,705 3,389,327
Change in other assets and other
liabilities....................... (7,540) 60,593 78,322 (12,785) (15,094)
Change in retained interests in
securitizations and contractual
mortgage servicing rights......... 80,218 (53,017) (32,962) (189,142) (166,319)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................. 277,577 382,094 257,500 (350,593) (190,501)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Change in interest-bearing deposits.... 29,585 (6,955) (10,527) (1,855) (2,013)
Principal collected on loans not held
for sale............................. 80,207 100,570 133,456 119,215 84,423
Origination of loans not held for
sale................................. (157,558) (109,287) (426,852) (427,389) (141,143)
Proceeds from sale of loans originally
classified as not held for sale...... 397,735 -- -- -- --
Purchases of premises and equipment,
net.................................. (45,847) (10,454) (11,659) 6,167 (25,627)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities................. 304,122 (26,126) (315,582) (303,862) (84,360)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Change in amounts due to Advanta Corp.
and affiliates....................... (558,120) (377,317) (171,649) 639,197 223,737
Change in other borrowings............. (76,435) (18,517) 57,918 14,660 3,857
Change in business unit capital for
transactions with Advanta Corp....... 73,927 42,867 180,349 5,222 44,277
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................. (560,628) (352,967) 66,618 659,079 271,871
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........ 21,071 3,001 8,536 4,624 (2,990)
Cash at beginning of period............ 20,540 12,004 12,004 7,380 10,370
----------- ----------- ----------- ----------- -----------
Cash at end of period.................. $ 41,611 $ 15,005 $ 20,540 $ 12,004 $ 7,380
=========== =========== =========== =========== ===========
See Notes to Combined Financial Statements
49
57
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In these notes to combined financial statements, "we", "us", and "our"
refer to Advanta Mortgage, unless the context otherwise requires.
Nature of Operations
Advanta Mortgage is a business unit of Advanta Corp. and had no separate
legal status or existence through September 30, 2000. Advanta Mortgage makes
nonconforming home equity loans directly to consumers and through brokers. This
business unit originates and services first and second lien mortgage loans,
including home equity lines of credit, through subsidiaries of Advanta Corp. In
addition to servicing and managing the loans it originates, Advanta Mortgage
contracts with third parties to service their nonconforming home equity loans on
a subservicing basis. Prior to the first quarter of 1999, this business unit
also engaged in the auto finance business.
Basis of Presentation
The activities of Advanta Mortgage have been conducted to date by various
entities that are wholly owned subsidiaries of Advanta Corp. These entities
include Advanta National Bank, Advanta Bank Corp., Advanta Mortgage Holding
Company and subsidiaries, and Advanta Residual Holding Corp. All of the
activities of Advanta Mortgage Holding Company and subsidiaries and Advanta
Residual Holding Corp. are part of this business unit. However, Advanta Mortgage
represents only a portion of the activities, operations and assets of Advanta
National Bank and Advanta Bank Corp. The combined financial statements include
all of the accounts of Advanta Mortgage Holding Company and subsidiaries and
Advanta Residual Holding Corp., and only the accounts of Advanta National Bank
and Advanta Bank Corp. that relate to the Advanta Mortgage business unit
activities of Advanta Corp.
The combined financial statements reflect the necessary adjustments to
eliminate intercompany items, transactions and profits. The combined financial
statements also reflect assumptions regarding the allocation of certain expense
items and balance sheet accounts, certain of which are material to the financial
statements. In that regard, there have been $53.6 million of indirect expenses
allocated to Advanta Mortgage by Advanta Corp in the nine months ended September
30, 2000 and $41.0 million allocated in the same period of 1999. There were
$56.5 million of indirect expenses allocated to Advanta Mortgage in the year
ended December 31, 1999, $38.8 million in the same period of 1998 and $19.7
million in the same period of 1997. These indirect expenses are related to
administrative and other functions supporting all legal entities and business
units within the Advanta Corp. group. See Note 14. Accordingly, the combined
historical financial statements of the business unit would not necessarily be
indicative of the results that would have been realized if the business unit had
operated as an independent entity.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Estimates are used when accounting for securitization income,
retained interests in securitizations, contractual mortgage servicing rights,
the fair value of certain financial instru-
50
58
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
ments, the allowance for credit losses, and income taxes, among others. Actual
results could differ from those estimates.
Interim Financial Statements
In the opinion of management, the financial statements as of September 30,
2000 and for the nine months ended September 30, 2000 and 1999 include all
adjustments (which include normal recurring adjustments and the valuation
adjustments discussed in Note 2) required for a fair statement of financial
position, results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Loans Held for Sale
Loans held for sale represent receivables currently on the balance sheet
that we intend to sell or securitize within the next six months. These assets
are reported at the lower of aggregate cost or fair market value by loan type.
Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
Allowance for Credit Losses
The allowance for credit losses is established as losses are estimated to
have occurred through a provision for credit losses charged to earnings. The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management's periodic review of the collectibility in light of
historical experience by loan type, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. We charge losses on nonperforming Advanta
Mortgage loans against the allowance generally at the earlier of foreclosure or
when they have become 180 days delinquent. This policy was implemented in the
three months ended June 30, 2000. The previous policy was the earlier of
foreclosure or 12 months delinquent.
The accrual of interest is discontinued when the related receivable becomes
90 days past due. Interest income is subsequently recognized only to the extent
cash payments are received.
Loan Origination Costs and Fees
Interest income is accrued on the unpaid principal balance of loans. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using a method which
approximates the level yield method. Upon the sale or securitization of loans,
the unamortized portion of net fees or costs is included in the computation of
the gain on sale. Deferred origination costs include certain costs relating to
direct sales and underwriting activities and preparing and processing loan
documents.
51
59
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
Securitization Activities
We use securitizations of loans as a funding source for operations and
generally have securitized loans quarterly. The transfer of financial assets in
which we surrender control over those assets is accounted for as a sale to the
extent that we receive consideration other than beneficial interests in the
transferred assets in exchange. Liabilities and derivatives incurred or obtained
as part of a transfer of financial assets are initially measured at fair value,
if practicable. We allocate the previous carrying amount of the receivables
securitized between the assets sold and the retained interests, including the
servicing relationship, interests in the receivables, and an interest-only
strip, 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 fair
value of the remaining interest to be collected from the borrowers on the
underlying loans after the payment of interest to the certificate holders and
the payment of a servicing fee to us in our role as servicer reduced by the
estimated fair value of our obligation for anticipated charge-offs. In the
fourth quarter of 1999, there was a minimal level of loans securitized due to
management's intention at that time to grow the on-balance sheet portfolio.
Retained Interests in Securitizations
Retained interests in securitizations include the retained interest-only
("IO") strip and subordinated trust assets related to loan securitizations.
Retained interest-only strips are measured in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). We account for the
retained interest-only strips from mortgage securitizations as trading
securities. These assets are recorded at estimated fair value and the resulting
unrealized gain or loss from the valuation of the receivable is included in the
results of operations for the period.
We estimate the fair value of retained interest-only strips 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 receivables sold over the sum of the
interest rate paid to the certificate holder plus the servicing fee, a trustee
fee, credit enhancement costs and an estimate of future credit losses over the
life of the receivables. Cash flows are discounted from the date the cash is
expected to become available to us (the "cash-out" method). These cash flows are
projected over the life of the receivables using prepayment, default, and
interest rate assumptions that management believes would be used by market
participants for similar financial instruments subject to prepayment, credit and
interest rate risk. The cash flows are discounted using an interest rate that
management believes a purchaser unrelated to the seller of the financial
instrument would demand. See Note 15 for discussion of assumptions used in the
estimate of fair value. As all estimates used are influenced by factors outside
our control, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change in the near term. Interest income is
recognized over the life of the retained interest-only strip using the discount
rate used in the valuation.
Ownership of subordinated trust assets, together with the related retained
interest-only strip, is represented by the subordinate certificates issued by
the securitization trust. These certificates serve as a form of credit
enhancement for the transactions, and excess losses, if any, on the collateral
would be absorbed by these amounts. These assets are classified as trading
securities and are carried at estimated fair value. In estimating fair value,
management considers the credit enhancement provided by the retained
interest-only strip.
52
60
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
Contractual Mortgage Servicing Rights
We allocate a portion of the book value of receivables securitized to the
retained servicing rights based on relative fair values. 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, prepayment penalties and other ancillary sources,
over adequate market-based compensation. Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125") defines adequate compensation
to include the profit that would be demanded in the marketplace. Contractual
mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net future servicing fee income.
We periodically evaluate the potential impairment of contractual mortgage
servicing rights. We stratify these rights based on two of the predominant risk
characteristics of the underlying loans, the period 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. See Note 15 for discussion of
assumptions used in the estimate of fair value.
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.
Derivative Financial Instruments
Advanta Corp. uses various derivative financial instruments, including
interest rate swaps, interest rate caps, options and forward contracts, as part
of its risk management strategy to reduce interest rate risk. Derivatives are
not used for trading or speculative activities. Derivatives are classified as
hedges or synthetic alterations of specific on-balance sheet items, off-balance
sheet items or anticipated transactions.
Advanta Corp. has conducted hedging activities on behalf of Advanta
Mortgage. The results of these activities are reflected in interest expense and
non-interest revenues in the results of operations for the periods presented.
Income Taxes
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various assets and liabilities
and gives current recognition to changes in tax rates and laws.
Cash Flow Reporting
All interest and taxes were paid by Advanta Corp. or affiliates of Advanta
Mortgage. For purposes of cash flow reporting for these combined financial
statements, interest and taxes are considered to be paid when charged to the
intercompany accounts. Cash paid for interest was $78.2
53
61
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
million during 1999, $76.3 million during 1998, and $51.0 million during 1997.
Cash paid for taxes was $25.1 million during 1999, $1.6 million during 1998, and
$5.9 million during 1997.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, cannot be applied retroactively and will be adopted as required
January 1, 2001. We anticipate that the adoption of SFAS No. 133 will not have a
material effect on the results of operations; however, we continue to monitor
potential changes and implementation guidance to this new accounting standard.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without amendment. SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
anticipate that the adoption of SFAS No. 140 will not have a material effect on
our results of operations.
NOTE 2. RECENT REGULATORY DEVELOPMENTS
In June 2000, we announced that Advanta Corp.'s banking subsidiaries,
Advanta National Bank and Advanta Bank Corp., reached agreements with their
respective bank regulatory agencies, primarily relating to the banks' subprime
lending operations. The agreements outlined a series of steps to modify
processes and formalize and document certain practices and procedures for the
banks' subprime lending operations. The agreements also established temporary
asset growth limits at Advanta National Bank and deposit growth limits at
Advanta Bank Corp., imposed restrictions on taking brokered deposits at Advanta
National Bank, and required that by September 30, 2000 Advanta National Bank's
capital ratios be maintained at approximately the levels at March 31, 2000. At
September 30, 2000, Advanta National Bank was in compliance with the increased
capital ratios required by the agreements. We achieved these ratios through a
combination of decreasing the assets at Advanta National Bank and making
aggregate capital contributions and other investments in Advanta National Bank
of approximately $70 million. The agreements also required us to change our
charge-off policy for delinquent mortgages to 180 days and to modify our
accounting processes and methodology for our allowance for credit losses and
valuation of residual assets.
In July 2000, we announced that Advanta National Bank signed an agreement
with the Office of the Comptroller of the Currency regarding the carrying value
of Advanta National Bank's retained interests in mortgage securitizations and
allowance for mortgage credit losses. For Advanta National Bank's June 30, 2000
Call Report, in accordance with the provisions of the agreement, we calculated
the valuation of the retained interests based on an 18% discount rate on the
interest-only strip and subordinated trust assets, a 15% discount rate on the
contractual mortgage servicing rights, a
54
62
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
prepayment rate that represents the average prepayment experience for the six
months ended February 29, 2000 and cumulative loss rates as a percentage of
original principal balance of 6% on closed end mortgage loans and 8% for HELOC
(open end) mortgage loans. The agreement required that based on these
assumptions, the carrying value of Advanta National Bank's contractual mortgage
servicing rights be reduced by $13 million and the carrying value of Advanta
National Bank's subordinated trust assets and retained interest-only strip be
reduced by a total amount of $201 million. The agreement further required that
Advanta National Bank's allowance for credit losses be increased by $22 million.
The agreement contains provisions regarding the use of similar discount rate and
credit loss assumptions for the calculation of the carrying value of the
residual assets in future periods.
NOTE 3. LOANS
Loans on the balance sheet, including those held for sale, consisted of the
following:
DECEMBER 31,
SEPTEMBER 30, ----------------------
2000 1999 1998
------------- ---------- --------
Gross mortgage and auto loans................ $332,074 $1,050,478 $829,819
Other loans.................................. 4,292 4,231 0
Add: Deferred origination costs, net of
deferred fees, and unamortized purchase
premiums................................... (1,864) (4,496) 11,349
Less: Allowance for credit losses............ (27,201) (23,872) (20,092)
-------- ---------- --------
Loans, net................................... $307,301 $1,026,341 $821,076
======== ========== ========
Securitized receivables were $7.9 billion at September 30, 2000, $7.3
billion at December 31, 1999 and $7.4 billion at December 31, 1998. Subservicing
receivables were $12.7 billion at September 30, 2000, $11.9 billion at December
31, 1999 and $8.3 billion at December 31, 1998. We bear no risk of credit loss
on the receivables in our subservicing portfolio and subserviced loans are not
included in our managed portfolio of receivables. At September 30, 2000, two
clients represented 76% of the subservicing receivables portfolio. One of our
larger subservicing clients, which represented 37% of the subservicing portfolio
at September 30, 2000, has decided to move aspects of its servicing in-house
and, therefore, will terminate its subservicing contract effective during the
fourth quarter of 2000. We expect to collect a termination fee in connection
with cancellation of the contract, which will partially offset the financial
impact of the cancellation.
At September 30, 2000, approximately 84% of managed loans represented first
lien position loans and the balance was second lien position loans. First lien
position loans represented 87% of managed loans at December 31, 1999, and
approximately 92% at December 31, 1998. Home equity lines of credit represented
14% of the managed mortgage loan portfolio at September 30, 2000, 10% at
December 31, 1999 and 5% at December 31, 1998.
Nonperforming owned assets were $37.7 million at September 30, 2000, $36.7
million at December 31, 1999 and $38.7 million at December 31, 1998.
55
63
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
The geographic concentration of managed receivables (owned receivables and
securitized receivables) was as follows:
DECEMBER 31,
----------------------------------------
1999 1998
----------------- -----------------
California................................. $ 997,298 12% $1,049,134 13%
Michigan................................... 654,632 8 774,263 9
Pennsylvania............................... 500,998 6 442,938 5
Ohio....................................... 439,359 5 422,272 5
Florida.................................... 431,008 5 430,940 5
All other.................................. 5,364,472 64 5,157,774 63
---------- --- ---------- ---
Total managed receivables.................. $8,387,767 100% $8,277,321 100%
========== === ========== ===
In the normal course of business, we make commitments to extend credit to
our home equity line of credit customers. Commitments to extend credit are
agreements to lend to a customer subject to certain conditions established in
the contract. Unused commitments to extend credit were $44 million at December
31, 1999 and $133 million at December 31, 1998.
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
The following table presents activity in the allowance for credit losses
for the periods presented:
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPT. 30, -------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- -------- -------- ------- ------- -------
Beginning balance................. $ 23,872 $ 20,092 $ 5,822 $ 8,785 $ 3,360 $ 5,164
Provision for credit losses....... 23,508 16,731 25,577 7,851 2,080 3,158
Valuation allowance on loans
transferred to held for sale.... (7,730) 0 0 0 0 0
Allowances on receivables sold,
purchased or transferred........ 0 (830) 0 (4,977) 6,404 1,000
Gross charge-offs................. (14,948) (15,132) (14,314) (6,828) (3,473) (6,038)
Recoveries........................ 2,499 3,011 3,007 991 414 76
-------- -------- -------- ------- ------- -------
Net charge-offs................... (12,449) (12,121) (11,307) (5,837) (3,059) (5,962)
-------- -------- -------- ------- ------- -------
Ending balance.................... $ 27,201 $ 23,872 $ 20,092 $ 5,822 $ 8,785 $ 3,360
======== ======== ======== ======= ======= =======
The provision for credit losses in the nine months ended September 30, 2000
includes an increase in the credit loss assumption made in response to our bank
regulatory examination process, including the implementation of the agreements
with the bank regulators that were signed during the second quarter and in July
2000 (see Note 2), and changes during the second quarter in the market and the
political and regulatory environment for subprime lending.
During the nine months ended September 30, 2000, $520 million of loans were
transferred to the held for sale classification due to a change in management's
intention regarding the sale of those loans. Approximately $398 million of the
transferred loans were sold in the third quarter of 2000 as part of the planned
decrease of assets at Advanta National Bank, in order to meet required capital
levels.
56
64
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 5. RETAINED INTERESTS IN SECURITIZATIONS AND CONTRACTUAL MORTGAGE SERVICING
RIGHTS
Retained interests in securitizations include the retained interest-only
("IO") strip and subordinated trust assets related to Advanta Mortgage loan
securitizations. The following table presents activity in the retained interests
in securitizations and contractual mortgage servicing rights ("CMSR") related to
Advanta Mortgage loan securitizations:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------
2000 1999 1998(1)
------------- -------- --------
Beginning balance retained interests in
securitizations.............................. $ 515,789 $501,038 $361,775
Beginning balance CMSR......................... $ 92,636 $ 74,425 $ 24,546
Retained interests in securitizations
activity:
Retained IO on sales, net.................... 55,736 50,462 181,425
Collateral deposits to subordinated trust
assets.................................... 73,884 45,717 38,907
Interest income.............................. 57,457 46,581 35,847
Cash released to Advanta..................... (82,932) (86,241) (79,918)
Fair value adjustments....................... (210,654) (32,000) (50,980)
Fair value adjustment related to auto........ 0 (12,000) 0
Net change in subordinated trust assets
associated with off-balance sheet
warehouse facilities...................... 21,260 (416) 13,982
Other........................................ 1,713 2,648 0
CMSR activity:
Servicing rights retained.................... 39,312 54,124 71,131
Amortization, net............................ (20,619) (39,134) (12,977)
Valuation provision.......................... (15,375) 3,221 (8,275)
Ending balance retained interests in
securitizations.............................. $ 432,253 $515,789 $501,038
Ending balance CMSR............................ $ 95,954 $ 92,636 $ 74,425
- ---------------
(1) In 1999, we reclassified $25.3 million from IO strip to CMSR to better
reflect the transaction structures. In addition, we reclassified from IO
strip $7.4 million as subordinated trust assets and $5.6 million as due from
trustee, as these amounts had already been collected by the trust. These
reclassifications had no impact on earnings. The 1998 balances have been
reclassified to conform to this presentation.
The par value of subordinated trust assets was $510,718 at September 30,
2000, $411,417 at December 31, 1999 and $291,942 at December 31, 1998.
There were $226.0 million of valuation adjustments to the retained
interests in Advanta Mortgage loan securitizations and CMSR in the nine months
ended September 30, 2000, which decreased net income by $226.0 million. These
valuation adjustments resulted from an increase in discount rate and credit loss
assumption used in the valuation of these assets. These changes were made in
response to our bank regulatory examination process, including the
implementation of the agreements with the bank regulators that were signed
during the second quarter and in July 2000
57
65
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
(see Note 2), and changes during the second quarter in the market and the
political and regulatory environment for subprime lending.
There were $28.8 million of valuation adjustments to the retained interests
in Advanta Mortgage loan securitizations and CMSR in the year ended December 31,
1999, which decreased net income by $17.4 million. These valuation adjustments
resulted from more conservative fair value assumptions. $10 million of the
charge was recorded in the second quarter of 1999, which resulted from an
increase in credit losses expected in the off-balance sheet loan portfolio based
on portfolio trends and experience. The majority of the remaining charge was
recorded in the fourth quarter of 1999 and resulted from an increase in the
discount rate on the retained interest-only strip and an increase in the credit
loss assumption. The discount rate was increased due to an increase in market
interest rates and an observed trend towards higher discount rates in available
public disclosures relating to comparable instruments. The increase in the loss
assumption was due to an additional increase in credit losses expected in the
off-balance sheet loan portfolio based on trends and experience. The decrease in
the valuation caused by the increased discount rate and credit loss assumption
was slightly offset by a decrease in prepayment speeds experienced.
Additionally, in the first quarter of 1999, we recorded valuation
adjustments to the retained interests in auto loan securitizations of $12
million, which decreased net income by $7.4 million. In the first quarter of
1999, Advanta Corp. implemented a plan to exit the auto finance business and
engaged an investment banker to solicit bids for the business as a whole,
including the retained interests in auto securitizations and certain auto loan
receivables. Although management did not ultimately accept any offers to acquire
the retained interests, the informal bids received were considered as part of
our fair value analysis of the retained interests which resulted in a decrease
in the valuation of the assets as of March 31, 1999.
There were $59.3 million of valuation adjustments to the retained interests
in Advanta Mortgage loan securitizations and CMSR in the year ended December 31,
1998, which decreased net income by $41.5 million. This charge resulted from an
increase in prepayment speeds experienced.
The balance in the valuation allowance for contractual mortgage servicing
rights was $20.4 million at September 30, 2000, $5.1 million at December 31,
1999 and $8.3 million at December 31, 1998.
Restricted interest-bearing deposits relating to loan securitizations were
$6.2 million at September 30, 2000, $35.8 million at December 31, 1999 and $25.3
million at December 31, 1998. These deposits and the retained interests in
securitizations serve as credit enhancements for the securitization
transactions.
58
66
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 6. SELECTED BALANCE SHEET INFORMATION
Other assets consisted of the following:
DECEMBER 31,
SEPTEMBER 30, --------------------
2000 1999 1998
------------- -------- --------
Servicing advances............................. $100,825 $ 84,922 $123,987
Real estate owned(A)........................... 6,235 9,560 6,621
Receivable from loans sold..................... 5,663 0 139,048
Accrued interest receivable.................... 3,319 8,946 9,207
Goodwill....................................... 1,982 2,121 2,305
Deposits with insurance companies.............. 0 15,488 17,676
Other.......................................... 12,255 6,504 2,652
-------- -------- --------
Total other assets............................. $130,279 $127,541 $301,496
======== ======== ========
- ---------------
(A) Carried at the lower of cost or fair market value less selling costs.
Other liabilities consisted of the following:
DECEMBER 31,
SEPTEMBER 30, ------------------
2000 1999 1998
------------- ------- -------
Accounts payable and accrued expenses............ $38,263 $48,162 $30,968
Other............................................ 25,028 31,456 18,639
------- ------- -------
Total other liabilities.......................... $63,291 $79,618 $49,607
======= ======= =======
NOTE 7. OTHER BORROWINGS
Other borrowings are loans funded through secured warehouse financing
facilities accounted for as secured borrowings.
We had secured warehouse financing facilities for mortgage loans totaling
$1.1 billion at September 30, 2000. Of the total, $500 million was committed. At
September 30, 2000, there were $331 million of loans funded through these
facilities, none of which were accounted for as secured borrowings. There was
$719 million available under these facilities at September 30, 2000. These
commitments can be withdrawn under certain conditions, including our failure to
make payments under the terms of the agreements. We pay a monthly facility fee
on the unused commitments of up to 35 basis points. These facilities provide for
on-balance sheet and off-balance sheet funding and are generally renewable
annually. Upon the expiration of these facilities, management expects to obtain
the appropriate levels of replacement funding under similar terms and
conditions. At December 31, 1999, we had secured warehouse financing facilities
for mortgage loans totaling $1.3 billion. There were $79.0 million of loans
funded through these facilities at December 31, 1999; $76.4 million of which
were accounted for as secured borrowings. At December 31, 1998, we had secured
warehouse financing facilities for mortgage loans totaling $1.5 billion. There
were $536.1 million of loans funded through these facilities at December 31,
1998; $18.5 million of which were accounted for as secured borrowings.
We are subject to loan covenants related to the maintenance of certain
equity levels at the borrowing subsidiaries, limitations on mergers and
acquisitions, limitations on transactions with
59
67
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
affiliates, and maintenance of adequate investment base and interest rate
protection agreements. Management believes that at September 30, 2000, we were
in compliance with all such loan covenants.
NOTE 8. COMMITMENTS AND CONTINGENCIES
We lease office space in several states under leases accounted for as
operating leases. The future minimum lease payments of all non-cancelable
operating leases are as follows:
Year Ended December 31,
2000............................................ $2,668
2001............................................ 2,856
2002............................................ 2,720
2003............................................ 2,302
2004............................................ 2,276
Thereafter...................................... 7,736
NOTE 9. BENEFIT PLANS
Advanta Corp. provides certain employee benefits including medical, dental
and life insurance to employees of Advanta Mortgage. Advanta Mortgage was
allocated expense of $10.5 million in 1999, $9.8 million in 1998 and $6.3
million in 1997 for those benefits.
Restricted Stock Plans
Certain employees of Advanta Mortgage are eligible to participate in
Advanta Corp.'s management incentive plans. 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 these elections were made, or were required by the terms of the
plans for executive officers, restricted shares of Advanta Corp. were issued to
employees. The number of shares granted to employees is determined by dividing
the amount of future bonus payments that 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 prior to vesting should the employee
terminate employment. Restricted shares vest 10 years from the date of grant.
Vesting was and may continue to be accelerated annually with respect to up to
one-third of the shares granted under the plan covering the particular
performance year, based on the extent to which the employee and Advanta Corp.
met or meet their respective performance goals for that 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. Compensation expense on
restricted shares is recognized over the vesting period of the shares.
Compensation expense recognized by Advanta Mortgage in connection with
restricted shares was $2.1 million in 1999 and 1998, and $1.7 million in 1997.
Stock Option Plans
Certain employees of Advanta Mortgage are eligible to participate in the
Advanta Stock Option Plan. Under the plan, employees are eligible to purchase
the Class B common stock of Advanta Corp.
60
68
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
Generally, option prices are the fair market value of the common stock at the
date of grant. Options are generally vested over a four-year period and expire
after 10 years. At December 31, 1999, there were 478 thousand options
outstanding that had been granted to employees of Advanta Mortgage, 214 thousand
of which were exercisable.
We have elected to account for stock-based compensation following
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" as permitted by SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). We have adopted the disclosure-only provisions of
SFAS 123. Had compensation cost for the stock option plans been determined
consistent with SFAS 123, Advanta Mortgage's net income would have been reduced
to the following pro forma amounts for the years ended December 31:
1999 1998 1997
------- ------- -------
Net income (loss)
As reported........................................ $(8,149) $26,962 $33,316
Pro forma.......................................... (8,743) 26,554 33,144
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.
There were 226 thousand options granted to employees of Advanta Mortgage in
the year ended December 31, 1999, with a weighted average grant date fair value
of $5.04. There were 175 thousand options granted to employees of Advanta
Mortgage in the year ended December 31, 1998, with a weighted average grant date
fair value of $8.33. There were 38 thousand options granted to employees of
Advanta Mortgage in the year ended December 31, 1997, with a weighted average
grant date fair value of $21.73.
During 1997 and 1998, Advanta Corp. changed the exercise price of certain
options granted during 1996 and 1997 to the market price on the date of the
modification. These modifications did not result in additional compensation
expense under the accounting prescribed by SFAS 123.
Employee Stock Purchase Plan
Certain employees of Advanta Mortgage are eligible to participate in
Advanta Corp.'s Employee Stock Purchase Plan, which allows employees and
directors to purchase Advanta Corp. Class B Common Stock at a 15% discount from
the market price without paying brokerage fees. The 15% discount is reported as
compensation expense and Advanta Mortgage incurred expense of $89 thousand in
1999, $86 thousand in 1998 and $71 thousand in 1997. Shares issued under the
plan are issued at the average market price on the day of purchase.
Employee Savings Plan
Certain employees of Advanta Mortgage are eligible to participate in
Advanta Corp.'s tax-deferred employee savings plan, which provides employees
with savings and investment opportunities, including the ability to invest in
Advanta Corp.'s Class B Common Stock. The employee savings plan provides for
discretionary employer contributions equal to a portion of the first 5% of an
employee's compensation contributed to the plan. For the three years ended
December 31, 1999, 1998 and 1997, Advanta Corp.'s contributions equaled 100% of
the first 5% of participating employees' compensation contributed to the plan.
The expense for this plan for Advanta Mortgage
61
69
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
employees totaled $1.5 million in 1999, $789 thousand in 1998 and $819 thousand
in 1997. All shares of Advanta Corp. Class B Common Stock purchased by the plan
in the three years ended December 31, 1999, 1998 and 1997 were acquired from
Advanta Corp. at the market price on each purchase date or were purchased on the
open market.
Deferred Compensation Plan
Certain employees of Advanta Mortgage are eligible to participate in
Advanta Corp.'s elective, nonqualified deferred compensation plan for qualified
executives and non-employee 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. Advanta Corp. has purchased life insurance
contracts to fund this plan.
Employee Stock Ownership Plan
Advanta Corp.'s Employee Stock Ownership Plan ("ESOP") covers employees who
have reached age 21 with one year of service, including employees of Advanta
Mortgage. Compensation expense related to the ESOP is included in the cost of
employee benefits provided to Advanta Mortgage by Advanta Corp.
NOTE 10. BUSINESS UNIT CAPITAL
The accompanying combined financial statements reflect the assets,
liabilities, revenues and expenses of Advanta Mortgage operations of the
entities described in Note 1. Advanta Mortgage capital for each of the periods
presented represents the amount of regulatory capital which we hold at the
regulated Advanta Corp. subsidiaries for the mortgage assets. It is calculated
using a method consistent with regulatory call report instructions. Advanta
Corp. invests capital in the mortgage business from parent company resources
including equity, capital securities and debt obligations. Management has
treated changes to Advanta Mortgage's capital other than net income as a
dividend to or contribution by Advanta Corp., and has reflected this change in
amounts due to Advanta Corp. and affiliates. The changes in Advanta Mortgage's
capital other than net income represent the net change in the amount that
Advanta Corp. has directly or indirectly invested in the net assets of the
operations of Advanta Mortgage.
NOTE 11. SELECTED INCOME STATEMENT INFORMATION
Other revenues include credit insurance revenues and other fee revenues. In
addition, in 1998, other revenues included an $11.2 million gain on the sale of
an investment in affordable housing partnerships, and $6 million from the
favorable settlement of certain prior year claims. In 1997, other revenues
included a $16.5 million loss in connection with a program offered to mortgage
customers, which was discontinued in the first quarter of 1998.
62
70
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
Operating expenses consisted of the following:
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
Salaries and employee benefits..... $ 67,410 $ 57,279 $ 77,390 $ 89,368 $ 60,554
Marketing expense.................. 33,947 29,675 39,520 36,542 17,031
Occupancy expense.................. 13,713 16,722 22,114 22,341 14,634
Credit and collection expense...... 8,413 10,477 14,359 7,974 4,052
External processing expense........ 4,864 4,963 6,232 7,403 3,569
Professional fees.................. 4,284 8,075 9,938 6,603 3,418
Postage expense.................... 2,326 2,623 3,348 3,311 2,373
Other (includes allocated expenses,
see Note 1)...................... 60,062 51,499 68,921 51,069 25,280
-------- -------- -------- -------- --------
Total operating expenses........... $195,019 $181,313 $241,822 $224,611 $130,911
======== ======== ======== ======== ========
NOTE 12. NET INTEREST INCOME
The following table presents the components of net interest income:
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
2000 1999 1999 1998 1997
-------- ------- -------- -------- -------
Interest income:
Loans............................ $ 71,249 $55,628 $ 75,485 $ 77,312 $58,704
Investments...................... 5,056 8,611 9,430 10,391 9,629
Retained interests in mortgage
securitizations............... 57,457 35,106 46,581 35,847 26,166
-------- ------- -------- -------- -------
Total interest income.............. 133,762 99,345 131,496 123,550 94,499
Interest expense................... 75,878 60,142 78,461 75,296 51,825
-------- ------- -------- -------- -------
Net interest income................ 57,884 39,203 53,035 48,254 42,674
Less: Provision for credit
losses....................... (23,508) (9,145) (16,731) (25,577) (7,851)
-------- ------- -------- -------- -------
Net interest income after provision
for credit losses................ $ 34,376 $30,058 $ 36,304 $ 22,677 $34,823
======== ======= ======== ======== =======
NOTE 13. INCOME TAXES
Advanta Mortgage is included in the consolidated federal tax return filed
by Advanta Corp. and is liable to Advanta Corp., on demand, for its relative
share of the consolidated federal income tax liability. The combined financial
statements have been prepared by applying the provisions of SFAS No. 109 as if
Advanta Mortgage were a separate taxpayer. The current tax liability is included
in amounts due to Advanta Corp. and affiliates on the balance sheet.
63
71
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
Income tax expense (benefit) consisted of the following components:
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------
2000 1999 1999 1998 1997
------- ------- -------- -------- --------
Current:
Federal............................ $ 5,062 $15,467 $ 13,524 $ 20,963 $ 14,536
State.............................. 2,864 (1,286) 1,896 1,639 1,470
------- ------- -------- -------- --------
Total current........................ 7,926 14,181 15,420 22,602 16,006
------- ------- -------- -------- --------
Deferred:
Federal............................ 0 (5,561) (18,370) (12,367) (12,879)
State.............................. (7,926) 2,824 (2,462) 1,235 (2,020)
------- ------- -------- -------- --------
Total deferred....................... (7,926) (2,737) (20,832) (11,132) (14,899)
------- ------- -------- -------- --------
Total tax expense (benefit).......... $ 0 $11,444 $ (5,412) $ 11,470 $ 1,107
======= ======= ======== ======== ========
The difference between the total income tax provision expected, using a
statutory rate of 35% and the actual effective tax rate of 0%, 39.3%, (39.9%),
29.8% and 3.2%, is due to state income taxes, net of the federal income tax
benefit, changes in the valuation allowance, tax credits and insurance program
income.
The net deferred tax asset is comprised of the following:
DECEMBER 31,
SEPTEMBER 30, ----------------------
2000 1999 1998
------------- --------- ---------
Gross deferred tax liabilities.............. $(148,704) $(213,687) $(169,216)
Gross deferred tax assets................... 273,677 258,520 193,217
Valuation allowance......................... (72,214) 0 0
--------- --------- ---------
Net deferred tax asset...................... $ 52,759 $ 44,833 $ 24,001
========= ========= =========
A summary of deferred tax assets and (liabilities) follows:
DECEMBER 31,
SEPTEMBER 30, ------------------
2000 1999 1998
------------- ------- -------
Securitization income............................ $ 86,293 $ 299 $(4,890)
Net operating loss............................... 13,547 31,335 22,191
Allowance for loan losses........................ 9,520 8,355 7,032
Deferred loan fees and costs..................... (28) (3,324) (481)
Other............................................ 15,641 8,168 149
Valuation allowance.............................. (72,214) 0 0
-------- ------- -------
Net deferred tax asset........................... $ 52,759 $44,833 $24,001
======== ======= =======
Net operating loss carryforwards totaled $38.7 million at September 30,
2000, of which $12.6 million expire in 2018, and $26.1 million expire in 2019.
As a result of the carrying value adjustments discussed in Note 2, Advanta
Corp. reported a pretax loss for the three and nine months ended September 30,
2000. A valuation allowance has been provided against the resulting deferred tax
asset given Advanta Corp.'s pre-existing net
64
72
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
operating loss carryforwards and the uncertainty of the realizability of the
incremental deferred tax asset. In establishing the valuation allowance,
management considered (1) the level of expected future taxable income, (2)
existing and projected book/tax differences, (3) tax planning strategies
available, and (4) the general and industry specific economic outlook. Based on
this analysis, management believes the net deferred tax asset will be realized.
NOTE 14. RELATED PARTY TRANSACTIONS
Amounts due to Advanta Corp. and affiliates result from inter-business unit
transactions primarily relating to financial and operational support to Advanta
Mortgage. With respect to funding support, interest expense has been allocated
to Advanta Mortgage to reflect the historical rates that Advanta Corp. paid to
obtain financing sources. Advanta Mortgage has also been allocated the financial
results of hedging transactions and the related transaction costs for the
transactions that Advanta Corp. conducted on behalf of Advanta Mortgage.
Direct expenses and certain indirect administrative expenses that Advanta
Corp. incurred on behalf of Advanta Mortgage have been allocated to Advanta
Mortgage using various allocation methods (i.e., direct benefit, headcount,
estimated usage, production, etc.). There are two parts to the allocation
process. First, specific expenses directly attributable to Advanta Mortgage are
identified and allocated accordingly. Second, Advanta Mortgage's share of
Advanta Corp.'s general and administrative expenses is estimated and
subsequently allocated using an applicable measurement base. Indirect expenses
that are subject to allocation include charges for services such as: information
technology, facilities and general facility support services, expenses for Board
of Directors and executive management oversight, legal, certain human resources
services, treasury and financial management and reporting support.
Management of Advanta Mortgage believes that the method of allocation and
the resulting expenses are reasonable. Since Advanta Mortgage did not operate as
a separate legal entity for any of the periods presented, the allocations do not
necessarily represent expenses that would have been incurred directly if Advanta
Mortgage had operated on a stand-alone basis historically.
As indicated in Note 9, employees of Advanta Mortgage participate in
certain benefit plans offered by Advanta Corp. Further, as indicated in Note 13,
Advanta Mortgage is included in the consolidated federal tax return filed by
Advanta Corp.
65
73
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Advanta Mortgage's financial instruments are
as follows at December 31:
1999 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial assets:
Cash.................................. $ 20,540 $ 20,540 $ 12,004 $ 12,004
Restricted interest-bearing
deposits........................... 35,810 35,810 25,283 25,283
Loans, net............................ 1,026,341 1,081,070 821,076 867,329
Retained interests in
securitizations.................... 515,789 515,789 501,038 501,038
Contractual mortgage servicing
rights............................. 92,636 96,736 74,425 77,932
Financial liabilities:
Amounts due to Advanta Corp. and
affiliates......................... $1,319,994 $1,319,994 $1,491,643 $1,491,643
Other borrowings...................... 76,435 76,435 18,517 18,517
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for Advanta Mortgage's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
We used the following methods and assumptions in estimating fair value
disclosures for financial instruments:
Cash and Restricted Interest-Bearing Deposits
For these short-term instruments, the carrying amount is a reasonable
estimate of the fair value.
Loans, Net
The fair values of loans are estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value for these loans includes the estimated value of
future discounted cash flows estimated as the excess of the weighted average
yield over the aggregate cost of funds plus an estimate of future credit losses
over the life of the receivables.
Retained Interests in Securitizations and Contractual Mortgage Servicing
Rights
The fair values of retained interests in securitizations and contractual
mortgage servicing rights are estimated based on discounted cash flow analyses
as described in Note 1. Management has used
66
74
ADVANTA MORTGAGE
(A BUSINESS UNIT OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
the following assumptions in the estimation of fair values of the retained
interests in loan securitizations:
DECEMBER 31,
SEPTEMBER 30, ------------
2000 1999 1998
------------- ---- ----
Weighted average assumed constant prepayment rates:
Fixed rate loans..................................... 20% 25% 29%
Variable rate loans.................................. 31 37 43
Weighted average assumed loss rate (annualized)........ 1.87 1.38 1.00
The weighted average discount rate used in the estimation of the fair value
of the retained interests in securitizations was 18% at September 30, 2000 and
approximately 12% at December 31, 1999. For purposes of estimating the fair
value of contractual mortgage servicing rights, management has assumed a
weighted average discount rate of 15% at September 30, 2000 and 10% at December
31, 1999 and weighted average constant prepayment rates consistent with the
retained interests in securitizations assumptions.
Amounts Due to Advanta Corp. and Affiliates and Other Borrowings
Amounts due to Advanta Corp. and affiliates are due on demand and the
carrying amount is a reasonable estimate of fair value. The carrying amounts of
short-term borrowings maturing within ninety days approximate their fair values.
Other borrowings are at variable interest rates and therefore the carrying value
approximates a reasonable estimate of the fair value.
Commitments to Extend Credit
There is no market value associated with our unused commitments to extend
credit, since any fees charged are consistent with the fees charged by other
companies at the reporting date to enter into similar agreements.
67
75
INFORMATION ABOUT ADVANTA
Advanta Corp. is a Delaware corporation. Advanta is a nationwide provider
of financial services. We offer diverse and innovative products to consumers and
small businesses. Our consumer products include first and second lien
non-conforming mortgage loans. Our mortgage loans are considered
"non-conforming" because we underwrite loans with credit characteristics that do
not meet the underwriting guidelines of federal mortgage agencies, such as the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. A loan may be considered non-conforming for a variety of reasons,
including the size of the loan in relation to the value of the underlying
property, the borrower's debt-to- income ratio and the borrower's prior credit
history. We service all of the mortgage loans that we originate or acquire. In
our contract servicing business, also known as "subservicing," we also service
the mortgage loans of third parties for a fee. The primary products we offer to
small businesses are business credit cards and equipment leases. Our basic
business card product is an unsecured MasterCard business credit card. The
majority of our equipment leases are for small-ticket items such as computers,
copiers, fax machines and other office equipment.
We own two depository institutions, or banks, ANB and ABC. Our banks offer
a variety of deposit products, such as retail and large denomination
certificates of deposit, that are insured by the FDIC. We fund and operate our
mortgage, business credit card and leasing businesses primarily through our
banks.
In addition to our lending and leasing businesses, we operate Advanta
Insurance, which offers a variety of credit related insurance products. We also
make venture capital investments through our affiliates, including Advanta
Partners LP.
Buyer and certain of its affiliates engage in transactions with us and
certain of our affiliates. An affiliate of Buyer acts as Trustee with respect to
certain securities that we offer. In addition, AMCUSA and certain of its
affiliates perform mortgage servicing for Buyer's subprime mortgages.
The principal executive offices of Advanta are located at Welsh and McKean
Roads, Spring House, Pennsylvania 19477.
INFORMATION ABOUT BUYER
Chase Manhattan Mortgage Corporation, with headquarters at 343 Thornall
Street, Edison, New Jersey, and affiliates are engaged in the origination and
servicing of residential mortgage products, including prime and subprime
mortgages and home equity and manufactured housing loans. Buyer is a subsidiary
of J.P. Morgan Chase & Co., which is a premier global financial services firm.
REGULATORY AND OTHER APPROVALS
Our bank subsidiaries, ANB and ABC, intend to seek the approval of the OCC
and the FDIC, respectively, to use proceeds received in the Transaction to pay a
dividend to Advanta Corp.
Completion of the Transaction also will depend upon the expiration or
termination of waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, if applicable.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements included or incorporated by reference
in this proxy statement to the extent and for periods indicated in their reports
have been audited by Arthur Andersen LLP, independent public accountants, and
are included or incorporated by reference in this proxy statement in reliance
upon the authority of that firm as experts in giving such reports. A
representative of Arthur Andersen LLP is expected to be present at the meeting,
will have the opportunity to make a statement if he or she desires to do so and
will be available to respond to appropriate questions of stockholders.
68
76
WHERE YOU CAN FIND MORE INFORMATION --
INCORPORATION OF INFORMATION BY REFERENCE
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
following public reference rooms maintained by the SEC at:
Judiciary Plaza 7 World Trade Center
450 Fifth Street, N.W. 13th Floor
Washington, D.C. 20549 New York, NY 10048
You may obtain information on the operation of the SEC's public reference
rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings also are available
to the public from the SEC's Internet website at http://www.sec.gov.
The SEC allows us to "incorporate by reference" into this proxy statement
the information we file with the SEC. This means that we are permitted to
disclose information to you by referring you to other documents we have filed
with the SEC. The information incorporated by reference is considered to be part
of this proxy statement, and information that we file with the SEC after the
date of this proxy statement will automatically update and supersede this
information.
We incorporate by reference in this proxy statement all the documents
listed below and any filings we make with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this proxy statement and
before the closing of the Transaction:
- Our Annual Report on Form 10-K for the year ended December 31, 1999;
- Our Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, June 30, and September 30, 2000; and
- Our Current Reports on Form 8-K dated: January 25, April 6, April 25, May
17, June 5, June 21, October 9, October 24, November 27, December 27,
2000, January 8, 2001 and January 23, 2001.
We will deliver, without charge, to anyone receiving this proxy statement,
upon written or oral request, a copy of any document incorporated by reference
in this proxy statement but not delivered to you with this proxy statement,
excluding all exhibits to those documents except any exhibit that has been
specifically incorporated by reference. Requests for these documents should be
made to the following address and phone number: Corporate Secretary, Advanta
Corp., Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477,
telephone (215) 657-4000. To ensure delivery before the meeting, any request for
documents should be made by February 13, 2001.
STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING
OF ADVANTA STOCKHOLDERS
We must have received by December 31, 2000 proposals of stockholders
intended to be presented at the annual meeting of stockholders in 2001 in order
for those proposals to be considered for inclusion in the proxy materials for
that annual meeting.
If a proposal does not comply with the applicable requirements of Rule
14a-8 under the Exchange Act, it will not be included in Advanta's proxy
soliciting material for the 2001 annual meeting of stockholders. Stockholder
proposals should be directed to Elizabeth H. Mai, Secretary, at the Advanta's
address as provided on the first page of this proxy statement.
A stockholder of Advanta may wish to have a proposal presented at the 2001
annual meeting of stockholders, but not to have such proposal included in
Advanta's proxy statement and form of proxy relating to that meeting. If notice
of any such proposal (addressed to Advanta at the address
69
77
provided on the first page of this proxy statement) is not received by Advanta
by March 20, 2001, then the proposal will be deemed "untimely" for purposes of
Rule 14a-4(c) promulgated under the Exchange Act and the individuals named in
the proxies solicited on behalf of the Board of Directors for use at the 2001
annual meeting of stockholders will have the right to exercise discretionary
voting authority as to that proposal.
FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements that may be
affected by risks and uncertainties that could cause actual results to differ
materially from those projected. These forward-looking statements can be
identified by the use of forward-looking phrases such as "will likely result,"
"may," "are expected to," "is anticipated," "estimate," "projected," "intends
to" or other similar words. We caution readers that any forward-looking
information provided by us 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:
- Whether the Transaction is completed on the terms and conditions provided
for in the purchase and sale agreement, including, but not limited to the
parameters relating to the calculation of the purchase price.
- Whether the OCC approves the request of ANB, if any, to pay a dividend to
Advanta Corp. upon consummation of the Transaction.
- The ultimate amount of restructuring and other related charges associated
with the conclusion of the strategic alternatives process for our
mortgage and leasing businesses.
- Increased credit losses and collection costs associated with a worsening
of general economic conditions, rising interest rates, shifts in product
mix within our portfolio of loans, rising delinquency levels, increases
in the number of customers seeking protection under the bankruptcy laws,
resulting in accounts being charged off as uncollectible, and the effects
of fraud by third parties or customers.
- Intense and increasing competition from numerous providers of financial
services who may employ various competitive strategies. We face
competition from national, regional and local originators of business
credit cards and business equipment leases, some of which have greater
resources than we do.
- The level of insurance policy renewals.
- The effects of interest rate fluctuations on our net interest margin and
the value of our 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) that we use to manage the risk of those fluctuations and the
continuing operational viability of those techniques and the accounting
and regulatory treatment of those instruments.
- Difficulties or delays in the securitization of our receivables and the
resulting impact on the cost and availability of such funding.
Difficulties and delays may result from the current economic, legal,
regulatory, accounting and tax environments and adverse changes in the
performance of the securitized assets.
- The amount, type and cost of financing available to us, including secured
financing, and any changes to that financing including any impact from
changes in the current economic, legal, regulatory, accounting and tax
environments, adverse changes in the performance of our owned loan
portfolio, any impact from changes in our debt ratings and the activities
of parties with which we have agreements or understandings, including any
activities affecting any investment.
70
78
- Changes in our aggregate accounts, loan balances or subserviced
receivables volume, and the growth rate thereof, including changes
resulting from factors such as shifting product mix, amount of actual
marketing investment made by us, prepayment of loan balances, changes in
relationships with significant customers and general economic conditions
and other factors beyond our control.
- The impact of "seasoning" on our level of delinquencies and losses which
may require a higher allowance for loan losses for on-balance sheet
assets and may adversely impact mortgage and business loan and lease
securitization income. "Seasoning" refers to the average age of a
lender's portfolio. The addition of account originations or balances and
the attrition of those accounts or balances could significantly impact
the seasoning of our overall portfolio.
- The amount of, and rate of growth in, our expenses, including employee
and marketing expenses, as our businesses develop or change and we expand
into new market areas; the acquisition or disposition of assets,
interest-earning, fixed or other; the effects of changes within our
organization or in our compensation and benefit plans; and the impact of
unusual items resulting from the ongoing evaluation of our business
strategies, asset valuations and organizational structures.
- 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 or delay in customers' acceptance of these products or
services, 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, tax laws, rates, regulations and
policies.
- The effects of, and changes in, the level of scrutiny, regulatory
requirements and regulatory initiatives resulting from the fact that our
banking and finance businesses are highly regulated and subject to review
and examination by federal and state regulators, including the Office of
the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. These effects include restrictions and limitations imposed
by banking laws, regulators, examinations, and the agreements between our
bank subsidiaries and their regulators.
- The effects of, and changes in, monetary and fiscal policies, federal and
state laws and regulations, financial, consumer, regulatory or otherwise,
and other activities of governments, agencies and other similar
organizations, including the Office of the Comptroller of the Currency
and the FDIC.
- 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 us or any of our
subsidiaries; adoptions of new, or changes in existing, accounting
policies and practices and the application of those policies and
practices.
- Our relationships with significant vendors, business partners and
customers.
- Our ability to attract and retain key personnel and customers.
Additional risks that may affect our future performance are described
elsewhere in this proxy statements and in our other filings with the SEC.
The cautionary statements provided above are being made according to the
provisions of the Private Securities Litigation Reform Act of 1995 and with the
intention of obtaining the benefits of the "safe harbor" provisions of that act
for any such forward-looking information.
71
79
ANNEX I
PURCHASE AND SALE AGREEMENT
Agreement dated as of January 8, 2001 by and between Advanta Corp., a
Delaware corporation (the "Company") and Chase Manhattan Mortgage Corporation, a
New Jersey corporation ("Buyer").
WHEREAS, the Company and the Selling Subsidiaries desire to sell, transfer
and assign to Buyer, and the Buyer Affiliates, and Buyer and the Buyer
Affiliates desire to purchase, assume and acquire from the Company and the
Selling Subsidiaries, on the terms and subject to the conditions set forth in
this Agreement, certain assets and liabilities;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements hereinafter contained and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
ARTICLE I
PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES
SECTION 1.01 Purchase of Assets; Assumption of Liabilities.
(a) Upon the terms and subject to the conditions hereof, at the Closing
hereunder the Company shall, and shall cause each of the Selling Subsidiaries to
sell to Buyer and the Buyer Affiliates (free and clear of all liens and
encumbrances, other than Permitted Liens), and Buyer and the Buyer Affiliates
shall purchase and accept from the Company and the Selling Subsidiaries, all of
the Company's and the Selling Subsidiaries' right, title and interest in, under
and to certain assets of the Company and the Selling Subsidiaries as set forth
on Schedule 1 hereto (collectively, the "Assets").
(b) Upon the terms and subject to the conditions hereof, at the Closing
hereunder, Buyer and the Buyer Affiliates shall accept and assume only those
liabilities (fixed, contingent or otherwise) set forth or listed on Schedule 2
hereto (collectively, the "Assumed Liabilities").
SECTION 1.02 Consummation of the Purchase and Sale. The purchase and sale
and the other transactions contemplated by this Agreement shall be consummated
and closing thereof (the "Closing") shall occur on the last Business Day of the
first calendar month in which the conditions precedent in Article VIII of this
Agreement shall have been satisfied or waived in accordance with the terms of
this Agreement, but in no event later than March 31, 2001. The date on which the
Closing shall occur is referred to herein as the "Closing Date." The exact date
and time of closing of the transactions contemplated by this Agreement shall be
mutually agreed upon by Buyer and the Company at least two Business Days prior
thereto and the Closing shall be held at the offices of Wolf, Block, Schorr and
Solis-Cohen LLP, 1650 Arch Street, Philadelphia, Pennsylvania or such other
place and time as the parties shall agree.
SECTION 1.03 Company Deliveries at Closing.
At the Closing:
(a) the Company or the Selling Subsidiaries, or any one or more of
them, as applicable, shall execute and deliver a Bill of Sale and General
Assignment in substantially the form of Exhibit E attached hereto and such
other conveyances, bills of sale, deeds, assignments, certificates and
other instruments as Buyer may reasonably request, in form mutually
satisfactory to the parties, in order to evidence the conveyance and
transfer of the Assets to Buyer in accordance with the terms of this
Agreement;
80
(b) the Company and the Selling Subsidiaries or any one or more of
them, as applicable, shall cause to be delivered the items required to be
obtained and delivered pursuant to Section 8.02 hereto; and
(c) the Company and the Selling Subsidiaries or any one or more of
them, as applicable, shall deliver executed copies of the Ancillary
Agreements.
SECTION 1.04 Buyer Deliveries at Closing.
At the Closing:
(a) Buyer and the Buyer Affiliates shall cause to be executed and
delivered an Assumption Agreement substantially in the form of Exhibit I
hereto and such other instruments of assumption, certificates and other
documents as the Company may reasonably request in form mutually
satisfactory to the parties, to evidence the assumption of the Assumed
Liabilities by Buyer and the Buyer Affiliates in accordance with the terms
of this Agreement;
(b) Buyer shall have delivered the items required to be obtained and
delivered pursuant to Section 8.01 hereof; and
(c) Buyer and, to the extent applicable, the Buyer Affiliates shall
deliver executed copies of the Ancillary Agreements.
SECTION 1.05 Daily Balance Sheet; Purchase Price; Allocation of Purchase
Price.
(a) Two Business Days before the Closing Date, the Company shall send to
Buyer a Daily Balance Sheet. On the Closing Date, the Company shall deliver to
Buyer a Daily Balance Sheet (the "Closing Daily Balance Sheet"). The Daily
Balance Sheet, Closing Daily Balance Sheet and Closing Balance Sheet shall be
prepared in accordance with the books and records of the Company and the Selling
Subsidiaries and in conformity with the provisions of Section 1.05(c) and the
other applicable provisions of this Agreement and, to the extent not
inconsistent with Section 1.05(c) and the other provisions of this Agreement, in
accordance with GAAP and consistent with the Company's past practices. In no
event shall the Daily Balance Sheet, Closing Daily Balance Sheet and Closing
Balance Sheet give effect to the consummation of the transactions contemplated
by this Agreement (including any Ancillary Agreements entered into in connection
with this Agreement). In consideration for the sale, transfer, conveyance and
assignment of the Assets, Buyer shall pay to the Company, in cash, on the
Closing Date an amount equal to the Purchase Price (as defined in Section
1.05(c)(iii)) less the amount of the ARM Holdback and less the amount of the
Document Holdback set forth in Sections 1.05(l) and 1.05(m) hereof. Such amount
shall be payable by wire transfer in immediately available federal funds to the
accounts designated by the Company in writing to Buyer no less than two Business
Days prior to the Closing Date. The Company shall, contemporaneously with the
delivery of the Closing Daily Balance Sheet, cause to be delivered a certificate
of the Company signed on its behalf by the Chief Financial Officer of the
Company, confirming that the Closing Daily Balance Sheet was prepared in
accordance with the provisions of this Section 1.05(a) and Section 1.05(c).
(b) Not later than ten days after the Closing Date, the Company and Buyer
and, if applicable, their Affiliates, shall execute and deliver to Arthur
Andersen LLP ("AA") an arrangement letter substantially in the form of Schedule
1.05(b)(1) (the "Arrangement Letter") engaging AA to audit the Closing Balance
Sheet. Not later than 60 days after the Closing Date, the Company and Buyer
shall each execute and deliver a customary representation letter to AA, each
substantially in the form of Schedule 1.05(b)(2) and that is reasonably
satisfactory to AA (each, a "Representation Letter"). Not later than 60 days
after AA's receipt of the Arrangement Letter signed by the Company and Buyer,
the Company shall prepare and deliver to Buyer the audited balance sheet of the
Business as of the close of business on the Closing Date, but without giving
effect to the transactions occurring at the Closing (including any Ancillary
Agreements entered into in connection with the Agreement) (the "Closing Balance
Sheet"), together with (i) a statement in
2
81
reasonable detail of any adjustment to the Closing Daily Balance Sheet reflected
in the Closing Balance Sheet and any adjustment in the Purchase Price resulting
therefrom (a "Post-Closing Adjustment") and (ii) subject to AA having received
signed Representation Letters from each of the Company and Buyer, a report of AA
confirming that such Closing Balance Sheet was prepared in accordance with the
provisions of Sections 1.05(a) and 1.05(c) and the other applicable provisions
of this Agreement. In the event that AA is unable to issue the audit report
contemplated in the Arrangement Letter, such report shall be issued by the
Independent Accounting Firm.
(c) (i) The Daily Balance Sheet, Closing Daily Balance Sheet and Closing
Balance Sheet shall be prepared in accordance with the books and records of the
Company and the Selling Subsidiaries and in conformity with the provisions of
this Section 1.05(c) and the other applicable provisions of this Agreement and,
to the extent not inconsistent with this Section 1.05(c), in accordance with
GAAP and consistent with the Company's past practices; provided, however, that
notwithstanding anything to the contrary contained in this Agreement, in
preparing the Daily Balance Sheet, Closing Daily Balance Sheet and Closing
Balance Sheet, the Owned Loans and the Off-Balance Sheet Loans, the Residual
Assets (as defined in Schedule 1.05(c)) and the contractual mortgage servicing
rights ("CMSR") shall each be valued pursuant to and in accordance with the
provisions of Schedule 1.05(c) (which is incorporated into this Section 1.05(c)
by reference as though fully set forth herein).
(ii) [Intentionally omitted.]
(iii) The purchase price used in calculating the amount to be paid by Buyer
pursuant to Section 1.05(a) hereof (the "Purchase Price") shall be an amount
equal to:
(A) the book value of the Assets as shown on the Closing Daily Balance
Sheet as determined in accordance with this Section 1.05(c) (which, for
purposes of calculating the Purchase Price for the Owned Loans, Off-Balance
Sheet Loans, Residual Assets and CMSR shall be deemed to be the prices
determined in accordance with the provisions of Schedule 1.05(c)) ; less
(B) the book value of the Assumed Liabilities as shown on the Closing
Daily Balance Sheet as determined in accordance with this Section 1.05(c);
less
(C) the purchase price reductions described on Schedules
1.05(c)(iii)(C)(1) and, to the extent applicable, 1.05(c)(iii)(C)(3); plus
(D) the Franchise Premium.
The Company shall, contemporaneously with the delivery of the Closing Daily
Balance Sheet, cause to be delivered a schedule evidencing the calculation of
the Purchase Price in accordance with the foregoing provisions and substantially
in the form of Schedule 1.05(c)(i) to this agreement (the "Purchase Price
Calculation"), together with a certificate of the Company signed on its behalf
by the Chief Financial Officer of the Company, confirming that the Purchase
Price was calculated in accordance with the provisions of Sections 1.05(a) and
1.05(c) and the other applicable provisions of this Agreement.
(iv) The values for the Owned Loans, Off-Balance Sheet Loans, Residual
Assets and CMSR determined in accordance with Schedule 1.05(c) shall apply in
each case for the Daily Balance Sheet, Closing Daily Balance Sheet and Closing
Balance Sheet.
(d) Buyer shall, within 30 days after its receipt of the Closing Balance
Sheet, advise the Company in writing (an "Objection Notice") in reasonable
detail of the amounts and descriptions of adjustments in balance sheet line
items and the accuracy of the valuation calculations pursuant to this Section
1.05, if any, which Buyer believes are necessary to be made to the Closing
Balance Sheet in order to comply with the provisions of Sections 1.05(a) and
1.05(c) hereof, together with a certificate of Buyer signed on its behalf by its
Chief Financial Officer, that such amounts and adjustments were computed and
made in accordance with the provisions of Sections 1.05(a) and
3
82
1.05(c) and the other applicable provisions of this Agreement. In the event that
Buyer does not deliver an Objection Notice within the time period specified
herein, the Post-Closing Adjustment delivered by the Company pursuant to Section
1.05(b) shall be the Final Post-Closing Adjustment and the Closing Balance Sheet
delivered by the Company pursuant to Section 1.05(b) hereof shall be deemed to
be the final Closing Balance Sheet for all purposes of this Agreement. Buyer
acknowledges that any non-compliance by Buyer with the provisions of the first
sentence of this paragraph could delay the delivery of the Closing Balance Sheet
(with the exception of any non-compliance of Buyer resulting from the failure of
the Company and the Selling Subsidiaries to comply with its obligations pursuant
to the provisions of this Agreement). In the event such non-compliance causes
delay, then to the extent that the Company cannot reasonably deliver the Closing
Balance Sheet within the 60-day period referred to in Section 1.05(b), it shall
be delivered by the Company as soon as reasonably practicable thereafter, but in
no event later than the number of days after the end of such 60-day period which
is equal to such delay; provided, however, that if such period extends beyond 90
days, the parties shall immediately proceed to resolution pursuant to the
procedures described in Section 1.05(f). In connection with the preparation of
the Closing Balance Sheet, the parties shall comply with Section 6.15 of this
Agreement, which contains certain provisions relating to the obligations of the
parties with respect to access to information, including without limitation
financial information, relating to the preparation of the Closing Balance Sheet.
(e) In the event that Buyer shall deliver an Objection Notice pursuant to
Section 1.05(d) hereof, Buyer and the Company shall attempt, in good faith, to
resolve their differences within the 30 day period following the receipt by the
Company of the Objection Notice. If the Company and Buyer are not able to
resolve all of their good faith differences with respect to the Closing Balance
Sheet within such 30 day period, any unresolved differences with respect to any
balance sheet line items and the accuracy of the valuation calculations pursuant
to this Section 1.05 shall be determined in accordance with Section 1.05(f)
hereof; provided, that until all Final Post-Closing Adjustments (if any) are
made pursuant to Section 1.05(f), if applicable, the Purchase Price shall be
deemed to be the Purchase Price set forth in the Purchase Price Calculation
delivered at Closing pursuant to Section 1.05(c) hereof, subject to any
adjustments agreed upon by the parties pursuant to the first sentence of Section
1.05(c).
(f) In the event that the Company and Buyer are unable to resolve
differences with respect to the Closing Balance Sheet in the manner set forth in
Section 1.05(e) within the 30-day period referred to therein, then the balance
sheet line items and the accuracy of the valuation calculations pursuant to
Section 1.05 remaining unresolved shall be determined by an independent
accounting firm mutually agreeable to Buyer and the Company (the "Independent
Accounting Firm") as follows:
(1) Within 15 days following retention of the Independent Accounting
Firm, the Company and Buyer shall present or cause to be presented the
disputed matters relating to balance sheet line item(s) and the accuracy of
the valuation calculations pursuant to Section 1.05 that must be resolved
with respect to the Closing Balance Sheet.
(2) The Company and Buyer shall use their commercially reasonable
efforts to cause the Independent Accounting Firm to render its decision as
soon as is reasonably practicable and in any event within 60 days,
including, without limitation, prompt compliance with all reasonable
requests by the Independent Accounting Firm for information, papers, books,
records, engagement letters, retention letters and the like; provided that
(i) the Company and Buyer agree that the scope of the retention of the
Independent Accounting Firm shall be limited to resolving matters relating
to the disputed balance sheet line item(s) and the accuracy of the
valuation calculations pursuant to this Section 1.05 on the Closing Balance
Sheet presented to the Independent Accounting Firm and (ii) in no event
shall the resolution of any issue by the Independent Accounting Firm be
outside the parameters within which such issues on the Closing Balance
Sheet were determined by each of the Company and Buyer. All decisions of
the Independent Accounting Firm made within the scope of its retention with
respect to balance
4
83
sheet line item(s) and the accuracy of the valuation calculations pursuant
to this Section 1.05 relating to the Closing Balance Sheet and any
Post-Closing Adjustment shall be conclusive, final and binding upon Buyer,
the Company and their respective Affiliates, and the Closing Balance Sheet
and any Final Post-Closing Adjustment as determined in accordance with the
provisions of this Section 1.05(f) shall be deemed to be the Closing
Balance Sheet and the Final Post-Closing Adjustment for all purposes of
this Agreement. In addition, any necessary adjustment in the Purchase Price
arising from any Final Post-Closing Adjustment to the Closing Balance Sheet
shall be made by such Independent Accounting Firm and written notice of any
such Final Post-Closing Adjustment in reasonable detail shall be given by
the Independent Accounting Firm to the Company and Buyer.
(g) The Company, on the one hand, and Buyer, on the other hand, shall share
equally all fees, costs, disbursements and other expenses of the Independent
Accounting Firm in connection with its review of disputed matters pursuant to
Section 1.05(f).
(h) If any Final Post-Closing Adjustment requires a reduction to the
Purchase Price, then the Company shall pay to Buyer in the manner and with
interest as provided in Section 1.05(j) the amount of such Final Post-Closing
Adjustment.
(i) If any Final Post-Closing Adjustment requires an increase to the
Purchase Price, then Buyer shall pay to the Company in the manner and with
interest as provided in Section 1.05(j) the amount of such Final Post-Closing
Adjustment.
(j) Any payment pursuant to Sections 1.05(h) or 1.05(i) hereof shall be
made within five Business Days after the Final Post-Closing Adjustment has been
determined, by delivery to the Company or Buyer, as the case may be, of a wire
transfer of immediately available federal funds from such party to one or more
designated accounts of such other party. The amount of any payment to be made
pursuant to Sections 1.05(h) or 1.05(i) shall bear interest from and including
the Closing Date to but excluding the date of payment at a rate per annum equal
to LIBOR as of the Closing Date. Such interest shall be payable at the same time
as the payment to which it relates and shall be calculated on the basis of a
year of 360 days and the actual number of days elapsed. Any adjustment amounts
which are not the subject of unresolved differences between the parties, and
therefore are not subject to Section 1.05(f) hereof, or which are resolved prior
to determination of any Final Post-Closing Adjustment pursuant to Section
1.05(f) hereof, shall be paid by and to the appropriate party within five
Business Days of determination, together with interest in the manner provided by
this Section 1.05(j). If any matters relating to balance sheet line items and
the accuracy of the valuation calculations pursuant to Section 1.05 are resolved
and paid in accordance with the preceding sentence then to the extent such
matters had been presented to the Independent Accounting Firm for determination
under Section 1.05(f) hereof, the parties shall notify the Independent
Accounting Firm that such matters are no longer disputed and therefore not
subject to further adjustment under Section 1.05(f).
(k) The Purchase Price plus or minus any Final Post Closing Adjustments to
the Purchase Price shall be allocated among the Assets pursuant to a procedure
mutually agreed upon by the parties prior to the Closing. The Company and Buyer
shall: (i) each report for Tax and financial purposes the transactions
contemplated by this Agreement in a manner consistent with such allocation,
including in the preparation and filing of IRS Form 8594 under Section 1060 of
the Code (or any successor Form or successor provision of tax law and under any
comparable provision of state or local tax law) with their respective Tax
Returns for the taxable year that includes the Closing Date; and (ii) take no
position inconsistent with such allocation in any Tax Return, before any agency
responsible for the collection of taxes or in any judicial proceeding relating
thereto, unless otherwise required by applicable law, and, if so required by
applicable law, the Company or Buyer as applicable, shall deliver reasonable
prior written notice to the other of the taking of such inconsistent position.
5
84
(l) The ARM Holdback shall be retained from the Purchase Price by Buyer.
Commencing on the Closing Date and until release of amounts remaining in the ARM
Holdback in accordance with this Section 1.05(l), the ARM Holdback funds shall
be held by Buyer in a segregated interest bearing money market account (the "ARM
Holdback Account") with The Chase Manhattan Bank (or any successor by merger
thereto), subject to the terms of this Agreement. The ARM Holdback Account shall
be managed, and withdrawals shall be permitted, only in accordance with the
terms of this Section 1.05(l):
(i) The Company shall contract for performance of the ARM Audit by the
ARM Audit Vendor pursuant to the terms of the ARM Audit Agreement to begin
as soon as practicable after execution of this Agreement but no later than
60 days after the Closing Date and to be completed no later than 12 months
after the Closing Date, unless more time is required by the ARM Audit
Vendor to complete the ARM Audit. The Company and Buyer shall cooperate
with each other in connection with the negotiation of the ARM Audit
Agreement. As of the Closing Date, the Company shall assign the ARM Audit
Agreement to Buyer. Buyer shall comply with the provisions of the ARM Audit
Agreement and shall provide the Company with full access to the ARM Audit
Vendor and the data, findings and work product of the ARM Audit Vendor.
Funds in the ARM Holdback Account shall be used by Buyer to fund the ARM
Audit and to pay ARM Adjustments, except to the extent any ARM Adjustment
is recovered by the servicer under the relevant Servicing Agreement. Buyer
shall release funds from the ARM Holdback Account to pay the reasonable
fees and expenses of the ARM Audit Vendor in accordance with the provisions
of the ARM Audit Agreement.
(ii) As of a date five days prior to the Closing Date, Buyer and the
Company shall evaluate all data then available, including the Arthur
Andersen Adjustable Rate Mortgage Agreed Procedures Report dated December
15, 2000 and the actual results of the ongoing ARM Audit, in order to
mutually determine in their commercially reasonable judgment whether an
adjustment in the amount of the ARM Holdback is appropriate.
(iii) Promptly upon completion of the ARM Audit, Buyer shall pay to
the Company from the ARM Holdback Account a sum equal to the amount
remaining in the ARM Holdback Account (including interest), less any
amounts paid or payable to the ARM Audit Vendor for the ARM Audit or paid
out or reserved for payment of ARM Adjustments identified as required in
the ARM Audit and reasonable expenses (excluding normal overhead expenses)
incurred by Buyer for the implementation of the ARM Adjustments. Such
amount shall be released to the Company by Buyer by wire transfer to an
account designated by the Company. To the extent any amounts reserved in
the ARM Holdback Account are not used in the payment of ARM Adjustments
within 12 months of the completion of the ARM Audit or earlier if all ARM
Adjustments have been paid, all such amounts (including accrued and unpaid
interest thereon) shall be immediately released to the Company by Buyer in
accordance with the preceding sentence.
(iv) If the Company in good faith challenges any amount held back by
Buyer in accordance with Section 1.05(l)(iii), the parties shall in good
faith select a mutually agreeable third party familiar with the matters
contemplated in this Section. Such third party shall make a determination
whether such amount is excessive and, if determined to be excessive, the
amount of such excess. The costs of retaining the third party pursuant to
this Section shall be paid 50% by the Company and 50% by Buyer if the
amount held back is found to be excessive, otherwise such costs shall be
paid in full by the Company. The parties agree that such third party's
decision shall be final and binding. Buyer shall remit to the Company any
excess amount determined pursuant to this Section by wire transfer to an
account designated by the Company within 15 days after written notice of
such determination is given to Buyer by such third party.
6
85
(m) The Document Holdback shall be retained from the Purchase Price by
Buyer. Commencing on the Closing Date and until release of the Document
Holdback, the Document Holdback shall be held by Buyer in a segregated interest
bearing money market account (the "Document Holdback Account") with The Chase
Manhattan Bank (or any successor by merger thereto), subject to the terms of
this Agreement. Amounts in the Document Holdback Account shall be managed, and
withdrawals shall be permitted, only in accordance with this Section 1.05(m):
(i) The Company shall cause the Custodian to provide a document level
inventory report for all mortgage loans in the Company's owned and
securitized mortgage loan servicing portfolio that are a part of the Assets
on the Custodial Files as of the Closing Date (the "Document Report")
identifying any mortgage loan documents that are required under the
applicable Servicing Agreements and custodial agreements to be included in
the Custodial Files that (A) are not contained in the Custodial Files (the
"Missing Documents") or (B) do not meet the requirements of the applicable
Servicing Agreements, excluding for this purpose those immaterial document
exceptions mutually determined by the parties to be immaterial (the
"Defective Documents"). The mortgage loan documents which Buyer or its
Affiliates are obligated to provide pursuant to the Buyer Contracts or any
agreements relating to mortgage loans acquired from Buyer and its
Affiliates shall be excluded from the Document Report.
(ii) Buyer shall use commercially reasonable efforts consistent with
the efforts it uses for its own business to obtain or recreate Missing
Documents and correct Defective Documents in the ordinary course of
business for all such Custodial Files that are the subject of the Document
Report; provided, that (x) reasonable expenses (excluding normal overhead
expenses) incurred by Buyer in connection with such corrective activities
shall be reimbursable to Buyer from funds in the Document Holdback Account
and (y) the foregoing undertaking of Buyer shall not relieve the Company of
liability for indemnification to the extent otherwise provided in this
Agreement. The Company shall be released from liability for Missing
Documents or Defective Documents when the Custodial File is Certified or
deemed by Buyer to be Certified in accordance with Section 1.05(m)(iv)
below or deemed to be Certified in accordance with Section 1.05(m)(vi)
below.
(iii) Amounts in the Document Holdback Account (including interest)
will be released pro rata on a monthly basis in proportion to the number of
mortgage loan Custodial Files that are Certified or for which the
applicable mortgage loans have been paid off (in full, by refinancing or
otherwise, or accepted as a "short pay") and satisfied, or liquidated
through foreclosure or otherwise, or is REO or written off due to lack of
equity or other determination not to pursue the economic interest in the
residential property securing the mortgage loan (any such mortgage loan
being a "Settled Loan") (i.e., a fraction, the numerator of which is the
total number of Custodial Files Certified or deemed Certified and mortgage
loans that are Settled Loans and the denominator of which is the total
number of Custodial Files identified in the Document Report), provided,
however, that in no event will the amount in the Document Holdback Account
be less than $250,000 until such time as all remaining Custodial Files are
Certified or the related mortgage loans become Settled Loans.
(iv) In the event that (A) any Custodial File is not Certified, (B)
the related mortgage loan is not a Settled Loan, or (C) the related loan is
not repurchased by the Company within 12 months of the Closing Date (or
such shorter period required under the applicable Servicing Agreements),
Buyer may, at its option withdraw $200 from the Document Holdback Account
for each Missing Document not yet obtained or Defective Document not yet
corrected and deem the Custodial File to be Certified.
(v) 12 months after the Closing Date, Buyer will, in good faith and in
accordance with Industry Practice, evaluate its potential for loss in
connection with the Missing Documents and the Defective Documents relating
to Custodial Files not yet Certified or deemed Certified, where the related
mortgage loans are not Settled Loans and communicate such loss amount (the
"Evaluated Document Loss") to the Company. Within three (3) Business Days
of completion of
7
86
such evaluation, Buyer shall remit to the Company the difference between
the amount then remaining in the Document Holdback Account and 150% of the
Evaluated Document Loss.
(vi) 18 months after the Closing Date, Buyer will again determine the
Evaluated Document Loss in accordance with the provisions of Section
1.05(m)(v) and communicate such amount to the Company. Within three
Business Days of completion of such evaluation, Buyer shall remit to the
Company the difference between the amount then remaining in the Document
Holdback Account and the Evaluated Document Loss and all remaining
Custodial Files shall be deemed to be Certified. To the extent any amounts
remain reserved in the Document Holdback Account after 18 months of the
expiration of such 18 month period, all such amounts (including accrued and
unpaid interest thereon) shall be immediately released to the Company by
Buyer by wire transfer to an account designated by the Company.
(vii) If the Company in good faith challenges any amount held back by
Buyer in accordance with Sections 1.05(m)(v) or 1.05(m)(vi), the parties
shall in good faith select a mutually agreeable third party familiar with
the matters contemplated in this Section. Such third party shall make a
determination whether such amount is excessive and, if determined to be
excessive, the amount of such excess. The costs of retaining the third
party pursuant to this Section shall be paid 50% by the Company and 50% by
Buyer if the Evaluated Document Loss is found to be excessive, otherwise
such costs shall be paid in full by the Company. The parties agree that
such third party's decision shall be final and binding. Buyer shall remit
to the Company any excess amount determined pursuant to this Section by
wire transfer to an account designated by the Company within 15 days after
written notice of such determination is given to Buyer by such third party.
SECTION 1.06 Further Assurances; Post-Closing Cooperation. At any time or
from time to time after the Closing, at either party's request and without
further consideration, the other party shall, and the Company shall cause the
Selling Subsidiaries, and Buyer shall cause the Buyer Affiliates, to execute and
deliver to the requesting party such other instruments of sale, transfer,
conveyance, assignment, assumption and confirmation and limited powers of
attorney, provide such materials and information and take such other actions as
the requesting party may reasonably deem necessary or desirable in order more
effectively to transfer, convey and assign to Buyer or the applicable Buyer
Affiliate, to confirm their title to, all of the Assets, and to effect the
assignment to Buyer or the applicable Buyer Affiliate, and their assumption, of
the Assumed Liabilities, and otherwise to cause the parties hereto, the Selling
Subsidiaries and the Buyer Affiliates to fulfill their obligations under this
Agreement and the Ancillary Agreements.
SECTION 1.07 Third-Party Consents.
(a) (i) To the extent that any Company Contract is not assignable without
the consent of another party, this Agreement shall not constitute an assignment
or an attempted assignment thereof if such assignment or attempted assignment
would constitute a breach thereof or a default thereunder. The parties shall use
commercially reasonable efforts to obtain the consent of such other party to the
assignment of any such Company Contract (other than Material Company Contracts
and Critical Information Technology Contracts, as to which Sections 6.04(b),
6.20, 8.01(j)and 8.02(i) shall apply) to Buyer in all cases in which such
consent is or may be required for assignment. If any such consent shall not be
obtained, the Company and the Buyer shall cooperate with each other in any
reasonable arrangement, which arrangement shall be reflected in an agreement
signed by the Company, the Selling Subsidiaries and the Buyer on the Closing
Date (the "Consent Agreement"), designed to (i) provide for Buyer the benefits
intended to be assigned to Buyer under the relevant Company Contract, including
enforcement at the cost and for the account of Buyer of any and all rights of
the Company or a Selling Subsidiary against the other party thereto arising out
of the breach or cancellation thereof by such other party or otherwise,
effective as of the Closing Date and (ii) provide that Buyer shall assume all
obligations and liabilities under such Company Contract of the Company or any
Selling Subsidiary or any Affiliate thereof, arising as a result of the
operation of the Business by Buyer after the Closing Date.
8
87
(ii) If Buyer shall elect not to purchase any Company Intellectual
Technology Asset that is designated in Schedule 6.18(a)-1 as an Asset that may
be leased by Buyer at Closing then, in lieu of Buyer purchasing such Asset,
Buyer shall lease such Asset on the Closing Date pursuant to a lease agreement
on commercially reasonable terms mutually agreeable to the Company and Buyer;
provided however, that the Company and the Selling Subsidiaries shall not be
obligated to enter into any such lease agreement if the consent of a third party
is required to lease the Asset and such consent shall not be obtained, and Buyer
shall then be obligated to purchase such Asset should Buyer still desire to
utilize the same.
(b) With respect to the Critical Information Technology Contracts and the
contracts designated on Annex A to Schedule 1 as contracts to be "split," the
parties hereto shall take such actions and cooperate as set forth in Schedule
6.18(b) and as set forth in footnotes 3 and 5 on Annex A to Schedule 1.
SECTION 1.08 Insurance Proceeds. If any of the tangible Assets are
destroyed or damaged or taken in condemnation between the date hereof and the
Closing Date, the insurance proceeds (or with respect to any self-insured Asset,
a cash amount equal to the amount that would have been payable under the terms
of a commercially reasonable insurance policy) or condemnation award with
respect thereto (to the extent attributable to the interest therein to be
acquired by Buyer), up to the amount of such proceeds or award, shall be an
Asset. At the Closing, the Company shall pay or credit to Buyer the interest of
the Company or any Selling Subsidiary to which it is entitled in any such
insurance proceeds (or cash amount) or condemnation awards received by it, to
the extent set forth in the immediately preceding sentence, on or prior to the
Closing and shall, to the extent permitted under the terms of applicable law
and/or applicable insurance policies, assign to or assert for the benefit of
Buyer all of its rights against any insurance companies, governmental or
regulatory authorities and others with respect to such damage, destruction or
condemnation. If such insurance proceeds or condemnation awards are received
after the Closing, the Company shall pay or credit to Buyer an amount equal to
the interest of the Company or any Selling Subsidiary (to the extent set forth
in the first sentence of this Section 1.08) to which it is entitled in any such
insurance proceeds or condemnation awards received by it, within 15 days after
receipt thereof by the Company or any Selling Subsidiary, and shall, to the
extent permitted under the terms of applicable law and/or applicable insurance
policies, assign to or assert for the benefit of Buyer all of its rights against
any insurance companies, governmental or regulatory authorities and others with
respect to such damage, destruction or condemnation in connection with a Final
Post-Closing Adjustment. As and to the extent that the Company and/or any of the
Selling Subsidiaries is entitled to receive insurance proceeds or cash proceeds
under policies maintained by the Company and its Affiliates, predecessors and
successors in respect of any Assumed Liability, the Company shall use reasonable
efforts to attempt to, to the extent permitted by the applicable insurance
policies and applicable law, cause the proceeds of such insurance, to the extent
necessary for Buyer to recover or be covered for amounts actually paid or
required to be paid by Buyer with respect to such Assumed Liability, to be
applied toward the payment of such Assumed Liability, but in no event (other
than with respect to such self-insured matters) shall the Company be required to
incur any out-of-pocket expense in connection therewith or to maintain any
insurance policies in place.
ARTICLE II
DEFINITIONS
SECTION 2.01 Definitions. As used in this Agreement the following terms
shall have the meanings set forth below:
"90 Day Delinquency Amount" shall have the meaning set forth in
Schedule 1.05(c).
"90 Day Delinquency Percentage" shall have the meaning set forth in
Schedule 1.05(c).
"90 Plus" shall have the meaning set forth in Schedule 1.05(c).
9
88
"90 Day Target Amount" shall have the meaning set forth in Schedule
1.05(c).
"90 Day Target Percentage" shall have the meaning set forth in
Schedule 1.05(c).
"AA" shall have the meaning set forth in Section 1.05(b) of this
Agreement.
"Actions" shall have the meaning set forth in Section 6.19 of this
Agreement.
"Advanta Bank Corp." or "ABC" shall mean Advanta Bank Corp., a Utah
industrial loan corporation.
"Advanta National Bank" or "ANB" shall mean Advanta National Bank, a
bank organized under the laws of the United States.
"Advanta Service Mark License and Domain Name Usage Agreement" shall
mean that certain limited license agreement to be entered into and dated as
of the Closing Date by and between the Company and Buyer.
"Advanta Warehouse Facility" means each of the following: the Morgan
Stanley Facility; the warehouse line established pursuant to the Sale and
Servicing Agreement dated as of September 30, 1999 among the Company,
certain of the Selling Subsidiaries and Advanta Home Equity Loan Owner
Trust 1999-SSB1, as amended and the agreements referred to therein and
related thereto; the warehouse line established pursuant to the Amended and
Restated Master Repurchase Agreement dated as of December 13, 1999 among
Bear Stearns Home Equity Trust, AMCUSA and Advanta Finance Corp., as
amended; and the warehouse line established pursuant to the Master
Repurchase Agreement dated as of June 16, 1999 between ANB and AMCUSA, as
amended.
"Affiliate" shall mean, with respect to any specified Person, a Person
that directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, the Person specified,
including but not limited to, a Subsidiary of any such Person. As used in
this definition, the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through ownership of voting securities,
as trustee or executor, by contract or credit arrangement or otherwise.
"Alternative Acquisition" shall have the meaning set forth in Section
6.02 of this Agreement.
"AMHC" shall mean Advanta Mortgage Holding Corp., a wholly owned
subsidiary of the Company.
"AMCUSA" shall mean Advanta Mortgage Corp. USA, a wholly owned
subsidiary of AMHC.
"Ancillary Agreements" means each of a Bill of Sale and General
Assignment in the form attached hereto as Exhibit E and the other
instruments of assignment or transfer, an Assumption Agreement in the form
attached hereto as Exhibit I and the other assumption instruments or
documents, the Advanta Service Mark License and Domain Name Usage Agreement
substantially in the form to be attached hereto as Exhibit C, a
Subservicing Agreement substantially in the form to be attached hereto as
Exhibit F, the Ridgeview Lease in the form attached hereto as Exhibit G, a
Webby Software License Agreement substantially in the form to be attached
hereto as Exhibit H, a Transitional Services Agreement relating to certain
transitional services substantially in the form to be attached hereto as
Exhibit J, an Information Access Agreement substantially in the form to be
attached hereto as Exhibit D, a Litigation Management Agreement
substantially in the form to be attached hereto as Exhibit L, Asset Leases
relating to the Assets described in Schedule 1.05(c)(iii)(C)(2)
substantially in the form to be attached hereto as Exhibit M, a Consent
Agreement substantially in the form attached hereto as Exhibit N, and the
Corporate Finance Program Agreement substantially in the form to be
10
89
attached hereto as Exhibit O, which agreements will be on commercially
reasonable, mutually satisfactory terms to be reasonably agreed upon by the
parties hereto prior to Closing.
"Applicable Requirements" shall mean with respect to the origination,
marketing, purchase, sale, servicing, subservicing and securitization of
non-conforming residential mortgage loans (including obligations of prior
originators or servicers for which the Company or any Selling Subsidiary is
responsible), all of the following: (i) all contractual obligations binding
upon the Company and any Selling Subsidiary; (ii) all federal, state and
local legal and regulatory requirements, including statutes, rules,
regulations and ordinances, applicable to the Business as conducted by the
Company and the Selling Subsidiaries; (iii) all applicable requirements and
guidelines governing the Business as conducted by the Company and the
Selling Subsidiaries of each governmental agency, board, commission,
instrumentality and other governmental or quasi governmental body or office
having jurisdiction over the Company and the Selling Subsidiaries; and (iv)
any other applicable judicial and administrative judgments, orders,
stipulations, awards, writs and injunctions governing the Business as
conducted by the Company and the Selling Subsidiaries.
"ARM Adjustments" shall mean any adjustments required to be made to
any audited mortgage loan to correct for errors in adjustments made to
interest rates and/or payment amounts prior to Closing on such mortgage
loans serviced by the Company or the Selling Subsidiaries as identified by
the ARM Audit and in accordance with the requirements of the applicable
Servicing Agreements and Industry Practice (i.e., borrowers will not be
pursued for shortfalls).
"ARM Audit" shall mean the audit to be performed by the ARM Audit
Vendor pursuant to the terms of the ARM Audit Agreement which shall
specifically include the validation of loan set up, including verification
of the accuracy of the system data, with respect to adjustable rate
mortgage loans that have undergone a rate change prior to the Closing Date.
"ARM Audit Agreement" shall mean the agreement between the Company and
the ARM Audit Vendor for performance of the ARM Audit, the terms of which
shall be mutually agreeable to the Company and Buyer.
"ARM Audit Vendor" shall mean a vendor that is mutually agreed upon by
Buyer and the Company.
"ARM Holdback" shall mean $4,000,000, or such other amount as shall be
mutually agreed upon by the Company and Buyer in accordance with the terms
of Section 1.05(l)(ii) to be held by Buyer in accordance with Section
1.05(l)(i).
"ARM Holdback Account" shall have the meaning assigned to that term in
Section 1.05(1).
"Arrangement Letter" shall have the meaning set forth in Section
1.05(b) of this Agreement.
"Assets" shall have the meaning set forth in Section 1.01(a) of this
Agreement.
"Assumed Liabilities" shall have the meaning set forth in Section
1.01(b) of this Agreement.
"Assumed Litigation" shall mean the litigation listed on Annex A to
Schedule 2, being litigation involving a single loan in which the
lender/servicer is named in the law suit solely as a result of its status
as a secured party or as a servicer for a secured party and there is no
claim for any damages or other relief against the lender/servicer. A claim
for damages or other relief brought after commencement of the litigation
will cause such litigation to be excluded from the definition of Assumed
Litigation.
"Bank Acts" shall mean, collectively, the Bank Holding Company Act of
1956, the National Bank Act, the Federal Reserve Act, the Federal Deposit
Insurance Act and any other federal or
11
90
state banking statutes which may govern the transactions contemplated by
this Agreement, as they may be amended from time to time, and the rules and
regulations promulgated thereunder.
"Bank Authority" shall mean the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Office of Thrift Supervision, and any
state banking authority or non-U.S. governmental banking authority having
jurisdiction over the Company, the Selling Subsidiaries, Buyer or any
Related Entities.
"Benefit Arrangement" shall have the meaning set forth in Section
6.08(e) of this Agreement.
"Board" shall have the meaning set forth in Section 3.01 of this
Agreement.
"Business" shall mean the business of originating, marketing,
purchasing, selling, servicing and subservicing and securitizing
non-conforming residential mortgage loans (including HELOCs) of the Company
and the Selling Subsidiaries and other Persons and the issuance of related
non-conforming mortgage insurance products all as of the Closing Date, but
excluding the Excluded Assets.
"Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which banks in the States of Delaware or New York are generally
closed for regular banking business.
"Business Licenses" shall have the meaning set forth in Section 4.09
of this Agreement.
"Buyer" shall have the meaning set forth in the preamble to this
Agreement.
"Buyer Affiliates" shall mean those entities set forth in Schedule
11.03.
"Buyer Contracts" shall mean any contract, agreement or any other
instrument relating to the subservicing of owned or securitized mortgage
loans by the Company and the Selling Subsidiaries to which Buyer or an
Affiliate thereof is an owner or issuer with respect to the subject
mortgage loans. For purposes of this Agreement, Buyer Contracts shall be
Company Contracts, but in no event shall any Buyer Contract be deemed to be
a Material Company Contract or as Significant Company Contract.
"Buyer Disclosure Schedule" shall mean the Disclosure Schedule
referred to in the first sentence of Article V hereof.
"Buyer Indemnified Persons" shall have the meaning set forth in
Section 10.01(a) of this Agreement.
"Buyer Managed Litigation" shall mean the litigation listed on Annex B
to Schedule 2 and which is to be managed by Buyer pursuant to the terms of
the Litigation Management Agreement.
"Buyer Material Adverse Change" shall mean the occurrence of any event
which would materially adversely effect the ability of Buyer to consummate
the transactions referred to in this Agreement.
"Buyer's Plan" shall have the meaning set forth in Section
6.08(b)(4)(A) of this Agreement.
"Cashflow Buyup Cap" shall have the meaning set forth in Schedule
1.05(c).
"Certify" and "Certified" shall mean the status of a Custodial File
which is certified in writing by the Custodian to contain all documentation
required under the requirements of the applicable Servicing Agreements.
12
91
"CF Confidentiality Agreements" shall have the meaning set forth in
Section 6.21 of this Agreement.
"Change of Control Severance Plans" shall mean the Advanta Employee
Change of Control Severance Plan and the Advanta Senior Management Change
of Control Severance Plan.
"Class A Preferred Shares" shall mean the shares of the Company's
Class A Preferred Stock, par value $1,000 per share.
"Class A Shares" shall mean the shares of the Company's Class A Common
Stock, par value $.01 per share.
"Closing" and "Closing Date" shall have the meanings set forth in
Section 1.02 of the Agreement.
"Closing Balance Sheet" shall have the meaning set forth in Section
1.05(b) of this Agreement.
"Closing Daily Balance Sheet" shall have the meaning set forth in
Section 1.05(a) of this Agreement.
"Closing Tape" shall have the meaning set forth in Section 6.26 of
this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act,
as amended and the rules and regulations promulgated thereunder.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Company Contracts" shall mean the contracts listed on Annex A to
Schedule 1 hereto and those entered into, consistent with the provisions of
Section 6.01(1) by the Company or any Selling Subsidiary on or after the
date hereof and prior to the Closing Date, that are used primarily or
exclusively in the conduct of the Business.
"Company Disclosure Schedule" shall mean the Disclosure Schedule
referred to in the first sentence of Article IV hereof.
"Company Employee Benefit Plan(s)" shall have the meaning set forth in
Section 4.14(b) of this Agreement.
"Company Indemnified Persons" shall have the meaning set forth in
Section 10.02 of this Agreement.
"Company Information Technology Assets" shall have the meaning set
forth in Section 6.18(a) of this Agreement.
"Company Information Technology Contracts" shall have the meaning set
forth in Section 6.18(a) of this Agreement.
"Company Intellectual Property" shall have the meaning set forth in
Section 4.10(a) of this Agreement.
"Company Plans" shall mean those plans set forth in Section 6.08(b)(1)
of the Company Disclosure Schedule.
"Company-Sponsored Mortgage Loan Securitization Transactions" shall
have the meaning set forth in Section 4.05(a) of this Agreement.
"Confidential Business Information" shall have the meaning set forth
in Section 6.14(d) of this Agreement.
13
92
"Confidentiality Agreement" shall have the meaning set forth in
Section 6.03(a) of this Agreement.
"Consent Agreement" shall have the meaning set forth in Section 1.07
of this Agreement.
"Consolidated Group" shall mean the affiliated group of corporations,
as defined in Section 1504 of the Code and the Treasury Regulations
promulgated thereunder, having the Company as its common parent
corporation.
"Corporate Finance Agreements" shall have the meaning set forth in
Section 4.19 of the Company Disclosure Schedule.
"Corporate Finance Loans" shall mean mortgage loans acquired by the
Company or a Selling Subsidiary pursuant to the Corporate Finance
Agreements.
"Corporate Finance Program Agreement" shall have the meaning set forth
in Section 6.21 of this Agreement.
"CPR Adjustment Event" shall have the meaning set forth in Schedule
1.05(c).
"Critical Information Technology Contracts" shall have the meaning set
forth in Section 6.18(b) of this Agreement.
"Custodial Files" shall mean those mortgage loan files held in custody
by the Custodian pursuant to a custodial agreement which are the subject of
the Document Report.
"Custodian" shall mean Bankers Trust Company of California, N.A. and,
if applicable, State Street Bank and Trust Company.
"Daily Balance Sheet" shall mean a pro-forma balance sheet of the
Business, substantially in the form of Exhibit A attached hereto, for the
date specified therein at the time of delivery, but without giving effect
to the transactions occurring at the Closing.
"Defective Documents" shall have the meaning set forth in Section
1.05(m)(i) of this Agreement.
"Deferral Plan" shall have the meaning set forth in Section 6.08(g) of
this Agreement.
"Delinquency Rate Adjustment" shall have the meaning set forth in
Schedule 1.05(c).
"Disclosure Schedules" shall mean the Company Disclosure Schedule and
the Buyer Disclosure Schedule.
"Distribution Date" shall have the meaning set forth in Schedule
1.05(c).
"Document Holdback" shall mean an amount equal to $55 for each
document that is reported in the Document Report as a Missing Document or a
Defective Document under the terms of Section 1.05(m)(i).
"Document Holdback Account" shall have the meaning set forth in
Section 1.05(m).
"Document Report" shall have the meaning set forth in Section 1.05(m).
"Employee(s)" shall have the meaning set forth in Section 4.14(a)(1)
of the Company Disclosure Schedule.
"Employment Transfer Time" shall have the meaning set forth in Section
6.08(a)(1) of this Agreement.
"Environmental Requirement" shall have the meaning set forth in
Section 4.12(a) of this Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
14
93
"Evaluated Document Loss" shall have the meaning set forth in Section
1.05(m) of this Agreement.
"Excluded Assets" shall have the meaning set forth in Section 4.19 of
the Company Disclosure Schedule.
"Final Post-Closing Adjustment" means:
(1) the Post-Closing Adjustment delivered by the Company pursuant
to Section 1.05(b) of this Agreement in the event that Buyer does not
deliver an Objection Notice to the Company within the 30-day period
described in Section 1.05(d) of this Agreement;
(2) the Post-Closing Adjustment delivered by the Company pursuant
to Section 1.05(b) of this Agreement as amended or modified by the
mutual agreement of the Company and Buyer within the 30-day period
described in Section 1.05(e) of this Agreement or any extension of such
time period to which the Company and Buyer have mutually agreed in
writing; or
(3) the Post-Closing Adjustment delivered by the Independent
Accounting Firm to the Company and Buyer pursuant to Section 1.05(f) of
this Agreement.
"Franchise Premium" shall have the meaning set forth in Schedule
1.05(c).
"GAAP" shall mean generally accepted accounting principles.
"Hazardous Material" shall have the meaning set forth in Section
4.12(a) of this Agreement.
"HELOC" shall mean a secured home equity line of credit.
"Holdback Funds" shall mean the ARM Holdback and the Document
Holdback, taken together.
"HSR Act" shall have the meaning set forth in Section 4.06 of this
Agreement.
"Inactive Employee" shall mean any Employee (1) who, at or as of the
Closing Date, is not actively at work (other than those who are on
vacation) due to an approved medical, family, military or personal leave
under the policies of the Company including, without limitation, any
Employee who is receiving long term disability benefits and (2) who is
identified with a "P" or an "L" in Section 4.14(a)(1) of the Company
Disclosure Schedule.
"Indemnitee" shall have the meaning set forth in Section 10.04 of this
Agreement.
"Indemnitor" shall have the meaning set forth in Section 10.04 of this
Agreement.
"Independent Accounting Firm" shall have the meaning set forth in
Section 1.05(f) of this Agreement.
"Information Access Agreement" shall have the meaning set forth in
Section 6.15(a) of this Agreement.
"Industry Practice" shall mean the industry practices associated with
operating the business of originating, marketing, purchasing, selling,
securitizing, servicing and/or subservicing non-conforming residential
mortgages (including secured home equity lines of credit) and/or selling
mortgage-related insurance or other similar products within the United
States.
"Insolvency Event" shall mean:
(i) the filing by the Company, or a good faith filing against the
Company, with respect to a decree or order of a court or agency or
supervisory authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency, bankruptcy,
15
94
readjustment of debt, marshaling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs; or
(ii) the Company shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, bankruptcy, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Company or of or relating to all or substantially all of
its property; or
(iii) the Company 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 an assignment
for the benefit of its creditors, or voluntarily suspend payment of its
obligations.
"Insurance Pipeline" shall mean all mortgage-related insurance or
similar products, consistent with licensing requirements, which have been
accepted for processing or underwriting by the Company, a Selling
Subsidiary or any Affiliate thereof as of the Closing Date which are being
processed and underwritten following the same programs and procedures as
currently in effect, and which have not yet been issued as of the Closing
Date.
"IRCA" shall mean the Federal Immigration and Reform Control Act, as
amended.
"Knowledge" when used with respect to the Company or the Selling
Subsidiaries, shall mean the knowledge of any of those employees of the
Company or any Affiliate of the Company responsible for the management
and/or operations of the Business, including those employees responsible
for the corporate, legal, tax and human resource functions that support the
Business.
"Letter Agreement" shall have the meaning set forth in Section 6.25 of
this Agreement.
"LIBOR" shall mean, as of any date, the London Interbank Offered Rate
for one-month deposits as shown at 11:00 a.m. London time on such date on
the display screen designated "Page 3570" by Dow Jones Markets, or such
other page as may replace such page on that service or such other services
as may be nominated by the British Bankers' Association for the purpose of
displaying London Interbank offered rates for U.S. Dollar Deposits.
"Lien" shall have the meaning set forth in Section 4.08 of this
Agreement.
"Losses" shall mean any and all claims, losses, liabilities, costs,
penalties, fines, expenses (including reasonable expenses for attorneys,
accountants, consultants and other experts or other expenses of litigation,
arbitration or other similar proceedings), damages, obligations to third
parties, expenditures, proceedings, judgments, awards, settlements or
demands that are imposed upon or otherwise incurred, suffered or sustained
by the relevant party.
"LTD Policy" shall have the meaning set forth in Section 6.08(b)(3) of
this Agreement.
"MSR Price" shall have the meaning set forth in Schedule 1.05(c).
"Material Adverse Change" shall mean (a) the enactment of legislation
by the United States which would (i) prevent the conduct of the Business in
any material respect or (ii) generally prohibit the deductibility of
interest on home mortgage loans; (b) the issuance of an order or decree by
a Bank Authority which would, solely as a result of the consummation by
Buyer of the transactions referred in this Agreement, impose upon Buyer the
obligation to comply with the terms of any Regulatory Agreements to which
the Company or any Selling Subsidiary is a party, (c) the occurrence of any
other event which on an objective basis would adversely impact Buyer in its
conduct of the Business as much or more than the adverse impact to Buyer
from the occurrence of any of the events referred to in clauses (a) and (b)
of this sentence, or (d) the occurrence of an Insolvency Event.
16
95
"Material Company Contracts" shall mean those Company Contracts
specified as material on Annex A to Schedule 1 hereto and Schedule
6.18(a)-2.
"Missing Documents" shall have the meaning set forth in Section
1.05(m)(i) of this Agreement.
"Model" or "Models" shall mean those models set forth in Section
4.10(b)-1 of the Company Disclosure Schedule.
"Morgan Stanley Facility" shall mean the warehouse line established
pursuant to the Amended and Restated Sale and Servicing Agreement dated as
of August 31, 1999 among Advanta Home Equity Loan Owner Trust 1998-MSI,
Advanta Conduit Receivables Inc., Advanta Mortgage Corp. USA, Advanta Bank
Corp., Advanta National Bank and Advanta Mortgage Corp. USA, Advanta Corp.
and Bankers Trust Company of California, N.A., as amended, and the
agreements referred to therein and related thereto.
"Mortgage Loan Purchase Agreement" shall have the meaning set forth in
Section 6.25 of this Agreement.
"Multi-Party Security Agreements" shall have the meaning set forth in
Section 6.21 of this Agreement.
"Objection Notice" shall have the meaning set forth in Section 1.05(d)
of this Agreement.
"Off-Balance Sheet Loans" shall mean all mortgage assets (including
HELOCs) that as of the date hereof are assets in the Morgan Stanley
Facility or subsequent to the date hereof, are sold into the Morgan Stanley
Facility, regardless of whether such assets are held on balance sheet by
the Company or a Selling Subsidiary as of the Closing Date.
"Ordinary Course of Business" shall mean the operation of the Business
in a manner consistent with Industry Practice.
"Outside Termination Date" shall have the meaning set forth in Section
9.01(b) of this Agreement.
"Owned Loans" shall mean a mortgage loan (including a HELOC) that is
owned and held on-balance sheet (either as a loan held for sale or for
investment) by the Company or a Selling Subsidiary.
"PBGC" shall have the meaning set forth in Section 4.14(b) of this
Agreement.
"Paid Time Off" shall have the meaning set forth in the Company's
Employee Handbook as in effect on the date hereof.
"Permitted Dispositions" shall have the meaning set forth in Section
6.01(1)(B)(4)(b) of this Agreement.
"Permitted Lien" shall mean with respect to real property matters,
easements, covenants, and utility easements, building restrictions, zoning
restrictions, and other easements and restrictions and matters of record
existing generally with respect to properties of a similar character or
which do not reduce the usefulness of the property for the purposes that
the property is presently used by the Company and the Selling Subsidiaries
and, for all other purposes throughout this Agreement, shall mean the
following Liens granted in the Ordinary Course of Business: (i) any
security interests or other Liens granted under or in connection with
equipment finance leases, securitization transactions or any Advanta
Warehouse Facility; or (ii) Liens for taxes or assessments or other similar
governmental charges not yet due and payable.
"Person" shall mean any individual, corporation, partnership (general
or limited), limited liability company, association, joint stock company,
business, trust, other entity or group.
17
96
"Pipeline Applications" shall mean all written applications from
prospective borrowers, brokers or correspondents for first or second lien
residential mortgage loans (including home equity lines of credit) which
have been accepted for processing or underwriting by the Company, a Selling
Subsidiary or any Affiliate thereof as of the Closing Date which are being
processed and underwritten following the same programs and procedures as
currently in effect, and which have not yet been closed and funded as of
the Closing Date.
"Post-Closing Adjustment" shall have the meaning set forth in Section
1.05(b) of this Agreement.
"Pricing Multiple" shall have the meaning set forth in Schedule
1.05(c).
"Proxy Statement" shall have the meaning set forth in Section 3.02 of
this Agreement.
"Purchase Price" shall have the meaning set forth in Section
1.05(c)(iii) of this Agreement and shall include any Final Post-Closing
Adjustment made pursuant to the provisions of Section 1.05 hereof.
"Purchase Price Calculation" shall have the meaning set forth in
Section 1.05(c)(iii).
"Regulatory Agreements" shall mean any agreement, consent decree or
order made by any Bank Authority or other governmental or regulatory
authority relating to the Company and/or the Selling Subsidiaries.
"Related Entities" shall mean any company, partnership, trust or
limited liability company of which the Company or Buyer, as the case may
be, directly or indirectly, owns 25% or more of the equity or can elect a
majority of the directors or partners or which the Company or Buyer is
otherwise deemed to control under any of the Bank Acts.
"Remaining Loans" shall have the meaning set forth in Section 6.25 of
this Agreement.
"Remaining Loans Purchase Agreement" shall have the meaning set forth
in Section 6.25 of this Agreement.
"Representation Letter" shall have the meaning set forth in Section
1.05(b) of this Agreement.
"Residual Assets" shall have the meaning set forth in Schedule
1.05(c).
"Residual Cashflow Event" shall have the meaning set forth in Schedule
1.05(c).
"Residual Cashflows" shall have the meaning set forth in Schedule
1.05(c).
"Residual Portfolio" shall have the meaning set forth in Schedule
1.05(c).
"Ridgeview Lease" shall have the meaning set forth in Section 4.13(a)
of this Agreement.
"Ridgeview Property" shall mean, collectively, the property presently
occupied by the Company or a Selling Subsidiary located at 800 and 850
Ridgeview Drive, Horsham, Pennsylvania.
"REO Property" or "REO" shall mean real property acquired by the
Company or the Selling Subsidiaries, on their own behalf or in their
capacity as Servicer or Subservicer under the Servicing Agreements, through
foreclosure or deed-in-lieu of foreclosure in connection with a defaulted
residential mortgage loan.
"Savings Plan" shall have the meaning set forth in Section
6.08(b)(4)(A) of this Agreement.
"SEC" shall have the meaning set forth in Section 3.02 of this
Agreement.
"Sellers" shall have the meaning set forth in Section 6.21 of this
Agreement.
18
97
"Selling Subsidiaries" shall mean AMHC, AMCUSA and its Subsidiaries,
Advanta National Bank, Advanta Bank Corp. and any Affiliates thereof which
have an interest in the Assets or Assumed Liabilities that are the subject
of this Agreement.
"Servicing Agreements" shall have the meaning set forth in Section
4.04(a) of this Agreement.
"Settled Loan" shall have the meaning set forth in Section
1.05(m)(iii).
"Shares" shall mean any Class A Share(s) or Class A Preferred
Share(s).
"Significant Company Contracts" shall mean the Company Contracts
identified as such on Annex A to Schedule 1 and Schedule 6.18(a)-2.
"Special Meeting" shall have the meaning set forth in Section 3.01 of
this Agreement.
"Spot Price" shall have the meaning set forth in Schedule 1.05(c).
"Subsidiary" shall mean, when used with reference to an entity, any
corporation or other entity, of which a majority of the outstanding voting
securities are owned directly or indirectly by such entity.
"Swap Target Price" shall have the meaning set forth in Schedule
1.05(c).
"Tape" shall have the meaning set forth in Section 4.28 of this
Agreement.
"Target Cashflows" shall have the meaning set forth in Schedule
1.05(c).
"Tax Return" shall mean any return, report, information statement,
schedule or other document (including any related or supporting information
and including any Form 1099 or other document or report required to be
provided by any of the parties to third parties) with respect to Taxes,
including any document required to be retained or provided to any
governmental authority pursuant to 31 U.S.C. Sections 5311-5328 and
regulations promulgated hereunder, relating to the parties or any
Consolidated Group of which any such entity was a member at the applicable
time, and any amended Tax Returns.
"Taxes" shall mean all federal, provincial, territorial, state,
municipal, local, foreign or other taxes, imposts, rates, levies,
assessments and other charges (and all interest and penalties thereon),
including, without limitation, all income, excise, franchise, gains,
capital, real property, goods and services, transfer, value added, gross
receipts, windfall profits, severance, ad valorem, personal property,
mortgage recording, employment, payroll, social security, unemployment,
disability, estimated or withholding taxes, and all customs and import
duties, and all interest, penalties and losses thereon or associated
therewith or associated with any Tax Return and any information reporting
requirement.
"Threshold Amount" shall have the meaning set forth in Section
10.05(a) of this Agreement.
"WARN Act(s)" shall mean the Worker Adjustment and Retraining
Notification Act, 29 U.S.C. Section 2101 et seq., and its corresponding
regulations, and any similar applicable state law, rule or regulation or
local ordinance, rule or regulation providing for notification to employees
affected by closing, relocation, sale of a business, mass layoff or similar
event.
ARTICLE III
STOCKHOLDERS' MEETING AND PROXY STATEMENT
SECTION 3.01 Stockholders' Meeting. The Company, acting through its Board
of Directors (the "Board"), will, in accordance with applicable law and the
Company's charter and bylaws, duly call, give notice of, convene and hold a
special meeting (including any adjournment or postpone-
19
98
ment thereof, the "Special Meeting") of its stockholders no later than 20
Business Days after the mailing of the Company's Proxy Statement for the purpose
of considering and taking action upon the approval of this Agreement and the
transactions contemplated hereby (it being agreed that the Company's election to
hold a Special Meeting is not an acknowledgment that such approval is required
under applicable law). The Board shall recommend such approval by the
stockholders and shall use commercially reasonable, to the extent lawful,
efforts to obtain such approval by its stockholders.
SECTION 3.02 Proxy Statement. In connection with any such Special Meeting,
the Company will (i) as promptly as practicable following the date of this
Agreement, prepare and file (subject to the requirements of Section 6.05(b)
herein) with the Securities and Exchange Commission ("SEC"), and use its
commercially reasonable efforts to have cleared by the SEC and thereafter mail
to its stockholders as promptly as practicable, a proxy statement and a form of
proxy, in connection with the vote of the Company's stockholders with respect to
this Agreement and the transactions contemplated hereby (such proxy statement,
together with any amendments thereof or supplements thereto, in each case in the
form or forms mailed to the Company's stockholders, is herein called the "Proxy
Statement"), (ii) use its commercially reasonable efforts to obtain the
necessary approvals by its stockholders of this Agreement and the transactions
contemplated hereby and (iii) otherwise comply with all legal requirements
applicable to the Special Meeting. The Company will include in the Proxy
Statement the recommendation of its Board that stockholders of the Company vote
in favor of the approval of this Agreement and the Ancillary Agreements and the
transactions contemplated hereby and thereby. The Proxy Statement will comply as
to form with all applicable requirements of the Securities Exchange Act of 1934,
as amended, and the rules promulgated thereunder, and will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements made not materially
misleading. The Company will: (i) promptly notify Buyer of the receipt of SEC
comments pertaining to the Proxy Statement and respond to such SEC comments as
promptly as practicable, as well as provide to Buyer copies of all pertinent
correspondence with the SEC pertaining to the Proxy Statement, and (ii) promptly
notify Buyer when the Proxy Statement has been cleared by the SEC.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Schedule delivered to Buyer
by the Company prior to the execution of this Agreement with section and
paragraph references corresponding to this Article IV (it being understood (i)
that no such disclosure will result in the assumption by Buyer of any liability
not otherwise expressly assumed hereunder and (ii) the inclusion of any item on
such Company Disclosure Schedule shall not be deemed to be an admission that
such item was required to be set forth on the Company Disclosure Schedule), the
Company represents and warrants to Buyer, on behalf of itself and, where
applicable, on behalf of the Selling Subsidiaries, as follows (the date as to
which the information set forth in any Section of the Company Disclosure
Schedule is true and correct is the date hereof as to the representations and
warranties made at signing, and the Closing Date as to the supplements to be
provided at Closing under the provisions of Section 6.13 (in each case,
representations and warranties that expressly speak only as of a specific date
or time need only be true and correct as of such date and time, and where a
specific date, as mutually agreed upon by the parties, is set forth in any
particular Section of the Company Disclosure Schedule such information need only
be true and correct as of the date and time set forth in the Section of the
Company Disclosure Schedule or in any supplement to the Company Disclosure
Schedule)).
SECTION 4.01 Organization. Each of the Company and the Selling
Subsidiaries is a corporation, industrial loan corporation or national banking
association, as set forth in Section 4.01 of the
20
99
Company Disclosure Schedule, duly organized and validly existing under the laws
of the jurisdiction of its formation or a banking organization duly chartered by
its chartering authority. Each of the Company and the Selling Subsidiaries is
duly qualified as a foreign corporation to conduct the Business in the states of
the United States and any foreign jurisdictions where its ownership or leasing
of the Assets used in the conduct of the Business or the Assets of the Business
requires it to be so qualified other than those where the failure to be so
qualified could in the aggregate be remedied without material cost or liability.
SECTION 4.02 Corporate Power, Authority Relative to this Agreement. Each
of the Company and the Selling Subsidiaries has full power and authority to
carry on its business as it is now being conducted and to own, use and/or lease
all of the Assets used in the conduct of the Business and to conduct the
Business in the manner currently conducted by it. The Company has full corporate
power and authority to execute and deliver this Agreement and the Ancillary
Agreements and, upon approval of the sale of the Assets contemplated by this
Agreement by the holders of Shares representing a majority of the votes entitled
to be cast by holders of the Class A Shares and Class A Preferred Shares, voting
together as a single class, as required to satisfy the conditions set forth in
Sections 8.01(i) and 8.02(j) (subject to the last parenthetical clause in the
penultimate sentence of Section 3.01), to consummate the transactions
contemplated hereby and thereby and to perform its obligations hereunder and
thereunder, including, without limitation, causing the Selling Subsidiaries to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Ancillary Agreements and the consummation of
the transactions contemplated hereby and thereby have been duly and validly
authorized by the Board and no other corporate proceedings on the part of the
Company or any Selling Subsidiary are necessary to authorize the execution,
delivery or performance of this Agreement and the Ancillary Agreements or to
consummate the transactions contemplated hereby and thereby other than (subject
to the last parenthetical clause in the penultimate sentence of Section 3.01)
the approval of this Agreement and the transactions contemplated hereby by the
holders of Shares representing a majority of the votes entitled to be cast by
holders of Class A Shares and Class A Preferred Shares, voting together as a
single class. This Agreement has been duly and validly executed and delivered by
the Company and, assuming this Agreement has been duly authorized, executed and
delivered by Buyer, this Agreement constitutes, and upon the execution and
delivery by the Company of the Ancillary Agreements, they will constitute, a
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except that (i) enforcement may be subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws, now or hereafter in effect, affecting creditors' rights generally and (ii)
the remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
SECTION 4.03 Conduct of Business. Between September 30, 2000 and the date
hereof, the Company and each of the Selling Subsidiaries has conducted the
Business in the Ordinary Course of Business, subject to and in conformity with
the Regulatory Agreements. The Company has maintained the business books and
records of the Business in a manner sufficient to permit the preparation of
financial statements of the Business in accordance with GAAP. Without limiting
the foregoing, except as set forth in the applicable Section of the Company
Disclosure Schedule, other than in the Ordinary Course of Business, there has
not occurred, between September 30, 2000 and the date hereof, any of the
following:
(i) (x) any increase in the salary, wages or other compensation of any
Employee whose annual salary is, or after giving effect to such change
would be, $75,000 or more; (y) any establishment or modification of (A)
targets, goals, pools or similar provisions in respect of any fiscal year
under any employee benefit plan or any employment-related Employee contract
or other compensation arrangement with or for Employees or (B) salary
ranges, salary increase guidelines or similar provisions in respect of any
employee benefit plan or any employment-related Employee contract or other
compensation arrangement with or for Employees; or
21
100
(z) any adoption, entering into or becoming bound by any employee benefit
plan or collective bargaining agreement, or amendment, modification or
termination (partial or complete) of any Company Employee Benefit Plan or
collective bargaining agreement, except to the extent required by
applicable law;
(ii) to the Knowledge of the Company and the Selling Subsidiaries, any
physical damage, destruction or other casualty loss (whether or not covered
by insurance) affecting any of the real or personal property or equipment
of the Company that is included in the Assets and used or held for use in
the conduct of the Business in any single occurrence exceeding $100,000 or
in an aggregate amount exceeding $250,000;
(iii) any material change in (A) any practice or policy of the
Business relating to: pricing of residential mortgage loan products,
accounting, financial reporting, mortgage loan inventory, mortgage loan
credit policy, reserves, allowance for losses or Tax practices; or (B) any
method of calculating the allowance for losses or reserves of the Business
for accounting, financial reporting or Tax purposes, as applicable;
(iv) other than the sale of REO and receivables of bankrupt
mortgagors: (A) any disposition of any Assets used or held for use in the
conduct of the Business, exceeding $100,000 in the aggregate; or (B) any
creation or incurrence of a Lien, other than a Permitted Lien, on any
Asset;
(v) any entering into, amendment, modification, termination (partial
or complete) or granting of a waiver of a material term or condition under
or giving any consent to a material term or condition with respect to any
Material Company Contracts or Significant Company Contracts;
(vi) capital expenditures or commitments for additions to property,
plant or equipment used or held for use in the conduct of the Business
constituting capital assets which are includible in the Assets in an
aggregate amount exceeding $100,000; and
(vii) any entering into of a contract to do or engage in any of the
foregoing after the date hereof.
SECTION 4.04 Loan Servicing Matters.
(a) Servicing Agreements. Except as set forth in Section 4.04(a) of the
Company Disclosure Schedule, all of the contracts and agreements pursuant to
which the Company or any Selling Subsidiary has the right and/or obligation to
service or subservice mortgage loans which are part of the Company Contracts
(each, a "Servicing Agreement"), are (i) valid and binding obligations of the
Company or the Selling Subsidiary as applicable, and to its Knowledge, of all of
the other parties thereto, (ii) in full force and effect, (iii) enforceable in
accordance with their terms (except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and subject to general
principles of equity), and (iv) neither the Company nor any Selling Subsidiary
has received written or other formal notice within the five year period prior to
the date hereof or the Closing Date, as applicable, alleging a material default
which remains uncured (or with the giving of such notice or lapse of time or
both, would be in default) under any Servicing Agreement. Except as set forth in
Section 4.04(a) of the Company Disclosure Schedule, no Servicing Agreement
contains any provisions providing for servicing under which any party has
recourse against the Company or any Selling Subsidiary for losses relating to
such servicing (other than losses caused by the Company's or a Selling
Subsidiary's negligence), except to the extent the Company or any Selling
Subsidiary holds a residual interest in any securitization that may be affected
by such losses (which interests have been disclosed to Buyer in Section 4.04(a)
of the Company Disclosure Schedule) and no Servicing Agreement pertains to
servicing of mortgage loans owned by FNMA, FHMC, or other governmental agency.
22
101
(b) Insurance. Except as set forth in Section 4.04(b) of the Company
Disclosure Schedule, within the three year period prior to the date hereof or
the Closing Date, as applicable, if any Servicing Agreement obligated any of the
Company or any Selling Subsidiary as servicer or subservicer to maintain
insurance with respect to any mortgage loan that is an Asset, such entity has
complied with all material obligations under all applicable required insurance,
including, without limitation, any private mortgage insurance (as defined in the
federal Homeowners Protection Act of 1998), and any fire, hazard or other
casualty insurance. Each such insurance policy placed by the Company or the
Selling Subsidiaries, at all times during such three year period to the extent
required under the applicable Servicing Agreement (i) is valid and binding and
in full force and effect, (ii) no premiums due thereunder were not paid and
(iii) neither the Company nor any Selling Subsidiary received, within the three
year period prior to the date hereof or the Closing Date, as applicable, any
written notice of cancellation or termination in respect of any such policy,
except to the extent that any such failure under clauses (i), (ii) or (iii) has
been cured or otherwise corrected. Except as set forth in Section 4.04(b) of the
Company Disclosure Schedule, to the extent required under the applicable
Servicing Agreement, insurance policies are with insurers who meet the
applicable requirements of the applicable Servicing Agreement and are in amounts
and had coverages that are in compliance with such applicable requirements in
all material respects, except where such failure has been cured or otherwise
corrected. Except as set forth in Section 4.04(b) of the Company Disclosure
Schedule, during the three year period prior to the date hereof or the Closing
Date, as applicable, neither the Company nor any Selling Subsidiary received any
written notice that any insurer under any policy referred to in this Section
4.04(b) is denying liability with respect to a material claim thereunder or
defending a material claim under a reservation of rights clause, or demanding
indemnification from the Company or any Selling Subsidiary with respect to a
material claim.
(c) Escrow Accounts. Except as set forth in Section 4.04(c) of the Company
Disclosure Schedule, during the two year period prior to the date hereof or the
Closing Date, as applicable, with respect to any mortgage loan that is an Asset
of the Business and is serviced by any of the Company or a Selling Subsidiary,
if the applicable Servicing Agreement obligated such Person to maintain escrow
funds for the payment of taxes or insurance with respect to the mortgage loan,
all required escrow accounts maintained by such Person have been created and
administered in all material respects in accordance with the related mortgage
loan documents and the applicable Servicing Agreement in each case as in effect
and as judicially interpreted when the escrow account was established, except to
the extent that any such failure has been cured or otherwise corrected.
SECTION 4.05 Securitization Matters.
(a) (i) Neither the Company or any of its Affiliates nor, to the Company's
Knowledge, any trustee or issuer with respect to any mortgage loan
securitization transaction in which the Company or any of its Affiliates was the
issuer (a "Company-Sponsored Mortgage Loan Securitization Transaction"), has
taken any action which would reasonably be expected to materially adversely
affect the characterization or tax treatment for federal, state or local income
or franchise tax purposes of the issuer or any securities issued in any such
Company-Sponsored Mortgage Loan Securitization Transaction; and (ii) all
federal, state and local income or franchise tax and information returns
required to be filed by the issuer relating to (A) any Company-Sponsored
Mortgage Loan Securitization Transactions that are REMICs and (B) the securities
issued by the Company-Sponsored Mortgage Loan Securitization Transactions that
are not REMICs, have been properly filed.
(b) No rating agency has downgraded, or given the Company or any Selling
Subsidiary any written or other formal notice that it is considering a
downgrading of any securities issued in any Company-Sponsored Mortgage Loan
Securitization Transaction.
(c) Except as set forth in Section 4.05(c) of the Company Disclosure
Schedule, neither the Company nor any of its Affiliates nor, to the Company's
Knowledge, any trustee or issuer with
23
102
respect to any Company-Sponsored Mortgage Loan Securitization Transaction, has
received any written or formal notice from any investor, underwriter or other
Person within the five-year period prior to the date hereof or the Closing Date,
as applicable, alleging a material default or violation with respect to any
Company-Sponsored Mortgage Loan Securitization Transaction which remains uncured
(or with the giving of such notice or lapse of time or both, would be a material
default) under any such Company-Sponsored Mortgage Loan Securitization
Transaction.
SECTION 4.06 Consents and Approvals; No Violation. Except as set forth in
Section 4.06 of the Company Disclosure Schedule, neither the execution, delivery
and performance of this Agreement or the Ancillary Agreements by the Company or
any Selling Subsidiary nor the consummation of the transactions contemplated
hereby and thereby by the Company or any Selling Subsidiary will (i) conflict
with or result in any breach or violation of any provision of the respective
charter or bylaws (or other similar governing documents) of the Company or any
of the Selling Subsidiaries; (ii) require the Company or any Selling Subsidiary
to obtain any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority or body, except (A) in
connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), if applicable, (B) pursuant to the Securities Exchange
Act of 1934, as amended, and the rules and requirements of the National
Association of Securities Dealers, Inc., (C) approval of Bank Authorities and
(D) approval of state insurance departments, if applicable; (iii) conflict with
or result in a material breach or violation of or a material default under (or
require any consent of or notice to any Person) or give rise to any Lien, right
of termination, unilateral modification or amendment, cancellation or
acceleration with respect to any Material Company Contract, except for any such
material breaches, violations or defaults (or Liens or rights of termination,
unilateral modifications or amendments, cancellations or accelerations) as to
which requisite waivers or consents are required to be obtained prior to the
Closing pursuant to the provisions of this Agreement or which individually or in
the aggregate would not have a material adverse effect on the Assets (taken
individually or as a whole); or (iv) violate any order, decree, judgment,
ordinance, statute, rule, law or regulation applicable, except for violations
which would not individually or in the aggregate have a material adverse effect
on the Assets (taken individually or as a whole).
SECTION 4.07 Litigation. Except as disclosed in Section 4.07 of the
Company Disclosure Schedule (which Section contains a complete list of all
pending litigation as to which the Company or a Selling Subsidiary has received
service of the applicable complaint or written or other formal notice that a
complaint has been filed, no litigation, claim, action or arbitration, pending
against or, to the Knowledge of the Company, threatened against the Company or
any of the Selling Subsidiaries with respect to the Business, the Assets, or
relating to any residential mortgage loan serviced by the Company or any Selling
Subsidiary pursuant to any Servicing Agreement, before any court or governmental
or regulatory authority or body acting in an adjudicative capacity (in each case
of competent jurisdiction) in effect, which would reasonably be expected to
result in the issuance of an order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of the transactions contemplated
by this Agreement or any of the Ancillary Documents or otherwise would
reasonably be expected to result in the issuance of equitable relief by a court
of competent jurisdiction in effect that would materially adversely impact the
operation of the Business as it is currently operated or result in material
Losses to the book value of the Assets (taken individually or as a whole).
SECTION 4.08 Title to Assets; Encumbrances. The Company or one of the
Selling Subsidiaries, as applicable, is in possession of and has good title to
or a valid leasehold interest in, or is licensed or otherwise entitled to use,
all of the Assets (excluding the Business real property and the Business leased
properties, as to which Section 4.13 is applicable, REO Property, and the
Company Intellectual Property, as to which Section 4.10 is applicable),
reflected in the September 30, 2000 Balance Sheet of the Business attached
hereto as Exhibit B, other than any of such Assets thereafter disposed of in the
Ordinary Course of Business, free and clear of all security interests,
mortgages,
24
103
pledges, monetary liens, conditional sales agreements, leases or encumbrances
(each, a "Lien"), except for Permitted Liens. Except as disclosed in Section
4.08 of the Company Disclosure Schedule, the tangible Assets are in a condition
which is adequate to operate the Business as currently operated.
SECTION 4.09 Licenses. The material permits, licenses, authorizations,
orders and approvals set forth in Section 4.09 of the Company Disclosure
Schedule ("Business Licenses") constitute all Business Licenses used or held for
use by the Company or any Selling Subsidiary and necessary for the operation of
the Business, as presently conducted by the Company or any Selling Subsidiary
and Section 4.09 of the Company Disclosure Schedule sets forth the parties,
functions and expiration and renewal dates for such Business Licenses. The
Company and each of the Selling Subsidiaries, as applicable, has all permits,
licenses, authorizations, orders and approvals of all governmental authorities
that are material to owning and leasing the properties comprising the Assets
used by the Company and the Selling Subsidiaries in the Business and material to
conducting the Business as presently conducted by the Company and the Selling
Subsidiaries.
SECTION 4.10 Patents, Trademarks, Trade Names, and Copyrights.
(a) "Company Intellectual Property" means any registered or unregistered
patent, patent application, copyright, copyright registration, trademark or
service mark, trademark or service mark registration or application or trade
name, business or product name, trade secret, Model, process, design, Company
owned computer program (including all source codes and related documentation in
Company's possession relating to such computer program), necessary to conduct
the Business as presently conducted by the Company and the Selling Subsidiaries.
Company Intellectual Property shall not include any of the foregoing to the
extent incorporating the word "ADVANTA," "Advanta," or the "Val" logo.
(b) The Company or a Selling Subsidiary has all right, title and interest
in or valid and binding rights under contract to use all Company Intellectual
Property. There are no (1) copyrights; (2) trademarks; or (3) patents that are,
in each case, Federally registered or the subject of pending applications for
Federal Registration, other than those set forth on Section 4.10(b) of the
Company Disclosure Schedule, reasonably necessary to or used in connection with
the conduct of the Business as presently conducted, except for those rights
which are the subject of the Advanta Service Mark License and Domain Name Usage
Agreement or referred to in Section 6.18(c) and other rights that are not
individually or in the aggregate material to the operation of the Business as
presently conducted. All of the registered copyrights, trademarks and patents
that are Company Intellectual Property and all Models are collectively set forth
in Sections 4.10(b) and 4.10(b).1, respectively, of the Company Disclosure
Schedule.
(c) Except as disclosed in Section 4.10(c) of the Company Disclosure
Schedule, all rights to the Company Intellectual Property:
(1) set forth in Section 4.10(b) of the Company Disclosure Schedule
have been duly registered in, filed in, or issued by the United States
Patent and Trademark Office or any other applicable office, or applications
to register such Company Intellectual Property have been filed and are
pending;
(2) set forth in Section 4.10(b) of the Company Disclosure Schedule
have been properly maintained and renewed in accordance with applicable
laws and regulations in the United States and are in full force and effect;
(3) are owned by the Company or the Selling Subsidiaries, as the case
may be, free and clear of any Liens, such that, no other person has any
right or interest in or license to use or right to license others to use
any of the Company Intellectual Property;
(4) are freely transferable; and
25
104
(5) are not, as of the date hereof or the Closing Date, as applicable,
subject to any outstanding order, decree, judgment or stipulation.
Except as set forth in Section 4.10(b) of the Company Disclosure Schedule, none
of the Company and the Selling Subsidiaries has received any written or other
formal notice that it is in default (or with the giving of notice or lapse of
time or both, would be in default) in any material respect under any contract to
use such Company Intellectual Property which default would be reasonably
expected to result in a material adverse effect on the Assets (taken
individually or as a whole) or the operation of the Business as presently
conducted.
(d) Except as disclosed in Section 4.10(d) of the Company Disclosure
Schedule (i) no proceedings to which the Company is a party have been commenced
and are still in effect against the Company or any Selling Subsidiary which (x)
challenge the rights of the Company or the Selling Subsidiaries to use any
material Company Intellectual Property, or (y) charge the Company or the Selling
Subsidiaries with infringement of any other person's rights in any material
Company Intellectual Property; and (ii) neither the Company nor any of the
Selling Subsidiaries has received any written or other formal notice during the
two year period prior to the date hereof or the Closing Date, as applicable,
that any such proceeding is threatened to be filed.
(e) No director, officer or employee of the Company or the Selling
Subsidiaries owns, directly or indirectly, in whole or in part, any material
Company Intellectual Property right; and to the Knowledge of the Company or the
Selling Subsidiaries, no director, officer or employee of the Company or the
Selling Subsidiaries owns, directly or indirectly, in whole or in part, any
other Company Intellectual Property right.
SECTION 4.11 Company Contracts.
(a) Section 4.11(a) of the Company Disclosure Schedule (with paragraph
references corresponding to those set forth below) contains a true and complete
list of each of the following contracts or other arrangements relating to the
Business as currently operated to which the Company or any Selling Subsidiary is
a party or by which any of the interests of the Company and the Selling
Subsidiaries in the Assets are bound and which are set forth on Annex A to
Schedule 1 with respect to the following:
(i) all Company Contracts with any Person (x) containing any provision
or covenant prohibiting or limiting the ability of the Company or any
Selling Subsidiary to engage in the Business as presently conducted or
compete with any Person in connection with the Business as presently
conducted or (y) prohibiting or limiting the ability of any Person to
compete with the Company or any Selling Subsidiary in connection with the
Business as presently conducted, in the case of both (x) and (y), to the
extent that any such provisions would be binding upon, or enforceable
against, Buyer in its operation of the Business after Closing;
(ii) all partnership, joint venture, shareholders' or other similar
Company Contracts entered into by the Company and/or the Selling
Subsidiaries with any Person in connection with the Business;
(iii) all Company Contracts pursuant to which the Company or a Selling
Subsidiary is obligated to consummate a transaction or series of
transactions relating to the future disposition or acquisition of any
Assets with a book value of more than $100,000, other than dispositions or
acquisitions of Assets in the Ordinary Course of Business; and
(iv) all other contracts with respect to the Business that (A) require
the payment, pursuant to the terms of any such contract, by the Company or
any Selling Subsidiary of more than $25,000 annually and (B) cannot be
terminated within 30 days after giving notice of termination, without
resulting in any material cost or penalty to the Company or any Selling
Subsidiary.
26
105
(b) Except as disclosed in Section 4.11(b) of the Company Disclosure
Schedule, each of the Company and the Selling Subsidiaries has complied in all
material respects with all of the material provisions of the Material Company
Contracts and Significant Company Contracts required to be complied with by it
and, neither the Company nor any of the Selling Subsidiaries has received
written or other formal notice of any material default (or with the giving of
such notice or lapse of time or both, would be a material default) thereunder,
which default has not been cured or otherwise corrected, and there is no
outstanding written or other formal notice of material default (or with the
giving of notice or lapse of time or both, would be a material default) or early
termination under any Material Company Contracts and Significant Company
Contract that was received (with the exception of the Servicing Agreements and
the agreements relating to the Company-Sponsored Mortgage Loan Securitization
Transactions, for which the time period shall be the five-year period prior to
the date hereof) by the Company or any Selling Subsidiary within the two-year
period prior to the date hereof or the Closing Date, as applicable, and which
non-compliance, default or notice of early termination has not been cured or
otherwise corrected, except where such noncompliance, defaults or terminations
would not be reasonably expected to have a material adverse effect on the Assets
(taken individually or as a whole).
(c) Except with respect to the Buyer Contracts, as to which no
representation is made by the Company in this paragraph, and subject to the
provisions of Section 4.11(b) above, except as disclosed in Section 4.11(c) of
the Company Disclosure Schedule each Material Company Contract and Significant
Company Contract is in full force and effect and, constitutes a legal, valid and
binding agreement, enforceable in all material respects in accordance with its
terms as to the Company and/or the applicable Selling Subsidiaries, and to the
Knowledge of the Company as to each other party thereto, subject to the effect
of bankruptcy, insolvency and similar laws and general equitable principles.
SECTION 4.12 Environmental Matters. Except as disclosed in Sections
4.12(b)(1) through (b)(7) of the Company Disclosure Schedule:
(a) For purposes of this Section 4.12, the following terms shall have
the following meanings: (i) the term "Hazardous Material" shall mean any
material, waste or substance including, without limitation, petroleum or
petroleum products that, whether by their nature or use, are subject to
control or regulation under any Environmental Requirement excluding such
materials, wastes or substances that are generated, used, stored,
transported, discharged, disposed or released in the normal operation of
the Business or the Assets in compliance with applicable Environmental
Requirements; (ii) the term "Environmental Requirement" shall collectively
mean the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (42 U.S.C. Section 9601, et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Section 1801, et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.), the Toxic
Substances Control Act (15 U.S.C. Section 2601, et seq.), the Clean Air Act
(42 U.S.C. Section 7401, et seq.) and the Federal Water Pollution Control
Act (33 U.S.C. Section 1251, et seq.), any regulation pursuant thereto, or
any other law, order or regulation addressing environmental, health or
safety issues of or by any governmental authority; and (iii) the term
"governmental authority" shall mean the Federal government, or any state or
other political subdivision thereof with jurisdiction over the
environmental conduct or conditions of the Business or the Assets, or any
agency, court or body of the Federal government, any state or other
political subdivision thereof, exercising executive, legislative judicial,
regulatory or administrative functions.
(b) The representations contained in this Section 4.12(b) relate only
to real property Assets (other than REO Property) which are used or held
for use in the Business by the Company or a Selling Subsidiary and with
respect to which a lease for such property is being assumed or entered into
by Buyer under this Agreement. The Company and the Selling Subsidiaries
have obtained all Business Licenses which are required under applicable
Environmental Requirements in connection with their conduct of the Business
as presently conducted
27
106
or their present use or occupancy of the real property Assets described in
the prior sentence in their operation of the Business as presently
conducted, and each of any such Business Licenses is in full force and
effect. The Company has conducted the Business in compliance in all
material respects with the terms and conditions of all such Business
Licenses and with any applicable Environmental Requirements. In addition,
except as set forth in Section 4.12(b) of the Company Disclosure Schedule
(with paragraph references corresponding to those set forth below):
(1) Neither the Company nor any Selling Subsidiary has received any
written or other formal notice of the issuance of an order, the filing
of an environmental claim, or the assessment of a penalty and, to the
Knowledge of the Company, no investigation is pending against the
Company or any Selling Subsidiary, in each of the foregoing cases, with
respect to any alleged and unremedied failure by the Company or any
Selling Subsidiary to have any such Business License required under
applicable Environmental Requirements in connection with the conduct of
the Business or with respect to any generation, treatment, storage,
recycling, transportation, discharge, disposal or release of any
Hazardous Material in connection with the operation by the Company and
the Selling Subsidiaries of the Business, and to the Knowledge of the
Company and the Selling Subsidiaries there are no facts or circumstances
in existence which could reasonably be expected to form the basis for
any such order, claim, penalty or investigation.
(2) Neither the Company nor any Selling Subsidiary currently (or
within the last two years) owns, operates or leases a treatment, storage
or disposal facility on any of such real property Assets described above
requiring a permit under the Resource Conservation and Recovery Act, as
amended, or under any other comparable state or local law; and, without
limiting the foregoing, to the Company's Knowledge with respect to the
real property Assets described above (i) no polychlorinated biphenyl is
now present, (ii) there are no asbestos or asbestos-containing materials
now present, (iii) there are no underground storage tanks or surface
impoundments for Hazardous Materials, active or abandoned, is now
present and (iv) no Hazardous Material has been released in a quantity
reportable under, or in violation of, any Environmental Requirement, at,
on or under any such real property Asset during any period that the
Company or a Selling Subsidiary owned, operated or leased such property.
(3) Neither the Company nor any Selling Subsidiary has within the
last two years, received written or other formal notice that it has
transported or arranged for the transportation of any Hazardous Material
in connection with the operation of the Business to any location that is
(i) listed on the NPL under CERCLA, (ii) listed for possible inclusion
on the NPL by the Environmental Protection Agency in CERCLIS or on any
similar state or local list or (iii) the subject of enforcement actions
by federal, state or local governmental authorities that may lead to
claims against the Company or a Selling Subsidiary or the Business.
(4) To Company's Knowledge, no Hazardous Material generated in
connection with the operation of the Business has been recycled,
treated, stored, disposed of or released by the Company or a Selling
Subsidiary at any location in violation of any applicable Environmental
Requirement.
(5) No written or other formal notification of a release of a
Hazardous Material in connection with the operation of the Business has
been filed by or on behalf of the Company or a Selling Subsidiary within
the two years prior to the date hereof or the Closing Date, as
applicable, and no written or other formal notice has been received by
the Company or any Selling Subsidiary within the last two years, that
any of the real property Assets described above is listed or proposed
for listing on the NPL, CERCLIS or any similar state or local list of
sites requiring investigation or clean-up.
28
107
(6) Within the two years prior to the date hereof or the Closing
Date, as applicable, no Liens have arisen under or pursuant to any
Environmental Requirement (and none are currently outstanding) on the
real property Assets described above, and no federal, state or local
governmental or authority action has been taken within the last two
years or, is in process that would subject any such real property Assets
to such Liens. There are no conditions on such real property Assets that
would require the Company and the Selling Subsidiaries to place any
notice or restriction relating to the presence of Hazardous Materials at
any such real property Asset in any deed to the real property Asset.
(7) There have been no written environmental reports, studies,
audits or tests that are in the possession of the Company or a Selling
Subsidiary in relation to such real property Assets which have not been
disclosed to Buyer in Section 4.12 (b)(7) of the Company Disclosure
Schedule prior to the execution of this Agreement.
SECTION 4.13 Real Property.
(a) Section 4.13(a) of the Company Disclosure Schedule lists all real
property owned by the Company or any of the Selling Subsidiaries (other than REO
Property) which is used by the Company or a Selling Subsidiary in the operation
of the Business as presently conducted and which real property (the "Ridgeview
Property") is intended to be leased to Buyer at Closing pursuant to a lease in
the form of the lease attached hereto and made a part hereof as Exhibit G (the
"Ridgeview Lease"). With respect to the Ridgeview Property:
(1) except as set forth in Section 4.13(a)(1) of the Company
Disclosure Schedule, the identified owner has good and marketable title to
the Ridgeview Property, free and clear of any Lien except for Permitted
Liens and those matters of record set forth on Section 4.13(a)(1) of the
Company Disclosure Schedule and in the title commitments and policies to
the Ridgeview Property, and has the power and authority to lease the
Ridgeview Property to Buyer, subject to Permitted Liens;
(2) except as set forth in Section 4.13(a)(2) of the Company
Disclosure Schedule, other than the Permitted Liens, there are no leases,
subleases, licenses, concessions, or other agreements granting to any party
or parties the right of use or occupancy of any portion of the Ridgeview
Property (except those between and among the Company, one or more Selling
Subsidiaries and their respective Affiliates which will be terminated on or
before the Closing Date); and
(3) except as set forth in Section 4.13(a)(3) of the Company
Disclosure Schedule, there are no outstanding options or rights of first
refusal to lease the Ridgeview Property, or any portion thereof or interest
therein.
(b) Section 4.13(b) of the Company Disclosure Schedule lists all leases of
real property currently leased or subleased to the Company or any of the Selling
Subsidiaries and included in the Company Contracts. Each lease and sublease
listed in Section 4.13(b) of the Company Disclosure Schedule (to the extent such
lease or sublease is included in the Assets) is in all material respects valid,
binding and enforceable against the Company or the Selling Subsidiaries which
are parties thereto and, to the Knowledge of the Company, against the other
parties thereto, and is in full force and effect, subject to bankruptcy,
reorganization and similar laws and general equitable principles. During the
two-year period prior to the date hereof or the Closing Date, as applicable, the
Company and the Selling Subsidiaries have not received any written or other
formal notice of any material default (or with the giving of notice or lapse of
time or both, would be a material default) under any of the leases or subleases
set forth in Section 4.13(b) of the Company Disclosure Schedule which has not
been cured or otherwise corrected.
(c) Section 4.13(c) of the Company Disclosure Schedule lists all
maintenance, service, food service and similar contracts relating to the
Ridgeview Property.
29
108
SECTION 4.14 Employees and Benefit Plans.
(a) Employees.
(1) For purposes of the Agreement, "Employees" shall have the meaning
set forth in Section I of Section 4.14(a)(1) of the Company Disclosure
Schedule. Section 4.14(a)(1) of the Company Disclosure Schedule sets forth
a complete and accurate list of all Employees, together with the following
information for each such Employee: name; position held; current salary and
salary grade; 2000 anticipated salary increase, including date and specific
anticipated amount of the increase; official title; 1999 salary and 2000
salary paid to the last month prior to Closing; 1998 and 1999 bonus and
commission amounts (if any); 1999 and 2000 (anticipated) annual bonus and
long-term incentive payments (if any) (including, with respect to stock
options or grants, the number of shares covered by such options and the
exercise price); Fair Labor Standards Act status; date of hire; schedule of
regular weekly hours of employment; year to date overtime; shift
differential (if any); annual vacation entitlement; accrued, but unused
vacation; service date for employee benefit plan purposes; whether the
Employee is employed based upon an employer sponsored non-resident visa
program; restrictions or special work arrangements, as requested in writing
by Buyer prior to Closing; social security number; work locations; and any
other information Buyer may reasonably request. Section 4.14(a)(1) of the
Company Disclosure Schedule indicates Employees who are Inactive Employees
as of the date thereof and, to the extent known as of the date thereof, the
date on which each Inactive Employee is expected to return to active
employment.
(2) Except as set forth in Section 4.14(a)(2) of the Company
Disclosure Schedule, none of the Employees have contracts of employment
with the Company or any of its Affiliates. All Employees are employed
"at-will," and their employment is terminable by the Company or an
Affiliate, as applicable, without liability therefor (other than liability
for severance payments or for retention bonuses or stay payments). Except
as described in Sections 4.14(a)(2) and 4.11(a)(i)(y) of the Company
Disclosure Schedule, as of the date set forth therein, none of the
Employees have outstanding contracts or other agreements with the Company
or any of its Affiliates relating to retention bonuses or offer letters
providing for retention bonuses or stay payments, commissions,
compensation, monetary or vacation awards, non-compete provisions or
agreements, perquisites (e.g., club memberships), stock options or warrants
or other similar benefits to Employees.
(3) The Company has not received any notification of any material
impediment to the employment of the Employees under applicable laws and is
not otherwise aware of any such material impediment.
(4) Except as set forth in Section 4.14(a)(4) of the Company
Disclosure Schedule, none of the Employees are working based upon an
employer sponsored non-resident visa and all Employees are authorized to
work in accordance with the Immigration and Reform Control Act ("IRCA").
(5) To the Company's Knowledge, the Company and its Affiliates have
each complied in all material respects with the requirements of Executive
Order 11246.
(6) Except as set forth on Section 4.14(a)(6) of the Company
Disclosure Schedule, no Employees are under any currently outstanding
written disciplinary actions (namely, either formal written warnings or
early performance alerts) for an action or inaction that constitutes a
violation of the Company's Code of Conduct.
(7) None of the Employees are subject to any union or other collective
bargaining agreement.
30
109
(8) Any notices required to be given by the Company pursuant to COBRA
or WARN Acts have been given or will be given by the Company by the time
required in such laws so as to comply with the Company's obligations
thereunder.
(b) Employee Benefit Plans.
Section 4.14(b) of the Company Disclosure Schedule sets forth a true
and complete list of all the employee benefit plans of the Company and its
Affiliates as defined by Section 3(3) of ERISA, all deferred compensation,
stock based compensation and incentive compensation plans and all
nonqualified plans (the "Company Employee Benefit Plan(s)"). The Company
has made available to Buyer copies of the Company Employee Benefit Plans.
The Company Employee Benefit Plans have each been administered in all
material respects in accordance with their terms and all applicable laws
and regulations, including conduct giving rise to liability under the
prohibited transaction provision of the Code or ERISA. Each Company
Employee Benefit Plan (including, without limitation, the Advanta Employee
Savings Plan -- 401(k)) that is intended to be qualified within the meaning
of Section 401(a) of the Code is qualified and has been determined by the
Internal Revenue Service to be so qualified and nothing has occurred that
would materially adversely affect the qualified status of such plan.
Neither the Company nor any defined benefit plan maintained by the Company
or its ERISA Affiliates has incurred any liability to the Pension Benefit
Guaranty Corporation ("PBGC") or under the Code, except liabilities to the
PBGC pursuant to Section 4007 of ERISA, all of which have been fully paid
as due.
SECTION 4.15 Labor Relations.
(a) With respect to the Business: (i) since September 30, 2000 through the
date hereof and the Closing, there has not been, and there is presently, no
pending or, to the best of the Company's Knowledge, threatened employee strike,
work stoppage or labor dispute; and (ii) to the Knowledge of the Company, no
union representation question with respect to the Employees exists, no
collective bargaining agreement exists or is currently being negotiated by the
Company with respect to the Employees, no demand has been received by the
Company for recognition by a labor organization with respect to the Employees
and none of the Employees is represented by any labor union or organization.
(b) Section 4.15(b) of the Company Disclosure Schedule contains a list of
the name of each Employee of the Business having an annual base salary or wages
of at least $75,000 at the date set forth therein, together with such Employee's
position or function, annual base salary or wages and any incentive or bonus
arrangement with respect to such Employee in effect on such date.
(c) Except as set forth in Section 4.15(c) of the Company Disclosure
Schedule, no unfair labor practice complaint or sex, age, race or other
discrimination claim has been brought during the two year period prior to the
date hereof or the Closing Date, as applicable, against the Company or any
Selling Subsidiary with respect to the conduct of the Business before the
National Labor Relations Board, the Equal Employment Opportunity Commission or
any other governmental or regulatory authority.
SECTION 4.16 No Additional Representations and Warranties. Except as
otherwise set forth in this Agreement, neither the Company nor any of the
Selling Subsidiaries make any representation or warranty whatsoever, express or
implied, as to the Assets or the Business, including, but not limited to, any
representation or warranty as to the merchantability or the transferability of
the Assets, or as to the performance of the Assets or the Business or as to the
fitness of the Assets for any particular purpose, or as to any infringement or
violation of any intellectual property rights by any Asset or any use thereof.
SECTION 4.17 Affiliate Transactions. Except as disclosed in Section
4.17(a) of the Company Disclosure Schedule (i) no officer, director or Affiliate
of the Company or any Selling Subsidiary, other than the Company and the Selling
Subsidiaries, provides or causes to be provided any assets,
31
110
services or facilities used or held for use by the Company and the Selling
Subsidiaries in connection with the Business and (ii) the Company and the
Selling Subsidiaries do not provide or cause to be provided any assets, services
or facilities to any such officer, director or Affiliate used or held for use in
connection with the Business. Except as disclosed in Section 4.17(b) of the
Company Disclosure Schedule, each of the transactions listed in Section 4.17(a)
of the Company Disclosure Schedule is engaged in on an arm's-length basis.
SECTION 4.18 Taxes.
(a) There are no Tax Liens on the Assets except for Liens for real property
taxes not yet due.
(b) The Company has established, in accordance with GAAP, adequate reserves
for the payment of, and will timely pay, all Taxes which are properly payable by
the Company and the Selling Subsidiaries which arise from or with respect to the
Assets and Assumed Liabilities and are incurred in or are attributable to any
Tax period, or portion thereof, ending on the Closing Date, the non-payment of
which would result in a Lien that is not a Permitted Lien on any Asset, or would
result in Buyer becoming liable therefor.
(c) Section 4.18(c) of the Company Disclosure Schedule lists all federal,
state, local and foreign Tax Returns filed with respect to the Assets and
Assumed Liabilities for taxable periods ending after December 31, 1997,
indicates those Tax Returns that have been audited, and indicates those Tax
Returns that are currently the subject of an audit.
SECTION 4.19 Entire Business. The Excluded Assets are excluded from the
Assets to be acquired by Buyer at Closing under this Agreement. The Assets to be
acquired by Buyer at Closing under this Agreement constitute all of the assets
which are necessary for the Company and the Selling Subsidiaries to conduct the
Business as currently operated; provided that the Assets to be acquired by Buyer
at Closing are combined with (a) assets similar to the Excluded Assets and (b)
the services to be provided by the Company and the Selling Subsidiaries under
the Ancillary Agreements.
SECTION 4.20 Disclosure. No representation or warranty contained in this
Agreement, and no statement contained in any Schedule hereto or in any
certificate, list or other writing furnished to Buyer pursuant to any provision
of this Agreement, contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements herein or
therein, in the light of the circumstances under which they were made, not
misleading.
SECTION 4.21 [Intentionally omitted.]
SECTION 4.22 Balance Sheet. Prior to the execution of this Agreement, the
Company has delivered to Buyer the September 30, 2000 balance sheet of the
Business attached hereto as Exhibit B. Except as set forth in the notes thereto
and as disclosed in Section 4.22 of the Company Disclosure Schedule, such
balance sheet was (i) prepared in accordance with the books and records of the
Company and the Selling Subsidiaries and, in accordance with GAAP and consistent
with the Company's past practices, (ii) fairly presents the financial condition
of the Business as of the date thereof, and (iii) was compiled from business
books and records regularly maintained by management and used to prepare the
financial statements of the Company relating to the Business in accordance with
the principles stated therein.
SECTION 4.23 [Intentionally omitted.]
SECTION 4.24 [Intentionally omitted.]
SECTION 4.25 [Intentionally omitted.]
SECTION 4.26 Guarantees. None of the Assumed Liabilities set forth on the
September 30, 2000 balance sheet of the Business or any liabilities relating to
any of the Assets is guaranteed by the Company or any of the Selling
Subsidiaries, except as disclosed in Section 6.17 of the Company Disclosure
Schedule.
32
111
SECTION 4.27 Compliance with Laws. Except as set forth in Section 4.27 of
the Company Disclosure Schedule:
(a) All federal, state, local or foreign laws or regulations,
including usury, truth-in-lending, real estate settlement procedures, equal
credit opportunity, fair lending, fair housing and disclosure laws,
applicable to the operation of the Business by the Company and the Selling
Subsidiaries or to the Assets of the Business (taking into account the
applicability of any law or regulation at the time of the applicable act of
the Company or any Selling Subsidiary and the then current judicial
interpretation thereof) has been complied with by the Company and the
Selling Subsidiaries in all material respects. Each residential mortgage
loan which is part of the Assets was originated and has been serviced, in
all material respects, in accordance with the Applicable Requirements.
(b) There are no ongoing governmental examinations or audits with
respect to the operation of the Business, nor has the Company or any
Selling Subsidiary received written or other formal notice of any such
proposed governmental consumer law compliance examination or audit which
could reasonably be expected to have a material adverse effect on the
Assets (taken individually or as a whole).
(c) The Company and the Selling Subsidiaries are not, nor at any time
within the five years prior to the date hereof or the Closing Date, as
applicable, has any of them been, nor has any of them received any written
or other formal notice that, within the five years prior to the date hereof
or the Closing Date, as applicable, it is or has been, in violation of or
in default under, in any material respect, any law, regulation,
pronouncement having the effect of law, judgment, injunction or order
applicable to the Business or the Assets which could reasonably be expected
to have a material adverse effect on the Assets (taken individually or as a
whole). The Company and the Selling Subsidiaries have, and have not at any
time during the five years prior to the date hereof or the Closing Date, as
applicable, received written or other formal notice that they have not,
complied in all material respects with Applicable Requirements, except to
the extent that the failure to be in compliance would not have a material
adverse effect on the Assets (taken individually or as a whole).
SECTION 4.28 Tape. Seller has previously delivered to Buyer a magnetic
computer tape (the "Tape") containing certain information regarding the
residential mortgage loans serviced by the Company or the Selling Subsidiaries
as of June 30, 2000. As of that date, the information contained in the fields of
such Tape set forth in Section 4.28 of the Company Disclosure Schedule (i) was
true and correct in all material respects and (ii) was a true and correct copy
of the information relating thereto contained in the loan servicing systems of
the Company and the Selling Subsidiaries as of such date.
SECTION 4.29 Investor Requirements. Except as disclosed in Section 4.29 of
the Company Disclosure Schedule, (i) the Company and the Selling Subsidiaries
meet or exceed the eligibility requirements of each "Master Servicer," Owner
Trustee, or other party to a Servicing Agreement for whom servicing is performed
under such Servicing Agreement (each, an "Investor"), and (ii) the Company, the
Selling Subsidiaries and/or Seller, as the case may be, have each timely filed,
or will have timely filed by the Closing Date, all reports to Investors required
to be filed pursuant to the requirements of the applicable Servicing Agreement,
except, with respect to both (i) and (ii), where the failure to do so would not
have a material adverse effect on the Assets (taken individually or as a whole).
SECTION 4.30 Physical Damage. Except as disclosed in Section 4.30 of the
Company Disclosure Schedule, there exists no material physical damage to any
mortgage collateral or REO from fire, flood, windstorm, earthquake, tornado,
hurricane or other similar casualty, which physical damage is not adequately
insured against in the manner prescribed by the Applicable Requirements.
33
112
SECTION 4.31 Payment of Taxes/Flood Tracking. Except as set forth in
Section 4.31 of the Company Disclosure Schedule, all material contractual
obligations of the Company and the Selling Subsidiaries, with respect to
applicable Taxes (including tax reporting for the period prior to the Closing),
special assessments and ground rents with respect to the residential mortgage
loans serviced under the Servicing Agreements and REOs have been complied with
and the tax parcel identifications for the real property relating thereto are
sufficiently adequate in all material respects for the Company and the Selling
Subsidiaries, as applicable, to comply with their material contractual
obligations under the Servicing Agreements with respect to taxes, except, with
respect to each of the above, where such failure will not in the aggregate have
a material adverse effect on the Assets (taken individually or as a whole). To
the extent required under an applicable Servicing Agreement, each serviced loan
is the subject of a fully paid, life of loan tax agreement a fully paid, life of
loan flood tracking agreement.
SECTION 4.32 Loss Mitigation. The Company or the Selling Subsidiaries, as
applicable, have complied in all material respects with the loss mitigation
activities that are contractually required under the applicable Servicing
Agreements, except to the extent that such failure would not in the aggregate
have a material adverse effect on the Assets (taken individually or as a whole).
Section 4.32 of the Company Disclosure Schedule sets forth a list of all
mortgage loans serviced by the Company or any Selling Subsidiary that are 90 or
more days past due with respect to which the Company or the Selling Subsidiaries
have entered into loss mitigation agreements which are currently outstanding.
SECTION 4.33 Waivers/Releases. Except as set forth in Section 4.33 of the
Company Disclosure Schedule, no mortgage loan included in the Assets has been
amended or modified by the Company or a Selling Subsidiary in any material
respect, except by instruments or documents identified in the file relating to
such loan or on the applicable loan servicing system, except to the extent that
any failure to do so would not have a material adverse effect on the Assets.
SECTION 4.34 [Intentionally omitted.]
SECTION 4.35 [Intentionally omitted.]
SECTION 4.36 [Intentionally omitted.]
SECTION 4.37 Inter-company Debt. The Assumed Liabilities will not include
any outstanding indebtedness which is owed to any of the Company's Affiliates.
SECTION 4.38 [Intentionally omitted.]
SECTION 4.39 ARM Loans. All of the applicable loan documents for
adjustable rate mortgage loans included in the Assets provide a mechanism for
selection of an alternative index in the event that the current index becomes
unavailable, except to the extent that the failure to provide an alternative
index would not have, a material adverse effect on the Assets (taken
individually or as a whole).
SECTION 4.40 Accounts. All material investor cash shortages, unidentified
principal and interest advances, or advances on zero balance Loans are disclosed
in Section 4.40 of the Company Disclosure Schedule. The schedule of the Test of
Expected Principal and Interest as of the date set forth in Section 4.40 of the
Company Disclosure Schedule has been prepared in accordance with all material
Applicable Requirements.
34
113
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as set forth in the Disclosure Schedule delivered to the Company by
Buyer prior to the execution of this Agreement, Buyer represents and warrants to
the Company as follows:
SECTION 5.01 Organization. Each of Buyer and the Buyer Affiliates is
a corporation or national banking association, duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation.
SECTION 5.02 Corporate Power, Authority Relative to this
Agreement. Each of Buyer and the Buyer Affiliates has full corporate power
and authority to execute and deliver this Agreement and the Ancillary
Agreements and to consummate the transactions contemplated hereby and
thereby and to perform its obligations hereunder and thereunder. The
execution and delivery of this Agreement and the Ancillary Agreements and
the consummation of the transactions hereby and thereby have been duly and
validly authorized by the Board of Directors of each of Buyer and the Buyer
Affiliates and no other corporate proceedings on the part of Buyer or any
Buyer Affiliate are necessary to authorize the execution, delivery or
performance of this Agreement and the Ancillary Agreements or to consummate
the transactions contemplated hereby and thereby. This Agreement has been
duly and validly executed and delivered by Buyer and, assuming that this
Agreement has been duly authorized, executed and delivered by the Company,
this Agreement constitutes, and upon the execution and delivery by Buyer of
the Ancillary Agreements each of them will constitute, a valid and binding
agreement of Buyer, enforceable against it in accordance with its terms,
except that (i) enforcement may be subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, affecting creditors' rights generally and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
SECTION 5.03 Consents and Approvals; No Violation. Neither the
execution and delivery and performance of this Agreement or the Ancillary
Agreements by Buyer or any Buyer Affiliate nor the consummation of the
transactions contemplated hereby and thereby by Buyer or any Buyer
Affiliate will (i) conflict with or result in any breach or violation of
any provision of the respective charter or bylaws (or other similar
governing documents) of Buyer or any Buyer Affiliate; (ii) require Buyer or
any Buyer Affiliate to obtain any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or
regulatory authority or body, except (A) in connection with the HSR Act, if
applicable, (B) pursuant to the Securities Exchange Act of 1934 or the
rules and requirements of the New York Stock Exchange, Inc., (C) approval
of state insurance departments, if applicable, or (D) approval of Bank
Authorities; or (iii) violate any order, decree, judgment, ordinance,
statute, rule, law or regulation applicable, except for violations which
would not, individually or in the aggregate, have a material adverse effect
on Buyer's ability to consummate the transactions contemplated in this
Agreement or in the Ancillary Agreements or to assume or discharge the
Assumed Liabilities.
SECTION 5.04 Litigation. There is no claim, action, arbitration,
investigation or proceeding pending or, to the Knowledge of Buyer,
threatened against Buyer or any Buyer Affiliate, before any court or
governmental or regulatory authority or body acting in an adjudicative
capacity, with respect to which would reasonably be expected to result in
(i) the issuance of an order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of the transactions
contemplated by this Agreement or any of the Ancillary Documents or (ii) an
adverse determination which would have a material adverse effect on the
ability of any Buyer Affiliate to consummate the transactions contemplated
in this Agreement or the Ancillary Agreements or to assume or discharge the
Assumed Liabilities.
35
114
SECTION 5.05 Buyer Contracts. With respect to the Buyer Contracts,
Buyer is not aware of any facts or circumstances that would cause the
Company or its Selling Subsidiaries to be in breach with respect to the
representations or warranties set forth in Sections 4.03(v), 4.04(a),
4.11(b) or 4.28 through 4.32 of this Agreement.
ARTICLE VI
COVENANTS
SECTION 6.01 Conduct of Business Standards.
(1) Conduct of the Business of the Company.
(A) Ordinary Course. Unless the Company has received the prior
written consent of Buyer (which consent shall not be unreasonably withheld,
conditioned or delayed) to do otherwise or except as expressly contemplated
by this Agreement, from the date hereof until the Closing Date, the Company
will and will cause each Selling Subsidiary to:
(a) use commercially reasonable efforts to (i) operate the Business
in the Ordinary Course of Business and, subject to the Regulatory
Agreements, take all commercially reasonable actions in the Ordinary
Course of Business consistent with past practice to preserve in all
material respects the current operations of the Business, (ii) comply in
all material respects with their contractual obligations to Employees
under the Company Employee Benefit Plans, (iii) maintain all real estate
and equipment comprising Assets necessary and material to the operation
of the Business as presently conducted in similar working order and
condition as on the date hereof, ordinary wear and tear and casualty
excepted, and (iv) comply in all material respects with their
contractual obligations under the Material and Significant Company
Contracts, except where failure to comply would not have a material
adverse effect on the Assets, the Assumed Liabilities or the Business;
(b) (i) cause the books and records of the Business to be
maintained in accordance with regulatory accounting principles, GAAP and
Applicable Requirements, as applicable, (ii) except as required by
applicable law or the Regulatory Agreements, not permit any material
change in pricing or credit practices or policies that would adversely
affect the Business, Assets or Assumed Liabilities; provided, that
weekly pricing changes to reflect changes in the Company's cost of funds
shall be deemed not to be material changes in pricing practices or
policies, and (iii) except as required by GAAP, applicable law or the
Regulatory Agreements, not permit any change in investment, accounting,
financial reporting, inventory, allowance or tax practices or policies
that would adversely affect the Business, Assets or Assumed Liabilities;
(c) (i) use commercially reasonable efforts to maintain in full
force and effect until the Closing substantially the same levels of
insurance coverage with respect to the Business as set forth on Schedule
6.01(1)(A)(c)(i) for at least one Business Day after the Closing on
substantially the same terms and conditions as set forth on Schedule
6.01(1)(A)(c)(i), and (ii) cause those benefits under such insurance
policies that would have been paid to the Company or the Selling
Subsidiaries with respect to the Assets or the Assumed Liabilities to be
paid or payable at Closing or thereafter in accordance with the
provisions of Section 1.08 of this Agreement; and
(d) (i) maintain reasonable processes, procedures and controls
designed to comply, in all material respects, with the requirements of
all laws, regulations, judgments and orders that are applicable to the
operation of the Business as presently conducted by the Company and the
Selling Subsidiaries and, (ii) promptly following receipt thereof,
notify Buyer of any Person alleging any material violation of any such
requirement, law or order.
36
115
(B) Other Conduct of the Company. From the date hereof until the
Closing Date, except as expressly contemplated by this Agreement, without
the prior written consent of Buyer (which consent shall not be unreasonably
withheld, conditioned or delayed), the Company will not, and will cause
each of the Selling Subsidiaries not to:
(1) [Intentionally omitted.]
(2) Compensation; Employment Agreements; Etc. Enter into, modify
or amend or renew any employment, collective bargaining, severance
agreement or benefit, incentive and commission plans (other than new ad
hoc and short term incentive and commission plans and ad hoc and short
term changes to incentive and commission plans) with any Employee or
promote or terminate any Employee, except in the Ordinary Course of
Business consistent with past practice or required to comply with the
Regulatory Agreements or by applicable law or any Banking Authority or
other regulatory authority; or grant any salary or wage increase to any
Employee or increase any Employee benefit (including incentive or bonus
payments to any Employee) except for (1) normal individual increases in
compensation and benefits to Employees in the Ordinary Course of
Business, including base compensation increases made in the Ordinary
Course of Business, (2) other changes that are consistent with past
practice or are required to comply with the Regulatory Agreements or by
applicable law or any Banking Authority or other regulatory authority,
(3) payments made to satisfy contractual obligations existing as of the
date hereof and disclosed to Buyer as provided elsewhere in this
Agreement or as set forth in Schedules to this Agreement, (4) employment
arrangements for, or grants of awards to Employees hired in the Ordinary
Course of Business, or (5) bonus payments in the Ordinary Course of
Business and in accordance with the Company's existing bonus plans or
arrangements as set forth in Schedule 6.01(1)(B)(2)(e) and Sections
4.03(i)(x), 4.03(i)(y), 4.14(a)(1), 4.14(a)(2) and 4.14(b) of the
Company Disclosure Schedule.
(3) Benefit Plans. Except as set forth on Section 4.03(i)(z) of
the Company Disclosure Schedule and Schedule 6.01(1)(B)(3) or permitted
elsewhere by this Agreement, enter into, establish, adopt or amend
(except as may be required under the Regulatory Agreements or by
applicable law or any Banking Authority or other regulatory authority),
any pension, retirement, stock option, stock purchase, savings, profit
sharing, deferred compensation, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any
trust agreement related thereto, in respect of the Employees.
(4) Dispositions.
(a) Sell, transfer, mortgage, encumber or otherwise dispose of or
discontinue any of the Assets used or held for use by the Company or the
Selling Subsidiaries, in the conduct of the Business, except (i)
Permitted Dispositions, as defined in Section 6.01(1)(B)(4)(b) below, or
(ii) as may be required to comply with the Regulatory Agreements.
(b) For purposes of this Section 6.01(1)(B)(4)(b), "Permitted
Dispositions" shall include:
(i) the transfer, sale, disposition or encumbrance of
residential mortgage loans in one or more term securitization
transactions subject to terms and conditions consistent with Industry
Practice (which shall not include transactions described in
subsection (iii) below) up to a maximum aggregate amount (determined
on the basis of unpaid principal balance) of $1.2 billion;
(ii) any and all sales of REO property and receivables of
bankrupt mortgagors;
(iii) the transfer, sale, disposition or encumbrance of owned
residential mortgage loans (including HELOCs) in one or more
transactions pursuant to any Advanta
37
116
Warehouse Facility; provided, however that the Company and the
Selling Subsidiaries shall not effectuate the transfer or sale of
residential mortgage loans (including HELOCs) in one or more
transactions from an Advanta Warehouse Facility to a Person other
than Buyer or an Affiliate thereof or to the Company or an Affiliate
thereof, in an aggregate amount (determined on the basis of unpaid
principal balance) in excess of $500 million; and
(iv) any and all whole loan sales of residential mortgage loans
other than sales pursuant to subsections (i), (ii) and (iii) above;
provided, however, that if the Company and the Selling Subsidiaries
intend to consummate any whole loan sales of residential mortgage
loans pursuant to this subsection (iv), the Company shall notify
Buyer in writing of its intention to execute a whole loan sale and
the amount of residential mortgage loans intended to be sold. Within
five (5) Business Days of Buyer's receipt of a data tape containing
standard and customary information relating to the residential
mortgage loans intended to be sold by the Company and the Selling
Subsidiaries, Buyer may submit in writing an offer to purchase such
residential mortgage loans. If an offer from Buyer contains a price
that is the same or higher than any other offer the Company receives
and other terms and conditions that are comparable to and no less
favorable to the Company and the Selling Subsidiaries than the terms
and conditions contained in the offers of potential purchasers other
than the Buyer, the Company and its Selling Subsidiaries shall
execute such whole loan sales of residential mortgage loans with
Buyer or any of its Affiliates on the terms and conditions contained
in Buyer's written offer. If Buyer does not submit a written offer
within the five day period described above, the Company and the
Selling Subsidiaries may execute a whole loan sale with any other
potential purchaser on any terms to which the Company and the Selling
Subsidiaries may agree, provided that: (i) no such terms will result
in a breach of this Agreement; (ii) such sale is closed in a manner
such that no obligations will be required to be performed by Buyer's
employees in connection with such sale before, on or after the
Closing Date; and (iii) to the extent that any such sales are
servicing retained, the servicing obligations are in accordance with
Industry Practice. Notwithstanding anything to the contrary contained
in this Section 6.01(1)(B)(4)(b), the fact that the Company has given
notice of its intention to execute a whole loan sale shall not
obligate the Company and its Selling Subsidiaries to complete any
whole loan sale of residential mortgage loans on any terms or
conditions whether with Buyer or any other third party; and
(v) dispositions in the Ordinary Course of Business that do not,
in the aggregate, exceed $50,000.
(5) Acquisitions. Acquire all or any portion of the assets,
business, or properties of any other Person or any other entity which
would be a part of the Business and included in the Assets or the
Assumed Liabilities, except (x) in the Ordinary Course of Business or
(y) in a transaction that individually or in the aggregate with all such
other acquisitions would not exceed $1,000,000 and would not materially
increase the Assumed Liabilities.
(6) Communications with Employees. Take any action that is
intended to hinder the transition of Employees to employment with Buyer.
The Company and the Selling Subsidiaries shall cooperate with Buyer to
communicate to Employees information relating to the transition of
employment, including but not limited to transition of benefit plans,
incentive, bonus and commission plans, and Buyer's employment-related
policies.
(7) Access to Employees. Deny Buyer reasonable access to any
Employee pursuant to procedures outlined in Schedule 6.01(1)(B)(7),
which access shall be for the purposes of increasing Buyer's
understanding of the organization and operation of the Business,
38
117
including the roles and functions of Employees in the organization and
operation of the Business.
(8) Other. Except in the Ordinary Course of Business: (i) violate,
breach or default under in any material respect, or take or fail to take
any action that (with or without notice or lapse of time or both) would
constitute a material violation or breach of, or material default under,
any term or provision of any Material Company Contract; (ii) cancel or
waive any material right of the Company under any indebtedness that is
an Assumed Liability, other than in the Ordinary Course of Business;
(iii) make capital expenditures (excluding those pursuant to existing
commitments and any capital expenditures necessary to maintain any real
property or other Assets in good working order and repair) or
commitments for additions to real property, plant or equipment
constituting Assets in an aggregate amount exceeding $100,000; or (iv)
enter into any contract to do or engage in any of the foregoing. The
Company and the Selling Subsidiaries will consult with Buyer on all
strategic and material operational matters relating to the operations of
the Business to the extent such consultation is in accordance with
applicable law including laws regarding the exchange of information and
other laws regarding competition. Any changes to Material and
Significant Contracts are deemed to be strategic and material
operational matters.
(C) Regulatory Agreements. Nothing contained in Sections 6.01(1)(A)
or 6.01(1)(B) shall preclude the Company or any Selling Subsidiary from
performing any action required or necessary to comply with any Regulatory
Agreement, and notwithstanding anything to the contrary contained in this
Agreement, the performance of any such action shall not be deemed to be a
violation of this Agreement.
(D) Conduct of Buyer. From the date hereof until the Closing Date,
Buyer shall cooperate with the Company in its efforts to operate the
Business in the Ordinary Course of Business and preserve the current
operations of the Business and Buyer shall take no action that would
interfere with the Company's obligations under Sections 6.01(1)(A) or
6.01(1)(B) hereof or any other provision of this Agreement, except in the
ordinary course of Buyer's pre-existing business relationship with the
Company or a Selling Subsidiary, or in connection with Buyer's fulfillment
of its obligations under this Agreement.
(E) Notwithstanding anything to the contrary contained in this
Agreement, (i) in no event shall the occurrence of a Delinquency Rate
Adjustment Event, Residual Cashflow Event, or a CPR Adjustment Event (each
as defined in Schedule 1.05(c)) constitute a breach of the obligations or
covenants of the Company and the Selling Subsidiaries under this Agreement
or be deemed to result in, or constitute, an adverse effect on the Assets,
Assumed Liabilities or the Business, and to the extent that a Delinquency
Rate Adjustment or a CPR Adjustment Event shall occur, such circumstance or
event shall not give Buyer the right to terminate this Agreement or
otherwise refuse to close hereunder and Buyer's sole remedy shall be an
adjustment to the Purchase Price in accordance with the provisions of
Section 1.05(c) of the Agreement, and (ii) in no event shall any
circumstance, consequence, result or event arising out of or resulting from
the execution of this Agreement or the announcement of any of the proposed
transactions contemplated by this Agreement (or any acts or omissions to
act required by this Agreement), including without limitation the loss of
personnel resulting from employees voluntarily terminating their employment
with the Company or a Selling Subsidiary, be deemed to result in, or
constitute, an adverse effect on the Assets, Assumed Liabilities or the
Business for any purposes of this Agreement, or be deemed to constitute a
violation by the Company or any Selling Subsidiary of Sections 6.01(1)(A)
or 6.01(1)(B) of this Agreement.
SECTION 6.02 No Solicitation, etc.
(a) From the date of this Agreement until the earlier of the Closing or the
termination of this Agreement, the Company shall not (and it will not permit any
of its officers, directors or Affiliates,
39
118
or any other Person acting on behalf of any of them, to) directly or indirectly
take any action to (i) solicit, engage in discussions, furnish information to,
or negotiate with any Person (whether such discussions or negotiations are
initiated by the Company or otherwise) or take any other action (including by
furnishing information with respect to the Business or permitting access for
this purpose to the assets, books and records used in connection with the
Business) intended or designed to facilitate the efforts of any Person (other
than Buyer) relating to the possible direct or indirect acquisition of the
Business (whether by way of contribution, purchase of capital stock, purchase of
assets or otherwise) (any such efforts by any such Person, including a firm
proposal to make such an acquisition, to be referred to as an "Alternative
Acquisition"), or (ii) enter into an agreement with any Person, other than
Buyer, providing for a possible Alternative Acquisition. Notwithstanding the
foregoing, the Company may furnish information concerning the Business to a
Person (other than Buyer) and may negotiate with such Person if counsel to the
Company advises the Board, or a committee thereof, that the failure to furnish
such information or negotiate with such Person could subject the Board or any of
the Company's directors to liability for breach of their fiduciary duties.
(b) The Company shall immediately cease any of its activities, discussions
or negotiations conducted prior to the date of this Agreement with any parties
other than Buyer with respect to any of the foregoing. In the event the Company
shall receive a written proposal for an Alternative Acquisition, it shall
promptly notify such Person of the terms of this Section 6.02 and shall inform
Buyer as to the Alternative Acquisition and the substance thereof (including the
identity of the Person proposing such Alternative Acquisition), and advise Buyer
of any developments with respect to such Alternative Acquisition promptly after
the occurrence thereof.
SECTION 6.03 Access to Information.
(a) Between the date of this Agreement and the Closing, upon reasonable
prior notice to the Company and subject to applicable laws relating to the
exchange of information, confidentiality and privacy matters, the Company will
give Buyer and its accountants, advisors and representatives reasonable access
during normal business hours to the offices and other facilities and to the
books and records of the Company and the Selling Subsidiaries relating to the
Business and will permit Buyer to make such reasonable inspections during normal
business hours as it may reasonably request and will cause its officers,
employees and agents and those of the Selling Subsidiaries to furnish Buyer with
such data and other information relating to the Business, the Assets and the
Assumed Liabilities as Buyer may from time to time reasonably request; provided,
however, that all such access and inspections shall be coordinated in advance by
Buyer with a designee of the Company (who has been identified to Buyer in
writing before the date hereof) and Buyer shall cooperate with the Company to
ensure that such access and inspections do not unreasonably interfere with the
normal business operations of the Company and the Selling Subsidiaries.
Notwithstanding the foregoing, neither the Company nor any of the Selling
Subsidiaries shall be required to provide access to or to disclose information
where such access or disclosure would, in the good faith opinion of its counsel,
jeopardize the attorney-client privilege of the institution in possession or
control of such information or contravene any law, rule, regulation, order,
judgment, decree or binding agreement entered into prior to the date of this
Agreement. The parties hereto will make appropriate substitute disclosure
arrangements to the extent practicable under circumstances in which the
restrictions of the immediately preceding sentence apply.
(b) All information received by Buyer and its representatives pursuant to
or on completion of this Agreement will be subject to the letter agreement dated
June 19, 2000, between Buyer and the Company (the "Confidentiality Agreement");
provided, however, that solely with respect to books, records, data and other
information relating to the Business which Buyer acquires as part of the Assets
and Assumed Liabilities (the "Acquired Information"), the provisions of the
Confidentiality Agreement relating to Buyer's obligations to maintain the
confidentiality of the Acquired Information shall terminate on the Closing Date
with respect to such information.
40
119
SECTION 6.04 Regulatory Matters; Other Consents.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees as promptly as practicable to (i) effect all necessary
filings under the HSR Act (which the parties shall file with the United States
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice on or prior to January 19, 2001, if they determine a
filing is so required) and use its commercially reasonable efforts to make all
filings with and give all notices reasonably required to secure all government
approvals and clearances required to consummate the transactions contemplated
hereby and by the Ancillary Agreements, (ii) provide such other information and
communications relating to this Agreement, the Ancillary Agreements and the
transactions contemplated hereby and thereby to such governmental or regulatory
authorities as such governmental or regulatory authorities may reasonably
request in connection therewith and (iii) cooperate in a reasonable manner with
the other party in connection with the performance of its obligations under this
Section 6.04. Each party will provide prompt notification to the other party
when any such consent, approval, filing or notice referred to in clause (i)
above is obtained, taken, made or given, as applicable, and will advise the
other of any material determination by any governmental or regulatory authority
regarding any of the approvals set forth above that would prohibit such party
from consummating the transactions contemplated by this Agreement or any of the
Ancillary Agreements.
(b) With respect to Material Company Contracts which require consent and
the Critical Information Technology Contracts that require renegotiation (or any
other form of conditional approval) from any third party prior to or after any
assignment by the Company or the Selling Subsidiaries, the Company and Buyer
will each diligently and in good faith exercise commercially reasonable efforts
towards obtaining such consents or satisfying any conditions imposed by any such
third party.
SECTION 6.05 Public Announcements.
(a) Generally. Buyer and the Company will consult with each other before
issuing any press release or otherwise making any public statements with respect
to the purchase and sale of the Assets contemplated herein, the other
transactions contemplated hereby or this Agreement, and shall not issue any such
press release or make any such public statement without the other party's
consent, which consent shall not be unreasonably withheld, except as may be
required by law, regulation or the rules of any national securities exchange or
The Nasdaq Stock Market.
(b) Regulatory Filings. Buyer will cooperate with the Company in the
preparation of any and all regulatory filings (including, without limitation,
the Proxy Statement) the Company is required to file in connection with this
Agreement and the transactions contemplated hereby; provided, however, that the
Company will permit Buyer to review and approve (such approval not to be
unreasonably withheld or delayed) of information relating to Buyer or any Buyer
Affiliate to be included in such filings.
SECTION 6.06 [Intentionally omitted.]
SECTION 6.07 Notification of Certain Matters. Each party shall give prompt
notice to the other of (i) the occurrence or non-occurrence of any event or
circumstance known to it, the occurrence or non-occurrence of which would cause
any representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at the time it is required to be true and
accurate, or (ii) any failure of the notifying party to comply with or satisfy
in any material respect any covenant, condition or agreement as of the time it
is required to be complied with or satisfied by the notifying party hereunder.
No notice given pursuant to this Section shall have any effect on the
representations, warranties, covenants or agreements contained in this Agreement
for the purposes of determining satisfaction of any condition contained herein
except as provided in this Agreement.
41
120
SECTION 6.08 Employment Matters.
(a) Employment with Buyer.
(1) Effective on the Closing Date as of 11:59 p.m., local time at each
location where Employees are employed or such later date of hire with
respect to Inactive Employees (the "Employment Transfer Time"), Buyer shall
employ Employees in comparable positions and at the same salaries and
compensation as in effect when employed by the Company and the Selling
Subsidiaries on the Closing Date.
(2) Buyer's obligation to employ any Employee is conditioned upon the
Closing taking place.
(3) Employees shall be employed at a location within a 30 mile radius
of the location where such Employee is employed by the Company on the
Closing Date.
(b) Employee Benefits.
(1) As of the Employment Transfer Time, Employees shall be eligible to
participate in Buyer's employee benefit plans as defined by Section 3(3) of
ERISA and other fringe benefits that Buyer has in effect on the same basis
as such plans and benefits are offered to similarly situated, existing
employees of Buyer. For all purposes other than benefit accruals and salary
credit service under the cash balance retirement plan and post-retirement
medical and life insurance benefits, Buyer will recognize any prior service
with the Company or a Selling Subsidiary of any Employee to the extent that
it would have been recognized under the applicable Company Employee
Benefits Plans as if it had been service with Buyer, including without
limitation for the purposes of determining: (i) eligibility for
participation and vesting, but not benefit accruals or salary credit
service, under Buyer's cash balance retirement plan; (ii) eligibility for
participation and vesting under Buyer's 401(k) and employee stock purchase
plans and under any stock-based compensation or incentive plan; (iii)
eligibility for participation in Buyer's medical, dental insurance and
other similar benefits, but not for purposes of post-retirement medical and
life insurance benefits; (iv) eligibility and calculation of benefit
amounts under Buyer's severance plan or plans (subject to adjustments,
which adjustments shall, however, not result in any reduction to severance
benefits payable, all as provided for in Schedule 6.08(b)(1)); (v)
calculation of vacation and personal day entitlement based upon years of
service; (vi) eligibility and calculation of benefits under service award
programs and Reserve Training benefits; (vii) eligibility to participate in
Buyer's job posting program; and (viii) eligibility and calculation of
leaves of absence and time off for personal emergency and death in the
immediate family and amount of pay while on a leave of absence or time off.
(2) Buyer agrees that it shall assume the Company's payment
obligations with respect to and shall pay the aggregate benefits payable
under the terms of the letter agreements issued by the Company in 2000 as
set forth in Schedule 6.08(b)(2).
(3) Buyer agrees that any pre-existing condition clause in any of
Buyer's health insurance policies or programs shall not be applicable to
any Employees; provided, that such Employees elect to enroll for coverage
under such policies or programs within the designated period following the
date on which they become employees of Buyer. The Company and the Selling
Subsidiaries acknowledge that the waiver of the pre-existing condition
clause does not mean Buyer's health insurance policies or programs provide
coverage for every existing condition. If any Employees elect coverage
under Buyer's long term disability insurance policy (the "LTD policy")
immediately following their date(s) of hire, the coverage of such Employees
shall be subject to the transfer provision of the LTD policy; but only if
such Employees were covered by the Company's or the Selling Subsidiary's
long term disability insurance policy on the date immediately preceding
their hire date(s) by Buyer. By way of explanation, this means upon a
disability of any such Employees that (1) the issuer of the LTD policy will
first apply the pre-existing condition clause of the LTD policy, and (2) if
no benefit is payable because of the
42
121
application of that clause, such issuer will then apply the pre-existing
condition clause under the Company's or the Selling Subsidiary's long term
disability policy to determine if a benefit would have been payable under
that policy. If under clause (2) a benefit would have been payable, the LTD
policy will pay a benefit, but such benefit shall be no greater than that
payable under the Company's or the Selling Subsidiary's long term
disability policy. Buyer shall be responsible for all "Continuation
Coverage" and COBRA notification for Employees who elect medical coverage
in its medical plan or program following their respective date(s) of hire.
(4)(i) Except as is otherwise specifically provided for in this
Agreement or as set forth in Schedule 6.08(b)(1), the Company and the
Selling Subsidiaries shall remain responsible for all employment and
benefit related contractual liabilities or obligations with respect to
Employees with respect to claims incurred or based on events, acts,
omissions, conduct or course of conduct, including, but not limited to,
WARN Act obligations, to the extent predominantly attributable to such
Employees' employment, or termination thereof, with the Company or a
Selling Subsidiary prior to the Employment Transfer Time.
(ii) Except as is otherwise specifically provided for in this
Agreement, Buyer shall be responsible for employment or benefit related
contractual liabilities or obligations with respect to all Employees with
respect to claims incurred or based on events, acts, omissions, conduct or
course of conduct, to the extent predominantly attributable to such
Employee's employment with Buyer after the Employment Transfer Time or with
respect to obligations specifically assumed by Buyer under this Agreement.
Notwithstanding the foregoing, the Company or the Selling Subsidiaries, as
the case may be, shall remain responsible for all benefits accrued under
(or claims against) the Company's Employee Benefit Plans. Buyer shall not,
except as otherwise specifically provided in this Agreement, at any time
assume any liability for the benefits of any active or any terminated,
vested or retired participant in the retirement plans of the Company or the
Selling Subsidiaries.
(A) With respect to the Advanta Corp. Employee Savings Plan (the
"Savings Plan"), the Company shall, consistent with the terms of the
Savings Plan and applicable law, make lump sum distributions available
to Employees, and provide such Employees with appropriate information
and forms so as to permit them to elect to transfer their account
balances to a defined contribution plan of the Buyer (the "Buyer's
Plan"). Buyer agrees that it shall permit, and shall cause Buyer's Plan
to permit, the transfer of such lump sum distribution directly to
Buyer's Plan, and shall accept, as part of such transfer, the portion of
any such Employees' account balance(s) that consist of a participant
loan, and shall continue to treat each such participant loan in a manner
that is consistent with the terms of the documentation for such loan.
Buyer and the Company shall cooperate so as to cause such elective
transfer to occur without, to the extent possible, causing any
outstanding loans of electing Employees to go into default. The Company
and Buyer shall cooperate in all matters related to such transfer,
including making appropriate amendments to the plans involved. All
liabilities for the provision of retirement benefits to any Employees
under the Savings Plan shall, upon such transfer of a Savings Plan
account balance otherwise held for the benefit of such Employees,
thereafter be assumed and provided under the Buyer's Plan.
(B) The Company shall pay (including, without limitation, by
issuance or vesting of stock) to Employees all amounts payable under the
Company's bonus plans or arrangements (determined by the Company in
accordance with the provisions of such bonus plans or arrangements) with
respect to the Employees' employment by the Company or a Selling
Subsidiary for the year 2000 and shall also similarly pay all Employees
a proportionate amount of any amounts payable under such plans or
arrangements with respect to the portion of the year 2001, if any,
during which such Employees remained employed by the Company or a
Selling Subsidiary. The proportionate amount referred to in the
preceding sentence shall be determined by reference to the provisions of
such plan or arrangement
43
122
and shall take into account the relationship of the portion of the year
2001 during which such Employees remained employed by the Company to the
full year 2001. The Company shall pay all such amounts (including by
issuance or vesting of stock) pursuant to this Section 6.08(b)(4)(B) on
or about the time the Company otherwise makes payments under such plans
or arrangements to its continuing employees.
(c) Employee Records. After Closing, the parties hereto will
cooperate with each other in the administration of all applicable employee
compensation and benefit plans relating to the Employees.
(d) No Third Party Beneficiaries; No Buyer Limitations. Nothing
expressed or implied in this Section 6.08 shall create any third party
beneficiary or other rights in any Employees in respect of continued
employment with the Company, the Selling Subsidiaries, Buyer or any of
their respective Affiliates or with respect to any benefits that may be
provided, directly or indirectly, from the Company or under any benefit
plans or arrangements of Buyer. Additionally, notwithstanding anything
contained herein to the contrary, no provision of this Agreement shall
constitute a limitation on rights to amend, modify or terminate, after the
Closing Date, any specific plan or arrangement of the Company, Buyer or any
of their respective Affiliates, except to the extent that this Agreement
contains comparability requirements as to a type of plan, program, policy
or arrangement that create such a limitation or such limitation is imposed
under the terms of any plan or obligation expressly assumed by Buyer.
(e) Benefit Arrangements Through Closing.
(i) The Company and the Selling Subsidiaries shall continue to make
their Benefit Arrangements (as defined below), including, but not limited
to medical, dental and the other welfare benefits plans, available to
Employees up to the Employment Transfer Time, and benefits under the
Benefit Arrangements shall be paid, or caused to be paid, consistent with
past practice, with respect to claims by Employees and their dependents in
accordance with the terms of the applicable Benefit Arrangements. "Benefit
Arrangements" means any employment, severance or similar contract or
arrangement (whether or not written) providing for compensation, bonus,
profit-sharing, stock option, or other stock related rights or other forms
of incentive or deferred compensation, Paid Time Off, insurance coverage
(including any self-insured arrangements), health or medical benefits,
disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance or
other benefits).
(ii) In accordance with Buyer's obligations to make benefits available
to Employees in the manner set forth in Section 6.08(b)(1), Buyer shall
make such benefits available to Employees as of the Employment Transfer
Time and in accordance with the terms and conditions, including eligibility
conditions, of Buyer's benefit plans, policies or practices.
(f) Stock Incentives, Stock Options and Bonus Arrangement. The
Company may, but is not required to, amend or modify any applicable stock
incentive, stock option or bonus plans, arrangements and/or grant documents
so as to provide for treatment of Employees that is not specifically
prohibited under the terms of this Section 6.08.
(g) Executive Deferral Plan. The Company may, but is not required to,
amend the Advanta Corp. Executive Deferral Plan (the "Deferral Plan") to
the extent necessary to provide that participants in the Deferral Plan who
are or become Employees may elect to be treated as not having terminated
employment for purposes of the distribution of benefits under the Deferral
Plan until such time as the electing participants terminate their
employment with Buyer, or an Affiliate of Buyer. The Company shall provide
for the distribution of plan benefits to Employees who have not made such
an election in the form of a single lump sum distribution or in such other
manner as may be permitted under the terms of the Deferral Plan.
44
123
(h) Notice to Employees. The Company shall give notice to Employees
that all coverages and accruals previously provided under the Company
Employee Benefit Plans established or maintained by the Company for current
and former Employees of the Company will terminate with respect to
Employees as of the Closing Date, except that (i) Employees with vested
accrued benefits under any employee pension benefit plan shall retain such
accrued benefits, and (ii) the Company Employee Benefit Plans shall
continue to pay benefits with respect to claims incurred before the Closing
Date and payable under the terms of the applicable plan or coverage.
(i) Vesting of Employees. The Company shall, and will cause the
Selling Subsidiaries to, as of the Closing Date (or as of such later date
as may be applicable) (i) vest Employees in their accrued benefits under
the Company's or its Affiliate's retirement plan and 401(k) plan (whether
or not qualified); (ii) vest Employees in all stock based awards through
the Closing Date to the extent provided for under the applicable plan or
award; (iii) subject to Employees submitting requisite documentation to the
Company, pay to such Employees, to the extent provided for under the
applicable benefit program, as soon as practicable the amount of any
educational assistance benefit for any class in which such Employees are
enrolled prior to the Closing Date or for which such Employees have
received approval to enroll prior to the Closing Date; and (iv) pay to such
Employees the value of any Paid Time Off benefits unused and carried over
from prior years (to the extent permitted under the Company's Paid Time Off
policy as in effect on the Closing Date) or accrued but unused Paid Time
Off to the extent required by law.
SECTION 6.09 Tax Reporting and Transfer Taxes.
(a) All state and local transfer, sales and use, notarial or similar taxes
or fees arising from or relating to the transactions contemplated by this
Agreement shall be borne by the party that is legally responsible therefor.
(b) Buyer, the Company and the Selling Subsidiaries agree that Buyer, as
agent for the Company and the Selling Subsidiaries, shall be responsible for the
filing of any tax information return and the mailing of any related notice,
including filings related to interest received from borrowers (IRS Form 1098)
for all transactions in the period commencing January 1, 2001. The Company and
the Selling Subsidiaries shall provide Buyer with complete and accurate records
of all interest received for all periods up to and including the Closing Date.
In addition, Buyer, the Company and the Selling Subsidiaries shall cooperate in
the timely preparation of all other Tax Returns relating to the Business the due
date of which is after the Closing Date, including, but not limited to, Tax
Returns under Sections 1441 - 1446 of the Code, Sections 6031 - 6060 of the
Code, the regulations thereunder and any comparable foreign, state and local
laws and regulations.
SECTION 6.10 Real Estate Matters. The Ridgeview Property will be leased to
Buyer pursuant to the Ridgeview Lease, substantially in the form of Exhibit G
hereto, at market rental rates to be mutually agreed upon by Buyer and the
Company, and subject to only the Permitted Liens to the extent valid and
enforceable. Except to the extent that the same are to continue to be paid by
the Company pursuant to the terms of the Ridgeview Lease, real estate taxes,
water and sewer rents, common area maintenance charges, rent, utility charges
and other sums paid or payable with respect to the Ridgeview Property and other
items customarily apportioned in the jurisdiction in which the real estate is
situated shall be apportioned pro rata between the Company and Buyer on a per
diem basis as of the close of business on the Closing Date, to the extent not
reflected in the Closing Daily Balance Sheet, and shall be paid thereafter
pursuant to the terms of the Ridgeview Lease. The rights of the Company, the
Selling Subsidiaries and their Affiliates under leases listed in Section 4.13(b)
of the Company Disclosure Schedule will be assigned to and assumed by Buyer
pursuant to a Bill of Sale and General Assignment and an Assumption Agreement in
the forms attached hereto as Exhibits E and I or such other form on commercially
reasonable terms as the parties shall mutually agree to and which shall be
acceptable to the landlords under the various
45
124
leases. Rents and other amounts paid or payable under the leases or subleases
listed in Section 4.13(b) of the Company Disclosure Schedule will be apportioned
pro rata between the Company and Buyer on a per diem basis as of the close of
business on the Closing Date to the extent not reflected in the Closing Balance
Sheet. Buyer and the Company will cooperate to obtain consents from landlords to
assignments of leases included in Company Contracts and Buyer shall replace the
Company, or any Affiliate, as the guarantor under any Guarantees of leases
included in Schedule 6.17.
SECTION 6.11 Fulfillment of Conditions. Prior to the Closing, each party
will, and the Company will cause the Selling Subsidiaries to, execute and
deliver at the Closing each Ancillary Agreement that is required hereby to be
executed and delivered by such party as a condition to the Closing. The parties
shall negotiate in good faith on commercially reasonable terms the form, of any
other agreements and documents required to be executed and delivered at Closing.
SECTION 6.12 Actions of Affiliates. Each party hereto hereby agrees that
it will use its commercially reasonable efforts to cause its regulated
Affiliates, subject to the Regulatory Agreements and all applicable regulatory
requirements, and will cause its other Affiliates (including, without limitation
in each case, as applicable, the Selling Subsidiaries) to take any and all such
actions (as sole shareholder or otherwise) as they are required to take pursuant
to the provisions of this Agreement.
SECTION 6.13 Supplements to Schedules. Through and including the Closing
Date, each of the Company and Buyer shall promptly (but limited to once per
month unless such modification would reasonably be expected to have a material
adverse effect on the transactions contemplated by this Agreement) supplement
or, amend or otherwise modify its applicable Disclosure Schedule with respect to
any matter hereafter arising which, if existing or occurring at the date of this
Agreement or at the Closing Date, would have been required to be set forth or
described in such Schedules. Any such modifications shall be provided by the
modifying party directly to the general counsel of the other party (or any other
party designed by such general counsel in writing) in a manner sufficient to
clearly identify the modifications from the schedules existing on the date of
execution of this Agreement. The receiving general counsel shall provide written
acknowledgment of the receipt of any such modifications.
SECTION 6.14 Non-Competition and Non-Solicitation.
(a) During the period beginning as of the close of business on the Closing
Date and ending on the fifth anniversary thereof, neither the Company nor any of
its Subsidiaries shall, directly or indirectly, engage in the business of
originating, marketing, servicing or subservicing, purchasing, selling and
securitizing residential mortgage loans, which business is in competition with
the Business; provided however, that none of the following shall violate this
Section 6.14: (i) ownership by the Company or any of its Subsidiaries of less
than 5% of the outstanding voting stock of any publicly traded or privately held
corporation or other Person which is in direct competition with the Business,
(ii) the Company or any of its Subsidiaries providing (A) services or products
(which services and products are not of a type primarily related to the business
of originating, marketing, servicing or subservicing, purchasing, selling and
securitizing residential mortgage loans and other secured home equity mortgage
loan products) to any Person that is in direct or indirect competition with the
Business, including without limitation an entity that provides services or
products to Buyer or any such Person, or (B) services and products that are of a
type primarily related to the business of originating, marketing, servicing or
subservicing, purchasing, selling and securitizing residential mortgage loans
and other secured home equity mortgage loan products but only to the extent such
services or products are set forth on Section 4.19 of the Company Disclosure
Schedule in paragraphs 7 through 14 under "Technology Shared
Services/Information Technology/Intellectual Property," relate to the Corporate
Finance Agreements or relate to the Insurance Agreements or Relationships and
Other Assets set forth on Annex A to Section 4.19 of the Company Disclosure
Schedule and to the extent that such services and products do not incorporate
the Assets or the
46
125
Assumed Liabilities, (iii) the Company granting a license to use the Advanta
name or an Advanta mark, with or without royalties, to any Person for any use,
other than use in the business of originating, marketing, servicing or
subservicing, purchasing, selling and securitizing residential mortgage loans,
in direct or indirect competition with the Business, or (iv) providing services
or products to Buyer or its Affiliates pursuant to the Ancillary Agreements or
as otherwise contemplated by this Agreement.
(b) (i) For the period beginning as of the close of business on the Closing
Date and ending on the second anniversary thereof, neither the Company nor any
of its Subsidiaries shall, directly or indirectly, employ, solicit for
employment, or induce to terminate employment with Buyer or any of its
Subsidiaries, any Employee (as defined in Section I(b) of Section 4.14(a)(1) of
the Company Disclosure Schedule) employed by Buyer or any of its Subsidiaries
then or within the preceding six months; provided, however, that the covenants
set forth in this Section 6.14(b) shall not apply to any Employee who has been
terminated by Buyer or any of its Subsidiaries, and, further provided, that any
solicitation by the Company and its Subsidiaries of Persons pursuant to the use
of any general advertisements or general solicitations, including, without
limitation, through the use of newspaper or trade journal advertisements, radio
advertisements or executive search firms, shall not be deemed to violate the
covenants set forth in this Section 6.14(b), as long as such general
advertisements, solicitations and search firms are not specifically directed to
Employees employed by Buyer or any of its Subsidiaries. The exceptions to
solicitation and inducement restrictions noted in the immediately preceding
sentence are not exceptions to the hiring restriction set forth in this Section
6.14(b)(i).
(ii) For the period beginning as of the close of business on the Closing
Date and ending on the second anniversary thereof, Buyer shall not, directly or
indirectly, employ, solicit for employment, or induce to terminate employment
with the Company or any of its Subsidiaries, any employee who is employed by
Company or any of its Subsidiaries in collections, decision support or marketing
as of the Closing Date and is then or within the preceding six months employed
by the Company or any of its Subsidiaries in collections, decision support or
marketing; provided, however, that the covenants set forth in this Section
6.14(b)(ii) shall not apply to any such employee who has been terminated by the
Company or any of its Affiliates or to any solicitation by Buyer of Persons
pursuant to the use of any general advertisements or general solicitations,
including, without limitation, through the use of newspaper or trade journal
advertisements, radio advertisements or executive search firms, shall not be
deemed to violate the covenants set forth in this Section 6.14(b)(ii), as long
as such general advertisements, solicitations and search firms are not
specifically directed to the foregoing employees. The exceptions to solicitation
and inducement restrictions noted in the immediately preceding sentence are not
exceptions to the hiring restrictions set forth in this Section 6.14(b)(ii).
(c) For the period beginning as of the close of business on the Closing
Date and ending on the second anniversary thereof, neither the Company nor any
of its Subsidiaries shall take any action that is intended to cause any client,
customer or supplier of the Business to terminate its relationship with or cease
doing business with Buyer or any of its Affiliates.
(d) For the period beginning as of the close of business on the Closing
Date and ending on the second anniversary thereof, neither the Company nor any
of its Subsidiaries shall, directly or indirectly, disclose (unless compelled or
required by law, regulation, regulatory authority or judicial or administrative
process) or use for a purpose that is prohibited under Section 6.14(a) hereof
any confidential information of a type primarily relating to the Business
("Confidential Business Information"). Notwithstanding the foregoing,
"Confidential Business Information" shall not include information or material
which: (i) are identified in Section 4.19 of the Company Disclosure Schedule to
the extent that such information or material does not incorporate the Assets or
the Assumed Liabilities; (ii) is or becomes generally available to or known by
the public other than as a result of a disclosure by the Company and its
Subsidiaries in violation of this Section 6.14(d); (iii) becomes available to or
known by the Company or any of its Subsidiaries after the Closing Date
47
126
from a person or entity who is not known by the Company or its Subsidiaries to
be bound by a confidentiality agreement with the Buyer or its Affiliates or
otherwise prohibited from transmitting such information to the Company and its
Subsidiaries; and (iv) information, analyses, processes, methodologies and
applications that are or may be used by the Company and its Subsidiaries as part
of its ongoing businesses and any future business that the Company may enter
without violating Section 6.14(a) hereof, including without limitation know how
of continuing employees of the Company and its Subsidiaries, or any background
rights of the Company and its Subsidiaries, to develop applications, inventions,
models, software, methodologies, processes, or other intellectual property (even
if any of the foregoing are similar to those comprising the Assets transferred
to Buyer pursuant to this Agreement as part of the Business).
Notwithstanding anything to the contrary contained in this Agreement, the
Company and its Subsidiaries shall be permitted to use Confidential Business
Information in connection with liabilities of the Business that are not Assumed
Liabilities, for purposes of: responding to, administering and processing any
requests for information or inquiries from, or satisfying the requirements of
any Banking Authority or other governmental or regulatory agency or authority;
complying with any law, statute, rule or regulation; commencing, prosecuting,
defending or settling any judicial or administrative claims or proceedings;
preparing and filing tax returns and responding to tax and other audits;
preparing and filing securities reports, disclosures and related documents;
participating in the preparation of the Closing Balance Sheet and the
resolutions of any disputes relating thereto; permitting or determining the
performance of the covenants and other obligations of the Company and the
Selling Subsidiaries required to be performed under this Agreement or any of the
Ancillary Agreements; administering employee compensation and benefit plans;
preparing financial statements of the Company and the Selling subsidiaries; or
amending, renegotiating, terminating and complying with contracts excluded under
Section 4.19 (provided that such Confidential Business Information is not used
in violation of the provisions of Section 6.14(a) above).
(e) For the period beginning as of the close of business on the Closing
Date and ending on the fifth anniversary thereof, neither the Company nor any of
its Subsidiaries shall directly or indirectly target or solicit the customers
listed as mortgage customers on the loan servicing platforms for the owned,
securitized and subserviced mortgage portfolios of the Company and the Selling
Subsidiaries on the Closing Date (the "Mortgage Customer List") for any product;
provided, however, that, so long as the Mortgage Customer List is not used in
violation of this Section 6.14(e), nothing in this Section 6.14(e) shall require
the Company or any of its Subsidiaries to destroy any Mortgage Customer List
that it may have in its possession (whether in hard copy, data file or
otherwise) or, so long as the Mortgage Customer List, or an excerpt thereof, is
not the source of the customer list, to sort or cull any customer list used by
the other businesses of the Company and its Subsidiaries, and provided further,
that promotions or other marketing activities that are not based on the Mortgage
Customer List, or an excerpt thereof, including, without limitation, targeted
marketing campaigns, marketing campaigns directed to the general public,
telemarketing, internet-based and e-mail advertising campaigns, newspaper, radio
and television advertisements that are not based on the Mortgage Customer List,
or an excerpt thereof, shall not constitute solicitations under this Section
6.14(e).
(f) It is the intention of the parties that the provisions of this Section
be enforced to the fullest extent permissible under the laws and policies of
each jurisdiction in which enforcement may be sought, and that the
unenforceability (or the modification to conform to such laws or policies) of
any provisions of this Section shall not render unenforceable, or impair, the
remainder of the provisions of this Section. Accordingly, if any provision of
this Section shall be determined to be invalid or unenforceable, such invalidity
or unenforceability shall be deemed to apply only with respect to the operation
of such provision in the particular jurisdiction in which such determination is
made and not with respect to any other provision or jurisdiction. The parties
hereto acknowledge and agree that any remedy at law for any breach of the
provisions of this Section would be inadequate, and the parties, as applicable,
hereby consent to the granting by any court of an
48
127
injunction or other equitable relief, without the necessity of actual monetary
loss being proved, in order that the breach or threatened breach of such
provisions may be effectively restrained.
SECTION 6.15 Access to Information.
(a) From and after the Closing Date, each party shall give the other party,
its counsel, accountants and representatives, reasonable, prompt and timely
access upon reasonable notice and during normal business hours to the
properties, deeds, documents, contracts, books and records (including, without
limitation, books of account and auditor's workpapers), electronic data,
records, files, invoices and other data in its possession or within its control,
in each case associated with, necessary to or used in the Business (or in
connection with functions that related to the Business before the Closing Date
that are set forth in Section 4.19 of the Company Disclosure Schedule), as
conducted on or before the Closing Date and to its employees, all as may be
reasonably requested by the other for the purposes of enabling the parties to:
(i) participate in the preparation of the Closing Balance Sheet and the
resolution of any disputes relating thereto; (ii) permit or determine the
performance of any covenants or other obligations required to be performed under
this Agreement or any of the Ancillary Agreements after the Closing Date by the
parties; (iii) administer all employee compensation and benefit plans; (iv)
permit the preparation and filing of any Tax Return, financial statements, HMDA
report or any other document required to be filed with any regulatory or
governmental agency or authority; (v) comply with any law, statute, rule or
regulation; (vi) amend, renegotiate, terminate and comply with contracts or
agreements excluded under Section 4.19; and (vii) respond to, handle, commence,
prosecute or dispose of any action, suit, proceeding, investigation or claim
made by or against a party, or request for information by, any governmental or
regulatory agency or any third party. Each party shall reasonably cooperate with
the other, if requested, in connection with the foregoing. At the Closing, the
Company and Buyer will enter into an information access agreement (the
"Information Access Agreement"), on commercially reasonable terms and conditions
mutually agreeable to the parties, that will provide, among other things, the
procedures, terms and conditions for the parties to access information in
accordance with the foregoing provisions.
(b) In connection with the preparation of the Closing Balance Sheet, each
party shall direct the appropriate personnel employed by it or its Affiliates to
provide all account reconciliations necessary to prepare the Closing Balance
Sheet within 30 days of the Closing Date and to provide all reasonably requested
financial information regarding the Business as promptly as practicable after
the Closing Date, but in any event sufficiently promptly to permit the
completion of the Closing Balance Sheet within the time requirements set forth
in Section 1.05 hereof.
(c) Notwithstanding anything to the contrary contained in this Agreement,
neither party shall be required to provide access to or to disclose information
where such access or disclosure would, in the good faith opinion of its counsel,
jeopardize the attorney-client privilege of the institution in possession or
control of such information or contravene any law, rule, regulation, order,
judgment, decree or binding agreement entered into prior to the date of this
Agreement. The parties hereto will make appropriate substitute disclosure
arrangements to the extent practicable under circumstances in which the
restrictions of the immediately preceding sentence apply.
(d) In no event will Buyer or any of Buyer's Affiliates deny the Company or
its Affiliates access to any information under this Section 6.15 on the basis of
any limitations contained in the consumer privacy policies of Buyer and its
Affiliates, as such policies may be adopted or amended from time to time;
provided, however, that under all circumstances the parties shall comply with
any procedures required by the Gramm Leach Bliley Act or other similar federal
or state privacy laws governing access to information, and if any such law or
laws would prevent either party from obtaining access to information directly,
the parties hereto will make appropriate substitute disclosure arrangements.
SECTION 6.16 Preservation of and Access to Books and Records. At the
Closing, the Company and Buyer will enter into the Information Access Agreement
which will provide, among
49
128
other things, that from and after the Closing Date, Buyer and the Company will
each own and control that portion of the stored and archived books, records and
magnetic tapes relating to the Business as set forth in the Information Access
Agreement, and will retain such books, records and magnetic tapes for the number
of years specified therein. The Information Access Agreement will contain the
procedures under which the parties will have access to the stored and archived
books, records and magnetic tapes relating to the Business and set forth the
division of the costs, expenses and fees relating to the storage of such items,
the manner in which such books, records and magnetic tapes which are commingled
with other items or matters not related to the Business will be stored and the
manner in which the fees and expenses related to the storage and retrieval of
all such items shall be paid.
SECTION 6.17 Guarantees. Buyer and the Company shall cooperate to cause
Buyer to replace the Company or any Affiliate thereof under the Guarantees
listed as numbers 1 and 2 in Schedule 6.17 or to otherwise assume the
obligations of the Company or any of its Affiliates under such guarantees from
and after the Closing Date.
SECTION 6.18 Information Technology Contracts.
(a) Company Information Technology Assets. On the Closing Date, as part of
the sale of Assets in Section 1.01(a), the Company and the Selling Subsidiaries
shall transfer or assign the Company Information Technology Assets and the
Company Information Technology Contracts as and to the extent set forth on
Schedules 6.18(a)-1 and 6.18(a)-2, respectively, (other than those Excluded
Information Technology Contracts set forth on Schedule 6.18(a)-3 to Buyer.
"Company Information Technology Assets" shall mean the material assets with
respect to information technology used or held for use in the operation of the
Business. Schedules 6.18(a)-1 and 6.18(a)-2 set forth the Company Information
Technology Assets, and the material agreement(s), if any, relating to each of
the Company Information Technology Assets (such agreements, collectively, the
"Company Information Technology Contracts").
(b) Information Technology Contract Consents; Buyer Cooperation. Buyer
acknowledges that many of the Company Information Technology Assets and Company
Information Technology Contracts require the consent of third parties as a
condition to or in connection with the assignment or transfer to Buyer and the
consummation of the other transactions contemplated by this Agreement. The
parties shall use commercially reasonable efforts and shall cooperate with each
other's reasonable requests for assistance to obtain any consents required as a
condition to or in connection with the assignment or transfer of such Company
Information Technology Assets and Company Information Technology Contracts to
Buyer on or before the Closing Date. In addition, Schedule 6.18(b) lists certain
Company Information Technology Contracts which contain provisions requiring the
Company and/or its Affiliates to satisfy minimum volume and/or purchase levels
(the "Critical Information Technology Contracts"). Buyer shall cooperate with
the Company to assist the Company in connection with renegotiating, amending
and/or assigning such provisions of the Critical Information Technology
Contracts consistent with the parties' rights and duties under Section 1.07.
(c) Reservation of Rights. Certain rights and interests of the Company or
one or more of the Selling Subsidiaries in certain of the Company Intellectual
Property and Company Information Technology Assets are excluded from this
transaction and are not being transferred to the Buyer under the terms of this
Agreement. These interests and rights to be excluded from the Assets and
retained by the Company and/or one or more of the Selling Subsidiaries are set
forth on Schedules 6.18(a)-3 and 6.18(c).
(d) Release of IP Addresses. Buyer covenants that within 180 days of
Closing, Buyer will reprogram the hardware transferred to Buyer as part of this
transaction, and take any other actions necessary to release all IP Addresses
registered to the Company as listed on Schedule 6.18(d) and make them available
for use by the Company. Buyer and the Company shall share equally in any
out-of-pocket third party expenses in connection with this obligation.
50
129
SECTION 6.19 Cooperation in Litigation.
(a) With respect to any liability that is not an Assumed Liability and
subject to applicable legal requirements, Buyer agrees, at the Company's
request, to take commercially reasonable actions necessary to make the specific
Employees requested by the Company, or if such Employees are no longer employed
by Buyer or no specific Employees are requested by the Company then employees
who are knowledgeable with respect to the matter in question, available to the
Company after the Closing Date in a manner that does not unreasonably interfere
with the performance of their employment duties to Buyer with respect to any
action, suit, proceeding or investigation to which the Company or a Selling
Subsidiary or Affiliate is a party or is otherwise involved, whether commenced
before or after the Closing Date ("Actions"). The Company agrees to reimburse
Buyer for reasonable expenses incurred by Buyer in connection with requests by
the Company pursuant to this Section 6.19(a).
(b) The Company and Buyer shall provide access to data, documentary
evidence, and other information relating to an Action in accordance with
Sections 6.15 and 6.16 hereof and the Information Access Agreement.
(c) With respect to any requests under Sections 6.19(a) and (b) relating to
Actions, the party requesting access to employees and/or information, as
applicable, will specify in its request a reasonable time deadline for
fulfilling the request and the other party shall exercise commercially
reasonable efforts to respond to and fulfill the request not later than the
specified time deadline.
SECTION 6.20 Cooperation in Obtaining Consents and other Matters;
Negotiation of Ancillary Agreements. Buyer shall use its commercially
reasonable efforts to cooperate with the Company and assist the Company in
obtaining all consents and approvals of any Persons required in connection with
the assignment of Material Company Contracts and the Critical Information
Technology Contracts and to renegotiate such Contracts. The parties shall use
commercially reasonable efforts to negotiate the Ancillary Agreements upon
commercially reasonable terms and conditions mutually agreeable to the parties
within thirty (30) days of the execution of this Agreement.
SECTION 6.21 Buyer Activities as Agent under the Corporate Finance Program
Agreement. Buyer shall, after Closing hereunder, pursuant to an agreement on
commercially reasonable terms mutually satisfactory to the parties as agreed
upon prior to Closing (the "Corporate Finance Program Agreement"), perform all
of the obligations of the Company and the Selling Subsidiaries under the
Corporate Finance Agreements, including without limitation the security
agreements (the "Multi-Party Security Agreements") and the mutual
confidentiality agreements (the "Mutual Confidentiality Agreements"). Such
obligations include, without limitation, the obligations with respect to the
following: to make payments to the sellers under the Corporate Finance
Agreements or their successors in interest (the "Sellers"); to service the
mortgage loans sold subject to such agreements; to maintain reserves for the
Sellers; to provide monthly reports and other information to the Sellers
(including access to servicing and accounting records and personnel); to
maintain confidentiality with respect to information related to the Sellers
under the Mutual Confidentiality Agreements to the extent such obligations are
enforceable against the Company or any Selling Subsidiaries; and the obligations
not to solicit the mortgagors of mortgage loans sold subject to the Corporate
Finance Agreements for refinancing (other than solicitations addressed to the
general public), or to provide any list of such mortgagors to third parties for
such purpose, to the extent such obligations are enforceable against the Company
or any Selling Subsidiaries. Any claim for indemnification under Article X of
this Agreement arising out of the Corporate Finance Agreements or mortgage loans
purchased by the Company or the Selling Subsidiaries from the Sellers under such
Corporate Finance Agreements shall be net of any amounts subject to recovery
with respect to the applicable Loss by offset under the Corporate Finance
Agreements against amounts otherwise
51
130
payable to such Sellers or their successors in interest as directed by the
Company and the Selling Subsidiaries.
SECTION 6.22 Obligation to Seek Reimbursement and/or Indemnification. From
and after the Closing Date, Buyer and its Affiliates shall perform the
obligations of the servicer or subservicer as set forth in the Servicing
Agreements, including, without limitation, the obligation to make servicing and
delinquency advances, manage litigation, cure documentation deficiencies and
manage borrowers' defaults. Obligations which relate to the period prior to the
Closing Date shall be performed to the extent required of the current servicer
or current subservicer under the provisions of the applicable Servicing
Agreements; provided, however, that neither Buyer nor its Affiliates assumes any
liability for acts or omissions or alleged acts or omissions of the Company or
its Affiliates on or prior to the Closing Date. In performing its obligations as
servicer or subservicer under the Servicing Agreements, Buyer and its Affiliates
will seek full recovery (including reimbursement for costs and expenses under
the provisions of the applicable Servicing Agreements and indemnification in
favor of servicer or subservicer for claims relating to servicing under the
provisions of the applicable Servicing Agreements) as servicer or subservicer
(including, where applicable, on behalf of the Company and the Selling
Subsidiaries) to the extent reasonably permissible under the terms of the
applicable Servicing Agreements. For the purpose of determining such obligations
of Buyer and its Affiliates to perform the obligations of the servicer and to
seek recovery, the obligations of the servicer and the recoverability with
respect to loans owned by Buyer or its Affiliates as of the Closing Date
(including Owned Loans and Off-Balance Sheet Loans) shall be determined pursuant
to the applicable Servicing Agreements for mortgage loans owned by Buyer or its
Affiliates as in effect immediately prior to the Closing Date. In the event that
recovery is not reasonably permissible under the terms of the Servicing
Agreements with respect to litigation, Buyer and its Affiliates shall have met
the Litigation Threshold (as such term is defined in Section 10.03(c)) prior to
seeking recovery against the Company under the terms of this Agreement.
SECTION 6.23 [Intentionally omitted.]
SECTION 6.24 Investor Accounts. The Company shall take such actions as are
necessary so as to insure that, as of the Closing Date, there are no investor
cash shortages, no non-recoverable advances of principal and interest, no
non-recoverable advances on zero balance loans, and no outstanding checks
greater than 180 days. The Company shall fund or Buyer shall pay 180 days after
Closing the net unresolved aged items as of the Closing Date relating to: (a)
reconciling items in suspense or clearing accounts greater than 30 days and (b)
reconciling items greater than 90 days in custodial accounts. The Company shall
fund or Buyer shall pay 60 days after Closing the net unresolved aged items as
of the Closing Date relating to: aged manual advances and reconciling items on
all remaining general ledger accounts greater than 120 days.
SECTION 6.25 Letter Agreement. Prior to the Closing Date, the parties
shall enter into a transaction for the sale of a substantial portion of the
Owned Loans and the Off-Balance Sheet Loans pursuant to the terms set forth in
that certain letter agreement dated of even date herewith, a copy of which is
attached hereto as Schedule 6.25 (the "Letter Agreement"). The Letter Agreement
provides for execution of a separate Mortgage Loan Purchase Agreement (the
"Mortgage Loan Purchase Agreement") which will be consummated prior to the
Closing Date. Any Owned Loans or Off-Balance Sheet Loans that are not sold
pursuant to the terms of the Mortgage Loan Purchase Agreement (collectively, the
"Remaining Loans") shall be sold to Buyer as of the Closing Date pursuant to a
separate mortgage loan purchase agreement to be executed as of the Closing Date
with respect to the Remaining Loans and reflecting substantially the same terms
and provisions as are set forth in the Mortgage Loan Purchase Agreement with the
exception of pricing which will be the then current market pricing using the
same pricing procedures (the "Remaining Loans Purchase Agreement"). The
provisions for indemnification with respect to the Owned Loans and the Off-
Balance Sheet Loans (including the Remaining Loans) shall be as set forth in the
Mortgage Loan Purchase Agreement and the Remaining Loans Purchase Agreement and
shall not be subject to the
52
131
limitations to indemnification set forth in Section 10.05(a). At Closing, any
ARM holdback and document holdback under the Mortgage Loan Purchase Agreement
and Remaining Loans Purchase Agreement shall be taken into account in the ARM
Holdback and Document Holdback under the provisions of Sections 1.05(l) and
1.05(m) of this Agreement, respectively.
SECTION 6.26 Closing Tape. The Company shall provide an updated magnetic
computer tape as soon as same can be available after each month end occurring
between the date of execution of this Agreement and the Closing Date, and again
as of the Closing Date. With respect to the tape delivered on the Closing Date
(the "Closing Tape"), the information contained in the fields of such Closing
Tape set forth in Section 4.28 of the Company Disclosure Schedule: (i) shall be
true and correct in all material respects; (ii) shall be a true and correct copy
of the information relating thereto contained in the loan servicing systems of
the Company and the Selling Subsidiaries as of the date of such tape.
ARTICLE VII
CERTAIN INSURANCE RELATED ACTIVITIES
SECTION 7.01 Insurance. The parties agree that, with respect to ongoing
programs of insurance provided to mortgage customers, Schedule 7.01(a)
identifies agreements, relationships, and other assets to be transferred to, and
obligations to be assumed by, Buyer. The parties agree that Buyer's
responsibilities are limited to sub-servicing and administrative functions as
specified on Schedule 7.01(b), and Buyer assumes no other liabilities or
obligations with respect to programs (and accompanying agreements) listed on
Schedule 7.01(b). The parties further agree that, with respect to all programs
of insurance included on Schedules 7.01(a) and 7.01(b), the Company shall retain
all refund obligations for any commission payment paid to, and retained by, the
Company, as of the Closing Date. The parties agree that, with respect to
programs no longer offered to mortgage customers, Schedule 7.01(b) identifies
the sub-servicing and administrative functions to be performed by Buyer. The
parties further agree that Annex A to Section 4.19 of the Company Disclosure
Schedule governs the insurance agreements, relationships, and other assets to be
retained by the Company. Buyer shall, after Closing, perform the obligations set
forth in Schedule 7.01(b).
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.01 Conditions to the Company's Obligation to Close. The
obligations of the Company and the Selling Subsidiaries to effect the sale of
the Assets and the other transactions contemplated by the Agreement are subject
to the satisfaction or waiver by the Company prior to or concurrently with the
Closing of each of the following conditions:
(a) Buyer shall have performed in all material respects its agreements
and covenants contained in or contemplated by this Agreement and the
Ancillary Agreements which are required to be performed by it at or prior
to the Closing;
(b) Each of the representations and warranties of Buyer set forth in
this Agreement and the Ancillary Agreements shall be true and correct in
all material respects (i) on and as of the date hereof as to the
representations and warranties made at signing and (ii) on and as of the
Closing Date as to the supplements to be provided at Closing under the
provisions of Section 6.13 (in each case representations and warranties
that expressly speak only as of a specific date or time need only be true
and correct as of such date and time, and where a specific date, as
mutually agreed upon by the parties, is set forth in any particular Section
of the Buyer Disclosure Schedule, such information need only be true and
correct as of the date and time set forth in the Section of the Buyer
Disclosure Schedule or in any supplement to the Buyer Disclosure Schedule,
except to the extent such failures to be true and correct individually or
in
53
132
the aggregate would not have a material adverse effect on the transactions
contemplated by this Agreement;
(c) No statute, rule or regulation shall have been enacted by any
governmental authority of competent jurisdiction which prohibits the
consummation of the purchase and sale of the Assets, the assumption of the
Assumed Liabilities and the other transactions contemplated by this
Agreement or any Ancillary Agreement;
(d) There shall be no order, judgment or decree of a United States
Federal or state court of competent jurisdiction or other governmental or
regulatory authority with competent jurisdiction in effect, precluding or
making illegal consummation of the purchase and sale of the Assets, the
assumption of the Assumed Liabilities and the other transactions
contemplated by this Agreement or any material Ancillary Agreement;
(e) The Ancillary Agreements shall be on commercially reasonable terms
and conditions mutually agreed upon by the parties and shall have been
executed and delivered by the Company and the Selling Subsidiaries, as
applicable;
(f) The Company shall have received a certificate signed on behalf of
Buyer by an executive officer of Buyer, dated as of the Closing Date, to
the effect that the conditions set forth in Sections 8.01(a) and 8.01(b)
hereof have been satisfied;
(g) The Company shall have received a favorable opinion of counsel
with respect to Buyer (a) as to its valid existence and good standing in
the jurisdiction of its incorporation; (b) as to the due execution and
delivery of the Agreement and the Ancillary Agreements; (c) that the
execution, delivery and performance of the Agreement and the Ancillary
Agreements by Buyer (i) are within its corporate power and authority, (ii)
are authorized by all necessary corporate action, (iii) do not conflict
with or breach its certificate of incorporation or by-laws, or any material
federal, New Jersey or Delaware law and (iv) to such counsel's knowledge,
do not require the consent or approval of any governmental authority which
has not been obtained; and (d) that the Agreement and the Ancillary
Agreements constitute legal, valid and binding obligations of Buyer,
enforceable in accordance with their terms, except as limited by applicable
bankruptcy, insolvency and similar laws and equitable principles affecting
the enforcement of creditors' rights generally. Such opinion shall be
subject to customary qualifications, limitations and assumptions and shall
otherwise be in form mutually satisfactory to the parties. Such counsel may
rely on the opinion of local counsel for matters of Delaware law;
(h) All filings with regulators and all regulatory and other approvals
required to be made or obtained by the Company and its Selling Subsidiaries
to consummate the transactions contemplated hereby and by the Ancillary
Agreements, including, without limitation, approvals of the Bank
Authorities for ANB and ABC to distribute to the Company and/or one or more
of the Company's Subsidiaries (by way of dividend or otherwise) any and all
proceeds of the sale of Assets under this Agreement and any other required
approvals of the Bank Authorities, shall have been made and obtained, shall
not be subject to the satisfaction of any condition required to be
satisfied at or prior to Closing that has not been satisfied or waived, and
shall remain in full force and effect, and all statutory waiting periods in
respect thereof shall have expired; and no such approvals shall contain any
conditions or restrictions which the Board of Directors of the Company
reasonably determines in good faith are unsatisfactory;
(i) This Agreement and the transactions contemplated hereby shall have
been approved by the affirmative vote of a majority of the votes entitled
to be cast by the holders of the Class A Shares and the Class A Preferred
Shares, voting together as a single class;
(j) All consents and approvals of any Persons required in connection
with the assignment of the Material Company Contracts shall have been
obtained in form mutually acceptable to the parties hereto in their
commercially reasonable judgment and substantially in the form of Exhibit N
hereto, or in a form on commercially reasonable terms mutually acceptable
to the
54
133
parties hereto, and renegotiations of the Critical Information Technology
Contracts shall have been completed;
(k) There shall not have occurred and be existing a Buyer Material
Adverse Change;
(l) The aggregate purchase price for the Owned Loans and Off-Balance
Sheet Loans referred to in the Letter Agreement and the Mortgage Loan
Purchase Agreement referred to therein between Buyer and Affiliates of the
Company shall not be more than $10,000,000 lower than the amounts reflected
as the purchase price for such loans in Exhibit B to the Letter Agreement
(excluding reductions resulting from payoffs of such loans); and
(m) Any other conditions as set forth in Schedule 8.01(m) to this
Agreement.
SECTION 8.02 Conditions to Buyer's Obligation to Close. The obligations of
Buyer to effect the purchase of the Assets and the assumption of the Assumed
Liabilities and the other transactions contemplated by this Agreement are
subject to the satisfaction or waiver by Buyer prior to or concurrently with the
Closing of each of the following conditions:
(a) Each of the Company and the Selling Subsidiaries shall have
performed in all material respects each of their agreements and covenants
contained in or contemplated by this Agreement and the Ancillary Agreements
which are required to be performed by them at or prior to the Closing;
(b) Each of the representations and warranties of the Company and the
Selling Subsidiaries set forth in this Agreement and the Ancillary
Agreements shall be true and correct in all material respects (i) on and as
of the date hereof as to the representations and warranties made at signing
and (ii) on and as of the Closing Date as to the supplements to be provided
at Closing under the provisions of Section 6.13 (in each case
representations and warranties that expressly speak only as of a specific
date or time need only be true and correct as of such date and time, and
where a specific date, as mutually agreed upon by the parties, is set forth
in any particular Section of the Company Disclosure Schedule such
information need only be true and correct as of the date and time set forth
in the Section of the Company Disclosure Schedule or in any supplement to
the Company Disclosure Schedule), except to the extent such failures to be
true and correct individually or in the aggregate would not have a material
adverse effect on the transactions contemplated by this Agreement;
(c) All filings with regulators and all regulatory and other approvals
required to be made or obtained by Buyer to consummate the transactions
contemplated hereby and by the Ancillary Agreements, including, without
limitation, the approvals listed in Schedule 8.02(c) and any required
approvals of the Bank Authorities, shall have been made and obtained, shall
not be subject to the satisfaction of any condition required to be
satisfied at or prior to Closing that has not been satisfied or waived, and
shall remain in full force and effect, and all statutory waiting periods in
respect thereof shall have expired; and no such approvals shall contain any
conditions or restrictions which the Board of Directors of Buyer reasonably
determines in good faith are unsatisfactory;
(d) No statute, rule or regulation shall have been enacted by any
governmental authority of competent jurisdiction which prohibits the
consummation of the purchase and sale of the Assets, the assumption of the
Assumed Liabilities and the other transactions contemplated by this
Agreement or any material Ancillary Agreement;
(e) There shall be no order, judgment or decree of a United States
Federal or state court of competent jurisdiction or other governmental or
regulatory authority with competent jurisdiction in effect, precluding or
making illegal consummation of the purchase and sale of the Assets, the
assumption of the Assumed Liabilities and the other transactions
contemplated by this Agreement or any Ancillary Agreement;
55
134
(f) The Ancillary Agreements shall be on commercially reasonable terms
and conditions mutually agreed upon by the parties and shall have been
executed and delivered by the Company and the Selling Subsidiaries, as
applicable;
(g) Buyer shall have received a certificate signed on the Company's
behalf by an executive officer of the Company, dated as of the Closing
Date, to the effect that the conditions set forth in Sections 8.02(a) and
8.02(b) hereof have been satisfied;
(h) Buyer shall have received a favorable opinion of Wolf, Block,
Schorr and Solis-Cohen LLP, counsel to the Company, with respect to the
Company and each of the Selling Subsidiaries (a) as to its valid existence
and good standing in the jurisdiction of its incorporation; (b) as to the
due execution and delivery of the Agreement and the Ancillary Agreements;
(c) that the execution, delivery and performance of the Agreement and the
Ancillary Agreements by the Company and each of the Selling Subsidiaries
(i) are within its corporate power and authority, (ii) are authorized by
all necessary corporate action, (iii) do not conflict with or breach its
certificate of incorporation or by-laws, or any material federal or
Delaware law or other applicable law of the jurisdiction of organization of
a Selling Subsidiary and (iv) do not require the consent or approval of any
governmental authority which has not been obtained; and (d) that the
Agreement and the Ancillary Agreements constitute legal, valid and binding
obligations of the Company and each of the Selling Subsidiaries,
enforceable in accordance with their terms, except as limited by applicable
bankruptcy, insolvency and similar laws and equitable principles affecting
the enforcement of creditors' rights generally. Such opinion shall be
subject to customary qualifications, limitations and assumptions and shall
otherwise be in form mutually satisfactory to the parties. Such counsel may
rely on opinions of local counsel for matters concerning the law of states
other than Pennsylvania or Delaware.
(i) All consents and approvals of any Persons (other than that of
Buyer or any Affiliate thereof) required in connection with the assignment
of the Material Company Contracts shall have been obtained in form mutually
acceptable to the parties hereto in their commercially reasonable judgment
substantially in the form of Exhibit N hereto or in a form on commercially
reasonable terms mutually acceptable to the parties hereto, and
renegotiations of the Critical Information Technology contracts shall have
been completed;
(j) This Agreement and the transactions contemplated hereby shall have
been approved by the affirmative vote of the holders of a majority of the
votes entitled to be cast by the holders of the Class A Shares and the
Class A Preferred Shares, voting together as a single class;
(k) Any other conditions as set forth in Schedule 8.02(k) to this
Agreement;
(l) There shall have not occurred and be existing a Material Adverse
Change;
(m) There shall not be a declared monetary event of default or a
declared non-monetary event of default (as such term is defined in the
applicable document) on the part of a Selling Subsidiary which has not been
waived or cured under any Company-Sponsored Mortgage Loan Securitization
Transaction and which would permit termination of such Selling Subsidiary
as servicer on account of such event of default ; and
(n) The aggregate dollar amount of the unpaid principal balance of
loans with payment delinquencies of 30 days or more in the term
securitization transactions consisting of the Company-Sponsored Mortgage
Loan Securitization Transactions shall not have increased by more than 25%
during the period commencing with December 31, 2000 and ending as of the
end of the calendar month immediately preceding the Closing.
56
135
ARTICLE IX
TERMINATION; AMENDMENTS; WAIVER
SECTION 9.01 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
(a) by mutual written consent of Buyer and the Company;
(b) by either Buyer or the Company if the transactions contemplated by
this Agreement have not been consummated by March 31, 2001 (as such date
may be extended by mutual agreement, the "Outside Termination Date");
(c) by either Buyer or the Company if any court of competent
jurisdiction or other governmental body within the United States with
competent jurisdiction shall have issued an order, decree or ruling or
taken any other action in effect permanently restraining, enjoining or
otherwise prohibiting consummation of the transactions contemplated by this
Agreement or any of the Ancillary Agreements, and such order, decree,
ruling or other action shall have become final and nonappealable;
(d) by Buyer, if (i) Buyer shall discover that any representation or
warranty made by the Company in this Agreement was untrue at the time such
representation or warranty was made or (except for those representations
and warranties made as of a particular date which need only be true and
correct as of such date) shall not be true and correct as of the Closing
Date (except where the failure to be so true and correct individually or in
the aggregate would not have a material adverse effect on the transactions
contemplated by this Agreement), provided that if any such failure to be so
true and correct is capable of being cured prior to the Outside Termination
Date, then Buyer may not terminate this Agreement under this paragraph (d)
until the Outside Termination Date, and Buyer must provide notice to the
Company, at or prior to the date originally scheduled for Closing by the
Company specifying in reasonable detail the untruthfulness in the
representations or warranties claimed by Buyer and in no event may Buyer
terminate this Agreement under this paragraph (d) if such failure is
corrected prior to the Outside Termination Date, or (ii) there shall have
been a breach of any covenant or agreement on the part of the Company or
any Selling Subsidiary under this Agreement resulting in a material adverse
effect on the Assets, which shall not be capable of being cured prior to
Outside Termination Date; or
(e) by the Company, if (i) the Company shall discover that any
representation or warranty made by Buyer in this Agreement was untrue at
the time such representation or warranty was made or (except for those
representations and warranties made as of a particular date which need only
be true and correct as of such date) shall not be true and correct as of
the Closing Date (except where the failure to be so true and correct would
not have a material adverse effect on the transactions contemplated by this
Agreement or materially adversely affect, or materially delay, the
consummation of the transactions contemplated by this Agreement), provided
that if any such failure to be so true and correct is capable of being
cured prior to the Outside Termination Date, then the Company may not
terminate this Agreement under this paragraph (e) until the Outside
Termination Date, and the Company must provide notice to Buyer, at or prior
to the date originally scheduled for closing by the Company specifying in
reasonable detail the untruthfulness in the representations and warranties
claimed by the Company, and in no event may the Company terminate this
Agreement under this paragraph (e) if such failure is corrected prior to
the Outside Termination Date or (ii) there shall have been a material
breach of any covenant or agreement in this Agreement on the part of Buyer
which shall not be capable of being cured prior to the Outside Termination
Date.
57
136
SECTION 9.02 Effect of Termination.
(a) In the event of the termination and abandonment of this Agreement
pursuant to Section 9.01 hereof, this Agreement shall forthwith become void,
without liability on the part of any Person except as provided in Sections
6.03(b) 9.02(b) and 11.09 provided, however, that termination will not relieve a
party in breach of this Agreement from liability for any willful breach of this
Agreement giving rise to such termination.
(b) In the event that any person or group shall propose an Alternative
Acquisition and thereafter this Agreement is terminated for any other reason
(other than by reason of the breach of this Agreement by Buyer) and a definitive
agreement with respect to such Alternative Acquisition is executed within one
year after such termination, then the Company shall pay to Buyer, by wire
transfer of same day funds, within two Business Days after such amount becomes
due, a termination fee of $1,000,000.
SECTION 9.03 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties to this Agreement.
SECTION 9.04 Extension; Waiver. At any time prior to the Closing, the
parties hereto, by action taken by or on behalf of the respective Boards of
Directors of the Company and Buyer, may (i) extend the time for the performance
of any of the obligations or other acts of any other applicable party hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein by any other party or in any document, certificate or writing delivered
pursuant hereto by any other applicable party or (iii) waive compliance with any
of the agreements of any other party or with any conditions to its own
obligations. Any agreement on the part of any other party to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. Such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE X
INDEMNIFICATION
SECTION 10.01 Indemnification by the Company.
(a) The Company shall indemnify and hold Buyer and its respective officers,
directors, employees, agents and Affiliates (together, the "Buyer Indemnified
Persons") harmless from and against any Losses suffered, incurred or sustained
by Buyer or any Buyer Indemnified Persons:
(1) resulting or arising from any breach of any representation or
warranty on the part of the Company or any Selling Subsidiary under this
Agreement whether or not related to the Assumed Liabilities;
(2) resulting or arising from any breach or nonfulfillment of any
covenant or agreement to be performed by the Company or any Selling
Subsidiary under this Agreement whether or not related to the Assumed
Liabilities; and
(3) resulting or arising from any liability relating to the acts,
omissions or obligations of the Company or any Selling Subsidiary on or
prior to the Closing Date relating to the Business or the operations
thereof (including matters set forth in Section 4.19 of the Company
Disclosure Schedule) which is not an Assumed Liability.
(b) Any and all Losses referred to in this Section 10.01 shall be computed
on a net basis, after taking into account any amounts received by any Buyer
Indemnified Person or any Affiliate thereof under any insurance policies, any
tax deductions taken or other tax benefits received by any of them as a result
of such Losses. The Buyer Indemnified Persons shall exercise commercially
reasonable good faith pursue all available insurance recoveries or insurance
claims.
58
137
(c) For purposes of recovery under the indemnification set forth in this
Section 10.01, references or qualifications in the representations and
warranties set forth in this Agreement as to Knowledge shall be disregarded and
shall not apply.
SECTION 10.02 Indemnification by Buyer.
(a) Buyer shall indemnify and hold the Company and the Selling Subsidiaries
and their respective officers, directors, employees, agents and Affiliates
(together, the "Company Indemnified Persons") harmless from and against any
Losses suffered, incurred or sustained by the Company or any Selling Subsidiary
or any Company Indemnified Persons:
(1) resulting or arising from any breach of any representation or
warranty on the part of Buyer under this Agreement;
(2) resulting or arising from any breach of any covenant or agreement
on the part of Buyer; and
(3) resulting or arising from any Assumed Liability.
(b) Any and all Losses referred to in this Section 10.02 shall be computed
on a net basis, after taking into account any amounts received by the Company or
any Selling Subsidiary under any insurance policies and any tax deductions taken
or other tax benefits received to any of them as a result of such Losses. The
Company and each Selling Subsidiary shall exercise commercially reasonable good
faith efforts to pursue all available insurance recoveries or insurance claims.
(c) For purposes of recovery under the indemnification set forth in this
Section 10.02, references or qualifications in the representations and
warranties set forth in this Agreement as to Knowledge shall be disregarded and
shall not apply.
SECTION 10.03 Litigation Management.
(a) Neither Buyer nor any of its Affiliates have assumed from the Company
or any Selling Subsidiary any liability for any litigation arising before or
after the Closing Date and relating to events occurring prior to the Closing
Date with the exception of Assumed Litigation.
(b) The Company shall manage the defense and ultimate resolution of any
litigation which is not Assumed Litigation or subject to the Litigation
Management Agreement but the Company shall not, without Buyer's prior written
consent (which consent shall not be unreasonably withheld or delayed),
compromise any claim or consent to entry of any judgment with respect to any
Company managed litigation which would (i) require Buyer or any of its
Affiliates to take any action or refrain from taking any action (including
payment of money or the taking of any action that would result in the diminution
of the value of any Asset) (it being understood and agreed that this clause (i)
shall not apply if the action to be taken involves solely the payment of
monetary damages or other amounts for which the Company shall be responsible);
(ii) impose an injunction or other equitable relief upon Buyer or any of its
Affiliates; or (iii) affirmatively admit any wrongdoing on the part of Buyer or
any of its Affiliates unless the Company obtains for Buyer or any of its
Affiliates, as an unconditional term of such settlement or compromise, the
release by the claimant or plaintiff of Buyer or any of its Affiliates from all
liability with respect thereto. In connection with any such settlement,
compromise or consent, Company agrees to request an agreement from the adverse
party or parties not to disclose the terms thereof. Buyer agrees to take all
steps reasonably necessary in connection with such settlement or compromise.
(c) Buyer shall manage as servicer or subservicer under the applicable
Servicing Agreements on behalf of the Company and the Selling Subsidiaries, the
defense and ultimate resolution of the Buyer Managed Litigation pursuant to the
Litigation Management Agreement to be negotiated between Buyer and the Company,
which Litigation Management Agreement shall provide that, to the extent Buyer
seeks full recovery to the extent reasonably permissible under the terms of the
applicable Servicing Agreements, and does not receive recovery, Buyer will incur
the first $1,000,000 of expenses in connection with such Buyer Managed
Litigation (the "Litigation Threshold").
(d) The Company and Buyer shall enter into one or more joint defense
agreements or other arrangements as necessary or appropriate to protect the
attorney-client privilege as it applies to the
59
138
Assumed Litigation, the Buyer Managed Litigation and any litigation arising out
of the conduct of the Business by the Company and the Selling Subsidiaries prior
to Closing. Nothing contained in this Agreement shall require Company, Buyer, or
their respective Affiliates to waive the attorney-client privilege, provided
that the Company and Buyer shall, and shall cause their respective Affiliates to
use commercially reasonable best efforts to comply with the provisions of this
Agreement in a manner that does not waive such privilege.
SECTION 10.04 Requirement for Notice. In the event that any claim is
asserted or action, suit, or proceeding is commenced against a party hereto or
one of its officers, directors, employees, agents or Affiliates ("Indemnitee")
which can reasonably be expected to result in any liability or indemnity being
imposed on another party hereto ("Indemnitor"), Indemnitee shall promptly give
notice thereof to Indemnitor. If Indemnitee fails to provide the notice with
reasonable promptness after Indemnitee receives notice of such claim, Indemnitor
will not be obligated to indemnify Indemnitee with respect to such claim to the
extent (and only to the extent) that Indemnitor's ability to defend has been
irreparably prejudiced by such failure of Indemnitee. Indemnitor then shall have
the opportunity to defend such claim, action, suit or proceeding with counsel
reasonably satisfactory to Indemnitee, if Indemnitor notifies Indemnitee within
ten days of receipt of the notice referred to in the immediately preceding
sentence that it will defend the claim, action, suit or proceeding, and that it
will be responsible for all Losses from such claim, action, suit or proceeding,
provided, however, that Indemnitee may at any time prior to the Indemnitor's
delivery of the notice referred to in the third sentence of this Section 10.04,
file any motion, answer or other pleadings or take any other action that
Indemnitee reasonably believes to be necessary or appropriate to protect its
interests. If Indemnitor agrees that it will be responsible for all Losses from
such claim, action, suit or proceeding then Indemnitor shall have control of any
defense or settlement (except that the consent of Indemnitee shall be required
if Indemnitee is required to pay any amounts or take or refrain from taking any
actions as a result of such settlement); and if Indemnitor accepts such defense
and diligently defends or pursues a settlement, then, except as provided in the
next sentence, Indemnitor shall not be liable to Indemnitee for any of
Indemnitee's attorneys' fees, but Indemnitor's attorneys shall contemporaneously
provide copies of all pleadings and correspondence relating to the claim,
action, suit or proceeding to Indemnitee or its designee. Indemnitee may retain
separate counsel to represent it in, but not control, any defense or settlement
of any claim controlled by Indemnitor pursuant to this Section 10.04, and
Indemnitee will bear its own costs and expenses with respect to such separate
counsel, except that Indemnitor will pay the costs and expenses of such separate
counsel if (x) in Indemnitee's good faith judgment, it is advisable, based on
advice of counsel, for the Indemnitee to be represented by separate counsel
because a conflict or potential conflict exists between Indemnitee and
Indemnitor or (y) the named parties to such claim include both Indemnitee and
Indemnitor and Indemnitee reasonably determines in good faith, based on advice
of counsel, that defenses are available to it that are unavailable to
Indemnitor. Notwithstanding the foregoing, Indemnitee may retain or take over
the control of the defense or settlement of any claim the defense of which
Indemnitor has elected to control if Indemnitee irrevocably waives its right to
indemnity under this Article X with respect to such claim. If Indemnitor does
not accept such defense within such ten day period or fails to diligently pursue
it, (i) Indemnitee will have the right to defend the claim by all appropriate
proceedings, which proceedings will be prosecuted by Indemnitee in good faith or
will be settled at the discretion of Indemnitee; (ii) Indemnitor nevertheless
shall have the opportunity at its sole cost and expense to participate in any
negotiations with respect thereto and shall cooperate therein; (iii) Indemnitee
shall have control of any defense; and (iv) Indemnitor shall also be responsible
for all of Indemnitee's legal fees and expenses. Notwithstanding the foregoing:
(x) no settlement of any claim as to which indemnification is required or may be
sought hereunder shall be made without the consent of the Indemnitor, which
consent shall not be unreasonably withheld, and (y) if Indemnitor accepted the
defense of a claim, action, suit or proceeding and Indemnitor believes that
Indemnitee is responsible for all or part of the Losses associated with such
claim, action, suit or
60
139
proceeding, then no settlement of such claim, action, suit or proceeding shall
be made without the consent of Indemnitee, which consent shall not be
unreasonably withheld.
SECTION 10.05 Limitation on Indemnification.
(a) Notwithstanding anything to the contrary contained herein, (i) neither
the Company nor the Selling Subsidiaries shall have any obligation with respect
to any indemnification payments pursuant to the provisions of Section
10.01(a)(1), except to the extent that the aggregate indemnification obligations
of the Company and the Selling Subsidiaries exceed $1,000,000 ("the Threshold
Amount") in the aggregate, and the Company and the Selling Subsidiaries shall
have no obligation with respect to the Threshold Amount, and (ii) the
indemnification provided for herein shall not cover, and in no event shall any
party hereto be liable for, any consequential or incidental damages.
(b) Notwithstanding anything to the contrary contained herein, (i) Buyer
shall not have any obligation with respect to any indemnification payments
pursuant to the provisions of Section 10.02(a)(1), except to the extent that the
aggregate indemnification obligations of Buyer exceed the Threshold Amount in
the aggregate, and Buyer shall have no obligation with respect to the Threshold
Amount, and (ii) the indemnification provided herein shall not cover, and in no
event shall any party hereto be liable for, any consequential or incidental
damages.
(c) Matters for which Holdback Funds are used or are available in
accordance with Sections 1.05(l) and 1.05(m) shall not be included in
determining whether the Threshold Amount has been reached or exceeded. Buyer
Indemnified Persons shall obtain payment from such Holdback Funds in accordance
with Sections 1.05(l) and 1.05(m) before seeking recovery from the Company or
the Selling Subsidiaries. Any claim for indemnification which is a claim under
10.01(a)(1) as well as 10.01(a)(3) shall result in liability to the Company only
after the Threshold Amount in 10.05(a) has been met.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01 Survival of Representations and Warranties. All covenants,
agreements, representations and warranties contained in this Agreement,
including the schedules hereto shall survive the Closing and the consummation of
the transactions contemplated by this Agreement, with the exception of:
(i) Sections 4.03, 4.09, 4.11, 4.13, 4.15, 4.17, 4.28, 4.30, 4.33 and
4.37 hereof which shall survive the Closing for the shorter of the
applicable statute of limitations period or three years;
(ii) Sections 4.04, 4.06, 4.07, 4.22, 4.26, 4.27, 4.29, 4.31, 4.32,
4.39 and 4.40 hereof, which shall survive the Closing for the shorter of
the applicable statute of limitations period or five years; and
(iii) Sections 4.01, 4.02, 4.05, 4.08, 4.10, 4.12, 4.14, 4.18, 4.19,
4.20, 5.02 and 11.02 hereof, which shall survive the Closing for the
applicable statute of limitations period.
Notwithstanding the foregoing, the parties hereto (including their permitted
assigns) shall be entitled to indemnity under Article X (subject to the
limitations on indemnity set forth therein) for any and all claims made to the
party breaching such representation or warranty within the periods indicated
above. The termination of any covenant, agreement, representation or warranty
shall not affect any Person's right to prosecute to conclusion any claim made in
writing as aforesaid (which describes such claim with reasonable specificity)
prior to the termination of such covenant, agreement, representation or
warranty.
SECTION 11.02 Brokerage Fees and Commissions. Except for Salomon Smith
Barney, (the fees of which will be paid by the Company), the Company hereby
represents and warrants to Buyer with respect to the Company and its Affiliates,
and Buyer hereby represents and warrants to the Company and its Affiliates with
respect to Buyer and its Affiliates, that no Person is entitled as a result
61
140
of actions by it or on its behalf to receive from the other, respectively, or
any of their respective Subsidiaries or Affiliates, to any investment banking,
brokerage or finder's fee or fees for financial consulting or advisory services
in connection with this Agreement or the transactions contemplated hereby.
SECTION 11.03 Entire Agreement; Assignment. This Agreement (including the
Disclosure Schedules and the Ancillary Agreements) (a) constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior disclosures, agreements and understandings, both
written and oral (other than the Confidentiality Agreement referred to in
Section 6.03(b) hereof to the extent set forth therein), among the parties or
any of them with respect to the subject matter hereof, (b) shall be binding upon
the parties hereto and their successors and permitted assigns and (c) shall not
be assigned without the prior written consent of the other parties hereto,
except that Buyer may assign any or all of its rights, interests or obligations
hereunder (including, without limitations, rights under Article X) to (i) one or
more Buyer Affiliates, provided that any such Buyer Affiliate agrees in writing
to be bound by all of the terms, conditions and provisions contained herein, or
(ii) any post-Closing purchaser of all or substantially all of the Assets, but
in no event shall such assignment under clauses (i) or (ii) relieve Buyer of its
obligations hereunder. Notwithstanding the foregoing, Buyer shall at Closing,
assign its rights, interests and obligations in and with respect to: (A) the
CMSR and other servicing Assets; (B) the Residual Assets; and (C) the insurance
Assets and HELOCs, in each case to one or more of the Buyer Affiliates which are
permitted legally and under the terms of Applicable Requirements to own and deal
with such assets, or any successor by merger. Subject to the preceding sentence,
this Agreement is binding upon, inures to the benefit of and is enforceable by
the parties hereto and their respective successors and assigns.
SECTION 11.04 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, each of which shall remain in full force
and effect.
SECTION 11.05 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person or by next business day courier to the
respective parties as follows:
If to Buyer:
Chase Manhattan Mortgage Corporation
343 Thornall Street
Edison, NJ 08837
Attention: Luke Hayden, Executive Vice President
with a copy to:
Chase Manhattan Mortgage Corporation
343 Thornall Street
Edison, NJ 08837
Attention: Molly Sheehan, Senior Vice President and General Counsel
If to the Company or any Selling Subsidiary:
Advanta Corp.
Welsh and McKean Roads
Spring House, PA 19477
Attention: William A. Rosoff
President and Vice Chairman of the Board
62
141
with a copy to:
Advanta Corp.
Welsh and McKean Roads
Spring House, PA 19477
Attention: Elizabeth H. Mai, Esquire
Senior Vice President and General Counsel
with a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
1650 Arch Street
Philadelphia, Pennsylvania 19103
Attention: Jay A. Dubow, Esquire
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof). Any such notice shall be effective upon receipt, if personally
delivered or sent by facsimile transmission, or one day after delivery to a
courier for next day delivery. Nothing in this Section 11.05 shall be deemed to
constitute consent to the manner and address for service of process in
connection with any legal proceeding (including litigation arising out of or in
connection with this Agreement), which service shall be effected as required by
applicable law.
SECTION 11.06 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 11.07 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning of interpretation of this Agreement.
SECTION 11.08 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 11.09 Expenses. Except as otherwise specifically provided herein,
all costs and expenses incurred in connection with the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses; provided,
however, that all costs and expenses (including transfer fees, consent fees and
penalty fees) incurred in connection with the assignments of the Material
Company Contracts and the Critical Information Technology Contracts shall be
paid by the Company and all costs and expenses (including transfer fees, consent
fees and penalty fees) incurred in connection with the assignment of any other
contracts or agreements (including transfer fees, consent fees and penalty
fees), and all recording fees, documentary stamps and sales taxes payable in
connection with the purchase and sale of the Company owned real property and
personal property, shall be paid solely by the Company, with all filing fees
associated with the HSR filings which shall be paid solely by Buyer.
SECTION 11.10 Third Party Beneficiaries. From and after the Closing
hereunder, except for the rights of holders and obligees of interest bearing
liabilities included in the Assumed Liabilities to performance of the
obligations assumed by Buyer to pay such holders and obligees the amounts owed
to them, this Agreement is not intended to, and does not, create any rights or
benefits of any Person other than the parties hereto.
SECTION 11.11 Construction; Interpretation. The parties hereby agree that
any rule of law or any legal decision that would require interpretation of any
claimed ambiguities in this Agreement against the party that drafted it has no
application and is expressly waived.
SECTION 11.12 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDINGS ARISING OUT
OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
63
142
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed under seal on its behalf by its officers thereunto duly authorized, all
as of the day and year first above written.
CHASE MANHATTAN MORTGAGE
CORPORATION
By: /s/ LUKE HAYDEN
------------------------------------
Name: Luke Hayden
Title: Executive Vice President
ATTEST:
/s/ DEAN B. ARNOLD
- ---------------------------------------------------
Name: Dean B. Arnold
Title: Senior Vice President Strategic
Planning & Corporate Development
ADVANTA CORP.
By: /s/ WILLIAM A. ROSOFF
------------------------------------
Name: William A. Rosoff
Title: President and Vice Chairman
of
the Board
ATTEST:
/s/ LIANE COHEN
- ---------------------------------------------------
Name: Liane Cohen
Title: Assistant Secretary
The undersigned join in this Agreement solely for the purpose of agreeing,
subject to the terms of this Agreement, to sell, transfer and assign those
portions of the Assets owned by the undersigned in accordance with the terms of,
and subject to the conditions contained in, this Agreement.
ADVANTA NATIONAL BANK
By: /s/ WILLIAM A. ROSOFF
------------------------------------
Name: William A. Rosoff
Title: President and Vice Chairman
of
the Board
64
143
ATTEST:
/s/ LIANE COHEN
- ---------------------------------------------------
Name: Liane Cohen
Title: Assistant Secretary
ADVANTA BANK CORP.
By: /s/ WILLIAM A. ROSOFF
------------------------------------
Name: William A. Rosoff
Title: President
ATTEST:
/s/ PHILIP M. BROWNE
- ---------------------------------------------------
Name: Philip M. Browne
Title: Chief Financial Officer
65
144
SCHEDULE 1
ASSETS
(A) All assets reflected on the Closing Balance Sheet.
(B) All other assets of the Company or the Selling Subsidiaries primarily
or exclusively used or held for use in the Business, including without
limitation all right, title and interest of the Company or the Selling
Subsidiaries in, to or under:
(i) all books and records primarily or exclusively used or held for
use in the Business or otherwise relating to the Assets (provided that the
Company, to the extent required by law, may retain copies of all such books
and records), including, but not limited to, customer lists and other
customer information, supplier lists and other supplier information,
existing books, records, manuals, documents, books of account,
correspondence, account and credit reports, files, product files,
literature, brochures, marketing plans and advertising material;
(ii) the Company Intellectual Property and the Company Information
Technology Assets, excluding those rights and interests set forth on
Schedule 6.18(c), and all rights, privileges, and options thereunder
primarily or exclusively relating or pertaining to the Business or the
Assets;
(iii) all of the rights and interests of the Company and the Selling
Subsidiaries accruing from and after the Closing Date (except that with
respect to clause (B)(iii)(1) below such rights and interest shall include
those accruing prior to, as well as from and after, the Closing Date) in
the following:
(1) the mortgage loans and mortgage loan receivables owned by the
Company or any of the Selling Subsidiaries and any Off-Balance Sheet
Loans and any Loans (including without limitation, the Owned Loans and
the Off-Balance Sheet Loans), including all notes and other evidences of
indebtedness and all rights of the Company and the Selling Subsidiaries
to receive payments arising therefrom, whether held for sale or for
investment, including all rights of the Company and the Selling
Subsidiaries with respect to any third party collection procedures or
any other actions or proceedings that have been commenced in connection
therewith;
(2) all residual securities issued in the Company-Sponsored
Mortgage Loan Securitization Transactions owned by the Company or any of
the Selling Subsidiaries, as set forth in Annex B to this Schedule 1,
and all instruments evidencing the same, including all rights of the
Company and the Selling Subsidiaries with respect to any third party
collection procedures or any other actions and proceedings commenced in
connection therewith;
(3) the Servicing Agreements listed in Annex C to this Schedule 1,
including, without limitation, all rights of the Company and the Selling
Subsidiaries to servicing and delinquency advance receivables;
(4) the Pipeline Applications;
(5) the Insurance Pipeline;
(6) the Company Contracts set forth on Annex A to this Schedule 1,
including the Material Company Contracts and the Critical Information
Technology Contracts, except to the extent that any portion of a Company
Contract is excluded from the Assets under (E)(i) of this Schedule 1;
and
(8) covenants of confidentiality and noncompetition, if any,
arising under the Company Contracts and benefits arising therefrom, to
the extent transferable to Buyer.
Notwithstanding the foregoing, the Assets relating to the Corporate Finance
Agreements shall be subject to the obligations under the Corporate Finance
Program Agreement and the Corporate Service Agreements.
145
(C) All rights of the Company and the Selling Subsidiaries arising from and
after the Closing Date under the leases and subleases of real or personal
property described in Schedule 4.13(b), together with any options to purchase
the underlying property or improvements, and all other rights, subleases,
licenses, permits, deposits and profits appurtenant or related thereto,
including all security deposits on the Closing Balance Sheet that were deposited
on behalf of the Company or a Selling Subsidiary (but with respect to the leases
for the AFC branch offices, such leases shall in any event be included within
this clause (C) to the extent that Buyer or any Buyer Affiliate continues, after
Closing, operations of such branch office and/or purchases, as part of the
Assets, the leasehold responsibilities thereon.
(D) All furniture, fixtures, equipment, machinery and other tangible
personal property described on Annex D to this Schedule 1.
(E) Notwithstanding the foregoing or anything to the contrary contained in
the Agreement, Assets shall not include the following:
(i) the Excluded Assets set forth on Schedule 4.19;
(ii) All rights, privileges and options of the Company or any of the
Selling Subsidiaries against third parties with respect to any liability
that is not an Assumed Liability, whether accruing before, on or after the
Closing Date, including, without limitation, any litigation or proceedings
not assumed by Buyer.
2
146
SCHEDULE 2
ASSUMED LIABILITIES
Assumed Liabilities shall include:
I. All liabilities and obligations (fixed, contingent or otherwise)
resulting from or arising out of the operation of the Business or ownership
of the Assets after the Closing Date (except as otherwise specified below),
relating to the following:
(A) Liabilities as reflected on the Closing Balance Sheet, whether
arising before, on or after the Closing Date, but only up to, and not
exceeding, the amount of such liabilities that are part of the Purchase
Price calculations as set forth in Section 1.05(c)(iii)(B) of the
Agreement, including any adjustments thereto made pursuant to the
Closing Balance Sheet and any Final Post-Closing Adjustment.
(B) The obligations of the servicer or subservicer as set forth in
the Servicing Agreements.
(C) All liabilities and other obligations under the Company
Contracts, including the Material Company Contracts and Critical
Information Technology Contracts, and any and all other leases,
contracts and agreements assumed by the Buyer under the terms of this
Agreement.
(D) The obligation to close and other obligations relating to the
Pipeline Applications and the Insurance Pipeline in accordance with the
terms of the commitments associated with such Pipeline Applications and
Insurance Pipeline outstanding as of the Closing Date;
(E) All amounts payable existing as of or after the Closing Date
with respect to Advanta Mortgage Acquisition Campaign 2001.1, as
detailed in the expense pre-approval authorization forms and purchase
orders appended thereto (and attached hereto as Annex D to Schedule 1),
and any other marketing campaign primarily or exclusively relating to
the Business which is engaged in after execution of this Agreement and
prior to the Closing Date and which does not violate the terms of this
Agreement.
(F) The obligation to pay 78% of the payment of approximately
$740,000 due on October 25, 2001 under the Microsoft Enterprise Select
Agreement dated October 25, 1999 between the Company and MSLI, LLC.
(G) The obligations referred to in Section 7.01(a) of the Company
Disclosure Schedule.
II. All liabilities and obligations (fixed, contingent, or otherwise)
resulting from or arising out of the Assumed Litigation (but not any other
litigation).
Except for the Assumed Liabilities listed above, Buyer and its Affiliates
shall not assume and shall have no liability for any indebtedness, obligations
or other liabilities of the Company or its Affiliates, including, without
limitation, any undisclosed liabilities or any items disclosed in the Company
Disclosure Schedule related to acts or omissions or alleged acts or omissions of
the Company or its Affiliates on or prior to the Closing Date.
As to liabilities related to the acts or omissions or alleged acts or
omissions of the Company or its Affiliates on or prior to the Closing Date,
Buyer and its Affiliates shall perform obligations required as the then current
servicer under the provisions of the applicable Servicing Agreements, but does
not assume any liability for acts or omissions or alleged acts or omissions of
the Company or its Affiliates on or prior to the Closing Date.
147
EXHIBIT/SCHEDULE LIST
EXHIBITS
Exhibit A Form of Daily Balance Sheet
Exhibit B September 30, 2000 Balance Sheet
Exhibit C Form of Advanta Service Mark License and Domain Name Usage
Agreement
Exhibit D Form of Information Access Agreement
Exhibit E Form of Bill of Sale and General Assignment
Exhibit F Form of Subservicing Agreement
Exhibit G Form of Lease Agreement
Exhibit H Form of Webby Software License Agreement
Exhibit I Form of Assumption Agreement
Exhibit J Form of Transitional Services Agreement
Exhibit K [INTENTIONALLY OMITTED]
Exhibit L Form of Litigation Management Agreement
Exhibit M Form of Asset Leases as Described in Schedule
1.05(c)(iii)(C)(2)
Exhibit N Form of Consent Agreement
Exhibit O Form of Corporate Finance Program Agreement
SCHEDULES
Schedule 1 Assets
Annex A to Schedule 1 Company Contracts
Exhibit 1 to Annex A Company-Sponsored Mortgage Loan Securitization Agreements
Exhibit 2 to Annex A Marketing Campaigns POs
Annex B to Schedule 1 Company-Sponsored Mortgage Loan Securitizations
Annex C to Schedule 1 Servicing Agreements
Annex D to Schedule 1 Fixed Assets
Schedule 1.05(b)(1) Arthur Andersen Arrangement Letter
Schedule 1.05(b)(2) Form of Arthur Andersen Representation Letter of Buyer and
Company
Schedule 1.05(c) Purchase Price Mechanism
Schedule 1.05(c)(i) Form of Purchase Price Calculation
Schedule 1.05(c)(iii)(C)(1) Purchase Price Adjustments for Fixed Assets
Schedule 1.05(c)(iii)(C)(2) Fixed Assets to be Leased by Buyer
Schedule 1.05(c)(iii)(C)(3) Contingent Purchases of Fixed Assets
Schedule 2 Assumed Liabilities
Annex A to Schedule 2 Assumed Litigation
Annex B to Schedule 2 Buyer Managed Litigation
Section 4.01 Selling Subsidiaries
Section 4.03(i)(x) Increases in Salary, Wages or Other Compensation
Section 4.03(i)(y) Establishment or Modification of Compensation Arrangements
Section 4.03(i)(z) Amendments and Modifications to Employee Benefit Plans since
June 30, 2000
2
148
Section 4.03(ii) Physical Damage to Non-REO Property
Section 4.03(iii)(A) Business Practices or Policy
Section 4.03(iii)(B) Method for Allowances
Section 4.03(iv) Disposition of Assets or Creation of Liens
Section 4.03(v) Amended or Modified Contracts
Section 4.03(vi) Capital Expenditures or Commitments
Section 4.04(a) Loan Servicing Matters -- Servicing Agreements
Section 4.04(b) Loan Servicing Matters -- Insurance
Section 4.04(c) Loan Servicing Matters -- Escrow Accounts
Section 4.05(a) & (b) Securitization Matters
Section 4.05(c) Securitization Matters -- Notices of Default
Section 4.06 Consents and Approvals
Section 4.07 Litigation
Section 4.08 Title to Assets; Encumbrances
Section 4.09 Business Licenses
Section 4.10(b) Registered and Pending Patents, Trademarks and Copyrights
Section 4.10(b).1 Models
Section 4.10(c) Exceptions Regarding Company Intellectual Property
Section 4.10(d) Intellectual Property Proceedings
Section 4.10(e) Personnel Rights to Intellectual Property
Section 4.11(a)(i)(x) Non-compete Contracts of Company
Section 4.11(a)(i)(y) Non-Compete Contracts of Individuals
Section 4.11(a)(ii) JV Contracts Regarding Business
Section 4.11(a)(iii) Contracts Relating to Disposition of Assets
Section 4.11(a)(iv) Other Contracts
Section 4.11(b) Company Contract Violations
Section 4.11(c) Imperfections as to Material and Significant Company
Contracts
Section 4.12(b)(2) Environmental Matters
Section 4.12(b)(7) Environmental Reports
Section 4.13(a) Owned Real Estate
Section 4.13(a)(1) Title Exceptions to Ridgeview Property
Section 4.13(a)(2) Occupancy Rights for Ridgeview
Section 4.13(a)(3) Ridgeview Options or Rights of First Refusal
Section 4.13(b) List of Leases
Section 4.13(c) Ridgeview Property Contracts
Section 4.14(a)(1) Employee Information
Section 4.14(a)(2) Employees Under Contract
Section 4.14(a)(3) Material Impediments to Employment
Section 4.14(a)(4) Non-Resident Visa Employees
Section 4.14(a)(5) Compliance with Executive Order 11246
Section 4.14(a)(6) Disciplinary Action
Section 4.14(a)(7) CBAs
3
149
Section 4.14(a)(8) COBRA Notices
Section 4.14(b) Employee Benefit Plans
Section 4.15(a) Union Activity
Section 4.15(b) Employees with Salaries Greater than 75K
Section 4.15(c) Agency Charges Related to Employment
Section 4.16 Additional Reps and Warranties
Section 4.17(a) Affiliate Transactions
Section 4.17(b) Non Arms-length Affiliate Transactions
Section 4.18(a) Tax Liens
Section 4.18(b) Reserves for Tax Payments
Section 4.18(c) Tax Returns
Section 4.19 Excluded Assets
Annex A to 4.19 Insurance Agreements, Relationships and Other Assets to be
Retained by the Company
Section 4.20 Disclosure Issues
Section 4.22 Exceptions Regarding Balance Sheet
Section 4.27 Compliance with Laws
Section 4.28 Tape
Section 4.29 Investor Requirements
Section 4.30 Physical Damage/REO
Section 4.31 Payment of Taxes/Flood Tracking
Section 4.32 Loss Mitigation Agreements
Section 4.33 Waivers/Releases
Section 4.40 Accounts
Schedule 6.01(1)(A)(c)(i) Schedule of Insurance
Schedule 6.01(1)(B)(2)(e) Bonus Arrangements
Schedule 6.01(1)(B)(3) Benefit Arrangements
Schedule 6.01(1)(B)(4) Disposition of Assets
Schedule 6.01(1)(B)(5) Acquisition of Assets
Schedule 6.01(1)(B)(6) Employee Communications
Schedule 6.01(1)(B)(7) Procedures for Access to Employees During Transition
Schedule 6.01(1)(B)(8) None
Schedule 6.08(b)(1) Employee Benefits
Annex B to Schedule Employee Deferral Plan Participants
6.08(b)(1)
Schedule 6.08(b)(2) Letter Agreements
Schedule 6.17 Guarantees
Schedule 6.18(a)-1 Company Information Technology Assets
Schedule 6.18(a)-2 Company Information Technology Contracts
Schedule 6.18(a)-3 Excluded Information Technology Contracts
Schedule 6.18(b) Critical Information Technology Contracts
Schedule 6.18(c) Reserved Company Intellectual Property and Company
Information Technology Assets
4
150
Schedule 6.18(d) IP Addresses to be Released by Buyer
Schedule 6.25 Letter Agreement
Schedule 7.01(a) Insurance Agreements, Relationships, and Other Assets to be
Transferred to Buyer and Obligations to be Assumed by Buyer
Schedule 7.01(b) Insurance Sub-servicing and Administrative Functions to be
Performed by Buyer
Schedule 8.01(m) Additional Conditions to the Company's Obligation to Close
Schedule 8.02(c) Regulatory Approvals
Schedule 8.02(k) Additional Conditions to Buyer's Obligations to Close
Schedule 11.03 Buyer Affiliates
5
151
TABLE OF CONTENTS
[Table of Contents will generate here]
i
152
SCHEDULE 1.05(C)
SECTION I. Residual Assets. Buyer conducted an evaluation of certain
residual assets as of June 30, 2000 based upon the Tape. The price to be paid by
Buyer for the Residual Assets (as defined in this Schedule 1.05(c) and
consisting of the assets listed in the general ledger accounts specified in the
definition of Residual Asset Accounts) will, regardless of the amounts or
balances in the general ledger accounts, be an amount equal to the sum of (i)
the Spot Price for such Assets as of the applicable Closing Date indicated in
the definition of Spot Price contained in this Schedule 1.05(c) and adjusted as
set forth below plus (ii) the Swap Target Price for such Assets as of the
applicable Closing Date indicated in the definition of Swap Target Price
contained in this Schedule 1.05(c). The Spot Price for the Residual Assets
referred to in the preceding sentence will be adjusted as of the applicable
Closing Date based on the following:
1. A) If the Residual Cashflows received are greater than the Target
Cashflows as of the applicable Closing Date indicated in the definition of
Target Cashflow contained in this Schedule 1.05(c), there will be a
reduction of the Spot Price in an amount equal to the Residual Cashflows
less the Target Cashflows. B) If the Residual Cashflows received by the
Company and the Selling Subsidiaries are less than the Target Cashflows as
of the applicable Closing Date indicated in the definition of Target
Cashflow contained in this Schedule 1.05(c), there will be an increase to
the Spot Price equal to the lesser of i) the Cashflow Buy-Up Cap for the
related Closing Date, or ii) the product of (x) .65, and (y) the Target
Cashflows less the Residual Cashflows.
2. On the Closing Date, to the extent that the 90 Day Delinquency
Percentage is not within the range between the lower band and the upper
band of the 90 Day Target Percentage for the related Closing Date there
will be an adjustment to the Spot Price equal to the product of A) .23, and
B) the difference between the 90 Day Delinquency Amount and the 90 Day
Target Amount (such product being referred to as the "Delinquency Rate
Adjustment"). If the 90 Day Delinquency Percentage is greater than the
upper band, there will be a reduction of the Spot Price in an amount equal
to the Delinquency Rate Adjustment. If the 90 Day Delinquency Percentage is
less that the lower band, there will be an increase to the Spot Price in an
amount equal to the Delinquency Rate Adjustment.
3. The Constant Prepayment Rate ("CPR") target band will be equal to
the June 2000, 3-month average CPR which was 20.39%, plus or minus
one-fifth of such amount (the "CPR Target Band"). If the 3-month average
CPR ending as of the end of the month immediately preceding the Closing
Date falls within the CPR Target Band, no adjustment to the valuation of
the Spot Price will be made. If the 3-month average CPR ending as of the
end of the month immediately preceding the Closing Date exceeds the CPR
Target Band, the Spot Price will be reduced by the product of A) 1.00%, and
B) the Spot Price, for each 100 basis points in CPR above the target band.
If the 3-month average CPR as of the end of the month immediately preceding
the Closing Date falls below the target band, the Spot Price will be
increased by the product of a) 1.00%, and b) the Spot Price, for each 100
basis points in CPR below the target band.
4. To the extent that there are HELOC draws in Company-Sponsored
Mortgage Loan Securitization Transactions funded by the Company or a
Selling Subsidiary which result in an increase to the balance of the
residual assets from the period beginning July 1, 2000 and ending on the
Closing Date, there will be a related increase to the Spot Price equal to
the product of A) .80, and B) the aggregate amount of all such draws.
SECTION II. Contractual Mortgage Servicing Rights. Buyer conducted a
valuation of certain CMSRs (being the assets listed in the general ledger
accounts specified in the definition of CMSR Accounts) relating to the Residual
Portfolio as of June 30, 2000. The price for the CMSRs as of the Closing Date,
regardless of the amounts or balances in the general ledger account, shall be
the "MSR Price" and determined separately for Portfolio A and Portfolio B, each
as defined below.
153
PORTFOLIO A PORTFOLIO B
- ----------- -----------
2000-2 2000-1
1999-1 1999-4
1998-4 1999-3
1998-3 1999-2
1998-2 2000-A
1998-1 1999-B
1997-4 1999-A
1997-3 1998-B
1997-2
1997-1
1996-4
1996-3
1996-2
1996-1
1995-3
1995-2
1995-1
1998-A
1997-A
1996-A
1995-1
1994-4
1994-3
1994-2
1994-1
1993-4
1993-2
1993-1
1992-3
SECTION III. Owned and Off-Balance Sheet Loans. The price to be paid by
Buyer for the Owned Loans (being the assets listed in the general ledger
accounts specified in the definition of Owned Loans Accounts) and the
Off-Balance Sheet loans, regardless of the amounts or balances in the general
ledger account, is to be determined in accordance with the Letter Agreement of
even date herewith which is attached as Schedule 6.25 to this Agreement and in
accordance with Section 6.25 of this Agreement.
DEFINITIONS.
"CPR Adjustment Event" shall mean that the 3-month average CPR is not
within the CPR Target Band.
"CPR Target Band" shall have the meaning set forth in Section I(4) of this
Schedule 1.05(c).
"CMSR Accounts" are the following accounts in the Company's general ledger:
ACCOUNT DESCRIPTION ACCOUNT NUMBER
- ------------------- --------------
Capitalized Servicing....................................... 156390
LOCOM Valuation Reserve..................................... 156393
CMSR-FAcil Line............................................. 156394
Incremental Servicing Reserves.............................. 156395
2
154
"Delinquency Rate Adjustment" shall mean that the 90 Day Delinquency
Percentage, determined in accordance with Schedule 1.05(c), is not within the
range between the upper and lower band of the 90 Day Target Amount.
"Distribution Date": the date on which the Company and the Selling
Subsidiaries, as applicable, receive Residual Cashflow from the securitization
trustee.
"Owned Loan Accounts" are the following accounts in the Company's general
ledger:
ACCOUNT DESCRIPTION ACCOUNT NUMBER
- ------------------- --------------
AEL Loans................................................... 133001
Closed-End Mortgage Loans-HES............................... 133002
MS Loans.................................................... 133022
98B HLTV.................................................... 133023
Mortgage Loans.............................................. 133024
Real Estate Loans........................................... 133026
2nd Mortgage Bulk........................................... 133030
Heloc Loans Contra 1999..................................... 133033
Real Estate Loans Contra.................................... 133034
Bear Stearns Loans.......................................... 133035
Closed End Contra HFS....................................... 133040
Heloc Loans Held for Sale................................... 133041
Heloc Contra HFS............................................ 133042
98B HLTV-Contra............................................. 133102
Ael MS Contra............................................... 133107
Heloc Loans Contra 2000 A................................... 133108
MS Loans Contra............................................. 133122
Mortgage Loan Valuation..................................... 133014
LOCUM Valuation-HFS......................................... 133037
Loan Valuation -- HFS Transfer.............................. 133043
Allowance For Loan Losses................................... 136001
Def'D Cost-Fas 91 Mtg....................................... 130106
Def Loan Orig Fees.......................................... 130551
Deferred Orig. Fees-Mtg..................................... 130553
Deferred Orig Fee-Heloc..................................... 130554
Premium Paid-Orig........................................... 130555
Premiums Paid-Acquisitions.................................. 130556
Premiums Paid Bulk.......................................... 130557
YSP -- Conduit -- Flow...................................... 130558
Contra-Deferred Orig Fees................................... 130562
Deferred Fees-Cond Pool HFI................................. 130563
Deferred Fees-Heloc-HFI..................................... 130564
Deferred Fees-Cond Flow-HFI................................. 130565
Deferred Fees Direct-HFI.................................... 130566
Deferred Fees CSC-HFI....................................... 130568
"MSR Price": the product of a) the "Pricing Multiple," and b) the ending
period unpaid principal balance of the related portfolio for the month ended
immediately preceding the Closing Date.
"Pricing Multiple": Portfolio A -- 0.883%
Portfolio B -- 1.415%
3
155
"Residual Cashflow Adjustment" shall mean that the Residual Cashflows are
greater or less than the Target Cashflows, determined in accordance with this
Schedule 1.05(c).
"Residual Cashflows": the sum of the actual cashflows pertaining to the
"Residual Assets" received by the Company and the Selling Subsidiaries, as
applicable, beginning in July of 2000 and ending with the Distribution Date
immediately preceding for the related Closing Date.
"Residual Portfolio": retained interests in the securitized mortgage loans
(including home equity lines of credit) owned by the trusts listed under
"Residual Assets."
"SWAP Target Price":
CLOSING DATE "SWAP TARGET PRICE"
------------ -------------------
January 31, 2001 $20,257,484
-------------------
February 28, 2001 $19,339,972
-------------------
March 31, 2001 $18,557,459
-------------------
"Cashflow Buy-Up Cap":
CLOSING DATE "CASHFLOW BUY-UP CAP"
------------ -----------------------
January 31, 2001 $15,000,000
-------------------
February 28, 2001 $17,000,000
-------------------
March 31, 2001 $19,000,000
-------------------
"Spot Price":
CLOSING DATE "SPOT PRICE"
------------ -----------------------
January 31, 2001 $369,508,085
February 28, 2001 $369,038,549
March 31, 2001 $368,853,860
"Target Cashflows":
CLOSING DATE "TARGET CASHFLOW"
------------ -----------------
January 31, 2001 $59,875,841
February 28, 2001 $67,119,692
March 31, 2001 $74,070,088
"90 Day Delinquency Amount": for the month ending immediately preceding the
Closing Date, the product of a) the 90 Day Delinquency Percentage, and b) the
ending period unpaid principal balance of the Residual Portfolio.
"90 Day Delinquency Percentage": for the month ending immediately preceding
the Closing Date, the fraction expressed as a percentage in which the numerator
is equal to the 90 Plus balances represented in the Residual Portfolio, and the
denominator is equal to the ending period unpaid principal balance as of the
same date.
"90 Plus": the sum of the unpaid principal balances that are: a) 90 days or
more delinquent, b) in Foreclosure, c) Real Estate Owned (REO), provided,
however, that bankruptcy accounts do not count toward the 90 day plus
calculation. Such amounts shall be determined in a manner consistent with that
reported in the statements to certificate holders.
"90 Day Target Amount": is the product of a) the 90 Day Target Percentage
as of the applicable Closing Date indicated in the definition of 90 Day Target
Percentage, and b) the ending period unpaid principal balance of the Residual
Portfolio.
4
156
"90 Day Target Percentage":
CLOSING DATE UPPER BAND LOWER BAND
------------ ---------- ----------
January 31, 2001 6.44% 5.48%
February 28, 2001 6.57% 5.59%
March 31, 2001 6.66% 5.68%
"Residual Assets": residual assets related to the following
Company-Sponsored Mortgage Loan Securitization Transactions (including the
related swaps):
AMLT ARHELT
- ---- ------
2000-2 2000-A
2000-1 1999-B
1999-4 1999-A
1999-3 1998-B
1999-2 1998-A
1999-1 1997-A
1998-4 1996-A
1998-3
1998-2
1998-1
1997-4
1997-3
1997-2
1997-1
1996-4
1996-3
1996-2
1996-1
1995-3
1995-2
1995-1
1994-4
1994-3
1994-2
1994-1
1993-4
1993-3
1993-2
1993-1
1992-3
5
157
"Residual Asset Accounts" are the following accounts on the Company's
general ledger:
ACCOUNT DESCRIPTION ACCOUNT NUMBER
- ------------------- --------------
Overcollateral Interest..................................... 124201
Morgan O/C.................................................. 124202
Residual Interest Rec., Net................................. 156301
Valuation Reserve........................................... 156308
Swap Mtm, Net............................................... 156330
Residual Asset-CPL Wet Fund................................. 156331
Incremental Loss Reserves................................... 156333
Wake Financing Reserve...................................... 156334
"Franchise Premium" shall mean the franchise premium set forth in Buyer's
written proposal to the Company, as accepted by the Company.
6
158
ANNEX II
[LOGO]
January 8, 2001
Board of Directors
Advanta Corp.
Welsh & McKean Roads
P.O. Box 844
Spring House, PA 19477-0844
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Advanta Corp. (the "Company") of the
aggregate consideration to be received by the Company in the proposed sale (the
"Proposed Sale") by the Company of the assets constituting the Company's
mortgage business (collectively, the "Subject Business") to Chase Manhattan
Mortgage Corporation (the "Buyer") pursuant to a Purchase and Sale Agreement to
be entered into between the Company and the Buyer (the "Agreement").
As more specifically set forth in the Agreement, in the Proposed Sale, the
Company will sell the Subject Business to the Buyer for a net asset equivalent
purchase price of approximately $310 million, representing the sum of Advanta's
net investment in the Subject Business and the gain on the proposed sale,
subject to adjustment in accordance with the terms of the Agreement.
In arriving at our opinion, we reviewed the Agreement, dated January 8,
2001, and held discussions with certain senior officers, directors and other
representatives and advisors of the Company concerning the businesses,
operations and prospects of the Subject Business. We examined certain financial
forecasts and other information and data for the business and operations of the
Subject Business which were provided to or otherwise discussed with us by the
management of the Company. We reviewed the financial terms of the Proposed Sale
as set forth in the Agreement in relation to, among other things: current and
historical market prices of certain other companies that we believe to be
comparable to the Subject Business and the trading markets of such other
companies; the historical and projected revenues and other operating data of the
Subject Business; and the historical and projected capitalization and financial
condition of the Subject Business. We considered, to the extent publicly
available, the financial terms of certain other similar transactions recently
effected that we considered relevant in evaluating the consideration to be
received in the Proposed Sale. We also considered the results from efforts to
solicit proposals for the acquisition of the Subject Business from third
parties. We also conducted such other analyses and examinations and considered
such other information and financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us, including the determination of the net book value of the
Subject Business, and have further relied upon the assurances of the management
of the Company that they are not aware of any facts that would make any of such
information inaccurate or misleading. With respect to financial forecasts and
other information and data provided to or otherwise reviewed by or discussed
with us, we have been advised by the management of the Company that such
forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Subject
Business and the strategic implications and operational benefits anticipated to
result from the Proposed Sale and we
159
have assumed that such financial forecasts will be realized in the amounts and
in the time periods currently estimated by management. We express no view with
respect to such forecasts and other information and data or the assumptions on
which they were based. We have not made or been provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Subject Business nor have we made any physical inspection of the
properties or assets of the Subject Business. We are not experts in the
evaluation of allowances for loan losses, and we have not made an independent
evaluation of the adequacy for loan losses of the Subject Business nor have we
reviewed any individual credit files, and we have assumed that the aggregate
allowances for loan losses are adequate to cover such losses. We have further
assumed that the Proposed Sale will be consummated in accordance with the terms
of the Agreement without waiver of any of the conditions precedent to the
Proposed Sale contained in the Agreement.
As you are aware, we did not participate in the discussions and
negotiations among representatives of the Company and the Buyer with respect to
the final terms of the Proposed Sale. We were not requested to consider, and our
opinion does not address, the relative merits of the Proposed Sale as compared
to any alternative business strategies that might exist for the Company or the
effect of any other transaction in which the Company might engage. Our opinion
necessarily is based upon information available to us and financial, stock
market and other conditions and circumstances existing and disclosed to us as of
the date hereof.
Salomon Smith Barney Inc. is acting as financial advisor to the Company in
connection with the Proposed Sale and will receive a fee for our services, the
major portion of which is payable only upon the consummation of the Proposed
Sale. Additionally, we have previously rendered, or are currently rendering,
certain investment banking and financial advisory services to the Company and
the Buyer, for which we received or will receive, compensation. In addition, in
the ordinary course of our business, we and our affiliates may actively trade or
hold the securities of the Company and the Buyer for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. Salomon Smith Barney Inc. and its affiliates
(including Citigroup Inc. and its affiliates) may maintain relationships with
the Company and the Buyer and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of the Company in its evaluation of the
Proposed Sale and our opinion is not intended to be and does not constitute a
recommendation of the Proposed Sale to the Company or a recommendation to any
stockholder as to how such stockholder should vote on any matters relating to
the Proposed Sale.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the consideration to be received
by the Company in the Proposed Sale is fair, from a financial point of view, to
the Company.
Very truly yours,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
160
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ADVANTA CORP.
The undersigned, a stockholder of Advanta Corp. (the "Company"), hereby
constitutes and appoints Dennis Alter, William A. Rosoff and Elizabeth H. Mai,
and each of them acting individually as the attorney and special proxy of the
undersigned, with full power of substitution, for and in the name and stead of
the undersigned to attend the Special Meeting of Stockholders of Advanta Corp.
to be held on February 27, 2001, at 1:00 p.m. at the Company's headquarters,
Welsh and McKean Roads, Spring House, Pennsylvania, and any adjournment or
postponement thereof, and thereat to vote all shares that the undersigned would
be entitled to cast if personally present as follows:
(CONTINUED, AND TO BE SIGNED ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
Please mark your votes as indicated in this example. [X]
1. To consider and vote upon a proposal to approve the Purchase and
Sale Agreement, dated as of January 8, 2001, by and between Advanta Corp. and
Chase Manhattan Mortgage Corporation and the transactions provided for in the
Purchase and Sale Agreement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To transact such other business as may properly come before the
meeting.
IF NOT OTHERWISE SPECIFIED, THE SHARES WILL BE VOTED FOR THE PROPOSAL TO APPROVE
THE PURCHASE AND SALE AGREEMENT, DATED AS OF JANUARY 8, 2001, BY AND BETWEEN
ADVANTA CORP. AND CHASE MANHATTAN MORTGAGE CORPORATION AND THE TRANSACTIONS
PROVIDED FOR IN THE PURCHASE AND SALE AGREEMENT. This proxy delegates authority
to vote on all other matters upon which the undersigned is entitled to vote and
which may come before the meeting or any adjournment or postponement of the
meeting. The undersigned hereby revokes all previous proxies for the meeting and
hereby acknowledges receipt of the notice of the meeting and the proxy statement
of Advanta Corp. furnished herewith.
PLEASE SIGN AND MAIL PROMPTLY.
Stockholder's Signature(s)__________________________ Date________________, 2001
NOTE: If shares are registered in more than one name, all owners should sign. If
signing in a fiduciary or representative capacity, please give full title and
attach evidence of authority. If a corporation, please sign with full corporate
name by a duly authorized officer and affix the corporate seal.
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -