RULE NO. 424(b)(4)
REGISTRATION NO. 333-33269
PEOPLE'S BANK CREDIT CARD MASTER TRUST
$425,000,000 Floating Rate Class A Asset Backed Certificates, Series 1997-2
$33,750,000 Floating Rate Class B Asset Backed Certificates, Series 1997-2
[PEOPLE'S BANK LOGO APPEARS HERE]
Transferor and Servicer
Each of the Floating Rate Class A Asset Backed Certificates, Series 1997-2 (the
"Class A Certificates") and each of the Floating Rate Class B Asset Backed
Certificates, Series 1997-2 (the "Class B Certificates" and, together with the
Class A Certificates, the "Offered Certificates") offered hereby will evidence
undivided interests in certain assets of the People's Bank Credit Card Master
Trust (the "Trust") created pursuant to a pooling and servicing agreement dated
as of June 1, 1993, as amended and restated, between People's Bank, as
transferor and servicer (the "Transferor"), and Bankers Trust Company, as
trustee. In addition, the Collateral Interest (as defined herein), which is not
offered hereby, will be issued in the initial amount of $41,250,000 (the
Collateral Interest together with the Offered Certificates, the
(continued on following page)
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE CERTIFICATES, AND THERE IS NO
ASSURANCE THAT ONE WILL DEVELOP. POTENTIAL INVESTORS SHOULD CONSIDER, AMONG
OTHER THINGS, THE INFORMATION SET FORTH IN "RISK FACTORS" COMMENCING ON PAGE
25.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR RECOURSE OBLIGATIONS OF PEOPLE'S BANK, PEOPLE'S STRUCTURED
FINANCE CORP. ("PSFC") OR ANY OF THEIR AFFILIATES. A CERTIFICATE IS NOT A
DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE
"FDIC"). THE RECEIVABLES ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public (1) Discount (2) PSFC (1)(3)
- -----------------------------------------------------------------------------------
Per Class A Certificate 100.00% 0.29% 99.71%
- -----------------------------------------------------------------------------------
Per Class B Certificate 100.00% 0.29% 99.71%
- -----------------------------------------------------------------------------------
Total $458,750,000 $1,330,375 $457,419,625
- -----------------------------------------------------------------------------------
(1) Plus accrued interest, if any, at the applicable Certificate Rate (as
defined herein) from the Closing Date.
(2) People's Bank and PSFC have agreed to indemnify the Underwriters (as
defined herein) against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(3) Before deduction of expenses of the offering payable by People's Bank esti-
mated to be $750,000.
The Offered Certificates are offered by the Underwriters as specified herein,
subject to receipt and acceptance by the Underwriters and subject to their
right to reject in whole or in part. It is expected that the Offered
Certificates will be delivered in book-entry form on or about September 24,
1997, through the facilities of The Depository Trust Company, Cedel Bank,
societe anonyme, and the Euroclear System.
UNDERWRITERS OF THE CLASS A CERTIFICATES
J.P. MORGAN & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
UNDERWRITER OF THE CLASS B CERTIFICATES
J.P. MORGAN & CO.
The date of this Prospectus is September 17, 1997.
(Continued from previous page)
"Certificates"). The property of the Trust includes, among other things,
receivables (the "Receivables") generated from time to time in a portfolio of
VISA(R) and MasterCard(R) credit card accounts, all monies due or to become
due in payment of the Receivables, Recoveries, Interchange, the benefits of
the funds and securities on deposit in certain bank accounts with respect to
the Certificates and certain interest rate cap agreements, each as defined or
described herein. People's Bank services the Receivables, and PSFC, a wholly-
owned subsidiary of People's Bank, owns the undivided interest in the Trust
not represented by the Certificates or the other interests issued by the
Trust. The Trust currently has four other series of certificates outstanding,
and PSFC and People's Bank may offer from time to time other series of
certificates which evidence fractional undivided interests in certain assets
of the Trust, which may have terms significantly different from the
Certificates, by exchanging a portion of PSFC's interest in the Trust.
Interest with respect to the Offered Certificates is scheduled to be
distributed on October 15, 1997 and on the 15th day of each month thereafter
(or, if such 15th day is not a business day, on the next succeeding business
day) (each a "Distribution Date"). Interest will accrue on the Class A
Certificates from the Closing Date through and including October 14, 1997 at
the rate of 5.78625% per annum and with respect to each Interest Period (as
defined herein) thereafter in the manner and with the exceptions described
herein at the rate of 0.13% per annum above the London interbank offered
quotations rate for one-month United States dollar deposits. Interest will
accrue on the Class B Certificates from the Closing Date through and including
October 14, 1997 at the rate of 5.98625% per annum and with respect to each
Interest Period thereafter in the manner and with the exceptions described
herein at the rate of 0.33% per annum above the London interbank offered
quotations rate for one-month United States dollar deposits. See "Description
of the Certificates--Interest Payments". Principal with respect to the Class A
Certificates is scheduled to be distributed on the August 2002 Distribution
Date (the "Class A Scheduled Payment Date"), but may be paid earlier or later
under certain limited circumstances as described herein. Principal with
respect to the Class B Certificates is scheduled to be distributed on the
September 2002 Distribution Date (the "Class B Scheduled Payment Date"), but
may be paid earlier or later under certain limited circumstances as described
herein. See "Maturity Considerations". Principal payments will not be made to
Class B Certificate Holders until the final principal payment has been paid in
respect of the Class A Certificates. See "Description of the Certificates--
Principal Payments".
The fractional undivided interest in the Trust represented by the Class B
Certificates will be subordinated to the Class A Certificates to the extent
described herein. In addition, the Collateral Interest will be subordinated to
the Offered Certificates to the extent described herein.
Application has been made to list the Class A Certificates on the Luxembourg
Stock Exchange.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
CERTIFICATES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR, AND PURCHASE, THE OFFERED CERTIFICATES IN THE
OPEN MARKET. SEE "UNDERWRITING".
AVAILABLE INFORMATION
The Transferor, as originator of the Trust, has filed a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
with the Commission on behalf of the Trust with respect to the Certificates
offered pursuant to this Prospectus. For further information, reference is
made to the Registration Statement and amendments thereof and exhibits
thereto, which are available for inspection without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; 7 World Trade Center, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of the Registration Statement and amendments thereof and exhibits
thereto may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Commission maintains a Web site at "http://www.sec.gov" that
contains information regarding registrants that file electronically with the
Commission.
2
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by People's Bank or the Underwriters. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein or
therein is correct as of any time subsequent to the date of such information.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction.
UNTIL DECEMBER 16, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
TABLE OF CONTENTS
PAGE
----
Available Information............. 2
Reports to Certificate Holders.... 3
Prospectus Summary................ 5
Risk Factors...................... 25
The Trust......................... 31
The Credit Card Business of Peo-
ple's Bank....................... 32
The Receivables................... 38
Maturity Considerations........... 41
Receivable Yield Considerations... 44
Use of Proceeds................... 44
People's Bank..................... 45
Description of the Certificates... 45
PAGE
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Certain Legal Aspects of the
Receivables...................... 86
Certain Federal Income Tax Conse-
quences.......................... 89
State and Local Tax Consequences.. 93
Certain Employee Benefit Plan
Considerations................... 94
Underwriting...................... 96
Legal Matters..................... 97
Index of Key Terms................ 98
Annex I Prior Series Issued and
Outstanding...................... AI-1
Annex II Global Clearance, Settle-
ment and Tax Documentation Proce-
dures............................ AII-1
REPORTS TO CERTIFICATE HOLDERS
Unless and until Definitive Certificates (as defined herein) are issued,
monthly and annual reports containing unaudited information concerning the
Trust and prepared by the Servicer will be sent on behalf of the Trust to Cede
& Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Offered Certificates, pursuant to the Agreement. See
"Description of the Certificates--Book-Entry Registration", "--Reports to
Certificate Holders" and "--Evidence as to Compliance". Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. The Transferor does not intend to send any of its
financial reports to Certificate Holders or to the owners of beneficial
interests in the Offered Certificates ("Offered Certificate Owners"). The
Servicer will file with the Securities and Exchange Commission (the
"Commission") such periodic reports with respect to the Trust as are required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations of the Commission thereunder.
3
[This Page Intentionally Left Blank]
4
PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus. Certain capitalized terms
used herein are defined elsewhere in this Prospectus. A listing of the pages on
which some of such terms are defined is found in the "Index of Key Terms".
Unless the context requires otherwise, certain capitalized terms, when used
herein, relate only to the Certificates.
Title of Securities......... $425,000,000 Floating Rate Class A Asset Backed
Certificates, Series 1997-2 (the "Class A
Certificates") and $33,750,000 Floating Rate
Class B Asset Backed Certificates, Series 1997-2
(the "Class B Certificates" and, together with
the Class A Certificates, the "Offered
Certificates" and, together with the Collateral
Interest described herein, the "Certificates").
The Trust................... The Certificates represent fractional undivided
interests in certain assets of People's Bank
Credit Card Master Trust (the "Trust"). The
Trust's fiscal year ends December 31. As used
herein, the term "Series 1997-2 Supplement"
refers to the supplement to the Agreement
relating to the Certificates; the term
"Agreement" refers to the Amended and Restated
Pooling and Servicing Agreement dated as of
March 18, 1997, amending and restating in its
entirety the Pooling and Servicing Agreement
dated as of June 1, 1993, and, unless the
context requires otherwise, refers to the
Agreement as supplemented by the Series 1997-2
Supplement; the term "Offered Certificate
Holders" refers to holders of the Offered
Certificates; the term "Certificate Holders"
refers to the Offered Certificate Holders and
the Collateral Interest Holder collectively; the
term "Class A Certificate Holders" refers to
holders of the Class A Certificates and the term
"Class B Certificate Holders" refers to holders
of the Class B Certificates; the term "Series"
refers to any series of certificates issued by
the Trust, including the Certificates; and the
term "Series 1997-2" refers to the Series
represented by the Certificates.
The Trust currently has four other Series
outstanding. See "Annex I: Prior Series Issued
and Outstanding" for a summary of these
outstanding Series.
Trustee..................... Bankers Trust Company, a New York banking
corporation (the "Trustee"). The Corporate Trust
Office is located at 4 Albany Street, New York,
New York 10006.
Transferor.................. People's Bank, a Connecticut stock savings bank
and a majority-owned subsidiary of People's
Mutual Holdings, is the Transferor of the
Receivables and the originator of the Trust. The
principal executive offices of People's Bank are
located at 850 Main Street, Bridgeport Center,
Bridgeport, Connecticut 06604, telephone number
(203) 338-7171.
5
Trust Assets................ The property of the Trust includes receivables
(the "Receivables") arising under certain
VISA(R)* and MasterCard(R)* credit card
accounts, all Receivables arising in Automatic
Additional Accounts and Additional Accounts
designated from time to time, all monies due or
to become due in payment of the Receivables, all
proceeds of the Receivables, proceeds of
insurance policies relating to the Receivables,
and the right to receive Interchange,
Recoveries, all monies on deposit in certain
bank accounts of the Trust, all monies and
securities on deposit in certain bank accounts
established and maintained for the benefit of
Certificate Holders of any Series, an interest
rate cap agreement for the exclusive benefit of
the Class A Certificate Holders (the "Class A
Interest Rate Cap") and an interest rate cap
agreement for the exclusive benefit of the Class
B Certificate Holders (the "Class B Interest
Rate Cap" and, together with the Class A
Interest Rate Cap, the "Interest Rate Caps"),
each provided by Morgan Guaranty Trust Company
of New York (the "Interest Rate Cap Provider"),
and any Enhancement issued with respect to any
Series. The term "Trust Portfolio" means the
pool of Eligible Receivables representing assets
of the Trust as of a specified date. The Trust
does not and will not include the Receivables of
any Accounts designated from time to time as
Removed Accounts, the Receivables of which have
been removed from the Trust.
The Offered Certificate Holders will not be
entitled to the benefits of any Enhancement
issued with respect to any Series other than
Series 1997-2, and the holders of the
certificates of other Series will not be
entitled to the benefits of, among other things,
the Interest Rate Caps or the Collateral
Interest. The term "Enhancement" shall mean,
with respect to any other Series, any letter of
credit, cash collateral account, collateral
interest, surety bond, guaranteed rate
agreement, maturity guaranty facility, tax
protection agreement, reserve account or other
contract or agreement principally for the
benefit of Certificate Holders of such Series.
The term "Enhancement" shall mean, with respect
to the Offered Certificates, the subordination
of the Collateral Interest and, in the case of
the Class A Certificates, the funds and
securities on deposit in the Reserve Account, up
to the Available Reserve Account Amount, and the
subordination of the Class B Investor Interest.
Securities Offered.......... The Class A Certificates and the Class B
Certificates will be issued on September 24,
1997 (the "Closing Date") in book-entry form
only, in the initial principal amounts of
$425,000,000 and $33,750,000, respectively, and
will each be represented by one or more Offered
Certificates registered in the name of Cede. All
references herein to Offered Certificate
Holders, Class A
* VISA(R) and MasterCard(R) are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
6
Certificate Holders or Class B Certificate
Holders shall refer to Offered Certificate
Owners, except as otherwise specified herein.
See "Description of the Certificates--Definitive
Certificates".
In addition to the Class A Certificates and the
Class B Certificates, the Collateral Interest
will be issued on the Closing Date in the
initial amount of $41,250,000 (which amount
represents 8.25% of the amount of the Initial
Investor Interest) as Enhancement for the
Offered Certificates. The provider of such
Enhancement is sometimes referred to herein as
the "Collateral Interest Holder".
Each of the Certificates represents a fractional
undivided interest in certain assets of the
Trust. The Trust assets will be allocated among
the Certificate Holders, the holders of
certificates of any other Series which is
outstanding at the time of such allocation and
the holder of the certificate (the "Exchangeable
Transferor Certificate") that represents the
Transferor Interest (as defined below), which is
currently held by People's Structured Finance
Corp. ("PSFC"), a wholly-owned special purpose
Connecticut subsidiary of People's Bank,
pursuant to an Assignment and Assumption
Agreement, dated as of December 15, 1995, by and
between the Transferor and PSFC. PSFC, in its
capacity as holder of the Exchangeable
Transferor Certificate, or any other permitted
assignee of the Exchangeable Transferor
Certificate that is then currently the
registered holder of the Exchangeable Transferor
Certificate, is sometimes referred to herein as
the "Holder of the Exchangeable Transferor
Certificate".
The Certificates represent interests in the Trust
only and do not represent interests in or
recourse obligations of the Transferor, PSFC or
any of their affiliates. A Certificate is not a
deposit and is not insured by the Federal
Deposit Insurance Corporation (the "FDIC").
Neither the Receivables nor the underlying
Accounts are insured or guaranteed by the FDIC
or any other governmental agency.
Investor Interest; Trans- On the Closing Date, the amount of the Class A
feror Interest............. Certificate Holders' interest in Principal
Receivables will equal $425,000,000 (the "Class
A Initial Investor Interest"), the amount of the
Class B Certificate Holders' interest in
Principal Receivables will equal $33,750,000
(the "Class B Initial Investor Interest"), and
the amount of the Collateral Interest in
Principal Receivables will equal $41,250,000
(the "Initial Collateral Interest" and, together
with the Class A Initial Investor Interest and
the Class B Initial Investor Interest, the
"Initial Investor Interest"). The Class A
Initial Investor Interest and the Class B
Initial Investor Interest may be reduced to
reflect the tender and cancellation of Offered
Certificates pursuant to an Investor Exchange.
The Class A Certificate Holders' interest in
Principal Receivables on any date
7
after the Closing Date (the "Class A Investor
Interest") will equal the Class A Initial
Investor Interest, less the sum of (i) an amount
equal to the sum of all payments in respect of
principal made on the Class A Certificates and
(ii) all Class A Investor Charge-Offs, plus any
reimbursements of such Class A Investor Charge-
Offs. The "Class A Adjusted Investor Interest"
will equal (i) the Class A Investor Interest
less (ii) the Principal Funding Account Balance
on such date. The Class B Certificate Holders'
interest in Principal Receivables on any date
after the Closing Date (the "Class B Investor
Interest") will equal the Class B Initial
Investor Interest, less all payments in respect
of principal made on the Class B Certificates,
any Class B Investor Charge-Offs and any other
reductions of the Class B Investor Interest as
described herein, plus any reimbursements of
such Class B Investor Charge-Offs and such other
reductions of the Class B Investor Interest as
described herein. The Collateral Interest
Holder's interest in Principal Receivables on
any date after the Closing Date (the "Collateral
Interest") will equal the Initial Collateral
Interest, less all payments in respect of
principal made on the Collateral Interest, any
Collateral Interest Charge-Offs and any other
reductions of the Collateral Interest as
described herein, plus any reimbursements of
such Collateral Interest Charge-Offs and such
other reductions of the Collateral Interest as
described herein. The aggregate of the Class A
Investor Interest, the Class B Investor Interest
and the Collateral Interest at any time is the
"Investor Interest". The aggregate of the Class
A Adjusted Investor Interest, the Class B
Investor Interest and the Collateral Interest at
any time is the "Adjusted Investor Interest".
The Holder of the Exchangeable Transferor
Certificate holds in the Trust the remaining
undivided interest in the Principal Receivables
and amounts on deposit in the Excess Funding
Account not represented by the Certificates or
any other undivided interests in the Trust that
have been issued and are outstanding at the time
of such determination (the "Transferor
Interest"). As new Receivables are added to the
Trust and as payments are made on Receivables,
the principal amount of the Transferor Interest
will fluctuate. The Holder of the Exchangeable
Transferor Certificate may tender the
Exchangeable Transferor Certificate or, if
provided in the relevant Supplement, the
Transferor may tender certificates representing
all or a portion of any Series of certificates
and the Holder of the Exchangeable Transferor
Certificate may tender the Exchangeable
Transferor Certificate to the Trustee and, upon
satisfying certain conditions, cause the Trustee
to issue one or more new Series, as described in
"Description of the Certificates--Exchanges",
which Exchange may have the effect of decreasing
the Transferor Interest. As of the date hereof,
six other Series have been issued by the Trust,
two of which have been paid in full. See "Annex
I: Prior Series Issued and Outstanding".
8
Allocation Percentages...... The Certificates will include the right to
receive (but only to the extent required to make
payments under the Agreement) a percentage (the
"Investor Percentage") of the Finance Charge
Collections and Principal Collections received
during each calendar month (a "Monthly Period").
Finance Charge Collections and Receivables in
Defaulted Accounts, at all times, and Principal
Collections during the Revolving Period, will be
allocated to the Certificate Holders based on
the Floating Investor Percentage as described
under "Description of the Certificates--
Allocation Percentages". Such amounts so
allocated will be further allocated among the
Class A Certificate Holders, the Class B
Certificate Holders and the Collateral Interest
Holder based on the Class A Floating Allocation,
the Class B Floating Allocation and the
Collateral Floating Allocation, respectively,
applicable during the related Monthly Period.
Principal Collections during the Controlled
Accumulation Period and the Rapid Amortization
Period will be allocated to the Certificate
Holders based on the Fixed Investor Percentage,
as described under "Description of the
Certificates--Allocation Percentages". Such
amounts so allocated will be further allocated
between the Class A Certificate Holders, the
Class B Certificate Holders and the Collateral
Interest Holder based on the Class A Fixed
Allocation, the Class B Fixed Allocation and the
Collateral Fixed Allocation, respectively. See
"Description of the Certificates--Allocation
Percentages".
Interest.................... Interest is required to be distributed on October
15, 1997 and on the 15th day of each month
thereafter, or, if such 15th day is not a
business day, on the next succeeding business
day (each, a "Distribution Date"), in an amount
equal to, in the case of the Class A
Certificates, the sum of (v) the product of (a)
the London interbank offered quotations rate for
one-month United States dollar deposits
("LIBOR"), determined as described herein, plus
0.13% (the "Class A Certificate Rate") (or
5.78625% for the Initial Interest Period), (b)
the lesser of the Class A Adjusted Investor
Interest as of the preceding Distribution Date
after giving effect to all payments, deposits
and withdrawals on such Distribution Date (or,
in the case of the first Distribution Date, the
Class A Initial Investor Interest) and the
Expected Class A Principal as of the preceding
Distribution Date, and (c) the actual number of
days in the related Interest Period divided by
360, plus (w) the Class A Covered Amounts for
such Interest Period, plus (x) the product of
(a) the Class A Excess Principal, (b) the lesser
of the Class A Certificate Rate and 10.13%, and
(c) the actual number of days in the related
Interest Period divided by 360 (clauses (v), (w)
and (x) collectively, the "Class A Monthly
Interest"), plus (y) to the extent permitted by
applicable law, any interest accrued on the
Class A Certificates (including interest on any
overdue Class A Monthly Interest) during any
prior accrual
9
period which has not been distributed to the
Class A Certificate Holders, plus, to the extent
that there is available Excess Spread, (z) an
amount equal to the product of (a) the amount by
which the Class A Certificate Rate exceeds
10.13%, (b) the Class A Excess Principal and (c)
the actual number of days in the related
Interest Period divided by 360 (the "Class A
Excess Interest"). In the case of the Class B
Certificates, interest will be distributed in an
amount equal to the sum of (w) the product of
(a) LIBOR, determined as described herein, plus
0.33% (the "Class B Certificate Rate"; the Class
A Certificate Rate and the Class B Certificate
Rate are each sometimes referred to as an
"Offered Certificate Rate" and collectively, the
"Offered Certificate Rates") (or 5.98625% for
the Initial Interest Period), (b) the lesser of
the Class B Investor Interest as of the
preceding Distribution Date (or, in the case of
the first Distribution Date, the Class B Initial
Investor Interest) after giving effect to all
payments, deposits and withdrawals on such
Distribution Date and the Expected Class B
Principal as of the preceding Distribution Date,
and (c) the actual number of days in the related
Interest Period divided by 360, plus (x) the
product of (a) the Class B Excess Principal, (b)
the lesser of the Class B Certificate Rate and
10.33%, and (c) the actual number of days in the
related Interest Period divided by 360
(collectively, the "Class B Monthly Interest"),
plus (y) to the extent permitted by applicable
law, any interest accrued on the Class B
Certificates (including interest on any overdue
Class B Monthly Interest) during any prior
accrual period which has not been distributed to
the Class B Certificate Holders, plus, to the
extent that there is available Excess Spread,
(z) an amount equal to the product of (a) the
amount by which the Class B Certificate Rate
exceeds 10.33%, (b) the Class B Excess Principal
and (c) the actual number of days in the related
Interest Period divided by 360 (the "Class B
Excess Interest"). For any Interest Period in
which the Class A Certificate Rate or the Class
B Certificate Rate, as the case may be, exceeds
the Class A Cap Rate or the Class B Cap Rate,
respectively, the portion of the Class A Monthly
Interest or the Class B Monthly Interest
attributable to the amount by which the Class A
Certificate Rate or the Class B Certificate
Rate, as the case may be, exceeds the Class A
Cap Rate or the Class B Cap Rate, respectively,
will be funded from payments made pursuant to
the Class A Interest Rate Cap or the Class B
Interest Rate Cap, respectively, and from Excess
Spread. Interest distributable on October 15,
1997 will accrue from and including the Closing
Date to and including October 14, 1997 (the
"Initial Interest Period").
Revolving Period............ No principal will be payable to Offered
Certificate Holders until the August 2002
Distribution Date or, upon the occurrence of a
Pay Out Event as described herein, the first
Distribution Date with respect to the Rapid
Amortization Period. For each Monthly Period
during the period from and including the Closing
Date, up
10
to and including the day prior to the day on
which the Controlled Accumulation Period or the
Rapid Amortization Period commences (the
"Revolving Period"), Available Investor
Principal Collections otherwise allocable to the
Certificate Holders will, unless a reduction in
the Required Collateral Interest has occurred
and subject to certain other limitations, be
applied as Shared Principal Collections, as
described below, and thereafter (to the extent
that the Transferor Interest exceeds the Minimum
Transferor Interest) be paid to the Holder of
the Exchangeable Transferor Certificate to
maintain the Investor Interest at the Initial
Investor Interest. See "Description of the
Certificates--Pay Out Events" for a discussion
of the events which might lead to the early
termination of the Revolving Period.
Principal Payments;
Controlled Accumulation Unless a Pay Out Event has occurred or is deemed
Period..................... to have occurred or the Controlled Accumulation
Period is postponed as a result of the
conditions set forth under "Description of the
Certificates--Postponement of Controlled
Accumulation Period", the controlled
accumulation period for the Certificates (the
"Controlled Accumulation Period") will commence
on June 1, 2001 (the "Controlled Accumulation
Date"), and will end on the earliest of (a) the
commencement of the Rapid Amortization Period,
(b) the payment of the Investor Interest in full
and (c) the termination of the Trust pursuant to
the Agreement. On the Business Day immediately
preceding each Distribution Date (each such
date, a "Transfer Date"), beginning with the
Transfer Date following the Monthly Period in
which the Controlled Accumulation Period
commences, an amount equal to the least of (a)
the Available Investor Principal Collections
with respect to the related Monthly Period, (b)
the sum of the Controlled Accumulation Amount
for the related Monthly Period and the
Accumulation Shortfall, if any (such sum, the
"Controlled Deposit Amount") and (c) the Class A
Adjusted Investor Interest on such Transfer Date
(prior to any deposits on such date) will be
deposited in a trust account established by the
Trustee (the "Principal Funding Account"). The
amount on deposit in the Principal Funding
Account (the "Principal Funding Account
Balance") will be deposited in the Distribution
Account for distribution to the Class A
Certificate Holders on the Class A Scheduled
Payment Date. If, for any Monthly Period prior
to the Class A Scheduled Payment Date, the
Available Investor Principal Collections for
such Monthly Period are less than the applicable
Controlled Deposit Amount, the amount of such
deficiency will be the applicable "Accumulation
Shortfall" for the succeeding Monthly Period.
See "Description of the Certificates--
Application of Collections".
On the Transfer Date immediately following the
Distribution Date on which the Class A Investor
Interest has been paid in full, an
11
amount equal to the lesser of (a) the Available
Investor Principal Collections for the related
Monthly Period and (b) the Class B Investor
Interest will be deposited into the Distribution
Account for distribution to the Class B
Certificate Holders on the Class B Scheduled
Payment Date. If, for any Monthly Period, the
Available Investor Principal Collections for
such Monthly Period exceed the applicable
Controlled Deposit Amount, such excess will be
first paid to the Collateral Interest Holder to
the extent that the Collateral Interest exceeds
the Required Collateral Interest (such excess,
the "Collateral Interest Surplus") and then
treated as Shared Principal Collections and
allocated to the holders of other Series of
certificates issued and outstanding or, subject
to certain limitations described herein (to the
extent that the Transferor Interest exceeds the
Minimum Transferor Interest), paid to the holder
of the Exchangeable Transferor Certificate.
Unless a Pay Out Event has occurred or is deemed
to have occurred, prior to the payment of the
Class A Investor Interest in full, all funds on
deposit in the Principal Funding Account will be
invested at the direction of the Servicer by the
Trustee in certain Permitted Investments.
Investment earnings (net of investment losses
and expenses) on funds on deposit in the
Principal Funding Account (the "Principal
Funding Investment Proceeds") during the
Controlled Accumulation Period will be used to
pay interest on the Class A Certificates up to
an amount (the "Class A Covered Amount") equal
to, for each Transfer Date, the product of (a) a
fraction, the numerator of which is the actual
number of days in the related Interest Period
and the denominator of which is 360, (b) the
Class A Certificate Rate in effect with respect
to the related Interest Period and (c) the
Principal Funding Account Balance as of the
preceding Distribution Date after giving effect
to all payments, deposits and withdrawals on
such Distribution Date. If, for any Transfer
Date, the Principal Funding Investment Proceeds
are less than the Class A Covered Amount, the
amount of such deficiency (the "Class A
Principal Funding Investment Shortfall") will be
paid, to the extent available, from the Reserve
Account and, if necessary, from Excess Spread
and Reallocated Principal Collections.
Funds on deposit in the Principal Funding Account
will be available to pay the Class A Certificate
Holders in respect of the Class A Investor
Interest on the Class A Scheduled Payment Date.
If the aggregate principal amount of deposits
made to the Principal Funding Account is
insufficient to pay the Class A Investor
Interest in full on the Class A Scheduled
Payment Date, the Rapid Amortization Period will
commence as described below. Although it is
anticipated that during the Controlled
Accumulation Period prior to the payment of the
Class A Investor Interest in full, funds will be
deposited in the Principal Funding Account in an
amount equal to the applicable Controlled
Deposit
12
Amount on each Transfer Date and that scheduled
principal will be available for distribution to
the Class A Certificate Holders on the Class A
Scheduled Payment Date, no assurance can be
given in that regard. See "Maturity
Considerations".
On the Class B Scheduled Payment Date, provided
that the Class A Investor Interest is paid in
full on the Class A Scheduled Payment Date and a
Rapid Amortization Period has not commenced,
Available Investor Principal Collections will be
used to pay the Class B Certificate Holders in
respect of the Class B Investor Interest as
described herein. If Available Investor
Principal Collections are insufficient to pay
the Class B Investor Interest in full on the
Class B Scheduled Payment Date, the Rapid
Amortization Period will commence as described
below. Although it is anticipated that scheduled
principal will be available for distribution to
the Class B Certificate Holders on the Class B
Scheduled Payment Date, no assurance can be
given in that regard. See "Maturity
Considerations".
If a Pay Out Event occurs during the Controlled
Accumulation Period, the Rapid Amortization
Period will commence and any amounts on deposit
in the Principal Funding Account will be
deposited in the Distribution Account for
distribution to the Class A Certificate Holders
on the Distribution Date following the Monthly
Period in which the Rapid Amortization Period
commences. See "Maturity Considerations",
"Description of the Certificates Application of
Collections" and "--Subordination of the Class B
Certificates".
Principal Payments; Rapid
Amortization Period........ During the period beginning on the day on which a
Pay Out Event occurs or is deemed to occur and
continuing to and including the earlier of (a)
the date on which the Investor Interest has been
paid in full and (b) the Scheduled Series 1997-2
Termination Date (the "Rapid Amortization
Period"), the Principal Allocation along with
Shared Principal Collections from other Series,
if any, will be distributed monthly to the Class
A Certificate Holders until the Class A Investor
Interest is paid in full and, following the
final principal payment to the Class A
Certificate Holders, to the Class B Certificate
Holders until the Class B Investor Interest is
paid in full and, following the final principal
payment to the Class B Certificate Holders, to
the Collateral Interest Holder until the
Collateral Interest is paid in full, on each
Distribution Date beginning with the
Distribution Date in the month following the
Monthly Period in which the Rapid Amortization
Period commences. See "Description of the
Certificates--Pay Out Events" for a discussion
of the events which might lead to the
commencement of a Rapid Amortization Period.
13
Scheduled Payment of Prin-
cipal and Interest......... The final distributions of interest and the
scheduled payment of principal on the Class A
Certificates and the Class B Certificates,
respectively, are scheduled to be made on the
August 2002 Distribution Date (the "Class A
Scheduled Payment Date") and the September 2002
Distribution Date (the "Class B Scheduled
Payment Date"; "Scheduled Payment Date" shall
refer to the Class B Scheduled Payment Date
and/or the Class A Scheduled Payment Date, as
applicable) and will be made no later than the
April 2005 Distribution Date (the "Scheduled
Series 1997-2 Termination Date"). After the
Scheduled Series 1997-2 Termination Date,
neither the Trust nor the Transferor will have
any further obligation to pay principal or
interest on the Certificates.
Exchanges................... The Agreement authorizes the Trustee to issue two
types of certificates: (i) one or more Series of
certificates transferable and having the
characteristics described below and (ii) the
Exchangeable Transferor Certificate, a
certificate evidencing the Transferor Interest,
currently held by PSFC and transferable only as
provided in the Agreement. The Agreement also
provides that, pursuant to any one or more
supplements to the Agreement (each, a
"Supplement"), the Holder of the Exchangeable
Transferor Certificate may tender the
Exchangeable Transferor Certificate (a
"Transferor Exchange") or, if provided in the
relevant Supplement, the Transferor may transfer
certificates representing any Series of
certificates and the Holder of the Exchangeable
Transferor Certificate may transfer the
Exchangeable Transferor Certificate (an
"Investor Exchange"), to the Trustee in exchange
for one or more new Series and a reissued
Exchangeable Transferor Certificate (any tender
pursuant to a Transferor Exchange or an Investor
Exchange being referred to as an "Exchange").
The Series 1997-2 Supplement permits an Investor
Exchange with respect to the Certificates. See
"Description of the Certificates--Exchanges". At
all times, however, the interest in the
Principal Receivables in the Trust represented
by the Transferor Interest must equal or exceed
the Minimum Transferor Interest (as defined
below). Under the Agreement, the Supplement
executed by the Transferor and the Trust in
conjunction with an Exchange will define, with
respect to any Series, the Principal Terms of
the Series. The Transferor and the Holder of the
Exchangeable Transferor Certificate may offer
any Series to the public or other investors
under a prospectus or other disclosure document
(a "Disclosure Document") in transactions either
registered under the Securities Act or exempt
from registration thereunder, directly or
through the Underwriters or one or more other
underwriters or placement agents, in fixed-price
offerings or in negotiated transactions or
otherwise. The Transferor and the Holder of the
Exchangeable Transferor Certificate may offer,
from time to time, additional Series issued by
the Trust. See "Description of the
Certificates--Exchanges".
14
Under the Agreement and pursuant to a Supplement,
an Exchange may occur only upon delivery to the
Trustee of the following: (i) a Supplement
specifying the Principal Terms of such Series,
(ii) an opinion of counsel to the effect that
the certificates of such Series under existing
law will be characterized as indebtedness for
Federal income tax purposes and that the
issuance of such Series will not materially
adversely affect the Federal income tax
characterization of any outstanding Series,
(iii) if required by the related Supplement, the
form of Enhancement, (iv) if Enhancement is
required by the Supplement, an appropriate
Enhancement instrument or agreement, (v) written
confirmation from the Rating Agency that the
Exchange will not result in such Rating Agency
reducing or withdrawing its rating on any then
outstanding Series rated by it, and (vi) the
existing Exchangeable Transferor Certificate
and, if applicable, the certificates
representing the Series to be exchanged.
The Holder of the Exchangeable Transferor
Certificate also has the right, upon Transferor
consent, to transfer the Exchangeable Transferor
Certificate, and the Transferor also has the
right to sell, transfer or pledge the Accounts,
provided that certain requirements contained in
the Agreement are satisfied and that the Rating
Agency has confirmed that such sale, transfer or
pledge will not result in the reduction or
withdrawal of its then existing rating of the
Certificates. See "Description of the
Certificates--Sale of Accounts" and "--Certain
Matters Regarding the Transferor and the
Servicer".
Receivables................. The Receivables arise in Accounts that have been
selected from the VISA and MasterCard credit
card accounts owned by the Transferor based on
criteria provided in the Agreement as applied
with respect to each Account upon its inclusion
in the portfolio and on the date of the
inclusion of the related Receivables in the
Trust. The Receivables consist of amounts
charged by cardholders for goods and services
and cash advances (the "Principal Receivables")
plus the related periodic finance charges billed
to the Accounts, amounts billed to the Accounts
in respect of annual membership fees, cash
advance fees, late fees, returned check fees,
overlimit fees, certain premiums in respect of
credit insurance relating to cardholders'
balances, Recoveries, Interchange and investment
earnings on the Excess Funding Account
(collectively, the "Finance Charge
Receivables"). In addition, if the Transferor
exercises the Discount Option in accordance with
the terms and conditions of the Agreement, an
amount equal to the product of the Discount
Percentage and the amount of Receivables arising
in designated Accounts on and after the date
such option is exercised that otherwise would be
Principal Receivables will be treated as Finance
Charge Receivables. See "Description of the
Certificates--Discount Option". "Accounts" means
VISA and MasterCard credit card
15
accounts identified as part of the accounts
underlying the Receivables in the Trust
Portfolio as of June 30, 1997, (the "Series Cut-
Off Date"), together with Additional Accounts
conveyed on August 1, 1997. "Recoveries" means
amounts received with respect to charged-off
credit card receivables which, prior to being
charged-off, were included in the Trust
Portfolio. The aggregate amount of Receivables
in the Accounts as of the Series Cut-Off Date
was approximately $2,650,000,000. The Finance
Charge Receivables will not affect the amount of
the Investor Interest represented by the
Certificates or the amount of the Transferor
Interest, which are determined on the basis of
the amount of the Principal Receivables in the
Trust.
During the term of the Trust, all new Receivables
arising in the Accounts will be automatically
transferred (without further action by the
Transferor) to the Trust by the Transferor. The
total amount of Receivables in the Trust will
fluctuate from day to day, because the amount of
new Receivables arising in the Accounts and the
amount of payments collected on existing
Receivables usually differ each day. Because the
Transferor Interest represents the interest in
the Principal Receivables in the Trust not
represented by the Certificates, the
certificates of other Series or any other
undivided interests in the Trust, the amount of
the Transferor Interest will fluctuate from day
to day as Receivables are collected and new
Receivables are transferred to the Trust. See
"The Receivables".
Addition and Removal of Pursuant to the Agreement, the Transferor has
Accounts................... (subject to certain limitations and conditions)
designated and may in the future designate
additional eligible consumer revolving credit
accounts or categories of eligible consumer
revolving credit accounts satisfying certain
criteria specified in the Agreement (the
"Automatic Additional Accounts") and has
conveyed or will convey (as applicable) to the
Trust all of the Receivables in such Automatic
Additional Accounts whether such Receivables are
then existing or thereafter created. See
"Description of the Certificates--Addition of
Accounts". Additionally, pursuant to the
Agreement, the Transferor has the right (subject
to certain limitations and conditions) and, in
some circumstances, is obligated, to designate
additional eligible consumer revolving credit
accounts to be included as Accounts (the
"Additional Accounts") and to convey to the
Trust all of the Receivables in the Additional
Accounts whether such Receivables are then
existing or thereafter created. The Transferor
previously designated Additional Accounts to be
included as Accounts on July 9, 1993, October 4,
1994, July 14, 1995, May 1, 1996, October 1,
1996, May 1, 1997, and August 1, 1997.
Automatic Additional Accounts and Additional
Accounts will consist of certain of the
Transferor's VISA credit card accounts
16
and MasterCard credit card accounts
constituting, respectively, Eligible Automatic
Additional Accounts and Eligible Additional
Accounts and satisfying certain other criteria,
and arising in Accounts designated by the
Transferor from time to time. Automatic
Additional Accounts and Additional Accounts may,
subject to certain conditions, also include
certain other consumer revolving credit
accounts. See "Description of the Certificates--
Addition of Accounts".
Further, pursuant to the Agreement, the
Transferor has the right (subject to certain
limitations and conditions) to remove the
Receivables related to certain Accounts
designated by the Transferor from the Trust (the
"Removed Accounts") and accept the conveyance of
all the Receivables in the Removed Accounts,
whether such Receivables are then existing or
thereafter created. Removed Accounts are not
included as Accounts of the Trust Portfolio. See
"Description of the Certificates--Removal of
Accounts".
Denomination................ The Offered Certificates will be offered for
purchase in minimum denominations of $1,000 and
integral multiples thereof.
Registration of Offered The Offered Certificates will initially be
Certificates............... represented by certificates registered in the
name of Cede, as the nominee of DTC. No Offered
Certificate Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein) are
issued under the limited circumstances described
herein. See "Description of the Certificates--
Definitive Certificates".
Clearance and Settlement.... Offered Certificate Owners may elect to hold
their certificates through DTC (in the United
States) or Cedel or Euroclear (in Europe), each
of which in turn hold through their respective
depositaries, which will hold positions through
DTC. Transfers within DTC or Cedel or Euroclear,
as the case may be, will be made in accordance
with the usual rules and operating procedures of
the relevant system. Cross-market transfers
between persons holding directly or indirectly
through DTC in the United States, on the one
hand, and counterparties holding directly or
indirectly through Cedel or Euroclear, on the
other, will be effected in DTC through the
relevant Depositaries of Cedel or Euroclear. See
"Description of the Certificates--Book-Entry
Registration" and Annex II.
Servicer.................... The Servicer is People's Bank, a Connecticut
chartered stock savings bank. In certain limited
circumstances, People's Bank may resign or be
removed as Servicer, in which event the Trustee
or a third party servicer may be appointed as
successor servicer (People's Bank, and any such
successor servicer acting in such capacity, are
referred to herein as the "Servicer"). The
Servicer is permitted to delegate certain of its
duties as servicer under the
17
Agreement to any of its affiliates, but any such
delegation will not relieve the Servicer of its
obligations thereunder.
Collections................. The Servicer will deposit all Collections in an
account established for such purpose (the
"Collection Account"). All amounts deposited in
the Collection Account will be allocated in the
manner provided in the Agreement, as
supplemented by the Series 1997-2 Supplement,
and the Supplements relating to any past or
future Series, by the Servicer between Principal
Collections and Finance Charge Collections. If
the Discount Option is exercised by the
Transferor, certain Collections that would
otherwise be characterized as Principal
Collections will instead be treated as Finance
Charge Collections. See "Description of the
Certificates--Discount Option". All such amounts
will then be allocated in accordance with the
respective interests of the Certificate Holders,
the certificate holders of any other Series and
the Holder of the Exchangeable Transferor
Certificate in the Principal Receivables and in
the Finance Charge Receivables in the Trust. See
"Description of the Certificates--Allocation
Percentages".
Subordination of the Class
B Certificates and the The Class B Investor Interest and the Collateral
Collateral Interest........ Interest will be subordinated as described
herein to the extent necessary to fund certain
payments with respect to the Class A
Certificates and the Class A Monthly Servicing
Fee as described herein. In addition, the
Collateral Interest will be subordinated as
described herein to the extent necessary to fund
certain payments with respect to the Class B
Certificates and the Class B Monthly Servicing
Fee. If the Collateral Interest is reduced to
zero, the Class B Certificate Holders will bear
directly the credit and other risks associated
with their interest in the Trust. If the Class B
Investor Interest and the Collateral Interest
are reduced to zero, the Class A Certificate
Holders will bear directly the credit and other
risks associated with their interest in the
Trust. To the extent the Class B Investor
Interest is thereby reduced, the percentage of
Finance Charge Collections allocated to the
Class B Certificate Holders in subsequent
Monthly Periods will be reduced. Such reductions
of the Class B Investor Interest will thereafter
be reimbursed and the Class B Investor Interest
increased on each Distribution Date by the
amount, if any, of Excess Spread and any Shared
Finance Charge Collections from other Series
available for that purpose for such Distribution
Date. Moreover, to the extent the amount of such
reduction in the Class B Investor Interest is
not reimbursed, the amount of principal
distributable to the Class B Certificate Holders
will be reduced. See "Description of
Certificates--Subordination of the Class B
Certificates" and "--Application of
Collections".
Application of Excess
Spread and Reallocated If Finance Charge Collections allocable to the
Cashflow................... Class A Investor Interest for any Monthly Period
plus, during the Controlled
18
Accumulation Period, Principal Funding
Investment Proceeds and amounts, if any,
withdrawn from the Reserve Account with respect
to such Monthly Period, are insufficient (such
insufficiency being the "Class A Required
Amount") to pay (i) interest accrued on the
Class A Certificates with respect to the related
Distribution Date in an amount equal to the sum
of (a) the Class A Monthly Cap Rate Interest due
on the related Distribution Date and any overdue
Class A Monthly Cap Rate Interest, and (b) the
Class A Covered Amount for the related Interest
Period, (ii) the Class A Monthly Servicing Fee
for the related Interest Period and any overdue
Class A Monthly Servicing Fees, (iii) the Class
A Investor Default Amount for such Monthly
Period, and (iv) unreimbursed Class A Investor
Charge-Offs (the aggregate of clauses (i)
through (iv), the "Class A Payment Amount"),
then first, Excess Spread, if any, from Finance
Charge Collections allocable to the Class B
Certificates and the Collateral Interest will be
allocated to the Class A Certificates up to the
Class A Required Amount, and second, Shared
Finance Charge Collections, if any, allocable to
the Certificates will be allocated to the Class
A Certificates up to the remaining Class A
Required Amount. If the sum of such Excess
Spread and Shared Finance Charge Collections is
less than the Class A Required Amount for such
Monthly Period, Reallocated Collateral Principal
Collections and, if the foregoing is
insufficient, Reallocated Class B Principal
Collections with respect to the related Monthly
Period, will be used to fund the remaining Class
A Required Amount. The Collateral Interest will
be reduced by the amount of Reallocated
Collateral Principal Collections and Reallocated
Class B Principal Collections used to fund the
Class A Required Amount, and the Class B
Investor Interest will be reduced by the amount
of Reallocated Class B Principal Collections in
excess of the Collateral Interest (after giving
effect to reductions for any Collateral Interest
Charge-Offs and any Reallocated Collateral
Principal Collections as of the related
Distribution Date) used to fund the Class A
Required Amount.
If, on the related Distribution Date, Reallocated
Principal Collections are insufficient to fund
the remaining Class A Required Amount for such
Monthly Period, then the Collateral Interest
(after giving effect to reductions for any
Collateral Interest Charge-Offs and Reallocated
Principal Collections as of such Distribution
Date) will be reduced by the amount of such
deficiency (but not by more than the Class A
Investor Default Amount for the related Monthly
Period). In the event that such reduction would
cause the Collateral Interest to be a negative
number, the Collateral Interest will be reduced
to zero, and the Class B Investor Interest
(after giving effect to reductions for any Class
B Investor Charge-Offs and any Reallocated Class
B Principal Collections as of such Distribution
Date) will be reduced by the amount by which the
Collateral Interest would
19
have been reduced below zero. In the event that
such reduction would cause the Class B Investor
Interest to be a negative number, the Class B
Investor Interest will be reduced to zero and
the Class A Investor Interest will be reduced by
the amount by which the Class B Investor
Interest would have been reduced below zero
(such reduction, a "Class A Investor Charge-
Off").
If Finance Charge Collections allocable to the
Class B Investor Interest for any Monthly Period
are insufficient (such insufficiency being the
"Class B Required Amount") to pay (i) interest
accrued on the Class B Certificates with respect
to the related Distribution Date in an amount
equal to the Class B Monthly Cap Rate Interest
due on the related Distribution Date and any
overdue Class B Monthly Cap Rate Interest, (ii)
the Class B Monthly Servicing Fee for the
related Interest Period and any overdue Class B
Monthly Servicing Fees, (iii) the Class B
Investor Default Amount for such Monthly Period,
and (iv) unreimbursed Class B Investor Charge-
Offs (the aggregate of clauses (i) through (iv),
the "Class B Payment Amount"), then first,
Excess Spread, if any, from Finance Charge
Collections allocable to the Class A
Certificates and the Collateral Interest, to the
extent not required to pay the Class A Required
Amount for such Monthly Period, will be
allocated to the Class B Certificates up to the
Class B Required Amount, and second, Shared
Finance Charge Collections, if any, allocable to
the Certificates and not required to pay the
Class A Required Amount for such Monthly Period
will be allocated to the Class B Certificates up
to the remaining Class B Required Amount. If the
sum of such Excess Spread and such Shared
Finance Charge Collections is insufficient to
fund the Class B Required Amount for such
Monthly Period, Reallocated Collateral Principal
Collections for the related Monthly Period and
not required to fund the Class A Required Amount
will be used to fund the remaining Class B
Required Amount.
If, on the related Distribution Date, Reallocated
Collateral Principal Collections not required to
fund the Class A Required Amount are
insufficient to fund the remaining Class B
Required Amount for such Monthly Period, then
the Collateral Interest (after giving effect to
reductions for any Collateral Interest Charge-
Offs, Reallocated Principal Collections and any
adjustments made thereto for the benefit of the
Class A Certificate Holders) will be reduced by
the amount of such deficiency (but not by more
than the Class B Investor Default Amount for
such Monthly Period). In the event that such
reduction would cause the Collateral Interest to
be a negative number, the Collateral Interest
will be reduced to zero, and the Class B
Investor Interest will be reduced by the amount
by which the Collateral Interest would have been
reduced below zero (such reduction, a "Class B
Investor Charge-Off"). In the event of a
reduction of the Class A Investor Interest,
20
the Class B Investor Interest or the Collateral
Interest, the amount of principal and interest
available to fund payments with respect to the
Class A Certificates, the Class B Certificates
and the Collateral Interest will be decreased.
See "Description of the Certificates--
Reallocation of Cash Flows" and "--Defaulted
Receivables; Adjustments and Fraudulent
Charges".
Finance Charge Collections allocable to the
Collateral Interest for any Monthly Period will
be applied to pay the Collateral Interest
Monthly Servicing Fee with respect to such
Monthly Period and any accrued and unpaid
Collateral Interest Monthly Servicing Fee with
respect to prior Monthly Periods, and any such
remaining Finance Charge Collections will be
applied as Excess Spread.
With respect to the related Transfer Date, Excess
Spread not required to fund the Class A Required
Amount and the Class B Required Amount, if any,
will be applied as specified in "Description of
the Certificates--Allocation of Funds--Payment
of Fees, Interest and Other Items".
Required Collateral Inter- The "Required Collateral Interest" with respect
est........................ to any Transfer Date means (a) initially, the
Initial Collateral Interest and (b) on any
Transfer Date thereafter, an amount equal to
8.25% of the Adjusted Investor Interest on such
Transfer Date, after taking into account
deposits into the Principal Funding Account on
such Transfer Date and all payments to be made
on the related Distribution Date and all
adjustments made on such Transfer Date, but not
less than $15,000,000; provided, however, that
(1) if certain reductions in the Collateral
Interest occur or if a Pay Out Event occurs, the
Required Collateral Interest for such Transfer
Date shall equal the Required Collateral
Interest for the Transfer Date immediately
preceding the occurrence of such reduction or
Pay Out Event; (2) in no event shall the
Required Collateral Interest exceed the unpaid
principal amount of the Offered Certificates as
of the last day of the Monthly Period preceding
such Transfer Date, less cash held in the
Principal Funding Account as of such Transfer
Date, after taking into account payments to be
made on the related Distribution Date; and (3)
the Required Collateral Interest may be reduced
at any time to a lesser amount upon written
confirmation from the Rating Agency that such
reduction will not result in the Rating Agency
reducing or withdrawing its rating on any then
outstanding Series rated by it. See "Description
of the Certificates--Required Collateral
Interest".
If on any Transfer Date, the Collateral Interest
has been reduced to an amount less than the
Required Collateral Interest, Excess Spread, to
the extent available, will be used to increase
the Collateral Interest to the extent of such
shortfall. See "Description of the
Certificates--Allocation of Funds--Excess
Spread."
21
Interest Rate Cap........... On the Closing Date, the Trustee will enter into
the Class A Interest Rate Cap and the Class B
Interest Rate Cap with the Interest Rate Cap
Provider for the exclusive benefit of the Class
A Certificate Holders and the Class B
Certificate Holders, respectively. On each
Transfer Date that the Class A Certificate Rate
or the Class B Certificate Rate for the related
Interest Period exceeds the Class A Cap Rate or
the Class B Cap Rate, respectively, the Interest
Rate Cap Provider will make a payment to the
Trustee, on behalf of the Trust, based on the
amount of such excess and the notional amount of
the applicable Interest Rate Cap. The Class A
Notional Amount will at all times be equal to or
greater than the amount of the Expected Class A
Principal, and the Class B Notional Amount will
at all times equal the amount of the Expected
Class B Principal, in each case less the
aggregate notional amount of any portion of the
related Interest Rate Cap sold on or prior to
the date of determination. The Class A Interest
Rate Cap and the Class B Interest Rate Cap will
terminate on the day immediately following the
Class A Scheduled Payment Date and the Class B
Scheduled Payment Date, respectively; provided,
however, that the Class A Interest Rate Cap and
the Class B Interest Rate Cap may each be
terminated at an earlier date if the Trustee has
obtained a Replacement Interest Rate Cap or
entered into a Qualified Substitute Arrangement
with respect thereto.
Shared Collections.......... In any Monthly Period during the Revolving
Period, Principal Collections otherwise
allocable to the Certificates, to the extent not
required to be paid to the Collateral Interest
Holder in respect of the excess, if any, of the
Collateral Interest over the Required Collateral
Interest, will be available to cover principal
payments due to or for the benefit of the
Certificate Holders of other Series. In
addition, if in any Monthly Period during the
Controlled Accumulation Period the Principal
Allocation is greater than the sum of (i) the
Controlled Deposit Amount and (ii) the
Collateral Monthly Principal, such excess will
also be available to cover principal payments
due to or for the benefit of Certificate Holders
of other Series and holders of other undivided
interests in the Trust issued pursuant to the
Agreement and the applicable Supplements. Such
Principal Collections applied to the payment of
certificates of other Series and to such other
interests in the Trust are herein referred to as
"Shared Principal Collections". Any such
application of Shared Principal Collections to
other Series will not result in a reduction in
the Investor Interest of this Series. In
addition, amounts designated as Shared Principal
Collections pursuant to the Supplement for any
other Series may be applied to cover principal
payments due to or for the benefit of the
Certificate Holders. See "Description of the
Certificates--Allocation of Funds".
In any Monthly Period, the amount of Excess
Spread available after application of those
items listed under "Description of the
22
Certificates--Allocation of Funds--Payment of
Fees, Interest and Other Items" (such amount
constituting "Shared Finance Charge
Collections") will be applied to cover any
shortfalls with respect to certain amounts
payable from Finance Charge Collections
allocable to any other Series or other undivided
interests in the Trust then outstanding. In
addition, amounts designated as Shared Finance
Charge Collections pursuant to the Supplement
for any other Series may be applied to cover
certain payments due to be made out of Finance
Charge Collections to the Certificate Holders,
including the reimbursement of reductions in the
Class B Investor Interest arising in connection
with the payment of the Class A Required Amount
and the reimbursement of reductions in the
Collateral Interest arising in connection with
the payment of the Class A Required Amount and
the Class B Required Amount. See "Description of
the Certificates--Allocation of Funds".
Shared Finance Charge Collections and Shared
Principal Collections will be applied to any
Series (and any related undivided interests in
the Trust) then outstanding pro rata, based upon
the amount of shortfall, if any, with respect to
such Series (and such interests).
Repurchase.................. The Investor Interest will be subject to optional
purchase by the Transferor on any Distribution
Date on which the Investor Interest is an amount
less than or equal to 5% of the Initial Investor
Interest (after giving effect to all payments to
be made on such date), if certain conditions set
forth in the Agreement are met. The Investor
Interest will be subject to mandatory purchase
by the Transferor on the Distribution Date
immediately preceding the Scheduled Series 1997-
2 Termination Date if the Investor Interest is
reduced to an amount less than or equal to 5% of
the Initial Investor Interest, if certain
conditions set forth in the Agreement are met.
The mandatory purchase requirement is in
addition to any other provisions and remedies
provided by the Agreement and will not serve to
relieve any party of obligations it may
otherwise have or waive any remedy that is
otherwise provided. The purchase price will
equal the Investor Interest, accrued and unpaid
interest on the Certificates and all other
amounts owing under the Loan Agreement among the
Trustee, the Transferor, the Servicer, the
Collateral Interest Holder and the other
financial institutions party thereto (the "Loan
Agreement") through the last day preceding the
Distribution Date on which the purchase occurs.
See "Description of the Certificates--Final
Payment of Principal; Termination of the Trust".
Tax Status.................. Special tax counsel to the Transferor, Mayer,
Brown & Platt, is of the opinion that under
existing law the Offered Certificates will be
characterized as indebtedness for federal income
tax purposes. Under the Agreement, the
Transferor, the Trustee, the Holder of the
Exchangeable Transferor Certificate and the
Certificate
23
Owners will agree to treat the Certificates as
debt for tax purposes. See "Certain Federal
Income Tax Consequences" for additional
information concerning the application of
federal income tax laws.
ERISA Considerations........ Under regulations issued by the Department of
Labor, the Trust's assets would not be deemed
"plan assets" of an employee benefit plan
holding the Offered Certificates of any class if
certain conditions are met, including that the
Offered Certificates of such class be held by at
least 100 persons independent of the Transferor
and each other upon completion of the public
offering being made hereby. The Class A
Underwriters will not sell the Class A
Certificates to employee benefit plans unless
they believe that the Class A Certificates will
be held by at least 100 persons upon the
completion of this offering. The Transferor
anticipates that the other conditions of the
regulations will be met with respect to the
Class A Certificates. The Class B Underwriters
do not anticipate that the Class B Certificates
will be held by at least 100 persons upon the
completion of this offering. Accordingly, the
Class B Certificates may not be acquired with
the assets of any employee benefit plan,
including without limitation any insurance
company general account deemed to include the
assets of an employee benefit plan. If the
Trust's assets were deemed to be "plan assets"
of such a plan, there is uncertainty as to
whether existing exemptions from the "prohibited
transaction" rules of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), would apply to all transactions
involving the Trust's assets. Regardless of
whether the Trust's assets are deemed to
constitute "plan assets", an employee benefit
plan's purchase of Offered Certificates may, in
the absence of an exemption, constitute a
prohibited transaction if any of the Transferor,
the Servicer, the Holder of the Exchangeable
Transferor Certificate, the Trustee or the
Underwriters is a party in interest with respect
to that plan. Accordingly, employee benefit
plans contemplating purchasing the Offered
Certificates should consult their counsel before
making a purchase. See "Certain Employee Benefit
Plan Considerations".
Class A Certificate Rat- It is a condition to the issuance of the Class A
ing........................ Certificates that the Class A Certificates be
rated in the highest generic rating category by
at least one nationally recognized rating
agency.
Class B Certificate Rat- It is a condition to the issuance of the Class B
ing........................ Certificates that the Class B Certificates be
rated in one of the three highest generic rating
categories by at least one nationally recognized
rating agency.
Listing..................... Application will be made to list the Class A
Certificates on the Luxembourg Stock Exchange.
24
RISK FACTORS
Limited Liquidity. There is currently no market for the Offered
Certificates. The Underwriters intend to make a market in the Offered
Certificates but are not obligated to do so. There is no assurance that a
secondary market will develop or, if it does develop, that it will provide
Offered Certificate Holders with liquidity of investment or that it will
continue until the Offered Certificates are paid in full.
Certain Legal Aspects. While the Transferor transferred interests in the
Receivables to the Trust, a court could treat such transaction as an
assignment of collateral as security for the benefit of holders of
certificates issued by the Trust. The Transferor represents and warrants in
the Agreement that the transfer of the Receivables to the Trust is either a
valid transfer and assignment of the Receivables to the Trust or the grant to
the Trust of a security interest in the Receivables. The Transferor has taken
certain actions as are required to perfect the Trust's security interest in
the Receivables and warrants that if the transfer to the Trust is deemed to be
a grant to the Trust of a security interest in the Receivables, the Trustee
will have a first priority perfected security interest therein. Nevertheless,
a tax or government lien on property of the Transferor where notice of such
lien has been filed before Receivables are transferred to the Trust may have
priority over the Trust's interest in such Receivables, and if the FDIC were
appointed conservator or receiver of the Transferor, certain administrative
expenses of the conservator, receiver or the State of Connecticut Department
of Banking may have priority over the Trust's interest in such Receivables.
See "Certain Legal Aspects of the Receivables--Transfer of Receivables".
To the extent that the Transferor has granted a security interest in the
Receivables to the Trust and that security interest was validly perfected
before the appointment of the FDIC as conservator or receiver and before the
Transferor's insolvency, and certain other conditions are satisfied including
that such security interest was not taken in contemplation of the insolvency
of the Transferor, and was not taken with the intent to hinder, delay or
defraud the Transferor or the creditors of the Transferor, such security
interest should be enforceable (to the extent of the Trust's "actual direct
compensatory damages") and should not be subject to avoidance by the FDIC, as
receiver or conservator for the Transferor, and, therefore, in such
circumstances, payments to the Trust with respect to the Receivables (up to
the amount of such damages) should not be subject to recovery by a conservator
or receiver for the Transferor. The foregoing conclusions are based on FDIC
general counsel opinions and policy statements regarding the application of
certain provisions of the Federal Deposit Insurance Act (as amended, the
"FDIA"). While a Policy Statement of the Resolution Trust Company (the "RTC")
indicates that "actual direct compensatory damages" would include outstanding
principal plus interest accrued to the date of payment, in one case a federal
district court held that such damages constituted the fair market value of the
repudiated bonds as of the date of repudiation, which, with respect to the
Certificates, depending upon circumstances existing on the date of
repudiation, could be an amount less than the outstanding principal plus
interest accrued to the date of repudiation. The FDIC has not adopted a policy
statement on payment of interest on collateralized borrowings of banks. If the
conservator or receiver for the Transferor were to assert that such security
interest should not be enforceable or should be subject to avoidance or were
to require the Trustee to establish its right to those payments by submitting
to and completing the administrative claims procedure under the FDIA, or the
conservator or receiver were to request a stay of proceedings with respect to
the Transferor as provided under the FDIA, delays in payments on the
Certificates and possible reductions in the amount of those payments could
occur. In addition, the appointment of a receiver or conservator could result
in administrative expenses of the receiver or conservator having priority over
the interest of the Trust in the Receivables. The FDIC, as conservator or
receiver, would also have the rights and powers conferred under Connecticut
law. See "Certain Legal Aspects of the Receivables--Certain Matters Relating
to Conservatorship and Receivership".
If a conservator or receiver were appointed for the Transferor, then a Pay
Out Event could occur with respect to all Series then outstanding and,
pursuant to the Agreement, new Principal Receivables would not be transferred
to the Trust. In that event, unless holders of more than 50% of the investor
interest of each Series of certificates issued and outstanding (or with
respect to any Series with two or more classes, more than 50% of each class)
instruct otherwise, the Trustee would sell the portion of the Receivables
allocable to each Series that
25
did not vote to disapprove of the sale of the Receivables in accordance with
the Agreement in a commercially reasonable manner and on commercially
reasonable terms, which may cause early termination of the Trust and a loss to
Certificate Holders of each such Series (including the Certificate Holders) if
the proceeds from such early sale allocable to such Series, if any, and the
amounts available under any Enhancement applicable to such Series were
insufficient to pay Certificate Holders of such Series in full. If the only
Pay Out Event to occur is either the insolvency of the Transferor or the
appointment of a conservator or receiver for the Transferor, the conservator
or receiver would have the power to prevent the early sale, liquidation or
disposition of the Receivables and the commencement of the Rapid Amortization
Period. A conservator or receiver may also have the power to cause the early
sale of the Receivables and the early retirement of the Certificates, to
prohibit the continued transfer of Principal Receivables to the Trust, and to
repudiate the servicing obligations of the Transferor. In addition, in the
event of a Servicer Default relating to the insolvency of the Servicer, if no
Servicer Default other than such conservatorship or receivership or insolvency
exists, the conservator or receiver for the Servicer may have the power to
prevent either the Trustee or the Certificate Holders from appointing a
successor Servicer. See "Certain Legal Aspects of the Receivables--Certain
Matters Relating to Conservatorship and Receivership".
Consumer Protection Laws. The Accounts and Receivables are subject to
numerous federal and state consumer protection laws imposing requirements on
the making, enforcement and collection of consumer loans. The United States
Congress ("Congress") and the states may enact laws and amendments to existing
laws to regulate further the credit card industry or to reduce finance charges
or other fees or charges applicable to credit card accounts. Such laws, as
well as any new laws or rulings which may be adopted, may adversely affect the
Servicer's ability to collect on the Receivables or maintain the required
level of periodic finance charges, annual membership fees and other fees. In
addition, failure by the Servicer to comply with such requirements could
adversely affect the Servicer's ability to enforce the Receivables. During
recent years, federal legislative proposals have attempted unsuccessfully to
limit the maximum annual percentage rate that issuers may assess on credit
card accounts. If such legislation were enacted and imposed an interest rate
cap substantially lower than the annual percentage rates currently assessed on
the Accounts, it is likely that the Portfolio Yield (averaged over a period of
three consecutive Monthly Periods) would be reduced to a rate below the
average of the Base Rates for such Monthly Periods and therefore a Pay Out
Event would occur with respect to the Certificates. See "Description of the
Certificates--Pay Out Events". In addition, during recent years, there has
been increased consumer awareness with respect to the level of finance charges
and fees and other practices of credit card issuers. As a result of these
developments and other factors, there can be no assurance as to whether any
federal or state legislation will be promulgated imposing additional
limitations on the monthly periodic finance charges or fees relating to the
Accounts.
Pursuant to the Agreement, the Transferor covenants to accept reassignment
of each Receivable not complying in all material respects with all
requirements of applicable law as of the time of its creation if, as a result
of such noncompliance, the related Account becomes a Defaulted Account or the
Trust's rights in, to or under the Receivable or its proceeds are impaired or
unavailable. The Transferor makes certain other representations and warranties
relating to the validity and enforceability of the Receivables. The Trustee
has not made, however, and it is not anticipated that it will make, any
examination of the Receivables or the records relating thereto for the purpose
of establishing the presence or absence of defects, compliance with such
representations and warranties, or for any other purpose. The sole remedy if
any such representation or warranty is breached and such breach continues
beyond the applicable cure period is that the Transferor will be obligated to
accept reassignment of the Investor Interest in the Receivables affected
thereby. See "Description of the Certificate--Representations and Warranties"
and "Certain Legal Aspects of the Receivables--Consumer Protection Laws".
Application of federal and state bankruptcy and debtor relief laws would
affect the interests of the Certificate Holders in the Receivables if such
laws result in any Receivables being written off as uncollectible when there
are insufficient funds available to reimburse such losses. See "Description of
the Certificates--Defaulted Receivables; Adjustments and Fraudulent Charges".
26
Competition in the Credit Card Industry. The credit card industry is highly
competitive and operates in an environment increasingly focused on the
interest and fees charged to consumers for credit card services. As new card
issuers enter the market and issuers seek to expand their shares of the
market, there is increased use of advertising, target marketing, pricing
competition and incentive programs, all of which may adversely impact issuer
profit margins. The MasterCard and Visa organizations do not require adherence
to specific underwriting standards, and therefore credit card issuers may
compete on the basis of individual account solicitation and underwriting
criteria. The Transferor has traditionally competed as a low fixed-rate
provider of credit card services targeting highly creditworthy customers who
carry balances on their credit cards. The growth of the Transferor's credit
card portfolio is largely due to customers who, attracted by its low rates,
have transferred balances from competing credit card issuers, as well as due
to higher balances from purchases and cash advances. The Transferor is
participating in such competition through direct marketing programs, average
annual percentage rates and monthly minimum payment rates the Transferor
believes compare favorably to rates and fees charged by certain of the
Transferor's competitors and operating efficiencies which permit it to
maintain a favorable cost structure. If cardholders choose to utilize
competing sources of credit, the amount and rate of new Receivables generated
in the Accounts may be reduced and certain purchase and payment patterns with
respect to Receivables may be affected. The size of the Trust will be
dependent upon the Transferor's continued ability to generate new Receivables.
If the amount of new Receivables generated declines significantly, Receivables
from Additional Accounts (to the extent available) may be added to the Trust,
as described below, or a Pay Out Event could occur, in which event the Rapid
Amortization Period would commence. See "Description of the Certificates--Pay
Out Events".
Payments and Maturity. The Receivables may be paid at any time, and there is
no assurance that there will be additional Receivables created in the Accounts
or that any particular pattern of cardholder repayments will occur. The
commencement and continuation of the Controlled Accumulation Period will be
dependent upon the continued generation of new Receivables to be conveyed to
the Trust. A significant decline in the amount of Receivables generated could
result in the occurrence of a Pay Out Event for the Certificate Holders and
the commencement of the Rapid Amortization Period. Certificate Holders should
be aware that the Transferor's ability to continue to compete in the current
industry environment will affect the Transferor's ability to generate new
Receivables to be conveyed to the Trust and may also affect payment patterns.
The minimum monthly payment currently required on the Accounts generally
approximates 3% of the statement balances (as of specific dates), plus past
due amounts. A portion of the Receivables volume is a result of convenience
use by obligors who pay their entire monthly statement balance on or prior to
its due date and do not incur finance charges thereon. A significant decrease
in the cardholder monthly payment rate or minimum required payment could slow
the accumulation of principal during the Controlled Accumulation Period or
delay the payment of principal on the Class A Scheduled Payment Date or the
Class B Scheduled Payment Date or during the Rapid Amortization Period, and
such delay of the accumulation of principal or payment of principal, as the
case may be, could adversely affect the ability of investors to reinvest
profitably. See "--Ability to Change Terms of the Receivables", "Maturity
Considerations" and "The Credit Card Business of People's Bank--Underwriting
Procedures".
Social, Technological and Economic Factors. Changes in card usage and
payment pattern by cardholders may result from a variety of social,
technological and economic factors. Social factors include potential changes
in consumers' attitudes to financing purchases with debt. Technological
factors include new methods of payment, such as debit cards. Economic factors
include the rate of inflation, unemployment levels, personal bankruptcy levels
and relative interest rates. As a consequence of some of these factors, the
credit card industry has experienced generally increased levels of losses and
delinquencies. The loss and delinquency experience of the Trust Portfolio has
reflected that trend.
While the Trust Portfolio is a geographically diverse portfolio, the largest
concentration of accounts giving rise to the Receivables included in the Trust
Portfolio are in Connecticut. The concentration of such accounts is currently
approximately 10%. See "The Receivables". The loss and delinquency experience
in Connecticut is currently more favorable than the experience of the Bank
Portfolio. Connecticut's economy has historically been
27
highly dependent on the insurance, aerospace and defense industries. As a
result of consolidation and structural changes in the financial services
sector and defense budget cutbacks, Connecticut's overall job growth has
lagged behind the United States as a whole. However, total job growth has been
positive in the state since 1993 and Connecticut residents continue to have
the highest per capita income of any state in the country. The Transferor is
unable to determine and has no basis to predict whether, or to what extent,
social, technological or economic factors will affect future credit card usage
or payment patterns.
Effect of Subordination of the Class B Certificates. The Class B
Certificates are subordinated in right of payment of principal to payments of
principal and interest on the Class A Certificates. Payments of principal in
respect of the Class B Certificates will not commence until after the Class A
Investor Interest has been paid in full as described herein. In addition, the
Class B Investor Interest is subject to reduction if the Class A Required
Amount for any Monthly Period is not funded from Collections allocable to the
Class A Investor Interest, from payments under the Class A Interest Rate Cap,
from Excess Spread, from Shared Finance Charge Collections from other Series
allocable to the Certificates or from Reallocated Collateral Principal
Collections and if the Collateral Interest has been reduced to zero. If the
Class B Investor Interest suffers such a reduction, the portion of Finance
Charge Collections allocable to the Class B Certificate Holders in future
Monthly Periods will be reduced and principal and interest payments on the
Class B Certificates may be delayed or reduced. See "Description of the
Certificates--Subordination of the Class B Certificates". Such reductions of
the Class B Investor Interest will thereafter be reimbursed and the Class B
Investor Interest increased on each Distribution Date by the amount, if any,
of Excess Spread and Shared Finance Charge Collections from other Series
available for that purpose for such Distribution Date.
Further, in the event of a sale of the Receivables due to an Insolvency
Event, the portion of the net proceeds of such sale allocable to pay principal
with respect to the Certificate Holders' interest in such Receivables will
first be used to pay principal amounts due to the Class A Certificate Holders
and will then be used to pay amounts due to the Class B Certificate Holders,
thereby causing a loss to Class B Certificate Holders if such remaining
portion is insufficient to pay the Class B Certificate Holders in full. See
"Description of the Certificates--Principal Payments" and "--Pay Out Events".
If the Class B Investor Interest is reduced to zero, the Class A Certificate
Holders will bear directly the credit and other risks associated with their
undivided interest in the Trust.
Ability to Change Terms of the Receivables. Pursuant to the Agreement, the
Transferor has not transferred, and will not transfer, the Accounts to the
Trust. Only the Receivables arising in the Accounts have been and will be so
transferred. As owner of the Accounts, the Transferor has the right (to the
extent provided in the applicable credit card agreements and the Agreement) to
determine the monthly periodic finance charge and other fees which will be
applicable from time to time to the Accounts, to alter the minimum monthly
payment required on the Accounts and to change various other terms with
respect to the Accounts. A decrease in the monthly periodic finance charges,
annual membership fees, cash advance fees or Interchange could decrease the
effective yield on the Accounts and could result in the occurrence of a Pay
Out Event for the Certificate Holders and the commencement of the Rapid
Amortization Period. Under the Agreement, the Transferor has agreed that,
except as otherwise required by law or as is deemed by the Transferor to be
necessary in order to maintain its credit card business, based upon a good
faith assessment by it, in its sole discretion, of the nature of the
competition in that business, the Transferor will not (i) reduce the annual
percentage rate which determines the monthly periodic finance charges assessed
on the Receivables or other fees on the accounts, if as a result of such
reduction, its reasonable expectation of the Portfolio Yield as of such date
would be less than the weighted average base rates of all Series or (ii)
unless required by law, reduce such periodic finance charge if its reasonable
expectation is that the Portfolio Yield would be less than the highest
certificate rate for any Series then issued and outstanding. Such changes may
include the reduction or waiver of annual membership fees in connection with
the Transferor's marketing efforts. The term "Base Rate" with respect to the
Certificates generally means, with respect to any Monthly Period, the weighted
average of (x) the lesser of the Class A Certificate Rate and Class A Cap
Rate, (y) the lesser of the Class B Certificate Rate and the Class B Cap Rate,
and (z) the Collateral Rate (weighted based on the Class A Investor Interest,
the Class B Investor Interest and the Collateral Interest,
28
respectively, as of the last day of the preceding Monthly Period) plus the
Servicing Fee Rate. The term "Portfolio Yield" means generally, with respect
to the Certificates and any Monthly Period, the annualized percentage
equivalent of a fraction, the numerator of which is equal to the sum of the
Finance Charge Receivables allocable to the Investor Interest billed during
such Monthly Period after subtracting the Investor Default Amounts for such
Monthly Period (but in no event greater than the aggregate amount of
Collections for such Monthly Period), Principal Funding Investment Proceeds
and amounts withdrawn from the Reserve Account and deposited into the Finance
Charge Account and allocable to the Certificates for such Monthly Period, and
the denominator of which is the Investor Interest as of the last day of the
preceding Monthly Period. In addition, the Transferor has agreed that, upon
the occurrence of the Pay Out Event described in clause (iv) of "Description
of the Certificates--Pay Out Events" (relating to the average of the Portfolio
Yields for any three consecutive Monthly Periods being less than the average
of the Base Rates for such Monthly Periods), the Transferor will not, unless
required by law, reduce the annual percentage rate determining the monthly
periodic finance charges on the Accounts to a rate resulting in the weighted
average of the base rates for all Series. The Transferor has also agreed not
to change the terms of the Accounts, unless (i) if the Transferor has a
comparable segment of credit card accounts, the change is also made applicable
to the comparable segment of the portfolio of accounts with similar
characteristics owned by it and (ii) if the Transferor does not own such a
comparable segment, any such change is not made with the intent to benefit the
Transferor materially over the Certificate Holders. In servicing the Accounts,
the Servicer is also required to exercise the same care and apply the same
policies that it exercises in handling similar matters for its own comparable
accounts. Except as specified above, there are no restrictions on the
Transferor's ability to change the terms of the Accounts. While the Transferor
has no current intention of decreasing the monthly periodic finance charges on
the overall Trust Portfolio, there can be no assurance that changes in
applicable law, changes in the marketplace or prudent business practice might
not result in a determination by the Transferor to take actions changing this
or other Account terms. In addition, an increase in the monthly periodic
finance charges and other fees applicable to the Accounts might have the
result of decreasing the volume of Receivables generated on those Accounts. A
significant decrease in Receivables could cause the Transferor Interest to
decline below the Minimum Transferor Interest. The Transferor would be
obligated in such event to add Receivables from Additional Accounts (to the
extent available) to the Trust. If the Transferor were unable to convey
Receivables in Additional Accounts to the Trust when required by the
Agreement, a Pay Out Event would occur.
Master Trust Considerations. The Trust, as a master trust, will issue the
Certificates, has issued six prior Series of certificates, two of which have
been paid in full, and may issue additional Series of certificates in the
future. See "Annex I: Prior Series Issued and Outstanding". While the
Principal Terms of any Series will be specified in a Supplement, the
provisions of a Supplement and, therefore, the terms of any additional Series,
will not be subject to the prior review or consent of Holders of the
certificates of any previously issued Series. Such Principal Terms may include
methods for determining applicable investor percentages and allocating
Collections, provisions creating different or additional security or other
Enhancement, provisions subordinating such Series to another Series (if the
Supplement relating to such Series so permits; the Series 1997-2 Supplement
will not permit the subordination of Series 1997-2 to any other Series) or
other Series to such Series, and any other amendment or supplement to the
Agreement which is made applicable only to such Series. It is a condition
precedent to the issuance of any additional Series that either (x) the Rating
Agency delivers written confirmation to the Trustee that such issuance or
Exchange will not result in the Rating Agency reducing or withdrawing its
rating on any outstanding Series or (y) if at the time of the issuance or
Exchange there is no outstanding Series currently rated by a Rating Agency, a
nationally recognized investment banking firm or commercial bank deliver a
certificate to the Trustee to the effect that the issuance or Exchange will
not have an adverse effect on the timing or distribution of payments to such
other Series. There can be no assurance, however, that the Principal Terms of
any other Series, including any Series issued from time to time hereafter, or
that a change in the character of the Trust Portfolio, through, for instance,
the addition of Receivables arising from Accounts and Receivables arising from
Additional Accounts or Automatic Additional Accounts, might not have an impact
on the timing and amount of payments received by a Certificate Holder,
including as a result of the refixing of the Investor Percentage with respect
to the allocation of the Principal Receivables. See "Description of the
Certificates--Exchanges" and "--Allocation Percentages".
29
Addition of Accounts. The Transferor expects, and in some cases will be
obligated, to designate Additional Accounts from time to time, the Receivables
in which will be conveyed to the Trust. Such Additional Accounts will likely
include accounts originated using criteria different from those which were
applied to previously-designated Accounts, because such Accounts were
originated at a different date, under different underwriting criteria or by
different institutions, or represent a separate segment of the Transferor's
credit card business. Consequently, there can be no assurance that Additional
Accounts designated in the future will be originated, priced or underwritten
in the same manner as previously-designated Accounts. The designation of
Additional Accounts will be subject to the satisfaction of certain conditions
described herein under "Description of the Certificates--Addition of
Accounts."
Control. Subject to certain exceptions, the Certificate Holders of each
Series may take certain actions, or direct certain actions to be taken, under
the Agreement or the related Supplement. Under certain circumstances, however,
the consent or approval of a specified percentage of the aggregate investor
interest of all Series or of the investor interest of each Series will be
required to take or direct certain actions, including requiring the
appointment of a successor Servicer following a Servicer Default, amending the
Agreement in certain circumstances and directing a repurchase of all
outstanding Series upon the breach of certain representations and warranties
by the Transferor. In such instances, the interests of the Holders of the
Certificates may not be aligned with the interests of the holders of
certificates of such other Series. Thus, even if the requisite majority of
Certificate Holders votes to take or direct such action, the Certificate
Holders of such other Series may control whether or not such action occurs.
Certificate Ratings. It is a condition to issuance of the Class A
Certificates that the Class A Certificates be rated in the highest generic
rating category by at least one nationally recognized rating agency. It is a
condition to the issuance of the Class B Certificates that the Class B
Certificates be rated in one of the three highest generic rating categories by
at least one nationally recognized rating agency. As used herein, the term
"Rating Agency" with respect to the Certificates, and with respect to any
other Series, means the rating agency or agencies from whom ratings have been
solicited as specified in the Supplement with respect to such Series. The
ratings address the likelihood of full payment of principal and interest of
the Certificates by the Scheduled Series 1997-2 Termination Date. The ratings
are based primarily on the quality of the Receivables, the credit support
provided by the Collateral Interest, the Interest Rate Caps and, with respect
to the rating of the Class A Certificates, the terms of the Class B
Certificates. The ratings are not a recommendation to purchase, hold or sell
Certificates, inasmuch as such ratings do not comment as to the market price
or suitability for a particular investor. There is no assurance that the
ratings will remain for any given period of time or that the ratings will not
be lowered or withdrawn by the Rating Agency if in its judgment circumstances
so warrant. The ratings do not address the possibility of the occurrence of a
Pay Out Event, and they do not address the likelihood of any payment in
respect of either Class A Excess Interest or Class B Excess Interest.
Limited Credit Enhancement. Although credit enhancement with respect to the
Offered Certificates will be provided by (i) the Collateral Interest and (ii)
with respect to the Class A Certificates, the subordination of the Class B
Certificates, the Collateral Interest and the Class B Investor Interest are
limited and will be reduced by certain claims made that are not paid from
Finance Charge Collections allocated to the Certificates and are not
reimbursed from Excess Spread or Shared Finance Charge Collections. If Finance
Charge Collections allocated to the Investor Interest, Excess Spread, Shared
Finance Charge Collections allocated to the Certificates, and Reallocated
Principal Collections are not sufficient to cover the Class A Investor Default
Amount and the Class B Investor Default Amount in any Monthly Period and if
the Collateral Interest has been reduced to zero, the Investor Interest will
be reduced (unless it is otherwise reimbursed) resulting in a reduction of the
amount of Collections allocable to Certificate Holders in future Monthly
Periods and in a reduction of the aggregate principal amount returned to the
Certificate Holders. If the Collateral Interest and, with respect to the Class
A Certificates, the Class B Investor Interest are reduced to zero, Class A
Certificate Holders and Class B Certificate Holders will bear directly the
credit and other risks associated with their undivided interest in the Trust.
See "Description of the Certificates--Reallocation of Cash Flows" and "--
Defaulted Receivables; Adjustments and Fraudulent Charges".
30
Reductions of the Collateral Interest and the Class B Investor Interest,
other than reductions resulting from principal payments, will be reimbursed by
Excess Spread and Shared Finance Charge Collections which are allocated and
available to fund such amounts. Certain factors, such as lowering the finance
charges (including late fees and membership charges) on outstanding
Receivables balances and increased convenience use by obligors who pay their
entire monthly statement balance on or prior to its due date and do not incur
finance charges thereon, may lower the amount of Finance Charge Receivables
generated as well as Collections in respect thereof, and may thereby reduce
the Excess Spread and Shared Finance Charge Collections available to replenish
the credit enhancement. See "Description of the Certificates--Allocation of
Funds". Finally, a slowing in payment rates on the Receivables could extend
the final Distribution Date for the Class A Certificates and Class B
Certificates beyond the Scheduled Payment Date for each such class. See "--
Payments and Maturity". The Reallocated Collateral Principal Collections and
the Reallocated Class B Principal Collections may only be utilized to cover
Required Amounts on and prior to the Scheduled Series 1997-2 Termination Date
and will not be available otherwise to pay the remaining principal on the
Certificates at any time.
Book-Entry Registration. The Offered Certificates will be initially
represented by one or more certificates registered in the name of Cede, the
nominee for DTC, and will not be registered in the names of the Offered
Certificate Owners or their nominees. Unless and until Definitive Certificates
are issued, Offered Certificate Owners will not be recognized by the Trustee
as Offered Certificate Holders, as that term is used in the Agreement. Hence,
until such time, Offered Certificate Owners will only be able to exercise the
rights of Offered Certificate Holders indirectly through DTC and its
participating organizations. See "Description of the Certificates--Book-Entry
Registration" and "--Definitive Certificates".
Reports to Certificate Holders. Unless and until Definitive Certificates are
issued, monthly and annual reports, containing information concerning the
Trust and prepared by the Servicer, will be sent on behalf of the Trust to
Cede, as nominee for DTC and the registered holder of the Offered
Certificates. Such reports will not constitute financial statements prepared
in accordance with generally accepted accounting principles and will not be
sent by the Servicer or the Trustee to the Offered Certificate Owners. See
"Description of the Certificates--Book-Entry Registration", "--Definitive
Certificates" and "--Reports to Certificate Holders".
Limitations on Interest Rate Cap Coverage. The Class A Notional Amount of
the Class A Interest Rate Cap will be reduced during the Controlled
Accumulation Period to an amount not less than the Expected Class A Principal.
Any Class A Excess Principal will not have the benefit of the Class A Interest
Rate Cap. The Class B Notional Amount of the Class B Interest Rate Cap will be
reduced to zero on the Class B Scheduled Payment Date. To the extent the Class
B Investor Interest is greater than zero on the Class B Scheduled Payment
Date, the Class B Certificate Holders will not have the benefit of the Class B
Interest Rate Cap. In addition, the Certificates will not include the right to
receive any interest on Excess Principal in excess of the Class A Cap Rate or
the Class B Cap Rate, as applicable. While distributions may be made in
respect of the Class A Excess Interest or the Class B Excess Interest, such
distributions are not addressed in the ratings assigned by the Rating
Agencies.
THE TRUST
The Trust has been formed in accordance with the laws of the State of New
York pursuant to the Agreement. Prior to its formation, the Trust did not have
any assets or obligations. The Trust has not and will not engage in any
activity, other than as described herein. The Trust will exist only for the
transactions described herein, including the receipt of the Receivables and
holding such Receivables, the issuance of the Exchangeable Transferor
Certificate, the issuance of certificates of other, previously-issued Series,
the issuance of the Certificates and other undivided interests representing
additional Series and related activities (including, with respect to any
Series, receiving any Enhancement and entering into the Enhancement agreement
relating thereto) and making payments thereon. As a consequence, the Trust is
not expected to have any need for additional capital resources.
31
THE CREDIT CARD BUSINESS OF PEOPLE'S BANK
GENERAL
People's Bank began its credit card program in 1985 by marketing a low
interest rate credit card to highly creditworthy individuals in its market
area. As a result of the initial program's success, People's Bank expanded the
program nationally. The June 1997 Nilson Report ranked People's Bank the 26th
largest VISA USA, Inc. ("VISA") and MasterCard International Incorporated
("MasterCard") credit card issuer in the United States as of March 1997 on the
basis of outstanding balances. People's Bank further expanded its credit card
operations in 1996 by establishing a limited branch in the United Kingdom,
which had generated credit card receivables of approximately $108 million at
June 30, 1997. No receivable generated by the United Kingdom branch will be
included in the Trust Portfolio. All of the eligible receivables in the Trust
Portfolio are payable in United States dollars.
The Receivables conveyed or to be conveyed to the Trust by People's Bank
pursuant to the Agreement have been or will be generated from transactions
made by holders of certain VISA and certain MasterCard credit card accounts, a
subset of People's Bank's entire portfolio of credit card accounts, and
include finance charges and fees billed to the Accounts. The Accounts were
generated under the VISA or MasterCard associations of which People's Bank is
a member.
People's Bank services all of its accounts and receivables at its facilities
in Bridgeport, Connecticut. Certain operations are performed on behalf of
People's Bank by Total System Services, Inc., of Columbus, Georgia ("Total
System"), including statement processing, printing and mailing. People's Bank
has used Total System for such services since it launched its credit card
program in 1985. If Total System were to fail or become insolvent, delays in
processing and recovery of information with respect to charges incurred by
cardholders could occur, and the replacement of such services could be time-
consuming. As a result, delays in payments to Certificate Holders could occur.
The entire portfolio of People's Bank VISA and MasterCard credit card
accounts (the "Bank Portfolio"), of which the Accounts giving rise to the
Trust Portfolio are a part, includes premium accounts (i.e., VISA Gold, Gold
MasterCard and business accounts) and standard accounts (i.e., VISA Classic
and standard MasterCard). The Accounts from which Receivables arose in the
initial Trust Portfolio included only the standard accounts and not premium
accounts. Since the May 1, 1996 addition of Additional Accounts, the Trust
Portfolio has included both standard and premium accounts. As of June 30,
1997, 5.17% of the accounts in the Bank Portfolio were premium accounts and
94.83% were standard accounts, and the receivables balance of premium accounts
and standard accounts, as a percentage of the total balance of the receivables
in the Bank Portfolio, was 5.50% and 94.50%, respectively. Both premium and
standard accounts undergo the same credit analysis, but premium accounts
generally carry higher annual membership fees and have higher credit limits.
The VISA and MasterCard credit card accounts may be used for three types of
transactions: credit card purchases, cash advances and convenience checks.
Purchases occur when cardholders use credit cards to buy goods and/or
services. A cash advance is made when a credit card is used to obtain cash
from a financial institution or an automated teller machine. Cardholders may
also use convenience checks to (i) transfer balances from other credit card
accounts to their People's Bank accounts and (ii) draw against their VISA and
MasterCard credit card accounts at any time. Amounts due with respect to
purchases, cash advances and convenience checks are included in the
Receivables.
In addition, cardholders have been able to purchase insurance covering their
account balances since March 1985. Premiums for this insurance are charged to
the account for each monthly Billing Cycle. Such insurance premiums are
included in the Receivables transferred to the Trust and are treated as
Finance Charge Receivables.
Each cardholder is subject to an agreement with People's Bank governing the
terms and conditions of the VISA or MasterCard credit card account. Pursuant
to each such agreement, except as described herein, People's Bank reserves the
right, subject to fifteen days' prior notice to the cardholder or as may be
required by law, to
32
add to, change or terminate any terms, conditions, services or features of its
VISA or MasterCard credit card accounts at any time, including increasing or
decreasing the periodic finance charges, other charges or the minimum monthly
payment requirements.
The credit evaluation, collection and charge-off policies and servicing
practices of People's Bank, as well as the terms and conditions governing
cardholder agreements in effect as of the date hereof, are under continuous
review and may change at any time in accordance with its business judgment,
applicable law and guidelines established by regulatory authorities.
Transactions creating the Receivables through the use of credit cards are
processed through the VISA and MasterCard systems. Should either system
materially curtail its activities, or should People's Bank cease to be a
member of VISA or MasterCard, for any reason, a Pay Out Event could occur, and
delays in payments on the Receivables and possible reductions in the amounts
thereof could also occur.
ACCOUNT ORIGINATION
The VISA and MasterCard credit card accounts owned by People's Bank were
principally generated through: (i) direct mail solicitations of individuals
who have been prescreened at credit bureaus on the basis of criteria furnished
by People's Bank; (ii) applicant-initiated requests; (iii) applications mailed
to customers of People's Bank and customers of certain agent banks for which
People's Bank acts as a sponsor with VISA and/or MasterCard pursuant to
People's Bank's Agent Bank Account program (the "Agent Bank Accounts"); and
(iv) affinity marketing programs which are originated by People's Bank by
soliciting prospective cardholders from identifiable groups with a common
interest or a common cause, and with the assistance of an organization of the
members of such group ("Affinity Program Accounts"). In addition to these
account origination methods, People's Bank originates certain co-brand
accounts and solicits accounts from students and alumni of local Connecticut
universities. People's Bank applies the same credit criteria without
distinction among the foregoing sources of applications, as described below in
"Underwriting Procedures", and the performance by the cardholders of such
accounts is generally comparable to the remaining Bank Portfolio of accounts.
The largest percentage of all national accounts are originated through
targeted, prescreened direct-mail requests and a significant number of
accounts are originated through applicant-initiated requests. People's Bank's
strategy of offering a low interest rate credit card to highly creditworthy
customers has received significant attention by national consumer groups,
consumer focused publications and financial journals. These sources frequently
publish information regarding People's Bank's credit card products, including
People's Bank's toll free customer service telephone number. Prospective
applicants contact People's Bank using the toll free telephone number and
request an application, which they then complete and return to People's Bank,
or complete an application over the telephone.
UNDERWRITING PROCEDURES
All applications for accounts originated by People's Bank are reviewed for
completeness and creditworthiness based on the credit underwriting criteria
established by People's Bank. People's Bank uses credit reports issued by
independent credit reporting agencies with respect to the applicant. In the
event there are discrepancies between the application and the credit report,
and in certain other circumstances, People's Bank may verify certain
information regarding the applicant.
All applications, including prescreened and direct mail candidates, are
evaluated by utilizing a credit scoring system. The credit scoring model used
by People's Bank was developed with Fair, Isaac Companies, which has extensive
experience in developing credit scoring models. Credit scoring is intended to
provide a general indication, based on the information available, of the
applicant's willingness and ability to repay his or her obligations. Credit
scoring evaluates a potential cardholder's credit profile and certain
application information in order to statistically quantify credit risk. Models
for credit scoring are developed by using statistics to evaluate common
characteristics and their correlation with credit risk. From time to time, the
credit scoring models used
33
by People's Bank are reviewed and are periodically updated to reflect more
current statistical data. Based on statistical analysis, People's Bank has
established a policy that certain accounts receiving high credit scores may be
automatically approved without judgmental review. Judgmental underwriting of
People's Bank's credit card accounts is used to evaluate those who score below
the preset level for automatic approval and above the preset level for
automatic rejection.
In the case of prescreened direct mail solicitations, selection criteria
established by People's Bank are used by credit bureaus to generate or screen
lists of qualifying individuals. Members of People's Bank's Credit Card
Services then mail solicitations to those qualifying individuals on the list.
Additional credit criteria are applied on a case-by-case basis to those
qualifying individuals accepting such solicitation to determine the
appropriate line of credit for such individuals. The information requested in
the response forms mailed to prescreened prospects is less extensive than the
information requested in the applications mailed to individuals who have not
been prescreened. Credit limits are assigned to prescreened prospective
cardholders based on a credit profile that includes existing indebtedness,
past payment patterns on other consumer loans and certain other criteria. The
response forms of individuals responding to prescreened direct mail
solicitations are reviewed by People's Bank and are checked again through
credit reporting bureaus. If no change in credit performance has occurred, an
offer of credit is made. Generally, each new cardholder is issued a credit
card that expires two years after issuance. People's Bank generally reissues
credit cards with two-year expiration dates, so long as the payment history of
the cardholder satisfies certain criteria.
BILLING AND PAYMENTS
The Bank Portfolio has different billing and payment structures, including
minimum payment levels, annual membership fees and monthly periodic charges.
For purposes of administrative convenience, the VISA and MasterCard credit
card accounts of People's Bank are currently grouped into twenty-two billing
cycles ending on the 5th through 27th day of each month (other than the 24th
day) (each, a "Billing Cycle"). Each Billing Cycle has its own monthly billing
date, at which time the activity in the related accounts during the month
ending on such billing date is processed and billed to accountholders. See
"The Receivables". The Accounts include VISA and MasterCard credit card
accounts in Billing Cycles ending at the close of business on each of the days
referred to above. See "The Receivables".
Monthly billing statements are sent to accountholders with either debit or
credit activity during the Billing Cycle. Generally, each month,
accountholders must make at least a minimum payment equal to the greater of
(i) 3% of the account balance and (ii) $10, plus any past due amount;
provided, however, that if the remaining balance is less than $10, the minimum
payment will be equal to the amount of such remaining balance.
The monthly periodic finance charges assessed on cash advances and
convenience checks are calculated by multiplying the average daily cash
advance balance by the applicable monthly periodic rate. Monthly periodic
finance charges are calculated on cash advances (including unpaid finance
charges) from the date of the transaction or, if a convenience check is used,
the day the convenience check is posted to the cardholder's account. The
monthly periodic finance charges assessed on purchases are calculated by
multiplying the average daily purchase balance by the applicable monthly
periodic rate. Monthly periodic finance charges are calculated on purchases
(including certain fees and unpaid finance charges) from the date of the
purchase or the first day of the Billing Cycle in which the purchase is posted
to the account (whichever is later). The credit card agreement provides that
monthly periodic finance charges are not assessed in most circumstances on
purchases if the purchaser's new balance shown in the billing statement is
paid within 25 days after the last day of the Billing Cycle, or if the
purchaser's previous balance is zero. The current fixed annual percentage rate
for purchases generally ranges from 11.90% to 13.99%; however, People's Bank
offers introductory rates below the standard rate. An increase in the fixed
annual percentage rate for purchases might have the result of decreasing the
volume of Receivables generated. The current fixed annual percentage rate for
cash advances is generally 19.80%. For a
34
break-down of the yield from finance charges and fees billed, see the table
titled "Revenue Experience Representative Portfolio" included under
"Receivable Yield Considerations".
Under the terms of People's Bank's agreement with each of its cardholders,
People's Bank may change the annual percentage rates applicable to Accounts.
In July 1997, People's Bank notified certain cardholders of its decision to
increase the annual percentage rates applicable to their Accounts for existing
balances and for future purchases and convenience checks. These increases are
generally not reflected in the current fixed annual percentage rates specified
above. On an average basis, the annual percentage rate increases on these
Accounts (which, as of June 30, 1997, had outstanding balances of
approximately $600 million) ranged between 2.0% and 2.5%. An increase in the
annual percentage rates applicable to these Accounts could, however, have the
result of reducing the volume of Receivables generated on such Accounts,
thereby limiting the favorable impact on yield of such increase. See "Risk
Factors--Ability to Change Terms of the Receivables". The annual percentage
rates and other terms of the cardholder agreements are continually reviewed by
People's Bank, and further changes to annual percentage rates and such terms
may occur based on changes in the law, changes in the marketplace or prudent
business practices. People's Bank expects to implement further selected
changes to annual percentage rates.
In addition, People's Bank may, at its option, increase the annual
percentage rates for purchases, balance transfer checks and cash advances for
the accounts of cardholders who fail to make payments by the due date or who
exceed the total credit limit set by People's Bank; however, People's Bank's
current practice is to lower such rates back to the corresponding standard
rates that were in effect upon compliance by such cardholders with the terms
of the accounts (e.g., making timely payments and staying within the credit
limit) for 5 consecutive Billing Cycles.
People's Bank may, at its option, reduce the minimum payment requirements
and monthly periodic finance charges described above for the accounts of
cardholders who are members of Consumer Credit Counseling Services, an
organization which assists financially troubled cardholders with outstanding
credit card balances to devise repayment programs. Such repayment programs
generally involves reducing the minimum monthly payment and/or reducing the
finance charges assessed. People's Bank may, but is not obligated to, accept
such repayment programs.
People's Bank generally assesses a non-refundable annual membership fee of
$25 for standard accounts, $30 for business accounts and $40 for premium
accounts. In response to market trends commencing in 1995, People's Bank
originated a proportionately larger amount of credit card accounts that did
not require payment of an annual membership fee. In addition, People's Bank
may waive the annual membership fee, or a portion thereof, in connection with
certain solicitations, affinity programs and in certain other cases. Some of
the accounts may be subject to certain additional fees, including: (i) a late
fee, generally in the amount of $20, with respect to any monthly payment if
the required minimum monthly payment is not received by the payment due date
shown on the monthly billing statement; (ii) a cash advance fee equal to 2% of
the amount of each cash advance (minimum $3; maximum $25) applied per
transaction at ATMs, People's Bank or any other bank; (iii) an overlimit fee,
generally in the amount of $20; and (iv) a returned check fee, generally in
the amount of $20. Subject to the requirements of applicable laws, People's
Bank may change certain of these fees and rates at any time by written notice
to cardholders. Pursuant to the terms of the cardholder agreement, People's
Bank may change the terms of such agreement and must give cardholders 15 days'
prior notice of any change which would result in an increase in the rate of
finance charges on existing balances or new activity, or other fees, or impose
a fee not set forth in such agreement. People's Bank may, pursuant to its
agreements with cardholders, apply payments received on the Accounts to
finance charges, principal balances and other amounts due in the order that it
may elect from time to time.
Collection of Delinquent Accounts. An account is initially considered
delinquent if the minimum monthly payment indicated on the accountholder's
statement is not received within one calendar month from the statement date.
Efforts to collect delinquent credit card receivables are made by People's
Bank's personnel and collection agencies and attorneys retained by People's
Bank. Under current practice, accountholders that become one to ten
35
days delinquent may be sent a notice and telephone calls to the accountholder
may begin once an account becomes delinquent. People's Bank uses an automated
dialer to telephone delinquent accountholders. People's Bank also uses the on-
line collections system of Total System and a Fair, Isaac Companies scoring
system to analyze the collection risk on such accounts.
Generally, within 31 days of contractual delinquency, no additional
extensions of credit through such account are authorized and, between 61 and
91 days of contractual delinquency, the account is closed. Consistent with the
credit and collection policies of People's Bank, in certain infrequent
circumstances, People's Bank may enter into arrangements with cardholders to
extend or otherwise change payment schedules, which can include the suspension
of finance charge accruals or bringing current (or "reaging") accounts where
cardholders make three consecutive minimum monthly payments. People's Bank
will enter into such arrangements only in circumstances where it believes its
ability to collect on the account will be enhanced by such arrangements.
The current policy of People's Bank is to charge-off, as a loan loss, the
principal portion of the receivables balance for both purchases and cash
advances at any time after the 210th through the 240th day of delinquency.
Charge-offs may occur earlier in some circumstances, as in the case of
bankrupt cardholders. At the time an account is charged off, an evaluation of
its collectibility is made on a case by case basis to determine whether
further remedies should be pursued by collection personnel at People's Bank,
outside collection agencies or, in some cases, outside attorneys. Delinquency
levels are monitored by collection managers and information is reported
regularly to senior management. Under the terms of the Agreement, any
Recoveries will be included in the assets of the Trust and considered Finance
Charge Receivables.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth the delinquency and loss experience for each
of the periods shown for receivables in accounts which would have
substantially satisfied the criteria for inclusion of its related receivables
in the Trust Portfolio (the "Representative Portfolio"). These Representative
Portfolio tables illustrate the historical performance of the Receivables as
if all Accounts in the Trust as of the Series Cut-Off Date were included in
the Trust since their origination. In fact, the Transferor has in the past
added pools of Additional Accounts that are about to reprice from an
introductory pricing period. During the introductory pricing period, Accounts
generally exhibit lower levels of yield and loss than do more seasoned
Accounts with standard pricing. As a consequence, the Representative Portfolio
tables below show revenue and loss experience that incorporates the impact of
introductory pricing and newer account loss experience which are not
representative of the Trust Portfolio.
The Servicer will file with the Commission monthly reports with respect to
the Trust, including information with respect to revenues, losses and
Portfolio Yield with respect to the Accounts. There can be no assurance that
the delinquency and loss experience for the Receivables in the future will be
similar to the historical experience of the Representative Portfolio included
in the tables set forth below because, among other things, economic and
financial conditions affecting the ability of cardholders to pay may be
different from those which prevailed during the periods reflected below.
36
LOSS EXPERIENCE
REPRESENTATIVE PORTFOLIO
(DOLLARS IN THOUSANDS)
SIX MONTH PERIOD YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ----------------------------------
1997 1996 1995 1994
---------------- ---------- ---------- ----------
Average Receivables Out-
standing(1)............ $2,575,359 $2,151,979 $1,649,780 $1,182,028
Gross Charge-Offs(2)(3). 64,294 99,542 56,101 27,858
Recoveries(4)........... 5,707 8,553 5,175 3,876
Net Charge-Offs(3)...... 58,587 90,989 50,926 23,982
Net Charge-Offs as Per-
centage of Average
Receivables Outstand-
ing(3)................. 4.55%(5) 4.23% 3.09% 2.03%
- --------
(1) Average Receivables Outstanding is the average of the daily receivable
balance during the period indicated.
(2) Gross Charge-Offs are calculated before Recoveries and do not include the
amount of any reductions in Average Receivables Outstanding due to fraud.
(3) The amounts of charge-offs include the principal and interest portion of
charged off receivables.
(4) Recoveries have historically been allocated to the Trust on a pro rata
basis. Peoples's Bank expects to adopt a methodology following the closing
date pursuant to which those Recoveries relating to previously charged-off
Trust Receivables will be treated as Finance Charge Receivables.
(5) Calculated on an annualized basis.
DELINQUENCY EXPERIENCE
REPRESENTATIVE PORTFOLIO
(DOLLARS IN THOUSANDS)
AS OF JUNE 30, AS OF DECEMBER 31,
------------------ ---------------------------------------------------------
1997 1996 1995 1994
NUMBER OF DAYS ------------------ ------------------- ------------------ ------------------
DELINQUENT(1) AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- -------------- ------- ---------- -------- ---------- ------- ---------- ------- ----------
31 to 60 days........... $26,061 0.98% $ 30,726 1.24% $23,227 1.27% $13,888 0.92%
61 to 90 days........... 17,342 0.66 19,566 0.79 13,292 0.73 7,476 0.50
91 to 120 days.......... 14,452 0.54 15,216 0.61 11,397 0.62 5,178 0.34
121 to 150 days......... 11,603 0.44 12,649 0.51 9,032 0.49 4,069 0.27
151 to 180 days......... 9,827 0.37 9,808 0.40 7,384 0.40 3,124 0.21
181 days or greater..... 16,826 0.64 14,666 0.59 10,613 0.58 4,498 0.30
------- ---- -------- ---- ------- ---- ------- ----
Total(2).............. $96,111 3.63% $102,631 4.14% $74,945 4.09% $38,233 2.54%
======= ==== ======== ==== ======= ==== ======= ====
- --------
(1) Number of days delinquent means the number of days after the billing date
next following the original billing date. For example, 31 days delinquent
means that no payment is received within 61 days after the original
billing date.
(2) Delinquencies are calculated as a percentage of outstanding receivables as
of the end of each calendar month. Delinquencies include bankruptcies.
Delinquencies and charge-offs as a percentage of the Representative
Portfolio are affected by a variety of factors. Among them are: (i) the rate
of growth of receivables in the Representative Portfolio; (ii) general
economic conditions in the United States and particularly the nationwide rise
in consumer loan delinquencies and the rise in personal bankruptcy filings;
(iii) the seasoning of the accounts in the Representative Portfolio; and (iv)
the creation and inclusion in the Representative Portfolio of a new product
group that generated higher revenues and higher losses. This new product group
represented approximately $85 million of receivables as of July 31, 1997.
People's Bank will not add additional receivables of this type to the Trust
without rating agency approval.
37
The decline in delinquencies in 1997 compared to prior years can be
attributed to the increased rate of growth of Receivables and the increased
percentage of unseasoned accounts in the Representative Portfolio, as well as
tightened credit underwriting criteria. Conversely, the rise in delinquencies
in 1995 and 1996 resulted from lower growth rates and therefore a lower level
of unseasoned accounts in the Representative Portfolio.
The rise in charge-offs since 1994 as a percentage of the Representative
Portfolio is primarily the result of the increased level of consumer loan
delinquencies, the rise of personal bankruptcies nationwide and the overall
seasoning of the Receivables in the Representative Portfolio.
People's Bank believes that conformity with its underwriting procedures (see
"--Underwriting Procedures") will keep the loss and delinquency experience
within historical norms, although there can be no assurance that the loss and
delinquency amounts as a percentage of the Representative Portfolio will
remain at current levels.
RECOVERIES
Recoveries have historically been allocated to the Trust on a pro rata
basis. People's Bank expects to adopt a methodology pursuant to which the
Transferor will be required, following the Closing Date, to transfer to the
Trust on each Transfer Date the amount of Recoveries received by the Servicer
during the preceding Monthly Period with respect to the Receivables in the
Trust Portfolio. Recoveries allocated to the Trust are treated as collections
of Finance Charge Receivables. See "--Loss and Delinquency Experience".
INTERCHANGE
Creditors participating in the VISA and MasterCard associations receive
certain fees as partial compensation for taking credit risk, absorbing fraud
losses and funding receivables for a limited period prior to initial billing.
Under the VISA and MasterCard systems, a portion of these fees collected in
connection with cardholder charges for merchandise and services is passed from
the banks clearing the transactions for merchants to credit card issuing
banks. These fees currently range from approximately 0.90% to 2.17% of the
transaction amount. People's Bank is required, pursuant to the terms of the
Agreement, to transfer to the Trust those fees attributed to cardholder
charges for merchandise and services in the Accounts ("Interchange"). Such
percentages are set by the VISA and MasterCard associations and may be changed
by either of them respectively from time to time. Interchange is treated as
Finance Charge Receivables for the purposes of determining the amount of
Finance Charge Receivables, allocating collections and payments to Certificate
Holders and calculating the Portfolio Yield.
THE RECEIVABLES
The Receivables conveyed to the Trust arise in Accounts from the Bank
Portfolio of VISA and MasterCard credit card accounts satisfying eligibility
criteria set forth in the Agreement (the "Trust Portfolio"). Such criteria do
not create a selection adverse to the Certificate Holders. Pursuant to the
Agreement, the Transferor has the right (and, under certain circumstances, the
obligation), subject to certain limitations and conditions set forth therein,
to designate from time to time Additional Accounts and to transfer to the
Trust all Receivables of such Additional Accounts, whether such Receivables
are then existing or thereafter created. Any Additional Accounts designated
pursuant to the Agreement must be Eligible Additional Accounts as of the date
the Transferor designates such accounts as Additional Accounts. The Agreement
also provides that the Transferor will add as Automatic Additional Accounts
certain new accounts opened in the ordinary course of its business. Automatic
Additional Accounts will be added to the Trust on the business day that they
are originated if certain requirements are satisfied. See "Description of the
Certificates--Addition of Accounts". Automatic Additional Accounts will
consist of certain of the Transferor's VISA and MasterCard credit card
accounts, constituting Eligible Automatic Additional Accounts and satisfying
certain other criteria, and arising in Accounts designated by the Transferor
from time to time. The Transferor may designate additional categories of
Automatic Additional
38
Accounts; provided, however, that the Transferor shall have received notice
from each Rating Agency that such designation will not result in a downgrading
or withdrawal of its rating of any certificates of any Series outstanding. In
addition, the Transferor is required to designate Eligible Additional Accounts
as Additional Accounts (x) to maintain the Transferor Interest such that on
any Record Date the Transferor Interest for the related Monthly Period equals
or exceeds 7% or such higher percentage as may be stated in any Supplement
(such percentage, the "Minimum Transferor Interest") of the average Aggregate
Principal Receivables and (y) to maintain, for so long as certificates of any
Series, including the Certificates, remain outstanding, Aggregate Principal
Receivables in an amount equal to or greater than the Minimum Aggregate
Principal Receivables. The term "Aggregate Principal Receivables" means in the
case of any date of determination, the sum of (i) the aggregate amount of
Principal Receivables and (ii) the amount on deposit in the Excess Funding
Account (exclusive of the amount of any investment earnings thereon), in each
case, as of the end of the last day of the Monthly Period immediately
preceding such date of determination. The "Minimum Aggregate Principal
Receivables" required to be maintained through the designation by the
Transferor of Additional Accounts shall generally be an amount equal to the
sum of the numerators used to calculate the Investor Percentage with respect
to Principal Receivables for each Series. Such amount may be increased by a
Supplement pursuant to which additional Series may be issued. The Transferor
will convey the Receivables then existing or thereafter created under such
Additional Accounts to the Trust. See "Description of the Certificates--
Addition of Accounts". Further, pursuant to the Agreement, the Transferor has
the right (subject to certain limitations and conditions discussed herein) to
remove certain Accounts designated by the Transferor whether such Receivables
are then existing or thereafter created. See "Description of Certificates--
Removal of Accounts". Throughout the term of the Trust, the Accounts from
which the Receivables arise will be the same credit card accounts designated
as Accounts by the Transferor plus any Additional Accounts and Automatic
Additional Accounts and minus any Removed Accounts. As of each date an Account
is added, and on any date Additional Accounts or Automatic Additional Accounts
are added, to the Trust, and on the date any new Receivables are created or
are added to the Trust, as applicable, the Transferor will (or will be deemed
to) represent and warrant to the Trust that the Receivables meet the
eligibility requirements specified in the Agreement. See "Description of the
Certificates--Representations and Warranties".
Some of the Accounts are recently solicited, unseasoned accounts and the
Receivables include Receivables that may be up to 240 days contractually
delinquent. Because the Accounts were selected as of the Series Cut-Off Date,
there can be no assurance that all of the accounts will continue to meet the
eligibility requirements during the life of the Trust. The Receivables in the
Accounts are the unsecured obligations of the cardholders.
The Receivables in the Trust Portfolio as of the Series Cut-Off Date, after
giving effect to Additional Accounts conveyed on August 1, 1997, totaled
$2,646,979,589.36. The Accounts had, as of the June 30, 1997 Monthly Period,
an average outstanding balance of $1,553 and an average credit limit of
$5,767. The percentage of the aggregate total Receivables balance to the
aggregate total credit limit was 26.93%, and the weighted average age of the
Accounts was approximately 31 months. As of the June 30, 1997 Monthly Period,
cardholders whose Accounts giving rise to the Receivables are included in the
Trust Portfolio have billing addresses in all 50 States and the District of
Columbia.
The following tables summarize the Trust Portfolio's balance and account
characteristics of the accounts giving rise to the Receivables as of the close
of the June 1997 Monthly Period for each of the Accounts (including the
Additional Accounts added August 1, 1997). Because the future composition of
the Trust Portfolio may change over time, these tables may not necessarily be
indicative of the composition of the Trust Portfolio after the June 1997
Monthly Period.
39
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
PERCENTAGE
PERCENTAGE OF OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES
ACCOUNT BALANCE RANGE ACCOUNTS OF ACCOUNTS RECEIVABLES BALANCE BALANCE
- --------------------- --------- ------------- ------------------- -----------
Credit Balance......... 28,254 1.66% $ (2,968,289.65) (0.11)%
Zero Balance........... 633,451 37.17 0.00 0.00
$0.01-$1,000.00........ 337,373 19.79 125,518,137.43 4.74
$1,000.01-$3,000.00.... 312,484 18.33 613,567,609.55 23.18
$3,000.01-$5,000.00.... 243,657 14.30 959,202,332.97 36.24
$5,000.01-$10,000.00... 146,676 8.61 923,535,057.20 34.89
Over $10,000.00........ 2,385 0.14 28,124,741.86 1.06
--------- ------ ----------------- ------
Total................ 1,704,280 100.00% $2,646,979,589.36 100.00%
========= ====== ================= ======
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
PERCENTAGE
PERCENTAGE OF OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES
CREDIT LIMIT RANGE ACCOUNTS OF ACCOUNTS RECEIVABLES BALANCE BALANCE
- ------------------ --------- ------------- ------------------- -----------
$0.01-$1,000.00........ 46,922 2.75% $ 12,145,927.94 0.46%
$1,000.01-$2,000.00.... 77,096 4.53 46,917,810.18 1.77
$2,000.01-$3,000.00.... 100,945 5.92 96,501,259.27 3.65
$3,000.01-$4,000.00.... 145,069 8.51 176,742,785.04 6.68
$4,000.01-$5,000.00.... 273,596 16.05 410,097,909.81 15.49
$5,000.01-$10,000.00... 1,026,066 60.21 1,827,705,827.57 69.05
Over $10,000.00........ 34,586 2.03 76,868,069.55 2.90
--------- ------ ----------------- ------
Total................ 1,704,280 100.00% $2,646,979,589.36 100.00%
========= ====== ================= ======
COMPOSITION BY PERIOD OF DELINQUENCY
TRUST PORTFOLIO
PERCENTAGE
PERIOD OF DELINQUENCY PERCENTAGE OF OF TOTAL
(DAYS CONTRACTUALLY NUMBER OF TOTAL NUMBER RECEIVABLES
DELINQUENT) ACCOUNTS OF ACCOUNTS RECEIVABLES BALANCE BALANCE
- --------------------- --------- ------------- ------------------- -----------
Current................. 1,637,290 96.07% $2,436,497,902.30 92.05%
1-30 Days............... 39,222 2.30 114,370,331.78 4.32
31-60 Days.............. 8,619 0.51 26,061,272.09 0.98
61 or More Days......... 19,149 1.12 70,050,083.19 2.65
--------- ------ ----------------- ------
Total................. 1,704,280 100.00% $2,646,979,589.36 100.00%
========= ====== ================= ======
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
PERCENTAGE
PERCENTAGE OF OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES
ACCOUNT AGE ACCOUNTS OF ACCOUNTS RECEIVABLES BALANCE BALANCE
- ----------- --------- ------------- ------------------- -----------
0 to 6 Months.......... 266,360 15.63% $ 482,077,058.04 18.21%
Over 6 to 12 Months.... 241,334 14.16 349,743,252.02 13.22
Over 12 to 24 Months... 433,096 25.41 608,874,746.42 23.00
Over 24 to 48 Months... 398,058 23.36 660,951,641.05 24.97
Over 48 Months......... 365,432 21.44 545,332,891.83 20.60
--------- ------ ----------------- ------
Total................ 1,704,280 100.00% $2,646,979,589.36 100.00%
========= ====== ================= ======
40
GEOGRAPHIC DISTRIBUTION BY RECEIVABLES BALANCE
TRUST PORTFOLIO
PERCENTAGE
PERCENTAGE OF OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES
ACCOUNTS OF ACCOUNTS RECEIVABLES BALANCE BALANCE
--------- ------------- ------------------- -----------
Connecticut............ 174,425 10.23% $ 262,688,649.30 9.92%
California............. 159,394 9.35 259,221,943.32 9.79
Texas.................. 118,134 6.93 203,960,738.37 7.71
New York............... 112,935 6.63 168,676,093.62 6.37
Florida................ 85,309 5.01 123,489,361.22 4.67
Illinois............... 67,330 3.95 110,759,571.82 4.19
Pennsylvania........... 77,572 4.55 107,737,173.75 4.07
Ohio................... 67,916 3.99 103,864,511.40 3.92
Michigan............... 57,718 3.39 94,276,696.53 3.56
New Jersey............. 56,114 3.29 82,914,013.05 3.13
Other(1)............... 727,433 42.68 1,129,390,836.98 42.67
--------- ------ ----------------- ------
Total................ 1,704,280 100.00% $2,646,979,589.36 100.00%
========= ====== ================= ======
- --------
(1) States with less than 3.13% of the Percentage of Total Receivables
Balance.
MATURITY CONSIDERATIONS
The Agreement provides that the Class A Certificate Holders and the Class B
Certificate Holders will not receive principal payments until the Class A
Scheduled Payment Date and the Class B Scheduled Payment Date, respectively,
except in the event of a Pay Out Event, which will result in the commencement
of the Rapid Amortization Period. A "Pay Out Event" occurs, either
automatically or after specified notice, upon (a) the failure of the
Transferor to make certain payments or transfers of funds for the benefit of
the Certificate Holders within the time periods stated in the Agreement, (b)
material breaches of certain representations, warranties or covenants of the
Transferor, (c) certain insolvency events involving the Transferor, (d) the
occurrence of a Servicer Default which would have a material adverse effect on
the Certificate Holders, (e) the failure of the Transferor to convey
Receivables arising under Additional Accounts when required by the Agreement,
(f) the Trust becoming subject to regulation as an "investment company" by the
Commission within the meaning of the Investment Company Act of 1940, as
amended, (g) a reduction in the average of the Portfolio Yields for any three
consecutive Monthly Periods to a rate which is less than the average of the
Base Rates for such period, (h) the failure to pay each class of Offered
Certificates in full on or prior to its applicable Scheduled Payment Date or
(i) the failure of the Interest Rate Cap Provider to make any payment under
the Interest Rate Caps within five days of the date such payment was due. See
"Description of the Certificates--Pay Out Events".
Controlled Accumulation Period. On each Transfer Date beginning with the
Transfer Date following the Monthly Period in which the Controlled
Accumulation Period commences, an amount equal to the least of (a) the
Available Investor Principal Collections with respect to the related Monthly
Period, (b) the "Controlled Deposit Amount", which is equal to the sum of the
Controlled Accumulation Amount for the related Monthly Period and the
Accumulation Shortfall, if any, for such Monthly Period, and (c) the Class A
Adjusted Investor Interest on such Transfer Date will be deposited in the
Principal Funding Account until the amount on deposit in the Principal Funding
Account (the "Principal Funding Account Balance") equals the Class A Investor
Interest. Amounts deposited in the Principal Funding Account will be deposited
in the Distribution Account for distribution to the Class A Certificate
Holders on the Class A Scheduled Payment Date. On the Transfer Date during the
Controlled Accumulation Period immediately following the Distribution Date on
which the Class A Investor Interest has been paid in full, an amount equal to
the lesser of (a) the Available Investor Principal Collections for the related
Monthly Period and (b) the Class B Investor Interest will be deposited into
the
41
Distribution Account for distribution to the Class B Certificate Holders on
the Class B Scheduled Payment Date. If, for any Monthly Period prior to the
payment in full of the Class A Investor Interest and the Class B Investor
Interest, the Available Investor Principal Collections for such Monthly Period
exceed the applicable Controlled Deposit Amount, any such excess will be first
paid to the Collateral Interest Holder to the extent that the Collateral
Interest exceeds the Required Collateral Interest and then treated as Shared
Principal Collections and allocated to the holders of other Series of
certificates issued and outstanding or, subject to certain limitations
described herein (to the extent that the Transferor Interest exceeds the
Minimum Transferor Interest), paid to the Holder of the Exchangeable
Transferor Certificate. After the Class A Investor Interest and the Class B
Investor Interest have each been paid in full, the remaining Available
Investor Principal Collections, to the extent required, will be distributed to
the Collateral Interest Holder on each related Transfer Date until the
earliest of the date the Collateral Interest has been paid in full, the
Scheduled Series 1997-2 Termination Date and the termination of the Trust.
Amounts in the Principal Funding Account are expected to be available to pay
the Class A Investor Interest in full on the Class A Scheduled Payment Date.
Available Investor Principal Collections are expected to be available to pay
the Class B Investor Interest in full on the Class B Scheduled Payment Date.
Although it is anticipated that Available Investor Principal Collections with
respect to each Monthly Period during the Controlled Accumulation Period will
be available on the related Transfer Date to make a deposit of the Controlled
Deposit Amount to the Principal Funding Account and that the Class A Investor
Interest will be paid to the Class A Certificate Holders on the Class A
Scheduled Payment Date and the Class B Investor Interest will be paid to the
Class B Certificate Holders on the Class B Scheduled Payment Date,
respectively, no assurance can be given in this regard. If the amount required
to pay the Class A Investor Interest or the Class B Investor Interest in full
is not available on the Class A Scheduled Payment Date or the Class B
Scheduled Payment Date, respectively, a Pay Out Event will occur and the Rapid
Amortization Period will commence.
"Controlled Accumulation Amount" means (a) for any Transfer Date with
respect to the Controlled Accumulation Period, prior to the payment in full of
the Class A Investor Interest, $30,357,142.86; provided, however, that if the
commencement of the Controlled Accumulation Period is delayed as described
below under "Description of the Certificates--Postponement of Controlled
Accumulation Period," the Controlled Accumulation Amount may be higher than
the amount stated above for each Transfer Date with respect to the Controlled
Accumulation Period and will be determined by the Servicer in accordance with
the Series 1997-2 Supplement based on the principal payment rates for the
Accounts and on the investor interests of other Series (other than certain
excluded Series) which are scheduled to be in their revolving periods and
scheduled to create Shared Principal Collections during the Controlled
Accumulation Period and (b) for any Transfer Date with respect to the
Controlled Accumulation Period after the payment in full of the Class A
Investor Interest, an amount equal to the Class B Investor Interest on such
Transfer Date.
"Accumulation Shortfall" means on each Transfer Date with respect to the
Controlled Accumulation Period prior to the Class A Scheduled Payment Date,
the excess, if any, of the applicable Controlled Deposit Amount for the
immediately preceding Transfer Date over the amount deposited in the Principal
Funding Account as Class A Monthly Principal for such preceding Transfer Date.
Should the Rapid Amortization Period commence, the Certificate Holders will
be entitled to receive monthly payments as provided herein of principal on
each Distribution Date (beginning with the Distribution Date in the month
following the month in which the Rapid Amortization Period commences) equal to
the product of the applicable Investor Percentage and Principal Collections
received during the related Monthly Period (less the amount of Reallocated
Principal Collections with respect to such Monthly Period used to fund the
Required Amounts), plus certain amounts treated as Principal Collections with
respect to such Monthly Period (including amounts applied with respect to
Investor Default Amounts and Investor Charge-Offs), plus the amount of Shared
Principal Collections, if any, allocable to the Certificates with respect to
such Monthly Period (collectively, the "Available Investor Principal
Collections"). Allocations based upon the applicable Fixed Investor Percentage
may result in deposits to the Principal Funding Account during the Controlled
Accumulation Period or distributions of principal to Certificate Holders
during the Rapid Amortization Period greater, relative to the
42
declining balance of the Investor Interest, than would be the case if a
percentage based on such declining balance were used to determine the
percentage of Collections to be deposited or distributed, as the case may be,
in respect of the Investor Interest. See "Description of the Certificates--
Allocation Percentages".
A significant decline in the amount of Receivables generated during the
Revolving Period could result in the occurrence of a Pay Out Event for the
Certificate Holders and the commencement of the Rapid Amortization Period,
thus shortening the maturity of the Certificates. Conversely, a significant
decline in the amount of Receivables generated during the Controlled
Accumulation Period or the Rapid Amortization Period could result in an
extension of the final payment of the Certificates. If the maturity of the
Certificates has been shortened at a time when interest rates generally
available are lower than the Certificate Rates, the yield to maturity realized
by the Certificate Holders upon reinvestment at the lower prevailing interest
rates may be lower than if the Certificates remained outstanding until the
expected maturity. Conversely, if the maturity of the Certificates is extended
at a time when interest rates generally available are higher than the
Certificate Rates, the yield to maturity realized by the Certificate Holders
may be lower than if the Certificates had matured when expected and the
Certificate Holders had reinvested at the higher prevailing interest rates.
The following table sets forth the highest and lowest cardholder monthly
payment rates for the Representative Portfolio during any month in the period
shown and the average cardholder monthly payment rates for all months during
the periods shown, in each case calculated as a percentage of the prior
month's ending outstanding receivables balance during the periods shown.
Payment rates shown in the table are based on amounts which would be deemed
payments of Principal Receivables and Finance Charge Receivables with respect
to the Accounts.
CARDHOLDER MONTHLY PAYMENT RATES(1)
REPRESENTATIVE PORTFOLIO
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -------------------------
JUNE 30, 1997 1996 1995 1994
------------- ------- ------- -------
Lowest................................. 10.52% 9.30% 9.12% 9.82%
Highest................................ 12.39 11.18 11.19 13.02
Average(2)............................. 11.36 10.41 10.03 11.08
- --------
(1) Monthly payment rates represent total payments collected during a given
month expressed as a percentage of the prior month's ending outstanding
receivables.
(2) The average monthly payment rates shown are expressed as an arithmetic
average of the payment rate during each month of the period indicated.
The amount of Collections may vary from month to month due to seasonal
variations, general economic conditions and payment habits of individual
cardholders. There can be no assurance that Principal Collections with respect
to the Trust Portfolio, and thus the rate at which Certificate Holders could
expect to receive payments of principal on the Certificates during either the
Controlled Accumulation Period or the Rapid Amortization Period, will be
similar to the historical experience set forth above. In addition, if a Pay
Out Event occurs, the average life and maturity of the Certificates could be
significantly reduced.
Because there may be a slowdown in the payment rate below the payment rate
used to determine the Controlled Accumulation Amounts, or because a Pay Out
Event may occur which would initiate the Rapid Amortization Period, there can
be no assurance that the Class A Investor Interest will be paid to the Class A
Certificate Holders on the Class A Scheduled Payment Date and the Class B
Investor Interest will be paid to the Class B Certificate Holders on the Class
B Scheduled Payment Date. As described under "Description of the
Certificates--Postponement of Controlled Accumulation Period," the Servicer
may shorten the Controlled Accumulation Period and, in such event, there can
be no assurance that there will be sufficient time to accumulate all amounts
necessary to pay the Class A Investor Interest and the Class B Investor
Interest on the Class A Scheduled Payment Date and the Class B Scheduled
Payment Date, respectively.
43
RECEIVABLE YIELD CONSIDERATIONS
The gross revenues from finance charges and fees billed to accounts in the
Representative Portfolio for the six month period ending June 30, 1997 and for
each of the three years ended December 31, 1996, 1995 and 1994 are set forth
in the following table. The historical yield figures in the table are
calculated on a billed basis, net of rebated fees and other charges.
Collections of Receivables included in the Trust are on a cash basis and may
not reflect the historical yield experience in the table. During periods of
increasing delinquencies or periodic payment deferral programs, yields on a
billed basis may exceed cash yields as amounts collected on credit card
receivables lag behind amounts billed to cardholders. Conversely, as
delinquencies decrease, cash yields may exceed yields on a billed basis as
amounts collected in a current period may include amounts billed during prior
periods. The yield on both a billed basis and a cash basis will be affected by
numerous factors, including the monthly periodic finance charges on the
Receivables, the amount of the annual membership fees and cash advance fees,
Interchange, changes in the delinquency rate on the Receivables and the
percentage of cardholders who pay their balances in full each month and do not
incur monthly periodic finance charges.
REVENUE EXPERIENCE
REPRESENTATIVE PORTFOLIO
(DOLLARS IN THOUSANDS)
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED ----------------------------------
JUNE 30, 1997 1996 1995 1994
------------- ---------- ---------- ----------
Finance Charges and Fees
Billed(1)............... $ 191,692 $ 331,317 $ 263,583 $ 182,657
Average Receivables Out-
standing(2)............. $2,575,359 $2,151,979 $1,649,780 $1,182,028
Yield from Finance
Charges and Fees
Billed(3)(4)............ 14.89%(5) 15.40% 15.98% 15.45%
- --------
(1) Finance Charges and Fees Billed include periodic finance charges, annual
membership fees, late fees, returned check fees, overlimit fees, the
premium of any insurance covering a cardholder's account balances, cash
advance transaction fees, interchange and recoveries allocable to the
related receivables. The annual membership fees, as presented, reflect
full recognition upon billing. The new methodology for payment of
Recoveries relating to charged off Receivables in the Trust may favorably
impact future yield levels for the Representative Portfolio by paying more
Recoveries to the Trust than under the previous pro rata payment
methodology.
(2) Average Receivables Outstanding is the average of the daily receivable
balance during the period indicated.
(3) Yield from Finance Charges and Fees Billed is calculated as a percentage
of the Average Receivables Outstanding.
(4) Finance Charges and Fees Billed in 1994 do not include interchange fees
collected on certain accounts that are included in this Representative
Portfolio. The Transferor does not believe that the effect on Yield from
Finance Charges and Fees Billed resulting from such exclusion is material.
(5) Calculated on an annualized basis.
As payment rates decline, the balances subject to monthly periodic finance
charges tend to grow, assuming no change in the level of purchasing activity.
Accordingly, under these circumstances, the yield related to periodic finance
charges normally increases. As account balances increase, annual membership
fees, which remain constant, represent a smaller percentage of the aggregate
account balance. See "The Credit Card Business of People's Bank".
USE OF PROCEEDS
The net proceeds from the sale of the Offered Certificates, approximately
$457,419,625.00, before deduction of expenses, will be paid to PSFC, other
than $1,552,362.11 thereof, which will be deposited in the Finance Charge
Account for the payment of interest on the Certificates with respect to the
first Distribution Date. PSFC intends to distribute substantially all of the
remaining proceeds to the Transferor through the declaration and payment of a
dividend and/or a distribution of capital to the Transferor, and the
Transferor will use such proceeds for its general corporate purposes.
44
PEOPLE'S BANK
People's Bank was formed in 1842 and is headquartered in Bridgeport,
Connecticut. People's Bank is a majority-owned subsidiary of People's Mutual
Holdings, which as of June 30, 1997 owned 59.7% of the issued and outstanding
common stock of People's Bank. People's Bank is chartered as a Connecticut
stock savings bank, and, as a state chartered non- member bank, is regulated
by the State of Connecticut Department of Banking and by the FDIC. People's
Bank is the largest independent bank in Connecticut, with total assets of
approximately $7.9 billion, total liabilities of approximately $7.2 billion,
and total stockholders' equity of approximately $667 million as of June 30,
1997. At June 30, 1997, People's Bank's Tier 1 leverage capital ratio was
8.5%, satisfying the minimum ratio of 4.0% generally required by the FDIC.
People's Bank is also subject to the FDIC's risk-based capital regulations,
which require minimum ratios of Tier 1 capital and total capital to risk-
weighted assets of 4.0% and 8.0%, respectively. People's Bank satisfied these
requirements at June 30, 1997 with ratios of 10.2% and 13.8%, respectively.
People's Bank's regulatory capital ratios at June 30, 1997 exceeded the FDIC's
numeric criteria for classification as a "well capitalized" institution. On
September 3, 1997, People's Bank entered into a definitive agreement to
acquire Norwich Financial Corp. ("Norwich") and its wholly-owned subsidiary,
The Norwich Savings Society. Norwich has assets of approximately $713 million
and is located in eastern Connecticut.
People's Structured Finance Corp. ("PSFC"), which is currently the Holder of
the Exchangeable Transferor Certificate, is a wholly-owned special purpose
Connecticut subsidiary of People's Bank. In establishing PSFC, People's Bank
has taken steps to ensure that PSFC is a bankruptcy remote corporation, which
steps include (but are not limited to) (a) the appointment of two independent
directors to PSFC's board of directors, (b) the creation of PSFC as a special
purpose subsidiary of People's Bank pursuant to a certificate of incorporation
containing certain limitations (including restrictions on the nature of PSFC's
business and restrictions on PSFC's ability to commence a voluntary case or
proceeding under the United States Bankruptcy Code or similar state laws
without the prior unanimous affirmative vote of all of its directors,
including the prior unanimous affirmative vote of both of its independent
directors), and (c) the maintenance by PSFC of separate bank accounts,
corporate records and books of account. The Exchangeable Transferor
Certificate, representing the Transferor Interest in the Trust, was
transferred to PSFC pursuant to an Assignment and Assumption Agreement, dated
as of December 15, 1995, by and between People's Bank and PSFC.
DESCRIPTION OF THE CERTIFICATES
The Offered Certificates will be issued pursuant to the Agreement, including
the Series 1997-2 Supplement, entered into between People's Bank, as
Transferor of the Certificates and as Servicer of the Accounts and the
Receivables, and Bankers Trust Company, as Trustee for the Certificate Holders
and the holders of other undivided interests in the Trust, substantially in
the form filed as exhibits to the Registration Statement of which this
Prospectus is a part. Pursuant to the Agreement, the Transferor has executed
six Supplements in connection with the issuance of other Series of
certificates, four of which are currently outstanding, and may execute further
Supplements thereto between the Transferor and the Trustee in order to issue
additional Series. See "--Exchanges". The Trustee will provide a copy of the
Agreement (without exhibits or schedules), including each Supplement, to
Certificate Holders without charge upon written request. The following summary
describes certain terms of the Agreement (including the Series 1997-2
Supplement) and is qualified in its entirety by reference to the Agreement
(including the Series 1997-2 Supplement).
GENERAL
The Certificates will represent a fractional undivided interest in certain
assets of the Trust, including the right to receive the Collections received
with respect to the Receivables in the Trust allocable to the Certificates
and, with respect to the Offered Certificates, the benefit of the Interest
Rate Caps. The property of the Trust consists of the Receivables, all monies
due or to become due thereunder, all proceeds of the Receivables, Interchange,
Recoveries, all monies on deposit in the Collection Account and the Excess
Funding Account, funds
45
on deposit in accounts established pursuant to the Series 1997-2 Supplement,
funds on deposit in any Series accounts established for the benefit of
Certificate Holders other than the Certificate Holders pursuant to the related
Supplement, funds on deposit and securities held in the Reserve Account for
the benefit of the Class A Certificate Holders, the benefit of the Interest
Rate Caps, the Collateral Interest and any other Enhancement issued with
respect to any additional Series (the drawing on, withdrawal from or payment
on such Enhancement, and the funds on deposit in any Series account with
respect to any additional Series, will not be available to Certificate
Holders). The Trust will include the Receivables from Additional Accounts and
Automatic Additional Accounts which may be added from time to time pursuant to
the terms of the Agreement and will not include the Receivables from any
Removed Accounts which may be removed from the Trust from time to time
pursuant to the terms of the Agreement.
Payments of interest and principal will be made on each related Distribution
Date to Offered Certificate Holders in whose names the Offered Certificates
were registered as of (i) the business day preceding the Distribution Date
with respect to book-entry Offered Certificates and (ii) the last day of the
calendar month preceding such Distribution Date with respect to Definitive
Certificates (each, a "Record Date"), and to the Collateral Interest Holder.
Class A Monthly Interest and Class B Monthly Interest will accrue from and
including the Distribution Date occurring in the preceding month (in the case
of the first Distribution Date, from and including the Closing Date) to and
including the day preceding the current Distribution Date. Interest payments
on the Offered Certificates will be derived from Finance Charge Collections,
amounts paid under the Interest Rate Caps, Principal Collections otherwise
allocable to the Collateral Interest and, for the Class A Certificate Holders,
withdrawals from the Reserve Account, Principal Funding Investment Proceeds
and Principal Collections otherwise allocable to the Class B Certificates.
Allocations of Finance Charge Collections with respect to any Distribution
Date will not exceed the product of the Investor Percentage with respect to
Finance Charge Receivables and such Collections.
Each of the Class A Certificates and the Class B Certificates will initially
be represented by Offered Certificates registered in the name of the nominee
of DTC (together with any successor depository selected by the Transferor, the
"Depository") except as set forth below. The Offered Certificates will be
available for purchase in minimum denominations of $1,000 and integral
multiples thereof in book-entry form. The Transferor has been informed by DTC
that DTC's nominee will be Cede. Accordingly, Cede is expected to be the
holder of record of the Offered Certificates. No Offered Certificate Owner
acquiring an interest in the Offered Certificates will be entitled to receive
a certificate representing such person's interest in the Offered Certificates.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, all references herein to actions by Offered
Certificate Holders shall refer to actions taken by DTC upon instructions from
its Participants (as defined below), and all references herein to
distributions, notices, reports and statements to Offered Certificate Holders
shall refer to distributions, notices, reports and statements to DTC or Cede,
as the registered holder of the Offered Certificates, as the case may be, for
distribution to Offered Certificate Owners in accordance with DTC procedures.
See "--Book Entry Registration" and "--Definitive Certificates".
Application has been made to list the Class A Certificates on the Luxembourg
Stock Exchange.
In the event that Definitive Certificates are issued, a Certificate that is
mutilated, destroyed, lost or stolen may be exchanged or replaced, as the case
may be, at the offices of the Transfer Agent and Registrar or, in the case of
the Class A Certificates, the co-transfer agent and co-registrar in Luxembourg
upon presentation of the Certificate or satisfactory evidence of the
destruction, loss or theft thereof the Transfer Agent and Registrar or to the
co-transfer agent and co-registrar, as applicable. An indemnity satisfactory
to the Transfer Agent and Registrar or the co-transfer agent and co-registrar,
as the case may be, and the Trustee may be required at the expense of the
Offered Certificate Holder before a replacement Offered Certificate will be
issued. The Certificate Holder will be required to pay any tax or other
governmental charge imposed in connection with such exchange or replacement
and any other expenses (including the fees and expenses of the Trustee and
either the Transfer Agent and Registrar or the co-transfer agent and co-
registrar, as applicable) connected therewith.
46
DETERMINATION OF LIBOR
The Trustee will determine LIBOR for each Interest Period (as defined below)
following the Initial Interest Period. For purposes of calculating LIBOR,
"London Banking Day" is any day on which commercial banks are open for
business (including dealings in foreign exchange and deposits in U.S. dollars)
in London.
"LIBOR" means, for a specific Interest Period (other than the Initial
Interest Period), the rate for deposits in U.S. dollars for a period equal to
one month (commencing on the first day of an Interest Period) which appears on
Telerate Page 3750 (as defined below) as of 11:00 a.m., London time, on the
LIBOR Determination Date (as defined below) for such Interest Period. If such
rate does not appear on Telerate Page 3750, the rate for such Interest Period
will be determined on the basis of the rates at which deposits in U.S. dollars
are offered by the Reference Banks (as defined below) at approximately 11:00
a.m., London time, on such LIBOR Determination Date to prime banks in the
London interbank market for a period equal to one month (commencing on the
first day of such Interest Period). The Trustee will request the principal
London office of each of the Reference Banks to provide a quotation of its
rate. If at least two such quotations are provided, the rate for such Interest
Period will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for such Interest Period will
be the arithmetic mean of the rates quoted by major banks in New York City,
selected by the Trustee, at approximately 11:00 a.m., New York City time, on
the first day of such Interest Period for loans in U.S. dollars to leading
European banks for a period equal to one month (commencing on the first day of
such Interest Period).
"Interest Period" means, with respect to any Distribution Date, a period
from and including the preceding Distribution Date to and including the day
immediately preceding such Distribution Date; provided, however, that the
Initial Interest Period will commence on the Closing Date.
"LIBOR Determination Date" means with respect to any Interest Period, the
second London Banking Day preceding the first day of each Interest Period.
"Reference Banks" means four major banks in the London interbank market
selected by the Trustee.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices).
THE INTEREST RATE CAPS
On the Closing Date, the Trustee will enter into the Interest Rate Caps with
the Interest Rate Cap Provider. The Class A Interest Rate Cap and the Class B
Interest Rate Cap will be for the exclusive benefit of the Class A Certificate
Holders and the Class B Certificate Holders, respectively.
The notional amount of the Class A Interest Rate Cap (the "Class A Notional
Amount") will at all times be equal to or greater than the amount of the
Expected Class A Principal less the aggregate notional amount of any portions
of the Class A Interest Rate Cap sold on or prior to the date of
determination. Pursuant to the Class A Interest Rate Cap, on each Transfer
Date on which the Class A Certificate Rate for the related Interest Period
exceeds 10.13% (the "Class A Cap Rate"), the Interest Rate Cap Provider will
make a payment to the Trustee, on behalf of the Trust, in an amount equal to
the product of (i) such excess, (ii) the Class A Notional Amount as of such
Transfer Date and (iii) the actual number of days in the related Monthly
Period divided by 360. The Class A Interest Rate Cap will terminate on the day
following the Class A Scheduled Payment Date; provided, however, that the
Class A Interest Rate Cap may be terminated at an earlier date if the Trustee
has obtained a substitute interest rate cap or entered into an alternative
arrangement satisfactory to the Rating Agency, which in each case will not
result in the reduction or withdrawal of the rating of the Offered
Certificates (such substitute interest rate cap, a "Replacement Interest Rate
Cap"; such alternative arrangement, a "Qualified Substitute Arrangement").
47
The notional amount of the Class B Interest Rate Cap (the "Class B Notional
Amount") will at all times be equal to the amount of the Expected Class B
Principal less the aggregate notional amount of any portions of the Class B
Interest Rate Cap sold on or prior to the date of determination. Pursuant to
the Class B Interest Rate Cap, on each Transfer Date on which the Class B
Certificate Rate for the related Interest Period exceeds 10.33% (the "Class B
Cap Rate"), the Interest Rate Cap Provider will make a payment to the Trustee,
on behalf of the Trust, in an amount equal to the product of (i) such excess,
(ii) the Class B Notional Amount as of such Transfer Date and (iii) the actual
number of days in the related Monthly Period divided by 360. The Class B
Interest Rate Cap will terminate on the day following the Class B Scheduled
Payment Date; provided, however, that the Class B Interest Rate Cap may be
terminated at an earlier date if the Trustee has obtained a Replacement
Interest Rate Cap or entered into a Qualified Substitute Arrangement.
In the event that the rating of the Interest Rate Cap Provider is reduced or
withdrawn, as specified in the Interest Rate Caps, the Trustee, at the
direction of the Servicer, shall use its best efforts either to obtain for
each such Interest Rate Cap a Replacement Interest Rate Cap, at the expense of
the Interest Rate Cap Provider, or to enter into a Qualified Substitute
Arrangement.
The Trustee, on behalf of the Trust, may sell all or a portion of an
Interest Rate Cap in an amount equal to the excess on such date of the Class A
Notional Amount or the Class B Notional Amount, as applicable, over the Class
A Adjusted Investor Interest or the Class B Investor Interest, respectively,
subject to (among other things) Rating Agency confirmation of the rating of
the related class of Offered Certificates. Funds from any such sale will be
applied as Class A Available Funds or Class B Available Funds, respectively,
in accordance with the allocations described below in "--Allocation of Funds."
THE INTEREST RATE CAP PROVIDER
The following information has been obtained from the Interest Rate Cap
Provider and has not been verified by People's Bank or the Underwriters. No
representation or warranty is made by People's Bank or the Underwriters with
respect thereto.
Morgan Guaranty Trust Company of New York ("Morgan Guaranty") is a wholly-
owned subsidiary and the principal asset of J.P. Morgan & Co. Incorporated
("Morgan"), a Delaware corporation whose principal office is located in New
York, New York. Morgan Guaranty is a commercial bank offering a wide range of
banking services to its customers both domestically and internationally. Its
business is subject to examination and regulation by Federal and New York
State banking authorities. As of June 30, 1997 Morgan Guaranty and its
subsidiaries had total assets of $188.5 billion, total net loans of $28.6
billion, total deposits of $57.9 billion and stockholder's equity of $10.1
billion. As of December 31, 1996, Morgan Guaranty and its subsidiaries had
total assets of $164.8 billion, total net loans of $27.4 billion, total
deposits of $53.1 billion, and stockholder's equity of $9.9 billion.
The Consolidated Statement of Condition of Morgan Guaranty as of June 30,
1997 is set forth on page 9 of Exhibit 99 to Form 8-K dated July 10, 1997 as
filed by Morgan with the Securities and Exchange Commission. Morgan Guaranty
will provide without charge to each person to whom this Prospectus is
delivered, on the request of any such person, a copy of the Form 8-K referred
to above. Written requests should be directed to: Morgan Guaranty Trust
Company of New York, 60 Wall Street, New York, New York 10260-0060, Attention:
Office of the Secretary.
The information with respect to Morgan Guaranty contained herein has been
obtained from Morgan Guaranty. The delivery of this Prospectus shall not
create any implication that there has been no change in the affairs of Morgan
Guaranty since the date hereof, or that the information contained or referred
to herein is correct as of any time subsequent to its date.
The Offered Certificates do not represent an obligation of Morgan Guaranty
or Morgan. Certificateholders will not have any right to proceed directly
against Morgan Guaranty in respect of Morgan Guaranty's obligations under the
Interest Rate Caps except in the limited circumstances described herein.
48
Morgan Guaranty is an affiliate of J.P. Morgan Securities Inc., one of the
Class A Underwriters and the Class B Underwriter.
BOOK ENTRY REGISTRATION
Offered Certificate Holders may hold their Offered Certificates through DTC
(in the United States) or Cedel or Euroclear (in Europe), which in turn hold
through DTC, if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the physical Offered Certificate or
Offered Certificates. Cedel and Euroclear will hold omnibus positions on
behalf of the Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries")
which in turn will hold such positions in customers' securities accounts in
the Depositaries' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participating organizations
("Participants" or "DTC Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes in accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers (who may include the underwriters of any Series), banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly (the "Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross market transfers between persons holding directly or indirectly
through DTC in the United States, on the one hand, and directly or indirectly
through Cedel Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by its Depositary; however, such cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
Because of time zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such business day. Cash
received in Cedel or Euroclear as a result of sales of securities by or
through a Cedel Participant or a Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available
in the relevant Cedel or Euroclear cash account only as of the business day
following settlement in DTC. See Annex II.
Offered Certificate Owners that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of,
or other interest in, Offered Certificates may do so only through Participants
and Indirect Participants. In addition, Offered Certificate Owners will
receive all distributions of principal and
49
interest on the Offered Certificates from the Trustee through the Participants
who in turn will receive them from DTC. Under a book entry format, Offered
Certificate Owners may experience some delay in their receipt of payments,
since such payments will be forwarded by the Trustee to Cede, as nominee for
DTC. DTC will forward such payments to its Participants which thereafter will
forward them to Indirect Participants or Offered Certificate Owners. It is
anticipated that the only "Offered Certificate Holder" (as such term is used
in the Agreement) of Offered Certificates in book entry form will be Cede, as
nominee of DTC. Offered Certificate Owners will not be recognized by the
Trustee as Offered Certificate Holders, as such term is used in the Agreement,
and Offered Certificate Owners will only be permitted to exercise the rights
of Offered Certificate Holders indirectly through the Participants who in turn
will exercise the rights of Offered Certificate Holders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book entry transfers among
Participants on whose behalf it acts with respect to the Offered Certificates
and is required to receive and transmit distributions of principal and
interest on the Offered Certificates. Participants and Indirect Participants
with which Offered Certificate Owners have accounts with respect to the
Offered Certificates similarly are required to make book entry transfers and
receive and transmit such payments on behalf of their respective Offered
Certificate Owners. Accordingly, although Offered Certificate Owners will not
possess Offered Certificates, Offered Certificate Owners will receive payments
and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of an Offered
Certificate Owner to pledge Offered Certificates to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Offered Certificates, may be limited due to the lack of a physical
certificate for such Offered Certificates.
DTC has advised the Transferor that it will take any action permitted to be
taken by an Offered Certificate Holder under the Agreement only at the
direction of one or more Participants to whose account with DTC the Offered
Certificates are credited. Additionally, DTC has advised the Transferor that
it will take such actions with respect to specified percentages of the
Investor Interest only at the direction of and on behalf of Participants whose
holdings include undivided interests that satisfy such specified percentages.
DTC may take conflicting actions with respect to other undivided interests to
the extent that such actions are taken on behalf of Participants whose
holdings include such undivided interests.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book-entry changes in accounts of Cedel Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Cedel in any of 36 currencies, including United
States dollars. Cedel provides to its Cedel Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulations by the Luxembourg Monetary
Institute. Cedel Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the underwriters of any Series of certificates. Indirect access to
Cedel is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System (the "Euroclear System") was created in 1968 to hold
securities for participants of the Euroclear System ("Euroclear Participants")
and to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 34 currencies, including United States dollars. The
Euroclear System includes various other services, including securities lending
and borrowing and interfaces with domestic markets
50
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the "Euroclear
Operator" or "Euroclear"), under contract with Euroclear Clearance System,
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative. The Cooperative establishes policy for the
Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the underwriters
of any Series of certificates. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Offered Certificates held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See Annex II. Cedel or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by an Offered
Certificate Holder under the Agreement on behalf of a Cedel Participant or a
Euroclear Participant only in accordance with its relevant rules and
procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Offered Certificates among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any
time.
DEFINITIVE CERTIFICATES
The Offered Certificates will be issued in fully registered, certificated
form to Offered Certificate Owners or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee, only if (i) the Transferor
advises the Trustee in writing that DTC is no longer willing or able to
properly discharge its responsibilities as Depository with respect to the
Offered Certificates, and the Trustee or the Transferor is unable to locate a
qualified successor, (ii) the Transferor, at its option, elects to terminate
the book-entry system through DTC or (iii) after the occurrence of a Servicer
Default, Offered Certificate Owners representing not less than 50% of each of
the Class A Investor Interest and the Class B Investor Interest advise the
Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the
best interests of the Offered Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all the Offered Certificate
Owners through Participants of the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the definitive certificate representing
the Offered Certificates and instructions for re-registration, the Trustee
will issue the Offered Certificates as Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
holders of the Offered Certificates under the Agreement ("Holders").
51
Distribution of principal and interest on the Offered Certificates will be
made by the "Paying Agent" (as defined in the Agreement) directly to Holders
of Definitive Certificates in accordance with the procedures set forth herein
and in the Agreement. During the Revolving Period, interest payments, and
during either the Controlled Accumulation Period or the Rapid Amortization
Period, interest and principal payments in respect of the Offered
Certificates, will be made to Offered Certificate Holders as provided herein
on each Distribution Date to the Holders in whose names the Definitive
Certificates were registered at the close of business on the related Record
Date. Distributions will be made by check mailed to the address of such Holder
as it appears on the certificate register. The final payment on any Offered
Certificate (whether Definitive Certificates or the Offered Certificates
registered in the name of Cede representing the Offered Certificates),
however, will be made only upon presentation and surrender of such Offered
Certificate at the office or agency specified in the notice of final
distribution to Offered Certificate Holders. The Trustee will provide such
notice to registered Offered Certificate Holders not later than the fifth day
of the month of such final distributions.
Definitive Certificates will be transferable and exchangeable at the offices
of the "Transfer Agent and Registrar" (as defined in the Agreement), which
shall initially be Bankers Trust Company. No service charge will be imposed
for any registration of transfer or exchange, but the Transfer Agent and
Registrar may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith. The Transfer Agent and
Registrar, as the case may be, shall not be required to register the transfer
or exchange of Definitive Certificates for a period of 15 days preceding the
due date for any payment with respect to such Definitive Certificates.
INTEREST PAYMENTS
Interest will accrue on the Class A Investor Interest at the Class A
Certificate Rate and on the Class B Investor Interest at the Class B
Certificate Rate during each Interest Period following the Initial Interest
Period and will accrue on the Class A Investor Interest at a rate of 5.78625%
per annum and on the Class B Investor Interest at a rate of 5.98625% per annum
during the Initial Interest Period. Interest will be distributed on October
15, 1997, and on each Distribution Date thereafter to Certificate Holders.
Interest on the Class A Certificates will be distributed in the amount of the
sum of (v) the product of (a) the Class A Certificate Rate, (b) the lesser of
the Class A Adjusted Investor Interest as of the preceding Distribution Date
(or, in the case of the first Distribution Date, the Class A Initial Investor
Interest) after giving effect to all payments, deposits and withdrawals on
such Distribution Date and the Expected Class A Principal as of the preceding
Distribution Date, and (c) the actual number of days in the related Interest
Period divided by 360, plus (w) the Class A Covered Amount for the related
Interest Period, plus (x) an amount equal to the product of (a) the Class A
Excess Principal, (b) the lesser of the Class A Certificate Rate and 10.13%
per annum, and (c) the actual number of days in the related Interest Period
divided by 360 (clauses (v), (w) and (x) collectively, the "Class A Monthly
Interest"), plus (y) to the extent permitted by applicable law, any interest
accrued on such Certificates (including interest on any overdue Class A
Monthly Interest calculated at a default rate of interest) during any prior
accrual period which has not been distributed to the Certificate Holders, plus
(z) to the extent that there is available Excess Spread, an amount equal to
the product of (a) the amount by which the Class A Certificate Rate exceeds
10.13% per annum, (b) the Class A Excess Principal, if any, and (c) the actual
number of days in the related Interest Period divided by 360 (the "Class A
Excess Interest").
In the case of the Class B Certificates, interest will be distributed in the
amount of the sum of (w) the product of (a) the Class B Certificate Rate, (b)
the lesser of the Class B Investor Interest as of the preceding Distribution
Date (or, in the case of the first Distribution Date, the Class B Initial
Investor Interest) after giving effect to all payments, deposits and
withdrawals on such Distribution Date and the Expected Class B Principal as of
the preceding Distribution Date, and (c) the actual number of days in the
related Interest Period divided by 360, plus (x) an amount equal to the
product of (a) the Class B Excess Principal, (b) the lesser of the Class B
Certificate Rate and 10.33% per annum, and (c) the actual number of days in
the related Interest Period divided by 360 (collectively, the "Class B Monthly
Interest"), plus (y) to the extent permitted by applicable law, any interest
accrued on such Certificates (including interest on any overdue Class B
Monthly Interest calculated at a
52
default rate of interest) during any prior accrual period not distributed to
the Certificate Holders, plus (z) to the extent that there is available Excess
Spread, an amount equal to the product of (a) the amount by which the Class B
Certificate Rate exceeds 10.33% per annum, (b) the Class B Excess Principal,
if any, and (c) the actual number of days in the related Interest Period
divided by 360 (the "Class B Excess Interest").
Any amounts in respect of distributable interest specified in clause (z)
above in each of the two preceding paragraphs with respect to the Class A
Certificates and the Class B Certificates that are unpaid on the Distribution
Date following the Interest Period in which they accrued will not be carried
over to future Distribution Dates.
"Expected Class A Principal" means (a) on each date to and excluding the
first Distribution Date occurring after the Monthly Period in which the
Controlled Accumulation Period commences (the "Initial Class A Accumulation
Date"), the Class A Initial Investor Interest, and (b) on each date thereafter
through but not including the Class A Scheduled Payment Date, the Class A
Initial Investor Interest less the product of (i) the Controlled Accumulation
Amount and the number of Distribution Dates which have occurred from and
including the Initial Class A Accumulation Date, and (c) on each date
thereafter, zero. "Expected Class B Principal" means the amount of the Class B
Investor Interest that is equal to (a) the Class B Initial Investor Interest
on each date to but excluding the Class B Scheduled Payment Date, and (b) on
each date thereafter, zero. "Class A Excess Principal" and "Class B Excess
Principal" (collectively, the "Excess Principal") mean on any date of
determination the amount by which the Class A Adjusted Investor Interest or
the Class B Investor Interest exceeds the Expected Class A Principal or the
Expected Class B Principal, respectively, after giving effect to all payments,
deposits and withdrawals on such date.
Interest payments up to the Class A Monthly Cap Rate Interest and Class B
Monthly Cap Rate Interest on any Distribution Date will be funded from Finance
Charge Collections allocated to the Class A Certificates and the Class B
Certificates, respectively, with respect to the preceding Monthly Period, and
interest payments up to the Class A Covered Amount will be funded from
Principal Funding Investment Proceeds and amounts withdrawn from the Reserve
Account. Payments of any Class A Monthly Cap Rate Interest, Class B Monthly
Cap Rate Interest and the Class A Covered Amount remaining unpaid after
application of such available funds will be paid from Excess Spread and Shared
Finance Charge Collections allocated to the Certificates. The Class A Monthly
Interest in excess of the sum of the Class A Monthly Cap Rate Interest and the
Class A Covered Amount and Class B Monthly Interest in excess of the Class B
Monthly Cap Rate Interest will be funded from payments made pursuant to,
respectively, the Class A Interest Rate Cap and the Class B Interest Rate Cap
and, if necessary, Excess Spread and Shared Finance Charge Collections. To the
extent the sum of (w) the applicable Floating Investor Percentage of Finance
Charge Collections during the preceding Monthly Period, (x) with respect to
the Class A Covered Amount, Principal Funding Investment Proceeds and amounts
withdrawn from the Reserve Account, and (y) Shared Finance Charge Collections
allocated and available to the Certificates is insufficient to pay such Class
A Monthly Cap Rate Interest and Class B Monthly Cap Rate Interest and such
Class A Covered Amount, then (i) Reallocated Principal Collections (to the
extent available) will be used to make such payments to the Class A
Certificates, and (ii) Reallocated Collateral Principal Collections (to the
extent available) remaining after such payments to the Class A Certificates
will be used to make such payments to the Class B Certificates.
PRINCIPAL PAYMENTS
During the Revolving Period (which begins on the Closing Date and ends on
the day before the Controlled Accumulation Period or the Rapid Amortization
Period begins), unless a reduction in the Required Collateral Interest has
occurred, no principal payments will be made to Certificate Holders and
Principal Collections allocable to the Investor Interest will, subject to
certain limitations, including the allocation of any Reallocated Principal
Collections to pay the Class A Required Amount and the Class B Required
Amount, be treated as Shared Principal Collections. On each Transfer Date
relating to the Controlled Accumulation Period, the Trustee at the direction
of the Servicer will deposit in the Principal Funding Account an amount equal
to the least of (a) the Available Investor Principal Collections with respect
to the preceding Monthly Period, (b) the applicable Controlled Deposit Amount
and (c) the Class A Adjusted Investor Interest prior to any deposits on such
date.
53
Amounts in the Principal Funding Account will be deposited in the Distribution
Account for payment to the Class A Certificate Holders on the Class A
Scheduled Payment Date. If the Class A Investor Interest has been paid in full
on the Class A Scheduled Payment Date, on the Transfer Date immediately
following the Class A Scheduled Payment Date, amounts equal to the lesser of
(a) the Available Investor Principal Collections with respect to the preceding
Monthly Period and (b) the Class B Investor Interest will be deposited in the
Distribution Account for distribution to the Class B Certificate Holders. Such
amounts in the Distribution Account will be paid to the Class B Certificate
Holders on the Class B Scheduled Payment Date. On each Transfer Date, if a
reduction in the Required Collateral Interest has occurred, any Available
Investor Principal Collections remaining after application to the Offered
Certificates as described herein will be applied in accordance with the Loan
Agreement to reduce the Collateral Interest to the Required Collateral
Interest. During the Controlled Accumulation Period until the final principal
payment is made to the Collateral Interest Holder, the portion of Available
Investor Principal Collections not applied to Class A Monthly Principal, Class
B Monthly Principal or Collateral Monthly Principal on a Transfer Date will
generally be treated as Shared Principal Collections.
"Available Investor Principal Collections" means, with respect to any
Monthly Period, an amount equal to the sum of (a)(i) Principal Collections
received during such Monthly Period and certain other amounts allocable to the
Investor Interest, minus (ii) the amount of Reallocated Principal Collections
with respect to such Monthly Period used to fund the Required Amounts, plus
(b) any Shared Principal Collections from other Series that are allocated to
Series 1997-2 with respect to such Monthly Period.
During the Controlled Accumulation Period, the Trustee at the direction of
the Servicer will transfer Principal Collections (other than Reallocated
Principal Collections) and Shared Principal Collections from other Series, if
any, allocated to the Certificates from the Principal Account to the Principal
Funding Account as described under "--Application of Collections."
On each Distribution Date with respect to the Rapid Amortization Period, the
Class A Certificate Holders will be entitled to receive the sum of the
Available Investor Principal Collections for the related Monthly Period plus,
if the Rapid Amortization Period commences after the commencement of the
Accumulation Period, the Principal Funding Account Balance, in an amount up to
the Class A Investor Interest until the earliest of the date the Class A
Certificates are paid in full, the Scheduled Series 1997-2 Termination Date
and the termination of the Trust. After payment in full of the Class A
Investor Interest, the Class B Certificate Holders will be entitled to receive
on each Distribution Date with respect to the Rapid Amortization Period the
Available Investor Principal Collections until the earliest of the date the
Class B Certificates are paid in full, the Scheduled Series 1997-2 Termination
Date and the termination of the Trust. After payment in full of the Class B
Investor Interest, the Collateral Interest Holder will be entitled to receive
on each Transfer Date (other than the Transfer Date prior to the Scheduled
Series 1997-2 Termination Date) and on the Scheduled Series 1997-2 Termination
Date, the Available Investor Principal Collections until the earliest of the
date the Collateral Interest is paid in full, the Scheduled Series 1997-2
Termination Date and the termination of the Trust. See "--Pay Out Events"
below for a discussion of events which might lead to the commencement of the
Rapid Amortization Period. See "-- Application of Collections" and "--
Allocation of Funds" below for a discussion of the method by which Principal
Collections and Shared Principal Collections available to the Certificates are
allocated during either the Controlled Accumulation Period or the Rapid
Amortization Period.
POSTPONEMENT OF CONTROLLED ACCUMULATION PERIOD
Upon written notice to the Trustee, the Servicer may elect to postpone the
commencement of the Controlled Accumulation Period, and extend the length of
the Revolving Period, subject to certain conditions including those set forth
below. The Servicer may make such election only if the Accumulation Period
Length (determined as described below) is less than fourteen months. On each
Determination Date until the Controlled Accumulation Period begins, the
Servicer will determine the "Accumulation Period Length", which is the number
of whole months expected to be required to fully fund the Principal Funding
Account no later than the Transfer Date preceding the Class A Scheduled
Payment Date, based on (a) the monthly Principal Collections expected to be
distributable to Certificate Holders of all Series, assuming a principal
payment rate no greater than the lowest
54
monthly principal payment rate on the Receivables for the preceding twelve
months and (b) the amount of principal expected to be distributable to
Certificate Holders of all Series (excluding certain other Series) which are
not expected to be in their revolving periods during the Controlled
Accumulation Period. If the Accumulation Period Length is less than fourteen
months, the Servicer may, at its option, postpone the commencement of the
Controlled Accumulation Period such that the number of months included in the
Controlled Accumulation Period will be equal to or exceed the Accumulation
Period Length. The effect of the foregoing calculation is to permit the
reduction of the length of the Controlled Accumulation Period based on the
investor interest of certain other Series which are scheduled to be in their
revolving periods during the Controlled Accumulation Period and on increases
in the principal payment rate occurring after the Closing Date. The
Accumulation Period Length will not be determined to be less than four months.
SUBORDINATION
The Class B Investor Interest and the Collateral Interest will be
subordinated to the extent necessary to fund certain payments with respect to
the Class A Certificates. In addition, the Collateral Interest will be
subordinated to the extent necessary to fund certain payments with respect to
the Class B Certificates. No payment of principal will be made to the Class B
Certificate Holders until the Class A Investor Interest is paid in full. No
payment of principal will be made to the Collateral Interest Holder on any
date until all payments of principal to the Class A Certificate Holders and
the Class B Certificate Holders to be made on such date have been paid or
provided for in full; provided, however, that on each Transfer Date, if a
reduction of the Required Collateral Interest has occurred, payments of
principal may be made to the Collateral Interest Holder prior to or
concurrently with payments of principal to Class A Certificate Holders and
Class B Certificate Holders. In addition, payment of the Required Amounts,
which includes payments to cover shortfalls in respect of (among other things)
interest and Monthly Servicing Fees, will be made on each Distribution Date
first to the Class A Certificate Holders and then to the Class B Certificate
Holders. No payment of interest will be made to the Collateral Interest Holder
on any date until the Class A Required Amount and the Class B Required Amount,
if any, on such date have been paid in full. Certain principal payments
otherwise allocable to the Collateral Interest Holder and, if the foregoing
are insufficient, allocable to the Class B Certificate Holders may be
reallocated to the Class A Certificate Holders, and certain principal payments
otherwise allocable to the Collateral Interest Holder may be reallocated to
the Class B Certificate Holders; and, as a result of such reallocations, the
Collateral Interest and, if the Collateral Interest has been reduced to zero,
the Class B Investor Interest may thereby decrease. To the extent one or both
of the Collateral Interest and the Class B Investor Interest are so reduced,
the percentage of Finance Charge Collections allocated to the Collateral
Interest Holder and, as applicable, the Class B Certificate Holders in
subsequent Monthly Periods will be reduced. Moreover, to the extent the amount
of such decrease in the Collateral Interest Holder and/or the Class B Investor
Interest is not reimbursed, the amount of principal distributable to the
Collateral Interest and/or the Class B Certificate Holders will be reduced.
See "--Allocation of Funds", "--Reallocation of Cash Flows".
CONVEYANCE OF RECEIVABLES
On July 9, 1993 the Transferor transferred and assigned to the Trust all of
its right, title and interest in and to the Receivables in the Accounts then
outstanding and all Receivables thereafter created in the Accounts and all
monies due or to become due with respect thereto (including Principal
Receivables, Finance Charge Receivables and all proceeds of such Receivables).
On October 4, 1994, July 14, 1995, May 1, 1996, October 1, 1996, May 1, 1997,
and August 1, 1997, the Transferor transferred and assigned to the Trust
Receivables arising from certain Additional Accounts designated pursuant to
the Agreement. On each day that an Eligible Automatic Additional Account has
been originated or shall be originated or designated as an Automatic
Additional Account by the Transferor (and on any day such Account exists but
has not been previously added to the Trust as a result of the limitations
expressed in "Addition of Accounts"), the Transferor has added or will add the
Receivables in each such account to the Trust and such accounts are treated as
Automatic Additional Accounts in an amount not in excess of the Maximum
Addition Amount.
In connection with the transfer of the Receivables to the Trust, the
Transferor indicated in its computer files the conveyance of the Receivables
to the Trust. In addition, the Transferor provided the Trustee a computer file
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or a microfiche list containing a true and complete list showing each Account,
identified by account number and indicating the total outstanding Receivable
balance transferred. The Transferor has provided the Trustee an updated list
of each Account, identified by account number and indicating the total
outstanding Receivable balance as of August 31, 1997, which list has been and
will be further updated periodically to reflect new Automatic Additional
Accounts and Additional Accounts and the removal of Removed Accounts. The
Transferor will not deliver to the Trustee any other records or agreements
relating to the Accounts or Receivables. Except as stated above, the records
and agreements relating to the Accounts and the Receivables maintained by the
Transferor or the Servicer will not be segregated by the Transferor or the
Servicer from other documents and agreements relating to other credit card
accounts and receivables and will not be stamped or marked to reflect the
transfer of the Receivables to the Trust, but the computer records of the
Transferor are required to be marked to evidence such transfer. The Transferor
has filed UCC financing statements with respect to the Receivables meeting the
requirements of Connecticut state law. See "Risk Factors--Certain Legal
Aspects" and "Certain Legal Aspects of the Receivables".
EXCHANGES
The Agreement provides for the Trustee to issue two types of certificates:
(i) one or more Series of certificates transferable and having the
characteristics described below and (ii) the Exchangeable Transferor
Certificate, a certificate evidencing the Transferor Interest, currently held
by PSFC and transferable only as provided in the Agreement. The Agreement also
provides that, pursuant to any one or more Supplements, the Holder of the
Exchangeable Transferor Certificate may tender such certificate, or the Holder
of the Exchangeable Transferor Certificate may tender the Exchangeable
Transferor Certificate and the Transferor may tender the certificates
evidencing all or a portion of any Series of certificates, to the Trustee in
exchange for one or more new Series and a reissued Exchangeable Transferor
Certificate. Under the Agreement, the Transferor and the Trustee will execute
a Supplement in conjunction with such an Exchange that will specify, with
respect to any newly issued Series, certain terms which may include: (i) its
name or designation; (ii) its initial principal amount (or method for
calculating such amount); (iii) its coupon rate (or formula for the
determination thereof); (iv) the closing date; (v) the rating agency or
agencies, if any, rating the Series; (vi) the interest payment date or dates
and the date or dates from which interest shall accrue including the interest
accrual period with respect to such Series; (vii) the name of the clearing
agency, if any; (viii) the method for allocating Collections to Certificate
Holders of such Series; (ix) the names of any accounts to be used by such
Series and the terms governing the operations of any such accounts; (x) the
percentage used to calculate monthly servicing fees; (xi) the Minimum
Transferor Interest; (xii) the minimum amount of Aggregate Principal
Receivables required to be maintained by the Transferor through the
designation of Additional Accounts; (xiii) the enhancer and terms of the
Enhancement with respect thereto; (xiv) the base rate applicable to such
Series; (xv) the terms on which the certificates of such Series may be
repurchased by the Transferor or remarketed to other investors; (xvi) the
series termination date; (xvii) any deposit into any account maintained for
the benefit of Certificate Holders of such Series; (xviii) the number of
classes of such Series, and if more than one class, the rights and priorities
of each such class; (xix) the extent to which the certificates of such Series
will be issuable in temporary or permanent global form (and, in such case, the
depositary for such global certificate or certificates, the terms and
conditions, if any, upon which such global certificate may be exchanged, in
whole or in part, for definitive certificates, and the manner in which any
interest payable on a temporary or permanent global certificate will be paid);
(xx) whether the certificates of such Series may be issued in bearer form and
any limitations imposed thereon; (xxi) whether Interchange or other fees will
be included in funds available to Certificate Holders of such Series; (xxii)
the priority of any Series with respect to any other Series; (xxiii) the
rights of the Holder of the Exchangeable Transferor Certificate that have been
transferred to the holders of such Series; and (xxiv) any other relevant terms
(all such terms, the "Principal Terms" of such Series). None of the
Transferor, the Servicer, the Holder of the Exchangeable Transferor
Certificate, the Trustee or the Trust is required or intends to obtain the
consent of any Certificate Holder to issue any additional Series. As a
condition of an Exchange, however, the Trustee must receive written
confirmation that the Exchange will not result in the Rating Agency reducing
or withdrawing its rating of any outstanding Series, including the
Certificates. The Transferor and the Holder of the Exchangeable Transferor
Certificate may offer any Series to the public under a Disclosure Document in
transactions either registered under
56
the Securities Act or exempt from registration thereunder directly, through
the Underwriters or one or more other underwriters or placement agents, in
fixed-price offerings or in negotiated transactions or otherwise. Any such
Series may be issued in fully registered or book-entry form in minimum
denominations determined by the Transferor. The Transferor and the Holder of
the Exchangeable Transferor Certificate may offer, from time to time,
additional Series.
The Agreement provides that the Holder of the Exchangeable Transferor
Certificate may perform Exchanges and the related Supplements may define
Principal Terms such that each Series has a period during which amortization
or accumulation of the principal amount thereof is intended to occur which may
have a different length and begin on a different date than such period for any
other Series. Further, one or more Series may be in their amortization periods
or accumulation periods, as the case may be, while other Series are not. Thus,
certain Series may not be amortizing or accumulating, as the case may be,
while other Series are amortizing or accumulating. Moreover, each Series may
have the benefits of the Enhancement available only to such Series. Under the
Agreement, the Trustee shall hold any such form of Enhancement only on behalf
of the Series to which the Enhancement relates. Likewise, with respect to each
such form of Enhancement, a different form of Enhancement agreement may be
delivered to the Trustee. The Agreement also provides that the related
Supplements may specify different coupon rates and monthly servicing fees with
respect to each Series (or a particular class within such Series) and may vary
between Series the terms upon which a Series (or a particular class within
such Series) may be repurchased by the Transferor or remarketed to other
investors. In addition, a Series Supplement may permit (as does the Series
1997-2 Supplement) an Investor Exchange by which the Certificate Holders of
such Series may elect to exchange their certificates for one or more newly
issued Series of certificates upon the satisfaction of certain conditions
specified in the Agreement and the related Supplement. Additionally, certain
Series may be subordinated to other Series, or classes within a Series may
have different priorities. The Series 1997-2 Supplement will not permit the
subordination of such Series to any other Series issued or which may hereafter
be issued by the Trust. There is no limit to the number of Exchanges that may
be performed under the Agreement. The Trust will terminate only as provided in
the Agreement.
Under the Agreement and pursuant to a Supplement, an Exchange may only occur
upon the satisfaction of certain conditions provided in the Agreement. Under
the Agreement, the Holder of the Exchangeable Transferor Certificate may
perform an Exchange by notifying the Trustee at least three days in advance of
the date upon which the Exchange is to occur. Under the Agreement, the notice
will state the designation of any Series to be issued on the date of the
Exchange and, with respect to each such Series: (i) its initial principal
amount (or method for calculating such amount) which amount may not be greater
than the current principal amount of the Exchangeable Transferor Certificate
plus, in the case of an Investor Exchange, the current principal amount of the
investor certificates to be exchanged, (ii) its certificate rate (or method
for calculating such rate) and (iii) the provider of the Enhancement, if any,
which is expected to provide credit support with respect to it. On the date of
the Exchange, the Agreement provides that the Trustee will authenticate any
such Series only upon delivery to it of the following, among others: (i) a
Supplement in form satisfactory to the Trustee signed by the Transferor and
specifying the Principal Terms of such Series, (ii) an opinion of counsel to
the effect that the certificates of such Series, unless otherwise stated, will
be characterized as indebtedness of the Transferor under existing law for
Federal, Connecticut and New York state income tax purposes, (iii) an opinion
of counsel to the effect that the issuance of such Series will not materially
adversely impact the Federal, Connecticut or New York state income tax
characterization of any outstanding Series or result in the Trust being
subject to Federal, New York or Connecticut tax at the entity level, (iv) the
Enhancement, if any, and an appropriate form of Enhancement agreement or
instrument with respect thereto executed by the Transferor and the issuer of
the Enhancement, (v) written confirmation from the Rating Agency that the
Exchange will not result in such Rating Agency reducing or withdrawing its
rating on any outstanding Series, (vi) the existing Exchangeable Transferor
Certificate and, if applicable, certificates of the Series to be exchanged,
and (vii) a certificate of an officer of the Transferor that on the date such
Exchange occurs, after giving effect to such Exchange, the Transferor Interest
will be at least equal to the Minimum Transferor Interest. Upon satisfaction
of such conditions, the Trustee will cancel the existing Exchangeable
Transferor Certificate and the certificates of the exchanged Series, if
applicable, and authenticate the new Series and a new Exchangeable Transferor
Certificate.
57
REPRESENTATIONS AND WARRANTIES
The Transferor has made and will make upon execution of each Supplement
certain representations and warranties to the Trust to the effect that, among
other things, (a) as of the Closing Date and the closing date of the issuance
by the Trust of the initial Series of certificates, the Transferor was duly
incorporated and in good standing and that it has the authority to consummate
the transactions contemplated by the Agreement and (b) as of the Series Cut
Off Date, or, with respect to any Additional Account or Automatic Additional
Account, the date on which such Additional Account or Automatic Additional
Account was transferred to the Trust, each Account was an Eligible Account (as
defined below). If (i) any of these representations and warranties proves to
have been incorrect in any material respect when made, and continues to be
incorrect for 60 days after notice to the Transferor by the Trustee or to the
Transferor and the Trustee by Certificate Holders holding not less than 50% of
each of the Class A Investor Interest, the Class B Investor Interest and the
Collateral Interest and (ii) as a result the interests of the Certificate
Holders are materially adversely affected, and continue to be materially
adversely affected during such period, then the Trustee or Certificate Holders
holding not less than 50% of each of the Class A Investor Interest, the Class
B Investor Interest and the Collateral Interest may give notice to the
Transferor (and to the Trustee in the latter instance) declaring that a Pay
Out Event has occurred, thereby commencing the Rapid Amortization Period. See
"--Pay Out Events".
The Transferor has made and will make upon the execution of each Supplement
representations and warranties to the Trust relating to the Receivables to the
effect, among other things, that (a) as of the closing date of the issuance by
the Trust of the related Series of certificates, each of the Receivables then
existing is an Eligible Receivable (as defined below) and (b) as of the date
of creation of any new Receivable, such Receivable is an Eligible Receivable
and the representation and warranty set forth in clause (b) in the immediately
following paragraph is true and correct with respect to such Receivable. In
the event (i) of a breach of any representation and warranty set forth in this
paragraph, within 60 days, or such longer period as may be agreed to by the
Trustee (but no longer than 120 days), of the earlier to occur of the
discovery of such breach by the Transferor or Servicer or receipt by the
Transferor of written notice of such breach given by the Trustee or any
"Enhancement Provider" (as defined in the Agreement), or, with respect to
certain breaches relating to prior liens, immediately upon the earlier to
occur of such discovery or notice and (ii) that, except with respect to
certain breaches relating to prior liens, as a result of such breach, the
Receivables in the related Accounts are charged off as uncollectible, the
Trust's rights in, to or under such Receivables or their proceeds are impaired
or the proceeds of such Receivables are not available for any reason to the
Trust free and clear of any lien, the Transferor shall accept reassignment of
each Principal Receivable as to which such breach relates (an "Ineligible
Receivable") on the terms and conditions set forth below; provided, however,
that no such reassignment shall be required to be made with respect to such
Ineligible Receivable if, on any day within the applicable period (or such
longer period as may be agreed to by the Trustee), the representations and
warranties with respect to such Ineligible Receivable shall then be true and
correct in all material respects. The Transferor shall accept reassignment of
each such Ineligible Receivable by (i) depositing into the Collection Account
an amount equal to the Finance Charge Receivables collected with respect to
such Ineligible Receivable and (ii) directing the Servicer to deduct the
amount of each such Ineligible Receivable from the aggregate amount of
Principal Receivables used to calculate the Transferor Interest; provided,
however, that if the exclusion of an Ineligible Receivable from the
calculation of the Transferor Interest would cause the Transferor Interest to
be less than the Minimum Transferor Interest or would otherwise not be
permitted by law, then such Ineligible Receivable shall be removed upon the
Transferor depositing in the Excess Funding Account (for allocation as a
Principal Receivable) in immediately available funds an amount equal to the
amount by which the Transferor Interest would be reduced below the Minimum
Transferor Interest. Any such deduction or deposit shall be considered a
repayment in full of the Ineligible Receivable. The obligation of the
Transferor to accept reassignment of any Ineligible Receivable is the sole
remedy respecting any breach of the representations and warranties set forth
in this paragraph with respect to such Receivable available to Certificate
Holders or the Trustee on behalf of Certificate Holders.
The Transferor has made and will make upon the execution of each Supplement
representations and warranties to the Trust to the effect, among other things,
that as of the Closing Date and the closing date of the issuance by the Trust
of the related Series of certificates (a) the Agreement, including the
Supplement, constitutes a legal, valid and binding obligation of the
Transferor and (b) the transfer of Receivables by it to the Trust under
58
the Agreement constitutes either a valid transfer and assignment to the Trust
of all right, title and interest of the Transferor in and to the Receivables
(other than Receivables in Additional Accounts), whether then existing or
thereafter created and the proceeds thereof (including amounts in any of the
accounts established for the benefit of the Certificate Holders), Recoveries
allocable to the Trust and Interchange with respect to the Trust or the grant
of a first priority security interest in such Receivables (except for certain
tax liens) and the proceeds thereof (including amounts in any of the accounts
established for the benefit of the Certificate Holders), which is effective as
to each such Receivable upon the creation thereof and which has been
perfected. The Transferor has made, and will make (or has been or will be
deemed to make), similar representations and warranties to the Trust in
connection with each assignment of Receivables in Additional Accounts or
Automatic Additional Accounts. In the event of a breach of any of the
representations and warranties described in the first sentence of this
paragraph, either the Trustee or the holders of certificates evidencing
undivided interests in the Trust aggregating more than 50% of the sum of the
investor interests of all Series issued and outstanding, by written notice to
the Transferor (and to the Trustee and the Servicer if given by the
Certificate Holders), may direct the Transferor to accept reassignment of the
Trust Portfolio within 60 days of such notice, or within such longer period
specified in such notice (but no longer than 120 days). The Transferor will be
obligated to accept reassignment of such Receivables on a Distribution Date
occurring within such applicable period. Such reassignment will not be
required to be made, however, if at any time during such applicable period, or
such longer period, the representations and warranties shall then be true and
correct in all material respects. The deposit amount for such reassignment
with respect to each Series of certificates required to be repurchased
following such notice, including the Certificates, will generally be equal to
the investor interest of each such Series on the last day of the Monthly
Period preceding the Distribution Date on which the reassignment is scheduled
to be made plus an amount equal to all interest accrued but unpaid on such
certificates at the applicable certificate rate (less the amounts previously
allocated for payment of interest and principal with respect to each such
Series of certificates) through the end of the interest accrual periods of
each such Series. The reassignment deposit amount shall equal the sum of the
reassignment deposits with respect to each Series then issued and outstanding
which is required to be repurchased following such notice. The payment of such
reassignment deposit amount into the Distribution Account will be considered a
prepayment in full of all Receivables and will be paid in full to the
Certificate Holders of such Series upon presentation and surrender of their
certificates. In the Series 1997-2 Supplement, the Transferor represents and
warrants that, as of the Closing Date, the Agreement, as supplemented by such
Supplement, constitutes a legal, valid and binding obligation of the
Transferor. Upon a breach of this representation, either the Trustee or the
holders of Certificates evidencing aggregate undivided interests in the Trust
aggregating more than 50% of each of the Class A Investor Interest, the Class
B Investor Interest and the Collateral Interest by written notice to the
Transferor (and to the Trustee and the Servicer if given by the Certificate
Holders) may direct the Transferor to purchase the Certificates (but not the
certificates of any other Series) on terms and conditions substantially
similar to those set forth above. If the Trustee or the Certificate Holders
(including the Certificate Holders) give a notice as provided above, the
obligation of the Transferor to make any such deposit or repurchase will
constitute the sole remedy respecting a breach of the representations and
warranties (set forth in this paragraph) available to the Trustee or the
Certificate Holders.
An "Eligible Account" is defined to mean a VISA or MasterCard credit card
account owned by the Transferor which, as of the Series Cut Off Date, (a) is
payable in United States dollars, (b) has not been identified on the computer
files of the Transferor as relating to a cardholder who has died or commenced
action relating to bankruptcy or who is the subject of an involuntary
bankruptcy, insolvency or similar action, (c) has not been classified by the
Transferor as counterfeit, fraudulent, stolen or lost, or as a corporate
business card, (d) has not been charged off by the Transferor in its customary
and usual manner for charging off such Account as of the Series Cut Off Date,
(e) has not been (and no Receivables in such Account have been) sold or
pledged to any other person, (f) is not an account on which People's Bank or
an affiliate of People's Bank is the obligor and (g) as of the date of
origination of such account, the obligor of which had a billing address in the
United States, its territories or possessions.
An "Eligible Receivable" is defined to mean each Receivable (a) arising
under an Eligible Account, an Eligible Additional Account (in the case of
Additional Accounts) or an Eligible Automatic Additional Account
59
(in the case of Automatic Additional Accounts), as the case may be, (b)
created in compliance, in all material respects, with all requirements of law
applicable to the Transferor, and pursuant to a credit card agreement
complying in all material respects with all requirements of law applicable to
the Transferor, (c) with respect to which all consents or authorizations of,
or registrations with, any governmental authority required to be obtained or
given by the Transferor in connection with the creation of such Receivable or
the execution, delivery, creation and performance by the Transferor of the
related credit card agreement have been duly obtained or given and are in full
force and effect as of the date of the creation of such Receivable, (d) as to
which, at the time of its creation and at all times thereafter, the Transferor
or the Trust had good and marketable title free and clear of all liens and
security interests (other than certain tax liens for taxes not then due or
which the Transferor is contesting), (e) which is the legal, valid and binding
payment obligation of the cardholder thereof, legally enforceable against such
cardholder in accordance with its terms (with certain bankruptcy related
exceptions), (f) which constitutes an "account" or "general intangible" under
and as defined in Article 9 of the UCC as then in effect in the State of New
York, (g) as to which as of the time of its transfer to the Trust, the
Transferor has satisfied all material obligations on its part with respect to
such Receivable required to be satisfied, (h) which is not, at the time of its
transfer to the Trust, subject to any right of rescission, setoff,
counterclaim or defense (including the defense of usury), other than certain
bankruptcy related defenses and (i) as to which the Transferor has done
nothing to impair, or omitted to take any action the omission of which would
impair, the rights of the Trust or the Certificate Holders.
The Trustee has not made, and it is not required or anticipated that the
Trustee will make, any general examination of the Receivables or any records
relating to the Receivables for the purpose of establishing the presence or
absence of defects, compliance with the Transferor's representations and
warranties or for any other purpose. The Servicer, however, has delivered and
will deliver to the Trustee on or before March 31 of each year, beginning in
1994, an opinion of counsel with respect to the validity of the security
interest of the Trust in and to the Receivables and certain other components
of the Trust. The Transferor has undertaken to file any such opinion of
counsel delivered to the Trustee with the Commission as an exhibit to a report
on Form 8-K filed under the provisions of the Exchange Act.
SALE OF ACCOUNTS
The Transferor has the right to sell, transfer or pledge the Accounts;
provided, however, that (i) the Rating Agency has advised the Transferor and
the Trustee that such sale, transfer or pledge will not result in the
reduction or withdrawal of the then existing rating of the certificates, (ii)
the Transferor and the Servicer determine such sale, transfer or pledge will
not be materially adverse to the interests of the Certificate Holders, (iii)
such purchaser, transferee or pledgee shall expressly assume in a supplemental
agreement the applicable obligations and covenants of the Transferor and (iv)
certain other conditions specified in the Agreement are satisfied.
ADDITION OF ACCOUNTS
On each day an Eligible Automatic Additional Account is originated (and on
any day such Account exists but has not been previously added to the Trust as
a result of the limitations expressed in the next succeeding sentence), the
Transferor will add the Receivables in each such account to the Trust and such
accounts shall be treated as Automatic Additional Accounts in an amount not in
excess of the Maximum Addition Amount. An "Eligible Automatic Additional
Account" is, as of the relevant date of addition, an Automatic Additional
Account that is (i) a VISA Account or MasterCard credit card account,
satisfying the criteria set forth in the definition of Eligible Account, or
(ii) any other consumer revolving credit account (x) satisfying the criteria
set forth in the definition of Eligible Account without regard to the
requirement that such account be a VISA or MasterCard credit card account, (y)
which would not cause the Rating Agency to indicate in writing that such
addition would result in the reduction or withdrawal of its then existing
rating of any Series of certificates and (z) to which, to the extent provided
in any Supplement, the provider of any Enhancement for the related Series of
certificates consents, which consent shall not be unreasonably withheld. The
Agreement provides that Automatic Additional Accounts will be transferred to
the Trust only if the following conditions are met: the
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number of Automatic Additional Accounts the Receivables of which are
designated to be added to the Trust since (i) the first day of the eleventh
preceding Monthly Period minus the number of Automatic Additional Accounts
whose inclusion has been approved by the Rating Agencies, that satisfy certain
other conditions and that were added on the initial day of the addition of
such type of Account since the first day of such eleventh preceding Monthly
Period plus the number of Additional Accounts, if any, the Receivables of
which were required to be and have been designated to be added to the Trust
since the first day of such eleventh preceding Monthly Period pursuant to the
next paragraph minus any Removed Accounts removed since the first day of such
eleventh preceding Monthly Period shall not exceed 15% of the number of
Accounts on the first day of such eleventh preceding Monthly Period, and (ii)
the first day of the second preceding Monthly Period minus the number of
Automatic Additional Accounts whose inclusion has been approved by the Rating
Agencies, that satisfy certain other conditions and that were added on the
initial day of the addition of such type of Account since the first day of
such second preceding Monthly Period plus the number of Additional Accounts,
if any, the Receivables of which were required to be and have been designated
to be added to the Trust since the first day of such second preceding Monthly
Period pursuant to the next paragraph minus any Removed Accounts removed since
the first day of such second preceding Monthly Period shall not exceed 10% of
the number of Accounts on the first day of such second preceding Monthly
Period (the lesser of the amounts described in clauses (i) and (ii) of this
sentence, the "Maximum Addition Amount"). The Transferor, at its option, may
terminate or suspend the inclusion of Automatic Additional Accounts at any
time.
As described above in "The Receivables", the Transferor has the right and,
in some circumstances, is obligated to designate from time to time Additional
Accounts to be included as Accounts. The Transferor will be required to add
Additional Accounts (i) if on any Record Date the Transferor Interest for the
related Monthly Period is less than the Minimum Transferor Interest of the
Aggregate Principal Receivables (or such higher amount established pursuant to
a Supplement) or (ii) if, on any date of determination, the Aggregate
Principal Receivables is less than the Minimum Aggregate Principal
Receivables. Each such Additional Account must be an "Eligible Additional
Account". An "Eligible Additional Account" is, as of the date such account is
added to the Trust, either (i) a VISA or MasterCard credit card account
satisfying the criteria set forth in the definition of Eligible Account or
(ii) any other consumer revolving credit account, (a) satisfying the criteria
set forth in the definition of Eligible Account (without regard to the
requirement that such account be a VISA or MasterCard credit card account),
(b) the addition of the receivables of which would not cause the Rating Agency
to indicate in writing that such addition would result in the reduction or
withdrawal of its then existing rating of any Series of certificates and (c)
to which, to the extent provided in any Supplement, the provider of any
Enhancement for the related Series of certificates consents, which consent
shall not be unreasonably withheld. The Transferor will convey to the Trust
its interest in all Receivables of such Additional Accounts, whether such
Receivables are then-existing or thereafter created subject to the following
conditions, among others: (i) the Transferor shall have given prior written
notice of such additions to the Rating Agency, (ii) the Transferor shall have
received notice from the Rating Agency that the inclusion of such accounts as
Additional Accounts will not result in the reduction or withdrawal of its then
existing rating of any Series of certificates, (iii) no selection procedure
believed by the Transferor to be materially adverse to the interests of the
holders of any Series of certificates, including the Certificate Holders, was
used in selecting the Additional Accounts and (iv) each Account was an
Eligible Additional Account.
REMOVAL OF ACCOUNTS
Subject to the conditions set forth in the next succeeding sentence, on each
Determination Date on which the Transferor Interest for the related Monthly
Period exceeds 10% of Aggregate Principal Receivables on such Determination
Date, the Transferor may, but shall not be obligated to, designate Receivables
from Accounts for deletion and removal from the Trust without notice to the
Certificate Holders (the "Removed Accounts"). The Transferor is permitted to
designate and require reassignment of Receivables from Removed Accounts only
upon satisfaction of the following conditions, among others: (i) the
Transferor shall have delivered to the Trustee for execution a written
reassignment and a computer file or microfiche list containing a true and
complete list of all Removed Accounts, the Accounts to be identified by, among
other things, account number and their aggregate
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amount of Principal Receivables as of the "Removal Date" (as defined in the
Agreement); (ii) the Transferor shall represent and warrant that no selection
procedure used by the Transferor which is materially adverse to the interests
of the Certificate Holders was utilized in selecting the Removed Accounts;
(iii) the removal of any Receivables of any Removed Accounts shall not, in the
reasonable belief of the Transferor, (a) cause a Pay Out Event to occur or (b)
cause the Transferor Interest as a percentage of Aggregate Principal
Receivables to be less than 10% on such Removal Date; (iv) the Transferor
shall have delivered prior written notice of the removal to the Rating Agency
and prior to the date on which such Receivables are to be removed, the
Transferor shall have received notice from the Rating Agency that such removal
will not result in the reduction or withdrawal of the then-existing rating of
any Series of certificates; (v) the Transferor shall have delivered to the
Trustee an officer's certificate confirming the items set forth in clauses (i)
through (iv) above; and (vi) the Transferor, the Trustee and the Rating Agency
will have received an opinion of counsel that the proposed removal will not
adversely affect the federal income tax characterization of the Trust.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Agreement, the Servicer will be responsible for servicing
and administering the Receivables in accordance with the Servicer's policies
and procedures for servicing credit card receivables comparable to the
Receivables. The Servicer maintains a blanket bond coverage insuring against
losses through wrongdoing of its officers and employees who are involved in
the servicing of credit card receivables covering such actions and in such
amounts as the Servicer believes to be reasonable from time to time.
DISCOUNT OPTION
The Transferor may at its option at any time designate a specified fixed or
variable percentage (the "Discount Percentage") of the amount of Receivables
arising in designated Accounts on and after the date such option (the
"Discount Option") is exercised that otherwise would have been treated as
Principal Receivables to be treated as Finance Charge Receivables. Such
designation of the Discount Percentage will become effective only upon
satisfaction of the requirements set forth in the Agreement, including
confirmation by each Rating Agency that such designation will not result in a
withdrawal or reduction of its rating of any outstanding Series of
certificates. On the date of processing of any Collections, the product of the
Discount Percentage and Collections of Receivables that arise in the
designated Accounts on such day on or after the date such option is exercised
that otherwise would be Principal Receivables will be deemed Finance Charge
Collections and will be applied accordingly. The Transferor may at its option,
at any time, temporarily or permanently suspend the Discount Option. Each
Certificate Holder by its acceptance of a beneficial interest in a Certificate
shall be deemed to have consented to the exercise by the Transferor of the
Discount Option at such time as the Transferor determines to exercise such
option.
THE COLLECTION ACCOUNT
The Servicer has established and will maintain, or cause to be maintained,
in the name of the Trust, for the benefit of Certificate Holders, a
"Collection Account", which is a non interest bearing segregated trust account
established with a "Qualified Institution", defined either as the corporate
trust department of a Qualified Trust Institution or as a depository
institution (which may include the Servicer, the Trustee or an affiliate of
the Servicer), organized under the laws of the United States or any one of the
states thereof, which at all times has a certificate of deposit rating of P-1
by Moody's Investors Service, Inc. ("Moody's") and of A-1+ by Standard &
Poor's Ratings Services, a division of The McGraw Hill Companies, Inc.
("Standard & Poor's"), or a long term rating of at least Aa3 by Moody's and
AAA by Standard & Poor's and deposit insurance as required by law and by the
FDIC. In addition, the Supplement with respect to any Series may require the
Trustee to establish and maintain a subaccount of the Collection Account for
such Series (such subaccount, a "Collection Subaccount"). Funds in the
Collection Account or, as provided in the related Supplement, any Collection
Subaccount, may be invested to the extent provided in such Supplement, at the
direction of the Servicer, in specified investments including (i) obligations
of or fully guaranteed by the United States of America, (ii) demand deposits,
time deposits or certificates of deposit of depository institutions or trust
companies, the certificates of deposit of which
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have a rating from Standard & Poor's of A-1+ and either the certificates of
deposit of which have a rating from Moody's of P-1 or the long term unsecured
debt obligations of which have a rating from Moody's of Aa3, and which demand
deposits, time deposits and certificates of deposit are fully insured to the
limits as required by law and by the FDIC, (iii) commercial paper having, at
the time of the Trust's investment, a rating of P-1 and A-1+, respectively,
from Moody's and Standard & Poor's, (iv) bankers acceptances issued by any
depository institution or trust company described in clause (ii) above,
(v) money market funds rated AAA-m or AAAm-G by Standard & Poor's or P-1 by
Moody's or which have otherwise been approved in writing by the Rating Agency
and (vi) certain open-end diversified investment companies which have been
approved in writing by the Rating Agency ("Permitted Investments"). Any
earnings (net of losses and investment expenses) on funds in the Collection
Account or any Collection Subaccount will be paid monthly to the Transferor or
as otherwise specified in the related Supplement. The Servicer has the
revocable power to withdraw funds from the Collection Account or any
Collection Subaccount for the sole purpose of carrying out the Servicer's
duties under the Agreement. The Servicer will initially make daily deposits of
Collections allocable to the Investor Interest into the Collection Account and
will not be entitled to use any such deposited funds for its own purposes. The
Paying Agent shall have the revocable power to withdraw funds from the
Collection Account or any Collection Subaccount for the purpose of making
distributions to the Certificate Holders in the manner provided in the related
Supplement. The Paying Agent shall initially be the Trustee. The Series 1997-2
Supplement provides for the establishment of a Series 1997-2 Collection
Subaccount and the investment of certain funds therein in Permitted
Investments. In addition, the Servicer has established and will maintain or
cause to be maintained with a Qualified Institution (other than the
Transferor) in the name of the Trustee, on behalf of the Trust, a segregated
trust account, the "Excess Funding Account" for the benefit of the Certificate
Holders of each Series and the Holder of the Exchangeable Transferor
Certificate. Amounts on deposit in such Excess Funding Account will be
invested in the manner directed by the Transferor in Permitted Investments.
SERIES 1997-2 ACCOUNTS
The Servicer will establish and maintain with a Qualified Trust Institution
in the name of the Trustee for the benefit of the Certificate Holders, two
separate accounts in a segregated trust account maintained in the corporate
trust department of such Qualified Trust Institution (which accounts need not
be deposit accounts), and which will be designated the "Finance Charge
Account" and the "Principal Account". The Servicer will also establish a
"Distribution Account" (a non-interest bearing segregated demand deposit
account established with a Qualified Trust Institution). In addition, the
Trustee will establish the Principal Funding Account and the Reserve Account.
See "--Principal Funding Account" and "--Reserve Account" for discussions of
the Principal Funding Account and the Reserve Account, respectively.
A "Qualified Trust Institution" is a depository institution (which may
include the Trustee) having corporate trust powers, organized under the laws
of the United States or any one of the states thereof, which at all times has
a long term rating of at least Baa3 by Moody's and of at least BBB- by
Standard & Poor's and deposit insurance as required by law and by the FDIC.
Funds in the Principal Account and the Finance Charge Account will be
invested, at the direction of the Servicer, in Permitted Investments. Any
earnings (net of losses and investment expenses) on funds in the Finance
Charge Account or the Principal Account will be paid to the Transferor. The
Servicer will have the revocable power to withdraw funds from the Collection
Account, the Finance Charge Account, the Principal Account and the Excess
Funding Account for the purpose of carrying out the Servicer's duties under
the Agreement. The Paying Agent shall have the revocable power to withdraw
funds from the Distribution Account for the purpose of making distributions to
the Certificate Holders. The Distribution Account shall not contain any funds
of the Transferor or amounts allocable to the Transferor Interest, and no
amounts on deposit therein shall be made available to the Transferor.
The Finance Charge Account, the Principal Account, the Principal Funding
Account and the Distribution Account are collectively referred to as the
"Series 1997-2 Accounts".
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ALLOCATION PERCENTAGES
Pursuant to the Agreement, the Servicer will allocate between the Investor
Interest, the investor interest of all other Series of certificates issued and
outstanding and the Transferor Interest all amounts collected on Finance
Charge Receivables, all amounts collected on Principal Receivables and all
Receivables in Defaulted Accounts. The Servicer will make each allocation by
reference to the applicable Investor Percentage (or the applicable percentage
for each other Series) and the Transferor Percentage in each case.
"Collections" (as defined in the Agreement) will be applied first, as
Collections in respect of Finance Charge Receivables ("Finance Charge
Collections") and, second, as Collections in respect of Principal Receivables
("Principal Collections").
The Investor Percentage will be calculated as follows:
Finance Charge Collections and Receivables in Defaulted Accounts; Principal
Collections during Revolving Period. When used with respect to Finance Charge
Collections, or with respect to Receivables in Accounts written off as
uncollectible ("Defaulted Accounts") at any time, or when used with respect to
Principal Collections during the Revolving Period, "Investor Percentage" means
for any Monthly Period, the "Floating Investor Percentage", which shall be, on
any date of determination (except, in the case of Finance Charge Receivables
and Defaulted Receivables, with respect to the first Monthly Period), the
percentage equivalent of a fraction, the numerator of which is the Adjusted
Investor Interest, determined as of the last day of the Monthly Period
immediately preceding such date of determination, and the denominator of which
is the greater of (i) the Aggregate Principal Receivables, determined as of
the last day of the Monthly Period immediately preceding such date of
determination, and (ii) the sum of the numerators used to calculate the
applicable investor percentages for all outstanding Series on such date of
determination. With respect to the first Monthly Period, allocations of
Finance Charge Receivables and Defaulted Accounts described in the preceding
sentence will be calculated as the product of (i) such allocation for the full
calendar month of September 1997 and (ii) a fraction, the numerator of which
is the actual number of days from and including the Closing Date through and
including September 30, 1997, and the denominator of which is 30. Such amounts
so allocated will be further allocated between the Class A Certificate
Holders, the Class B Certificate Holders and the Collateral Interest Holder
based on the Class A Floating Allocation, the Class B Floating Allocation and
the Collateral Floating Allocation, respectively. The "Class A Floating
Allocation" means, with respect to any Monthly Period, the percentage
equivalent (which percentage may never exceed 100%) of a fraction, the
numerator of which is equal to the Class A Adjusted Investor Interest as of
the close of business on the last day of the preceding Monthly Period (or with
respect to the first Monthly Period, as of the Closing Date) and the
denominator of which is equal to the Adjusted Investor Interest as of the
close of business on such day. The "Class B Floating Allocation" means, with
respect to any Monthly Period, the percentage equivalent (which percentage may
never exceed 100%) of a fraction, the numerator of which is equal to the Class
B Investor Interest as of the close of business on the last day of the
preceding Monthly Period (or with respect to the first Monthly Period, as of
the Closing Date) and the denominator of which is equal to the Adjusted
Investor Interest as of the close of business on such day. The "Collateral
Floating Allocation" means, with respect to any Monthly Period, the percentage
equivalent (which percentage may never exceed 100%) of a fraction, the
numerator of which is equal to the Collateral Interest as of the close of
business on the last day of the preceding Monthly Period (or with respect to
the first Monthly Period, as of the Closing Date) and the denominator of which
is equal to the Adjusted Investor Interest as of the close of business on such
day.
Principal Collections during the Controlled Accumulation Period or the Rapid
Amortization Period. When used with respect to Principal Collections for any
Monthly Period during the Controlled Accumulation Period or the Rapid
Amortization Period, "Investor Percentage" means the "Fixed Investor
Percentage", which shall be, on any date of determination, the percentage
equivalent of a fraction, the numerator of which is the Investor Interest as
of the close of business on the last day of the Revolving Period (or, if there
has been an Investor Exchange with respect to the Certificates after the end
of the Revolving Period, the Investor Interest as of the end of the Revolving
Period will be reduced ratably to reflect the amount of Certificates tendered
and canceled pursuant to any Investor Exchange), and the denominator of which
is the greater of (a) the Aggregate Principal Receivables determined as of the
last day of the Monthly Period immediately preceding
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such date of determination and (b) the sum of the numerators used to calculate
the applicable investor percentages for all outstanding Series on such date of
determination with respect to Principal Receivables. Such amounts so allocated
will be further allocated between the Class A Certificate Holders, the Class B
Certificate Holders and the Collateral Interest Holder based on the Class A
Fixed Allocation, the Class B Fixed Allocation and the Collateral Fixed
Allocation, respectively. The "Class A Fixed Allocation" means, with respect
to any Monthly Period, the percentage equivalent (which percentage may never
exceed 100%) of a fraction, the numerator of which is equal to the Class A
Investor Interest as of the close of business on the last day of the Revolving
Period and the denominator of which is equal to the Investor Interest as of
the close of business on such day. The "Class B Fixed Allocation" means, with
respect to any Monthly Period, the percentage equivalent (which percentage may
never exceed 100%) of a fraction, the numerator of which is equal to the Class
B Investor Interest as of the close of business on the last day of the
Revolving Period and the denominator of which is equal to the Investor
Interest as of the close of business on such day. The "Collateral Fixed
Allocation" means, with respect to any Monthly Period, the percentage
equivalent (which percentage may never exceed 100%) of a fraction, the
numerator of which is equal to the Collateral Interest as of the close of
business on the last day of the Revolving Period and the denominator of which
is equal to the Investor Interest as of the close of business on such day.
The "Transferor Percentage" will, in all cases, be equal to 100% minus the
sum of the applicable Investor Percentage and the applicable investor
percentages with respect to all Series of investor certificates issued and
outstanding.
"Class A Investor Interest" for any date means an amount equal to (a) the
Class A Initial Investor Interest, minus (b) the aggregate amount of principal
payments made to the Class A Certificate Holders prior to such date, minus (c)
the excess, if any, of the aggregate amount of Class A Investor Charge-Offs
for all Transfer Dates prior to such date over the aggregate amount of any
reimbursements of Class A Investor Charge-Offs for all Transfer Dates prior to
such date; provided, however, that the Class A Investor Interest may not be
reduced below zero.
"Class B Investor Interest" for any date means an amount equal to (a) the
Class B Initial Investor Interest, minus (b) the aggregate amount of principal
payments made to the Class B Certificate Holders prior to such date, minus (c)
the aggregate amount, if any, of Class B Investor Charge-Offs for all Transfer
Dates prior to such date, minus (d) the aggregate amount, if any, of
Reallocated Class B Principal Collections for all prior Transfer Dates with
respect to which the Collateral Interest has not been reduced, minus (e) the
aggregate amount, if any, by which the Class B Investor Interest has been
reduced to fund the Class A Investor Default Amount on all prior Transfer
Dates, plus (f) the aggregate amount of Excess Spread and Shared Finance
Charge Collections allocated and available on all prior Transfer Dates for the
purpose of reimbursing amounts deducted pursuant to the foregoing clauses (c),
(d) and (e); provided, however, that the Class B Investor Interest may not be
reduced below zero.
"Collateral Interest" for any date means an amount equal to (a) the Initial
Collateral Interest, minus (b) the aggregate amount of principal payments made
to the Collateral Interest Holder prior to such date, minus (c) the aggregate
amount, if any, of Collateral Interest Charge-Offs for all Transfer Dates
prior to such date, minus (d) the aggregate amount, if any, of Reallocated
Principal Collections for all prior Transfer Dates, minus (e) the aggregate
amount, if any, by which the Collateral Interest has been reduced to fund the
Class A Investor Default Amount and the Class B Investor Default Amount on all
prior Transfer Dates, plus (f) the aggregate amount of Excess Spread and
Shared Finance Charge Collections allocated and available on all prior
Transfer Dates for the purpose of reimbursing amounts deducted pursuant to the
foregoing clauses (c), (d) and (e); provided, however, that the Collateral
Interest may not be reduced below zero.
"Class A Adjusted Investor Interest", for any date of determination, means
an amount equal to the then current Class A Investor Interest minus the
Principal Funding Account Balance, if any, on such date.
65
"Adjusted Investor Interest", for any date of determination, means an amount
equal to the sum of the Class A Adjusted Investor Interest, the Class B
Investor Interest and the Collateral Interest, in each case as of such date.
As a result of the calculations described above, Finance Charge Collections
received during any Monthly Period will generally be allocated to the
Certificate Holders based on the relationship of the amount of the Investor
Interest to the Aggregate Principal Receivables in the Trust (which may
fluctuate from month to month). As described above, during the Revolving
Period the Investor Percentage applied when allocating Principal Collections
is expected to vary from month to month because the Investor Interest as a
percentage of the Aggregate Principal Receivables in the Trust will fluctuate
from day to day. During the Controlled Accumulation Period and the Rapid
Amortization Period, however, the amount of Principal Collections allocated to
the Investor Interest each day will generally be equal to the Investor
Percentage with respect to Aggregate Principal Receivables on the last day of
the Revolving Period or as of the effective date of the most recent tender and
cancellation of Certificates pursuant to an Investor Exchange, if any, after
the commencement of the Controlled Accumulation Period or the Rapid
Amortization Period.
EXCESS FUNDING ACCOUNT
At any time during which no Series is in an accumulation period or
amortization period (including any early amortization period), or for a Series
in an accumulation period or an amortization period, during which the
principal funding account, if any, is fully funded or amounts have otherwise
been deposited in an account established for the benefit of such Series
sufficient to pay the principal amount of such Series in full, and the
Transferor Interest does not exceed the Minimum Transferor Interest, funds (to
the extent available therefor as described herein) otherwise payable to the
Holder of the Exchangeable Transferor Certificate will be deposited in the
Excess Funding Account on any business day in an amount equal to the
difference on such business day between the Transferor Interest and the
Minimum Transferor Interest; provided, however, that to the extent the
Transferor Interest has been reduced below the Minimum Transferor Interest as
a result of Receivables in Defaulted Accounts (which are not Ineligible
Receivables) allocated to the Transferor Interest, no funds will be deposited
in the Excess Funding Account in respect of such reduction attributable to
such Receivables in Defaulted Accounts, as determined below. Funds on deposit
in the Excess Funding Account will be withdrawn and either (i) paid to the
Holder of the Exchangeable Transferor Certificate to the extent that on any
day the Transferor Interest exceeds the Minimum Transferor Interest as a
result of the addition of new Receivables to the Trust or (ii) allocated to
one or more Series when they are in accumulation or amortization periods
(including any early amortization period). Such deposits in and withdrawals
from the Excess Funding Account may be made on a daily basis. With respect to
any date, to the extent that the Minimum Transferor Interest exceeds the
Transferor Interest due to the allocation of Principal Receivables in any
Defaulted Accounts to the Transferor Interest on such date, the Transferor
will not be required to make a deposit to the Excess Funding Account with
respect to the portion of such excess equal to the lesser of (i) the product
of the Principal Receivables in such Defaulted Accounts and the Transferor
Percentage on such date and (ii) the product of (a) the amount by which the
Minimum Transferor Interest exceeds the Transferor Interest and (b) a
percentage, the numerator of which is the Transferor Percentage of the
Principal Receivables in such Defaulted Accounts on such day and the
denominator of which is the Aggregate Principal Receivables at the end of the
preceding date of processing minus the Aggregate Principal Receivables on the
current date prior to the deposit of any amount in the Excess Funding Account.
Any funds on deposit in the Excess Funding Account at the beginning of the
Rapid Amortization Period for the Series will be paid to the Certificate
Holders as a payment in respect of principal, and during the Controlled
Accumulation Period will be deposited in the Principal Funding Account to the
extent that the Available Investor Principal Collections allocable to the
Investor Interest are insufficient to deposit in to the Principal Funding
Account the applicable Controlled Deposit Amount.
Funds on deposit in the Excess Funding Account will be invested by the
Trustee at the direction of the Transferor in Permitted Investments. On each
Distribution Date, all net investment income earned on amounts in
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the Excess Funding Account since the preceding Distribution Date will be
withdrawn from the Excess Funding Account and applied as Collections in
respect of Finance Charge Receivables as described herein.
APPLICATION OF COLLECTIONS
The Servicer will deposit into the Collection Account, no later than the
second business day following the date of processing, any payment collected by
the Servicer on the Receivables. Notwithstanding the foregoing, for as long as
(a) (i) the Servicer provides to the Trustee a letter of credit or other
arrangement covering risk of collection of the Servicer acceptable to the
Rating Agency and (ii) the Transferor and the Trustee shall have received a
notice from the Rating Agency that such letter of credit or other arrangement
would not result in the lowering or withdrawal of such Rating Agency's then-
existing rating of any Series of certificates or (b) People's Bank remains the
Servicer under the Agreement, if People's Bank or any of its affiliates in
which the Collection Account is maintained has and maintains a certificate of
deposit rating of P-1 by Moody's and of A-1 by Standard & Poor's and deposit
insurance as required by law and the FDIC, then the Servicer need not deposit
collections on the day indicated in the preceding sentence but may use for its
own benefit all such collections until the related Transfer Date at which time
the Servicer will make such deposits in an amount equal to the net amount of
such deposits and payments which would have been made had the conditions of
this proviso not applied.
Throughout the existence of the Trust, on each business day the Servicer
shall allocate and pay to the Holder of the Exchangeable Transferor
Certificate, an amount equal to the Transferor Percentage of the aggregate
amount of Principal Collections and Finance Charge Collections in respect of
such business day.
On each business day, the Servicer will withdraw the following amounts from
the Collection Account for application as indicated:
(a) an amount equal to the applicable Floating Investor Percentage of the
aggregate amount of such deposits in respect of Finance Charge Collections
will be deposited into the Finance Charge Account;
(b) during the Revolving Period, an amount equal to the applicable
Floating Investor Percentage of the aggregate amount of such deposits in
respect of Principal Collections, up to an amount by which the Collateral
Interest exceeds the Required Collateral Interest as of such day (such
excess, the "Collateral Interest Surplus"), will be deposited in the
Principal Account. On any business day when the amount on deposit in the
Principal Account exceeds the applicable Collateral Interest Surplus, such
excess will be treated as Shared Principal Collections and applied as such;
(c) during the Controlled Accumulation Period, an amount equal to the sum
of (i) the applicable Fixed Investor Percentage of the aggregate amount of
such deposits in respect of Principal Collections, together with certain
amounts treated as Principal Collections, including amounts applied with
respect to Investor Default Amounts and Investor Charge Offs (collectively,
the "Principal Allocation"), (ii) any amount of Shared Principal
Collections and (iii) amounts withdrawn from the Excess Funding Account
allocated to the Certificates will be deposited in the Principal Account,
up to, during any Monthly Period, an amount equal to the sum of the
applicable Controlled Deposit Amount and the applicable Collateral Interest
Surplus. On any business day when the amount on deposit in the Principal
Account exceeds the sum of the applicable Controlled Deposit Amount for the
Certificates and the applicable Collateral Interest Surplus, such excess
will be treated as Shared Principal Collections and applied as such; and
(d) during the Rapid Amortization Period, if any, an amount equal to the
applicable Fixed Investor Percentage of the aggregate amount of such
deposits in respect of Principal Collections, any amount of Shared
Principal Collections and any amounts withdrawn from the Excess Funding
Account allocated to the Certificates, up to the amount of the Investor
Interest, will be deposited into the Principal Account.
During any Monthly Period, Shared Principal Collections will be allocated to
each outstanding Series pro rata based on the amount of the shortfall in
deposits in respect of Principal Collections to cover amounts payable to the
Certificate Holders of any Series and, as applicable, to holders of other
related undivided interests in the Trust out of Collections in respect of
Principal Receivables. The Servicer will pay any remaining Shared
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Principal Collections on such business day to the Holder of the Exchangeable
Transferor Certificate (so long as the Transferor Interest exceeds the Minimum
Transferor Interest).
Any Shared Principal Collections and other amounts not paid to the
Transferor because the Transferor Interest on any date, after giving effect to
the inclusion in the Trust of all Receivables on or prior to such date and the
application of all prior payments to the Transferor, does not exceed the
Minimum Transferor Interest, together with any adjustment payments (as
described in the third paragraph of "--Defaulted Receivables; Adjustments and
Fraudulent Charges" below), will be deposited into and held in the Excess
Funding Account, and on the commencement of the Amortization Period with
respect to any Series, such amounts will be deposited in the Principal Account
of such Series to the extent specified in the related Supplement until the
holders of certificates of such Series have been paid in full. "Amortization
Period", with respect to any Series, refers to the period following the
related revolving period, which will be the early amortization period, the
rapid amortization period, the controlled accumulation period, the controlled
amortization period, or such other amortization or accumulation period, in
each case as defined, as applicable, with respect to such Series in the
related Series Supplement. Any proceeds from any repurchase of the
certificates occurring in connection with a Service Transfer and the proceeds
of any sale, disposition or liquidation of Receivables following the
occurrence of a Pay Out Event caused by the appointment of a receiver or
conservator for the Transferor or in connection with the termination of the
Trust will be deposited into the Collection Account immediately upon receipt
and will be allocated as Principal Collections or Finance Charge Collections,
as applicable.
ALLOCATION OF FUNDS
Payment of Fees, Interest and Other Items. On each Transfer Date (except as
noted below), the Servicer or the Trustee, acting pursuant to the Servicer's
instructions, will withdraw all amounts on deposit in the Finance Charge
Account in respect of allocations of Finance Charge Receivables during the
immediately preceding Monthly Period and make the following payments and
deposits in the following order:
(i) An amount equal to the Class A Available Funds with respect to such
Transfer Date will be distributed in the following priority:
(a) the sum of (x) the product of (i) the lesser of the Class A
Certificate Rate and the Class A Cap Rate (or 5.78625% for the Initial
Interest Period), (ii) the Class A Adjusted Investor Interest
determined as of the preceding Distribution Date (after giving effect
to all payments, deposits and withdrawals made on such Distribution
Date) or, for the Initial Interest Period, the Class A Initial Investor
Interest, and (iii) the actual number of days in the related Interest
Period or the Initial Interest Period divided by 360 (the "Class A
Monthly Cap Rate Interest") and (y) the Class A Covered Amount for the
related Interest Period plus any overdue Class A Monthly Cap Rate
Interest and Class A Covered Amount in respect of which a distribution
to Class A Certificate Holders has not been made, will be deposited in
the Distribution Account for distribution to Class A Certificate
Holders on the next succeeding Distribution Date;
(b) an amount equal to the Class A Monthly Servicing Fee for the
preceding Monthly Period and any accrued and unpaid Class A Monthly
Servicing Fees will be paid to the Servicer;
(c) an amount equal to the Class A Investor Default Amount for the
preceding Monthly Period will be treated as Principal Collections and
will be applied on such Transfer Date in accordance with " Payments of
Principal" below;
(d) an amount equal to the unreimbursed Class A Investor Charge-Offs
will be treated as Principal Collections and will be applied on such
Transfer Date in accordance with "--Payments of Principal" below; and
(e) the balance, if any, will constitute a portion of Excess Spread
and will be allocated and distributed as described below.
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The excess of the Class A Monthly Interest over the sum of the Class A
Monthly Cap Rate Interest and the Class A Covered Amount will be funded from
and to the extent of payments made pursuant to the Class A Interest Rate Cap
and from Excess Spread.
(ii) An amount equal to the Class B Available Funds with respect to such
Transfer Date will be distributed in the following priority:
(a) an amount equal to the product of (i) the lesser of the Class B
Certificate Rate and the Class B Cap Rate (or 5.98625% for the Initial
Interest Period) (ii) the Class B Investor Interest determined as of
the preceding Distribution Date (after giving effect to all payments,
deposits and withdrawals made on such Distribution Date) or, for the
Initial Interest Period, the Class B Initial Investor Interest, and
(iii) the actual number of days in the related Interest Period or the
Initial Interest Period divided by 360 ("Class B Monthly Cap Rate
Interest"), plus any overdue Class B Monthly Cap Rate Interest in
respect of which a distribution to Class B Certificate Holders has not
been made, will be deposited in the Distribution Account for
distribution to Class B Certificate Holders on the next succeeding
Distribution Date;
(b) an amount equal to the Class B Monthly Servicing Fee for the
preceding Monthly Period and any accrued and unpaid Class B Monthly
Servicing Fees will be paid to the Servicer;
(c) an amount equal to the Class B Investor Default Amount for the
preceding Monthly Period will be treated as Principal Collections and
will be applied on such Transfer Date in accordance with "--Payments of
Principal" below;
(d) an amount equal to the unreimbursed Class B Investor Charge-Offs
will be treated as Principal Collections and (other than those amounts
treated as Reallocated Principal Collections) will be applied on such
Transfer Date in accordance with "--Payments of Principal" below; and
(e) the balance, if any, will constitute a portion of Excess Spread
and will be allocated and distributed as described below.
The excess of the Class B Monthly Interest over the Class B Monthly Cap Rate
Interest will be funded from and to the extent of payments made pursuant to
the Class B Interest Rate Cap and from and to the extent of Excess Spread.
(iii) An amount equal to the Collateral Available Funds with respect to
such Transfer Date will be distributed in the following priority:
(a) an amount equal to the Collateral Interest Monthly Servicing Fee
for the preceding Monthly Period and any accrued and unpaid Collateral
Interest Servicing Fees will be paid to the Servicer; and
(b) the balance, if any, will constitute a portion of Excess Spread
and will be allocated and distributed as described below.
"Class A Available Funds" means, with respect to any Monthly Period, an
amount equal to the sum of (a) the Class A Floating Allocation of Finance
Charge Collections allocated to the Investor Interest and deposited in the
Finance Charge Account with respect to such Monthly Period, (b) Principal
Funding Investment Proceeds, if any, with respect to the related Transfer
Date, (c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class A Available Funds pursuant to the Series
1997-2 Supplement with respect to such Transfer Date and (d) the proceeds from
the sale of all or any portion of the Class A Interest Rate Cap deposited into
the Collection Account during such Monthly Period. "Class B Available Funds"
means, with respect to any Monthly Period, an amount equal to the sum of (a)
the Class B Floating Allocation of Finance Charge Collections allocated to the
Investor Interest and deposited in the Finance Charge Account with respect to
such Monthly Period and (b) the proceeds from the sale of all or any portion
of the Class B Interest Rate Cap deposited into the Collection Account during
such Monthly Period. "Collateral Available Funds" means, with respect to any
Monthly Period, an amount equal to the Collateral Floating Allocation of
Finance Charge Collections allocated to the Investor Interest with respect to
such Monthly Period.
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"Excess Spread" on each Transfer Date will equal the sum of (a) the excess
of the Class A Available Funds over the Class A Payment Amount, (b) the excess
of the Class B Available Funds over the Class B Payment Amount and (c) the
excess of the Collateral Available Funds over the Collateral Interest Monthly
Servicing Fee payable on such Transfer Date.
Excess Spread. On each Transfer Date, the Servicer or the Trustee, acting
pursuant to the Servicer's instructions, will apply Excess Spread with respect
to the preceding Monthly Period and make the following payments and deposits
in the following priority:
(a) an amount equal to the Class A Required Amount will be used to pay
such Class A Required Amount and will be applied and distributed in
accordance with the priorities described in clauses (i)(a) through (i)(d)
above under "--Payment of Interest, Fees and Other Items";
(b) an amount equal to the Class B Required Amount will be used to pay
such Class B Required Amount and will be applied and distributed in
accordance with the priorities described in clauses (ii)(a) through (ii)(d)
above under "--Payment of Interest, Fees and Other Items";
(c) an amount equal to the amount of any accrued and unpaid interest on
any overdue Class A Monthly Interest, calculated on the basis of (x) a
default rate of interest equal to the Class A Certificate Rate plus 0.5%
and (y) the actual number of days such Class A Monthly Interest is or was
at any time overdue, divided by 360, will be deposited in the Distribution
Account for distribution to Class A Certificate Holders on the next
succeeding Distribution Date;
(d) an amount equal to the amount of any accrued and unpaid interest on
any overdue Class B Monthly Interest, calculated on the basis of (x) a
default rate of interest equal to the Class B Certificate Rate plus 0.5%
and (y) the actual number of days such Class B Monthly Interest is or was
at any time overdue, divided by 360, will be deposited in the Distribution
Account for distribution to Class B Certificate Holders on the next
succeeding Distribution Date;
(e) an amount equal to any unreimbursed reductions in the Class B
Investor Interest in connection with the payment of the Class A Required
Amount will be applied to reinstate the Class B Investor Interest and will
be treated as Principal Collections and applied on such Transfer Date in
accordance with "--Payments of Principal" below;
(f) an amount equal to the product of (i) an amount equal to LIBOR plus
1.0% per annum, or such lesser amount as may be designated in the Loan
Agreement (the "Collateral Rate"), (ii) the Collateral Interest as of the
preceding Distribution Date (after giving effect to all payments, deposits
and withdrawals made on such date) or, for the first Transfer Date, the
Initial Collateral Interest, and (iii) the actual number of days in the
related Interest Period or the Initial Interest Period divided by 360 (the
"Collateral Monthly Interest"), plus any overdue Collateral Monthly
Interest in respect of which a distribution to the Collateral Interest
Holder has not been made, will be distributed to the Collateral Interest
Holder in accordance with the Loan Agreement;
(g) an amount equal to the amount by which the Class A Monthly Interest
for the preceding Interest Period exceeds the Class A Monthly Cap Rate
Interest (other than Class A Excess Interest), to the extent such amount is
not paid by the Interest Rate Cap Provider pursuant to the Class A Interest
Rate Cap, and any such accrued and unpaid amounts for prior Interest
Periods, will be deposited in the Distribution Account for distribution to
Class A Certificate Holders on the next succeeding Distribution Date;
(h) an amount equal to the amount by which the Class B Monthly Interest
for the preceding Interest Period exceeds the Class B Monthly Cap Rate
Interest (other than Class B Excess Interest), to the extent such amount is
not paid by the Interest Rate Cap Provider pursuant to the Class B Interest
Rate Cap, and any such accrued and unpaid amounts for prior Interest
Periods, will be deposited in the Distribution Account for distribution to
Class B Certificate Holders on the next succeeding Distribution Date;
(i) an amount equal to the aggregate Collateral Default Amount for the
preceding Monthly Period will be treated as Principal Collections and will
be applied on such Transfer Date in accordance with "--Payments of
Principal" below;
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(j) an amount equal to any unreimbursed reductions in the Collateral
Interest for reasons other than payment of principal to the Collateral
Interest Holder will be applied to reinstate the Collateral Interest and
will be treated as Principal Collections and applied on such Transfer Date
in accordance with "--Payments of Principal" below;
(k) on each Transfer Date from and after the Reserve Account Funding
Date, but prior to the date on which the Reserve Account terminates as
described under "--Reserve Account," an amount up to the excess, if any, of
the Required Reserve Account Amount over the Available Reserve Account
Amount will be deposited into the Reserve Account;
(l) any other amounts due and payable under the Loan Agreement will be
applied and distributed in accordance with and to the extent specified in
the Loan Agreement;
(m) an amount equal to the amount of any Class A Excess Interest accruing
during the related Interest Period;
(n) an amount equal to the amount of any Class B Excess Interest accruing
during the related Interest Period;
(o) the balance, if any, will constitute Shared Finance Charge
Collections, to be applied and distributed as described below in "--Shared
Finance Charge Collections";
(p) any amounts remaining after application as Shared Finance Charge
Collections will be applied to the payment of other accrued and unpaid
expenses of the Trust, if any; and
(q) any amounts remaining after application as Shared Finance Charge
Collections and to expenses of the Trust, if any, will be paid to the
Holder of the Exchangeable Transferor Certificate.
Shared Finance Charge Collections. Shared Finance Charge Collections will be
applied to cover any shortfalls with respect to amounts payable from Finance
Charge Collections allocable to any other Series then outstanding. Any such
Shared Finance Charge Collections remaining after covering shortfalls with
respect to all outstanding Series will be distributed to the Holder of the
Exchangeable Transferor Certificate. Any amounts designated as Shared Finance
Charge Collections pursuant to Supplements for any other Series and allocable
to the Certificates will be applied first, to the extent of any shortfalls in
the amount available from the Finance Charge Account, to make the payments and
deposits described in clauses (i)(a) through (i)(d) above under "--Payments of
Fees, Interest and Other Items", second, to make the payments and deposits
described in clauses (ii)(a) through (ii)(d) above under "--Payments of Fees,
Interest and Other Items", third, to make the payment described in clause
(iii)(a) above under "--Payments of Fees, Interest and Other Items", fourth,
to reimburse any reductions in the Class B Investor Interest arising in
connection with the payment of the Class A Required Amount, fifth, to pay the
Collateral Monthly Interest and sixth, to make the payments described above in
clauses (g), (h), (i), (j), (k) and (l) of "--Excess Spread" and thereafter
paid to the Holder of the Exchangeable Transferor Certificate. If the amount
on deposit in the Finance Charge Account with respect to the allocations of
Finance Charge Receivables during the preceding Monthly Period and any amounts
designated as Shared Finance Charge Collections pursuant to the Supplements
for any other Series and allocable to the Certificates are insufficient to
make any of the payments or deposits specified in clauses (i)(a) through
(i)(d) and (ii)(a) through (ii)(d) above under "--Payments of Fees, Interest
and Other Items", the Trustee, acting pursuant to the Servicer's instructions,
will apply Principal Collections allocated to the Collateral Interest as
Reallocated Collateral Principal Collections on the Transfer Date, first to
cover any remaining Class A Required Amount and second to cover any Class B
Required Amount, and if the Reallocated Collateral Principal Collections on
such Transfer Date are less than the remaining Class A Required Amount, to
apply Principal Collections allocated to the Class B Certificates as
Reallocated Class B Principal Collections on the Transfer Date to cover any
remaining Class A Required Amount. See "--Reallocation of Cash Flows".
Payments of Principal. On each Transfer Date, the Servicer or the Trustee,
acting pursuant to the Servicer's instructions, will distribute Available
Investor Principal Collections on deposit in the Principal Account in the
following priority:
(i) On each Transfer Date with respect to the Revolving Period:
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(a) an amount equal to the Collateral Monthly Principal will be paid
to the Collateral Interest Holder in accordance with the Loan
Agreement; and
(b) the balance, if any, will constitute Shared Principal Collections
and will be allocated and distributed as described below under "--
Shared Principal Collections";
(ii) On each Transfer Date with respect to the Controlled Accumulation
Period (beginning on the first Transfer Date following the Monthly Period
in which the Controlled Accumulation Period commences):
(a) prior to the Class A Scheduled Payment Date, an amount equal to
the Class A Monthly Principal will be deposited in the Principal
Funding Account, and on the Transfer Date immediately preceding the
Class A Scheduled Payment Date the aggregate amount on deposit in the
Principal Funding Account will be deposited in the Distribution Account
for distribution to the Class A Certificate Holders on the Class A
Scheduled Payment Date;
(b) for each Transfer Date after the Class A Investor Interest has
been paid in full, an amount equal to the Class B Monthly Principal for
such Transfer Date will be distributed to the Class B Certificate
Holders;
(c) on each Transfer Date with respect to the Controlled Accumulation
Period in which a reduction in the Required Collateral Interest has
occurred, an amount equal to the Collateral Monthly Principal will be
paid to the Collateral Interest Holder in accordance with the Loan
Agreement; and
(d) the balance, if any, will constitute Shared Principal Collections
and will be allocated and distributed as described below under "--
Shared Principal Collections";
(iii) On each Transfer Date with respect to the Rapid Amortization Period
(beginning on the first Transfer Date following the Monthly Period in which
the Rapid Amortization Period commences):
(a) an amount equal to the Class A Monthly Principal will be
deposited in the Distribution Account for distribution to the Class A
Certificate Holders on the next succeeding Distribution Date;
(b) after the Class A Investor Interest has been paid in full, an
amount equal to the Class B Monthly Principal will be deposited in the
Distribution Account for distribution to the Class B Certificate
Holders on the next succeeding Distribution Date;
(c) after the Class B Investor Interest has been paid in full, an
amount equal to the Collateral Monthly Principal will be paid to the
Collateral Interest Holder in accordance with the Loan Agreement; and
(d) the balance, if any, will constitute Shared Principal Collections
and will be allocated and distributed as described below under "--
Shared Principal Collections".
"Class A Monthly Principal" with respect to any Transfer Date relating to
the Controlled Accumulation Period or the Rapid Amortization Period, prior to
the payment in full of the Class A Investor Interest, will equal the least of
(i) Available Investor Principal Collections on deposit in the Principal
Account with respect to such Transfer Date, (ii) for each Transfer Date with
respect to the Controlled Accumulation Period, prior to the Class A Scheduled
Payment Date, the applicable Controlled Deposit Amount for such Transfer Date
and (iii) the Class A Adjusted Investor Interest prior to any deposits on such
Transfer Date.
"Class B Monthly Principal" with respect to the Transfer Date relating to
the Controlled Accumulation Period immediately following the Class A Scheduled
Payment Date, or with respect to any Transfer Date relating to the Rapid
Amortization Period, beginning with the Transfer Date on which the Class A
Investor Interest has been paid in full (after taking into account payments to
be made on the related Distribution Date), will equal the lesser of (i)
Available Investor Principal Collections on deposit in the Principal Account
(minus the portion of such Available Investor Principal Collections applied to
Class A Monthly Principal on such Transfer Date) and (ii) the Class B Investor
Interest for such Transfer Date.
"Collateral Monthly Principal" means (a) with respect to any Transfer Date
relating to the Revolving Period following any reduction of the Required
Collateral Interest effected as described in clause (3) of the
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proviso in the definition of "Required Collateral Interest", an amount equal
to the lesser of (i) the excess, if any, of the Collateral Interest (after
giving effect to reductions for any Collateral Interest Charge-Offs and
Reallocated Principal Collections on such Transfer Date and after giving
effect to any further adjustments thereto for the benefit of the Class A
Certificate Holders and the Class B Certificate Holders on such Transfer Date)
over the Required Collateral Interest on such Transfer Date, and (ii) the
Available Investor Principal Collections on such Transfer Date or (b) with
respect to any Transfer Date relating to the Controlled Accumulation Period
prior to repayment in full of the Class B Investor Interest an amount equal to
the lesser of (i) the excess, if any, of the Collateral Interest (after giving
effect to reductions for any Collateral Interest Charge-Offs and Reallocated
Principal Collections on such Transfer Date and after giving effect to any
further adjustments thereto for the benefit of the Class A Certificate Holders
and the Class B Certificate Holders on such Transfer Date) over the Required
Collateral Interest on such Transfer Date, and (ii) the Available Investor
Principal Collections remaining after allocations to the Offered Certificates
on such Transfer Date or (c) with respect to any Transfer Date relating to the
Controlled Accumulation Period or the Rapid Amortization Period, beginning
with the Transfer Date on which the Class B Investor Interest has been paid in
full (after taking into account payments to be made on the related
Distribution Date), an amount equal the least of (i) Available Investor
Principal Collections on deposit in the Principal Account (minus the portion
of such Available Investor Principal Collections applied to Class A Monthly
Principal and Class B Monthly Principal on such Transfer Date) and (ii) the
Collateral Interest for such Transfer Date.
Shared Principal Collections. Principal Collections for any Monthly Period
allocated to the Investor Interest will first be used to cover, with respect
to any Monthly Period during the Controlled Accumulation Period, deposits of
the Controlled Deposit Amount to the Principal Funding Account with respect to
the Class A Certificates or of the Class B Investor Interest to the
Distribution Account with respect to the Class B Certificates, and during the
Rapid Amortization Period, the deposit of the Class A Investor Interest and
the Class B Investor Interest to the Distribution Account, and then under
certain circumstances payments to the Collateral Interest Holder, in each case
as described above. The Servicer will determine the amount of Principal
Collections for any Monthly Period allocated to the Investor Interest
remaining after covering required payments to the Certificate Holders and any
similar amount remaining for any other Series. The Servicer will allocate
Shared Principal Collections derived from Principal Collections allocated to
the Investor Interest to cover any scheduled or permitted principal
distributions to Certificate Holders of other Series, and deposits to
principal funding accounts, if any, for any other Series entitled thereto
which have not been covered out of the Principal Collections allocable to such
Series and out of certain other amounts for such Series ("Principal
Shortfalls"). If Principal Shortfalls exceed Shared Principal Collections for
any Monthly Period, Shared Principal Collections will be allocated pro rata
among the applicable Series based on the relative amounts of Principal
Shortfalls. To the extent that Shared Principal Collections exceed Principal
Shortfalls, the balance will be paid to the holder of the Exchangeable
Transferor Certificate or, under certain circumstances, deposited into the
Excess Funding Account. Any amounts designated as Shared Principal Collections
pursuant to Supplements for any other Series and allocable to the Certificates
will be applied as described in "--Payments of Principal" above.
REALLOCATION OF CASH FLOWS
On each Distribution Date during the Revolving Period, the Controlled
Accumulation Period and the Rapid Amortization Period, if any, the Servicer
will determine the Class A Required Amount and the Class B Required Amount. If
either or both of the Required Amounts are greater than zero after application
of available Finance Charge Collections, Excess Spread, and Shared Finance
Charge Collections, then Principal Collections allocable to the Collateral
Interest will be reallocated and applied first to fund the remaining Class A
Required Amount, if any, and second to fund to the remaining Class B Required
Amount, if any, and to the extent that Reallocated Collateral Principal
Collections are less than such remaining Class A Required Amount, Principal
Collections allocable to the Class B Certificates will then be reallocated and
applied to fund the remaining Class A Required Amount. The Collateral Interest
will be reduced by the amount of Reallocated Collateral Principal Collections
and Reallocated Class B Principal Collections applied to fund the Required
Amounts. The Class B Investor Interest will be reduced by the amount of
Reallocated Class B Principal Collections in excess of the Collateral
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Interest (after giving effect to reductions for any Collateral Interest
Charge-Offs and any Reallocated Collateral Principal Collections as of the
related Distribution Date) applied to fund the Class A Required Amount.
"Class A Required Amount" for any date means the amount, if any, by which
the Class A Available Funds with respect to the related Monthly Period are
insufficient to pay the Class A Payment Amount for the related date.
"Class A Payment Amount" for any date means the aggregate of (i) the Class A
Monthly Cap Rate Interest with respect to the related Distribution Date and
any Class A Monthly Cap Rate Interest accrued during any prior period and not
distributed to the Class A Certificate Holders, (ii) the Class A Covered
Amount and any Class A Covered Amount accrued during any prior period and not
distributed to the Class A Certificate Holders, (iii) the Class A Monthly
Servicing Fee with respect to the related Distribution Date and any accrued
and unpaid Class A Monthly Servicing Fees from prior Monthly Periods, (iv) the
Class A Investor Default Amount for the related Monthly Period, and (v)
unreimbursed Class A Investor Charge-Offs.
"Class B Required Amount" for any date means the amount, if any, by which
the Class B Available Funds for any Monthly Period are insufficient to pay the
Class B Payment Amount.
"Class B Payment Amount" for any date means the aggregate of (i) the Class B
Monthly Cap Rate Interest with respect to the related Distribution Date and
any Class B Monthly Cap Rate Interest accrued during any prior period and not
distributed to the Class B Certificate Holders, (ii) the Class B Monthly
Servicing Fee with respect to the related Distribution Date and any accrued
and unpaid Class B Monthly Servicing Fees from prior Monthly Periods, (iii)
the Class B Investor Default Amount for the related Monthly Period, and (iv)
unreimbursed Class B Investor Charge-Offs.
"Required Amounts" for any date means the Class A Required Amount and the
Class B Required Amount, collectively.
Principal Collections allocable to the Collateral Interest and the Class B
Certificates for the purpose of determining Collections available to be
applied as Reallocated Principal Collections will be determined (i) for any
Monthly Period during the Revolving Period by multiplying the Collateral
Floating Allocation or the Class B Floating Allocation, as the case may be, by
the applicable Floating Investor Percentage of Principal Collections for such
Monthly Period, and (ii) for any Monthly Period during the Controlled
Accumulation Period or the Rapid Amortization Period, if any, by multiplying
the Collateral Fixed Allocation or the Class B Fixed Allocation, as the case
may be, by the applicable Fixed Investor Percentage of Principal Collections
for such Monthly Period, and in each case adding certain other amounts treated
as Principal Collections (including amounts applied with respect to Investor
Default Amounts and Investor Charge-Offs).
Any reductions of the Class B Investor Interest or of the Collateral
Interest, if reduced to an amount less than the Required Collateral Interest,
due to payment of the Class A Required Amount or, with respect to the
Collateral Interest, payment of the Class B Required Amount, will thereafter
be reimbursed and the Class B Investor Interest and the Collateral Interest,
as the case may be, increased on each Distribution Date by the amount, if any,
of Excess Spread and any Shared Finance Charge Collections from other Series
available for that purpose (in the case of the Collateral Interest, up to the
Required Collateral Interest).
"Reallocated Class B Principal Collections" for any Monthly Period means
Principal Collections allocable to the Class B Investor Interest for the
related Monthly Period in an amount not to exceed the amount applied to fund
the Class A Required Amount, if any; provided, however, that such amount will
not exceed the Class B Investor Interest after giving effect to any Class B
Investor Charge-Offs for the related Transfer Date.
"Reallocated Collateral Principal Collections" for any Monthly Period means
Principal Collections allocable to the Collateral Interest for the related
Monthly Period in an amount not to exceed the amount applied to fund the Class
A Required Amount and the Class B Required Amount, if any; provided, however,
that such
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amount will not exceed the Collateral Interest after giving effect to any
Collateral Investor Charge-Offs for the related Transfer Date.
"Reallocated Principal Collections" for any date means Reallocated Class B
Principal Collections and Reallocated Collateral Principal Collections, for
such date, collectively.
DEFAULTED RECEIVABLES; ADJUSTMENTS AND FRAUDULENT CHARGES
On the eighth business day of each month but not later than the tenth
calendar day (and if such day is not a business day, the preceding business
day) (such date, a "Determination Date"), the Servicer will calculate the
Class A Investor Default Amount, the Class B Investor Default Amount and the
Collateral Default Amount for the preceding Monthly Period. The terms "Class A
Investor Default Amount", "Class B Investor Default Amount" and "Collateral
Default Amount" mean, respectively, for any Monthly Period, the product of (a)
the Class A Floating Allocation, the Class B Floating Allocation or the
Collateral Floating Allocation, as the case may be, determined as of the end
of the Monthly Period, (b) the Floating Investor Percentage for Receivables in
Defaulted Accounts and (c) the amount of Defaulted Receivables for such
Monthly Period (the sum of the Class A Investor Default Amount, the Class B
Investor Default Amount and the Collateral Default Amount being sometimes
referred to as the "Investor Default Amount"). The term "Defaulted
Receivables" means, for any Monthly Period, Receivables which in such Monthly
Period were written off as uncollectible in accordance with the Servicer's
policies and procedures for servicing credit card receivables comparable to
the Receivables.
On each Determination Date, if the Class A Investor Default Amount exceeds
the amount of Excess Spread, Shared Finance Charge Collections and Reallocated
Principal Collections which are allocated and available to fund such amount
with respect to the Monthly Period immediately preceding such Determination
Date, the Collateral Interest (after giving effect to reductions for any
Collateral Interest Charge-Offs and any Reallocated Principal Collections as
of the related Distribution Date) will be reduced by the amount of such excess
(but not by more than the Class A Investor Default Amount for such Monthly
Period). In the event that such reduction would cause the Collateral Interest
to be a negative number, the Collateral Interest will be reduced to zero, and
the Class B Investor Interest (after giving effect to reductions for any Class
B Investor Charge-Offs and any Reallocated Class B Principal Collections in
excess of the Collateral Interest as of such Distribution Date) will be
reduced by the amount by which the Collateral Interest would have been reduced
below zero. In the event that such reduction would cause the Class B Investor
Interest to be a negative number, the Class B Investor Interest will be
reduced to zero, and the Class A Investor Interest will be reduced by the
amount by which the Class B Investor Interest would have been reduced below
zero (a "Class A Investor Charge-Off"), which will have the effect of slowing
or reducing the return of principal and interest to the Class A Certificate
Holders. If the Class A Investor Interest has been reduced by the amount of
any Class A Investor Charge-Offs, it will be reimbursed on any Transfer Date
(but not by an amount in excess of the aggregate Class A Investor Charge-Offs)
by the amount of collections of Finance Charge Receivables, Excess Spread and
Shared Finance Charge Collections allocated and available for such purpose as
described under "--Allocation of Funds."
On each Determination Date, if the Class B Investor Default Amount exceeds
the amount of Excess Spread, Shared Finance Charge Collections and Reallocated
Collateral Principal Collections which are allocated and available to fund
such amount with respect to the Monthly Period preceding such Determination
Date, the Collateral Interest (after giving effect to reductions for any
Collateral Interest Charge-Offs and any Reallocated Principal Collections as
of the related Distribution Date and after giving effect to any adjustments
with respect thereto as described in the preceding paragraph) will be reduced
by the amount of such excess (but not by more than the Class B Investor
Default Amount for such Monthly Period). In the event that such reduction
would cause the Collateral Interest to be a negative number, the Collateral
Interest will be reduced to zero and the Class B Investor Interest will be
reduced by the amount by which the Collateral Interest would have been reduced
below zero (a "Class B Investor Charge-Off"). The Class B Investor Interest
will also be reduced by the amount of Reallocated Class B Principal
Collections in excess of the Collateral Interest (after giving effect to
reductions for any Collateral Interest Charge-Offs and any Reallocated
Collateral Principal Collections as of the related Distribution Date) and the
amount of any portion of the Class B Investor Interest allocated to the Class
A
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Certificates to avoid a reduction in the Class A Investor Interest. The Class
B Investor Interest will thereafter be reimbursed (but not in excess of the
unpaid principal balance of the Class B Certificates) on any Transfer Date by
the amount of Excess Spread and Shared Finance Charge Collections allocated
and available for that purpose as described under "--Allocation of Funds".
On each Determination Date, if the Collateral Default Amount exceeds the
amount of Excess Spread and Shared Finance Charge Collections which are
allocated and available to fund such amount with respect to the Monthly Period
preceding such Determination Date, the Collateral Interest will be reduced by
the amount of such excess but not more than the lesser of the Collateral
Default Amount and the Collateral Interest for such Transfer Date (a
"Collateral Interest Charge-Off"). The Collateral Interest will also be
reduced by the amount of Reallocated Collateral Principal Collections and the
amount of any portion of the Collateral Interest allocated to the Class A
Certificates to avoid a reduction in the Class A Investor Interest or to the
Class B Certificates to avoid a reduction in the Class B Investor Interest.
The Collateral Interest will thereafter be reimbursed on any Transfer Date by
the amount of Excess Spread allocated and available for that purpose as
described under "--Allocation of Funds". An "Investor Charge-Off" means a
Class A Investor Charge-Off, a Class B Investor Charge-Off or a Collateral
Interest Charge-Off, as the context requires.
The Servicer shall be obligated to reduce on a net basis at the end of each
Monthly Period the aggregate amount of Principal Receivables (i) created in
respect of merchandise refused or returned by the obligor thereunder or as to
which the obligor thereunder has asserted a counterclaim or defense, (ii)
reduced by the Servicer by any charge-back or other principal adjustment,
(iii) created as a result of a fraudulent or counterfeit charge, (iv)
resulting from adjustments relating to returned or dishonored checks, or (v)
resulting from Servicer error. The Interest will be reduced by the amount of
any such adjustment; provided, however, that if the Transferor Interest would
be reduced below the Minimum Transferor Interest by virtue of any such
adjustment, the Holder of the Exchangeable Transferor Certificate will be
required to make an adjustment payment to be deposited to the Excess Funding
Account in an amount equal to the amount by which the Transferor Interest
would have been reduced below the Minimum Transferor Interest.
REQUIRED COLLATERAL INTEREST
The "Required Collateral Interest" with respect to any Transfer Date means
(i) initially, the Initial Collateral Interest and (ii) thereafter on each
Transfer Date an amount equal to 8.25% of the sum of the Class A Adjusted
Investor Interest, the Class B Investor Interest and the Collateral Interest
on such Transfer Date, after taking into account all deposits into the
Principal Funding Account on such Transfer Date and all payments to be made on
the related Distribution Date after all adjustments made on such Transfer
Date, but not less than $15,000,000; provided, however, that (1) if certain
reductions in the Collateral Interest are made or if a Pay Out Event occurs,
the Required Collateral Interest for such Transfer Date shall equal the
Required Collateral Interest for the Transfer Date immediately preceding the
occurrence of such reduction or Pay Out Event, (2) in no event shall the
Required Collateral Interest exceed the unpaid principal amount of the Offered
Certificates as of the last day of the Monthly Period preceding such Transfer
Date, less cash held in the Principal Funding Account as of such Transfer
Date, after taking into account deposits and payments to be made on the
related Distribution Date and (3) the Required Collateral Interest may be
reduced to a lesser amount at any time upon written confirmation from the
Rating Agency that such reduction will not result in the Rating Agency
reducing or withdrawing its rating on the Class A Certificates or the Class B
Certificates.
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1997-2 Supplement, the Trustee will establish and
maintain with a Qualified Institution a segregated trust account held for the
benefit of the Class A Certificate Holders (the "Principal Funding Account").
During the Controlled Accumulation Period, the Trustee at the direction of the
Servicer will transfer Principal Collections (other than Reallocated Principal
Collections) and Shared Principal Collections from other Series, if any,
allocated to the Certificates from the Principal Account to the Principal
Funding Account as described under "--Application of Collections."
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Funds on deposit in the Principal Funding Account will be invested to the
following Transfer Date by the Trustee at the direction of the Servicer in
Permitted Investments. Investment earnings (net of investment losses and
expenses) on funds on deposit in the Principal Funding Account (the "Principal
Funding Investment Proceeds") will be used to pay interest on the Class A
Certificates up to an amount (the "Class A Covered Amount") equal to, for each
Transfer Date, the product of (a) a fraction, the numerator of which is the
actual number of days in the related Interest Period and the denominator of
which is 360, (b) the Class A Certificate Rate in effect with respect to the
related Interest Period and (c) the Principal Funding Account Balance as of
the preceding Distribution Date after giving effect to all payments, deposits
and withdrawals on such Distribution Date. If, for any Transfer Date, the
Principal Funding Investment Proceeds are less than the Class A Covered
Amount, the amount of such deficiency (the "Class A Principal Funding
Investment Shortfall") will be withdrawn, to the extent available, from the
Reserve Account and deposited in the Finance Charge Account and included as
Class A Available Funds for such Transfer Date.
RESERVE ACCOUNT
Pursuant to the Series 1997-2 Supplement, the Trustee will establish and
maintain with a Qualified Institution a segregated trust account held for the
benefit of the Class A Certificate Holders (the "Reserve Account"). The
Reserve Account is established to assist with the subsequent distribution of
interest on the Class A Certificates during the Controlled Accumulation
Period. On each Transfer Date from and after the Reserve Account Funding Date,
but prior to the termination of the Reserve Account, the Trustee, acting
pursuant to the Servicer's instructions, will apply Excess Spread allocated to
the Offered Certificates (to the extent described below under "--Allocation of
Funds--Excess Spread") to increase the amount on deposit in the Reserve
Account (to the extent such amount is less than the Required Reserve Account
Amount). The "Reserve Account Funding Date" will be the Transfer Date with
respect to the Monthly Period which commences no later than three months prior
to the commencement of the Controlled Accumulation Period, or such earlier
date as the Servicer may determine. The "Required Reserve Account Amount" for
any Transfer Date on or after the Reserve Account Funding Date will be equal
to (a) .50% of the Class A Investor Interest or (b) any other amount
designated by the Transferor; provided that if such designation is of a lesser
amount, the Transferor shall have provided the Servicer, the Collateral
Interest Holder and the Trustee with written confirmation from the Rating
Agency that such designation will not result in a reduction or withdrawal of
the Rating Agency's rating on the Class A Certificates or the Class B
Certificates and the Transferor shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to such officer at such time, in the reasonable belief of the
Transferor, such designation will not cause a Pay Out Event to occur and will
not cause an event that, after the giving of notice or the lapse of time,
would cause a Pay Out Event to occur with respect to Series 1997-2. On each
Transfer Date, after giving effect to any deposit to be made to, and any
withdrawal to be made from, the Reserve Account on such Transfer Date, the
Trustee will withdraw from the Reserve Account an amount equal to the excess,
if any, of the amount on deposit in the Reserve Account over the Required
Reserve Account Amount and distribute such excess to the Collateral Interest
Holder for application in accordance with the terms of the Loan Agreement.
Provided that the Reserve Account has not terminated as described below, all
amounts on deposit in the Reserve Account on any Transfer Date (after giving
effect to any deposits to, or withdrawals from, the Reserve Account to be made
on such Transfer Date) will be invested to the following Transfer Date by the
Trustee at the direction of the Servicer in Permitted Investments. The
interest and other investment income (net of investment expenses and losses)
earned on such investments will be retained in the Reserve Account (to the
extent the amount on deposit is less than the Required Reserve Account Amount)
or deposited in the Finance Charge Account and treated as Class A Available
Funds.
On or before each Transfer Date with respect to the Controlled Accumulation
Period and on the first Transfer Date with respect to the Rapid Amortization
Period, a withdrawal will be made from the Reserve Account, and the amount of
such withdrawal will be deposited in the Finance Charge Account and treated as
Class A Available Funds for such Transfer Date in an amount equal to the
lesser of (a) the Available Reserve Account Amount with respect to such
Transfer Date and (b) the Class A Principal Funding Investment Shortfall
77
with respect to such Transfer Date; provided that the amount of such
withdrawal will be reduced to the extent that interest and other investment
income on Reserve Account funds are deposited in the Finance Charge Account
and treated as Finance Charge Collections as described in the last sentence of
the immediately preceding paragraph. On each Transfer Date, the amount
available to be withdrawn from the Reserve Account (the "Available Reserve
Account Amount") will be equal to the lesser of the amount on deposit in the
Reserve Account (before giving effect to any deposit to be made to the Reserve
Account on such Transfer Date) and the Required Reserve Account Amount for
such Transfer Date.
The Reserve Account will be terminated upon the earlier to occur of (a) the
termination of the Trust pursuant to the Agreement and (b) if the Controlled
Accumulation Period has not commenced, the first Transfer Date with respect to
the Rapid Amortization Period or, if the Controlled Accumulation Period has
commenced, the earlier to occur of (i) the first Transfer Date with respect to
the Rapid Amortization Period and (ii) the Transfer Date immediately preceding
the Class A Scheduled Payment Date. Upon the termination of the Reserve
Account, all amounts on deposit therein (after giving effect to any withdrawal
from the Reserve Account on such date as described above) will be distributed
to the Collateral Interest Holder for application in accordance with the terms
of the Loan Agreement.
FINAL PAYMENT OF PRINCIPAL; TERMINATION OF TRUST
The Investor Interest will be subject to optional purchase by the Transferor
on any Distribution Date on or after which the Investor Interest is reduced to
an amount less than or equal to 5% of the Initial Investor Interest if certain
conditions set forth in the Agreement are met. The Investor Interest will be
subject to mandatory purchase by the Transferor on the Distribution Date
immediately preceding the Scheduled Series 1997-2 Termination Date if the
Investor Interest is reduced to an amount less than or equal to 5% of the
Initial Investor Interest, if certain conditions set forth in the Agreement
are met. The mandatory purchase requirement is in addition to any other
provisions and remedies provided by the Agreement and will not serve to
relieve any party of obligations it may otherwise have or waive any remedy
that is otherwise provided. The purchase price will be equal to the Investor
Interest, plus accrued and unpaid interest (other than Class A Excess Interest
or Class B Excess Interest, as the case may be) on the Certificates at the
applicable Offered Certificate Rate or Collateral Rate, as applicable, and any
other amounts owing under the Loan Agreement through the date preceding the
date on which the purchase occurs, less the amounts, if any, previously
accumulated for the payment of principal and interest. The net proceeds of
such purchase and any Collections on the Receivables will be distributed pro
rata to Certificate Holders and holders of other undivided interests in the
Trust, including the Certificate Holders, on the Distribution Date following
the Monthly Period in which such purchase occurs as final payment of the
Certificates. Subject to prior termination as provided above, the Agreement
provides that the final distribution of principal and interest on the Offered
Certificates will be made no later than the April 2005 Distribution Date (the
"Scheduled Series 1997-2 Termination Date").
Unless the Servicer and the Holder of the Exchangeable Transferor
Certificate instruct the Trustee otherwise, the Trust will terminate on the
earlier of: (a) the day after the Distribution Date with respect to any Series
following the day on which funds shall have been deposited in the Collection
Account or the applicable Series account sufficient to pay in full (i) the
aggregate investor interest of all Series outstanding plus accrued interest
thereon (other than Class A Excess Interest or Class B Excess Interest, as the
case may be) at the applicable certificate rates through the applicable
interest accrual period prior to the Distribution Date with respect to each
such Series and (ii) all amounts owed to each Enhancement Provider and (b) if
a trust extension has occurred, the extended trust termination date, which
shall be no later than the expiration of 21 years from the death of the last
survivor of the descendants of Joseph P. Kennedy, the father of the late
President of the United States, living on the date of the Agreement. Upon the
termination of the Trust and the surrender of the Exchangeable Transferor
Certificate, the Trustee shall convey to the Holder of the Exchangeable
Transferor Certificate all right, title and interest of the Trust in and to
the Receivables and other funds of the Trust (other than funds on deposit in
the Collection Account and other similar bank accounts of the Trust with
respect to other Series).
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In the event that the Investor Interest is greater than zero on the
Scheduled Series 1997-2 Termination Date, the Trustee will sell or cause to be
sold interests in the Receivables or certain Receivables as specified in the
Agreement, in an amount up to 110% of the Investor Interest of the
Certificates at the close of business on such date (but not more than the
total amount of Receivables allocable to the Certificates). The net proceeds
of such sale and any Collections on the Receivables will be distributed on the
Scheduled Series 1997-2 Termination Date, as the final payment of the
Certificates, first, pro rata to the Class A Certificate Holders in an amount
sufficient to pay the Class A Investor Interest in full, second, pro rata to
the Class B Certificate Holders in an amount sufficient to pay to Class B
Investor Interest in full, and the balance to the Collateral Interest Holder.
PAY OUT EVENTS
The Revolving Period will continue through the end of the May 2001 Monthly
Period and the Controlled Accumulation Period will begin at such time, unless
such date is postponed as described under "--Postponement of Controlled
Accumulation Period" or a Pay Out Event occurs prior to such date. The Rapid
Amortization Period will commence when a Pay Out Event occurs or is deemed to
occur. A Pay Out Event with respect to the Certificates refers to any of the
following events:
(i) failure on the part of the Transferor or the Holder of the
Exchangeable Transferor Certificate (a) to make any payment or deposit on
the date required under the Agreement (or within the applicable grace
period which will not exceed five business days), unless such failure is
due to certain force majeure events, or (b) duly to observe or perform in
any material respect any covenants or agreements of the Transferor, which
in the case of subclause (b) hereof has a material adverse effect on the
Certificate Holders (which determination shall be made without regard to
whether amounts are available under the Interest Rate Caps), continues
unremedied for a period of 60 days after written notice and continues to
affect materially and adversely the interests of the Certificate Holders
for such period;
(ii) any representation or warranty made by the Transferor in the
Agreement, including the Series 1997-2 Supplement, or any information
required to be given by the Transferor to the Trustee to identify the
Accounts proves to have been incorrect in any material respect when made
and continues to be incorrect in any material respect for a period of 60
days after written notice and as a result of which the interests of the
Certificate Holders are materially and adversely affected (which
determination shall be made without regard to whether amounts are available
under the Interest Rate Caps); provided, however, that a Pay Out Event
described in this clause (ii) shall not be deemed to occur if the
Transferor has accepted the transfer of the related Receivable or all such
Receivables, if applicable, during such period (or such longer period as
the Trustee may specify) in accordance with the provisions thereof;
(iii) certain events of insolvency, conservatorship or receivership
relating to the Transferor;
(iv) with respect to any Determination Date, the average of the Portfolio
Yields for the three consecutive Monthly Periods preceding such
Determination Date is a rate which is less than the average of the Base
Rates for such Monthly Periods;
(v) the Trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940, as amended;
(vi) after any applicable grace period, a failure by the Transferor to
convey Receivables in Additional Accounts to the Trust when required by the
Agreement;
(vii) any Servicer Default occurs which would have a material adverse
effect on the Certificate Holders (which determination shall be made
without regard to whether amounts are available under the Interest Rate
Caps);
(viii) failure to have paid the Class A Investor Interest in full on the
Class A Scheduled Payment Date or to have paid the Class B Investor
Interest in full on the Class B Scheduled Payment Date; or
(ix) failure of the Interest Rate Cap Provider to make any payment under
the Class A Interest Rate Cap or the Class B Interest Rate Cap within five
days of the date such payment was due.
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In the case of any event described in clause (i), (ii) or (vii), a Pay Out
Event will be deemed to have occurred with respect to the Certificates only
if, after any applicable grace period described in such clauses, either the
Trustee or Certificate Holders evidencing undivided interests aggregating more
than 50% of each of the Class A Investor Interest, the Class B Investor
Interest and the Collateral Interest, by written notice to the Transferor and
the Servicer (and to the Trustee, if given by the Certificate Holders) declare
that, as of the date of such notice, a Pay Out Event has occurred. In the case
of either event described in clause (iii) or (v), a Pay Out Event with respect
to all Series, and in the case of any event described in clause (iv), (vi),
(viii), or (ix), a Pay Out Event with respect to only the Certificates, will
be deemed to have occurred, without any notice or other action on the part of
the Trustee, the Certificate Holders or all Certificate Holders, as
appropriate, immediately upon the occurrence of such event. The Rapid
Amortization Period will commence on the date a Pay Out Event occurs or is
deemed to have occurred. Monthly distributions of principal to the Certificate
Holders will begin (if they have not already) on the first Distribution Date
in the Monthly Period following the Monthly Period in which such Pay Out Event
occurs. Thus, Certificate Holders may begin receiving distributions of
principal earlier than they otherwise would have, which may shorten the final
maturity of the Certificates.
In addition to the consequences of a Pay Out Event discussed above, if
pursuant to certain provisions of federal or state law, the Transferor
voluntarily enters liquidation or a receiver is appointed for the Transferor
(an "Insolvency Event"), on the day of such event the Transferor will
immediately cease to transfer Principal Receivables to the Trust and promptly
give notice to the Trustee of such event. Under the terms of the Agreement,
within 15 days, the Trustee will publish a notice of the occurrence of the
Insolvency Event stating that the Trustee intends to sell, dispose of, or
otherwise liquidate the Receivables in a commercially reasonable manner,
unless otherwise instructed within a specified period by the Certificate
Holders and other holders of undivided interests in the Trust representing
undivided interests aggregating more than 50% of the investor interest of each
Series (or, with respect to any Series with two or more classes, 50% of each
class) to the effect that such Certificate Holders and interest holders
disapprove of the liquidation of Receivables and wish to continue having
Principal Receivables transferred to the Trust as before such Insolvency
Event, and if not so instructed the Trustee will sell, dispose of, or
otherwise liquidate the portion of the Receivables allocable to each Series
that did not vote to disapprove of the liquidation of the Receivables in
accordance with the Agreement in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from the sale, disposition or
liquidation of the Receivables will be treated as Collections of the
Receivables and applied as provided above in "--Application of Collections".
If the only Pay Out Event to occur is either the insolvency of a Transferor
or the appointment of a conservator or receiver for a Transferor, the
conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of the
Rapid Amortization Period. In addition, a conservator or receiver may have the
power to cause the early sale of the Receivables and the early retirement of
the Certificates.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Agreement, the Servicer is responsible for servicing,
collecting, enforcing and administering the Receivables in accordance with the
policies and procedures for servicing credit card receivables and exercising a
degree of skill and care consistent with those of a reasonable and prudent
servicer of credit card receivables, but in any event at least comparable with
the policies and procedures and the degree of skill and care applied or
exercised with respect to its own credit card receivables. The Servicer
maintains blanket bond coverage insuring against losses through wrongdoing of
its officers and employees who are involved in the servicing of credit card
receivables covering such actions and in such amounts as the Servicer believes
to be reasonable from time to time.
Servicing activities performed by the Servicer include collecting and
recording payments, communicating with cardholders, investigating payment
delinquencies, evaluations in relation to increasing credit limits and in
issuing credit cards, providing billing records to cardholders and maintaining
internal records with respect to each Account. Managerial and custodial
services performed by the Servicer on behalf of the Trust include providing
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assistance in any inspections of the documents and records relating to the
Accounts and Receivables by the Trustee pursuant to the Agreement, maintaining
the agreements, documents and files relating to the Accounts and Receivables
as custodian for the Trust and providing related data processing and reporting
services for Certificate Holders and on behalf of the Trustee.
SERVICER COVENANTS
In the Agreement, the Servicer covenants with the Certificate Holders
(including the Certificate Holders) and the Trustee, as to each Receivable and
related Account, that: (a) it will duly fulfill all obligations on its part to
be fulfilled under or in connection with the Receivables and the related
Accounts, and will maintain in effect all qualifications required in order to
service the Receivables and the related Accounts, the failure to comply with
which would have a material adverse effect on the Certificate Holders
(including the Certificate Holders); (b) it will not permit any rescission or
cancellation of the Receivables, except in accordance with the credit and
collection policies of the Transferor or as ordered by a court of competent
jurisdiction or other governmental authority; (c) it will do nothing to impair
the rights of the Certificate Holders (including the Certificate Holders) in
the Receivables or the related Accounts; and (d) it will not reschedule,
revise or defer payments due on the Receivables except in accordance with the
credit and collection policies of the Transferor for servicing receivables.
Under the terms of the Agreement, all Receivables in an Account will be
assigned and transferred or reassigned and transferred to the Servicer and
such account shall no longer be included as an Account if the Servicer
discovers, or receives written notice from the Trustee, that any covenant of
the Servicer set forth above has not been complied with and such noncompliance
has not been cured within 60 days thereafter and has a material adverse effect
on the Certificate Holders' interest in such Receivable. If the Transferor is
the Servicer, such reassignment and retransfer shall be made on or before the
end of the Monthly Period in which such reassignment obligation arises, by the
Servicer deducting the portion of any such Receivable which is a Principal
Receivable from the aggregate amount of Principal Receivables used to
calculate the Transferor Interest. In addition, if the Transferor Interest
would be reduced below the Minimum Transferor Interest, People's Bank as
Servicer will deposit into the Collection Account an amount equal to the
amount by which the Transferor Interest will be reduced below the Minimum
Transferor Interest (such reassignment and retransfer to the Servicer to be
effected only upon such deposit by the Servicer in the Excess Funding
Account). If the Transferor is not the Servicer, such assignment and transfer
will be made when the Servicer deposits an amount equal to the amount of such
Receivable in the Collection Account no later than the Transfer Date following
the Monthly Period during which such obligation arises. The amount of such
deposit shall be allocated as Collections pursuant to the Agreement. In either
case, this retransfer and reassignment or transfer and assignment to the
Servicer constitutes the sole remedy available to the Certificate Holders if
such covenant or warranty of the Servicer is not satisfied. In either case,
the Trust's interest in any such assigned Receivables shall be automatically
assigned to the Servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's compensation for its servicing activities and reimbursement
for its expenses is a monthly servicing fee (the "Servicing Fee"). The
Servicing Fee will be allocated among the Transferor Interest (the "Transferor
Servicing Fee"), the Certificate Holders, Certificate Holders of all of the
other Series and other holders of undivided interests in the Trust. The
portion of the Servicing Fee allocable to each Series of certificates,
including the Certificates, on any Distribution Date will generally be equal
to one-twelfth of the product of (a) the applicable servicing fee percentage
with respect to such Series and (b) the investor interest of such Series with
respect to the last day of the related Monthly Period. The portion of the
Servicing Fee allocable to each of the Class A Certificate Holders, the Class
B Certificate Holders and the Collateral Interest Holder on each Distribution
Date (respectively, the "Class A Monthly Servicing Fee", the "Class B Monthly
Servicing Fee" and the "Collateral Interest Monthly Servicing Fee"; together,
the "Monthly Servicing Fees") will be equal to one-twelfth of the product of
2% per annum (the "Servicing Fee Rate") and the Class A Adjusted Investor
Interest, the Class B Investor Interest or the Collateral Interest, as the
case may be, as of the last day of
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the related Monthly Period. The Monthly Servicing Fees will be paid each month
from the Finance Charge Account; however, payment thereof will be made after
payment to Certificate Holders of certain distributions of interest therefrom.
On any Distribution Date with respect to any Monthly Period, the Transferor
Servicing Fee will equal one-twelfth of the product of (a) the Transferor
Interest and (b) the weighted average servicing fee percentage with respect to
all Series of certificates.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Receivables including, without
limitation, payment of the fees and disbursements of the Trustee, Paying
Agent, Transfer Agent and Registrar and independent accountants and other fees
which are not expressly stated in the Agreement to be payable by the Trust or
the Certificate Holders other than federal, state and local income and
franchise taxes, if any, of the Trust.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from its obligations and duties under the
Agreement, except upon determination that performance of its duties is no
longer permissible under applicable law and except as described below. No such
resignation will become effective until the Trustee or a successor to the
Servicer has assumed the Servicer's responsibilities and obligations under the
Agreement. Notwithstanding the foregoing, People's Bank may transfer its
servicing obligations to any of its affiliates (which meets certain
eligibility standards set forth in the Agreement) or, subject to certain
conditions set forth in the Agreement, to any other entity which the Rating
Agency has advised in writing will not result in the reduction or withdrawal
of its then existing rating of the Certificates and be relieved of its
obligations and duties under the Agreement.
The Agreement provides that the Servicer will indemnify the Trust, for the
benefit of the Certificate Holders (including the Certificate Holders), and
the Trustee from and against any reasonable loss, liability, expense, damage
or injury suffered or sustained by reason of any acts or omissions or alleged
acts or omissions of the Servicer with respect to the activities of the Trust
or the Trustee pursuant to the Agreement; provided, however, that the Servicer
shall not indemnify (a) the Trustee for liabilities imposed by reason of or
resulting from fraud, negligence, breach of fiduciary duty or willful
misconduct by the Trustee in the performance of its duties under the
Agreement, (b) the Trust, the Certificate Holders or the Offered Certificate
Owners for liabilities arising from actions taken by the Trustee at the
request of Certificate Holders, (c) the Trust, the Certificate Holders or the
Offered Certificate Owners for any losses, claims, damages or liabilities
incurred by any Certificate Holder in its capacity as an investor, including
without limitation, losses incurred as a result of defaulted Receivables or
Receivables which are written off as uncollectible or (d) the Trust, the
Certificate Holders or the Offered Certificate Owners for any liabilities,
costs or expenses of the Trust, the Certificate Holders or the Offered
Certificate Owners arising under any tax law, including without limitation any
federal, state or local income or franchise tax or any other tax imposed on or
measured by income (or any interest or penalties with respect thereto or
arising from a failure to comply therewith) required to be paid by the Trust,
the Certificate Holders or the Offered Certificate Owners in connection
therewith to any taxing authority.
The Agreement provides that neither the Transferor nor the Servicer nor any
of their respective directors, officers, employees or agents will be under any
other liability to the Trust, the Certificate Holders or any other person for
any action taken, or for refraining from taking any action, in good faith
pursuant to the Agreement. Neither the Transferor, the Servicer nor any of
their respective directors, officers, employees or agents will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence of the Transferor, the Servicer or
any such person in the performance of its duties or by reason of reckless
disregard of obligations and duties thereunder. In addition, the Agreement
provides that the Servicer is not under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability.
The Agreement provides that, in addition to Exchanges, the Holder of the
Exchangeable Transferor Certificate may transfer all or a portion of the
Exchangeable Transferor Certificate to any other party upon written consent of
the Transferor; provided, however, that, in each case, prior to any such
transfer (i) (a) the Trustee
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receives written notification from the Rating Agency then rating each Series
that such transfer will not result in a lowering of its then-existing rating
of the certificates rated by it and (b) the Trustee receives (among other
things) a written opinion of counsel confirming that such transfer would not
adversely affect the treatment of the Certificates of each series as debt for
Federal, New York or Connecticut state income tax purposes or result in the
trust being treated as a taxable entity and will not be treated as a taxable
exchange to Certificate Holders or (ii) such transfer complies with the
provisions of the next succeeding paragraph. The Transferor, in its capacity
as the original holder of the Exchangeable Transferor Certificate, transferred
its interest in the Exchangeable Transferor Certificate to PSFC in accordance
with the requirements described in clause (i) of the preceding sentence,
pursuant to an Assignment and Assumption Agreement dated as of December 15,
1995 by and between the Transferor and PSFC.
Any person into which, in accordance with the Agreement, the Transferor or
the Servicer may be merged or consolidated or any person resulting from any
merger or consolidation to which the Transferor or the Servicer is a party, or
any person succeeding to the business of the Transferor or the Servicer, upon
execution of a supplemental agreement for the assumption of the Transferor's
or Servicer's obligations and delivery of an officer's certificate with
respect to the compliance of the transaction with the applicable provisions of
the Agreement and an opinion of counsel to the effect that such supplemental
agreement is legal, valid and binding, will be the successor to the Transferor
or the Servicer, as the case may be, under the Agreement. The Transferor may
effect any sale, transfer or pledge of the Accounts or any of its obligations
under the Agreement or effect any merger, consolidation or assumption which is
not in accordance with the provisions of the preceding sentence so long as,
among other conditions set forth in the Agreement: (a) the Transferor and
Servicer determine that such event will not be adverse to the interests of the
Certificate Holders of any Series; (b) the Rating Agency indicates that such
event will not adversely affect the then-existing rating of certificates of
any Series outstanding, including the Certificates; and (c) the purchaser,
transferee, pledgee or successor entity executes a supplemental agreement
whereby such entity agrees to assume the obligations of the Transferor.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or Certificate Holders and other interest holders representing undivided
interests aggregating more than 50% of the sum of the investor interests of
all certificates and other undivided interests in the Trust outstanding, by
written notice to the Servicer (and to the Trustee if given by the Certificate
Holders and interest holders), may terminate all of the rights and obligations
of the Servicer as servicer under the Agreement and in and to the Receivables
and the proceeds thereof and the Trustee may appoint a new Servicer (a
"Service Transfer"). The rights and interest of the Transferor and the Holder
of the Exchangeable Transferor Agreement under the Agreement and, as
applicable, in the Transferor Interest will not be affected by such
termination. The Trustee shall as promptly as possible appoint a successor
Servicer, which successor Servicer must satisfy certain eligibility criteria
contained in the Agreement. If no such Servicer has been appointed and has
accepted such appointment by the time the Servicer ceases to act as Servicer,
all authority, power and obligations of the Servicer under the Agreement shall
pass to and be vested in the Trustee. If the Trustee is unable to obtain any
bids from eligible servicers and the Servicer delivers an officer's
certificate to the effect that it cannot in good faith cure the Servicer
Default which gave rise to a transfer of servicing, and if the Trustee is
legally unable to act as successor Servicer, then the Trustee shall give the
Transferor the right to accept reassignment of the Receivables at a price
generally equal to the higher of the outstanding principal balance of the
certificates plus accrued interest through the date of reassignment and the
average bid quoted by two recognized dealers for a similar security rated in
the highest rating category by the Rating Agency and having a remaining
maturity approximately equal to the remaining maturity of such Series.
A "Servicer Default" refers to any of the following events:
(a) failure by the Servicer to make any payment, transfer or deposit or
to give instructions to the Trustee to make any withdrawal, on the date the
Servicer is required to do so under the Agreement (or within the applicable
grace period, which shall not exceed five business days);
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(b) failure on the part of the Servicer duly to observe or perform in any
respect any other covenants or agreements of the Servicer which has a
material adverse effect on the holders of outstanding Series, including the
Certificate Holders (which determination shall be made without regard to
whether funds are available in any Enhancement) and which continues
unremedied for a period of 60 days after written notice and continues to
have a material adverse effect on the Certificate Holders for such period;
or the delegation by the Servicer of its duties under the Agreement, except
as specifically permitted thereunder;
(c) any representation, warranty or certification made by the Servicer in
the Agreement or any Supplement, or in any certificate delivered pursuant
to the Agreement or any Supplement, proves to have been incorrect when made
which has a material adverse effect on the rights of Certificate Holders
(which determination shall be made without regard to whether funds are
available in any Enhancement) and which continues to be incorrect in any
material respect for a period of 60 days after written notice; or
(d) the occurrence of certain events of bankruptcy, insolvency or
receivership of the Servicer.
In the event of a Servicer Default, if a conservator or receiver is
appointed for the Servicer and no Servicer Default other than such
conservatorship or receivership or the insolvency of the Servicer exists, the
conservator or receiver may have the power to prevent either the Trustee or
the majority of the Certificate Holders from effecting a Service Transfer.
REPORTS TO CERTIFICATE HOLDERS
On each Distribution Date, the Paying Agent will forward to each Certificate
Holder of record a statement (the "Monthly Servicer Report") prepared by the
Servicer setting forth among other things: (a) the total amount distributed to
Class A Certificate Holders, the Class B Certificate Holders and the
Collateral Interest Holder, respectively, (b) the amount of the distribution
made on such Distribution Date allocable to Class A Monthly Principal, Class B
Monthly Principal and Collateral Monthly Principal, respectively, (c) the
amount of the distribution made on such Distribution Date allocable to Class A
Monthly Interest, Class B Monthly Interest and Collateral Monthly Interest,
respectively, (d) the amount of Principal Collections processed during the
preceding Monthly Period and allocated in respect of the Class A Certificates,
the Class B Certificates and the Collateral Interest, respectively, (e) the
aggregate amount of Principal Receivables, the Investor Interest, the Adjusted
Investor Interest, the Class A Investor Interest, the Class A Adjusted
Investor Interest, the Class B Investor Interest and the Collateral Interest,
and the Floating Investor Percentage, Class A Floating Allocation, the Class B
Floating Allocation and the Collateral Floating Allocation, the Fixed Investor
Percentage, the Class A Fixed Allocation, the Class B Fixed Allocation and the
Collateral Fixed Allocation, in each case as of the end of the last day of the
preceding Monthly Period, (f) the aggregate outstanding balance of Accounts
which are up to 30 days delinquent, 31 to 60 days delinquent, and 61 or more
days delinquent in accordance with the Servicer's then-existing credit card
guidelines by class of delinquency as of the end of the preceding Monthly
Period, (g) the Class A Investor Default Amount, the Class B Investor Default
Amount and the Collateral Default Amount for the preceding Monthly Period, (h)
the aggregate amount of Class A Investor Charge-Offs, Class B Investor Charge-
Offs and Collateral Interest Charge-Offs for the preceding Monthly Period and
the aggregate amount of Investor Charge-Offs reimbursed to each class on the
Transfer Date immediately preceding such Distribution Date, (i) the amount of
the Class A Monthly Servicing Fee, the Class B Monthly Servicing Fee and the
Collateral Interest Monthly Servicing Fee for the preceding Monthly Period,
(j) the "Pool Factor" as of the end of the last day of the preceding Monthly
Period (consisting of a seven-digit decimal expressing the ratio of Investor
Interest to Initial Investor Interest), (k) the Principal Funding Account
Balance as of the related Transfer Date, (l) the Accumulation Shortfall for
the preceding Monthly Period, (m) the Principal Funding Investment Proceeds
transferred to the Finance Charge Account on the related Transfer Date, (n)
the Class A Principal Funding Investment Shortfall on the related Transfer
Date, (o) the amount of Class A Available Funds and Class B Available Funds on
deposit in the Finance Charge Account on the related Transfer Date, (p) the
aggregate amount of Finance Charge Collections allocable to the Investor
Interest for the preceding Monthly Period, (q) the Required Amounts, if any,
and, if the amount payable under the Interest Rate Caps and Shared Finance
Charge Collections available to the Certificates are insufficient to satisfy
the Required Amounts, the amount of Reallocated Collateral Principal
Allocations and Reallocated Class B Principal Allocations to be applied
thereto,
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and any reductions in the Collateral Interest and the Class B Investor
Interest to satisfy the Class A Required Amount and the Class B Required
Amount, as the case may be, (r) the Available Reserve Account Amount and the
Reserve Account Draw, and (s) the ratio of the Collateral Interest to the
Investor Interest of the Certificates as of the last day of the preceding
Monthly Period.
On or before January 31 of each calendar year, beginning with 1998, the
Paying Agent will furnish to each person who at any time during the preceding
calendar year was an Offered Certificate Holder of record a statement prepared
by the Servicer containing the information required to be contained in the
Monthly Servicer Report, as set forth in clauses (a), (b) and (c) above
aggregated for such calendar year or the applicable portion thereof during
which such person was an Offered Certificate Holder, together with such other
customary information (consistent with the treatment of the Offered
Certificates as debt) as the Trustee or the Servicer deems necessary or
desirable to enable the Offered Certificate Holders to prepare their tax
returns.
The Trustee will publish or will cause to be published following each
Distribution Date (including the Scheduled Series 1997-2 Termination Date) in
a daily newspaper in Luxembourg (expected to be the Luxemburger Wort) a notice
to the effect that the information described in "Description of the
Certificates--Reports to Certificate Holders" in the prospectus will be
available for review at the main office of the listing agent of the Trust in
Luxembourg.
Notices to Certificate Holders will be given by publication in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort. In the
event that Definitive Certificates are issued, notices to Certificate Holders
will also be given by mail to the addresses of such holders as they appear in
the certificate register.
EVIDENCE AS TO COMPLIANCE
The Agreement provides that on or before March 31 of each calendar year, the
Servicer will cause a firm of independent accountants to furnish a report to
the effect that such firm has made a study and evaluation of the Servicer's
internal accounting controls relative to the servicing of Accounts under the
Agreement, and that, on the basis of such study and evaluation, such firm is
of the opinion that the system of internal accounting controls in effect on
the date set forth in such report relating to certain servicing procedures
performed by the Servicer under the Agreement, taken as a whole, was
sufficient for the prevention and detection of errors and irregularities in
amounts that would be material to the financial statements of the Servicer and
that such servicing was conducted in compliance with the applicable sections
of the Agreement, except for such exceptions, errors or irregularities as such
firm shall believe to be immaterial to the financial statements of the
Servicer and such other exceptions, errors or irregularities as shall be set
forth in such report. In addition, on or before March 31 of each calendar
year, such firm has compared or will compare the amounts contained in the
Servicer's statements and certificates delivered during such year with the
computer reports of the Servicer and statements of any agents engaged by the
Servicer to perform servicing activities which were the source of such amounts
and deliver a report confirming that such amounts are in agreement except for
such exceptions as it believes to be immaterial to the financial statements of
the Servicer and such other exceptions as shall be set forth in such report.
The Agreement provides for delivery to the Trustee, on or before March 31 of
each calendar year, of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fully performed, or has caused to
be performed, its obligations in all material respects under the Agreement
throughout the preceding year, or, if there has been a default in the
performance of any such obligation in any material respect, specifying the
nature and status of the default.
AMENDMENTS
The Agreement and any Supplement may be amended by the Transferor, the
Servicer and the Trustee, without certificate holder consent, to cure any
ambiguity, to correct or supplement any provision therein which may be
inconsistent with any other provision therein, and to add any other provisions
with respect to matters or questions arising under the Agreement and any
Supplement which are not inconsistent with the provisions of the
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Agreement and any Supplement. See "The Receivables". The Agreement may be
amended from time to time without the consent of the Certificate Holders by
the Trustee, and by the Transferor or the Servicer with the consent of the
Trustee, to (a) provide for the transfer by the Transferor of its interest in
and to all or part of the Accounts in accordance with the provisions of the
Agreement and (b) provide for the purchase of Principal Receivables by the
Trust at a price which is less than 100% of the outstanding balance thereof,
and to provide for the treatment of Principal Collections, in an amount up to
the aggregate amount by which the purchase price of Principal Receivables as
sold thereafter is less than 100%, as Finance Charge Collections; provided,
however, that any such action shall not adversely affect in any material
respect the interests of the Certificate Holders (each Certificate Holder will
be deemed to have agreed that the exercise of such option by the Transferor,
at such time the Transferor determines to exercise such options, will not
adversely affect in any material respects the interests of Certificate
Holders); provided, further, however, that the Servicer and the Trustee shall
have received notice from the Rating Agency that any such amendment will not
result in the reduction or withdrawal of its then-existing rating of the
certificates of any Series. Moreover, any Supplement and any amendments
regarding the addition or removal of Receivables to or from the Trust will not
be considered amendments requiring certificate holder consent under the
provisions of the Agreement or any Supplement.
The Agreement may be amended by the Transferor, the Servicer and the Trustee
with the consent of the holders of certificates evidencing undivided interests
aggregating not less than 66 2/3% of the principal amount of all Series
adversely affected, for the purpose of adding any provisions to, changing in
any manner or eliminating any of the provisions of the Agreement or any
Supplement or of modifying in any manner the rights of Certificate holders of
any Series. No such amendment, however, may (a) reduce in any manner the
amount of, or delay the timing of, distributions required to be made on such
Series, (b) change the definition of or the manner of calculating the interest
of any certificate holder of such Series or (c) reduce the aforesaid
percentage of undivided interests, the holders of which are required to
consent to any such amendment, in each case without the consent of all
Certificate holders of all Series adversely affected. Promptly following the
execution of any amendment to the Agreement or any Supplement, the Trustee
will furnish written notice of the substance of such amendment to each
certificate holder of all Series (or with respect to an amendment of a
Supplement, to the applicable Series).
LIST OF CERTIFICATE HOLDERS
Upon written request of Certificate Holders of record representing undivided
interests in the Trust aggregating not less than 10% of the Investor Interest,
the Trustee after having been adequately indemnified by such Certificate
Holders for its costs and expenses, and having given the Servicer notice that
such request has been made, will afford such Certificate Holders access during
business hours to the current list of Certificate Holders of the Trust for
purposes of communicating with other Certificate Holders with respect to their
rights under the Agreement. The Agreement generally does not provide for any
annual or other meetings of Certificate Holders. See "--Book Entry
Registration" and "--Definitive Certificates" above.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor independently represents and warrants in the Agreement that
the transfer of Receivables, Interchange and Recoveries constitutes either a
valid transfer and assignment to the Trust of all right, title and interest of
the Transferor in and to the Receivables, Interchange and Recoveries, except
for the interest of the Transferor as the then current holder of the
Exchangeable Transferor Certificate, or the grant to the Trust of a security
interest in such property. The Transferor also independently represents and
warrants in the Agreement that, in the event the transfer of Receivables,
Interchange and Recoveries by the Transferor to the Trust is deemed to create
a security interest under the Uniform Commercial Code (the "UCC"), as in
effect in the State of New York, there will exist a valid, subsisting and
enforceable first priority perfected security interest in such property in
existence at the time of the formation of the Trust in favor of the Trust and
a valid, subsisting and enforceable first priority perfected security interest
in such property created thereafter in favor of the Trust on and after their
86
creation, except for certain tax and other customary liens. For a discussion
of the Trust's rights arising from a breach of these warranties, see
"Description of the Certificates--Representations and Warranties".
The Transferor independently represents that the Receivables are "accounts"
or "general intangibles" for purposes of the UCC as in effect in the States of
New York and Connecticut. The transfer and assignment of accounts and the
transfer of accounts and general intangibles as security for an obligation are
covered by Article 9 of the UCC, with the transfer and assignments of accounts
treated in the same fashion as the creation and perfection of a security
interest therein. The filing of an appropriate financing statement is required
to perfect the interest of the Trust therein. Financing statements covering
the Receivables have been filed with the appropriate governmental authority to
protect the interests of the Trust in the Receivables.
There are certain limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the closing
date of the issuance by the Trust of the initial Series of certificates could
have an interest in such Receivables with priority over the Trust's interest.
Under the Agreement, however, the Transferor represents and warrants that it
has transferred the Receivables to the Trust free and clear of the lien of any
third party. In addition, the Transferor covenants that it will not sell,
pledge, assign, transfer or grant any lien on any Receivable (or any interest
therein) other than to the Trust. A tax or other government lien on property
of the Transferor arising prior to the time a Receivable comes into existence
may also have priority over the interest of the Trust in such Receivable. In
addition, if the FDIC were appointed as receiver of the Transferor, certain
administrative expenses of the receiver or the State of Connecticut Department
of Banking may have priority over the interest of the Trust in such
Receivable.
CERTAIN MATTERS RELATING TO CONSERVATORSHIP AND RECEIVERSHIP
The Transferor is chartered as a Connecticut stock savings bank and is
subject to regulation and supervision by the State of Connecticut Department
of Banking. If the Transferor becomes insolvent or is in an unsound condition
or if certain other circumstances occur, the State of Connecticut Department
of Banking may request the Attorney General of Connecticut to apply to the
Connecticut Court for an order appointing a conservator or receiver for the
Transferor. Since the Transferor is a FDIC-insured bank, Connecticut law
requires the conservator or receiver to be the Connecticut Banking
Commissioner and permits the Commissioner to request that the FDIC be
appointed conservator or receiver. In addition, the FDIC may appoint itself as
conservator or receiver for the Transferor if the FDIC determines that one or
more of certain conditions exist (such as, but not limited to, the
Transferor's assets being insufficient for obligations, substantial
dissipation of assets or earnings, the existence of unsafe or unsound
conditions, the willful violation of a cease and desist order, concealment of
records or assets, inability to meet obligations, the incurrence (or
likelihood) of losses resulting in depletion of substantially all of its
capital, violations of law likely to cause financial deterioration, cessation
of insured status or undercapitalization of the Transferor).
The FDIA sets forth certain powers that the FDIC in its capacity as
conservator or receiver for the Transferor could exercise. To the extent that
the Transferor has granted a security interest in the Receivables to the
Trust, and that interest was validly perfected before the appointment of the
FDIC as conservator or receiver and before the Transferor's insolvency, was
not taken in contemplation of the insolvency of the Transferor, and was not
taken with the intent to hinder, delay or defraud the Transferor or the
creditors of the Transferor, such security interest should not be subject to
avoidance if the Pooling and Servicing Agreement and Supplements thereto and
related documents are approved by the Transferor and are continuously
maintained as records of the Transferor (as required by the FDIA) and the
transactions represent bona fide and arm's length transactions undertaken for
adequate consideration in the ordinary course of business and the secured
party is neither an insider nor an affiliate of the Transferor. As a result,
payments to the Trust with respect to the Receivables (up to the amount of
actual, direct compensatory damages, as described below) should not be subject
to recovery by the FDIC as conservator or receiver of the Transferor. The
foregoing conclusions regarding avoidance or recovery are based on FDIC
general counsel opinions and policy statements regarding the application of
certain provisions of the FDIA. If, however, the FDIC, as conservator or
receiver for the Transferor were to assert a contrary position, or were to
require the Trustee to establish its right to those payments by submitting to
and
87
completing the administrative claims procedure established under the FDIA, or
the conservator or receiver were to request a stay of proceedings with respect
to the Transferor as provided under the FDIA, delays in payments on the
Certificates and possible reductions in the amount of those payments could
occur. The FDIA provides that the FDIC may repudiate contracts determined by
it to be burdensome and that claims for repudiated obligations are limited to
actual, direct compensatory damages determined as of the date of the
appointment of the conservator or receiver. The FDIA does not define the term
"actual direct compensatory damages". On April 10, 1990, the RTC, formerly a
sister agency of the FDIC, adopted a statement of policy (the "RTC Policy
Statement") with respect to the payment of interest on direct collateralized
borrowings of savings associations. The RTC Policy Statement states that
interest on such borrowings will be payable at the contract rate up to the
date of the redemption or payment by the conservator, receiver, or the trustee
of an amount equal to the principal owed plus the contract rate of interest up
to the date of such payment or redemption, plus any expenses of liquidation if
provided for in the contract to the extent secured by the collateral. However,
in a case involving zero-coupon bonds issued by a savings association which
were repudiated by the RTC, a federal district court in the Southern District
of New York held, in 1993, that the RTC was obligated to pay holders the fair
market value of repudiated bonds as of the date of repudiation. The FDIC
itself has not adopted a policy statement on payment of interest on
collateralized borrowings of banks. The FDIC, as conservator or receiver,
would also have the rights and powers conferred under Connecticut law.
The Agreement provides that, upon the appointment of a conservator or
receiver or upon a voluntary liquidation with respect to the Transferor, the
Transferor will promptly give notice thereof to the Trustee and a Pay Out
Event will occur with respect to all Series then outstanding. Pursuant to the
Agreement, newly created Principal Receivables will not be transferred to the
Trust on and after any such appointment or voluntary liquidation (although
Finance Charge Receivables on existing balances will continue to be
transferred), and unless otherwise instructed within a specified period by
holders of more than 50% of the investor interest of each Series outstanding
(or, with respect to any Series with two or more classes, 50% of each class)
to the effect that such Certificate Holders disapprove of the liquidation of
the Receivables and wish to continue having Principal Receivables transferred
to the Trust as before such appointment or voluntary liquidation, the Trustee
will proceed to sell, dispose of or otherwise liquidate the portion of the
Receivables allocable to each Series that did not vote to disapprove of the
liquidation of the Receivables in accordance with the Agreement in a
commercially reasonable manner and on commercially reasonable terms. There can
be no assurance, however, that a receiver or conservator will allow and not
seek avoidance of continued transfer of Receivables to the Trust after
receivership or conservatorship of the Transferor. Under the Agreement, the
proceeds from the sale of the Receivables would be treated as Collections of
the Receivables and the Investor Percentage of such proceeds would be
distributed to the Certificate Holders. This procedure could be delayed, as
described above. If the only Pay Out Event to occur is either the insolvency
of the Transferor or the appointment of a conservator or receiver for the
Transferor, the conservator or receiver may have the power to prevent the
early sale, liquidation or disposition of the Receivables, the commencement of
the Rapid Amortization Period and the transfer of servicing obligations from
the Transferor. A conservator or receiver would have the power to cause the
early sale of the Receivables and the early retirement of the Certificates, to
prohibit the continued transfer of Principal Receivables to the Trust, and to
repudiate the servicing obligations of the Transferor. See "Description of the
Certificates--Pay Out Events". In addition, the appointment of a receiver or
conservator could adversely affect the Transferor's ability to repurchase
ineligible Receivables from the Trust or make cash deposits in respect of
credits, adjustments or fraudulent charges and could result in administrative
expenses of the receiver or conservator having priority over the interest of
the Trust in the Receivables.
CONSUMER PROTECTION LAWS
The relationship of the cardholder and credit card issuer is extensively
regulated by federal and state consumer protection laws. With respect to
credit cards issued by the Transferor, the most significant laws include the
federal Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting,
Fair Debt Collection Practice and Electronic Funds Transfer Acts and
applicable state law. These statutes impose disclosure requirements when a
credit card account is advertised, when it is opened, at the end of monthly
Billing Cycles, and at year end. In
88
addition, these statutes limit cardholder liability for unauthorized use,
prohibit certain discriminatory practices in extending credit, and impose
certain limitations on the type of account-related charges that may be
assessed. Cardholders are entitled under these laws to have payments and
credits applied to the credit card accounts promptly, to receive prescribed
notices and to require billing errors to be resolved promptly. The Trust may
be liable for certain violations of consumer protection laws that apply to the
Receivables, either as assignee from the Transferor with respect to
obligations arising before transfer of the Receivables to the Trust or as a
party directly responsible for obligations arising after the transfer. In
addition, a cardholder may be entitled to assert such violations by way of
set-off against his obligation to pay the amount of Receivables owing. The
Transferor warrants to the Trust in the Agreement that all Receivables have
been and will be created in compliance with the requirements of such laws. The
Servicer has also agreed in the Agreement to indemnify the Trust, among other
things, for any liability arising from such violations caused by the Servicer.
For a discussion of the Trust's rights arising from the breach of these
warranties, see "Description of the Certificates--Representations and
Warranties".
Certain jurisdictions may attempt to require out-of-state credit card
issuers to comply with such jurisdiction's consumer protection laws (including
laws limiting the charges imposed by such credit card issuers) in connection
with their operations in such jurisdictions. A successful challenge by such a
jurisdiction could have an adverse impact on the Transferor's credit card
operations or the yield on the Receivables in the Trust.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion represents the opinion of Mayer, Brown & Platt,
special tax counsel to the Transferor ("Tax Counsel"), subject to the
exceptions and qualifications described herein, as to the material Federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates. This discussion, however, does not address every aspect
of the Federal income tax laws that may be relevant to holders of Offered
Certificates in light of their personal investment circumstances or to certain
types of Offered Certificate Holders subject to special treatment under the
Federal income tax laws (for example, banks and life insurance companies).
Accordingly, investors should consult their own tax advisors regarding
Federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Offered Certificates in their own
particular circumstances. The discussion is generally limited to those persons
who are the initial holders of the Offered Certificates and to investors who
will hold Offered Certificates as capital assets. This discussion is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), its legislative history, the Treasury regulations thereunder, and
published rulings and court decisions in effect (or, in the case of certain
Treasury regulations, that are proposed) as of the date hereof, all of which
are subject to change, possibly retroactively. No ruling on any of the issues
discussed below has been or will be sought from the Internal Revenue Service
(the "IRS") and no assurance can be given that the IRS will not take contrary
positions. It is anticipated that the Trust will not be indemnified for any
Federal income tax that may be imposed upon it, and the imposition of any such
taxes on the Trust could result in a reduction in the amounts available for
distribution to the Offered Certificate Holders.
TREATMENT OF THE OFFERED CERTIFICATES AS INDEBTEDNESS
Tax Counsel is of the opinion that, although no transaction closely
comparable to that contemplated herein has been the subject of any Treasury
regulation, revenue ruling or judicial decision, based upon its analysis of
the factors discussed below, the Offered Certificates, when issued, will be
characterized for Federal income tax purposes as indebtedness that is secured
by the Receivables.
The Transferor and Offered Certificate Holders will express in the Agreement
the intent that, for Federal, state and local income and franchise tax
purposes, and for the purposes of any other tax imposed on or measured by
income, the Offered Certificates will be indebtedness secured by the
Receivables. The Transferor, by entering into the Agreement, PSFC, by its
beneficial ownership of the Transferor Interest, and each Offered Certificate
89
Holder, by virtue of accepting a beneficial interest in an Offered
Certificate, will agree to treat the Offered Certificates (or the beneficial
interests therein) as indebtedness secured by the Receivables for Federal,
state and local income and franchise tax purposes and for the purposes of any
other tax imposed on or measured by income. Because, however, different
criteria are used in determining the nontax accounting treatment of a
transaction, the Transferor and PSFC will treat the Agreement for financial
accounting purposes as a transfer of an ownership interest in the Receivables
and not as creating a debt obligation.
The economic substance of a transaction generally determines its Federal
income tax consequences and the form of a transaction, while a relevant
factor, is generally not conclusive evidence of its economic substance. In
appropriate circumstances the courts have allowed taxpayers, as well as the
IRS, to treat a transaction in accordance with its economic substance,
notwithstanding that participants characterized the transaction differently
for nontax purposes. In some instances, however, courts have held that a
taxpayer is bound by the particular form it has chosen for a transaction, even
if the substance of the transaction does not accord with its form. Tax Counsel
believes that the rationale of those cases will not apply to this transaction.
The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether
the transferee has obtained the opportunity for gain if the property increases
in value, has assumed the risk of loss if the property decreases in value and
whether the transferee, at the time of transfer, has a fixed interest in the
proceeds of the receivable when collected. Based upon its analysis of such
factors, Tax Counsel is of the opinion that the Offered Certificates will be
characterized for Federal income tax purposes as indebtedness secured by the
Receivables. Contrary characterizations that could be asserted by the IRS are
described under " --Possible Characterization of Offered Certificates as
Interests in an Association Taxable as a Corporation or a Partnership" below.
Except as otherwise expressly indicated, the following discussion assumes that
the Offered Certificates will be treated as debt obligations for Federal
income tax purposes.
INTEREST INCOME TO OFFERED CERTIFICATE HOLDERS
It is anticipated that the Offered Certificates will be issued at par value
(or at an insubstantial discount from par value). To the extent that stated
interest on the Offered Certificates constitutes "qualified stated interest",
it will be taxable as ordinary income for Federal income tax purposes when
received or accrued by Offered Certificate Holders in accordance with their
respective methods of tax accounting. The Treasury regulations provide that
qualified stated interest generally includes stated interest that is
"unconditionally payable" at least annually at a single fixed rate or at a
qualified floating or objective variable rate that appropriately takes into
account the length of the interval between payments. Interest is considered
"unconditionally payable" if reasonable legal remedies exist to compel timely
payment or terms and conditions of the debt instrument make the likelihood of
late payment (other than a late payment that occurs within a reasonable grace
period) or nonpayment (ignoring the possibility of nonpayment due to default,
insolvency or similar circumstances) a remote contingency. The Transferor and
PSFC intend to take the position that late payment or nonpayment of stated
interest on the Offered Certificates is a remote contingency, and therefore
that such stated interest constitutes qualified stated interest and (assuming
the Offered Certificates are not issued with a greater than de minimis
discount from par value) the Offered Certificates are not treated as being
issued with OID. It is possible, however, that the Internal Revenue Service
would take the position that none of the stated interest payable on the
Offered Certificates is "unconditionally payable" and hence that all of such
interest should be included in the Offered Certificates' stated redemption
price at maturity. Consequently, the Offered Certificates would be treated as
being issued with original issue discount ("OID") (generally, the excess of
the "stated redemption price at maturity" of an Offered Certificate, or all
payments on the Offered Certificate other than payments of qualified stated
interest, over the issue price of the Offered Certificate). To the extent the
Offered Certificates were treated as being issued with OID, an Offered
Certificate Holder would be required, subject to a de minimis exception, to
include OID in income as interest over the term of the Offered Certificate
under a constant yield method, and, in general, OID must be included in income
in advance of the receipt of cash representing that
90
income. Because of the uncertainty of treatment, holders are urged to consult
their own tax advisors regarding the treatment of stated interest on the
Offered Certificates.
An Offered Certificate Holder who purchases an Offered Certificate at a
market discount may be subject to the "market discount" rules of the Code.
These rules provide, in part, for the treatment of gain attributable to
accrued market discount as ordinary income upon the receipt of partial
principal payments or on the sale or other disposition of the Offered
Certificate, and for the deferral of interest deductions with respect to debt
incurred to acquire or carry the market discount Offered Certificate.
If an Offered Certificate is purchased by an Offered Certificate Holder at a
premium, such premium will be amortized as an offset to interest income (with
a corresponding reduction in the Offered Certificate Holder's basis) under a
constant yield method over the term of the Offered Certificate if an election
under Section 171 of the Code is made or is previously in effect.
DISPOSITION OF OFFERED CERTIFICATES
If an Offered Certificate is sold, exchanged or otherwise disposed of, an
Offered Certificate Holder generally will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale, exchange or
disposition and the Offered Certificate Holder's adjusted basis in the Offered
Certificate. The adjusted basis of an Offered Certificate generally will equal
the cost of the Offered Certificate to the Offered Certificate Holder,
increased by any OID or market discount previously includible in the Offered
Certificate Holder's gross income, and reduced by the portion of the basis of
the Offered Certificate allocable to payments on the Offered Certificate
previously received by the Offered Certificate Holder and any amortized
premium. Subject to the market discount rules, gain or loss on the sale or
other disposition of an Offered Certificate will be capital gain or loss if
the Offered Certificate is held by the Offered Certificate Holder as a capital
asset, except to the extent a holder realizes ordinary income attributable to
accrued interest. Capital gain or loss will be long-term if the Offered
Certificate is held by the Offered Certificate Holder for more than one year
and otherwise will be short-term.
POSSIBLE CHARACTERIZATION OF OFFERED CERTIFICATES AS INTERESTS IN AN
ASSOCIATION TAXABLE AS A CORPORATION OR A PARTNERSHIP
Although, as described above, it is the opinion of Tax Counsel that the
Offered Certificates are properly characterized as debt for Federal income tax
purposes, such opinion is not binding on the IRS or the courts and no
assurance can be given that this characterization would prevail. If the IRS
were to contend successfully that the Offered Certificates were not debt
obligations for Federal income tax purposes, Offered Certificates might be
classified for Federal income tax purposes as interests in an association
taxable as a corporation that owns the Receivables or as a partnership,
including a "publicly traded partnership".
If the arrangement created by the Agreement were treated as either an
association taxable as a corporation or a "publicly traded partnership"
taxable as a corporation, the resulting entity may be subject to Federal
income taxes at corporate tax rates on its taxable income from the
Receivables. Such a tax might result in reduced distributions to Offered
Certificate Holders and Offered Certificate Holders might be liable for a
share of such a tax. Moreover, it is unlikely that distributions by the entity
would be deductible in computing the entity's taxable income (assuming that
the Offered Certificates were treated as ownership interests rather than as
debt) with the result that the entity would have significant taxable income
and tax liability. In addition, all or part of the distributions to Offered
Certificate Holders would generally be treated as dividend income to the
Offered Certificate Holders.
If, alternatively, the Offered Certificates were treated as interests in a
partnership, the income reportable by the Offered Certificate Holders as
partners could differ from the income reportable by the Offered Certificate
Holders as holders of debt obligations. For example, a cash basis Offered
Certificate Holder might be required to report income when it accrued to the
partnership rather than when it is received by the Offered Certificate Holder.
91
Moreover, an individual's share of expenses of the partnership would be
miscellaneous itemized deductions that, in the aggregate, are allowed as
deductions only to the extent they exceed two percent of the individual's
adjusted gross income, and would be subject to reduction under Section 68 of
the Code if the individual's adjusted gross income exceeded certain limits. As
a result, the individual might be taxed on a greater amount of income than the
stated rate on the Offered Certificates. Finally, if a class of Offered
Certificates were treated as interests in a partnership and another class of
Offered Certificates were treated as debt, a portion of the taxable income
allocated to an Offered Certificate Holder of the class of Offered
Certificates treated as interests in a partnership that is a pension, profit
sharing or employee benefit plan or other tax-exempt entity (including an
individual retirement account) would constitute "unrelated business taxable
income" generally taxable to the holder under the Code.
Since the Transferor and PSFC will treat the Offered Certificates as
indebtedness for Federal income tax purposes, neither the Transferor nor PSFC
will comply with the tax reporting requirements that would apply under these
alternative characterizations of the Offered Certificates.
FOREIGN INVESTORS
Assuming the Offered Certificates represent debt obligations for Federal
income tax purposes, if interest (including OID) on the Offered Certificates
paid to a nonresident alien individual, foreign corporation, foreign
partnership or foreign estate or trust is not effectively connected with the
conduct of a United States trade or business of the recipient, it will be
considered "portfolio interest" and will (subject to the discussion of backup
withholding below) be generally exempt from United States withholding tax;
provided, however, that the Offered Certificate Holder complies with
applicable certification requirements (and does not actually or constructively
own ten percent or more of the voting stock of the Transferor or PSFC and is
not a controlled foreign corporation related to the Transferor or its
affiliates).
If the Offered Certificates were recharacterized as interests in an
association taxable as a corporation or a "publicly traded partnership"
taxable as a corporation, to the extent distributions under the Agreement were
treated as dividends, a nonresident alien individual or foreign corporation
would generally be subject to withholding tax on the gross amount of such
dividends at the rate of 30% (or lower rate as provided by an applicable
treaty). If the IRS were to contend successfully that the Offered Certificates
represent interests in a partnership (not taxable as a corporation), an
Offered Certificate Holder that is a nonresident alien, foreign corporation or
foreign estate or trust might be required to file a United States individual
or corporate income tax return and pay tax on its share of partnership income
at regular U.S. rates, including the branch profits tax in the case of an
Offered Certificate Holder that is a corporation, and would be subject to
withholding tax on its share of partnership income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Servicer will be required to report annually to the IRS, and to each
Offered Certificate Holder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for Federal income taxes, if any) for each calendar year, except as
to exempt holders (generally, holders that are corporations, certain tax-
exempt organizations or nonresident aliens who provide certification as to
their status as nonresidents). Each non-exempt Offered Certificate Holder will
be required to provide, under penalty of perjury, a certificate on IRS Form W-
9 containing his or her name, address, correct Federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a nonexempt Offered Certificate Holder fail to provide the required
certification, the Offered Certificate Holder will be subject to backup
withholding of U.S. Federal income tax at a rate of 31% of the amounts
otherwise payable to the holder. Such amount would be remitted to the IRS as a
credit against the holder's Federal income tax liability.
92
STATE AND LOCAL TAX CONSEQUENCES
GENERAL
State tax consequences to each Offered Certificate Holder will depend upon
the provisions of the state tax laws to which the Offered Certificate Holder
is subject. Most states modify or adjust the taxpayer's Federal taxable income
to arrive at the amount of income potentially subject to state tax. Resident
individuals generally pay state tax on 100% of such state modified income,
while corporations and other taxpayers generally pay state tax only on that
portion of state modified income assigned to the taxing state under the
state's own apportionment and allocation rules. Because each state's tax law
varies, it is impossible to predict the tax consequences to the Offered
Certificate Holders in all of the state taxing jurisdictions in which they are
already subject to tax.
CONNECTICUT
The activities to be undertaken by the Servicer in servicing and collecting
the Receivables will take place in Connecticut. Connecticut imposes an income
tax on corporations doing business in Connecticut measured by their net income
apportioned to Connecticut. This discussion is based upon present provisions
of Connecticut law and regulations, and applicable judicial or ruling
authority, all of which are subject to change, which change may be
retroactive. No ruling on any of the issues discussed below will be sought
from the Connecticut Department of Revenue.
Assuming the Offered Certificates are treated as indebtedness for Federal
income tax purposes, Pullman & Comley, LLC, special Connecticut counsel to the
Transferor, is of the opinion that this treatment will also apply for
Connecticut tax purposes. Pursuant to this treatment, Offered Certificate
Holders not otherwise subject to Connecticut tax would not become subject to
such tax solely because of their ownership of the Offered Certificates.
Offered Certificate Holders already subject to taxation in Connecticut as
corporations, however, could be required to pay tax on the income generated
from ownership of these Offered Certificates.
In the alternative, if the Offered Certificates are treated as interests in
a partnership (not taxable as a corporation) for Federal income tax purposes,
the same treatment should also apply for Connecticut tax purposes. In such
case, Connecticut could view the partnership as doing business in Connecticut.
Connecticut would not impose any tax on the Trust, but an Offered Certificate
Holder not otherwise subject to taxation in Connecticut could become subject
to Connecticut income taxes as a result of its mere ownership of Offered
Certificates.
If the Offered Certificates are instead treated as ownership interests in an
association taxable as a corporation or a "publicly traded partnership"
taxable as a corporation, then the entity could be subject to Connecticut
income tax. Such taxes could result in reduced distributions to Offered
Certificate Holders. An Offered Certificate Holder not otherwise subject to
tax in Connecticut would not become subject to Connecticut taxes as a result
of its mere ownership of such an interest.
Because each state's income tax laws vary, it is impossible to predict the
income tax consequences to the Offered Certificate Holders in all of the state
taxing jurisdictions in which they are already subject to tax. There can be no
assurance that other states will not claim that the Servicer has undertaken
activities in such states. If such a claim were made, no assurances can be
given as to whether the Offered Certificates would be treated as indebtedness
by any particular state. Offered Certificate Holders are urged to consult
their own tax advisors with respect to state taxes.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE OFFERED CERTIFICATES.
93
CERTAIN EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Section 406 of ERISA and section 4975 of the Code prohibit certain pension,
profit sharing or other employee benefit plans, Keogh plans, individual
retirement accounts or annuities and employee annuity plans (collectively,
including entities whose underlying assets are deemed to include the assets of
one or more employee benefit plans (including without limitation insurance
company general accounts), "Benefit Plans") from engaging in certain
transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the Benefit Plan. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code for such
persons.
A possible violation of the prohibited transaction rules could occur if the
Offered Certificates were to be purchased with assets of any Benefit Plan if
the Transferor, the Servicer, the Trustee or the Underwriters were a "party in
interest" or a "disqualified person", with respect to such Benefit Plan. The
Transferor, the Servicer, the Trustee and the Underwriters are "parties in
interest" or "disqualified persons" with respect to many Benefit Plans. Prior
to the purchase of an Offered Certificate, the fiduciary of any Benefit Plan
should consider whether a prohibited transaction might arise by virtue of the
relationship between the Benefit Plan and the Transferor, the Servicer, the
Trustee, the Underwriters or any affiliate of any thereof and, if so, should
consult counsel regarding the purchase. The Department of Labor (the "DOL")
has issued five class exemptions that may apply to otherwise prohibited
transactions arising from the purchase or holding of the Offered Certificates:
DOL Prohibited Transaction Exemption 84-14 (Class Exemption for Plan Asset
Transactions Determined by Independent Qualified Professional Asset Managers),
90-1 (Class Exemption for Certain Transactions Involving Insurance Company
Pooled Separate Accounts), 91-38 (Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds), 95-60 (Class Exemption for
Certain Transactions Involving Insurance Company General Accounts) and 96-23
(Class Exemption for Plan Asset Transactions Determined by In House Asset
Managers).
Other prohibited transactions may arise through the operation of a
regulation (the "Plan Asset Regulation") issued by the DOL. Under certain
circumstances, the Plan Asset Regulation treats the assets of an entity in
which a Benefit Plan has an equity interest as assets of such Benefit Plan.
Although the Transferor and the Offered Certificate Owners have agreed to
treat the Offered Certificates as debt instruments for tax purposes, the
Offered Certificates may be considered equity interests in the Trust for
purposes of the Plan Asset Regulation. In such a case, if investment in the
Offered Certificates by Benefit Plans is substantial, the Plan Asset
Regulation may apply to treat assets of the Trust as assets of an investing
Benefit Plan unless the exception described below applies.
The assets of the Trust would not be treated as plan assets if the Offered
Certificates constitute "publicly offered securities". A publicly offered
security is a security that is (a) freely transferable, (b) part of a class of
securities that is owned by 100 or more investors independent of the issuer
and of one another and (c) either is (i) part of a class of securities
registered under section 12(b) or 12(g) of the Exchange Act or (ii) sold to
the plan as part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act and the class of
securities of which such security is a part is registered under the Exchange
Act within 120 days (or such later time as may be allowed by the Commission)
after the end of the fiscal year of the issuer during which the offering of
such securities to the public occurred. A class of securities will not fail to
be widely held solely because subsequent to the initial offering the number of
independent investors falls below 100 as a result of events beyond the control
of the issuer. For the purpose of this exception, the Class A Certificates
should be deemed a "class" of securities that would be tested separately from
any other securities that may be issued by the Trust. It is anticipated that
the Class A Certificates will meet the criteria of publicly offered securities
as set forth above. The Class A Underwriters will not sell the Class A
Certificates to Benefit Plans unless they believe that the Class A
Certificates will be held by at least 100 persons independent of the
Transferor and each other at the conclusion of the offering. In addition,
there are no restrictions imposed on the transfer of the Class A Certificates;
and the Class A Certificates will be sold as part of an offering pursuant to
an effective registration statement under the Securities Act and then will be
timely registered under the Exchange Act. It is not expected
94
that the Class B Certificates will meet the criteria of publicly offered
securities, and accordingly the Class B Certificates may not be acquired with
the assets of any Benefit Plan (including without limitation any insurance
company general account deemed to include the assets of any Benefit Plan).
If the Plan Asset Regulation were to apply so that the Trust is considered
to hold "plan assets", transactions involving the Trust and "parties in
interest" or "disqualified persons" with respect to a Benefit Plan that is an
Offered Certificate Owner might be prohibited under Section 406 of ERISA and
section 4975 of the Code unless an exemption is applicable. The five DOL class
exemptions mentioned above may not provide relief for all transactions
involving the Trust's assets even if they would otherwise be applicable to the
purchase of an Offered Certificate by a Benefit Plan.
It should also be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and Section 4975 of the Code.
Pursuant to Section 401(c), the Department of Labor is required to issue final
regulations (the "General Account Regulations") not later than December 31,
1997 with respect to insurance policies issued on or before December 31, 1998
that are supported by an insurer's general account. The General Account
Regulations are to provide guidance on which assets held by the insurer
constitute "plan assets" for purposes of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code. Section 401(c) also provides
that, except in the case of avoidance of the General Account Regulation and
actions brought by the Secretary of Labor relating to certain breaches of
fiduciary duties that also constitute breaches of state or federal criminal
law, until the date that is 18 months after the General Account Regulations
become final, no liability under the fiduciary responsibility and prohibited
transaction provisions of ERISA and Section 4975 of the Code may result on the
basis of a claim that the assets of the general account of an insurance
company constitute the assets of any Benefit Plan. The plan asset status of
insurance company separate accounts is unaffected by new Section 401(c) of
ERISA, and separate account assets continue to be treated as the plan assets
of any Benefit Plan invested in a separate account.
In light of the foregoing, fiduciaries of a Benefit Plan considering the
purchase of Offered Certificates should consult their own counsel regarding
whether the assets of the Trust would be considered plan assets, the
consequences that would apply if the Trust's assets were considered plan
assets and the possibility of exemptive relief from the prohibited transaction
rules.
Finally, fiduciaries of a Benefit Plan should consider the fiduciary
standards under ERISA or other applicable law in the context of the Benefit
Plan's particular circumstances before authorizing an investment of a portion
of a Benefit Plan's assets in the Offered Certificates. Accordingly, among
other factors, such fiduciaries should consider whether the investment (i)
satisfies the diversification requirement of ERISA or other applicable law,
(ii) is in accordance with the Benefit Plan's governing instruments and (iii)
is prudent considering the "Risk Factors" and other factors discussed in this
Prospectus.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
with respect to the Offered Certificates (the "Underwriting Agreement"), PSFC
and the Transferor have agreed with respect to the Class A Certificates to
sell to each of the Underwriters named below (the "Class A Underwriters"), and
each of the Class A Underwriters, for whom J.P. Morgan Securities Inc. is
acting as representative, has severally agreed to purchase, the principal
amount of Class A Certificates set forth opposite its name below:
PRINCIPAL AMOUNT OF
UNDERWRITERS CLASS A CERTIFICATES
- ------------ --------------------
J.P. Morgan Securities Inc................................. $106,250,000
Goldman, Sachs & Co........................................ 106,250,000
Lehman Brothers Inc........................................ 106,250,000
Salomon Brothers Inc....................................... 106,250,000
------------
$425,000,000
============
Under the terms and conditions of the Underwriting Agreement, the several
Class A Underwriters are committed to take and pay for all of the Class A
Certificates, if any are taken.
Subject to the terms and conditions set forth in the Underwriting Agreement,
PSFC and the Transferor have agreed with respect to the Class B Certificates
to sell to J.P. Morgan Securities Inc. (the "Class B Underwriter" and together
with the Class A Underwriters, the "Underwriters"), and the Class B
Underwriter has agreed to purchase, the Class B Certificates.
Under the terms and conditions of the Underwriting Agreement, the Class B
Underwriter is committed to take and pay for all of the Class B Certificates,
if any are taken.
PSFC and the Transferor have been advised by the Class A Underwriters that
they propose initially to offer the Class A Certificates to the public at the
price set forth on the cover page hereof and to certain dealers at such price
less concessions not in excess of 0.175% of the principal amount of the Class
A Certificates. The Class A Underwriters may allow, and such dealers may
reallow, concessions not in excess of 0.100% of the principal amount of the
Class A Certificates to certain brokers and dealers. After the Class A
Certificates are released for sale to the public, the public offering price
and other selling terms may from time to time be varied by the Class A
Underwriters.
PSFC and the Transferor have been advised by the Class B Underwriter that it
proposes initially to offer the Class B Certificates to the public at the
price set forth on the cover page hereof and to certain dealers at such price
less concessions not in excess of 0.175% of the principal amount of the Class
B Certificates. The Class B Underwriter may allow, and such dealers may
reallow, concessions not in excess of 0.100% of the principal amount of the
Class B Certificates to certain brokers and dealers. After the Class B
Certificates are released for sale to the public, the public offering price
and other selling terms may from time to time be varied by the Class B
Underwriter.
Application has been made to list the Class A Certificates on the Luxembourg
Stock Exchange.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Offered
Certificates. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid
for, and purchase the Offered Certificates in the open market to cover
syndicate shorts or to stabilize the price of the Offered Certificates. Any of
these activities may stabilize or maintain the market price of the Offered
Certificates above independent market levels. The Underwriters are not
required to engage in these activities, and if commenced, such activities may
be discontinued at any time.
96
Each Underwriter has represented and agreed that (a) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the Offered Certificates to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or
who is a person to whom the document may otherwise lawfully be issued or
passed on, (b) it has complied and will comply with all applicable provisions
of the Financial Services Act 1986 and other applicable laws and regulations
with respect to anything done by it in relation to the Offered Certificates
in, from and otherwise involving the United Kingdom and (c) if that
Underwriter is an authorized person under the Financial Services Act 1986, it
has only promoted and will only promote (as that term is defined in Regulation
1.02 of the Financial Services (Promotion of Unregulated Schemes) Regulations
1991) to any person in the United Kingdom the scheme described herein if that
person is of a kind described either in Section 76(2) of the Financial
Services Act of 1986 or in Regulation 1.04 of the Financial Services
(Promotion of Unregulated Schemes) Regulations 1991.
PSFC and the Transferor will indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
Morgan Guaranty is an affiliate of J.P. Morgan Securities Inc., one of the
Class A Underwriters and the Class B Underwriter.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Offered Certificates
will be passed upon for the Transferor by William T. Kosturko, General Counsel
to People's Bank. Certain legal matters relating to the Offered Certificates
will be passed upon for the Transferor by Mayer, Brown & Platt, New York, New
York. Certain legal matters relating to the federal tax consequences of the
issuance of the Offered Certificates and certain other matters relating
thereto will be passed upon for the Transferor by Mayer, Brown & Platt, New
York, New York and certain legal matters relating to Connecticut state income
tax consequences will be passed upon for the Transferor by Pullman & Comley,
LLC, Bridgeport, Connecticut, special Connecticut counsel to People's Bank.
Certain legal matters relating to the issuance of the Offered Certificates
will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher &
Flom LLP, New York, New York.
97
INDEX OF KEY TERMS
Accounts................................................................ 15
Accumulation Period Length.............................................. 54
Accumulation Shortfall.................................................. 11, 42
Additional Accounts..................................................... 16
Adjusted Investor Interest.............................................. 8, 66
Affinity Program Accounts............................................... 33
Agent Bank Accounts..................................................... 33
Aggregate Principal Receivables......................................... 39
Agreement............................................................... 5
Amortization Period..................................................... 68
Automatic Additional Accounts........................................... 16
Available Investor Principal Collections................................ 42, 54
Available Reserve Account Amount........................................ 78
Bank Portfolio.......................................................... 32
Base Rate............................................................... 28
Benefit Plans........................................................... 94
Billing Cycle........................................................... 34
Cedel Participants...................................................... 50
Cedel................................................................... 50
Cede.................................................................... 3
Certificate Holders..................................................... 5
Certificates............................................................ 2, 5
Class A Adjusted Investor Interest...................................... 8, 65
Class A Available Funds................................................. 69
Class A Cap Rate........................................................ 47
Class A Certificate Holders............................................. 5
Class A Certificate Rate................................................ 9
Class A Certificates.................................................... 1, 5
Class A Covered Amount.................................................. 12, 77
Class A Excess Interest................................................. 10, 52
Class A Excess Principal................................................ 53
Class A Fixed Allocation................................................ 65
Class A Floating Allocation............................................. 64
Class A Initial Investor Interest....................................... 7
Class A Interest Rate Cap............................................... 6
Class A Investor Charge-Off............................................. 20, 75
Class A Investor Default Amount......................................... 75
Class A Investor Interest............................................... 8, 65
Class A Monthly Cap Rate Interest....................................... 68
Class A Monthly Interest................................................ 9, 52
Class A Monthly Principal............................................... 72
Class A Monthly Servicing Fee........................................... 81
Class A Notional Amount................................................. 47
Class A Payment Amount.................................................. 19, 74
Class A Principal Funding Investment Shortfall.......................... 12, 77
Class A Required Amount................................................. 19, 74
Class A Scheduled Payment Date.......................................... 2, 14
Class A Underwriters.................................................... 96
Class B Available Funds................................................. 69
Class B Cap Rate........................................................ 48
98
Class B Certificate Holders............................................. 5
Class B Certificate Rate................................................ 10
Class B Certificates.................................................... 1, 5
Class B Excess Interest................................................. 10, 53
Class B Excess Principal................................................ 53
Class B Fixed Allocation................................................ 65
Class B Floating Allocation............................................. 64
Class B Initial Investor Interest....................................... 7
Class B Interest Rate Cap............................................... 6
Class B Investor Charge-Off............................................. 20, 75
Class B Investor Default Amount......................................... 75
Class B Investor Interest............................................... 8, 65
Class B Monthly Cap Rate Interest....................................... 69
Class B Monthly Interest................................................ 10, 52
Class B Monthly Principal............................................... 72
Class B Monthly Servicing Fee........................................... 81
Class B Notional Amount................................................. 48
Class B Payment Amount.................................................. 20, 74
Class B Required Amount................................................. 20, 74
Class B Scheduled Payment Date.......................................... 2, 14
Class B Underwriter..................................................... 96
Closing Date............................................................ 6
Code.................................................................... 89
Collateral Available Funds.............................................. 69
Collateral Default Amount............................................... 75
Collateral Fixed Allocation............................................. 65
Collateral Floating Allocation.......................................... 64
Collateral Interest Charge-Off.......................................... 76
Collateral Interest Holder.............................................. 7
Collateral Interest Monthly Servicing Fee............................... 81
Collateral Interest Surplus............................................. 12, 67
Collateral Interest..................................................... 8, 65
Collateral Monthly Interest............................................. 70
Collateral Monthly Principal............................................ 72
Collateral Rate......................................................... 70
Collection Account...................................................... 18, 62
Collection Subaccount................................................... 62
Collections............................................................. 64
Commission.............................................................. 3
Congress................................................................ 26
Controlled Accumulation Amount.......................................... 42
Controlled Accumulation Date............................................ 11
Controlled Accumulation Period.......................................... 11
Controlled Deposit Amount............................................... 11, 41
Cooperative............................................................. 51
Defaulted Accounts...................................................... 64
Defaulted Receivables................................................... 75
Definitive Certificates................................................. 51
Depositaries............................................................ 49
Depository.............................................................. 46
Determination Date...................................................... 75
Disclosure Document..................................................... 14
99
Discount Option....................................................... 62
Discount Percentage................................................... 62
Distribution Account.................................................. 63
Distribution Date..................................................... 2, 9
DOL................................................................... 94
DTC Participants...................................................... 49
DTC................................................................... 3, AII-1
Eligible Account...................................................... 59
Eligible Additional Account........................................... 61
Eligible Automatic Additional Account................................. 60
Eligible Receivable................................................... 59
Enhancement Provider.................................................. 58
Enhancement........................................................... 6
ERISA................................................................. 24
Euroclear Operator.................................................... 51
Euroclear Participants................................................ 50
Euroclear System...................................................... 50
Euroclear............................................................. 51
Excess Funding Account................................................ 63
Excess Principal...................................................... 53
Excess Spread......................................................... 70
Exchange Act.......................................................... 3
Exchangeable Transferor Certificate................................... 7
Exchange.............................................................. 14
Expected Class A Principal............................................ 53
Expected Class B Principal............................................ 53
FDIA.................................................................. 25
FDIC.................................................................. 1, 7
Finance Charge Account................................................ 63
Finance Charge Collections............................................ 64
Finance Charge Receivables............................................ 15
Fixed Investor Percentage............................................. 64
Floating Investor Percentage.......................................... 64
Global Securities..................................................... AII-1
Holder of the Exchangeable Transferor Certificate..................... 7
Holders............................................................... 51
Indirect Participants................................................. 49
Ineligible Receivable................................................. 58
Initial Class A Accumulation Date..................................... 53
Initial Collateral Interest........................................... 7
Initial Interest Period............................................... 10
Initial Investor Interest............................................. 7
Insolvency Event...................................................... 80
Interchange........................................................... 38
Interest Period....................................................... 47
Interest Rate Cap Provider............................................ 6
Interest Rate Caps.................................................... 6
Investor Charge-Off................................................... 76
Investor Default Amount............................................... 75
Investor Exchange..................................................... 14
Investor Interest..................................................... 8
Investor Percentage................................................... 9, 64
100
IRS................................................................... 89
LIBOR Determination Date.............................................. 47
LIBOR................................................................. 9, 47
Loan Agreement........................................................ 23
London Banking Day.................................................... 47
MasterCard............................................................ 32
Maximum Addition Amount............................................... 61
Minimum Aggregate Principal Receivables............................... 39
Minimum Transferor Interest........................................... 39
Monthly Period........................................................ 9
Monthly Servicer Report............................................... 84
Monthly Servicing Fees................................................ 81
Moody's............................................................... 62
Morgan................................................................ 48
Morgan Guaranty....................................................... 48
Norwich............................................................... 45
Offered Certificate Holder............................................ 50
Offered Certificate Holders........................................... 5
Offered Certificate Owners............................................ 3
Offered Certificate Rates............................................. 10
Offered Certificate Rate.............................................. 10
Offered Certificates.................................................. 1, 5
OID................................................................... 90
Participants.......................................................... 49
Pay Out Event......................................................... 41
Paying Agent.......................................................... 52
Permitted Investments................................................. 63
Plan Asset Regulation................................................. 94
Pool Factor........................................................... 84
Portfolio Yield....................................................... 29
Principal Account..................................................... 63
Principal Allocation.................................................. 67
Principal Collections................................................. 64
Principal Funding Account Balance..................................... 11, 41
Principal Funding Account............................................. 11, 76
Principal Funding Investment Proceeds................................. 12, 77
Principal Receivables................................................. 15
Principal Shortfalls.................................................. 73
Principal Terms....................................................... 56
PSFC.................................................................. 1, 7, 45
Qualified Institution................................................. 62
Qualified Substitute Arrangement...................................... 47
Qualified Trust Institution........................................... 63
Rapid Amortization Period............................................. 13
Rating Agency......................................................... 30
Reallocated Class B Principal Collections............................. 74
Reallocated Collateral Principal Collections.......................... 74
Reallocated Principal Collections..................................... 75
Receivables........................................................... 2, 6
Record Date........................................................... 46
Recoveries............................................................ 16
Reference Banks....................................................... 47
101
Removal Date........................................................ 62
Removed Accounts.................................................... 17, 61
Replacement Interest Rate Cap....................................... 47
Representative Portfolio............................................ 36
Required Amounts.................................................... 74
Required Collateral Interest........................................ 21, 73, 76
Required Reserve Account Amount..................................... 77
Reserve Account..................................................... 77
Reserve Account Funding Date........................................ 77
Revolving Period.................................................... 11
RTC Policy Statement................................................ 88
RTC................................................................. 25
Scheduled Payment Date.............................................. 14
Scheduled Series 1997-2 Termination Date............................ 14, 78
Securities Act...................................................... 2
Series 1997-2....................................................... 5
Series 1997-2 Accounts.............................................. 63
Series 1997-2 Supplement............................................ 5
Series Cut-Off Date................................................. 16
Series.............................................................. 5
Service Transfer.................................................... 83
Servicer Default.................................................... 83
Servicer............................................................ 17
Servicing Fee Rate.................................................. 81
Servicing Fee....................................................... 81
Shared Finance Charge Collections................................... 23
Shared Principal Collections........................................ 22
Standard & Poor's................................................... 62
Supplement.......................................................... 14
Tax Counsel......................................................... 89
Telerate Page 3750 ................................................. 47
Terms and Conditions................................................ 51
Total System........................................................ 32
Transfer Agent and Registrar........................................ 52
Transfer Date....................................................... 11
Transferor Exchange................................................. 14
Transferor Interest................................................. 8
Transferor Percentage............................................... 65
Transferor Servicing Fee............................................ 81
Transferor.......................................................... 1
Trust Portfolio..................................................... 6, 38
Trustee............................................................. 5
Trust............................................................... 1,5
U.S. Person......................................................... AII-4
UCC................................................................. 86
Underwriters........................................................ 96
Underwriting Agreement.............................................. 96
VISA................................................................ 32
102
ANNEX I
PRIOR SERIES ISSUED AND OUTSTANDING
The Trust has previously issued six Series of certificates, two of which have
been repaid in full. The table below sets forth the principal characteristics
of the four Series previously issued by the Trust that are currently
outstanding: the Series 1994-2 Certificates, the Series 1995-1 Certificates,
the Series 1996-1 Certificates and the Series 1997-1 Certificates. For more
specific information with respect to a Series, any prospective investor should
contact People's Bank at (203) 338-7171. People's Bank will provide, without
charge, to any prospective purchaser of the Offered Certificates, a copy of
the Disclosure Documents for any previously publicly-issued and outstanding
Series.
SERIES 1994-2
Initial Investor Interest.................................... $400,000,000
Class A Certificate Rate through November 14, 1994........... 5.0875% per annum
after November 14, 1994...................................... LIBOR plus 0.15%
Class B Certificate Rate..................................... LIBOR plus 0.40%
Current Investor Interest.................................... $400,000,000
Class A Controlled Amortization Amount....................... $27,142,857.14
Class B Controlled Amortization Amount....................... $20,000,000
Controlled Amortization Date................................. March 1, 1997
Monthly Servicing Fee........................................ 2.00% per annum
Initial Cash Collateral Amount............................... $36,000,000
Class A Expected Final Distribution Date..................... May 1998
Class B Expected Final Distribution Date..................... June 1998
Scheduled Series 1994-2 Termination Date..................... March 2001
Series Issuance Date......................................... October 27, 1994
SERIES 1995-1
Initial Investor Interest.................................... $400,000,000
Class A Certificate Rate..................................... LIBOR plus 0.20%
Class B Certificate Rate..................................... LIBOR plus 0.35%
Current Investor Interest.................................... $400,000,000
Class A Controlled Amortization Amount....................... $27,142,857.14
Class B Controlled Amortization Amount....................... $20,000,000
Controlled Amortization Date................................. August 1, 1999
Monthly Servicing Fee........................................ 2.00% per annum
Initial Cash Collateral Amount............................... $36,000,000
Class A Expected Final Distribution Date..................... October 2000
Class B Expected Final Distribution Date..................... November 2000
Scheduled Series 1995-1 Termination Date..................... August 2003
Series Issuance Date......................................... March 28, 1995
AI-1
SERIES 1996-1
Initial Investor Interest..................................... $400,000,000
Class A Certificate Rate...................................... LIBOR plus 0.15%
Class B Certificate Rate...................................... LIBOR plus 0.30%
Current Investor Interest..................................... $400,000,000
Class A Controlled Amortization Amount........................ $27,071,428.57
Class B Controlled Amortization Amount........................ $21,000,000
Controlled Amortization Date.................................. November 1, 2000
Monthly Servicing Fee......................................... 2.0% per annum
Initial Cash Collateral Amount................................ $36,000,000
Class A Expected Final Distribution Date...................... January 2002
Class B Expected Final Distribution Date...................... February 2002
Scheduled Series 1996-1 Termination Date...................... November 2004
Series Issuance Date.......................................... July 2, 1996
SERIES 1997-1
Initial Investor Interest..................................... $500,000,000
Class A Initial Investor Interest............................. $425,000,000
Class B Initial Investor Interest............................. $33,750,000
Initial Collateral Interest................................... $41,250,000
Current Investor Interest..................................... $500,000,000
Class A Certificate Rate...................................... LIBOR plus 0.12%
Class B Certificate Rate...................................... LIBOR plus 0.32%
Controlled Accumulation Amount................................ $30,357,142.86
Controlled Accumulation Date.................................. December 1, 2000
Servicing Fee Rate............................................ 2.0% per annum
Class A Scheduled Payment Date................................ February 2002
Class B Scheduled Payment Date................................ March 2002
Scheduled Series 1997-1 Termination Date...................... October 2004
Series Issuance Date.......................................... March 27, 1997
AI-2
ANNEX II
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered People's Bank
Credit Card Master Trust Floating Rate Class A Asset Backed Certificates,
Series 1997-2 and Floating Rate Class B Asset Backed Certificates, Series
1997-2 (collectively, the "Global Securities") will be available only in book-
entry form. Investors in the Global Securities may hold such Global Securities
through The Depository Trust Company ("DTC"), Cedel or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior People's Bank Credit Card Master Trust
issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Offered Certificates will be effected on a delivery-
against-payment basis through the respective Depositaries of Cedel and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
Participants and Indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior People's Bank Credit Master Trust
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in the
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior People's
Bank Credit Card Master Trust issues in same-day funds.
AII-1
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
accounts of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued to the Global Securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of actual days elapsed
and a 360 day year. Payment will then be made by the respective Depositary to
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The Global Securities credit will appear the next day (European time)
and the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debit
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the settlement.
Under this procedure, Cedel Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the
value date. Therefore, in many cases the investment income on the Global
Securities earned during that one day period may substantially reduce or
offset the amount of such overdraft charges, although this result will depend
on each Cedel Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date on the basis of
actual days elapsed and a 360 day year. The payment will then be reflected in
the account of the Cedel Participant or Euroclear Participant the following
day, and receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the Cedel
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in a debit position in anticipation of receipt
of the sale proceeds in its account, the back-
AII-2
valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Offered
Certificates that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Offered Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless
the filer alternatively files Form W-8. Form 1001 may be filed by the Offered
Certificate Owner or its agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Offered Certificate Owner
of a Global Security or, in the case of a Form 1001 or a Form 4224 filer, its
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing
AII-3
agency). Form W-8 and Form 1001 are effective for three calendar years and
Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source or, for trusts whose taxable years begin after December 31,
1996, a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who
have the authority to control all substantial decisions of the trust. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors
are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
AII-4