SUBJECT TO COMPLETION, DATED JUNE 15, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 15, 1998)
$641,000,000
PARTNERS FIRST CREDIT CARD MASTER TRUST
$528,000,000 CLASS A SERIES 1998-3 FLOATING RATE ASSET BACKED SECURITIES
$113,000,000 CLASS B SERIES 1998-3 FLOATING RATE ASSET BACKED SECURITIES
PARTNERS FIRST RECEIVABLES FUNDING, LLC
TRANSFEROR
PARTNERS FIRST HOLDINGS, LLC
SERVICER
-------------------------
The Class A Series 1998-3 Floating Rate Asset Backed Securities (the "Class
A Securities") and the Class B Series 1998-3 Floating Rate Asset Backed
Securities (the "Class B Securities" and, together with the Class A Securities,
the "Offered Securities") offered hereby will represent undivided interests in
certain assets of the Partners First Credit Card Master Trust (the "Trust")
created pursuant to an Amended and Restated Pooling and Servicing Agreement,
dated as of May 13, 1998 (the "Pooling and Servicing Agreement"), among Partners
First Receivables Funding, LLC ("Funding"), as transferor (in such capacity, the
"Transferor"), Partners First Holdings, LLC ("Partners First"), as servicer (in
such capacity, the "Servicer"), and The Bank of New York, as
(CONTINUED ON NEXT PAGE)
THE FRACTIONAL UNDIVIDED INTEREST IN THE TRUST REPRESENTED BY THE CLASS B
SECURITIES WILL BE SUBORDINATED TO THE EXTENT NECESSARY TO FUND PAYMENTS WITH
RESPECT TO THE CLASS A SECURITIES TO THE EXTENT DESCRIBED HEREIN.
POTENTIAL INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH IN "RISK
FACTORS" COMMENCING ON PAGE S-16 HEREIN AND ON PAGE 20 IN THE PROSPECTUS.
THE OFFERED SECURITIES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR, PARTNERS
FIRST OR ANY AFFILIATE OF EITHER OF THEM. AN OFFERED SECURITY IS NOT A
DEPOSIT AND NEITHER THE OFFERED SECURITIES NOR THE UNDERLYING ACCOUNTS OR
RECEIVABLES ARE INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
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
SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT TRANSFEROR(1)(2)
Per Class A Security........................... % % %
Per Class B Security........................... % % %
Total.......................................... $ $ $
(1) Plus accrued interest, if any, at the Class A Interest Rate or the Class B
Interest Rate, as applicable, from , 1998.
(2) Before deduction of expenses payable by the Transferor, estimated to be
$634,590.
-------------------------
This Prospectus Supplement and the Prospectus may be used by each of
BancBoston Securities Inc. and Nesbitt Burns Securities Inc., each of whom is
affiliated with the Transferor, in connection with offers and sales related to
market-making transactions in the Offered Securities. Each of BancBoston
Securities Inc. and Nesbitt Burns Securities Inc. may act as principal or agent
in such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale.
The Offered Securities are offered by the Underwriters when, as and if
issued by the Trust and accepted by the Underwriters and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
the Offered Securities will be delivered in book-entry form on or about
, 1998, through the facilities of The Depository Trust Company,
Cedel Bank, SOCIETE ANONYME and the Euroclear System.
-------------------------
MERRILL LYNCH & CO.
BANCBOSTON SECURITIES INC.
CREDIT SUISSE FIRST BOSTON
NESBITT BURNS SECURITIES INC.
SALOMON SMITH BARNEY
-------------------------
The date of this Prospectus Supplement is June , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted without the delivery of a final prospectus supplement
and prospectus. This prospectus supplement and the accompanying prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy, nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
(CONTINUED FROM PREVIOUS PAGE)
trustee (the "Trustee"). The property of the Trust includes the receivables (the
"Receivables") that are generated from time to time in a portfolio of consumer
revolving credit card accounts (the "Accounts"), collections thereon, funds on
deposit in certain accounts of the Trust and the benefit of a Yield Supplement
Account. Concurrently with the issuance of the Offered Securities, the Trust
will issue the Collateral Interest (as defined herein) in the initial invested
amount of $67,000,000 to the Collateral Interest Holder (as defined herein) and
the Class D Series 1998-3 Asset Backed Securities in the initial invested amount
of $42,000,000 (the "Class D Securities" and, together with the Collateral
Interest and the Offered Securities, the "Securities") to the Transferor. The
Collateral Interest and the Class D Securities are not being offered pursuant to
this prospectus supplement (the "Prospectus Supplement") and prospectus (the
"Prospectus"). The Collateral Interest will be subordinated to the Offered
Securities and the Class D Securities will be subordinated to the Offered
Securities and the Collateral Interest, in each case as described herein. The
Transferor may sell from time to time other series of securities that evidence
undivided interests in certain assets of the Trust, which may have terms
significantly different from the Offered Securities and which are not offered
hereby. The issuance of additional series of securities may impact the timing or
amount of payments received by holders of the Offered Securities.
Interest on the Securities will be paid on August 17, 1998 and on the 15th
day of each month thereafter (or, if any such 15th day is not a business day,
the next succeeding business day) (each, a "Distribution Date"). Interest on the
Securities with respect to each Distribution Date will accrue during the period
from and including the preceding Distribution Date (or, in the case of the first
Distribution Date, the Closing Date) to but excluding such Distribution Date (an
"Interest Period"). Interest on the Class A Securities will accrue during each
Interest Period at the Class A Interest Rate. "Class A Interest Rate" means a
rate PER ANNUM equal to the London interbank offered quotations rate for United
States dollar deposits for a period of one month ("LIBOR"), determined as of the
LIBOR Determination Date (as described herein), plus %. Interest on the Class
B Securities will accrue during each Interest Period at the Class B Interest
Rate. "Class B Interest Rate" means a rate PER ANNUM equal to LIBOR plus %.
Principal with respect to the Class A Securities is scheduled to be
distributed on the June 2003 Distribution Date (the "Class A Scheduled Payment
Date"), but may be paid earlier or later under certain limited circumstances
described herein. Principal with respect to the Class B Securities is scheduled
to be distributed on the June 2003 Distribution Date (the "Class B Scheduled
Payment Date"), but may be paid earlier or later under certain limited
circumstances described herein. See "Maturity Considerations" and "Series
Provisions -- Pay Out Events" herein and "Description of the Securities -- Pay
Out Events and Reinvestment Events" in the Prospectus. Principal payments will
not be made to the Class B Securityholders until the final principal payment has
been made in respect of the Class A Securities. See "Series Provisions --
Principal Payments."
There is currently no secondary market for the Offered Securities, and
there is no assurance that one will develop or, if one does develop, that it
will continue until the Offered Securities are paid in full.
-------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
SECURITIES, INCLUDING OVER-ALLOTMENT TRANSACTIONS, STABILIZING TRANSACTIONS,
SYNDICATE COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
-------------------------
THE OFFERED SECURITIES CONSTITUTE A SEPARATE SERIES OF INVESTOR SECURITIES
BEING OFFERED BY THE TRUST FROM TIME TO TIME PURSUANT TO A PROSPECTUS DATED JUNE
15, 1998. THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE OFFERED SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS AND PURCHASERS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UPON RECEIPT OF A REQUEST BY AN INVESTOR OR HIS OR HER REPRESENTATIVE,
WITHIN THE PERIOD DURING WHICH THERE IS A PROSPECTUS DELIVERY OBLIGATION, THE
UNDERWRITERS WILL TRANSMIT OR CAUSE TO BE TRANSMITTED PROMPTLY, WITHOUT CHARGE
AND IN ADDITION TO ANY SUCH DELIVERY REQUIREMENTS, A PAPER COPY OF A PROSPECTUS
SUPPLEMENT AND A PROSPECTUS OR A PROSPECTUS SUPPLEMENT AND A PROSPECTUS IN
ELECTRONIC FORMAT.
S-2
SUMMARY OF SERIES TERMS
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. REFERENCE IS MADE TO THE INDEX OF DEFINED TERMS
BEGINNING ON PAGE S-47 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 79 OF THE
PROSPECTUS FOR THE LOCATION HEREIN AND THEREIN OF THE DEFINITIONS OF CERTAIN
CAPITALIZED TERMS USED HEREIN. CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED
HEREIN HAVE THE MEANINGS ASSIGNED TO THEM IN THE PROSPECTUS.
Trust................................................. Partners First Credit Card Master Trust (the "Trust").
Title of Securities................................... $528,000,000 aggregate principal amount of Class A Series 1998-3
Floating Rate Asset Backed Securities (the "Class A Securities") and
$113,000,000 aggregate principal amount of Class B Series 1998-3
Floating Rate Asset Backed Securities (the "Class B Securities" and,
together with the Class A Securities, the "Offered Securities").
Beneficial interest in the Offered Securities will be issued in
minimum denominations of $1,000 and integral multiples of $1,000 in
excess thereof.
Initial Invested Amount............................... $750,000,000 (the "Initial Invested Amount").
Class A Initial Invested Amount....................... $528,000,000 (the "Class A Initial Invested Amount").
Class B Initial Invested Amount....................... $113,000,000 (the "Class B Initial Invested Amount").
Collateral Initial Invested Amount.................... $67,000,000 (the "Collateral Initial Invested Amount").
Class D Initial Invested Amount....................... $42,000,000 (the "Class D Initial Invested Amount").
Series Required Transferor Amount..................... For any date, 7% of the Invested Amount (the "Series Required
Transferor Amount").
Class A Interest Rate................................. The Class A Interest Rate will be a rate PER ANNUM equal to LIBOR
plus %.
Class B Interest Rate................................. The Class B Interest Rate will be a rate PER ANNUM equal to LIBOR
plus %.
Distribution Dates.................................... On August 17, 1998 and on the 15th day of each month thereafter (or,
if any such 15th day is not a business day, the next succeeding
business day).
Interest Period....................................... Interest on the Offered Securities with respect to each Distribution
Date will accrue during the period from and including the preceding
Distribution Date (or, in the case of the first Distribution Date,
the Closing Date) to but excluding such Distribution Date.
Controlled Accumulation Amount........................ For each Distribution Date with respect to the Controlled
Accumulation Period, $53,416,667; except that, if the commencement of
the Controlled Accumulation Period is delayed as described herein
under "Series Provisions -- Principal Payments," the Controlled
Accumulation Amount for each Distribution Date with respect to the
Controlled Accumulation Period will be determined as described under
"Series Provisions -- Application of Collections -- Payments of
Principal" herein.
Class A Scheduled Payment Date........................ The June 2003 Distribution Date.
Class B Scheduled Payment Date........................ The June 2003 Distribution Date.
Closing Date.......................................... , 1998 (the "Closing Date").
Series Invested Amount................................ The Initial Invested Amount.
S-3
The Offered Securities, the Collateral Interest and
the Class D Securities.............................. Each of the Offered Securities represents an undivided interest in
the Trust. The portion of the Trust Assets allocated to the Offered
Securities as described under "Description of the Pooling and
Servicing Agreement -- Allocations" in the Prospectus will be further
allocated among the interest of the holders of the Class A Securities
(the "Class A Securityholders' Interest"), the interest of the
holders of the Class B Securities (the "Class B Securityholders'
Interest"), the interest of the Collateral Interest Holder (as
defined below), the interest of the holders of the Class D Securities
(the "Class D Securityholders' Interest"), and the interest of the
holders of the Transferor Security (the "Transferor's Interest"), as
described below. The Class A Securityholders' Interest and the Class
B Securityholders' Interest are sometimes collectively referred to
herein as the "Offered Securityholders' Interest." The holders of the
Offered Securityholders' Interest are referred to herein as the
"Series Securityholders." A specified undivided interest in the Trust
Assets (the "Collateral Interest") in the initial amount of
$67,000,000 (which amount represents 9.0% of the sum of the Class A
Initial Invested Amount, the Class B Initial Invested Amount, the
Collateral Initial Invested Amount and the Class D Initial Invested
Amount) and the Class D Securities in the initial amount of
$42,000,000 (which amount represents 5.5% of the sum of the Class A
Initial Invested Amount, the Class B Initial Invested Amount, the
Collateral Initial Invested Amount and the Class D Initial Invested
Amount) constitute Credit Enhancement for the Offered Securities. The
holder of the Collateral Interest is referred to herein as the
"Collateral Interest Holder." Allocations will be made to the
Collateral Interest and the Collateral Interest Holder will have
voting and certain other rights as if the Collateral Interest were a
subordinated class of Securities. Allocations also will be made to
the Class D Securities; however, the Transferor, as initial holder of
the Class D Securities, will not be able to exercise any of such
voting and other rights. The Transferor's Interest will represent the
right to the assets of the Trust not allocated to the Class A
Securityholders' Interest, the Class B Securityholders' Interest, the
Collateral Interest, the Class D Securityholders' Interest or the
holders of other interests in the Trust. The principal amount of the
Transferor's Interest will fluctuate as the amount of Receivables in
the Trust changes from time to time.
The aggregate amount of Principal Receivables allocated to the
Offered Securityholders' Interest, the Collateral Interest and the
Class D Securityholders' Interest (the "Invested Amount") will be
$750,000,000 on the Closing Date (the "Initial Invested Amount").
The aggregate amount of Principal Receivables allocable to the Class
A Securityholders' Interest (as more fully described herein, the
"Class A Invested Amount") will be $528,000,000 on the Closing Date
(the "Class A Initial Invested Amount"). The aggregate amount of
Principal Receivables allocable to the Class B Securityholders'
Interest (as more fully described herein, the "Class B Invested
Amount") will be $113,000,000 on the Closing Date (the "Class B
Initial Invested Amount"). The aggregate amount of Principal
Receivables allocable to the Collateral Interest (as more fully
described herein, the "Collateral Invested Amount") will be
$67,000,000 on the Closing Date (the "Collateral Initial Invested
Amount"). The aggregate amount of Principal Receivables allocable
S-4
to the Class D Securityholders' Interest (as more fully described
herein, the "Class D Invested Amount") will be $42,000,000 on the
Closing Date (the "Class D Initial Invested Amount"). For purposes of
this Prospectus Supplement, the Collateral Invested Amount and the
Class D Invested Amount will be deemed to be the "Enhancement
Invested Amount" for the Offered Securities. The Class B
Securityholders' Interest will decline in certain circumstances as a
result of (a) the allocation to the Class B Securityholders' Interest
of certain Defaulted Amounts, including such amounts otherwise
allocable to the Class A Securityholders' Interest when the Class D
Invested Amount and the Collateral Invested Amount are each zero and
(b) the redirection of collections of Principal Receivables otherwise
allocable to the Class B Securityholders' Interest to fund certain
payments in respect of the Class A Securities. Any such reductions in
the Class B Securityholders' Interest may be reimbursed out of Excess
Spread, if any, Excess Finance Charge Collections allocable to the
Series offered hereby (the "Offered Series"), if any, and from the
redirection of certain amounts allocable first to the Class D
Securities and then to the Collateral Interest as described herein.
During the Controlled Accumulation Period, for the purpose of
allocating collections of Finance Charge Receivables and the
Defaulted Amount with respect to each Monthly Period, the Class A
Securityholders' Interest will be further reduced (in an amount not
to exceed the Class A Invested Amount) by the amount on deposit in
the Principal Funding Account (as so reduced, the "Class A Adjusted
Invested Amount") and the Class B Securityholders' Interest will be
further reduced by the amount by which the amount on deposit in the
Principal Funding Account exceeds the Class A Invested Amount (as so
reduced, the "Class B Adjusted Invested Amount," and, together with
the Class A Adjusted Invested Amount, the Collateral Invested Amount
and the Class D Invested Amount, the "Adjusted Invested Amount"). The
principal amount of the Transferor's Interest will fluctuate as the
amount of Principal Receivables in the Trust, the adjusted invested
amount of each Series and the amounts on deposit in the Special
Funding Account change from time to time.
The Class A Securities, the Class B Securities, the Collateral
Interest and the Class D Securities will each include the right to
receive (but only to the extent needed to make required payments on
each Distribution Date under the Pooling and Servicing Agreement)
varying percentages of the collections of Finance Charge Receivables
and Principal Receivables and will be allocated varying percentages
of the Defaulted Amount with respect to each Monthly Period.
Collections of Finance Charge Receivables and Principal Receivables
and the Defaulted Amount will be allocated to the Offered Series
based on the Series Allocation Percentage for the Offered Series
(subject to redirection, in the case of certain Series Allocable
Finance Charge Collections to other Series in Group I as described
under "Description of the Pooling and Servicing Agreement --
Reallocations Among Securities of Different Series within a Reallocation
Group" in the Prospectus). Redirected Investor Finance Charge
Collections and the Series Default Amount will be further allocated among
the holders of the Class A Securities, the holders of the Class B
Securities, the Collateral Interest Holder and the holders of the Class D
Securities based on the Class A Floating
S-5
Percentage, the Class B Floating Percentage, the Collateral Floating
Percentage and the Class D Floating Percentage, respectively (each as
defined herein). The Principal Allocation Percentage of Series
Allocable Principal Collections will be allocated among the holders
of the Class A Securities, the Class B Securities, the Collateral
Interest and the Class D Securities based on the Class A Principal
Percentage, the Class B Principal Percentage, the Collateral
Principal Percentage and the Class D Principal Percentage,
respectively.
Other Series.......................................... The Offered Securities will be the third Series of asset backed
securities issued by the Trust (any such securities of any Series,
"Investor Securities"). The initial Series of Investor Securities
issued by the Trust, Series 1998-1, will be repaid on or prior to the
Closing Date.
Concurrently with the issuance of the Offered Securities, the Trust
will issue a Series of Investor Securities in the initial aggregate
principal amount of $750,000,000, designated as "Partners First
Credit Card Master Trust, Series 1998-2." Such Series of Investor
Securities will be part of Group I. Additional Series are expected to
be issued from time to time by the Trust. See "Description of
the Pooling and Servicing Agreement -- New Issuances" and
" -- Reallocations Among Securities of Different Series within a
Reallocation Group" in the Prospectus and "Maturity Considerations"
herein.
Receivables........................................... The Receivables arise in Accounts that have been selected from the
total portfolio of VISA(Register mark) and MasterCard(Register mark)*
accounts serviced by Partners First, based on criteria provided in
the Pooling and Servicing Agreement as applied on January 29, 1998 or
the applicable cut-off date for any Accounts added thereafter as more
fully described herein under "The Partners First Portfolio." The
aggregate amount of Receivables in the Accounts as of April 30, 1998
was $1,770,206,794, comprised of $1,733,134,153 of Principal
Receivables and $37,072,641 of Finance Charge Receivables.
Registration of the Offered Securities................ The Offered Securities initially will be represented by securities
registered in the name of Cede, as the nominee of DTC. No purchaser
of an Offered Security will be entitled to receive a definitive
security except under certain limited circumstances described in the
Prospectus. Purchasers of the Offered Securities may elect to hold
their Securities through DTC (in the United States) or Cedel or
Euroclear (in Europe). See "Series Provisions -- Delivery, Form,
Transfer and Exchange" herein and "Description of the
Securities -- Definitive Securities" in the Prospectus.
Servicing Fee......................................... The Servicing Fee Rate for the Offered Securities will be 2% PER
ANNUM. On each Distribution Date, Servicer Interchange with respect
to the related Monthly Period will be withdrawn from the Collection
Account and paid to the Servicer in respect of the Servicing Fee. The
Class A Servicing Fee, the Class B Servicing Fee, the Collateral
Interest Servicing Fee and the Class D Servicing Fee (each as defined
herein) will be paid on each Distribution Date as described under
"Series Provisions -- Application of Collections -- Payment of Fees,
Interest and Other Items" and " -- Servicing Compensation and Payment
of Expenses" herein. See "Description of the Securities -- Servicing
of Expenses" in the Prospectus.
- -------------------------
*VISA and MasterCard are registered trademarks of VISA USA, Inc. ("VISA") and
MasterCard International Incorporated ("MasterCard"), respectively.
S-6
Revolving Period and Controlled Accumulation
Period.............................................. The "Revolving Period" with respect to the Offered Securities means
the period from and excluding the Closing Date to, but not including,
the earlier of (a) the commencement of the controlled accumulation
period with respect to the Offered Securities (the "Controlled
Accumulation Period") and (b) the commencement of the Early
Amortization Period. Unless a Pay Out Event has occurred, the
Controlled Accumulation Period will commence at the close of business
on May 31, 2002; PROVIDED, that subject to the conditions set forth
under "Series Provisions -- Principal Payments" herein, the day on
which the Revolving Period ends and the Controlled Accumulation
Period begins may be delayed to no later than the close of business
on April 30, 2003. The Controlled Accumulation Period will end on the
earliest of (a) the commencement of the Early Amortization Period,
(b) the payment in full of the Invested Amount and (c) the Series
Termination Date for the Offered Series (the "Stated Series
Termination Date"). No principal will be payable to Class A
Securityholders until the June 2003 Distribution Date (the "Class A
Scheduled Payment Date") or, upon the occurrence of a Pay Out Event
as described herein, the first Distribution Date with respect to the
Early Amortization Period. No principal will be payable to the Class
B Securityholders until the Class A Invested Amount is paid in full.
Principal with respect to the Class B Securities is expected to be
distributed on the June 2003 Distribution Date (the "Class B
Scheduled Payment Date"). No principal will be payable to the
Collateral Interest Holder until the Class B Invested Amount is paid
in full; PROVIDED, that during the Revolving Period or the Controlled
Accumulation Period, certain collections of Principal Receivables
allocable to the Offered Securityholders' Interest and the Collateral
Interest will be paid to the Collateral Interest Holder to the extent
the sum of the Collateral Invested Amount and the Class D Invested
Amount exceeds the Required Enhancement Amount. No principal will be
payable to the Class D Securityholders until the Collateral Invested
Amount has been paid in full. For the period beginning on the Closing
Date and ending with the earlier of the commencement of the
Controlled Accumulation Period or the Early Amortization Period,
collections of Principal Receivables otherwise allocable to the
Offered Securityholders' Interest, the Collateral Interest and the
Class D Securityholders' Interest (other than collections of
Principal Receivables allocated to the Class B Securityholders'
Interest, the Collateral Interest and the Class D Securityholders'
Interest ("Redirected Principal Collections") that are used to pay
any deficiency in the Class A Required Amount, the Class B Required
Amount or the Collateral Required Amount) will, subject to certain
limitations, be treated as Shared Principal Collections and applied
to cover principal payments due to or for the benefit of
securityholders of other Principal Sharing Series, or paid to the
holder of the Transferor Security or, in certain circumstances,
deposited in the Special Funding Account. See "Series
Provisions -- Pay Out Events" herein and "Description of the
Securities -- Pay Out Events and Reinvestment Events" in the
Prospectus for a discussion of the events which might lead to the
termination of the Revolving Period prior to the commencement of the
Controlled Accumulation Period. In addition, see "Series
Provisions -- Principal Payments" herein
S-7
and "Description of the Pooling and Servicing Agreement -- Shared
Principal Collections" in the Prospectus.
Early Amortization Period............................. During the period commencing at the close of business on the business
day immediately preceding the day on which a Pay Out Event has
occurred and ending on the earlier of (a) the payment of the Invested
Amount in full and (b) the Stated Series Termination Date (the "Early
Amortization Period"), Available Principal Collections (as defined
herein) will be distributed monthly on each Distribution Date to the
holders of the Class A Securities and, following payment in full of
the Class A Invested Amount, to the holders of the Class B Securities
and, following payment in full of the Class B Invested Amount, to the
Collateral Interest Holder and, following payment in full of the
Collateral Invested Amount, to the holders of the Class D Securities
beginning with the Distribution Date in the month following the
commencement of the Early Amortization Period. See "Series
Provisions -- Pay Out Events" herein and "Description of the
Securities -- Pay Out Events and Reinvestment Events" in the
Prospectus for a discussion of the events which might lead to the
commencement of the Early Amortization Period.
Subordination of the Class B Securities, the
Collateral Interest and the Class D Securities...... The Class B Securities, the Collateral Interest and the Class D
Securities will be subordinated, as described herein, to the extent
necessary to fund payments with respect to the Class A Securities as
described herein. In addition, the Collateral Interest and the Class
D Securities will be subordinated to the extent necessary to fund
certain payments with respect to the Class B Securities. If the
Collateral Invested Amount and the Class D Invested Amount are each
reduced to zero, holders of the Class B Securities will bear directly
the credit and other risks associated with their interest in the
Trust. To the extent the Class B Invested Amount is reduced, the
percentage of collections of Finance Charge Receivables allocable to
holders of the Class B Securities in subsequent Monthly Periods will
be reduced. Moreover, to the extent the amount of such reduction in
the Class B Invested Amount is not reimbursed, the amount of
principal distributable to holders of the Class B Securities will be
reduced. Such reductions of the Class B Invested Amount will
thereafter be reimbursed and the Class B Invested Amount increased on
each Distribution Date by the amount, if any, of Excess Spread and
Excess Finance Charge Collections allocable to the Offered Series for
such Distribution Date available for that purpose. See "Description
of the Pooling and Servicing Agreement -- Credit
Enhancement -- Subordination" in the Prospectus.
Yield Supplement Account.............................. The Securities will have the benefit of an account (the "Yield
Supplement Account") which will be held in the name of the Trustee
for the benefit of the holders of Securities (collectively, the
"Securityholders"). On the Closing Date, the Transferor will deposit
$11,250,000 (the "Initial Yield Supplement Deposit") into the Yield
Supplement Account. On each Distribution Date, an amount equal to the
Yield Supplement Draw Amount will be released and deposited into the
Collection Account and will be treated as collections of Finance
Charge Receivables allocable to the Securities. The Yield Supplement
Account will not be replenished following the withdrawals of amounts
on deposit therein on any Distribution Date.
S-8
The "Yield Supplement Draw Amount" means an amount equal to the sum
of (i) 1/9th of the Initial Yield Supplement Deposit for the six
Distribution Dates from and including the August 1998 Distribution
Date through and including the January 1999 Distribution Date, (ii)
1/18th of the Initial Yield Supplement Deposit for the six
Distribution Dates from and including the February 1999 Distribution
Date through and including the July 1999 Distribution Date and (iii)
with respect to any such Distribution Date, the investment earnings
on the amounts on deposit in the Yield Supplement Account during the
preceding Interest Period. See "Series Provisions -- Yield Supplement
Account" herein.
Additional Amounts Available to Series
Securityholders..................................... With respect to any Distribution Date, Excess Spread and Excess
Finance Charge Collections allocable to the Offered Series will be
applied to fund the Class A Required Amount, the Class B Required
Amount and the Collateral Required Amount, as well as certain other
items. The "Class A Required Amount" means, with respect to any
Distribution Date, the amount, if any, by which the sum of (a) the
Class A Monthly Interest due on such Distribution Date and any
overdue Class A Monthly Interest and Class A Additional Interest and
any overdue Class A Additional Interest, (b) the Class A Servicing
Fee for such Distribution Date and any overdue Class A Servicing Fee
and (c) the Class A Default Amount, if any, for the related Monthly
Period exceeds the Class A Available Funds for the related Monthly
Period. The "Class B Required Amount" means, with respect to any
Distribution Date, the amount equal to the sum of (a) the amount, if
any, by which the sum of (i) the Class B Monthly Interest due on the
related Distribution Date and any overdue Class B Monthly Interest
and Class B Additional Interest and any overdue Class B Additional
Interest and (ii) the Class B Servicing Fee for such Distribution
Date and any overdue Class B Servicing Fee exceeds the Class B
Available Funds for the related Monthly Period and (b) the Class B
Default Amount, if any, for the related Monthly Period. The
"Collateral Required Amount" means, with respect to any Distribution
Date, the amount equal to the sum of (a)(i) the Collateral Monthly
Interest due on such Distribution Date and any overdue Collateral
Monthly Interest and Collateral Additional Interest and any overdue
Collateral Additional Interest and (ii) the Collateral Default
Amount, if any, for the related Monthly Period and (b) the amount, if
any, by which the Collateral Servicing Fee for such Distribution Date
and any overdue Collateral Servicing Fee exceeds the Collateral
Available Funds for the related Monthly Period. The "Required Amount"
for any Monthly Period shall mean the sum of (a) the Class A Required
Amount, (b) the Class B Required Amount and (c) the Collateral
Required Amount, for such Monthly Period. "Excess Spread" for any
Transfer Date will equal the sum of (a) the excess of (i) Class A
Available Funds for the related Monthly Period over (ii) the sum of
the amounts referred to in clauses (a), (b) and (c) in the definition
of "Class A Required Amount" above, (b) the excess of (i) Class B
Available Funds for the related Monthly Period over (ii) the sum of
the amounts referred to in clauses (a) (i) and (ii) in the definition
of "Class B Required Amount" above, (c) Collateral Available Funds
(as defined herein) for the related Monthly Period not used to pay
S-9
the Collateral Interest Servicing Fee, as described herein and (d)
the Class D Available Funds for the related Monthly Period not used
to pay the Class D Servicing Fee.
If, on any Distribution Date, Excess Spread and Excess Finance Charge
Collections allocable to the Offered Series are less than the Class A
Required Amount, collections of Principal Receivables allocable first
to the Class D Securityholders' Interest, second to the Collateral
Interest and last to the Class B Securityholders' Interest with
respect to the related Monthly Period will be redirected to fund the
remaining Class A Required Amount. If such Redirected Principal
Collections with respect to such Monthly Period are insufficient to
fund the remaining Class A Required Amount for the related
Distribution Date, then the Class D Invested Amount (after giving
effect to any Redirected Principal Collections on such Distribution
Date) will be reduced by the amount of such deficiency (but not by
more than the Class A Default Amount for such Monthly Period). In the
event that such reduction would cause the Class D Invested Amount to
be a negative number, the Class D Invested Amount will be reduced to
zero, and the Collateral Invested Amount (after giving effect to
reductions for any Redirected Principal Collections for which the
Class D Invested Amount was not reduced on such Distribution Date)
will be reduced by the amount by which the Class D Invested Amount
would have been reduced below zero (but not by more than the excess
of the Class A Default Amount, if any, for such Monthly Period over
the amount of the reduction, if any, of the Class D Invested Amount
in respect of the Class A Default Amount on such Distribution Date).
In the event that such reduction would cause the Collateral Invested
Amount to be a negative number, the Collateral Invested Amount will
be reduced to zero, and the Class B Invested Amount (after giving
effect to reductions for any Redirected Principal Collections for
which the Collateral Invested Amount was not reduced on such
Distribution Date) will be reduced by the amount by which the
Collateral Invested Amount would have been reduced below zero (but
not by more than the excess of the Class A Default Amount, if any,
for such Monthly Period over the amount of the reductions, if any, of
the Class D Invested Amount and the Collateral Invested Amount in
respect of the Class A Default Amount on such Distribution Date). In
the event that such reduction would cause the Class B Invested Amount
to be a negative number, the Class B Invested Amount will be reduced
to zero, and the Class A Invested Amount will be reduced by the
amount by which the Class B Invested Amount would have been reduced
below zero (but not by more than the excess, if any, of the Class A
Default Amount for such Monthly Period over the amount of the
reductions, if any, in the Class D Invested Amount, Collateral
Invested Amount and the Class B Invested Amount in respect of the
Class A Default Amount on such Distribution Date) (such reduction, a
"Class A Charge-Off"). If the Class D Invested Amount, the Collateral
Invested Amount and the Class B Invested Amount are reduced to zero,
the Class A Securityholders will bear directly the credit and other
risks associated with their undivided interest in the Trust. See
"Series Provisions -- Redirection of Cash Flows" and " -- Defaulted
Receivables; Charge-Offs" herein.
S-10
If, on any Distribution Date, Excess Spread and Excess Finance Charge
Collections allocated to the Offered Series not required to pay the
Class A Required Amount or reimburse Class A Charge-Offs is less than
the Class B Required Amount, Redirected Principal Collections
allocable first to the Class D Securities and second to the
Collateral Interest for the related Monthly Period not required to
pay the Class A Required Amount will be used to fund the remaining
Class B Required Amount. If such remaining Redirected Principal
Collections allocable to the Class D Securities with respect to such
Monthly Period are insufficient to fund the remaining Class B
Required Amount for such Distribution Date, then the Class D Invested
Amount (after giving effect to reductions for any Redirected
Principal Collections and any adjustments made thereto for the
benefit of the Class A Securityholders) will be reduced by the amount
of such deficiency (but not by more than the Class B Default Amount
for such Monthly Period). In the event that such reduction would
cause the Class D Invested Amount (after giving effect to any
reductions for any Redirected Principal Collections and any
reductions to the Class D Invested Amount pursuant to the preceding
paragraph) to be a negative number, the Class D Invested Amount will
be reduced to zero, and the Collateral Invested Amount (after giving
effect to any reductions for Redirected Principal Collections for
which the Class D Invested Amount was not reduced on such
Distribution Date) will be reduced by the amount by which the Class D
Invested Amount would have been reduced below zero (but not by more
than the excess, if any, of the Class B Default Amount over the
reduction, if any, in the Class D Invested Amount in respect of the
Class A Default Amount and the Class B Default Amount). In the event
that such reduction would cause the Collateral Invested Amount (after
giving effect to any reductions for Redirected Principal Collections
for which the Class D Invested Amount was not reduced on such
Distribution Date) to be a negative number, the Collateral Invested
Amount will be reduced to zero, and the Class B Invested Amount
(after giving effect to any reductions for Redirected Principal
Collections for which the Collateral Invested Amount was not reduced
on such Distribution Date) will be reduced by the amount by which the
Collateral Invested Amount would have been reduced below zero (but
not by more than the excess, if any, of the Class B Default Amount
over the reductions, if any, in the Class D Invested Amount and the
Collateral Invested Amount in respect of the Class A Default Amount
and the Class B Default Amount on such Distribution Date) (such
reduction, a "Class B Charge-Off"). In the event of a reduction of
the Class A Invested Amount, the Class B Invested Amount, the
Collateral Invested Amount or the Class D Invested Amount, the amount
of principal and interest available to fund payments with respect to
the Class A Securities and the Class B Securities will be decreased.
See "Series Provisions -- Redirection of Cash Flows" and
" -- Defaulted Receivables; Charge-Offs" herein.
Credit Enhancement.................................... The Collateral Invested Amount and the Class D Invested Amount
constitute the Credit Enhancement for the Offered Securities. On each
Distribution Date, the amount of Credit Enhancement required to be
maintained for the benefit of the holders of the Offered Securities
will equal the Required Enhancement Amount. The
S-11
"Required Enhancement Amount" means, subject to certain limitations
more fully described herein, (a) $109,000,000 on the initial
Distribution Date and (b) on any Distribution Date thereafter, an
amount equal to the greater of (i) 14.5% of the sum of the Class A
Adjusted Invested Amount and the Class B Adjusted Invested Amount on
such Distribution Date (in each case after taking into account
deposits into the Principal Funding Account and payments to be made
on such Distribution Date) and the Collateral Invested Amount and the
Class D Invested Amount on such Distribution Date, and (ii) 5.0% of
the Initial Invested Amount; PROVIDED, HOWEVER, (1) if certain
reductions in the Collateral Invested Amount are made or if a Pay Out
Event occurs, the Required Enhancement Amount for such Distribution
Date will equal the Required Enhancement Amount for the Distribution
Date immediately preceding the occurrence of such reduction or Pay
Out Event; (2) in no event will the Required Enhancement Amount
exceed the unpaid principal amount of the Offered Securities as of
the last day of the Monthly Period immediately preceding such
Distribution Date after taking into account payments to be made on
such immediately preceding Distribution Date and subtracting amounts
then on deposit in the Principal Funding Account; and (3) the
Required Enhancement Amount may be reduced at the Transferor's option
at any time to a lesser amount if the Rating Agency Condition is
satisfied. See "Series Provisions -- Required Enhancement Amount."
Redirected Investor Finance Charge Collections........ Series 1998-3 will be one of two Series of Investor Securities to be
outstanding at the close of business on the Closing Date, each of
which will be part of the same Reallocation Group of Series ("Group
I") which may include additional Series to be issued by the Trust
from time to time. Collections of Finance Charge Receivables
allocable to the Investor Securities of each Series in Group I will
be aggregated and made available for certain required distributions
to all Series in Group I PRO RATA based upon the relative amount of
such required distributions for each Series in Group I as described
under "Description of the Pooling and Servicing Agreement --
Reallocations Among Securities of Different Series within a
Reallocation Group" in the Prospectus. Consequently, any issuance of
a new Series in Group I may have the effect of reducing or increasing
the amount of collections of Finance Charge Receivables allocable to
the Offered Securities. See "Risk Factors -- Issuance of New Series"
in the Prospectus. In addition, it has not been determined whether
any Series issued by the Trust in the future will be included in
Group I.
Shared Principal Collections.......................... The Offered Series has been designated as a Principal Sharing Series.
Collections of Principal Receivables and certain other amounts
otherwise allocable to other Principal Sharing Series, if any, to the
extent such collections are not needed to make payments to or
deposits for the benefit of the securityholders of such other Series,
will be applied to cover principal payments due to or for the benefit
of the Series Securityholders. See "Description of the Pooling and
Servicing Agreement -- Shared Principal Collections" in the
Prospectus. There can be no assurance that any Series issued by the
Trust in the future will be designated a Principal Sharing Series.
S-12
Excess Finance Charge Collections..................... The Offered Series has been designated as an Excess Allocation
Series. See "Description of the Pooling and Servicing Agree-
ment -- Sharing of Excess Finance Charge Collections Among Excess
Allocation Series" in the Prospectus. There can be no assurance that
any Series issued by the Trust in the future will be designated an
Excess Allocation Series.
Optional Repurchase................................... The Offered Securityholders' Interest, the Collateral Interest and
the Class D Securityholders' Interest will be subject to optional
repurchase by the Transferor on any Distribution Date on or after the
Distribution Date on which the sum of the Class A Invested Amount,
the Class B Invested Amount, the Collateral Invested Amount and the
Class D Invested Amount, if any, is reduced to an amount which is not
more than $75,000,000 (10% of the Initial Invested Amount). The
purchase price will be equal to the sum of (i) the Class A Invested
Amount and the Class B Invested Amount (less the Principal Funding
Account Balance, if any), (ii) the Collateral Invested Amount, if
any, and the Class D Invested Amount, if any, and (iii) accrued and
unpaid interest on the Offered Securities, the Collateral Interest
and the Class D Securities (and accrued and unpaid interest with
respect to interest amounts that were due but not paid on a prior
Interest Payment Date) through the day preceding such Distribution
Date.
Defeasance............................................ The Securities may be defeased in whole or in part at any time upon
satisfaction of the following conditions: (i) there shall have been
deposited (x) in the Principal Funding Account an amount equal to the
sum of the outstanding principal balances of the Class A Securities,
the Class B Securities and the Collateral Interest, which amount
shall be invested in Eligible Investments and (y) in the Reserve
Account an amount equal to or greater than the anticipated excess of
the Base Rate over the investment earnings on the amount deposited in
the Principal Funding Account pursuant to clause (x), as estimated by
the Transferor, for the period from the date of such deposit to the
Principal Funding Account through the Class B Scheduled Payment Date;
(ii) the Transferor shall have delivered to the Trustee an opinion of
counsel to the effect that such deposit and termination of
obligations will not result in the Trust being required to register
as an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, and an opinion of counsel to the
effect that following such deposit none of the Trust, the Reserve
Account or the Principal Funding Account will be deemed to be an
association (or publicly traded partnership) taxable as a
corporation; (iii) the Transferor shall have delivered to the Trustee
a certificate of an officer of the Transferor stating that the
Transferor reasonably believes that such deposits will not constitute
a Pay Out Event or any event that, with the giving of notice or the
lapse of time, would cause a Pay Out Event to occur; (iv) the Rating
Agency Condition shall have been satisfied in connection with such
events; and (v) the amounts deposited into the Principal Funding
Account and the Reserve Account pursuant to the foregoing clauses (x)
and (y) are proceeds from the issuance of a Series of Investor
Securities. If the Securities have been defeased in whole, the
Securities will no longer be entitled to the security interest of the
Trust in the Receivables and other Trust assets (except those set
forth above), and the percentages applicable to the allocation to the
S-13
Securityholders of Principal Collections, Finance Charge Collections
and Defaulted Receivables will be reduced to zero. Upon the
satisfaction of the foregoing conditions, the Class D Invested Amount
will be reduced to zero. See "Series Provisions -- Defeasance"
herein.
Stated Series Termination Date........................ The November 2006 Distribution Date. See "Series Provisions -- Series
Termination" herein.
Trustee............................................... The Bank of New York, in its capacity as Trustee under the Pooling
and Servicing Agreement.
Tax Status............................................ Special tax counsel to the Transferor is of the opinion that under
existing law the Offered Securities will be characterized as debt for
federal income tax purposes. Under the Pooling and Servicing
Agreement, the Security Owners will agree to treat the Offered
Securities as debt of the Transferor for federal income tax purposes.
See "U.S. Federal Income Tax Consequences" in the Prospectus for
additional information concerning the application of federal income
tax laws.
ERISA Considerations.................................. Subject to the considerations described below, the Class A Securities
are eligible for purchase by employee benefit plan investors. Under a
regulation issued by the United States Department of Labor, the
Trust's assets would not be deemed "plan assets" of an employee
benefit plan holding the Class A Securities if the Class A Securities
qualify as "publicly offered securities" under the regulation. To
qualify as publicly offered securities, certain conditions must be
met, including that the Class A Securities must be held, upon
completion of the public offering made hereby, by at least 100
investors who are independent of the Transferor and of one another.
The Class A Underwriters expect that the Class A Securities will be
held by at least 100 independent investors at the conclusion of the
offering, although no assurance can be given, and no monitoring or
other measures will be taken to ensure, that such condition will be
met. The Transferor anticipates that the other conditions of the
regulation will also be met. If the Trust's assets were deemed to be
"plan assets" of an employee benefit plan investor (E.G., if the 100
independent investor criterion is not satisfied), violations of the
"prohibited transaction" rules of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"), could result
and generate excise tax and other liabilities unless a statutory,
regulatory or administrative exemption is available. It is uncertain
whether existing exemptions from the "prohibited transaction" rules
of ERISA and Section 4975 of the Code would apply to all transactions
involving the Trust's assets. Accordingly, fiduciaries or other
persons contemplating purchasing the Class A Securities on behalf or
with "plan assets" of any employee benefit plan should consult their
counsel before making a purchase. See "ERISA Considerations" in the
Prospectus.
The Class B Underwriters currently do not expect that the Class B
Securities will be held by at least 100 independent investors and,
therefore, do not expect that the Class B Securities will qualify as
publicly offered securities under the regulation referred to in the
preceding paragraph. Accordingly, the Class B Securities may not be
acquired by (a) any employee benefit plan that is subject to
S-14
ERISA, (b) any plan or other arrangement (including an individual
retirement account or Keogh plan) that is subject to Section 4975 of
the Code, or (c) any entity whose underlying assets include "plan
assets" under the regulation (or otherwise under ERISA) by reason of
any such plan's investment in the entity, including without
limitation an insurance company general account (each of (a), (b) and
(c), a "Plan"). By its acceptance of a Class B Security or any
interest therein, each Class B Securityholder will be deemed to have
represented and warranted that it is neither a Plan nor acquiring or
holding such Class B Security or interest therein for, on behalf of
or otherwise using the plan assets of any Plan.
Class A Security Rating............................... It is a condition to the issuance of the Class A Securities that they
be rated in the highest rating category by at least one nationally
recognized rating agency. The rating of the Class A Securities is
based primarily on the value of the Receivables, the terms of the
Class B Securities and the benefits of the Collateral Interest, the
Class D Securities and the Yield Supplement Account. See "Risk
Factors -- Limited Nature of Rating" in the Prospectus.
Class B Security Rating............................... It is a condition to the issuance of the Class B Securities that they
be rated in one of the three highest rating categories by at least
one nationally recognized rating agency. The rating of the Class B
Securities is based primarily on the value of the Receivables and the
benefits of the Collateral Interest, the Class D Securities and the
Yield Supplement Account. See "Risk Factors -- Limited Nature of
Rating" in the Prospectus.
S-15
RISK FACTORS
POTENTIAL INVESTORS SHOULD CONSIDER THE RISK FACTORS DISCUSSED UNDER "RISK
FACTORS" IN THE PROSPECTUS AND THE FOLLOWING RISK FACTORS IN CONNECTION WITH THE
PURCHASE OF THE OFFERED SECURITIES.
LIMITED AMOUNTS OF CREDIT ENHANCEMENT. Although Credit Enhancement with
respect to the Class A Securities will be provided by the subordination of the
Class B Securities, the Collateral Interest and the Class D Securities to the
extent described herein and by the Yield Supplement Account, and with respect to
the Class B Securities, by the subordination of the Collateral Interest and the
Class D Securities to the extent described herein and by the Yield Supplement
Account, the amount available thereunder is limited, may decline during the
Controlled Accumulation Period and will be reduced by payments made pursuant
thereto. If the Enhancement Invested Amount has been reduced to zero, Class B
Securityholders will bear directly the credit and other risks associated with
their undivided interest in the Trust and the Class B Invested Amount may be
reduced. If the Class B Invested Amount is reduced to zero, Class A
Securityholders will bear directly the credit and other risks associated with
their undivided interest in the Trust. Further, in the event of a reduction of
the Class B Invested Amount or the Enhancement Invested Amount, the amount of
principal and interest available to make distributions with respect to the Class
A Securities and the Class B Securities may be reduced.
EFFECT OF SUBORDINATION OF CLASS B SECURITIES; PRINCIPAL PAYMENTS. The
Class B Securities are subordinated in right of payment of principal to the
Class A Securities. Payments of principal in respect of the Class B Securities
will not commence until after the final principal payment with respect to the
Class A Securities has been made as described herein. Moreover, the Class B
Invested Amount is subject to reduction if the Class A Required Amount for any
Monthly Period is greater than zero and is not funded from Excess Spread and
Excess Finance Charge Collections allocated to the Offered Series, Redirected
Principal Collections with respect to the Class D Securities and reductions in
the Class D Invested Amount, if any, and Redirected Principal Collections with
respect to the Collateral Interest and reductions in the Collateral Invested
Amount, if any. To the extent the Class B Invested Amount is reduced, the
percentage of collections of Finance Charge Receivables allocable to the Class B
Securityholders' Interest in future Monthly Periods will be reduced. Moreover,
to the extent the amount of such reduction in the Class B Invested Amount is not
reimbursed, the amount of principal and interest distributable to the Class B
Securityholders will be reduced. See "Series Provisions -- Allocation
Percentages" and " -- Subordination of the Class B Securities, the Collateral
Interest and the Class D Securities" herein. If the Class B Invested Amount is
reduced to zero, the holders of the Class A Securities will bear directly the
credit and other risks associated with their undivided interest in the Trust.
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement and the Supplement for the Offered
Series provide that the Class A Securityholders will not receive payments of
principal until the Class A Scheduled Payment Date, or earlier in the event of a
Pay Out Event which results in the commencement of the Early Amortization
Period. Class A Securityholders will receive payments of principal on each
Distribution Date following the Monthly Period in which a Pay Out Event occurs
until the Class A Invested Amount has been paid in full or the Stated Series
Termination Date has occurred. The Class B Securityholders will not receive
payments of principal until the Class B Scheduled Payment Date, or earlier in
the event of a Pay Out Event which results in the commencement of the Early
Amortization Period, but not until the Class A Invested Amount has been paid in
full. The Class B Securityholders will not begin to receive payments of
principal until the final principal payment on the Class A Securities has been
made.
On each Distribution Date during the Controlled Accumulation Period,
amounts equal to the least of (a) Available Principal Collections (see "Series
Provisions -- Principal Payments" herein) for the related Monthly Period on
deposit in the Collection Account, (b) the Controlled Deposit Amount, which is
equal to the sum of the Controlled Accumulation Amount for such Monthly Period
and any Deficit Controlled Accumulation Amount (both as defined under "Series
Provisions -- Application of Collections -- Payments of Principal" herein) and
(c) the sum of the Class A Adjusted Invested Amount and the Class B Adjusted
Invested Amount (prior to any deposits on such day) will be deposited in the
Principal Funding Account for the Offered Series held by the Trustee (the
"Principal Funding Account") until the principal amount on deposit in the
Principal Funding Account (the "Principal Funding Account Balance") equals the
sum of the Class A Invested Amount and the Class B Invested Amount or the first
Distribution Date with respect to the Early Amortization Period. After the Class
A Invested Amount has been paid in full, or following the first Distribution
Date on which the Principal Funding Account Balance has increased to the Class A
Invested Amount, Available Principal Collections, to the extent required, will
be distributed to the Class B Securityholders on each Distribution Date
beginning, during the Controlled Accumulation Period, on the Class B Scheduled
Payment Date, until the earlier of the Distribution Date on which the Class B
Invested Amount has been
S-16
paid in full and the Stated Series Termination Date. Amounts in the Principal
Funding Account are expected to be available to pay the Class A Invested Amount
on the Class A Scheduled Payment Date. After payment of the Class A Invested
Amount in full, Available Principal Collections are expected to be available to
pay the Class B Invested Amount on the Class B Scheduled Payment Date. Although
it is anticipated that collections of Principal Receivables will be available on
each Distribution Date during the Controlled Accumulation Period to make a
deposit of the applicable Controlled Deposit Amount and that the Class A
Invested Amount will be paid to the Class A Securityholders on the Class A
Scheduled Payment Date and that the Class B Invested Amount will be paid to the
Class B Securityholders on the Class B Scheduled Payment Date, respectively, no
assurance can be given in this regard. See "Series Provisions -- Principal
Payments" herein for a discussion of the circumstances under which the
commencement of the Controlled Accumulation Period may be delayed.
The Transferor may, at or after the time at which the Controlled
Accumulation Period commences for the Offered Series, cause the Trust to issue
another Series (or some portion thereof, to the extent that the full principal
amount of such other Series is not otherwise outstanding at such time) as a
Paired Series with respect to the Offered Series to be used to finance the
increase in the Transferor Amount caused by the accumulation of principal in the
Principal Funding Account with respect to the Offered Series. Although no
assurances can be given as to whether such other Series will be issued and, if
issued, the terms thereof, the outstanding principal amount of such Series may
vary from time to time (whether or not a Pay Out Event occurs with respect to
the Offered Securities), and the interest rate with respect to securities of
such other Series may be established on its date of issuance and may be reset
periodically. Further, since the terms of the Offered Securities will vary from
the terms of such other Series, the Pay Out Events or Reinvestment Events with
respect to such other Series will vary from the Pay Out Events with respect to
the Offered Series and may include Pay Out Events or Reinvestment Events which
are unrelated to the status of the Transferor or the Servicer or the
Receivables, such as Pay Out Events or Reinvestment Events related to the
continued availability and rating of certain providers of Series Enhancement to
such other Series. If a Pay Out Event or Reinvestment Event does occur with
respect to any such Paired Series prior to the payment in full of the Offered
Securities, the final payment of principal to the Series Securityholders may be
delayed.
Should a Pay Out Event occur with respect to the Offered Securities and the
Early Amortization Period commence, any amount on deposit in the Principal
Funding Account will be paid to the Class A Securityholders on the Distribution
Date in the month following the commencement of the Early Amortization Period
and the Class A Securityholders will be entitled to receive Available Principal
Collections on each Distribution Date with respect to such Early Amortization
Period (as described herein) until the Class A Invested Amount has been paid in
full or until the Stated Series Termination Date occurs. After the Class A
Invested Amount has been paid in full and if the Stated Series Termination Date
has not occurred, Available Principal Collections will be paid to the Class B
Securities on each Distribution Date until the earlier to occur of the date on
which the Class B Invested Amount has been paid in full and the Stated Series
Termination Date.
Should a Pay Out Event occur with respect to the Offered Securities and the
Early Amortization Period commence, any amount on deposit in the Special Funding
Account will be released and treated as Shared Principal Collections to the
extent needed to cover principal payments due to or for the benefit of any
Series, including the Offered Series, entitled to the benefits of Shared
Principal Collections. See "Description of the Securities -- Pay Out Events and
Reinvestment Events" in the Prospectus and "Series Provisions -- Pay Out Events"
herein.
The ability of the Class A Securityholders and the Class B Securityholders
to receive payments of principal on the Class A Scheduled Payment Date and on
the Class B Scheduled Payment Date, respectively, depends on the payment rates
on the Receivables, the amount of outstanding Receivables, delinquencies,
charge-offs and new borrowings on the Accounts, the potential issuance by the
Trust of additional Series and the availability of Shared Principal Collections.
Monthly payment rates on the Receivables may vary because, among other things,
cardholders may fail to make required minimum payments, may only make payments
as low as the minimum required amount or may make payments as high as the entire
outstanding balance. Monthly payment rates may also vary due to seasonal
purchasing and payment habits of cardholders and to changes in any terms of
rebate programs in which cardholders participate. See the table entitled
"Cardholder Monthly Payment Rates -- Partners First Portfolio" under "The
Partners First Portfolio -- Payment Rates" herein. The Transferor cannot
predict, and no assurance can be given, as to the cardholder monthly payment
rates that will actually occur in any future period, as to the actual rate of
payment of principal of the Offered Securities or whether the terms of any
subsequently issued Series might have an impact on the amount or timing of any
such payment of principal. See "Risk Factors -- Generation of Additional
Receivables; Dependency on Cardholder Repayments" and "Description of the
Pooling and Servicing Agreement -- Shared Principal Collections" in the
Prospectus.
In addition, the amount of outstanding Receivables and the delinquencies,
charge-offs and new borrowings on the Accounts may vary from month to month due
to the availability of other sources of credit, legal factors, general economic
S-17
conditions and spending and borrowing habits of individual cardholders. There
can be no assurance that collections of Principal Receivables with respect to
the Trust Portfolio, and thus the rate at which the Series Securityholders could
expect to receive payments of principal on their Securities during the Early
Amortization Period or the rate at which the Principal Funding Account could be
funded during the Controlled Accumulation Period, will be similar to the
historical experience set forth in the table entitled "Cardholder Monthly
Payment Rates -- Partners First Portfolio" under "The Partners First
Portfolio -- Payment Rates" herein. As described under "Series
Provisions -- Principal Payments," the Transferor may shorten the 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 Invested
Amount and the Class B Invested Amount on the Class A Scheduled Payment Date and
on the Class B Scheduled Payment Date, respectively. In addition, the Trust, as
a master trust, may issue additional Series from time to time, and there can be
no assurance that the terms of any such Series might not have an impact on the
timing or amount of payments received by the Series Securityholders. Further, if
a Pay Out Event occurs, the average life and maturity of the Class A Securities
and the Class B Securities could be significantly reduced.
For the reasons set forth above, there can be no assurance that deposits in
the Principal Funding Account will be made on or prior to the Class A Scheduled
Payment Date in an amount sufficient to pay the Class A Invested Amount to the
Class A Securityholders on the Class A Scheduled Payment Date, or that the
amount remaining in the Principal Funding Account following payment in full of
the Class A Securities together with Available Principal Collections will be
sufficient to pay the Class B Invested Amount in full on the Class B Scheduled
Payment Date or that the actual number of months elapsed from the date of
issuance of the Class A Securities and Class B Securities to their respective
final Distribution Dates will equal the expected number of months. See "Risk
Factors -- Generation of Additional Receivables; Dependency on Cardholder
Repayments" in the Prospectus.
THE PARTNERS FIRST PORTFOLIO
GENERAL
The Receivables to be conveyed to the Trust pursuant to the Pooling and
Servicing Agreement have been or will be generated from transactions made by
holders of certain credit card accounts (the "Trust Portfolio") that have been
selected from the total portfolio of VISA and MasterCard accounts of BKB (the
"BKB Portfolio") and Harris (the "Harris Portfolio") serviced by Partners First
(the "Partners First Portfolio"). The BKB Portfolio includes all credit card
accounts originated or acquired by it with the exception of (i) those accounts
of cardholders who reside in the primary geographic market of BKB and its
affiliates (I.E., Massachusetts, Rhode Island, Connecticut and New Hampshire),
(ii) those accounts of other cardholders having other banking relationships with
BKB or its affiliates and (iii) student, VIP, foreign accounts and accounts with
employees of BKB and its affiliates. The Harris Portfolio includes all of its
credit card accounts except corporate accounts. The Receivables also will
include all fees billed to the Accounts. The Accounts were generated under the
VISA and MasterCard associations of which BKB and Harris are members.
The Partners First Portfolio may in the future also include accounts
originated by financial institutions other than BKB or Harris. Any such other
financial institutions may choose not to include all of their credit card
accounts in the Partners First Portfolio, particularly if, similar to BKB, any
such financial institution chooses to retain its regional or relationship
accounts. See "Credit Card Activities -- Account Origination" in the Prospectus.
Following the acquisition of any such new accounts, the receivables arising
under such Accounts will be originated and serviced following the business model
currently used in originating and servicing the Partners First Portfolio. See
"Credit Card Activities -- Development of the Business Model of Partners First;
The Role of FAMIS" in the Prospectus. Receivables originated by financial
institutions other than BKB and Harris may be included in the Trust Portfolio
upon satisfaction of certain conditions, including the Rating Agency Condition.
See "Credit Card Activities -- Account Origination" in the Prospectus.
The Accounts and Receivables will primarily be serviced by First Data
Resources Inc. ("FDR"). Additional Accounts may be designated from time to time
and Receivables arising therein will be included in the Trust on and after their
respective cut-off dates. During the period beginning on April 1, 1998 and
ending on or about the Closing Date, the Transferor added and will add to the
Trust the Receivables arising in all Eligible Accounts that had not previously
been designated to have their Receivables added to the Trust. See "Risk
Factors -- Addition of Trust Assets" and "Description of the Pooling and
Servicing Agreement -- Additions of Accounts and Participation Interests" in the
Prospectus. Set forth below is certain information with respect to the Partners
First Portfolio. See "Credit Card Activities" and "The Accounts" in the
Prospectus. Because the Trust's assets consist of Receivables more than half of
which were generated from Accounts originated since September 1995, the
historical information set forth below with respect to the Partners First
Portfolio may not be indicative of the performance of the Partners First
Portfolio as the Receivables and the Accounts mature. There can be no assurance
that the yield, loss and delinquency experience with respect to the Receivables
will be comparable to that set forth below with respect to the entire Partners
First Portfolio.
S-18
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth the loss and delinquency experience for the
Partners First Portfolio for each of the periods shown.
LOSS EXPERIENCE FOR THE PARTNERS FIRST PORTFOLIO
YEAR ENDED DECEMBER 31,
QUARTER ENDED ----------------------------------------------------
MARCH 31, 1998 1997 1996 1995(5)
-------------- -------------- -------------- ------------
Average Receivables Outstanding(1)........... $1,847,431,186 $1,830,299,437 $1,548,027,125 $977,326,058
Total Net Charge-Offs(2)(3).................. $ 32,831,899 $ 127,021,955 $ 50,492,120 $ 27,437,327
Total Net Charge-Offs as a Percentage of
Average Receivables Outstanding(3)(4)...... 7.11%(6) 6.94% 3.26% 2.81%
- ---------------
(1) Average receivables outstanding ("Average Receivables Outstanding") is
calculated by determining the daily average of outstanding account balances
for each month during the period indicated and then dividing the sum of such
daily averages for such months by the number of months in such period.
(2) Total Net Charge-Offs for 1998 are credit and bankruptcy charge-offs net of
recoveries, accrued interest and accrued fees, with the exception of Harris
losses prior to the conversion to the FDR system (March 13, 1998), which
include accrued fees. Prior to 1998, Total Net Charge-Offs were net of
recoveries and accrued interest only.
(3) Total Net Charge-Offs for the calendar month ended April 30, 1998 were
$11,229,629, which represented 7.52% of Average Receivables Outstanding for
April 1998 (annualized). Total Net Charge-Offs for the calendar month ended
May 31, 1998 were $11,464,642, which represented 7.82% of Average
Receivables Outstanding for May 1998 (annualized).
(4) Prior to the conversion to the FDR system (March 13, 1998), the Harris
charge-off policy was to charge off delinquent accounts at 180 days past
due. Under the Harris policy, credit charge-offs occurred multiple times
throughout the month. Upon the conversion to the FDR system, the Harris
charge-off policy was changed to mirror the BKB policy: accounts more than
180 days contractually past due are charged off once a month, on the first
business day of the following month. Accordingly, the conversion caused
contractual charge-offs in the Harris Portfolio to be delayed one month.
Receivables in accounts in the Harris Portfolio that became 180 days past
due between March 14 and March 31, 1998 were not charged off until April 1,
1998, and were considered April losses. There were approximately $2,541,547
of such receivables. Had the conversion not occurred, the Total Net
Charge-Offs as a Percentage of Average Receivables Outstanding for the
Partners First Portfolio for the quarter would have been 7.66%.
(5) Includes information with respect to the Harris Portfolio for 12 months and
with respect to the BKB Portfolio for the last 4 months of the year.
(6) Annualized.
DELINQUENCIES AS A PERCENTAGE OF THE PARTNERS FIRST PORTFOLIO
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31,
------------------------------------------------------------------
AS OF MARCH 31, 1998 1997 1996 1995(3)
------------------------ ------------------------ ------------------------ ----------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
Receivables
Outstanding(1)........ $1,819,886 $1,963,885 $1,854,657 $1,124,774
Receivables Delinquent:
30-59 Days............ $ 33,497 1.84% $ 33,268 1.69% $ 28,937 1.55% $ 13,541
60-89 Days............ 20,959 1.15 21,397 1.09 18,332 0.99 7,352
90-119 Days........... 16,583 0.91 16,433 0.84 14,066 0.76 5,456
120 Days or More(2)... 44,777 2.46 30,448 1.55 23,484 1.27 5,231
---------- ---- ---------- ---- ---------- ---- ----------
Total............... $ 115,816 6.36% $ 101,546 5.17% $ 84,819 4.57% $ 31,580
========== ==== ========== ==== ========== ==== ==========
PERCENTAGE
----------
Receivables
Outstanding(1)........
Receivables Delinquent:
30-59 Days............ 1.20%
60-89 Days............ 0.65
90-119 Days........... 0.49
120 Days or More(2)... 0.47
----
Total............... 2.81%
====
- ---------------
(1) Receivables Outstanding in the Accounts consist of all amounts due from
cardholders as posted to the Accounts.
(2) Includes amounts pending charge-off.
(3) Includes information with respect to the Harris Portfolio for 12 months and
with respect to the BKB Portfolio for the last 4 months of the year.
Partners First believes that the trend since 1994 in the delinquencies and
losses in the Partners First Portfolio is comparable to that experienced by
other issuers in the credit card market over this time period and is
attributable in part to the maturation of the Partners First Portfolio and
overall marketplace trends. The increase in delinquencies and losses is
consistent with the seasoning of new credit card accounts. As accounts mature,
delinquencies, which typically are low in the early periods of account activity,
may be expected to increase for some of the accounts. There can be no assurance
that the delinquency and loss experience for the Receivables in the Trust
Portfolio will be similar to the historical portfolio set forth above.
S-19
REVENUE EXPERIENCE
The revenues for the Partners First Portfolio from finance charges and fees
billed to cardholders and Interchange are set forth in the following table for
each of the periods shown.
The historical revenue figures in the following table include interest on
purchases and cash advances and fees accrued during the cycle. Cash collections
on the receivables may not reflect the historical experience in the table.
During periods of increasing delinquencies, billings of finance charges and fees
may exceed cash payments as amounts collected on credit card receivables lag
behind amounts billed to cardholders. Conversely, as delinquencies decrease,
cash payments may exceed billings of finance charges and fees as amounts
collected in a current period may include amounts billed during prior periods.
Revenues from finance charges and fees on both a billed and a cash basis will be
affected by numerous factors, including the periodic finance charges on the
receivables, the amount of fees paid by cardholders, the percentage of
cardholders who pay off their balances in full each month and do not incur
periodic finance charges on purchases and changes in the level of delinquencies
on the receivables. See "Risk Factors" in the Prospectus.
REVENUE EXPERIENCE FOR THE PARTNERS FIRST PORTFOLIO
YEAR ENDED DECEMBER 31,
QUARTER ENDED ------------------------------------------------------
MARCH 31, 1998 1997 1996 1995(7)
-------------- -------------- -------------- --------------
Average Receivables Outstanding............ $1,847,431,186 $1,830,299,437 $1,548,027,125 $ 977,326,058
Total Finance Charges and Fees
Billed(1)(2)............................. 76,040,870 284,044,536 200,160,362 136,094,855
Interchange(2)(3).......................... 4,756,108 22,408,554 22,235,597 16,291,790
Total Revenues(2)(4)....................... 80,796,978 306,453,090 222,395,959 152,386,645
Average Revenue Yield(2)(5)................ 17.49%(6) 16.74% 14.37% 15.59%
- ---------------
(1) Total Finance Charges and Fees Billed are comprised of periodic finance
charges, cash advance fees, annual membership fees and other charges.
(2) For the calendar month ended April 30, 1998, Total Finance Charges and Fees
Billed were $25,349,401, Interchange was $1,761,017 and Total Revenues were
$27,110,418 which represented 18.16% of Average Receivables Outstanding
(annualized). For the calendar month ended May 31, 1998, Total Finance
Charges and Fees Billed were $25,334,826, Interchange was $1,702,665 and
Total Revenues were $27,037,491 which represented 18.43% of Average
Receivables Outstanding (annualized).
(3) Interchange represents revenue attributable to Interchange received during
the period indicated. The amount of Interchange allocable to each period
indicated above has been estimated.
(4) Total Revenues are the result of adding Total Finance Charges and Fees
Billed and Interchange.
(5) Average Revenue Yield is the result of dividing Total Revenues by the
Average Receivables Outstanding during the period indicated.
(6) Annualized.
(7) Includes information with respect to the Harris Portfolio for 12 months and
with respect to the BKB Portfolio for the last 4 months of the year.
The revenues for the Partners First Portfolio shown in the tables above are
related to finance charges, together with fees, billed to holders of the
accounts and Interchange. The revenues related to finance charges depend in part
upon the collective preference of cardholders to use their credit cards as
revolving debt instruments for purchases and cash advances and paying off credit
card account balances over several months as opposed to convenience use, where
the cardholders prefer instead to pay off their entire balance each month,
thereby avoiding finance charges on purchases, and upon other services of which
cardholders choose to avail themselves and which are paid for by the use of the
card. Revenues related to finance charges and fees also depend on the types of
charges and fees assessed by the Account Originators on the accounts in the
Partners First Portfolio and on whether such accounts are non-premium or premium
credit card accounts. Accordingly, revenues will be affected by future changes
in the types of charges and fees assessed on the accounts and on the respective
percentages of the receivable balances of non-premium and premium credit card
accounts. Revenues could be adversely affected by future changes in the charges
and fees assessed by the Account Originator and other factors. See "Certain
Legal Aspects of the Receivables -- Consumer Protection Laws" in the Prospectus.
Neither the Servicer nor any of its affiliates has any basis to predict how any
future changes in the usage of the accounts by cardholders or in the terms of
accounts may affect the revenue for the Partners First Portfolio.
S-20
INTERCHANGE
The Transferor will be required, pursuant to the terms of the Supplement
applicable to the Offered Series (the "Offered Series Supplement"), to transfer
to the Trust for the benefit of the Offered Series, a percentage of the
Interchange attributed to cardholder charges for goods and services in the
Accounts. Interchange arising under the Accounts will be allocated to the
Offered Series on the basis of the Series Allocation Percentage for the Offered
Series of the amount of Interchange attributable to the Accounts, as reasonably
estimated by the Transferor. MasterCard and VISA may from time to time change
the amount of Interchange reimbursed to banks issuing their credit cards.
Interchange will be treated as a portion of Series Allocable Finance Charge
Collections for the purposes of allocating collections of Finance Charge
Receivables, making required monthly payments and calculating the Portfolio
Yield. See "Credit Card Activities -- Interchange" in the Prospectus.
In the future, subject to certain requirements contained in the Offered
Series Supplement and the Pooling and Servicing Agreement, the Transferor may,
in lieu of transferring Interchange to the Trust as set forth above, allocate
Interchange to the Trust and the Offered Series by treating a percentage of
collections of the Principal Receivables (whether arising from cardholder
charges for goods and services or cash advances) as collections of Finance
Charge Receivables approximately equivalent to the then current Interchange on
the credit card accounts in the Partners First Portfolio (subject to adjustment
at the option of the Transferor upon the satisfaction of certain conditions as
described in the Prospectus under "Description of the Pooling and Servicing
Agreement -- Discount Option").
PAYMENT RATES
The following table sets forth the highest and lowest cardholder monthly
payment rates for the Partners First Portfolio during any month in the period
shown and the average cardholder monthly payment rates for all months during
each period shown, calculated as the percentage equivalent of a fraction. For
the highest and lowest monthly payment rates, the numerator of the fraction is
equal to all payments from cardholders as posted to the accounts during the
applicable month and the denominator is equal to the Average Receivables
Outstanding for such month. For the monthly average payment rate, the numerator
of the fraction is equal to all payments from cardholders as posted to the
accounts during the indicated period divided by the number of months in the
period, and the denominator is equal to the Average Receivables Outstanding.
CARDHOLDER MONTHLY PAYMENT RATES
PARTNERS FIRST PORTFOLIO
YEAR ENDED DECEMBER 31,
QUARTER ENDED -----------------------------
MARCH 31, 1998 1997 1996 1995(1)
-------------- ----- ----- -------
AVERAGE
Lowest Month.............................................................. 10.20% 10.55% 8.95% 12.67%
Highest Month............................................................. 12.70% 12.55% 13.47% 16.18%
Monthly Average........................................................... 11.34% 11.61% 11.91% 14.11%
- ---------------
(1) Includes information with respect to the Harris Portfolio for 12 months and
with respect to the BKB Portfolio for the last four months of the year.
Partners First generally determines the minimum monthly payment with
respect to the accounts by multiplying the combined new balance of purchases and
cash advances, less any disputed amounts, by 2% ( 1/50 expressed as a
percentage). If the amount so calculated is less than $15, it is increased to
$15. The sum of such amount and any past due amounts equals the minimum payment
amount. The minimum payment amount, however, is never more than the new balance.
It should be noted that the payment rates reflected above are driven
primarily by Harris payment rate experience. A decrease in payment rates may be
expected due to an anticipated change in minimum payment policy for Harris
originated accounts to conform to Partners First/BKB policy.
There can be no assurance that the cardholder monthly payment rates in the
future will be similar to the historical experience set forth above. In
addition, the amount of collections of Receivables 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 collections of Principal
Receivables with respect to the Trust Portfolio will be similar to the
historical experience set forth above or that deposits into the Collection
Account or the Principal Funding Account, as applicable, will be made in
accordance with the applicable Controlled Accumulation Amount. If a Pay Out
Event occurs, the average life of the Securities could be significantly reduced
or increased.
S-21
THE RECEIVABLES
The aggregate amount of Receivables in the Trust Portfolio as of April 30,
1998 was $1,770,206,794, comprised of $1,733,134,153 of Principal Receivables
and $37,072,641 of Finance Charge Receivables. The active Accounts had an
average total receivables balance of $2,181 and an average credit limit of
$5,636. The percentage of the aggregate total receivables balance to the
aggregate total credit limit was 27.8%. The average age of the Accounts was
approximately 48.9 months. As of April 30, 1998, all of the Accounts in the
Trust Portfolio were VISA or MasterCard credit card accounts, of which 68.55%
were non-premium accounts and 31.45% were premium accounts, and the total
receivables balances of non-premium accounts and premium accounts, as a
percentage of the total receivables, were 70.39% and 29.61%, respectively.
Approximately 15.43%, 6.30%, 5.87%, 5.73% and 5.36% of the Receivables related
to cardholders having billing addresses in Illinois, Texas, New Jersey, Florida
and Ohio, respectively. Not more than 4.49% of the Receivables related to
cardholders having billing addresses in any other single state.
The following tables summarize the Trust Portfolio by various criteria as
of April 30, 1998. During the period beginning on April 1, 1998 and ending on or
about the Closing Date, the Transferor added and will add to the Trust the
Receivables arising in all Eligible Accounts that had not previously been
designated to have their Receivables included in the Trust. The Transferor may
designate Additional Accounts from time to time and Receivables arising therein
will be included in the Trust. Because the composition of the Trust Portfolio
will change over time, these tables are not necessarily indicative of the
composition of the Trust Portfolio at any time subsequent to April 30, 1998.
References to "Receivables Outstanding," "Receivables" and to "total
receivables" in the preceding paragraph and in the following tables include
Finance Charge Receivables and Principal Receivables.
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT BALANCE RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------------------------------------- ---------- --------- -------------- -----------
Credit Balance................................... 20,236 1.79% $ (2,248,816) (0.13)%
No Balance....................................... 316,555 28.06 0 0.00
$ 0-$1,000.................................... 286,410 25.39 103,168,335 5.83
$1,001-$2,000.................................... 136,800 12.13 207,020,681 11.69
$2,001-$3,500.................................... 183,348 16.25 497,879,994 28.13
$3,501-$5,000.................................... 112,573 9.98 468,828,580 26.48
$5,001 or More................................... 72,255 6.40 495,558,020 28.00
---------- --------- -------------- -----------
TOTAL..................................... 1,128,177 100.00% $1,770,206,794 100.00%
========== ========= ============== ===========
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
CREDIT LIMIT RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------------------------------------- ---------- --------- -------------- -----------
Less than or equal to $1,000..................... 89,800 7.96% $ 30,820,021 1.74%
$1,001-$2,000.................................... 86,867 7.70 91,491,860 5.17
$2,001-$3,500.................................... 194,716 17.26 304,991,623 17.23
$3,501-$5,000.................................... 252,518 22.38 462,798,144 26.14
$5,001 or More................................... 504,276 44.70 880,105,146 49.72
---------- --------- -------------- -----------
TOTAL..................................... 1,128,177 100.00% $1,770,206,794 100.00%
========== ========= ============== ===========
S-22
COMPOSITION BY PERIOD OF DELINQUENCY
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
PERIOD OF DELINQUENCY NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
(DAYS CONTRACTUALLY DELINQUENT) ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------------------------------------------------------- --------- --------- -------------- -----------
Current-29 Days...................................................... 1,091,743 96.77% $1,666,090,358 94.12%
30-59 Days........................................................... 12,550 1.11 31,964,542 1.81
60-89 Days........................................................... 7,546 0.67 21,467,238 1.21
90-119 Days.......................................................... 5,523 0.49 16,533,012 0.93
120 or More Days..................................................... 10,815 0.96 34,151,644 1.93
--------- --------- -------------- -----------
TOTAL......................................................... 1,128,177 100.00% $1,770,206,794 100.00%
========= ========= ============== ===========
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT AGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------------------------------------------------------- --------- --------- -------------- -----------
Not More than 6 Months............................................... 66,418 5.89% $ 140,220,860 7.92%
Over 6 Months to 12 Months........................................... 150,369 13.33 319,806,517 18.07
Over 12 Months to 18 Months.......................................... 85,983 7.62 150,831,373 8.52
Over 18 Months to 24 Months.......................................... 136,120 12.07 176,519,115 9.97
Over 24 Months to 36 Months.......................................... 288,312 25.55 457,185,821 25.83
Over 36 Months to 48 Months.......................................... 117,208 10.39 111,066,361 6.27
Over 48 Months to 60 Months.......................................... 72,157 6.40 70,723,740 4.00
Over 60 Months to 72 Months.......................................... 19,021 1.69 30,315,484 1.71
Over 72 Months....................................................... 192,589 17.06 313,537,523 17.71
--------- --------- -------------- -----------
TOTAL......................................................... 1,128,177 100.00% $1,770,206,794 100.00%
========= ========= ============== ===========
GEOGRAPHIC DISTRIBUTION OF ACCOUNTS
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES RECEIVABLES
STATE ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------------------------------------------------------ --------- ------------ -------------- -----------
Illinois.......................................................... 184,508 16.34% $ 272,729,783 15.43%
Texas............................................................. 63,917 5.67 111,315,046 6.30
New Jersey........................................................ 68,042 6.03 103,887,122 5.87
Florida........................................................... 59,357 5.26 101,503,587 5.73
Ohio.............................................................. 59,971 5.32 94,826,169 5.36
Pennsylvania...................................................... 56,454 5.00 79,518,775 4.49
California........................................................ 45,775 4.06 76,193,598 4.30
New York.......................................................... 56,712 5.03 74,509,485 4.21
Michigan.......................................................... 41,857 3.71 63,752,210 3.60
Indiana........................................................... 35,556 3.15 60,594,181 3.42
Wisconsin......................................................... 35,792 3.17 60,322,360 3.41
Virginia.......................................................... 28,250 2.50 50,881,014 2.87
Maryland.......................................................... 27,360 2.43 47,100,468 2.66
Georgia........................................................... 25,670 2.28 44,664,850 2.52
Missouri.......................................................... 24,793 2.20 42,170,849 2.38
North Carolina.................................................... 25,384 2.25 41,432,404 2.34
Minnesota......................................................... 25,246 2.24 37,681,132 2.13
S-23
PERCENTAGE PERCENTAGE
OF OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES RECEIVABLES
STATE ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------------------------------------------------------ --------- ------------ -------------- -----------
Tennessee......................................................... 18,358 1.63% $ 29,691,472 1.68%
Arizona........................................................... 16,869 1.50 25,776,055 1.46
Alabama........................................................... 12,956 1.15 24,021,828 1.36
Colorado.......................................................... 17,054 1.51 23,962,388 1.35
Louisiana......................................................... 14,138 1.25 22,854,091 1.29
Kentucky.......................................................... 13,003 1.15 21,794,377 1.23
Oklahoma.......................................................... 12,256 1.09 20,263,604 1.14
Iowa.............................................................. 13,271 1.18 19,395,670 1.10
Kansas............................................................ 11,481 1.02 17,959,055 1.01
South Carolina.................................................... 10,946 0.97 16,994,005 0.96
Mississippi....................................................... 9,272 0.82 16,483,155 0.93
Arkansas.......................................................... 10,035 0.89 16,345,715 0.92
Oregon............................................................ 10,247 0.91 15,341,453 0.87
Washington........................................................ 11,099 0.98 15,285,352 0.86
Nevada............................................................ 8,711 0.77 14,169,600 0.80
Massachusetts..................................................... 9,996 0.89 11,226,304 0.63
New Mexico........................................................ 5,937 0.53 9,251,322 0.52
Maine............................................................. 5,562 0.49 8,829,002 0.50
Nebraska.......................................................... 6,135 0.54 7,893,034 0.45
West Virginia..................................................... 4,808 0.43 7,231,644 0.41
Utah.............................................................. 5,140 0.46 6,952,710 0.39
Montana........................................................... 4,136 0.37 6,328,231 0.36
Idaho............................................................. 4,211 0.37 6,025,548 0.34
Delaware.......................................................... 3,093 0.27 5,541,574 0.31
South Dakota...................................................... 3,087 0.27 5,204,854 0.29
Connecticut....................................................... 4,085 0.36 5,100,520 0.29
North Dakota...................................................... 3,042 0.27 5,058,572 0.29
Washington, DC.................................................... 2,539 0.23 4,757,220 0.27
Vermont........................................................... 2,364 0.21 4,099,013 0.23
Hawaii............................................................ 2,027 0.18 3,184,349 0.18
Wyoming........................................................... 1,946 0.17 2,827,711 0.16
Other............................................................. 1,819 0.16 2,530,866 0.14
New Hampshire..................................................... 1,492 0.13 1,670,344 0.09
Alaska............................................................ 1,016 0.09 1,635,032 0.09
Rhode Island...................................................... 1,402 0.12 1,438,091 0.08
--------- ------------ -------------- -----------
Total...................................................... 1,128,177 100.00% $1,770,206,794 100.00%
--------- ------------ -------------- -----------
--------- ------------ -------------- -----------
USE OF PROCEEDS
The net proceeds from the issuance of the Offered Securities will be paid
to the Transferor. The Transferor will use such net proceeds together with net
proceeds from the issuance of the Series 1998-2 Investor Securities to
repurchase a previously issued Series of Investor Securities which the
Transferor sold privately on January 29, 1998. In addition, on the Closing Date,
the Transferor will utilize net proceeds from the issuance of the Offered
Securities to fund the Initial Yield Supplement Deposit, in the amount of
$11,250,000.
PARTNERS FIRST
As of April 30, 1998, Partners First had approximately $527,000,000 in
total assets, approximately $402,000,000 in total liabilities and approximately
$125,000,000 in member's equity.
S-24
SERIES PROVISIONS
The Offered Securities will be issued pursuant to the Pooling and Servicing
Agreement and the Offered Series Supplement specifying the Principal Terms of
the Securities. The following summary describes certain terms applicable to the
Offered Securities. Reference should be made to the Prospectus for additional
information concerning the Offered Securities and the Pooling and Servicing
Agreement. See "Description of the Pooling and Servicing Agreement" in the
Prospectus.
INTEREST PAYMENTS
Interest on the Class A Securities and the Class B Securities will accrue
from the Closing Date on the outstanding principal balance of the Class A
Securities and the Class B Invested Amount at the Class A Interest Rate and
Class B Interest Rate, respectively. Interest will be distributed on August 17,
1998 and on the 15th day of each month thereafter, or if any such 15th day is
not a business day, the next succeeding business day (each, a "Distribution
Date"), to the Securityholders in whose names the Offered Securities were
registered at the close of business on the preceding Record Date. Interest for
any Distribution Date will accrue during the period from and including the
preceding Distribution Date (or in the case of the first Distribution Date, from
and including the Closing Date) to but excluding such Distribution Date (each
such period, an "Interest Period"). "Record Date" means, with respect to any
Distribution Date, the business day preceding such Distribution Date, except
that, with respect to any Definitive Securities, Record Date means, with respect
to any Distribution Date, the fifth day of the Monthly Period during which such
Distribution Date occurs. Interest payments on the Offered Securities with
respect to each Distribution Date will be calculated on the basis of the actual
number of days in the related Interest Period and a 360-day year.
Interest payments with respect to the Class A Securities for each
Distribution Date will be calculated on the outstanding principal balance of the
Class A Securities as of the preceding Record Date (or in the case of the
initial Distribution Date, on the Class A Initial Invested Amount). On each
Distribution Date, Class A Available Funds for the related Monthly Period will
be applied to pay Class A Monthly Interest and Class A Monthly Interest
previously due but not paid to the Class A Securityholders and any Class A
Additional Interest. To the extent Class A Available Funds allocated to the
Class A Securityholders' Interest for such Monthly Periods are insufficient to
pay such interest, Excess Spread and Excess Finance Charge Collections allocated
to the Offered Series and Redirected Principal Collections allocable first to
the Class D Invested Amount, then to the Collateral Invested Amount and then to
the Class B Invested Amount will be used to make such payments. "Class A
Available Funds" means, with respect to any Monthly Period, an amount equal to
the sum of (i) the Class A Floating Percentage of the sum of the Redirected
Investor Finance Charge Collections allocated to the Offered Series with respect
to such Monthly Period (including any investment earnings and certain other
amounts that are to be treated as collections of Finance Charge Receivables
allocable to the Offered Series in accordance with the Pooling and Servicing
Agreement and the Offered Series Supplement) and the Yield Supplement Draw
Amount, if any, with respect to the related Distribution Date, (ii) if such
Monthly Period relates to a Distribution Date with respect to the Controlled
Accumulation Period, Principal Funding Investment Proceeds, if any, with respect
to the related Distribution Date, and (iii) amounts, if any, to be withdrawn
from the Reserve Account that must be included in Class A Available Funds
pursuant to the Offered Series Supplement with respect to such Distribution
Date.
Interest payments with respect to the Class B Securities for each
Distribution Date will be calculated on the Class B Invested Amount as of the
preceding Record Date (or in the case of the initial Distribution Date, on the
Class B Initial Invested Amount). On each Distribution Date, Class B Available
Funds for the related Monthly Period will be applied to pay Class B Monthly
Interest and Class B Monthly Interest previously due but not paid to the Class B
Securityholders and any Class B Additional Interest. To the extent Class B
Available Funds allocated to the Class B Securityholders' Interest for such
Monthly Period are insufficient to pay such interest, Excess Spread and Excess
Finance Charge Collections allocated to the Offered Series and Redirected
Principal Collections allocable first to the Class D Invested Amount and then to
the Collateral Invested Amount, in each case not required to pay the Class A
Required Amount or reimburse Class A Charge-Offs will be used to make such
payments. "Class B Available Funds" means, with respect to any Monthly Period,
an amount equal to the sum of (i) the Class B Floating Percentage of the sum of
the Redirected Investor Finance Charge Collections allocated to the Offered
Series with respect to such Monthly Period (including any investment earnings
and certain other amounts that are to be treated as collections of Finance
Charge Receivables allocable to the Offered Series in accordance with the
Pooling and Servicing Agreement and the Offered Series Supplement) and the Yield
Supplement Draw Amount, if any, with respect to the related Distribution Date,
and (ii) amounts, if any, to be withdrawn from the Reserve Account that must be
included in Class B Available Funds pursuant to the Offered Series Supplement
with respect to such Distribution Date.
S-25
The Servicer will determine LIBOR (i) for the period from the Closing Date
through July 14, 1998, on June , 1998, (ii) for the period from July 15, 1998
through August 16, 1998, on July 13, 1998, and (iii) for each subsequent
Interest Period, on the second London business day prior to the commencement of
such Interest Period (each, a "LIBOR Determination Date"). For purposes of
calculating LIBOR, a London business day is any day on which dealings in
deposits in United States dollars are transacted in the London interbank market.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in
United States dollars for a period equal to the relevant Interest Period
(commencing on the first day of such Interest Period) which appears on Telerate
Page 3750 (as defined below) as of 11:00 a.m., London time, on such date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks (as defined below) at approximately 11:00
a.m., London time, on that day to prime banks in the London interbank market for
a period equal to the relevant Interest Period (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 the day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided as requested, the
rate for that day will be the arithmetic mean of the rates quoted by major banks
in New York City, selected by the Servicer, at approximately 11:00 a.m., New
York City time, on that day for loans in United States dollars to leading
European banks for a period equal to the relevant Interest Period (commencing on
the first day of such Interest Period).
"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).
"Reference Banks" means three major banks in the London interbank market
selected by the Servicer.
PRINCIPAL PAYMENTS
During the Revolving Period (which begins on the Closing Date and ends on
the day before the commencement of the Controlled Accumulation Period or, if
earlier, the Early Amortization Period), no principal payments will be made to
the holders of the Offered Securities. During the Controlled Accumulation Period
(on or prior to the Class A Scheduled Payment Date), principal will be deposited
in the Principal Funding Account as described below and on the Class A Scheduled
Payment Date will be distributed to Class A Securityholders up to the Class A
Invested Amount and then on the Class B Scheduled Payment Date to Class B
Securityholders up to the Class B Invested Amount. During the Early Amortization
Period, which will begin upon the occurrence of a Pay Out Event, and until the
Stated Series Termination Date occurs, principal will be paid first to the Class
A Securityholders until the Class A Invested Amount has been paid in full, and
then to the Class B Securityholders until the Class B Invested Amount has been
paid in full. Unless a reduction in the Required Enhancement Amount has
occurred, no principal payments will be made in respect of the Collateral
Invested Amount until the final principal payment has been made to the Class B
Securityholders. No principal payments will be made to the Class D
Securityholders until the Collateral Invested Amount has been paid in full.
On each Distribution Date with respect to the Controlled Accumulation
Period, the Trustee will deposit in the Principal Funding Account an amount
equal to the least of (a) Available Principal Collections on deposit in the
Collection Account with respect to such Distribution Date, (b) the Controlled
Deposit Amount for such Distribution Date and (c) the sum of the Class A
Adjusted Invested Amount and the Class B Adjusted Invested Amount, until the
Principal Funding Account Balance equals the sum of the Class A Invested Amount
and the Class B Invested Amount. Amounts on deposit in the Principal Funding
Account up to the Class A Invested Amount will be paid to the Class A
Securityholders on the Class A Scheduled Payment Date. If the amount on deposit
in the Principal Funding Account on the Class A Scheduled Payment Date exceeds
the Class A Invested Amount, the amount of such excess, up to the Class B
Invested Amount, will be paid to the Class B Securityholders on the Class B
Scheduled Payment Date. After the Class A Invested Amount has been paid in full,
on each Distribution Date during the Controlled Accumulation Period, amounts
equal to the lesser of (a) Available Principal Collections with respect to such
Distribution Date and (b) the Class B Invested Amount will be deposited in the
Collection Account for distribution to the Class B Securityholders until the
Class B Invested Amount has been paid in full. Such amounts in the Collection
Account will be paid to the Class B Securityholders on the Class B Scheduled
Payment Date.
If a Pay Out Event occurs with respect to the Offered Securities during the
Controlled Accumulation Period, the Early Amortization Period will commence and
any amount on deposit in the Principal Funding Account will be paid first to the
Class A Securityholders on the first Distribution Date with respect to the Early
Amortization Period and then, after the Class A Invested Amount is paid in full,
to the Class B Securityholders. After payment in full of the Class A Invested
Amount, the Class B Securityholders will be entitled to receive an amount equal
to the Class B Invested Amount.
S-26
"Available Principal Collections" means, with respect to any Monthly
Period, an amount equal to the sum of (i) an amount equal to the Principal
Allocation Percentage of the Series Allocation Percentage of all collections of
Principal Receivables received during such Monthly Period (minus the Redirected
Principal Collections, if any, used to fund the Required Amount), (ii) any
Shared Principal Collections with respect to other Principal Sharing Series that
are allocated to the Offered Series and (iii) certain other amounts which
pursuant to the Offered Series Supplement are to be treated as Available
Principal Collections with respect to the related Distribution Date.
The Controlled Accumulation Period is currently expected to commence at the
close of business on May 31, 2002; however, the date on which the Controlled
Accumulation Period actually commences may be delayed if the Controlled
Accumulation Period Length (determined as described below) is less than twelve
months. Beginning on the Determination Date immediately preceding the February
2002 Distribution Date and on each Determination Date thereafter until the
Controlled Accumulation Period actually commences, the Transferor will determine
the "Controlled Accumulation Period Length" based on, among other things, the
then current principal payment rate on the Accounts and the principal amount of
Principal Sharing Series that are entitled to share principal with the Offered
Series; PROVIDED, HOWEVER, that the Controlled Accumulation Period Length will
not be less than one month. If the Controlled Accumulation Period Length is less
than twelve months, the Controlled Accumulation Period will commence no later
than the close of business on April 30, 2003, and the number of months in the
Controlled Accumulation Period will be equal to the Controlled Accumulation
Period Length. The effect of the foregoing calculation is to reduce the
Controlled Accumulation Period Length based on the invested amounts of other
Principal Sharing Series that are scheduled to be in their revolving periods and
thus scheduled to make Shared Principal Collections available to the Offered
Series during the Controlled Accumulation Period. In addition, if the Controlled
Accumulation Period Length shall have been determined to be less than 12 months
and, after the date on which such determination is made, a Pay Out Event or
Reinvestment Event (as those terms are defined in the Supplement for such
Series) shall occur with respect to any outstanding Principal Sharing Series,
the Controlled Accumulation Period will commence on the earlier of (i) the date
that such Pay Out Event or Reinvestment Event shall have occurred with respect
to such Series and (ii) the date on which the Controlled Accumulation Period is
then scheduled to commence.
On each Distribution Date with respect to the Early Amortization Period
until the Class A Invested Amount has been paid in full or the Stated Series
Termination Date occurs, the holders of the Class A Securities will be entitled
to receive Available Principal Collections in an amount up to the Class A
Invested Amount. After payment in full of the Class A Invested Amount, the
holders of the Class B Securities will be entitled to receive, on each
Distribution Date, Available Principal Collections until the earlier of the date
the Class B Invested Amount is paid in full and the Stated Series Termination
Date. After payment in full of the Class B Invested Amount, the Collateral
Interest Holder will be entitled to receive, on each Distribution Date,
Available Principal Collections until the earlier of the date the Collateral
Invested Amount is paid in full and the Stated Series Termination Date. After
payment in full of the Collateral Invested Amount, the Class D Securityholders
will be entitled to receive on each Distribution Date, Available Principal
Collections until the earlier of the date the Class D Invested Amount is paid in
full and the Stated Series Termination Date.
SUBORDINATION OF THE CLASS B SECURITIES, THE COLLATERAL INTEREST AND THE CLASS D
SECURITIES
The Class B Securities, the Collateral Interest and the Class D Securities
will be subordinated to the extent necessary to fund certain payments with
respect to the Class A Securities. In addition, the Collateral Interest and the
Class D Securities will be subordinated to the extent necessary to fund certain
payments with respect to the Class B Securities. Certain principal payments
otherwise allocable to the Class B Securities may be redirected to the Class A
Securities and the Class B Invested Amount may be reduced. Certain principal
payments otherwise allocable to the Collateral Interest may be redirected to the
Class A Securities and the Class B Securities and the Collateral Invested Amount
may be reduced. Similarly, certain principal payments otherwise allocable to the
Class D Securities may be redirected to the Class A Securities, the Class B
Securities and the Collateral Interest and the Class D Invested Amount may be
reduced. If the Class D Invested Amount and the Collateral Invested Amount are
each reduced to zero, holders of the Class B Securities will bear directly the
credit and other risks associated with their undivided interest in the Trust. To
the extent the Class B Invested Amount is reduced, the percentage of collections
of Finance Charge Receivables allocated to the Class B Securityholders in
subsequent Monthly Periods will be reduced. Moreover, to the extent the amount
of such reduction in the Class B Invested Amount is not reimbursed, the amount
of principal distributable to the Class B Securityholders will be reduced. If
the Class B Invested Amount is reduced to zero, the Class A Securityholders will
bear directly the credit and other risks associated with their undivided
interest in the Trust. In the event of a reduction in the Class A Invested
Amount, the Class B Invested Amount, the Collateral Invested Amount or the Class
D Invested Amount, the amount of principal and interest available to fund
payments with respect to the Class A
S-27
Securities and the Class B Securities will be decreased. See " -- Allocation
Percentages," " -- Redirection of Cash Flows" and " -- Application of
Collections -- Excess Spread; Excess Finance Charge Collections" below.
ALLOCATION PERCENTAGES
Pursuant to the Pooling and Servicing Agreement, the Servicer will allocate
among the Offered Series and all other Series outstanding all collections of
Finance Charge Receivables and Principal Receivables and the Defaulted Amount
with respect to such Monthly Period as described under "Description of the
Pooling and Servicing Agreement -- Allocations" in the Prospectus and, with
respect to the Offered Series specifically, as described below.
Pursuant to the Pooling and Servicing Agreement, during each Monthly
Period, the Servicer will allocate to the Offered Series its Series Allocable
Finance Charge Collections, Series Allocable Principal Collections and Series
Allocable Defaulted Amount.
"Series Allocable Finance Charge Collections," "Series Allocable Principal
Collections" and "Series Allocable Defaulted Amount" mean, with respect to the
Offered Series and for any Monthly Period, the product of (a) the Series
Allocation Percentage for the Offered Series and (b) the amount of collections
of Finance Charge Receivables deposited in the Collection Account, the amount of
collections of Principal Receivables deposited in the Collection Account and the
amount of all Defaulted Amounts, respectively, with respect to such Monthly
Period.
"Series Allocation Percentage" means, with respect to the Offered Series
and for any Monthly Period, the percentage equivalent of a fraction, the
numerator of which is the sum of the Series Adjusted Invested Amount for the
Offered Series as of the last day of the immediately preceding Monthly Period
plus the Required Transferor Amount for the Offered Series as of the last day of
the immediately preceding Monthly Period and the denominator of which is the
Trust Adjusted Invested Amount plus the sum of all Required Transferor Amounts
as of such last day.
"Series Adjusted Invested Amount" means, with respect to the Offered Series
and for any Monthly Period, the Series Invested Amount for the Offered Series,
less the excess, if any, of all reductions in the Invested Amount (other than
any reductions occasioned by payments of principal to the Series Securityholders
or to the Collateral Interest Holder) as of the last day of the preceding
Monthly Period over the aggregate amount of any reimbursement of such reductions
as of such last day.
The Series Allocable Finance Charge Collections and the Series Allocable
Defaulted Amount for the Offered Series with respect to any Monthly Period will
be allocated to the Offered Securities, the Collateral Interest and the Class D
Securities based on the Floating Allocation Percentage and the remainder of such
Series Allocable Finance Charge Collections and Series Allocable Defaulted
Amount will be allocated to the Transferor's Interest. The "Floating Allocation
Percentage" means, with respect to any Monthly Period, the percentage equivalent
(which percentage shall never exceed 100%) of a fraction, the numerator of which
is equal to the Adjusted Invested Amount as of the last day of the preceding
Monthly Period (or with respect to the first Monthly Period, the Initial
Invested Amount) and the denominator of which is equal to the product of (a) the
sum of the total amount of the Principal Receivables in the Trust as of such day
(subject to adjustment to give effect to designations of Additional Accounts and
Removed Accounts) (or with respect to the first Monthly Period, the total amount
of Principal Receivables in the Trust on the Closing Date) and the principal
amount on deposit in the Special Funding Account as of such day and (b) the
Series Allocation Percentage.
Investor Finance Charge Collections (which for any Monthly Period is equal
to the product of the Floating Allocation Percentage and the Series Allocable
Finance Charge Collections) will be redirected among all Series in Group I as
set forth in "Description of the Pooling and Servicing Agreement -- Reallocation
Among Securities of Different Series within a Reallocation Group" in the
Prospectus. Redirected Investor Finance Charge Collections allocated to the
Offered Series and the Series Default Amount will be further allocated among the
Class A Securityholders, the Class B Securityholders, the Collateral Interest
Holder and the Class D Securityholders in accordance with the Class A Floating
Percentage, the Class B Floating Percentage, the Collateral Floating Percentage
and the Class D Floating Percentage, respectively. The "Class A Floating
Percentage" means, with respect to any Monthly Period, the percentage equivalent
(which percentage shall never exceed 100%) of a fraction, the numerator of which
is equal to the Class A Adjusted Invested Amount 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 Invested Amount as of the close of business on such day (or, with
respect to the first Monthly Period, the Initial Invested Amount). The "Class B
Floating Percentage" means, with respect to any Monthly Period, the percentage
equivalent (which percentage shall never exceed 100%) of a fraction, the
numerator of which is equal to the Class B Adjusted Invested Amount as of the
close of business on the last day of the preceding Monthly Period
S-28
(or with respect to the first Monthly Period, as of the Closing Date) and the
denominator of which is equal to the Adjusted Invested Amount at the close of
business on such day (or with respect to the first Monthly Period, the Initial
Invested Amount). The "Collateral Floating Percentage" means, with respect to
any Monthly Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Collateral
Invested Amount 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 Invested Amount as
of the close of business on such day (or with respect to the first Monthly
Period, the Initial Invested Amount). The "Class D Floating Percentage" means,
with respect to any Monthly Period, the percentage equivalent (which percentage
shall never exceed 100%) of a fraction, the numerator of which is equal to the
Class D Invested Amount 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 Invested
Amount as of the close of business on such day (or with respect to the first
Monthly Period, the Initial Invested Amount).
The Series Allocable Principal Collections for the Offered Series will be
allocated to the Offered Securities, the Collateral Interest and the Class D
Securities based on the Principal Allocation Percentage and the remainder of
such Series Allocable Principal Collections will be allocated to the
Transferor's Interest. The "Principal Allocation Percentage" means, with respect
to any Monthly Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to (a) during the
Revolving Period, the Series Adjusted Invested Amount for the Offered Series as
of the last day of the immediately preceding Monthly Period (or, in the case of
the first Monthly Period, the Closing Date) and (b) during the Controlled
Accumulation Period or the Early Amortization Period, the Series Adjusted
Invested Amount for the Offered Series as of the last day of the Revolving
Period and the denominator of which is equal to the product of (i) the sum of
the total amount of Principal Receivables in the Trust as of the last day of the
immediately preceding Monthly Period (subject to adjustment to give effect to
designations of Additional Accounts and Removed Accounts) and the principal
amount on deposit in the Special Funding Account as of such last day (or, in the
case of the first Monthly Period, the Closing Date) and (ii) the Series
Allocation Percentage for the Offered Series as of the last day of the
immediately preceding Monthly Period; PROVIDED, HOWEVER, that because the
Offered Securities are subject to being paired with a future Series, if a Pay
Out Event or a Reinvestment Event (as those terms are defined in the related
Supplement) occurs with respect to a Paired Series during the Controlled
Accumulation Period with respect to the Offered Series, the Transferor may, by
written notice delivered to the Trustee and the Servicer, designate a different
numerator for the foregoing fraction, provided that such numerator is not less
than the Adjusted Invested Amount as of the last day of the revolving period for
such Paired Series and the Transferor shall have received written notice from
each Rating Agency that such designation will satisfy the Rating Agency
Condition 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 the time, in the reasonable belief of the Transferor, such
designation will not cause a Pay Out Event or an event that, after the giving of
notice or lapse of time, would constitute a Pay Out Event, to occur with respect
to the Offered Series.
Such amounts so allocated to the Offered Securities, the Collateral
Interest and the Class D Securities will be further allocated to the Class A
Securityholders, the Class B Securityholders, the Collateral Interest Holder and
the Class D Securityholders based on the Class A Principal Percentage, the Class
B Principal Percentage, the Collateral Principal Percentage and the Class D
Principal Percentage, respectively. The "Class A Principal Percentage" means,
with respect to any Monthly Period, (i) during the Revolving Period, the
percentage equivalent (which percentage shall never exceed 100%) of a fraction,
the numerator of which is equal to the Class A Invested Amount as of the last
day of the immediately preceding Monthly Period (or, in the case of the first
Monthly Period, the Class A Initial Invested Amount) and the denominator of
which is equal to the Invested Amount as of such day (or, in the case of the
first Monthly Period, the Initial Invested Amount) or (ii) during the Controlled
Accumulation Period or the Early Amortization Period, the percentage equivalent
(which percentage shall never exceed 100%) of a fraction, the numerator of which
is equal to the Class A Invested Amount as of the last day of the Revolving
Period, and the denominator of which is equal to the Invested Amount as of such
day. The "Class B Principal Percentage" means, with respect to any Monthly
Period, (i) during the Revolving Period, the percentage equivalent (which
percentage shall never exceed 100%) of a fraction, the numerator of which is
equal to the Class B Invested Amount as of the last day of the immediately
preceding Monthly Period (or, in the case of the first Monthly Period, the Class
B Initial Invested Amount) and the denominator of which is equal to the Invested
Amount as of such day (or, in the case of the first Monthly Period, the Initial
Invested Amount) or (ii) during the Controlled Accumulation Period or the Early
Amortization Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Class B
Invested Amount as of the last day of the Revolving Period and the denominator
of which is equal to the Invested Amount as of such day. The "Collateral
Principal Percentage" means, with respect to any Monthly Period, (i) during the
Revolving Period, the percentage equivalent (which percentage shall never exceed
100%) of a fraction, the numerator of
S-29
which is equal to the Collateral Invested Amount as of the last day of the
immediately preceding Monthly Period (or, in the case of the first Monthly
Period, the Collateral Initial Invested Amount) and the denominator of which is
equal to the Invested Amount as of such day (or, in the case of the first
Monthly Period, the Initial Invested Amount) or (ii) during the Controlled
Accumulation Period or the Early Accumulation Period, the percentage equivalent
(which percentage shall never exceed 100%) of a fraction, the numerator of which
is equal to the Collateral Invested Amount as of the last day of the Revolving
Period and the denominator of which is equal to the Invested Amount as of such
day. The "Class D Principal Percentage" means, with respect to any Monthly
Period, (i) during the Revolving Period, the percentage equivalent (which
percentage shall never exceed 100%) of a fraction, the numerator of which is
equal to the Class D Invested Amount as of the last day of the immediately
preceding Monthly Period (or, in the case of the first Monthly Period, the Class
D Initial Invested Amount) and the denominator of which is equal to the Invested
Amount as of such day (or, in the case of the first Monthly Period, the Initial
Invested Amount) or (ii) during the Controlled Accumulation Period or the Early
Amortization Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Class D
Invested Amount as of the last day of the Revolving Period and the denominator
of which is equal to the Invested Amount as of such day.
As used herein, the following terms have the meanings indicated:
"Class A Invested Amount" for any date means an amount equal to (i)
the Class A Initial Invested Amount, less (ii) the amount of principal
payments made to the Class A Securityholders on or prior to such date, less
(iii) the excess, if any, of the aggregate amount of Class A Charge-Offs
for all prior Distribution Dates over the aggregate amount of any
reimbursements of Class A Charge-Offs for all Distribution Dates prior to
such date; PROVIDED, HOWEVER, that the Class A Invested Amount may not be
reduced below zero.
"Class B Invested Amount" for any date means an amount equal to (i)
the Class B Initial Invested Amount, less (ii) the amount of principal
payments made to the Class B Securityholders on or prior to such date, less
(iii) the aggregate amount of Class B Charge-Offs for all prior
Distribution Dates, less (iv) the aggregate amount of Redirected Principal
Collections for all prior Distribution Dates which have been used to fund
the Required Amount with respect to such Distribution Dates (excluding any
Redirected Principal Collections that have resulted in a reduction of the
Collateral Invested Amount or the Class D Invested Amount), less (v) an
amount equal to the amount by which the Class B Invested Amount has been
reduced to cover the Class A Default Amount on all prior Distribution Dates
as described below under " -- Defaulted Receivables; Charge-Offs," plus
(vi) the aggregate amount of Excess Spread and Excess Finance Charge
Collections allocated to the Offered Series and applied on all prior
Distribution Dates for the purpose of reimbursing amounts deducted pursuant
to the foregoing clauses (iii), (iv) and (v); PROVIDED, HOWEVER, that the
Class B Invested Amount may not be reduced below zero.
"Class A Adjusted Invested Amount" for any date means an amount equal
to the then current Class A Invested Amount less the funds on deposit in
the Principal Funding Account (up to the Class A Invested Amount) on such
date.
"Class B Adjusted Invested Amount" for any date means an amount equal
to the then current Class B Invested Amount less the funds on deposit in
the Principal Funding Account in excess of the Class A Invested Amount on
such date.
"Class D Invested Amount" for any date means an amount equal to (i)
the Class D Initial Invested Amount, less (ii) the aggregate amount of
principal payments made to the Class D Securityholders prior to such date,
less (iii) the aggregate amount of Class D Charge-Offs for all prior
Distribution Dates, less (iv) the aggregate amount of Redirected Principal
Collections for all prior Distribution Dates, less (v) an amount equal to
the aggregate amount by which the Class D Invested Amount has been reduced
to fund the Class A Default Amount, the Class B Default Amount and the
Collateral Default Amount on all prior Distribution Dates as described
below under " -- Defaulted Receivables; Charge-Offs," plus (vi) the
aggregate amount of Excess Spread and Excess Finance Charge Collections
allocated to the Offered Series and applied on all prior Distribution Dates
for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (iii), (iv) and (v); PROVIDED, HOWEVER, that the Class D Invested
Amount may not be reduced below zero.
"Collateral Invested Amount" for any date means an amount equal to (i)
the Collateral Initial Invested Amount, less (ii) the aggregate amount of
principal payments made to the Collateral Interest Holder prior to such
date, less (iii) the aggregate amount of Collateral Charge-Offs for all
prior Distribution Dates, less (iv) the aggregate amount of Redirected
Principal Collections for all prior Distribution Dates (excluding any
Redirected Principal Collections that have resulted
S-30
in a reduction of the Class D Invested Amount), less (v) an amount equal to
the aggregate amount by which the Collateral Invested Amount has been
reduced to fund the Class A Default Amount and the Class B Default Amount
on all prior Distribution Dates as described below under " -- Defaulted
Receivables; Charge-Offs," plus (vi) the aggregate amount of Excess Spread
and Excess Finance Charge Collections allocated to the Offered Series and
applied on all prior Distribution Dates for the purpose of reimbursing
amounts deducted pursuant to the foregoing clauses (iii), (iv) and (v);
PROVIDED, HOWEVER, that the Collateral Invested Amount may not be reduced
below zero.
"Invested Amount" for any date means an amount equal to the sum of the
Class A Invested Amount, the Class B Invested Amount, the Collateral
Invested Amount and the Class D Invested Amount on such date.
PRINCIPAL FUNDING ACCOUNT
The Servicer will establish and maintain in the name of the Trustee, on
behalf of the Trust, the Principal Funding Account as a deposit account meeting
the eligibility requirements specified in the Pooling and Servicing Agreement
(an "Eligible Deposit Account") held for the benefit of the Series
Securityholders. During the Controlled Accumulation Period, the Servicer will
transfer collections in respect of Principal Receivables, Shared Principal
Collections allocated to the Offered Series and other amounts described herein
to be treated in the same manner as collections of Principal Receivables from
the Collection Account to the Principal Funding Account as described below under
" -- Application of Collections."
Unless a Pay Out Event has occurred with respect to the Offered Securities,
all amounts on deposit in the Principal Funding Account (the "Principal Funding
Account Balance") on any Distribution Date (after giving effect to any deposits
to, or withdrawals from, the Principal Funding Account to be made on such
Distribution Date) will be invested to the following Distribution Date by the
Trustee at the direction of the Servicer in Eligible Investments. On each
Distribution Date with respect to the Controlled Accumulation Period, the
interest and other investment income (net of investment expenses and losses)
earned on such investments (the "Principal Funding Investment Proceeds") will be
withdrawn from the Principal Funding Account and will be treated as a portion of
Class A Available Funds. If such investments with respect to any such
Distribution Date yield less than the Class A Interest Rate, the Principal
Funding Investment Proceeds with respect to such Distribution Date will be less
than the Covered Amount for such Distribution Date. It is intended that any such
shortfall will be funded from other Class A Available Funds (including a
withdrawal from the Reserve Account, if necessary, as described below under
" -- Reserve Account"). The Available Reserve Account Amount at any time will be
limited and there can be no assurance that sufficient funds will be available to
fund any such shortfall. The "Covered Amount" means, for any Distribution Date
with respect to the Controlled Accumulation Period or the first Distribution
Date with respect to the Early Amortization Period, if such Distribution Date
occurs prior to the payment in full of the Class A Invested Amount and the Class
B Invested Amount, an amount equal to the product of (i) a fraction, the
numerator of which is equal to the actual number of days in the related Interest
Period and the denominator of which is 360, (ii) the sum of (a) the product of
(x) a fraction, the numerator of which is an amount equal to the excess, if any,
of the outstanding principal amount of the Class A Securities, over the Class A
Adjusted Invested Amount, and the denominator of which is an amount equal to the
excess of the sum of the outstanding principal amount of the Class A Securities
and the outstanding principal amount of the Class B Securities, over the sum of
the Class A Adjusted Invested Amount and the Class B Adjusted Invested Amount,
in each case as of the preceding Distribution Date and (y) the Class A Interest
Rate in effect during such Interest Period and (b) the product of (x) a
fraction, the numerator of which is equal to the excess, if any, of the
outstanding principal amount of the Class B Securities, over the Class B
Adjusted Invested Amount, and the denominator of which is an amount equal to the
excess of the sum of the outstanding principal amount of the Class A Securities
and the outstanding principal amount of the Class B Securities, over the sum of
the Class A Adjusted Invested Amount and the Class B Adjusted Invested Amount,
in each case as of the preceding Distribution Date and (y) the Class B Interest
Rate in effect during such Interest Period, and (iii) the Principal Funding
Account Balance (but not in excess of the sum of the Class A Adjusted Invested
Amount and the Class B Adjusted Invested Amount), if any, as of the preceding
Distribution Date.
RESERVE ACCOUNT
The Servicer will establish and maintain in the name of the Trustee, on
behalf of the Trust, an Eligible Deposit Account for the benefit of the Series
Securityholders (the "Reserve Account"). The Reserve Account is established to
assure the subsequent distribution of interest on the Securities as provided in
this Prospectus Supplement during the Controlled Accumulation Period. On each
Distribution 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 and Excess Finance Charge
Collections allocated to the Offered Series (in the order of priority described
below under " -- Application of Collections -- Excess Spread; Excess Finance
Charge Collections") to increase the amount on deposit in the Reserve
S-31
Account (to the extent such amount is less than the Required Reserve Account
Amount). In addition, on each such Distribution Date, the Transferor will have
the option, but will not be required, to make a deposit in the Reserve Account
to the extent that the amount on deposit in the Reserve Account, after giving
effect to any Excess Spread and Excess Finance Charge Collections allocated and
available to be deposited in the Reserve Account on such Distribution Date, is
less than the Required Reserve Account Amount. The "Reserve Account Funding
Date" will be the Distribution Date which occurs not later than the earliest of
(a) the Distribution Date with respect to the Monthly Period which commences 3
months prior to the commencement of the Controlled Accumulation Period; (b) the
first Distribution Date for which the difference between (x) the Series Adjusted
Portfolio Yield and (y) the Base Rate is less than 2.00%, but in such event the
Reserve Account Funding Date shall not be required to occur earlier than the
Distribution Date which commences 12 months prior to the commencement of the
Controlled Accumulation Period; (c) the first Distribution Date for which the
difference between (x) the Series Adjusted Portfolio Yield and (y) the Base Rate
is less than 3.00%, but in such event the Reserve Account Funding Date shall not
be required to occur earlier than the Distribution Date which commences 6 months
prior to the commencement of the Controlled Accumulation Period; or (d) the
first Distribution Date for which the difference between (x) the Series Adjusted
Portfolio Yield and (y) the Base Rate is less than 3.50%, but in such event the
Reserve Account Funding Date shall not be required to occur earlier than the
Distribution Date which commences 4 months prior to the commencement of the
Controlled Accumulation Period. The "Required Reserve Account Amount" for any
Distribution Date on or after the Reserve Account Funding Date will be equal to
0.5% of the sum of the Class A Invested Amount and the Class B Invested Amount
as of the preceding Distribution Date, or any other amount designated by the
Transferor, provided that the Transferor, the Servicer and the Trustee each has
received written notice from each Rating Agency that such designation will
satisfy the Rating Agency Condition. On each Distribution Date, after giving
effect to any deposit to be made to, and any withdrawal to be made from, the
Reserve Account on such Distribution 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 shall
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 Distribution Date (after
giving effect to any deposits to, or withdrawals from, the Reserve Account to be
made on such Distribution Date) will be invested to the following Distribution
Date by the Trustee at the direction of the Servicer in Eligible 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 therein is less than the Required Reserve Account
Amount) or deposited in the Collection Account and treated as collections of
Finance Charge Receivables allocable to the Offered Series.
On or before each Distribution Date with respect to the Controlled
Accumulation Period and on the first Distribution Date with respect to the Early
Amortization Period, a withdrawal will be made from the Reserve Account, and the
amount of such withdrawal will be deposited in the Collection Account and
included in collections of Finance Charge Receivables in an amount equal to the
lesser of (a) the Available Reserve Account Amount with respect to such
Distribution Date and (b) the excess, if any, of the Covered Amount with respect
to such Distribution Date over the Principal Funding Investment Proceeds with
respect to such Distribution Date; PROVIDED, HOWEVER, that the amount of such
withdrawal will be reduced to the extent that funds otherwise would be available
to be deposited in the Reserve Account on such Distribution Date. On each
Distribution 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 Distribution Date) and the Required
Reserve Account Amount for such Distribution Date.
The Reserve Account will be terminated following the earliest to occur of
(a) the termination of the Trust pursuant to the Pooling and Servicing
Agreement, (b) the date on which the Offered Securities are paid in full and (c)
if the Controlled Accumulation Period has not commenced, the occurrence of a Pay
Out Event with respect to the Offered Securities or, if the Controlled
Accumulation Period has commenced, the earlier of the first Distribution Date
with respect to the Early Amortization Period and the Class B 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 until the
Collateral Invested Amount has been paid in full and then to the Class D
Securityholders until the Class D Invested Amount has been paid in full. Any
amounts withdrawn from the Reserve Account and distributed to the Collateral
Interest Holder or the Class D Securityholders as described above will not be
available for distribution to the Class A Securityholders or the Class B
Securityholders.
S-32
REDIRECTION OF CASH FLOWS
With respect to each Distribution Date, on each Determination Date, the
Servicer will determine the amount (the "Class A Required Amount"), which will
be equal to the amount, if any, by which (a) the sum of (i) Class A Monthly
Interest for such Distribution Date, (ii) the amount of any Class A Monthly
Interest previously due but not distributed to the Class A Securityholders on a
prior Distribution Date, (iii) any Class A Additional Interest for such
Distribution Date and the amount of any Class A Additional Interest previously
due but not distributed to the Class A Securityholders on a prior Distribution
Date, (iv) the Class A Servicing Fee for such Distribution Date and any unpaid
Class A Servicing Fee and (v) the Class A Default Amount, if any, for such
Distribution Date exceeds (b) the Class A Available Funds for the related
Monthly Period. If the Class A Required Amount is greater than zero, Excess
Spread and Excess Finance Charge Collections allocated to the Offered Series and
available for such purpose will be used to fund the Class A Required Amount with
respect to such Distribution Date. If such Excess Spread and Excess Finance
Charge Collections are insufficient to fund the Class A Required Amount,
collections of Principal Receivables allocable first to the Class D Securities,
second to the Collateral Invested Amount and last to the Class B Securities for
the related Monthly Period ("Redirected Principal Collections") will be used to
fund the remaining Class A Required Amount. If Redirected Principal Collections
with respect to the related Monthly Period, together with Excess Spread and
Excess Finance Charge Collections allocated to the Offered Series are
insufficient to fund the Class A Required Amount for such related Monthly
Period, then the Class D Invested Amount (after giving effect to reductions for
any Class D Charge-Offs on such Distribution Date) will be reduced by the amount
of such deficiency (but not by more than the Class A Default Amount for such
Distribution Date). In the event that such reduction would cause the Class D
Invested Amount to be a negative number, the Class D Invested Amount will be
reduced to zero, and the Collateral Invested Amount (after giving effect to
reductions for any Collateral Charge-Offs) will be reduced by the amount by
which the Class D Invested Amount would have been reduced below zero (but not by
more than the excess of the Class A Default Amount, if any, for such
Distribution Date over the amount of such reduction, if any, of the Class D
Invested Amount with respect to such Distribution Date). In the event that such
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount (after giving effect to reductions for any Class B Charge-Offs) will be
reduced by the amount by which the Collateral Invested Amount would have been
reduced below zero (but not by more than the excess, if any, of the Class A
Default Amount for such Distribution Date over the amount of the reductions, if
any, of the Class D Invested Amount and the Collateral Invested Amount with
respect to such Distribution Date, as described above). In the event that such
reduction would cause the Class B Invested Amount to be a negative number, the
Class B Invested Amount will be reduced to zero and the Class A Invested Amount
will be reduced by the amount by which the Class B Invested Amount would have
been reduced below zero (but not by more than the excess, if any, of the Class A
Default Amount for such Distribution Date over the amount of the reductions, if
any, of the Class D Invested Amount, the Collateral Invested Amount and the
Class B Invested Amount with respect to such Distribution Date, as described
above). Any such reduction in the Class A Invested Amount will have the effect
of slowing or reducing the return of principal and interest to the Class A
Securityholders. In such case, the Class A Securityholders will bear directly
the credit and other risks associated with their undivided interest in the
Trust. See " -- Defaulted Receivables; Charge-Offs" below.
With respect to each Distribution Date, on each Determination Date, the
Servicer will determine the amount (the "Class B Required Amount"), which will
be equal to the sum of (a) the amount, if any, by which the sum of (i) Class B
Monthly Interest for such Distribution Date, (ii) the amount of any Class B
Monthly Interest previously due but not distributed to Class B Securityholders
on a prior Distribution Date, (iii) any Class B Additional Interest for such
Distribution Date and the amount of any Class B Additional Interest previously
due but not distributed to Class B Securityholders on a prior Distribution Date,
and (iv) the Class B Servicing Fee for such Distribution Date and any unpaid
Class B Servicing Fee exceeds the Class B Available Funds for the related
Monthly Period and (b) the Class B Default Amount. If the Class B Required
Amount is greater than zero, Excess Spread and Excess Finance Charge Collections
allocated to the Offered Series and not required to pay the Class A Required
Amount or reimburse Class A Charge-Offs will be used to fund the Class B
Required Amount with respect to such Distribution Date. If such Excess Spread
and Excess Finance Charge Collections available with respect to such
Distribution Date are less than the Class B Required Amount, Redirected
Principal Collections allocable to the Class D Invested Amount and not required
to fund the Class A Required Amount for the related Monthly Period will then be
used to fund the remaining Class B Required Amount. If such Redirected Principal
Collections allocable to the Class D Invested Amount are insufficient to fund
the remaining Class B Required Amount, then the Class D Invested Amount (after
any adjustments made thereto for the benefit of the Class A Securityholders)
will be reduced by the amount of such insufficiency (but not by more than the
Class B Default Amount for such Distribution Date). In the event that such
reduction would cause the Class D Invested Amount to be a negative number, the
Class D Invested Amount will be reduced to zero, and the Collateral Invested
Amount will be reduced by the amount by which the Class D Invested Amount would
have been reduced
S-33
below zero (but not by more than the excess of the Class B Default Amount for
such Distribution Date over the amount of such reduction of the Class D Invested
Amount). In the event that such reduction would cause the Collateral Invested
Amount to be a negative number, the Collateral Invested Amount will be reduced
to zero, and the Class B Invested Amount will be reduced by the amount by which
the Collateral Invested Amount would have been reduced below zero (but not by
more than the excess, if any, of the Class B Default Amount for such
Distribution Date over the amount of the reductions, if any, of the Class D
Invested Amount and the Collateral Invested Amount with respect to such
Distribution Date, as described above), and the Class B Securityholders will
bear directly the credit and other risks associated with their undivided
interests in the Trust. See " -- Defaulted Receivables; Charge-Offs" below.
With respect to each Distribution Date, on each Determination Date, the
Servicer will determine the amount (the "Collateral Required Amount"), which
will be equal to the sum of (a) the sum of (i) Collateral Monthly Interest for
such Distribution Date, (ii) the amount of any Collateral Monthly Interest
previously due but not distributed to the Collateral Interest Holder on a prior
Distribution Date, (iii) any Collateral Additional Interest for such
Distribution Date and the amount of any Collateral Additional Interest
previously due but not distributed to Collateral Interest Holder on a prior
Distribution Date, and (iv) the Collateral Default Amount and (b) the amount, if
any, by which the Collateral Servicing Fee for such Distribution Date and any
unpaid Collateral Servicing Fee exceeds the Collateral Available Funds for the
related Monthly Period. If the Collateral Required Amount is greater than zero,
Excess Spread and Excess Finance Charge Collections allocated to the Offered
Series and available to pay such amounts after prior applications thereof will
be used to fund the components of the Collateral Required Amount. If such Excess
Spread and Excess Finance Charge Collections available with respect to such
Distribution Date are less than the Collateral Required Amount, Redirected
Principal Collections allocable to the Class D Invested Amount and not required
to fund the Class A Required Amount or the Class B Required Amount for the
related Monthly Period will then be used to fund the remaining Collateral
Required Amount. If such Redirected Principal Collections allocable to the Class
D Invested Amount are insufficient to fund the remaining Collateral Required
Amount, then the Class D Invested Amount (after any adjustments made thereto for
the benefit of the Class A Securityholders and the Class B Securityholders) will
be reduced by the amount of such insufficiency (but not by more than the
Collateral Default Amount for such Distribution Date). In the event that such
reduction would cause the Class D Invested Amount to be a negative number, the
Class D Invested Amount will be reduced to zero, and the Collateral Invested
Amount will be reduced by the amount by which the Class D Invested Amount would
have been reduced below zero (but not by more than the excess of the Collateral
Default Amount for such Distribution Date over the amount of such reduction of
the Class D Invested Amount).
Reductions of the Class A Invested Amount or Class B Invested Amount shall
thereafter be reimbursed and the Class A Invested Amount or Class B Invested
Amount increased on each Distribution Date by the amount, if any, of Excess
Spread and Excess Finance Charge Collections allocable and available to
reimburse such amounts. See " -- Application of Collections -- Excess Spread;
Excess Finance Charge Collections" below. When such reductions of the Class A
Invested Amount and Class B Invested Amount have been fully reimbursed,
reductions of first, the Collateral Invested Amount and then the Class D
Invested Amount will be reimbursed to the extent of the full amount of any prior
reduction thereof.
APPLICATION OF COLLECTIONS
PAYMENT OF FEES, INTEREST AND OTHER ITEMS. On each Distribution Date, the
Trustee, acting pursuant to the Servicer's instructions, will apply the Class A
Available Funds, Class B Available Funds, Collateral Available Funds and Class D
Available Funds (see " -- Interest Payments" above) on deposit in the Collection
Account in the following priority:
(A) On each Distribution Date, an amount equal to the Class A Available
Funds with respect to such Distribution Date will be distributed in the
following priority:
(i) an amount equal to Class A Monthly Interest for such Distribution
Date, plus the amount of any Class A Monthly Interest previously due but
not distributed to Class A Securityholders on a prior Distribution Date,
plus the amount of any Class A Additional Interest for such Distribution
Date and any Class A Additional Interest previously due but not distributed
to the Class A Securityholders on a prior Distribution Date, will be
distributed to the Class A Securityholders;
(ii) an amount equal to the Class A Servicing Fee for such
Distribution Date, plus the amount of any Class A Servicing Fee previously
due but not distributed to the Servicer on a prior Distribution Date, will
be paid to the Servicer;
(iii) an amount equal to the Class A Default Amount for such
Distribution Date will be treated as a portion of Available Principal
Collections for such Distribution Date; and
S-34
(iv) the balance, if any, shall constitute Excess Spread and shall be
allocated and distributed or deposited as described under " -- Excess
Spread; Excess Finance Charge Collections" below.
(B) On each Distribution Date, an amount equal to the Class B Available
Funds with respect to such Distribution Date will be distributed in the
following priority:
(i) an amount equal to Class B Monthly Interest for such Distribution
Date, plus the amount of any Class B Monthly Interest previously due but
not distributed to Class B Securityholders on a prior Distribution Date,
plus the amount of any Class B Additional Interest for such Distribution
Date and any Class B Additional Interest previously due but not distributed
to the Class B Securityholders on a prior Distribution Date, will be
distributed to the Class B Securityholders;
(ii) an amount equal to the Class B Servicing Fee for such
Distribution Date, plus the amount of any Class B Servicing Fee previously
due but not distributed to the Servicer on a prior Distribution Date, will
be paid to the Servicer; and
(iii) the balance, if any, shall constitute Excess Spread and shall be
allocated and distributed or deposited as described under " -- Excess
Spread; Excess Finance Charge Collections" below.
(C) On each Distribution Date, an amount equal to the Collateral Available
Funds with respect to such Distribution Date will be distributed or deposited in
the following priority:
(i) an amount equal to the Collateral Interest Servicing Fee for such
Distribution Date, plus the amount of any Collateral Interest Servicing Fee
previously due but not distributed to the Servicer on a prior Distribution
Date, will be paid to the Servicer; and
(ii) the balance, if any, will constitute a portion of Excess Spread
and will be allocated and distributed or deposited as described under
" -- Excess Spread; Excess Finance Charge Collections" below.
(D) On each Distribution Date, an amount equal to the Class D Available
Funds with respect to such Distribution Date will be distributed or deposited in
the following priority:
(i) an amount equal to the Class D Servicing Fee for such Distribution
Date, plus the amount of any Class D Servicing Fee previously due but not
distributed to the Servicer on a prior Distribution Date, will be paid to
the Servicer; and
(ii) the balance, if any, will constitute a portion of Excess Spread
and will be allocated and distributed or deposited as described under
" -- Excess Spread; Excess Finance Charge Collections" below.
"Class A Additional Interest" means, with respect to any Distribution Date,
an amount equal to the product of (i) a fraction, the numerator of which is
equal to the actual number of days in the preceding Interest Period and the
denominator of which is 360, (ii) the Class A Interest Rate plus 2% PER ANNUM
and (iii) the amount of any Class A Interest Shortfall for such Distribution
Date.
"Class A Interest Shortfall" means, with respect to any Distribution Date,
the excess, if any, of the Class A Monthly Interest for the preceding
Distribution Date, over the aggregate amount of funds allocated and available to
pay the Class A Monthly Interest on such preceding Distribution Date.
"Class A Monthly Interest" means, with respect to any Distribution Date, an
amount equal to the product of (i) a fraction, the numerator of which is equal
to the actual number of days in the Interest Period preceding such Distribution
Date, and the denominator of which is 360, (ii) the Class A Interest Rate and
(iii) the outstanding principal balance of the Class A Securities as of the
close of business on the last day of the preceding Monthly Period (or with
respect to the initial Distribution Date, the Closing Date).
"Class B Additional Interest" means, with respect to any Distribution Date,
an amount equal to the product of (i) a fraction, the numerator of which is
equal to the actual number of days in the preceding Interest Period and the
denominator of which is 360, (ii) the Class B Interest Rate plus 2% PER ANNUM
and (iii) the amount of any Class B Interest Shortfall for such Distribution
Date.
"Class B Interest Shortfall" means, with respect to any Distribution Date,
the excess, if any, of the Class B Monthly Interest for the preceding
Distribution Date, over the aggregate amount of funds allocated and available to
pay the Class B Monthly Interest on such preceding Distribution Date.
S-35
"Class B Monthly Interest" means, with respect to any Distribution Date, an
amount equal to the product of (i) a fraction, the numerator of which is equal
to the actual number of days in the Interest Period preceding such Distribution
Date and the denominator of which is 360, (ii) the Class B Interest Rate and
(iii) the Class B Invested Amount as of the close of business on the last day of
the preceding Monthly Period (or with respect to the initial Distribution Date,
the Closing Date).
"Collateral Available Funds" means, with respect to any Monthly Period, an
amount equal to the product of (i) the Collateral Floating Percentage and (ii)
the sum of the Redirected Investor Finance Charge Collections (including any
investment earnings and certain other amounts that are to be treated as
collections of Finance Charge Receivables allocable to the Offered Series in
accordance with the Pooling and Servicing Agreement and the Offered Series
Supplement) and the Yield Supplement Draw Amount, if any, for the related
Distribution Date.
"Class D Available Funds" means, with respect to any Monthly Period, an
amount equal to the product of (i) the Class D Floating Percentage and (ii) the
sum of the Redirected Investor Finance Charge Collections (including any
investment earnings and certain other amounts that are to be treated as
collections of Finance Charge Receivables allocable to the Offered Series in
accordance with the Pooling and Servicing Agreement and the Offered Series
Supplement) and the Yield Supplement Draw Amount, if any, for the related
Distribution Date.
"Excess Spread" means, with respect to any Distribution Date, an amount
equal to the sum of the amounts described above in clause (A)(iv), clause
(B)(iii), clause (C)(ii) and clause (D)(ii).
EXCESS SPREAD; EXCESS FINANCE CHARGE COLLECTIONS. On each Distribution
Date, the Trustee, acting in accordance with the applicable monthly Servicer's
Certificate, will apply Excess Spread and Excess Finance Charge Collections
allocated to the Offered Series with respect to the related Monthly Period, to
make the following distributions or deposits in the following priority:
(a) an amount equal to the Class A Required Amount, if any, with
respect to the related Monthly Period will be used to fund any deficiency
pursuant to clauses (A) (i), (ii) and (iii) above under " -- Payment of
Fees, Interest and Other Items" in such order of priority;
(b) an amount equal to the aggregate amount of Class A Charge-Offs
which have not been previously reimbursed will be treated as a portion of
Available Principal Collections for such Distribution Date as described
under " -- Payments of Principal" below;
(c) an amount equal to the Class B Required Amount, if any, with
respect to such Distribution Date will be (I) used to fund any deficiency
pursuant to clauses (B) (i) and (ii) above under " -- Payment of Fees,
Interest and Other Items" in such order of priority and then (II) treated,
up to the Class B Default Amount, as a portion of Available Principal
Collections for such Distribution Date;
(d) an amount equal to the difference, if any, between (x) the sum of
(A) the product of (i) a fraction, the numerator of which is equal to the
actual number of days in the Interest Period preceding such Distribution
Date, and the denominator of which is 360, (ii) the Class B Interest Rate
and (iii) the outstanding principal balance of the Class B Securities as of
the close of business on the last day of the preceding Monthly Period and
(B) any amounts in respect of the foregoing clause (A) previously due but
not distributed to the Class B Securityholders on a prior Distribution
Date, and (y) the amount distributed to the Class B Securityholders
pursuant to clause (B) (i) above under " -- Payment of Fees, Interest and
Other Items";
(e) an amount equal to the aggregate amount by which the Class B
Invested Amount has been reduced pursuant to clauses (iii), (iv) and (v) of
the definition of "Class B Invested Amount" under " -- Allocation
Percentages" above (but not in excess of the aggregate amount of such
reductions which have not been previously reimbursed) will be treated as a
portion of Available Principal Collections for such Distribution Date;
(f) an amount equal to the excess, if any, of the sum of the Monthly
Servicing Fee for such Distribution Date and the amount of any Monthly
Servicing Fee previously due but not distributed to the Servicer on a prior
Distribution Date, over the sum of the amounts distributed to the Servicer
on such Distribution Date pursuant to clauses (A)(ii), (B)(ii), (C)(i) and
(D)(i) above under " -- Payment of Fees, Interest and Other Items" shall be
distributed to the Servicer;
(g) an amount equal to Collateral Monthly Interest for such
Distribution Date, plus the amount of any Collateral Monthly Interest
previously due but not distributed to the Collateral Interest Holder on a
prior Distribution Date and any Collateral Additional Interest previously
due but not distributed to the Collateral Interest Holder on a prior
Distribution
S-36
Date, will be distributed to the Collateral Interest Holder for application
in accordance with the Loan Agreement (as hereinafter defined);
(h) an amount equal to the Collateral Default Amount shall be treated
as a portion of Available Principal Collections with respect to such
Distribution Date;
(i) an amount equal to the aggregate amount by which the Collateral
Invested Amount has been reduced pursuant to clauses (iii), (iv) and (v) of
the definition of "Collateral Invested Amount" under " -- Allocation
Percentages" above (but not in excess of the aggregate amount of such
reductions which have not been previously reimbursed) shall be treated as a
portion of Available Principal Collections for such Distribution Date;
(j) on each Distribution 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" above, an amount up to the excess,
if any, of the Required Reserve Account Amount over the Available Reserve
Account Amount shall be deposited into the Reserve Account;
(k) an amount equal to Class D Monthly Interest for such Distribution
Date, plus the amount of any Class D Monthly Interest previously due but
not distributed to Class D Securityholders on a prior Distribution Date,
plus additional interest at a rate equal to the Class D Interest Rate plus
2% PER ANNUM (the "Class D Additional Interest"), will be distributed to
the holders of the Class D Securities;
(l) an amount equal to the Class D Default Amount shall be treated as
a portion of Available Principal Collections with respect to such
Distribution Date;
(m) an amount equal to the aggregate amount by which the Class D
Invested Amount has been reduced pursuant to clauses (iii), (iv) and (v) of
the definition of "Class D Invested Amount" under " -- Allocation
Percentages" above (but not in excess of the aggregate amount of such
reductions which have not been previously reimbursed) shall be treated as a
portion of Available Principal Collections for such Distribution Date;
(n) an amount equal to the aggregate of any other amounts then
required to be applied pursuant to the Loan Agreement among the Transferor,
the Trustee, the Servicer and the Collateral Interest Holder (the "Loan
Agreement") (to the extent such amounts are required to be applied pursuant
to the Loan Agreement out of Excess Spread and Excess Finance Charge
Collections) shall be distributed to the Collateral Interest Holder for
application in accordance with the Loan Agreement; and
(o) the balance, if any, will be applied first to any other amounts
that the Trust may be liable for from time to time and not otherwise
provided for above, and then will constitute a portion of Excess Finance
Charge Collections for such Distribution Date and will be available for
allocation to other Excess Allocation Series or to the holders of the
Transferor Securities as described in "Description of the Pooling and
Servicing Agreement -- Sharing of Excess Finance Charge Collections Among
Excess Allocation Series" in the Prospectus.
"Collateral Monthly Interest" means, with respect to any Distribution Date,
an amount equal to the product of (i)(A) a fraction, the numerator of which is
equal to the actual number of days in the Interest Period preceding such
Distribution Date, and the denominator of which is 360, times (B) the Collateral
Rate in effect with respect to the applicable Interest Period and (ii) the
Collateral Invested Amount as of the preceding Record Date; PROVIDED, HOWEVER,
with respect to the first Distribution Date, Collateral Monthly Interest shall
be equal to the interest accrued on the Collateral Initial Invested Amount at
the Collateral Rate for the period from the Closing Date to but excluding the
first Distribution Date.
"Collateral Rate" means a rate specified in the Loan Agreement not to
exceed one-month LIBOR plus 1.0% PER ANNUM.
"Collateral Additional Interest" means, with respect to any Distribution
Date, additional interest with respect to Collateral Monthly Interest due but
not paid to the Collateral Interest Holder on a prior Distribution Date at a
rate equal to the Collateral Rate.
PAYMENTS OF PRINCIPAL. On each Distribution Date, the Trustee, acting
pursuant to the Servicer's instructions, will distribute Available Principal
Collections (see " -- Principal Payments" above) on deposit in the Collection
Account in the following priority:
(i) on each Distribution Date with respect to the Revolving Period,
all such Available Principal Collections will be distributed or deposited
in the following priority:
S-37
(A) an amount equal to the Collateral Monthly Principal will be
paid to the Collateral Interest Holder to be applied in accordance with
the terms of the Loan Agreement; and
(B) the balance will be treated as Shared Principal Collections and
applied as described under "Description of the Pooling and Servicing
Agreement -- Shared Principal Collections" in the Prospectus;
(ii) on each Distribution Date with respect to the Controlled
Accumulation Period, all such Available Principal Collections will be
distributed or deposited in the following priority:
(A) an amount equal to the lesser of (x) the Controlled Deposit
Amount and (y) the sum of the Class A Adjusted Invested Amount and the
Class B Adjusted Invested Amount will be deposited in the Principal
Funding Account;
(B) for each Distribution Date before the Class B Invested Amount
is paid in full, if a reduction in the Required Enhancement Amount has
occurred, an amount equal to the Collateral Monthly Principal will be
paid to the Collateral Interest Holder to be applied in accordance with
the Loan Agreement;
(C) for each Distribution Date beginning on the Distribution Date
on which the Class B Invested Amount is paid in full, an amount up to
the Collateral Invested Amount will be paid to the Collateral Interest
Holder to be applied in accordance with the Loan Agreement;
(D) for each Distribution Date beginning on the Distribution Date
on which the Collateral Invested Amount is paid in full, an amount up to
the Class D Invested Amount will be paid to the Class D Securityholders;
and
(E) for each Distribution Date, the balance, if any, of Available
Principal Collections not applied pursuant to paragraphs (A) and (B) or
(C) or (D) (as applicable) above will be treated as Shared Principal
Collections and applied as described under "Description of the Pooling
and Servicing Agreement -- Shared Principal Collections" in the
Prospectus; and
(iii) on each Distribution Date with respect to the Early Amortization
Period, all such Available Principal Collections will be distributed as
follows:
(A) an amount up to the Class A Adjusted Invested Amount will be
distributed to the Class A Securityholders;
(B) for each Distribution Date beginning on the Distribution Date
on which the Class A Invested Amount is paid in full, an amount up to
the Class B Adjusted Invested Amount will be distributed to the Class B
Securityholders;
(C) for each Distribution Date beginning on the Distribution Date
on which the Class B Invested Amount is paid in full, an amount up to
the Collateral Invested Amount will be paid to the Collateral Interest
Holder for application in accordance with the Loan Agreement;
(D) for each Distribution Date beginning on the Distribution Date
on which the Collateral Invested Amount is paid in full, an amount up to
the Class D Invested Amount will be paid to the Class D Securityholders;
and
(E) for each Distribution Date, after giving effect to paragraphs
(A), (B), (C) and (D) above, an amount equal to the balance, if any, of
such Available Principal Collections will be allocated to Shared
Principal Collections and applied in accordance with the Pooling and
Servicing Agreement.
"Controlled Accumulation Amount" means for any Distribution Date with
respect to the Controlled Accumulation Period, $53,416,667; PROVIDED, HOWEVER,
that, if the commencement of the Controlled Accumulation Period is delayed as
described above under " -- Principal Payments," the Controlled Accumulation
Amount for each Distribution Date with respect to the Controlled Accumulation
Period may be different for each Distribution Date with respect to the
Controlled Accumulation Period and will be determined by the Transferor in
accordance with the Offered Series Supplement based on the principal payment
rates for the Accounts and on the invested amounts of other Principal Sharing
Series that are scheduled to be in their revolving periods and then scheduled to
create Shared Principal Collections during the Controlled Accumulation Period.
"Deficit Controlled Accumulation Amount" means (a) on the first
Distribution Date with respect to the Controlled Accumulation Period, the
excess, if any, of the Controlled Accumulation Amount for such Distribution Date
over the amount deposited in the Principal Funding Account on such Distribution
Date and (b) on each subsequent Distribution Date with
S-38
respect to the Controlled Accumulation Period, the excess, if any, of the
Controlled Deposit Amount for such subsequent Distribution Date over the amount
deposited in the Principal Funding Account on such subsequent Distribution Date.
"Controlled Deposit Amount" shall mean, for any Distribution Date with
respect to the Controlled Accumulation Period, an amount equal to the sum of the
Controlled Accumulation Amount for such Distribution Date and any Deficit
Controlled Accumulation Amount for the immediately preceding Distribution Date.
"Collateral Monthly Principal" means (a) with respect to any Distribution
Date relating to the Revolving Period following any reduction of the Required
Enhancement Amount pursuant to clause (3) of the proviso of the definition
thereof, an amount equal to the lesser of (i) the excess, if any, of the sum of
the Collateral Invested Amount (after giving effect to reductions for any
Collateral Charge-Offs and Redirected Principal Collections for which the Class
D Invested Amount was not reduced on such Distribution Date and after giving
effect to any adjustments thereto for the benefit of the holders of the Offered
Securities on such Distribution Date) and the Class D Invested Amount (after
giving effect to any distributions and deposits to be made on such Distribution
Date) over the Required Enhancement Amount on such Distribution Date, and (ii)
the Available Principal Collections on such Distribution Date or (b) with
respect to any Distribution Date relating to the Controlled Accumulation Period,
an amount equal to the lesser of (i) the excess, if any, of the sum of the
Collateral Invested Amount (after giving effect to reductions for any Collateral
Charge-Offs and Redirected Principal Collections on such Distribution Date and
after giving effect to any adjustments thereto for the benefit of the holders of
the Offered Securities on such Distribution Date) and the Class D Invested
Amount (after giving effect to any distributions to be made on such Distribution
Date) over the Required Enhancement Amount on such Distribution Date, and (ii)
the excess, if any, of (A) the Available Principal Collections on such
Distribution Date over (B) the lesser of (x) the Controlled Deposit Amount and
(y) the sum of the Class A Adjusted Invested Amount and the Class B Adjusted
Invested Amount for such Distribution Date.
YIELD SUPPLEMENT ACCOUNT
The Securities will have the benefit of an account (the "Yield Supplement
Account"), which will be held in the name of the Trustee for the benefit of the
Securityholders. On the Closing Date, the Transferor will deposit $11,250,000
(the "Initial Yield Supplement Deposit") into the Yield Supplement Account. On
each Distribution Date, an amount equal to the Yield Supplement Draw Amount will
be released and deposited into the Collection Account and will be treated as
collections of Finance Charge Receivables allocable to the Securities. The Yield
Supplement Account will not be replenished following the withdrawals of amounts
on deposit therein on any Distribution Date. The "Yield Supplement Draw Amount"
means an amount equal to the sum of (i) 1/9th of the Initial Yield Supplement
Deposit for the six Distribution Dates from and including the August 1998
Distribution Date through and including the January 1999 Distribution Date, (ii)
1/18th of the Initial Yield Supplement Deposit for the six Distribution Dates
from and including the February 1999 Distribution Date through and including the
July 1999 Distribution Date and (iii) with respect to any such Distribution
Date, the investment earnings on the amounts on deposit in the Yield Supplement
Account during the preceding Interest Period.
REQUIRED ENHANCEMENT AMOUNT
The "Required Enhancement Amount" means (a) $109,000,000 on the initial
Distribution Date and (b) on any Distribution Date thereafter, an amount equal
to the greater of (i) 14.5% of the sum of the Class A Adjusted Invested Amount
and the Class B Adjusted Invested Amount on such Distribution Date, in each
case, after taking into account deposits into the Principal Funding Account and
payments to be made on such Distribution Date, and the Collateral Invested
Amount and the Class D Invested Amount on such Distribution Date, and (ii) 5.0%
of the Initial Invested Amount; PROVIDED, HOWEVER, (1) that if certain
reductions in the Collateral Invested Amount are made or if a Pay Out Event
occurs, the Required Enhancement Amount for such Distribution Date shall equal
the Required Enhancement Amount for the Distribution Date immediately preceding
the occurrence of such reduction or Pay Out Event, (2) in no event shall the
Required Enhancement Amount exceed the unpaid principal amount of the Offered
Securities as of the last day of the Monthly Period preceding such Distribution
Date after taking into account payments to be made on such immediately preceding
Distribution Date and subtracting amounts then on deposit in the Principal
Funding Account and (3) the Required Enhancement Amount may be reduced at the
Transferor's option to a lesser amount at any time if the Rating Agency
Condition is satisfied.
DEFAULTED RECEIVABLES; CHARGE-OFFS
On each Determination Date, the Servicer will calculate the Series Default
Amount for the preceding Monthly Period. The term "Series Default Amount" means,
for any Monthly Period, the product of (i) the Floating Allocation Percentage
with respect to such Monthly Period and (ii) the Series Allocable Defaulted
Amount for such Monthly Period. A portion of the Series Default Amount will be
allocated to the Class A Securities (the "Class A Default Amount") on each
Distribution Date
S-39
in an amount equal to the product of the Class A Floating Percentage applicable
during the related Monthly Period and the Series Default Amount for such Monthly
Period. A portion of the Series Default Amount will be allocated to the Class B
Securities (the "Class B Default Amount") in an amount equal to the product of
the Class B Floating Percentage applicable during the related Monthly Period and
the Series Default Amount for such Monthly Period. An amount equal to the Class
A Default Amount for each Monthly Period will be paid from Class A Available
Funds, then from Excess Spread and Excess Finance Charge Collections allocated
to the Offered Series, and then from Redirected Principal Collections, if
applicable, and applied as described above under " -- Application of
Collections -- Payment of Fees, Interest and Other Items." An amount equal to
the Class B Default Amount for each Monthly Period will be paid from Excess
Spread and Excess Finance Charge Collections allocated to the Offered Series,
and from Redirected Principal Collections allocable to the Collateral Invested
Amount and the Class D Invested Amount, if applicable, and applied as described
above under " -- Application of Collections -- Excess Spread; Excess Finance
Charge Collections."
On each Distribution Date, if the Class A Required Amount for such
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charge
Collections allocable to the Offered Series and Redirected Principal
Collections, the Class D Invested Amount (after giving effect to reductions for
any Redirected Principal Collections on such Distribution Date) will be reduced
by the amount of such excess, but not by more than the Class A Default Amount
for such Distribution Date. In the event that such reduction would cause the
Class D Invested Amount to be a negative number, the Class D Invested Amount
will be reduced to zero, and the Collateral Invested Amount (after giving effect
to any Redirected Principal Collections for which the Class D Invested Amount
was not reduced on such Distribution Date) will be reduced by the amount by
which the Class D Invested Amount would have been reduced below zero, but not by
more than the excess, if any, of the Class A Default Amount for such
Distribution Date over the amount of the reduction, if any, of the Class D
Invested Amount in respect of the Class A Default Amount on such Distribution
Date. In the event that such reduction would cause the Collateral Invested
Amount to be a negative number, the Collateral Invested Amount will be reduced
to zero, and the Class B Invested Amount (after giving effect to reductions for
any Redirected Principal Collections for which the Collateral Invested Amount
was not reduced on such Distribution Date) will be reduced by the amount by
which the Collateral Invested Amount would have been reduced below zero, but not
by more than the excess, if any, of the Class A Default Amount for such
Distribution Date over the amount of the reductions, if any, of the Class D
Invested Amount and the Collateral Invested Amount in respect of the Class A
Default Amount on such Distribution Date. In the event that such reduction would
cause the Class B Invested Amount to be a negative number, the Class B Invested
Amount will be reduced to zero, and the Class A Invested Amount will be reduced
by the amount by which the Class B Invested Amount would have been reduced below
zero, but not by more than the excess, if any, of the Class A Default Amount for
such Distribution Date over the amount of the reductions, if any, of the Class D
Invested Amount, the Collateral Invested Amount and of the Class B Invested
Amount in respect of the Class A Default Amount on such Distribution Date (a
"Class A Charge-Off"), which will have the effect of slowing or reducing the
return of principal to the holders of the Class A Securities. If the Class A
Invested Amount has been reduced by the amount of any Class A Charge-Offs, it
will thereafter be increased on any Distribution Date (but not by an amount in
excess of the aggregate Class A Charge-Offs) by the amount of Excess Spread and
Excess Finance Charge Collections allocable to the Offered Series available for
such purpose as described above under " -- Application of Collections -- Excess
Spread; Excess Finance Charge Collections."
On each Distribution Date, if the Class B Required Amount for such
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charge
Collections allocable to the Offered Series and not required to pay the Class A
Required Amount or reimburse Class A Charge-Offs, then the Class D Invested
Amount (after giving effect to reductions for any Redirected Principal
Collections on such Distribution Date and after giving effect to any reductions
thereto as described in the preceding paragraph) will be reduced by the amount
of such excess, but not by more than the Class B Default Amount for such
Distribution Date. In the event that such reduction would cause the Class D
Invested Amount to be a negative number, the Class D Invested Amount will be
reduced to zero, and the Collateral Invested Amount (after giving effect to
Redirected Principal Collections for which the Class D Invested Amount was not
reduced on such Distribution Date and after giving effect to any reductions
thereto as described in the preceding paragraph) will be reduced by the amount
by which the Class D Invested Amount would have been reduced below zero, but not
by more than the excess, if any, of the Class B Default Amount for such
Distribution Date over the amount of the reduction, if any, of the Class D
Invested Amount in respect of the Class A Default Amount and the Class B Default
Amount on such Distribution Date. In the event that such reduction would cause
the Collateral Invested Amount to be reduced below zero, then the Collateral
Invested Amount will be reduced to zero and the Class B Invested Amount (after
giving effect to reductions for any Redirected Principal Collections for which
the Collateral Interest was not reduced on such Distribution Date) will be
reduced by the amount of such excess, but not by more than the excess, if any,
of the Class B Default Amount for such Distribution Date over the amount of the
reductions, if any, of the Class D Invested Amount and the Collateral Invested
Amount in respect of the Class A Default Amount and the Class B
S-40
Default Amount on such Distribution Date (a "Class B Charge-Off"). The Class B
Invested Amount will also be reduced by the amount of Redirected Principal
Collections in excess of the Collateral Invested Amount (after giving effect to
reductions for any Collateral Charge-Offs and any Redirected Principal
Collections on such Distribution Date) and the amount of any portion of the
Class B Invested Amount allocated to the Class A Securities to avoid a reduction
in the Class A Invested Amount. The Class B Invested Amount will thereafter be
increased on any Distribution Date (but not by an amount in excess of the amount
of such reductions in the Class B Invested Amount) by the amount of Excess
Spread and Excess Finance Charge Collections allocable to the Offered Series
available for such purpose as described above under " -- Application of
Collections -- Excess Spread; Excess Finance Charge Collections."
On each Distribution Date, if the Collateral Floating Percentage of the
Series Default Amount (the "Collateral Default Amount") for such Distribution
Date exceeds the amount of Excess Spread and Excess Finance Charge Collections
allocated to the Offered Series which is allocated and available to fund such
amount as described above under " -- Application of Collections -- Excess
Spread; Excess Finance Charge Collections," then the Class D Invested Amount
(after giving effect to reductions for any Redirected Principal Collections on
such Distribution Date and after giving effect to any reductions thereto as
described in the preceding two paragraphs) will be reduced by the amount of such
excess, but not by more than the excess, if any, of the Collateral Default
Amount over the amount of the reduction, if any, of the Class D Invested Amount
in respect of the Collateral Default Amount on such Distribution Date. In the
event that such reduction would cause the Class D Invested Amount to be a
negative number, the Class D Invested Amount will be reduced to zero, and the
Collateral Invested Amount (after giving effect to reductions for any Redirected
Principal Collections for which the Class D Invested Amount was not reduced on
such Distribution Date) will be reduced by the amount by which the Class D
Invested Amount would have been reduced below zero, but not by more than the
excess, if any, of the Collateral Default Amount for such Distribution Date,
over the amount of the reduction, if any, of the Class D Invested Amount in
respect of the Collateral Default Amount on such Distribution Date (a
"Collateral Charge-Off"). The Collateral Interest will also be reduced by the
amount of Redirected Principal Collections and the amount of any portion of the
Collateral Invested Amount allocated to the Class A Securities to avoid a
reduction in the Class A Invested Amount or to the Class B Securities to avoid a
reduction in the Class B Invested Amount. The Collateral Invested Amount will
thereafter be increased on any Distribution Date (but not by an amount in excess
of the amount of such reductions in the Collateral Invested Amount) by the
amount of Excess Spread and Excess Finance Charge Collections allocated to the
Offered Series and available for that purpose as described above under
" -- Application of Collections -- Excess Spread; Excess Finance Charge
Collections."
On each Distribution Date, if the Class D Floating Percentage of the Series
Default Amount (the "Class D Default Amount") for such Distribution Date exceeds
the amount of Excess Spread and Excess Finance Charge Collections allocated to
the Offered Series which is allocated and available to fund such amount as
described above under " -- Application of Collections -- Excess Spread; Excess
Finance Charge Collections," not required to fund the Class A Required Amount,
the Class B Required Amount or the Collateral Required Amount, the Class D
Invested Amount will be reduced by the amount of such excess, but not by more
than the lesser of the Class D Default Amount and the Class D Invested Amount
for such Distribution Date (a "Class D Charge-Off"). The Class D Invested Amount
will also be reduced by the amount of Redirected Principal Collections and the
amount of any portion of the Class D Invested Amount allocated to the Class A
Securities to avoid a reduction in the Class A Invested Amount, to the Class B
Securities to avoid a reduction in the Class B Invested Amount or to the
Collateral Interest to avoid a reduction in the Collateral Invested Amount. The
Class D Invested Amount will thereafter be increased on any Distribution Date
(but not by an amount in excess of the amount of such reductions in the Class D
Invested Amount) by the amount of Excess Spread and Excess Finance Charge
Collections allocated to the Offered Series and available for that purpose as
described above under " -- Application of Collections -- Excess Spread; Excess
Finance Charge Collections."
PAY OUT EVENTS
The "Pay Out Events" with respect to the Offered Securities will include
each of the following:
(a) the occurrence of an Insolvency Event relating to the Transferor
or the occurrence of certain events of insolvency with respect to PFR or
Partners First unless, in the case of PFR or Partners First, the Rating
Agency Condition is satisfied with respect to the deletion of PFR or
Partners First, as applicable, from this Pay Out Event;
(b) the Trust becomes an "investment company" within the meaning of
the Investment Company Act of 1940, as amended;
(c) a failure on the part of the Transferor (i) to make any payment or
deposit required under the Pooling and Servicing Agreement or the Offered
Series Supplement within five business days after the day such payment or
deposit
S-41
is required to be made; or (ii) to observe or perform any other covenants
or agreements of the Transferor set forth in the Pooling and Servicing
Agreement or the Offered Series Supplement, which failure has a material
adverse effect on the Series Securityholders and which continues unremedied
for a period of 60 days after written notice;
(d) any representation or warranty made by the Transferor in the
Pooling and Servicing Agreement or the Offered Series 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 or given 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 Series Securityholders are materially and adversely
affected; PROVIDED, HOWEVER, that a Pay Out Event shall not be deemed to
occur thereunder if the Transferor has repurchased the related Receivables
or all such Receivables, if applicable, during such period in accordance
with the provisions of the Pooling and Servicing Agreement;
(e) a failure by the Transferor to make an addition to the Trust
within five business days after the day on which it is required to make
such addition pursuant to the Pooling and Servicing Agreement or the
Offered Series Supplement;
(f) the occurrence of any Servicer Default;
(g) a reduction of the average Series Adjusted Portfolio Yield for any
three consecutive Monthly Periods to a rate less than the average of the
Base Rates for such three Monthly Periods; and
(h) the Transferor is unable for any reason to transfer Receivables to
the Trust in accordance with the Pooling and Servicing Agreement or the
Offered Series Supplement.
Then, in the case of any event described in subparagraph (c), (d) or (f),
after the applicable grace period, if any, set forth in such subparagraphs,
either the Trustee or the Holders of Offered Securities evidencing more than 50%
of the aggregate unpaid principal amount of Offered Securities by notice then
given in writing to the Transferor and the Servicer (and to the Trustee if given
by the Series Securityholders) may declare that a Pay Out Event has occurred
with respect to the Offered Series as of the date of such notice, and, in the
case of any event described in subparagraph (a), (b), (e), (g) or (h), a Pay Out
Event shall occur with respect to the Offered Series without any notice or other
action on the part of the Trustee immediately upon the occurrence of such event.
The Transferor shall deliver to the Rating Agency a copy of any such notice
given or received by it.
For purposes of the Pay Out Event described in subparagraph (g) above, the
terms "Base Rate" and "Series Adjusted Portfolio Yield" will be defined as
follows with respect to the Offered Securities:
"Base Rate" means, with respect to any Monthly Period, the sum of the
weighted average of the Class A Interest Rate, the Class B Interest Rate,
the Collateral Rate and the Class D Interest Rate as of the last day of
such Monthly Period (weighted based on the Class A Invested Amount, the
Class B Invested Amount, the Collateral Invested Amount and the Class D
Invested Amount, respectively, as of the last day of such Monthly Period)
plus the product of 2.00% and the percentage equivalent of a fraction, the
numerator of which is the Adjusted Invested Amount and the denominator of
which is the Invested Amount each as of the last day of such Monthly
Period.
"Series Adjusted Portfolio Yield" means, with respect to any Monthly
Period, the annualized percentage equivalent of a fraction, (i) the
numerator of which is equal to (a) Redirected Investor Finance Charge
Collections (including any investment earnings and certain other amounts
that are to be treated as collections of Finance Charges Receivables
allocable to the Offered Series in accordance with the Pooling and
Servicing Agreement) for such Monthly Period, plus (b) the amount of
Principal Funding Investment Proceeds for the related Distribution Date,
plus (c) provided that each Rating Agency has consented to the inclusion
thereof in calculating the Series Adjusted Portfolio Yield, any Excess
Finance Charge Collections that are allocated to the Offered Series, plus
(d) the amount of funds withdrawn from the Reserve Account and included in
Class A Available Funds or Class B Available Funds for the Distribution
Date with respect to such Monthly Period, plus (e) the Yield Supplement
Draw Amount, if any, for the Distribution Date with respect to such Monthly
Period, less (f) the Series Default Amount for the Distribution Date with
respect to such Monthly Period, and (ii) the denominator of which is the
Invested Amount as of the last day of the preceding Monthly Period.
If the proceeds of any sale of the Receivables following the occurrence of
an Insolvency Event with respect to the Transferor, as described in the
Prospectus under "Description of the Securities -- Pay Out Events and
Reinvestment Events," allocated to the Class A Invested Amount and the proceeds
of any collections on the Receivables in the Collection Account are not
sufficient to pay in full the remaining amount due on the Class A Securities,
the Class A Securityholders will suffer a corresponding loss and no such
proceeds will be available to the Class B Securityholders.
S-42
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The share of the Servicing Fee allocable to the Class A Securityholders,
the Class B Securityholders, the Collateral Interest Holder and the Class D
Securityholders with respect to any Distribution Date (the "Monthly Servicing
Fee") will be equal to one-twelfth of the product of (a) 2% (the "Servicing Fee
Rate") and (b) (i) the Adjusted Invested Amount as of the last day of the
Monthly Period preceding such Distribution Date, less (ii) the product of (A)
any amount on deposit in the Special Funding Account as of the last day of the
Monthly Period preceding such Distribution Date and (B) the Series Allocation
Percentage for the Offered Series with respect to such Monthly Period (the
amount calculated pursuant to this clause (b) is referred to as the "Servicing
Base Amount"); provided, however, with respect to the first Distribution Date,
the Monthly Servicing Fee will be equal to $ . On each Distribution Date a
portion of Interchange with respect to the related Monthly Period that is on
deposit in the Collection Account will be withdrawn from the Collection Account
and paid to the Servicer in payment of a portion of the Monthly Servicing Fee
with respect to such Monthly Period ("Servicer Interchange"). The Servicer
Interchange for any Monthly Period will be an amount equal to the portion of
collections of Finance Charge Receivables allocated to the Invested Amount with
respect to such Monthly Period that is attributable to Interchange; PROVIDED,
HOWEVER, that Servicer Interchange for a Monthly Period may not exceed
one-twelfth of the product of the Adjusted Invested Amount, as of the last day
of such Monthly Period and (ii) 0.75%. In the case of any insufficiency of
Servicer Interchange on deposit in the Collection Account on any Distribution
Date, a portion of the Monthly Servicing Fee with respect to such Monthly Period
will not be paid to the extent of such insufficiency and in no event shall the
Trust, the Trustee or the holders of the Offered Securities, the Collateral
Interest Holder or the Class D Securityholders be liable for the share of the
Monthly Servicing Fee to be paid out of Servicer Interchange. The share of the
Monthly Servicing Fee allocable to the Class A Securityholders with respect to
any Distribution Date (the "Class A Servicing Fee") shall be equal to one-
twelfth of the product of (a) the Class A Floating Percentage, (b) 1.25% (the
"Net Servicing Fee Rate") and (c) the Servicing Base Amount; PROVIDED, HOWEVER,
that with respect to the first Distribution Date, the Class A Servicing Fee
shall be equal to $ . The share of the Monthly Servicing Fee allocable to
the Class B Securityholders with respect to any Distribution Date (the "Class B
Servicing Fee") shall be equal to one-twelfth of the product of (a) the Class B
Floating Percentage, (b) the Net Servicing Fee Rate and (c) the Servicing Base
Amount; PROVIDED, HOWEVER, that with respect to the first Distribution Date, the
Class B Servicing Fee shall be equal to $ . The share of the Monthly
Servicing Fee allocable to the Collateral Interest Holder with respect to any
Distribution Date (the "Collateral Interest Servicing Fee") shall be equal to
one-twelfth of the product of (a) the Collateral Floating Percentage, (b) the
Net Servicing Fee Rate and (c) the Servicing Base Amount; PROVIDED, HOWEVER,
that with respect to the first Distribution Date, the Collateral Interest
Servicing Fee shall be equal to $ . The share of the Monthly Servicing Fee
allocable to the Class D Securityholders with respect to any Distribution Date
(the "Class D Servicing Fee") shall be equal to one-twelfth of the product of
(a) the Class D Floating Percentage, (b) the Net Servicing Fee Rate and (c) the
Servicing Base Amount; PROVIDED, HOWEVER, that with respect to the first
Distribution Date, the Class D Servicing Fee shall be equal to $ . The
remainder of the Servicing Fee shall be paid by the holders of the Transferor
Securities or the securityholders of other Series (as provided in the related
Supplements) and in no event will the Trust, the Trustee or the Series
Securityholders be liable for the share of the Servicing Fee to be paid by the
holders of the Transferor Securities or the securityholders of any other Series.
SERIES TERMINATION
If, on the Distribution Date which is two months prior to the Stated Series
Termination Date, the Invested Amount (after giving effect to all changes
therein on such date) exceeds zero, the Servicer will, within the 40-day period
beginning on such date, solicit bids for the sale of interests in the Principal
Receivables or certain Principal Receivables, together in each case with the
related Finance Charge Receivables, in an amount equal to the Invested Amount at
the close of business on the last day of the Monthly Period preceding the Stated
Series Termination Date (after giving effect to all distributions required to be
made on the Stated Series Termination Date other than from the proceeds of the
sale). The Transferor and the Collateral Interest Holder will be entitled to
participate in, and to receive notice of each bid submitted in connection with,
such bidding process. Upon the expiration of such 40-day period, the Trustee
will determine (a) which bid is the highest cash purchase offer (the "Highest
Bid") and (b) the amount (the "Available Final Distribution Amount") which
otherwise would be available in the Collection Account on the Stated Series
Termination Date for distribution to the Series Securityholders, the Collateral
Interest Holder and the Class D Securityholders. The Servicer will sell such
Receivables on the Stated Series Termination Date to the bidder who provided the
Highest Bid and will deposit the proceeds of such sale in the Collection Account
for allocation (together with the Available Final Distribution Amount) to the
Offered Securityholders' Interest, the Collateral Interest and the Class D
Securityholders' Interest in the order of priority specified herein.
S-43
REPORTS
No later than the second business day prior to each Distribution Date, the
Servicer will forward to the Trustee, the Paying Agent, each Rating Agency and
the Collateral Interest Holder, a statement (the "Monthly Report") prepared by
the Servicer setting forth certain information with respect to the Trust and the
Class A Securities, the Class B Securities, the Collateral Interest and the
Class D Securities, including: (a) the aggregate amount of Principal Receivables
and Finance Charge Receivables in the Trust as of the end of such Monthly
Period; (b) the Invested Amount, the Class A Invested Amount, the Class B
Invested Amount, the Collateral Invested Amount and the Class D Invested Amount
at the close of business on the last day of the preceding Monthly Period; (c)
the amounts on deposit in the Yield Supplement Account, and the Enhancement
Invested Amount at the close of business on the last day of the preceding
Monthly Period; (d) the Series Allocation Percentage, the Floating Allocation
Percentage, the Class A Floating Percentage, the Class B Floating Percentage,
the Collateral Floating Percentage and the Class D Floating Percentage, the
Principal Allocation Percentage, the Class A Principal Percentage, the Class B
Principal Percentage, the Collateral Principal Percentage and the Class D
Principal Percentage; (e) the amount of collections of Principal Receivables and
Finance Charge Receivables processed during the related Monthly Period and the
portion thereof allocated to the Offered Securityholders' Interest; (f) the
aggregate outstanding balance of Accounts that were 30, 60 and 90 days or more
delinquent as of the end of such Monthly Period; (g) the Series Default Amount,
the Class A Default Amount, the Class B Default Amount, the Collateral Default
Amount, Class D Default Amount and the Defaulted Amount with respect to such
Monthly Period; (h) the aggregate amount, if any, of Class A Charge-Offs, Class
B Charge-Offs, any reductions in the Class B Invested Amount pursuant to clauses
(iv) and (v) of the definition of "Class B Invested Amount" under
" -- Allocation Percentages" above, the amounts by which the Collateral Invested
Amount has been reduced pursuant to clauses (iii), (iv) and (v) of the
definition of "Collateral Invested Amount" under " -- Allocation Percentages"
above, and the amounts by which the Class D Invested Amount has been reduced
pursuant to clauses (iii), (iv) and (v) of the definition of "Class D Invested
Amount" under " -- Allocation Percentages" above, and any Class A Charge-Offs or
Class B Charge-Offs reimbursed on the related Transfer Date, for such Monthly
Period; (i) the Monthly Servicing Fee, Class A Servicing Fee, Class B Servicing
Fee, Collateral Interest Servicing Fee and the Class D Servicing Fee for such
Monthly Period; (j) the Series Adjusted Portfolio Yield for such Monthly Period;
(k) the Base Rate for such Monthly Period; (l) Redirected Principal Collections;
and (m) Shared Principal Collections.
In addition, no later than March 31 of each calendar year beginning with
March 31, 1999, the Servicer will cause a firm of independent certified public
accountants to furnish the report described in "Description of the Pooling and
Servicing Agreement -- Evidence as to Compliance" in the Prospectus.
DEFEASANCE
The Securities may be defeased in whole or in part at any time upon
satisfaction of the following conditions: (i) there shall have been deposited
(x) in the Principal Funding Account an amount equal to the sum of the
outstanding principal balances of the Class A Securities, the Class B Securities
and the Collateral Interest, which amount shall be invested in Eligible
Investments and (y) in the Reserve Account an amount equal to or greater than
the anticipated excess of the Base Rate over the investment earnings on the
amount deposited in the Principal Funding Account pursuant to clause (x), as
estimated by the Transferor, for the period from the date of such deposit to the
Principal Funding Account through the Class B Scheduled Payment Date, (ii) the
Transferor shall have delivered to the Trustee an opinion of counsel to the
effect that such deposit and termination of obligations will not result in the
Trust being required to register as an "investment company" within the meaning
of the Investment Company Act of 1940, as amended, and an opinion of counsel to
the effect that following such deposit none of the Trust, the Reserve Account or
the Principal Funding Account will be deemed to be an association (or publicly
traded partnership) taxable as a corporation; (iii) the Transferor shall have
delivered to the Trustee a certificate of an officer of the Transferor stating
that the Transferor reasonably believes that such deposits will not constitute a
Pay Out Event or any event that, with the giving of notice or the lapse of time,
would cause a Pay Out Event to occur; (iv) the Rating Agency Condition shall
have been satisfied in connection with such events; and (v) the amounts
deposited into the Principal Funding Account and the Reserve Account pursuant to
the foregoing clauses (x) and (y) are proceeds from the issuance of a Series of
Investor Securities. If the Securities have been defeased in whole, the
Securities will no longer be entitled to the security interest of the Trust in
the Receivables and other Trust assets (except those set forth above), and the
percentages applicable to the allocation to the Securityholders of Principal
Collections, Finance Charge Collections and Defaulted Receivables will be
reduced to zero. Upon the satisfaction of the foregoing conditions, the Class D
Invested Amount will be reduced to zero.
S-44
CONSTITUENT CLASS D SECURITIES
Subject to the satisfaction of certain conditions set forth in the Offered
Series Supplement, including satisfaction of the Rating Agency Condition, the
Class D Securityholders may at any time and from time to time subdivide the
Class D Securities into two or more subsidiary securities, or reallocate all or
any portion of the amounts distributable to the Class D Securityholders or to
any other Securityholder. The Class D Securities will initially be retained by
the Transferor. For so long as the Transferor is the holder of the Class D
Securities, the interest rate applicable to the Class D Securities (the "Class D
Interest Rate") will be zero. However, in connection with such subdivision, the
Transferor may increase the Class D Rate with respect to all or a portion of the
Class D Securities.
DELIVERY, FORM, TRANSFER AND EXCHANGE
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 Global
Securities. No Security Owner acquiring an interest in a Global Security will be
entitled to receive a certificate representing such person's interest in a
Global Security unless Definitive Securities are issued. Unless and until
Definitive Securities are issued under the limited circumstances described in
the Prospectus, all references herein to actions by holders of Global Securities
shall refer to actions taken by DTC upon instructions from its Participants, and
all references herein to distributions, notices, reports and statements to
holders of Global Securities shall refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Global Securities, as
the case may be, for distribution to Security Owners in accordance with DTC
procedures. See "Description of the Securities -- Book-Entry Registration" and
" -- Definitive Securities" in the Prospectus.
The Offered Securities will be issued in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof. The Offered Securities, and
transfers thereof and of beneficial interests therein, will be registered as
provided in the Pooling and Servicing Agreement.
AMENDMENTS
The holders of the Series 1998-3 Securities, by purchasing their Series
1998-3 Securities, will be deemed to have consented to any amendments to the
Pooling and Servicing Agreement that may be necessary for the Transferor
Security representing the Transferor Interest to be converted to an
uncertificated interest in the Trust.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
as supplemented by the terms agreement relating to the Class A Securities
(together, the "Class A Underwriting Agreement") among the Transferor, Partners
First and the underwriters of the Class A Securities named below (the "Class A
Underwriters") and the terms and conditions set forth in the underwriting
agreement as supplemented by the terms agreement relating to the Class B
Securities (together, the "Class B Underwriting Agreement," and together with
the Class A Underwriting Agreement, the "Underwriting Agreement") among the
transferor, Partners First and the underwriters of the Class B Securities named
below (the "Class B Underwriters," and together with the Class A Underwriters,
the "Underwriters"), the Transferor has agreed to cause the Trust to sell to the
Underwriters, and each of the Underwriters has severally agreed to purchase, the
principal amount of the Class A Securities and Class B Securities set forth
opposite their names:
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
UNDERWRITERS CLASS A SECURITIES CLASS B SECURITIES
- ------------------------------------------------------- ------------------- -------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................... $ $
BancBoston Securities Inc..............................
Credit Suisse First Boston Corporation.................
Nesbitt Burns Securities Inc...........................
Salomon Brothers Inc...................................
------------------- -------------------
Total................................................ $ 528,000,000 $ 113,000,000
=================== ===================
The Underwriting Agreement provides that the obligation of the Class A
Underwriters to pay for and accept delivery of the Class A Securities and the
obligation of the Class B Underwriters to pay for and accept delivery of the
Class B Securities are subject to the approval of certain legal matters by their
counsel and to certain other conditions. All of the Offered Securities will be
issued if any are issued.
S-45
The Underwriters currently intend to make a market in the Offered
Securities; however, they are not obligated to do so, any market-making may be
discontinued at any time, and there can be no assurance that an active public
market for the Offered Securities will develop.
The Underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Offered Securities in accordance with Regulation M under the Exchange Act.
Over-allotment transactions involve syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the Offered Securities so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
the Offered Securities in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when the
Offered Securities originally sold by such syndicate member are purchased in a
syndicate covering transaction. Such over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
prices of the Offered Securities to be higher than they would otherwise be in
the absence of such transactions. None of the Transferor, the Servicer or the
Underwriters represents that the Underwriters will engage in any such
transactions or that such transactions, once commenced, will not be discontinued
without notice at any time.
The Class A Underwriters propose initially to offer the Class A Securities
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 % of the principal
amount of the Class A Securities. The Class A Underwriters may allow, and such
dealers may reallow, concessions not in excess of % of the principal amount
of the Class A Securities to certain brokers and dealers. After the initial
public offering, the public offering price and other selling terms may be
changed by the Class A Underwriters.
The Class B Underwriters propose initially to offer the Class B Securities
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 % of the principal
amount of the Class B Securities. The Class B Underwriters may allow, and such
dealers may reallow, concessions not in excess of % of the principal amount
of the Class B Securities to certain brokers and dealers. After the initial
public offering, the public offering price and other selling terms may be
changed by the Class B Underwriters.
Each Underwriter has represented and agreed that (a) it has only issued,
distributed 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
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom such 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 with respect to anything done by it in relation to
the Offered Securities in, from or 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(2) 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 a kind described either in Section 76(2) of the
Financial Services Act 1986 or in Regulation 1.04 of the Financial Services
(Promotion of Unregulated Schemes) Regulations 1991.
The Transferor and Partners First 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. The Underwriters have agreed to reimburse the Transferor for certain
expenses of the issuance and distribution of the Offered Securities.
This Prospectus Supplement and the Prospectus may be used by each of
BancBoston Securities Inc., and Nesbitt Burns Securities Inc., each of whom is
affiliated with the Transferor, in connection with offers and sales related to
market-making transactions in the Offered Securities. Each of BancBoston
Securities Inc. and Nesbitt Burns Securities Inc. may act as principal or agent
in such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale. Neither BancBoston Securities Inc. nor
Nesbitt Burns Securities Inc. has any obligation to make a market in the Offered
Securities and any such market-making may be discontinued at any time without
notice, in its sole discretion. BancBoston Securities Inc. and Nesbitt Burns
Securities Inc. are among the Underwriters participating in the initial
distribution of the Offered Securities.
LEGAL MATTERS
Certain legal matters relating to the Offered Securities will be passed
upon for the Transferor and the Trust by Skadden, Arps, Slate, Meagher & Flom
LLP. Certain legal matters will be passed upon for the Underwriters by Orrick,
Herrington & Sutcliffe LLP. Certain legal matters relating to the federal tax
consequences of the issuance of the Offered Securities will be passed upon for
the Transferor by Skadden, Arps, Slate, Meagher & Flom LLP.
S-46
INDEX OF DEFINED TERMS
PAGE
-----------
Accounts........................................................................................................ S-2
Adjusted Invested Amount........................................................................................ S-5
Available Final Distribution Amount............................................................................. S-43
Available Principal Collections................................................................................. S-27
Available Reserve Account Amount................................................................................ S-32
Average Receivables Outstanding................................................................................. S-19
Base Rate....................................................................................................... S-42
BKB Portfolio................................................................................................... S-18
Class A Additional Interest..................................................................................... S-35
Class A Adjusted Invested Amount................................................................................ S-5, S-30
Class A Available Funds......................................................................................... S-25
Class A Charge-Off.............................................................................................. S-10, S-40
Class A Default Amount.......................................................................................... S-39
Class A Floating Percentage..................................................................................... S-28
Class A Initial Invested Amount................................................................................. S-3, S-4
Class A Interest Rate........................................................................................... S-2
Class A Interest Shortfall...................................................................................... S-35
Class A Invested Amount......................................................................................... S-4, S-30
Class A Monthly Interest........................................................................................ S-35
Class A Principal Percentage.................................................................................... S-29
Class A Required Amount......................................................................................... S-9, S-33
Class A Scheduled Payment Date.................................................................................. S-2, S-7
Class A Securities.............................................................................................. S-1, S-3
Class A Securityholders' Interest............................................................................... S-4
Class A Servicing Fee........................................................................................... S-43
Class A Underwriting Agreement.................................................................................. S-45
Class A Underwriters............................................................................................ S-45
Class B Additional Interest..................................................................................... S-35
Class B Adjusted Invested Amount................................................................................ S-5, S-30
Class B Available Funds......................................................................................... S-25
Class B Charge-Off.............................................................................................. S-11, S-41
Class B Default Amount.......................................................................................... S-40
Class B Floating Percentage..................................................................................... S-28
Class B Initial Invested Amount................................................................................. S-3, S-4
Class B Interest Rate........................................................................................... S-2
Class B Interest Shortfall...................................................................................... S-35
Class B Invested Amount......................................................................................... S-4, S-30
Class B Monthly Interest........................................................................................ S-36
Class B Principal Percentage.................................................................................... S-29
Class B Required Amount......................................................................................... S-9, S-33
Class B Scheduled Payment Date.................................................................................. S-2, S-7
Class B Securities.............................................................................................. S-1, S-3
Class B Securityholders' Interest............................................................................... S-4
Class B Servicing Fee........................................................................................... S-43
Class B Underwriter............................................................................................. S-45
Class B Underwriting Agreement.................................................................................. S-45
Class D Additional Interest..................................................................................... S-37
Class D Available Funds......................................................................................... S-36
Class D Charge-Off.............................................................................................. S-41
Class D Default Amount.......................................................................................... S-41
Class D Floating Percentage..................................................................................... S-29
Class D Initial Invested Amount................................................................................. S-3, S-5
S-47
PAGE
-----------
Class D Interest Rate........................................................................................... S-45
Class D Invested Amount......................................................................................... S-5, S-30
Class D Principal Percentage.................................................................................... S-30
Class D Securities.............................................................................................. S-2
Class D Securityholders' Interest............................................................................... S-4
Class D Servicing Fee........................................................................................... S-43
Closing Date.................................................................................................... S-3
Code............................................................................................................ S-14
Collateral Additional Interest.................................................................................. S-37
Collateral Available Funds...................................................................................... S-36
Collateral Charge-Off........................................................................................... S-41
Collateral Default Amount....................................................................................... S-41
Collateral Floating Percentage.................................................................................. S-29
Collateral Initial Invested Amount.............................................................................. S-3, S-4
Collateral Interest............................................................................................. S-2, S-4
Collateral Interest Holder...................................................................................... S-4
Collateral Interest Servicing Fee............................................................................... S-43
Collateral Invested Amount...................................................................................... S-4, S-30
Collateral Monthly Interest..................................................................................... S-37
Collateral Monthly Principal.................................................................................... S-39
Collateral Principal Percentage................................................................................. S-29
Collateral Rate................................................................................................. S-37
Collateral Required Amount...................................................................................... S-9, S-34
Controlled Accumulation Amount.................................................................................. S-38
Controlled Accumulation Period.................................................................................. S-7
Controlled Accumulation Period Length........................................................................... S-27
Controlled Deposit Amount....................................................................................... S-39
Covered Amount.................................................................................................. S-31
Deficit Controlled Accumulation Amount.......................................................................... S-38
Distribution Date............................................................................................... S-2, S-25
Early Amortization Period....................................................................................... S-8
Eligible Deposit Account........................................................................................ S-31
Enhancement Invested Amount..................................................................................... S-5
ERISA........................................................................................................... S-14
Excess Spread................................................................................................... S-9, S-36
FDR............................................................................................................. S-18
Floating Allocation Percentage.................................................................................. S-28
Funding......................................................................................................... S-1
Group I......................................................................................................... S-12
Harris Portfolio................................................................................................ S-18
Highest Bid..................................................................................................... S-43
Initial Invested Amount......................................................................................... S-3, S-4
Initial Yield Supplement Deposit................................................................................ S-8, S-39
Interest Period................................................................................................. S-2, S-25
Invested Amount................................................................................................. S-4, S-31
Investor Securities............................................................................................. S-6
LIBOR........................................................................................................... S-2, S-26
LIBOR Determination Date........................................................................................ S-26
Loan Agreement.................................................................................................. S-37
MasterCard...................................................................................................... S-6
Monthly Report.................................................................................................. S-44
Monthly Servicing Fee........................................................................................... S-43
Net Servicing Fee Rate.......................................................................................... S-43
S-48
PAGE
-----------
Offered Securities.............................................................................................. S-1, S-3
Offered Securityholders' Interest............................................................................... S-4
Offered Series.................................................................................................. S-5
Offered Series Supplement....................................................................................... S-21
Partners First.................................................................................................. S-1
Partners First Portfolio........................................................................................ S-18
Pay Out Events.................................................................................................. S-41
Plan............................................................................................................ S-15
Pooling and Servicing Agreement................................................................................. S-1
Principal Allocation Percentage................................................................................. S-29
Principal Funding Account....................................................................................... S-16
Principal Funding Account Balance............................................................................... S-16, S-31
Principal Funding Investment Proceeds........................................................................... S-31
Prospectus...................................................................................................... S-2
Prospectus Supplement........................................................................................... S-2
Receivables..................................................................................................... S-2
Record Date..................................................................................................... S-25
Redirected Principal Collections................................................................................ S-7, S-33
Reference Banks................................................................................................. S-26
Required Amount................................................................................................. S-9
Required Enhancement Amount..................................................................................... S-12, S-39
Required Reserve Account Amount................................................................................. S-32
Reserve Account................................................................................................. S-31
Reserve Account Funding Date.................................................................................... S-32
Revolving Period................................................................................................ S-7
Securities...................................................................................................... S-2
Securityholders................................................................................................. S-8
Series Adjusted Invested Amount................................................................................. S-28
Series Adjusted Portfolio Yield................................................................................. S-42
Series Allocable Defaulted Amount............................................................................... S-28
Series Allocable Finance Charge Collections..................................................................... S-28
Series Allocable Principal Collections.......................................................................... S-28
Series Allocation Percentage.................................................................................... S-28
Series Default Amount........................................................................................... S-39
Series Required Transferor Amount............................................................................... S-3
Series Securityholders.......................................................................................... S-4
Servicer........................................................................................................ S-1
Servicer Interchange............................................................................................ S-43
Servicing Base Amount........................................................................................... S-43
Servicing Fee Rate.............................................................................................. S-43
Stated Series Termination Date.................................................................................. S-7
Telerate Page 3750.............................................................................................. S-26
Transferor...................................................................................................... S-1
Transferor's Interest........................................................................................... S-4
Trust........................................................................................................... S-1, S-3
Trust Portfolio................................................................................................. S-18
Trustee......................................................................................................... S-2
Underwriters.................................................................................................... S-45
Underwriting Agreement.......................................................................................... S-45
VISA............................................................................................................ S-6
Yield Supplement Account........................................................................................ S-8, S-39
Yield Supplement Draw Amount.................................................................................... S-9, S-39
S-49
[THIS PAGE INTENTIONALLY LEFT BLANK]
ANNEX I
OTHER SERIES
The table below sets forth the principal characteristics of the one other
Series issued by the Trust that will remain outstanding upon the issuance of the
Series 1998-3 Securities. For more specific information with respect to any
Series, any prospective investor should contact Partners First Holdings, LLC at
(410) 865-8700. The Transferor will provide, without charge, to any prospective
purchaser of the Securities, a copy of the Disclosure Documents for any other
publicly issued Series.
SERIES 1998-2
SERIES TERMS
Group...................................................................... Group I
Annual Servicing Fee Percentage............................................ 2.0%
Series Termination Date.................................................... November 2004 Distribution Date
Series Issuance Date....................................................... , 1998
1. CLASS A SECURITIES
Class A Initial Invested Amount............................................ $528,000,000
Class A Interest Rate...................................................... One Month LIBOR + %
Controlled Accumulation Amount (subject to adjustment)..................... $53,416,667
Commencement of Controlled Accumulation Period (subject to adjustment)..... May 31, 2000
Enhancement................................................................ Initial Collateral Interest, Initial Class D
Invested Amount
Other Enhancement.......................................................... Subordination of Class B Securities
Scheduled Payment Date..................................................... June 2001 Distribution Date
2. CLASS B SECURITIES
Class B Initial Invested Amount............................................ $113,000,000
Class B Interest Rate...................................................... One Month LIBOR + %
Controlled Accumulation Amount (subject to adjustment)..................... Same as for Class A Securities
Commencement of Controlled Accumulation Period (subject to adjustment)..... Same as for Class A Securities
Enhancement................................................................ Initial Collateral Interest, Initial Class D
Invested Amount
Scheduled Payment Date..................................................... Same as for Class A Securities
3. COLLATERAL INTEREST
Collateral Initial Invested Amount......................................... $67,000,000
Collateral Rate............................................................ One Month LIBOR + 1.0% or such lesser amount
as specified in the Loan Agreement
Enhancement................................................................ Subordination of Class D Securities
4. CLASS D SECURITIES
Class D Initial Invested Amount............................................ $42,000,000
Class D Interest Rate...................................................... 0% (subject to adjustment)
A-1
[THIS PAGE INTENTIONALLY LEFT BLANK]
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
PARTNERS FIRST CREDIT CARD MASTER TRUST
ASSET BACKED SECURITIES
PARTNERS FIRST RECEIVABLES FUNDING, LLC
TRANSFEROR
PARTNERS FIRST HOLDINGS, LLC
SERVICER
------------------------
Partners First Receivables Funding, LLC ("PFRF"), as transferor (in such
capacity, the "Transferor"), may sell from time to time one or more series
(each, a "Series") of asset backed securities (the "Securities") evidencing
undivided interests in certain assets of the Partners First Credit Card Master
Trust (the "Trust"), created pursuant to an Amended and Restated Pooling and
Servicing Agreement, dated as of May 13, 1998 (the "Pooling and Servicing
Agreement"), among the Transferor, Partners First Holdings, LLC, as Servicer (in
such capacity, the "Servicer"), and The Bank of New York, as trustee (the
"Trustee"). The property of the Trust includes, among other things, the
receivables (the "Receivables") that are generated from time to time in a
portfolio of consumer revolving credit card accounts (the "Accounts"),
collections thereon, funds on deposit in certain accounts of the Trust, any
Participation Interests (as defined herein) included in the Trust, collections
thereon and any Credit Enhancement (as defined herein) with respect to any
particular Series or Class as more fully described herein and, with respect to a
Series offered hereby, in the related Prospectus Supplement (as defined below).
The Receivables in the Accounts are sold to PFRF and then transferred by PFRF to
the Trust as more fully described herein. All of the Receivables in the Trust on
the date hereof were originated or acquired by BankBoston (NH), National
Association ("BKB") and Harris Trust and Savings Bank ("Harris"). As more fully
set forth herein, it is anticipated that in the future, Receivables originated
by financial institutions other than BKB and Harris may be included in the
Trust, upon satisfaction of certain conditions, including the Rating Agency
Condition. Each of BKB and Harris has retained, and any such other financial
institution may retain, the receivables in certain of their respective accounts.
Securities will be sold from time to time under this Prospectus on terms
determined for each Series at the time of the sale and described in the related
prospectus supplement (each, a "Prospectus Supplement"). Each Series will
consist of one or more classes of Securities (each, a "Class"). Each Security
will represent an undivided interest in certain assets of the Trust and the
interest of the holders of each Class or Series will include the right to
receive a varying percentage of each month's collections with respect to the
Receivables at the times, in the manner and to the extent described herein and,
with respect to any Series offered hereby, in the related Prospectus Supplement.
Interest and principal payments with respect to each Series offered hereby will
be made as specified in the related Prospectus Supplement. A Series offered
hereby (or any Class within such Series) may be entitled to the benefits of a
cash collateral account or guaranty, spread account, yield supplement account,
collateral interest, letter of credit, surety bond, insurance policy or other
form of credit enhancement as specified in the Prospectus Supplement relating to
such Series. In addition, any Series offered hereby may include one or more
Classes which are subordinated in right and priority of payment to one or more
other Classes of such Series or another Series, in each case to the extent
described in the related Prospectus Supplement. Each Series of Securities or
Class offered hereby will be rated in one of the four highest categories by at
least one nationally recognized statistical rating organization.
POTENTIAL INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH IN "RISK FACTORS"
COMMENCING ON PAGE 20 HEREIN.
------------------------
THE SECURITIES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR, THE SERVICER
OR ANY AFFILIATE OF EITHER OF THEM. A SECURITY IS NOT A DEPOSIT AND NEITHER THE
SECURITIES NOR THE UNDERLYING ACCOUNTS OR RECEIVABLES ARE INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
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 OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Securities may be sold by the Transferor directly to purchasers, through
agents designated from time to time, through underwriting syndicates led by one
or more managing underwriters or through one or more underwriters acting alone.
If underwriters or agents are involved in the offering of the Securities of any
Series offered hereby, the name of the managing underwriter or underwriters or
agents will be set forth in the related Prospectus Supplement. If an
underwriter, agent or dealer is involved in the offering of the Securities of
any Series offered hereby, the underwriter's discount, agent's commission or
dealer's purchase price will be set forth in, or may be calculated from, the
related Prospectus Supplement, and the net proceeds to the Transferor from such
offering will be the public offering price of such Securities less such discount
in the case of an underwriter, the purchase price of such Securities less such
commission in the case of an agent or the purchase price of such Securities in
the case of a dealer, and less, in each case, the other expenses of the
Transferor associated with the issuance and distribution of such Securities. See
"Plan of Distribution."
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OF ANY
SERIES UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 15, 1998
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT.................................. 3
REPORTS TO SECURITYHOLDERS............................. 3
AVAILABLE INFORMATION.................................. 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........ 3
PROSPECTUS SUMMARY..................................... 4
RISK FACTORS........................................... 20
USE OF PROCEEDS........................................ 29
THE TRUST.............................................. 29
CREDIT CARD ACTIVITIES................................. 30
General.............................................. 30
Development of the Business Model of Partners First;
The Role of FAMIS................................. 31
Business Strategy.................................... 32
Processing and Servicing of Credit Card Accounts..... 32
Account Origination.................................. 33
Underwriting Procedures.............................. 34
Additional Accounts.................................. 35
Billing and Payments................................. 35
Interchange.......................................... 36
Collection of Delinquent Accounts.................... 37
Recoveries........................................... 37
Fraud Prevention..................................... 38
PARTNERS FIRST HOLDINGS, LLC........................... 38
PARTNERS FIRST RECEIVABLES FUNDING, LLC................ 38
THE ACCOUNTS........................................... 38
DESCRIPTION OF THE SECURITIES.......................... 39
General.............................................. 39
Book-Entry Registration.............................. 40
Definitive Securities................................ 42
Interest............................................. 42
Principal............................................ 43
Pay Out Events and Reinvestment Events............... 44
Servicing Compensation and Payment of Expenses....... 45
Termination of the Trust............................. 46
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT..... 46
Conveyance of Receivables............................ 46
Eligible Accounts and Receivables.................... 47
Representations and Warranties....................... 47
Transferor Securities................................ 48
Additions of Accounts or Participation Interests..... 49
Removal of Accounts.................................. 50
Discount Option...................................... 50
Yield Supplement Account............................. 51
Premium Option....................................... 51
Indemnification...................................... 51
Collection and Other Servicing Procedures............ 52
New Issuances........................................ 52
Collection Account................................... 54
PAGE
----
Allocations.......................................... 54
Groups of Series..................................... 55
Reallocations Among Securities of Different Series
within a Reallocation Group....................... 55
Sharing of Excess Finance Charge Collections Among
Excess Allocation Series.......................... 57
Shared Principal Collections......................... 57
Paired Series........................................ 57
Special Funding Account.............................. 58
Funding Period; Pre-Funding Account.................. 58
Defaulted Receivables; Rebates and Fraudulent
Charges........................................... 58
Credit Enhancement................................... 59
Interest Rate Swaps and Related Caps, Floors and
Collars........................................... 61
Servicer Covenants................................... 61
Certain Matters Regarding the Servicer............... 61
Servicer Default..................................... 62
Evidence as to Compliance............................ 63
Amendments........................................... 63
List of Securityholders.............................. 63
The Trustee.......................................... 64
DESCRIPTION OF THE PURCHASE AGREEMENTS................. 64
PFR Purchase Agreements.............................. 64
Transferor Purchase Agreement........................ 65
Formation Transactions; Account Origination.......... 66
Limitations on Liability............................. 67
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES............... 67
Transfer of Receivables.............................. 67
Certain Matters Relating to Insolvency............... 68
Consumer Protection Laws............................. 70
Proposed Legislation................................. 70
U.S. FEDERAL INCOME TAX CONSEQUENCES................... 70
General.............................................. 70
Characterization of the Securities as Indebtedness... 71
Taxation of Interest Income of Securityholders....... 71
Sale of a Security................................... 72
Tax Characterization of the Trust.................... 72
FASIT................................................ 73
Foreign Investors.................................... 74
Defeasance........................................... 75
STATE AND LOCAL TAXATION............................... 75
ERISA CONSIDERATIONS................................... 76
General.............................................. 76
Exception for Publicly Offered Securities............ 76
Consequences if Securities of a Series Do Not Qualify
as Publicly Offered Securities.................... 77
Special Considerations Applicable to Insurance
Company General Accounts.......................... 77
PLAN OF DISTRIBUTION................................... 78
LEGAL MATTERS.......................................... 78
INDEX OF DEFINED TERMS................................. 79
2
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to any Series will, among other things,
set forth with respect to such Series: (a) the initial aggregate principal
amount of each Class of such Series; (b) the rate of interest on each Security
(the "Security Rate") (or method of determining the Security Rate) of each such
Class; (c) the expected date or dates on which the Invested Amount with respect
to each such Class will have been paid to the holders of the Securities of such
Class ("Securityholders"); (d) the extent to which any Class within a Series is
subordinated to any other Class of such Series or any other Series; (e) the
Distribution Dates for the respective Classes; (f) relevant financial
information with respect to the Receivables; (g) additional information with
respect to any Series Enhancement relating to such Series; and (h) the plan of
distribution of such Series.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities (as defined herein) are issued,
monthly and annual unaudited reports, containing 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 Securities pursuant to the Pooling and Servicing
Agreement. Such reports will be made available by DTC and its participants to
the Securityholders in accordance with the rules, regulations and procedures
creating and affecting DTC. See "Description of the Pooling and Servicing
Agreement -- Evidence as to Compliance." Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. The Pooling and Servicing Agreement does not require the sending of,
and the Transferor does not intend to send, any of its financial reports to the
Securityholders or to the owners of beneficial interests in the Securities
("Security Owners").
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 Securities and Exchange Commission (the "Commission") with respect to
the Securities 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., Room 1024, Washington, D.C. 20549; Seven World Trade Center, New York, New
York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Servicer will file with the Commission such periodic reports, if any,
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. In addition, the Commission maintains a public access
site on the Internet through the World Wide Web at which site reports, proxy and
information statements and other information regarding registrants, including
all electronic filings, may be viewed. The Internet address of the Commission's
World Wide Web site is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Servicer, on behalf of the
Trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Securities offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be part hereof. Any statement contained
herein or in a document deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in any other subsequently filed document which
also is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as modified or superseded, to constitute a part of this
Prospectus.
The Servicer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any or all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to Partners First Holdings, LLC; 900 Elkridge Landing Road,
Suite 300, Linthicum, Maryland 21090-2925; Attention: Chief Financial Officer.
Telephone requests for such copies should be directed to (410) 865-8700.
3
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT. REFERENCE IS MADE TO THE INDEX OF DEFINED
TERMS BEGINNING ON PAGE 79 HEREIN FOR THE LOCATION HEREIN OF THE DEFINITIONS OF
CERTAIN CAPITALIZED TERMS USED HEREIN. UNLESS THE CONTEXT REQUIRES OTHERWISE,
CERTAIN CAPITALIZED TERMS, WHEN USED HEREIN AND IN ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT, RELATE ONLY TO THE PARTICULAR SERIES BEING OFFERED BY SUCH
PROSPECTUS SUPPLEMENT.
Issuer................................... Partners First Credit Card Master Trust (the "Trust"). The Trust, as a master
trust, is expected to issue series of Securities (each, a "Series") from time to
time. See "The Trust."
Servicer................................. Partners First Holdings, LLC, a Delaware limited liability company ("Partners
First"), as Servicer (in such capacity, the "Servicer"). The Servicer will receive
a fee as servicing compensation from the Trust in respect of each Series in the
amounts and at the times specified in the related Prospectus Supplement (the
"Servicing Fee"). The Servicing Fee may be payable from Finance Charge
Receivables, Interchange or other amounts as specified in the related Prospectus
Supplement.
In certain limited circumstances, Partners First may resign or be removed, in
which event the Trustee or, so long as it meets certain eligibility standards set
forth in the Pooling and Servicing Agreement, a third-party Servicer may be
appointed as successor Servicer (Partners First, or any such successor Servicer,
is referred to herein as the "Servicer"). Partners First is permitted to delegate
certain of its duties as Servicer to any of its affiliates or, subject to certain
conditions, to third-party service providers, but any such delegation will not
relieve the Servicer of its liability and responsibility with respect to such
duties under the Pooling and Servicing Agreement or any Supplement. Partners First
has delegated substantially all of its servicing duties to First Data Resources
Inc. ("FDR"). See "Description of the Securities -- Servicing Compensation and
Payment of Expenses."
Trustee.................................. The Bank of New York (the "Trustee"), a New York banking corporation.
Transferor............................... Partners First Receivables Funding, LLC ("PFRF" or, in its capacity as transferor,
the "Transferor"), a Delaware limited liability company and a special purpose
wholly owned subsidiary of Partners First Receivables, LLC ("PFR"), a Delaware
limited liability company. PFR is a wholly owned subsidiary of Partners First.
Account Originators...................... The Partners First Portfolio will be originated and serviced following a business
model which evolved from a business model originally established by BankBoston,
N.A. ("BankBoston") and First Annapolis Marketing Information Services, Inc.
("FAMIS"). Currently, under such business model: (i) the functions required to be
performed by an insured financial institution under applicable law and the rules
of MasterCard and VISA are performed by BKB (and, in certain circumstances, may be
performed by Harris) and, as described below, would be assumed by the Bank (as
defined below) following its establishment; (ii) credit processing, cardholder
communication, customer payment processing, certain collection activities and
certain other account servicing functions are performed by FDR; and (iii) the
account marketing and portfolio management activities, including brand strategy,
development of credit policy and product pricing are performed by Partners First,
which also proactively monitors and supervises FDR's activities to ensure
compliance with performance standards established by Partners First. See "Credit
Card Activities -- Development of the Business Model of Partners First; The Role
of FAMIS."
4
Pursuant to separate Contribution Agreements (each, a "Contribution Agreement"),
on January 29, 1998, the date of issuance of the first Series of Securities,
BankBoston (NH), National Association ("BKB"), a national banking association
organized under the laws of the United States, and Harris Trust and Savings Bank,
a bank chartered under the laws of the State of Illinois ("Harris"), each
contributed to Partners First all of their respective rights under specified
consumer revolving credit card accounts originated by BKB or Harris, as
applicable, except (i) the related cardholder agreements, (ii) all rights to
create, enforce and collect receivables and any other amounts owing under the
Partners First Portfolio (as defined below) and (iii) all rights to amend and
modify the related cardholder agreements (collectively, the "Retained Rights"). As
used herein "Partners First Portfolio" means (i) the credit card accounts
originated or acquired by BKB and Harris and contributed to Partners First
pursuant to the Contribution Agreements on January 29, 1998, (ii) any other
consumer revolving credit card accounts originated by BKB or Harris, as
applicable, following January 29, 1998 and transferred to Partners First by BKB or
Harris pursuant to the Assistance Agreements (as defined below) and (iii) as
described in the following paragraph, any other credit card accounts over which
Partners First has acquired the right to designate the financial institution that
will exercise the Retained Rights with respect to such credit card accounts.
Under the Contribution Agreements and the Assistance Agreements, Partners First
has the right to designate the financial institutions that will exercise the
Retained Rights with respect to the credit card accounts in the Partners First
Portfolio. On January 29, 1998, Partners First designated each of BKB and Harris
as the Account Originator with respect to specified credit card accounts in the
Partners First Portfolio. As used herein, "Account Originator" means, as of any
date of determination, each financial institution which (i) has been designated by
Partners First as the financial institution that will exercise the Retained Rights
with respect to credit card accounts in the Partners First Portfolio, (ii) if such
financial institution is not an affiliate of Partners First, has entered into a
written agreement with Partners First in the form of, or substantially similar to,
the Assistance Agreements (as defined below) and (iii) has entered into a
receivables purchase agreement with PFR in, or substantially in, the form of the
PFR Purchase Agreements (as defined below) pursuant to which PFR purchases
receivables which are Eligible Receivables (as defined herein), including
receivables which are then sold to the Transferor pursuant to the Transferor
Purchase Agreement and then transferred to the Trust pursuant to the Pooling and
Servicing Agreement.
On January 29, 1998, Partners First entered into separate Assistance Agreements
(each, an "Assistance Agreement") with each of BKB and Harris, pursuant to which
each of BKB and Harris appointed Partners First its sole and exclusive agent to
exercise all of its rights and perform all of its obligations with respect to the
credit card accounts in the Partners First Portfolio originated by BKB and Harris,
as applicable, except for the power to determine the terms under which new credit
card accounts will be originated, whether to extend credit under the credit card
accounts, and to effect Interchange (as defined herein) settlement. In connection
with such appointment, Partners First authorized each of BKB and Harris to use, on
a non-exclusive basis, Partners First's rights under the credit card accounts in
the Partners First Portfolio and related assets, including certain proprietary
information related thereto, to the extent necessary for each of BKB and Harris to
perform the foregoing functions. In its capacity as agent under the
5
Assistance Agreements, Partners First will perform certain functions including
making recommendations with respect to the Credit Card Guidelines (as defined
below), administering the Credit Card Guidelines, managing the Partners First
Portfolio, arranging for the billing and collection of any receivables arising
thereunder, and otherwise servicing and administering the credit card accounts in
the Partners First Portfolio and the related receivables. As used herein, "Credit
Card Guidelines" means, with respect to any credit card account and the related
receivables, the respective policies and procedures of the applicable Account
Originator, relating to (i) the determination of the creditworthiness of
cardholders and potential cardholders, (ii) the extension of credit under the
credit card accounts, and (iii) the maintenance and enforcement of the credit card
accounts and the collection of the related receivables.
Until March 1998, each of BKB and Harris remained Account Originators, originated
new credit card accounts into the Partners First Portfolio and exercised the
Retained Rights with respect to the credit card accounts originated by BKB and
Harris, respectively. In March 1998, Partners First designated BKB as the Account
Originator with respect to the existing credit card accounts in the Partners First
Portfolio, including the Accounts. Going forward, Harris may continue to be an
Account Originator with respect to any new credit card accounts originated through
Harris' marketing efforts, including any New Accounts. In addition, it is
anticipated that Partners First will establish a federally insured financial
institution as a subsidiary (the "Bank"), which will either be a newly chartered
financial institution formed by Partners First or an existing financial
institution acquired by Partners First. Upon its establishment Partners First will
designate the Bank as the sole Account Originator with respect to the credit card
accounts in the Partners First Portfolio, including the Accounts and any New
Accounts. Effective as of the date of the Bank's appointment as Account
Originator, each of BKB and Harris will cease to be an Account Originator.
It is anticipated that the Partners First Portfolio may include credit card
accounts originated by financial institutions other than BKB, Harris or the Bank.
In addition, prior to the establishment of the Bank, Partners First may designate
other financial institutions as Account Originators with respect to the Partners
First Portfolio, including the Accounts. Any such financial institution would
originate credit card accounts. However, any such credit card accounts and any
credit card accounts originated by the Bank may only be designated as Accounts and
the related Receivables may only be included in the Trust, if certain conditions,
including the Rating Agency Condition, are satisfied. See "Risk Factors -- Addition
of Trust Assets" and "Description of the Pooling and Servicing Agreement -- Addition
of Accounts or Participation Interests."
The Partners First Portfolio includes all of the credit card accounts originated
or acquired by Harris except corporate accounts and all of the credit card
accounts originated or acquired by BKB except for (i) those accounts of
cardholders who reside in the primary geographic market of BKB and its affiliates
(i.e., Massachusetts, Rhode Island, Connecticut and New Hampshire), (ii) those
accounts of other cardholders having other banking relationships with BKB or its
affiliates and (iii) student, VIP, foreign accounts and accounts with employees of
BKB and its affiliates. In addition, any other financial institution designated by
Partners First as an Account Originator may choose not to include all of its
credit card accounts in the Partners First Portfolio, particularly if, similar to
BKB, such financial institution chooses to retain its regional or relationship
customers.
6
Transfer of Receivables.................. Pursuant to separate PFR Purchase Agreements entered into between PFR and each of
BKB and Harris on January 29, 1998, each of BKB and Harris sold to PFR, all of
their respective right, title and interest in and to (i) the receivables existing
on January 29, 1998 in designated credit card accounts originated by BKB and
Harris, as applicable, (ii) all of the receivables created in such credit card
accounts following January 29, 1998 and (iii) the receivables in each new
designated credit card account originated following January 29, 1998 by BKB and
Harris, as applicable, whether such receivables are then existing or are
thereafter created. Pursuant to the PFR Purchase Agreements, on January 29, 1998,
PFR acquired approximately $1,870,000,000 aggregate principal amount of
receivables of which approximately $1,190,000,000 aggregate principal amount of
receivables were conveyed to PFR by BKB and approximately $680,000,000 aggregate
principal amount of receivables were conveyed to PFR by Harris. As used herein,
"PFR Purchase Agreement" means a receivables purchase agreement entered into
between PFR and an Account Originator providing for the sale by such Account
Originator to PFR of all of its right, title and interest in and to receivables
created under specified credit card accounts originated by such Account
Originator, and includes the Original PFR Purchase Agreements (as defined herein)
and any Additional PFR Purchase Agreements (as defined herein). See "Description
of the Purchase Agreements -- PFR Purchase Agreements."
In connection with the anticipated establishment by Partners First of the Bank,
PFR and the Bank will enter into one or more receivables purchase agreements in,
or substantially in, the form of the PFR Purchase Agreements entered into between
PFR and each of BKB and Harris.
Pursuant to the receivables purchase agreement entered into between PFR and the
Transferor on January 29, 1998 (as may be amended from time to time, the
"Transferor Purchase Agreement" and, together with the PFR Purchase Agreements,
the "Purchase Agreements"), PFR sells to the Transferor all of the Eligible
Receivables included in the receivables purchased from BKB and Harris immediately
upon giving effect to any such purchase by PFR. Subject to satisfaction of certain
conditions (including the Rating Agency Condition), upon the execution of a PFR
Purchase Agreement between PFR and the Bank or any other Account Originator, PFR
will sell to the Transferor all of the Eligible Receivables included in the
receivables acquired by PFR pursuant to the PFR Purchase Agreement with such other
Account Originator. Pursuant to the Transferor Purchase Agreement, on January 29,
1998, PFR sold approximately $1,846,000,000 aggregate principal amount of
Receivables (the "Initial Receivables") to the Transferor. The Transferor in turn
transferred the Initial Receivables to the Trust pursuant to the Pooling and
Servicing Agreement in exchange for the Transferor Security and a Series of
Securities which the Transferor sold privately. The Initial Receivables
constituted all of the Eligible Receivables acquired by PFR from BKB and Harris on
January 29, 1998.
If so provided in a PFR Purchase Agreement, the Account Originator will assign to
PFR the right to Recoveries (as defined herein) and Interchange (as defined
herein) allocable to the receivables subject to such PFR Purchase Agreement.
Pursuant to their respective PFR Purchase Agreements, each of BKB and Harris
assigns to PFR the right to Recoveries and Interchange allocable to the
receivables conveyed by BKB or Harris, as applicable, to PFR or its approximate
equivalent in the form of Discount Option Receivables (as defined herein)
allocable to the Receivables. See "Description of the Purchase Agreements."
7
Pursuant to the Transferor Purchase Agreement, PFR assigns to the Transferor all
of its rights to Recoveries, if any, and Interchange, if any, assigned to it
pursuant to the PFR Purchase Agreements. See "Description of the Purchase
Agreements -- Transferor Purchase Agreement."
The Transferor in turn transfers the Receivables and the rights to Recoveries and
Interchange acquired by it under the Transferor Purchase Agreement to the Trust
pursuant to the Pooling and Servicing Agreement. See "Description of the Pooling
and Servicing Agreement -- Conveyance of Receivables."
Trust Assets............................. The assets of the Trust (the "Trust Assets") include the receivables
("Receivables") arising under certain VISA(Register mark) and
MasterCard(Register mark)* revolving credit card accounts (the "Accounts"), and
the proceeds thereof, including recoveries on charged-off Receivables
("Recoveries"), and any other fees, proceeds of credit insurance policies relating
to the Receivables and may include the right to receive Interchange (as defined
herein), if any, allocable to the Securities, funds on deposit in certain accounts
of the Trust for the benefit of Securityholders, Participation Interests (as
defined herein), if any, and any Credit Enhancement (as defined herein) issued
with respect to a particular Series (the drawing on or payment of any Series
Enhancement for the benefit of a Series or Class of Securityholders will not be
available to the Securityholders of any other Series or Class). "Interchange"
consists of certain fees received by Account Originators from VISA and MasterCard
as partial compensation for taking credit risk, absorbing fraud losses and funding
receivables for a limited period prior to initial billing. "Series Enhancement"
means, with respect to any Series or Class of Securities, any Credit Enhancement,
interest rate swap agreement, interest rate cap agreement or other similar
arrangement for the benefit of Securityholders of such Series or Class. The
subordination of any Series or Class of Securities to another Series or Class of
Securities shall be deemed to be a Series Enhancement. "Participation Interests"
means participations representing undivided interests in a pool of assets
primarily consisting of revolving credit card receivables, charge card receivables
and other self-liquidating financial assets. See "Description of the Pooling and
Servicing Agreement -- Additions of Accounts or Participation Interests."
To the extent provided in any Supplement (as defined below) or in an amendment to
the Pooling and Servicing Agreement, all or a portion of the Receivables or
Participation Interests conveyed to the Trust and all collections received with
respect thereto may be allocated to one or more Series or groups of Series (each,
a "Group") as long as the Rating Agency Condition (as defined herein) shall have
been satisfied with respect to such allocation, and the Servicer shall have
delivered an officer's certificate to the Trustee to the effect that the Servicer
reasonably believes such allocation will not have an Adverse Effect (as defined
herein).
The Securities........................... The Securities will be issued in Series, each of which will consist of one or more
Classes. The specific terms of a Series or Class will be established as described
herein under "Description of the Pooling and Servicing Agreement -- New
Issuances." However, while the specific terms of any Series or Class offered
hereby will be described in the related Prospectus Supplement, the terms of such
Series or Class will not be subject to prior review by, or consent of, the holders
of the Securities of any previously issued Series.
- ---------------
* VISA and MasterCard are registered trademarks of VISA U.S.A. Inc. ("VISA") and MasterCard International Incorporated
("MasterCard"), respectively.
8
Unless otherwise specified in the related Prospectus Supplement, the Securities of
a Series offered hereby will generally be available for purchase in minimum
denominations of $1,000 and in integral multiples thereof and will only be
available in book-entry form except in certain limited circumstances as described
herein under "Description of the Securities -- Definitive Securities." Interests
in the Trust Assets will be allocated among (a) the Securityholders, including
Credit Enhancers (as defined herein) holding uncertificated subordinated interests
(each, an "Enhancement Invested Amount"), of a particular Series (the
"Securityholders' Interest"), (b) the Securityholders (including such holders of
Enhancement Invested Amounts) of other Series, if any, (c) the holders of any
Participations and (d) the interest of the Transferor and its permitted
transferees (the "Transferor's Interest"), as described below. The Invested Amount
of a Series offered hereby will, except as otherwise provided herein and except
with respect to Securities with a variable principal amount, remain fixed at the
aggregate initial principal amount of the Securities of such Series. The
Securityholders' Interest of a Series will include the right to receive (but only
to the extent needed to make required payments under the Pooling and Servicing
Agreement, including the related Supplement, and subject to any reallocation or
redirection of such amounts if the related Supplement so provides) varying
percentages of collections of Finance Charge Receivables and Principal Receivables
and will be allocated a varying percentage of the Receivables in Defaulted
Accounts with respect to each calendar month (each, a "Monthly Period"). See
"Description of the Securities -- Interest" and " -- Principal." If the Securities
of a Series offered hereby are included in more than one Class, the collections
allocable to the Invested Amount of such Series may be further allocated among
each Class in such Series as described in the related Prospectus Supplement.
The Transferor's Interest................ The Transferor's Interest at any time represents the right to the Trust Assets in
excess of the Securityholders' Interest, the interest of any holder of a
Participation and Enhancement Invested Amounts of all Series then outstanding. The
principal amount of the Transferor's Interest (the "Transferor Amount") will
fluctuate as the amount of the Principal Receivables held by the Trust changes
from time to time. In addition, the Transferor intends to cause the issuance of
Series from time to time and any such issuance will have the effect of decreasing
the Transferor Amount to the extent of the initial Invested Amount of such Series.
See "Risk Factors -- Issuance of New Series."
The level of the "Required Transferor Amount," which equals the sum of the Series
Required Transferor Amounts (as defined herein) for each outstanding Series, is
intended to enable the Transferor's Interest to absorb fluctuations in the amount
of Principal Receivables held by the Trust from time to time (due to, among other
things, seasonal purchase and payment habits of cardholders or adjustments in the
amount of Principal Receivables because of rebates, refunds, fraudulent charges or
otherwise). See "Risk Factors -- Generation of Additional Receivables; Dependency
on Cardholder Repayments" and "Description of the Pooling and Servicing
Agreement -- Defaulted Receivables; Rebates and Fraudulent Charges."
9
Issuance of New Series................... The Pooling and Servicing Agreement authorizes the Trustee to issue four types of
securities: (a) one or more Series of Securities, (b) Participations representing
participation interests in the Receivables, as described below, (c) a security
evidencing the Transferor's Interest in the Trust retained by the Transferor (the
"Transferor Security"), which Transferor Security will be held by the Transferor,
and (d) securities ("Supplemental Securities") held by transferees of a portion of
the Transferor Security. The Transferor Security and any Supplemental Securities
are collectively referred to as the "Transferor Securities." At the option of the
Transferor, the Pooling and Servicing Agreement may be amended to provide that the
Transferor Interest need not be represented by a security but may be an
uncertificated interest in the Trust. See "Description of the Pooling and
Servicing Agreement -- Transferor Securities." On January 29, 1998, the Transferor
issued a Supplemental Security to an affiliate of the Transferor.
The Pooling and Servicing Agreement provides that, pursuant to any one or more
supplements to the Pooling and Servicing Agreement (each, as may be amended from
time to time, a "Supplement"), the Transferor may cause the Trustee without the
consent of the Securityholders to issue one or more new Series and accordingly
cause a reduction in the Transferor's Interest represented by the Transferor
Securities. There can be no assurance that the terms of any Series might not have
an impact on the timing or amount of payments received by a Securityholder of
another Series. Under the Pooling and Servicing Agreement, the Transferor may
define, with respect to any Series, the Principal Terms of such Series. See
"Description of the Pooling and Servicing Agreement -- New Issuances." The
Transferor may offer any Series to the public or other investors under a
disclosure document (a "Disclosure Document"), which will consist of a Prospectus
Supplement in the case of a Series offered hereby, in transactions either
registered under the Securities Act or exempt from registration thereunder,
directly or through one or more underwriters or placement agents, in fixed-price
offerings or in negotiated transactions or otherwise. See "Plan of Distribution."
A new Series may be issued only upon satisfaction of the conditions described
herein under "Description of the Pooling and Servicing Agreement -- New Issuances"
including, among others, that (a) such issuance will satisfy the Rating Agency
Condition (as defined herein) and (b) the Transferor shall have delivered to the
Trustee and certain providers of Series Enhancement a certificate of an authorized
officer to the effect that, in the reasonable belief of the Transferor, such
issuance will not, based on the facts known to such representative at the time of
such certification, have an Adverse Effect.
The Pooling and Servicing Agreement provides that, pursuant to any one or more
supplements to the Pooling and Servicing Agreement (each, a "Participation
Supplement"), the Transferor may direct the Trustee to issue on behalf of the
Trust one or more participations (each, a "Participation"), to be delivered to or
upon the order of the Transferor upon the satisfaction of certain conditions
described herein under "Description of the Pooling and Servicing Agreement -- New
Issuances."
In addition to the foregoing, it is a condition to the issuance of each Series
offered hereby that on the related Series Issuance Date the aggregate amount of
Receivables which are more than 30-days past due will not exceed 20% of the
aggregate amount of Receivables in the Trust.
10
The Accounts............................. The Accounts generally consist of VISA and MasterCard consumer revolving credit
card accounts included in the Partners First Portfolio, which were designated from
time to time by the Transferor (or an affiliate thereof), that, in each case, meet
the criteria provided in the Pooling and Servicing Agreement for an Eligible
Account (as defined herein), but do not include any Removed Accounts (as defined
herein). The Accounts are not being sold or transferred to the Trust and will
continue to be controlled and held by the Account Originators unless transferred
as described herein. See "Credit Card Activities" and "Description of the Purchase
Agreements."
The Transferor conveyed to the Trust Receivables existing on January 29, 1998 in
certain VISA and MasterCard consumer revolving credit card accounts (the "Initial
Accounts") that met the criteria provided in the Pooling and Servicing Agreement
for an Eligible Account as of January 29, 1998 and will convey Receivables arising
in the Initial Accounts from time to time thereafter until the termination of the
Trust. The Initial Accounts constituted all of the Eligible Accounts in the
Partners First Portfolio on January 29, 1998. In addition, pursuant to the Pooling
and Servicing Agreement, the Transferor expects (subject to certain limitations
and conditions), and in some circumstances will be obligated, to have Additional
Accounts designated, the Receivables of which will be included in the Trust or, in
lieu thereof or in addition thereto, to include Participation Interests in the
Trust. Additional Accounts include New Accounts and Aggregate Addition Accounts
(as defined herein). The Transferor will convey to the Trust all Receivables in
Additional Accounts, whether such Receivables are then existing or thereafter
created. The addition to the Trust of Receivables in Aggregate Addition Accounts
or Participation Interests will be subject to certain conditions, including, among
others, that (a) unless such addition is a required addition or a designation of
New Accounts, such addition will satisfy the Rating Agency Condition and (b) the
Transferor shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, in the reasonable belief of the Transferor, such
addition will not have an Adverse Effect. The Transferor will also have the right,
in certain circumstances, to remove from the Trust all Receivables of certain
designated Accounts (the "Removed Accounts"). See "Description of the Pooling and
Servicing Agreement -- Additions of Accounts or Participation Interests" and
" -- Removal of Accounts" and "Risk Factors -- Addition of Trust Assets."
The Receivables.......................... The Receivables include (a) periodic finance charges, cash advance fees, late
charges, annual membership fees, returned check fees, overlimit fees and other
miscellaneous fees and the interest portion of any Participation Interests as
determined pursuant to the applicable Supplement (the "Finance Charge
Receivables"), and (b) amounts charged by cardholders for merchandise and
services, amounts advanced to cardholders as cash advances and the principal
portion of any Participation Interests as determined pursuant to the applicable
Supplement (the "Principal Receivables"). Recoveries attributed to charged-off
Receivables up to the amount of Defaulted Receivables in any Monthly Period will
be treated as collections of Principal Receivables. The excess, if any, of
Recoveries over Defaulted Receivables will be treated as collections of Finance
Charge Receivables. In addition, certain Interchange or its equivalent in the form
of Discount Option Receivables attributed to cardholder charges for merchandise
and services in the Accounts will be treated as collections of Finance Charge
Receivables. See "Credit Card Activities -- Interchange."
11
All receivables arising in the Partners First Portfolio will automatically be sold
to PFR. Pursuant to the Transferor Purchase Agreement, all new Eligible
Receivables arising in the Accounts during the term of the Trust will
automatically be sold by PFR to the Transferor and then transferred by the
Transferor to the Trust. Accordingly, the amount of Receivables in the Trust will
fluctuate from day to day as new Receivables are generated and as existing
Receivables are collected, charged-off as uncollectible or otherwise adjusted.
If so specified in the related Prospectus Supplement, the Servicer will establish
and maintain a yield supplement account for the benefit of the Securityholders of
such Series (each, a "Yield Supplement Account"). Amounts on deposit in the Yield
Supplement Account for any Series (together with investment earnings thereon) will
be released and deposited into the Collection Account in the amounts and at the
times specified in the Prospectus Supplement for such Series. Each such deposit
into the Collection Account will be treated as collections of Finance Charge
Receivables allocable to the Securities of the related Series. The Yield
Supplement Account for any Series will be funded with proceeds from the offering
of the related Series of Securities.
Clearance and Settlement................. Unless otherwise specified in the related Prospectus Supplement, the Securities
will be available for purchase in minimum denominations of $1,000 and integral
multiples thereof in book-entry form only. Securityholders may elect to hold their
Securities through any of DTC (in the United States) or Cedel Bank, SOCIETE
ANONYME ("Cedel") or the Euroclear System ("Euroclear") (in Europe). See
"Description of the Securities -- Book-Entry Registration."
Interest................................. Interest will accrue on the Invested Amount or outstanding principal amount of the
Securities of a Series or Class offered hereby at the PER ANNUM rate either
specified in or determined in the manner specified in the related Prospectus
Supplement. Except as otherwise provided herein, collections of Finance Charge
Receivables and certain other amounts allocable to the Invested Amount of a Series
offered hereby will generally be used to make interest payments to Securityholders
of such Series on each Interest Payment Date with respect thereto; PROVIDED that
if an Early Amortization Period commences with respect to such Series, thereafter
interest will be distributed to such Securityholders monthly on each Special
Payment Date (as defined herein). If the Interest Payment Dates for a Series or
Class occur less frequently than monthly, such collections or other amounts (or
the portion thereof allocable to such Class) will be deposited in one or more
trust accounts (each, an "Interest Funding Account") and used to make interest
payments to Securityholders of such Series or Class on the following Interest
Payment Date with respect thereto. If a Series has more than one Class of
Securities, each such Class may have a separate Interest Funding Account. See
"Description of the Securities -- Interest."
Principal................................ The principal of the Securities of each Series offered hereby will be scheduled to
be paid either (a) in full on an expected date specified in the related Prospectus
Supplement (the "Expected Final Payment Date"), in which case such Series will
have a Controlled Accumulation Period as described below under " -- Controlled
Accumulation Period," or (b) in installments commencing on a date specified in the
related Prospectus Supplement (the "Principal Commencement Date"), in which case
such Series will have a Controlled Amortization Period as described below under
" -- Controlled Amortization Period." If a Series has more than one Class of
Securities, each Class may have a different method of paying principal,
12
Expected Final Payment Date or Principal Commencement Date. The payment of
principal with respect to the Securities of a Series or Class may commence earlier
than the applicable Expected Final Payment Date or Principal Commencement Date,
and the final principal payment with respect to the Securities of a Series or
Class may be made later than the applicable Expected Final Payment Date or other
expected date, if a Pay Out Event occurs with respect to such Series or Class or
under certain other circumstances described herein. See "Risk Factors --
Generation of Additional Receivables; Dependency on Cardholder Repayments" for a
description of factors that may affect the timing of principal payments on
Securities. See "Description of the Securities -- Principal."
Revolving Period......................... The Securities of each Series offered hereby will have a revolving period (the
"Revolving Period") that will commence on the date of issuance of the related
Series (the "Series Issuance Date") or on a date prior thereto specified in the
related Supplement and, for a Series offered hereby, the related Prospectus
Supplement (the "Series Cut-Off Date") and continue until the earlier of (a) the
commencement of the Early Amortization Period or Early Accumulation Period with
respect to such Series and (b) the date specified in the related Prospectus
Supplement as the end of the Revolving Period with respect to such Series. If the
related Prospectus Supplement provides that a Series is a Principal Sharing Series
(as defined herein), during the Revolving Period with respect to such Series,
collections of Principal Receivables and certain other amounts otherwise allocable
to the Securityholders' Interest of such Series will be treated as Shared
Principal Collections and will be distributed to, or for the benefit of, the
Securityholders of other Principal Sharing Series or the holders of the Transferor
Securities or deposited into the Special Funding Account, as more fully described
in the related Prospectus Supplement. If the related Prospectus Supplement
provides that a Series is not a Principal Sharing Series, during the Revolving
Period with respect to such Series collections of Principal Receivables and
certain other amounts otherwise allocable to the Securityholders' Interest of such
Series will be paid to the holders of the Transferor Securities or deposited into
the Special Funding Account, as more fully described in the related Prospectus
Supplement. See "Description of the Securities -- Principal" and " -- Pay Out
Events and Reinvestment Events" for a discussion of the events that might lead to
the termination of the Revolving Period with respect to a Series prior to its
scheduled date.
Controlled Accumulation Period........... If the related Prospectus Supplement so specifies, unless an Early Amortization
Period or, if so specified in the related Prospectus Supplement, an Early
Accumulation Period commences with respect to a Series offered hereby, the
Securities of such Series will have a scheduled accumulation period (the
"Controlled Accumulation Period") that will commence at the close of business on
the date or dates specified in or determined as specified in such Prospectus
Supplement and continue until the earliest of (a) the commencement of the Early
Amortization Period or, if so specified in the related Prospectus Supplement, an
Early Accumulation Period with respect to such Series, (b) payment in full of the
Invested Amount, including the Enhancement Invested Amount, if any, of the
Securities of such Series and (c) the series termination date with respect to such
Series (the "Series Termination Date"). The Controlled Accumulation Period may be
postponed under the conditions set forth in "Description of the Securities --
Principal." During the Controlled Accumulation Period with respect to a Series,
collections of Principal Receivables and, if so specified in the related
Prospectus
13
Supplement, certain other amounts allocable to the Securityholders' Interest of
such Series (including Shared Principal Collections (as defined herein), if any,
allocable to such Series) will be deposited on each Distribution Date in a trust
account established for the benefit of the Securityholders of such Series (each, a
"Principal Funding Account") and used to make principal distributions to the
Securityholders of such Series or any Class thereof when due. The amount to be
deposited in the Principal Funding Account (the "Controlled Deposit Amount") for
any Series offered hereby on any Distribution Date may, but will not necessarily,
be limited to an amount equal to an amount specified in or determined as specified
in the related Prospectus Supplement (the "Controlled Accumulation Amount") plus
any existing deficit controlled accumulation amount arising from prior
Distribution Dates. If the Prospectus Supplement for a Series so specifies, the
amount to be deposited in the Principal Funding Account on a Distribution Date may
be a variable amount. If a Series has more than one Class of Securities, each
Class may have a separate Principal Funding Account and Controlled Accumulation
Amount and the Controlled Accumulation Period with respect to each Class may
commence on different dates. In addition, the related Prospectus Supplement may
describe certain priorities among such Classes with respect to deposits of
principal into such Principal Funding Accounts.
Early Accumulation Period................ If so specified and under the conditions set forth in the Prospectus Supplement
relating to a Series having a Controlled Accumulation Period, during the period
from the day on which a Reinvestment Event (as defined herein) has occurred, until
the earliest of (a) the commencement of the Early Amortization Period (if any),
(b) payment in full of the Invested Amount, including the Enhancement Invested
Amount, if any, of the Securities of such Series, and (c) the Series Termination
Date with respect to such Series (the "Early Accumulation Period"), collections of
Principal Receivables and, if so specified in the related Prospectus Supplement,
certain other amounts allocable to the Securityholders' Interest of such Series
(including Shared Principal Collections, if any, allocable to such Series) will be
deposited on each Distribution Date in the Principal Funding Account and used to
make distributions of principal to the Securityholders of such Series or any Class
thereof on the Expected Final Payment Date. The amount to be deposited in the
Principal Funding Account during the Early Accumulation Period will not be limited
to any Controlled Deposit Amount. See "Description of the Securities -- Pay Out
Events and Reinvestment Events" for a discussion of the events which might lead to
commencement of an Early Accumulation Period.
Controlled Amortization Period........... If the related Prospectus Supplement so specifies, unless an Early Amortization
Period commences with respect to a Series offered hereby, the Securities of such
Series will have an amortization period (the "Controlled Amortization Period")
that will commence at the close of business on the date specified in such
Prospectus Supplement and continue until the earliest of (a) the commencement of
the Early Amortization Period with respect to such Series, (b) payment in full of
the Invested Amount, including the Enhancement Invested Amount, if any, of the
Securities of such Series and (c) the Series Termination Date with respect to such
Series. During the Controlled Amortization Period with respect to a Series,
collections of Principal Receivables and certain other amounts allocable to the
Securityholders' Interest of such Series (including Shared Principal Collections,
if any, allocable to such Series) will be used on each Distribution Date to make
principal distributions to Securityholders of such Series or any Class thereof
then
14
scheduled to receive such distributions. The amount to be distributed to
Securityholders of any Series offered hereby on any Distribution Date may, but
will not necessarily, be limited to an amount (the "Controlled Distribution
Amount") equal to an amount (the "Controlled Amortization Amount") specified in
the related Prospectus Supplement plus any existing deficit controlled
amortization amount arising from prior Distribution Dates. If a Series has more
than one Class of Securities, each Class may have a different Controlled
Amortization Amount. In addition, the related Prospectus Supplement may describe
certain priorities among such Classes with respect to such distributions.
Early Amortization Period................ During the period from the day on which a Pay Out Event has occurred with respect
to a Series to the date on which the Invested Amount, including the Enhancement
Invested Amount, if any, of the Securities of such Series has been paid in full or
the related Series Termination Date has occurred (the "Early Amortization
Period"), collections of Principal Receivables and certain other amounts allocable
to the Securityholders' Interest of such Series (including Shared Principal
Collections, if any, allocable to such Series) will be distributed as principal
payments to the Securityholders of such Series monthly on each Distribution Date
beginning with the first Special Payment Date with respect to such Series. During
the Early Amortization Period with respect to a Series, distributions of principal
to Securityholders will not be subject to any Controlled Deposit Amount or
Controlled Distribution Amount. In addition, upon the commencement of the Early
Amortization Period with respect to a Series, any funds on deposit in a Principal
Funding Account with respect to such Series will be paid to the Securityholders of
the relevant Class or Series on the first Special Payment Date with respect to
such Series. See "Description of the Securities -- Pay Out Events and Reinvestment
Events" for a discussion of the events that might lead to the commencement of the
Early Amortization Period with respect to a Series.
Allocations Among Series................. Pursuant to the Pooling and Servicing Agreement, during each Monthly Period, the
Servicer is required to first allocate to each Series collections of Principal
Receivables and Finance Charge Receivables and the Defaulted Receivables with
respect to such Monthly Period based on the Series Allocation Percentage (as
defined herein). See "Description of the Pooling and Servicing Agreement --
Allocations." Subject to reallocation among Series in a Reallocation Group, such
amounts allocated to each Series are then further allocated within each Series to
the Securityholders, any Series Enhancement and the holders of the Transferor
Securities pursuant to the terms of the related Supplement.
Sharing of Excess Finance
Charge Collections Among
Excess Allocation Series................. If the Prospectus Supplement for a Series so provides, any Series may be
designated as a Series that shares with other Series similarly designated, subject
to certain limitations, certain Excess Finance Charge Collections (as defined
herein) allocable to any such Series (an "Excess Allocation Series"). Subject to
certain limitations described under "Description of the Pooling and Servicing
Agreement -- Sharing of Excess Finance Charge Collections Among Excess Allocation
Series," collections of Finance Charge Receivables and certain other amounts
allocable to the Securityholders' Interest of any Series that is designated as an
Excess Allocation Series in excess of the amounts necessary to make required
payments with respect to such Series (including payments to the provider of any
related Series Enhancement) will be applied to cover shortfalls with respect to
amounts payable from collections of Finance Charge Receivables
15
allocable to any other Series designated as an Excess Allocation Series, in each
case PRO RATA based upon the amount of the shortfall with respect to amounts
payable from Collections of Finance Charge Receivables, if any, with respect to
each other Excess Allocation Series. See "Description of the Pooling and Servicing
Agreement -- Sharing of Excess Finance Charge Collections Among Excess Allocation
Series."
Shared Principal Collections............. If the Prospectus Supplement for a Series so provides, any Series may be
designated as a Series that shares with other Series similarly designated, subject
to certain limitations, certain excess collections of Principal Receivables and
certain other amounts allocable to the Securityholders' Interest of such Series (a
"Principal Sharing Series"). To the extent that collections of Principal
Receivables and certain other amounts that are allocated to the Securityholders'
Interest of any Principal Sharing Series are not needed to make payments to the
Securityholders of such Series or required to be deposited in a Principal Funding
Account for such Series and to the extent that any amounts are specified in any
Participation Supplement to be treated as Shared Principal Collections, such
amounts may be applied to cover principal payments due to or for the benefit of
Securityholders of another Principal Sharing Series. Any such reallocation will
not result in a reduction in the Invested Amount of the Series to which such
collections were initially allocated. See "Description of the Pooling and
Servicing Agreement -- Shared Principal Collections."
Reallocations Among Series
in a Reallocation Group.................. If so provided in the related Prospectus Supplement, the Securities of a Series
may be included in a Group that will be subject to reallocations of collections of
Finance Charge Receivables and other amounts or obligations among the Series in
such Group (a "Reallocation Group"). Collections of Finance Charge Receivables
allocable to each Series in a Reallocation Group will be aggregated and made
available for certain required payments for all Series in such Group.
Consequently, the issuance of new Series in such Group may have the effect of
reducing or increasing the amount of collections of Finance Charge Receivables
allocable to the Securities of other Series in such Group. See "Risk Factors --
Issuance of New Series."
Paired Series............................ If so provided in the related Prospectus Supplement, a Series of Securities may be
issued (a "Paired Series") that is paired with one or more other Series or a
portion of one or more other Series previously issued by the Trust (a "Prior
Series"). A Paired Series may be issued at or after the commencement of a
Controlled Accumulation Period or Controlled Amortization Period for a Prior
Series. As the Invested Amount of the Prior Series having a Paired Series is
reduced, the Invested Amount of the Paired Series will increase by an equal
amount. Upon payment in full of such Prior Series, the Invested Amount of the
Paired Series will be equal to the amount of the Invested Amount paid to
Securityholders of such Prior Series. If a Pay Out Event or Reinvestment Event
occurs with respect to the Prior Series having a Paired Series or with respect to
the Paired Series when such Prior Series is in a Controlled Amortization Period or
Controlled Accumulation Period, the percentage specified in the applicable
Prospectus Supplement for the allocation of collections of Principal Receivables
to the Securityholders' Interest of such Prior Series (the "Principal Allocation
Percentage") and the Series Allocation Percentage for the Prior Series and the
Principal Allocation Percentage and the Series Allocation Percentage for the
Paired Series will be reset as specified in the related Prospectus Supplement and
the Controlled Amortization Period, Controlled Accumulation Period, Early
Amortization Period or Early Accumulation Period for such Prior Series could be
lengthened.
16
Special Funding Account.................. If, on any date, the Transferor Amount is less than or equal to the Required
Transferor Amount, the Servicer will not distribute to the holders of the
Transferor Securities any collections of Principal Receivables that otherwise
would be distributed to the holders of the Transferor Securities, but shall
deposit such funds in the Special Funding Account.
Funds on deposit in the Special Funding Account will be withdrawn and paid to the
holders of the Transferor Securities on any Distribution Date to the extent that,
after giving effect to such payment, the Transferor Amount exceeds the Required
Transferor Amount on such date; PROVIDED, HOWEVER, that if a Controlled
Accumulation Period, Early Accumulation Period, Controlled Amortization Period or
Early Amortization Period commences with respect to any Series, any funds on
deposit in the Special Funding Account will be released and treated as collections
of Principal Receivables to the extent needed to cover principal payments due to
or for the benefit of such Series. See "Description of the Pooling and Servicing
Agreement -- Special Funding Account."
Funding Period; Pre-Funding Account...... The Prospectus Supplement relating to a Series of Securities may specify that for
a period beginning on the Series Issuance Date and ending on a specified date
before the commencement of a Controlled Amortization Period or Controlled
Accumulation Period with respect to such Series (the "Funding Period"), the
aggregate amount of Principal Receivables in the Trust allocable to such Series
may be less than the aggregate principal amount of the Securities of such Series
and an amount equal to the amount of such deficiency (the "Pre-Funding Amount")
will be held in a trust account established with the Trustee for the benefit of
Securityholders of such Series (the "Pre-Funding Account") pending the transfer of
additional Principal Receivables to the Trust or pending the reduction of the
Invested Amounts of other Series issued by the Trust. The related Prospectus
Supplement will specify the initial Invested Amount on the Series Issuance Date
with respect to such Series, the aggregate principal amount of the Securities of
such Series (the "Full Invested Amount") and the date by which the Invested Amount
is expected to equal the Full Invested Amount. The Invested Amount will increase
as Principal Receivables are delivered to the Trust or as the Invested Amounts of
other Series of the Trust are reduced. The Invested Amount may also decrease due
to the occurrence of a Pay Out Event as specified in the related Prospectus
Supplement. See "Risk Factors -- Pre-Funding Account."
During the Funding Period, funds on deposit in the Pre-Funding Account for a
Series of Securities will be withdrawn and paid to the Transferor to the extent of
any increases in the Invested Amount. In the event that the Invested Amount does
not for any reason equal the Full Invested Amount by the end of the Funding
Period, any amount remaining in the Pre-Funding Account and any additional amounts
specified in the related Prospectus Supplement will be payable to the
Securityholders of such Series in a manner and at such time as set forth in the
related Prospectus Supplement.
If so specified in the related Prospectus Supplement, funds in the Pre-Funding
Account with respect to any Series will be invested by the Trustee in Eligible
Investments or will be subject to a guaranteed rate or investment agreement or
other similar arrangement, and investment earnings and any applicable payment
under any such investment arrangement will be applied to pay interest on the
Securities of such Series.
17
Credit Enhancement....................... The credit enhancement (the "Credit Enhancement") with respect to a Series offered
hereby may include a letter of credit, a cash collateral account or guaranty,
spread account, yield supplement account, a collateral interest, a surety bond, an
insurance policy, guaranteed rate agreement, maturity liquidity facility, tax
protection agreement or any other form of credit enhancement described in the
related Prospectus Supplement. Credit Enhancement may also be provided to a Class
or Classes of a Series or to a Series by subordination provisions which require
that distributions of principal or interest be made with respect to the Securities
of such Class or Classes or such Series before distributions are made to one or
more other Classes of such Series or to another Series (if the Supplement for such
Series so provides).
The type, characteristics and amount of the Credit Enhancement with respect to any
Series will be determined based on several factors, including the characteristics
of the Receivables and Accounts underlying or comprising the Trust Assets as of
the Series Issuance Date with respect thereto, and will be established on the
basis of requirements of each applicable Rating Agency. The terms of the Credit
Enhancement with respect to any Series offered hereby will be described in the
related Prospectus Supplement. If so specified in the Prospectus Supplement for a
Series, the level of Credit Enhancement for such Series may be reduced if such
reduction satisfies the Rating Agency Condition. See "Description of the Pooling
and Servicing Agreement -- Credit Enhancement" and "Risk Factors -- Limited Nature
of Rating."
Servicing................................ Partners First, in its capacity as Servicer under the Pooling and Servicing
Agreement, is the initial Servicer for the Trust. The Servicer is responsible for
servicing, managing and making collections on the Receivables. Partners First has
delegated the majority of the credit card processing and account servicing and a
significant portion of the collection functions to FDR, following the business
model originally established by BankBoston and FAMIS as described in "Credit Card
Activities -- Development of the Business Model of Partners First; The Role of
FAMIS." See "Credit Card Activities -- Processing and Servicing of Credit Card
Accounts." The "Distribution Date" for a Series will be the day occurring in each
month (or, if such day is not a business day, the next business day) or such other
date specified in the Supplement for a Series. The "Transfer Date" for a Series
will be the business day preceding each Distribution Date or such other date
specified in the Supplement for a Series. On the earlier of (a) the second
business day following the Date of Processing (as defined below) and (b) the day
on which the Servicer deposits any collections into the Collection Account,
subject to certain exceptions described herein, the Servicer will pay to the
holders of the Transferor Securities and any Participations their allocable
portion of any collections then held by the Servicer. The "Date of Processing" is
the business day on which a record of any transaction is first recorded pursuant
to the Servicer's data processing procedures. The "Determination Date" for a
Series will be the third business day preceding the Distribution Date in each
Monthly Period, or such other date specified in the Supplement for a Series. On
each Determination Date, the Servicer will calculate the amounts to be allocated
to the Securityholders of each Class or Series, the holders of any Participations
and the holders of the Transferor Securities as described herein in respect of
collections of Receivables received with respect to the preceding Monthly Period.
Income Tax Withholding................... Interest on the Securities will be subject to United States withholding tax and
backup withholding unless the holder complies with applicable IRS identification
requirements.
18
Tax Status............................... Except to the extent otherwise specified in the related Prospectus Supplement, it
is anticipated that special tax counsel will be of the opinion that the Securities
of each Class offered hereby of each Series will be characterized as indebtedness
for Federal income tax purposes. Except to the extent otherwise specified in the
related Prospectus Supplement, the Security Owners will agree to treat the
Securities offered hereby as debt for Federal income tax purposes. See "U.S.
Federal Income Tax Consequences" for additional information concerning the
application of Federal income tax laws.
ERISA Considerations..................... See "ERISA Considerations" herein and "Summary of Series Terms -- ERISA
Considerations" in the applicable Prospectus Supplement.
Security Rating.......................... It will be a condition to the issuance of each Series of Securities or Class
thereof offered pursuant to this Prospectus and the related Prospectus Supplement
that they be rated in one of the four highest applicable rating categories by at
least one nationally recognized statistical rating organization selected by the
Transferor, as specified in the applicable Supplement (each rating agency rating
any Series, a "Rating Agency"). The rating or ratings applicable to the Securities
of each such Series or Class thereof will be set forth in the related Prospectus
Supplement. A security rating should be evaluated independently of similar ratings
of different types of securities. A rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. Each rating should be evaluated independently of any
other rating. See "Risk Factors -- Limited Nature of Rating."
Listing.................................. If so specified in the Prospectus Supplement relating to a Series, application
will be made to list the Securities of such Series, or all or a portion of any
Class thereof, on the Luxembourg Stock Exchange or any other specified exchange.
19
RISK FACTORS
Investors should consider the following risk factors in connection with the
purchase of the Securities.
LIMITED LIQUIDITY. It is anticipated that, to the extent permitted, the
underwriters of any Series of Securities offered hereby will make a market in
such Securities, but in no event will any such underwriters be under an
obligation to do so. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide
Securityholders of any Series offered hereby with liquidity of investment or
that it will continue for the life of such Securities.
LIMITED INFORMATION WITH RESPECT TO CERTAIN RECEIVABLES AND ACCOUNTS. It is
anticipated that the Accounts will include credit card accounts acquired from
credit card issuers other than BKB and Harris. In originating such credit card
accounts, any such other credit card issuers may have applied underwriting
criteria different from the criteria applied with respect to the Initial
Accounts and any such credit card accounts may not have been subject to the same
level of credit review as the Initial Accounts. Upon designation of such credit
card accounts as Accounts, the Receivables arising therein will be included in
the Trust. There can be no assurance that any such credit card accounts will be
of the same credit quality as the Initial Accounts. To the extent that any such
credit card accounts are designated to have their Receivables included in the
Trust following the issuance of a Series of Securities, the related Prospectus
Supplement will not include any information with respect to such Receivables or
the criteria used in originating the related Accounts. Consequently, prospective
purchasers of Securities issued prior to the inclusion of any such Receivables
in the Trust will not have such information available to them when making the
decision to purchase the Securities.
LIMITED OPERATING HISTORY. Partners First commenced operations in January
1998 and has limited operating history, underwriting or servicing experience, or
delinquency, default and loss experience with respect to credit card accounts,
other than through BKB and Harris. Partners First will delegate substantially
all of its servicing functions to FDR, which will service the credit card
accounts in the Partners First Portfolio, including the Accounts, following the
business model originally established by BankBoston and FAMIS. See "Credit Card
Activities -- Development of the Business Model of Partners First; The Role of
FAMIS." BKB began originating and servicing credit card accounts in September
1995 and therefore, has limited underwriting and servicing experience, and
limited delinquency, default and loss experience with respect to the Accounts.
As of January 29, 1998, approximately 63% of the Receivables designated to be
included in the Trust were originated or purchased by BKB. Until March 1998,
each of BKB and Harris remained Account Originators and exercised the Retained
Rights with respect to the Accounts originated by BKB and Harris, as applicable.
In March 1998, Partners First designated BKB as the sole Account Originator with
respect to the existing credit card accounts in the Partners First Portfolio,
including the Accounts. Harris may continue to act as an Account Originator with
respect to new credit card accounts originated by it, including New Accounts. In
addition, it is anticipated that Partners First will establish a federally
insured financial institution as a subsidiary (the "Bank"), which will either be
a newly chartered financial institution formed by Partners First, or an existing
financial institution acquired by Partners First. Partners First will designate
the Bank as the sole Account Originator with respect to the credit card accounts
in the Partners First Portfolio, including the Accounts and any New Accounts.
Effective as of the date of the Bank's appointment as Account Originator, each
of BKB and Harris will cease to be an Account Originator. As an Account
Originator, the Bank will also originate credit card accounts; however, none of
such credit card accounts may be designated as Accounts and none of the related
receivables may be transferred to the Trust unless certain conditions, including
the Rating Agency Condition, are satisfied. The Bank will have little or no
operating history, underwriting or servicing experience, or delinquency, default
or loss experience with respect to credit card accounts, and will rely on the
experience of Partners First to assist the Bank in setting the Credit Card
Guidelines, including assisting the Bank in determining the underwriting and
origination policies with respect to the Accounts and will rely on FDR for the
implementation of such policies.
LIMITED SEASONING OF TRUST PORTFOLIO. The average age of a credit card
issuer's portfolio of accounts is an indicator of the stability of delinquency
and loss levels of that portfolio. A portfolio of older accounts generally
behaves more predictably than a newly originated portfolio. Approximately 95% of
the Receivables transferred to the Trust that were created under Accounts in the
BKB Portfolio were generated under Accounts which BKB originated within the
24-month period preceding January 29, 1998 and over 48% of such Receivables were
generated under Accounts which BKB originated within the 12-month period
preceding January 29, 1998. Approximately 12% of the Receivables transferred to
the Trust that were created under Accounts in the Harris Portfolio were
generated under Accounts which Harris originated within the 24-month period
preceding January 29, 1998. The Accounts originated or purchased by BKB
represent a significant portion of the Trust's initial portfolio. The levels of
such delinquencies and losses may increase as the average age of the Accounts
increases, until the Accounts become more seasoned.
20
LIMITED HISTORY OF TRUST AND TRANSFEROR. The Transferor was formed in
January 1998, and the Trust was formed on January 29, 1998. The Transferor and
the Trust have no substantial assets other than their respective interests in
the Receivables and the proceeds thereof as described herein.
RELIANCE ON FIRST DATA RESOURCES INC. Partners First has delegated the
majority of the credit card processing and account servicing and a significant
portion of the collection functions to FDR, a subsidiary of First Data Corp.
("FDC"), pursuant to a seven-year contract, automatically renewable for an
additional two-year period, entered into on January 29, 1998. Under the terms of
this contract, Partners First will be required to obtain some of these services
from FDR on an exclusive basis. If FDR should fail to perform its functions or
become insolvent or if the agreement is terminated, a Pay Out Event could occur
and delays in payments on the Receivables and possible reductions in the dollar
amounts thereof could also occur. See "Credit Card Activities -- Processing and
Servicing of Credit Card Accounts."
NON-RECOURSE TO THE ACCOUNT ORIGINATORS, PFR, THE TRANSFEROR OR AFFILIATES
THEREOF. No Securityholder will have recourse for payment of its Securities to
any assets of the Account Originators, PFR, the Transferor (other than the
Transferor Security, to the extent described herein), or any affiliate thereof.
Consequently, Securityholders must rely solely upon payments on the Receivables
for the payment of principal of and interest on the Securities. Furthermore,
under the Pooling and Servicing Agreement, the Securityholders have an interest
in the Receivables and collections thereon only to the extent of the
Securityholders' Interest and, to the limited extent described herein, the
Transferor's Interest. Should the Securities not be paid in full on a timely
basis, Securityholders may not look to any assets of any of the Account
Originators, PFR, the Transferor (other than the Transferor Security to the
limited extent described herein) or any affiliate thereof to satisfy their
claims.
CHARACTERISTICS AS A SALE; INSOLVENCY AND RECEIVERSHIP RISKS. Each Account
Originator and PFR represents and warrants in the applicable Purchase Agreement
that the transfer of all Receivables pursuant thereto to the applicable
purchaser is a valid sale and assignment of such Receivables from such party to
such purchaser, or if notwithstanding their intent, the respective transfers of
Receivables are not treated as sales, the respective Purchase Agreements will be
deemed to create a first priority security interest in the Receivables.
With respect to Receivables conveyed by an Account Originator to PFR, in a
receivership or conservatorship of the Account Originator, if the conveyance of
Receivables by such Account Originator is not treated as a sale, but is deemed
to create a security interest in the Receivables conveyed, PFR's interest in
such Receivables may be subject to tax or other governmental liens relating to
the Account Originator arising before the subject Receivables came into
existence and to certain administrative expenses of the receivership,
conservatorship or bankruptcy proceeding. Each of the Account Originators has
taken or will take certain actions required to perfect PFR's interest in the
Receivables conveyed by such Account Originator.
A conservator or receiver would have the power under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") to
repudiate contracts of, and to request a stay of up to 90 days of any judicial
action or proceeding involving, an Account Originator. However, notwithstanding
the insolvency of, or the appointment of a receiver or conservator for, an
Account Originator, subject to certain qualifications, a valid perfected
security interest of PFR in the Receivables conveyed to it by the Account
Originator should be enforceable (to the extent of PFR's "actual direct
compensatory damages" (as described below)) and payments to PFR with respect to
the subject Receivables (up to the amount of such damages) should not be subject
to an automatic stay of payment or to recovery by such a conservator or
receiver. If, however, the conservator or receiver were to assert that the
security interest was unperfected or unenforceable, or were to require PFR to
establish its right to those payments by submitting to and completing the
administrative claims procedure established under FIRREA, or the conservator or
receiver were to request a stay of proceedings with respect to the Account
Originator, as provided under FIRREA, delays in payments to the Trust and on the
Securities and possible reductions in the amount of those payments could occur.
In the event of a repudiation of obligations by a conservator or receiver,
FIRREA provides that a claim for the repudiated obligation is limited to "actual
direct compensatory damages" determined as of the date of the appointment of the
conservator or receiver (which in most cases are expected to include the
outstanding principal on the Securities plus interest accrued thereon to the
date of payment). The Federal Deposit Insurance Corporation ("FDIC") has not
adopted a formal policy statement on payment of principal and interest on
collateralized borrowings of banks that are repudiated. On April 10, 1990, the
Resolution Trust Corporation (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 collateralized borrowings. 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 or receiver 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
21
extent secured by the collateral. In one case involving the repudiation by the
RTC of certain secured zero-coupon bonds issued by a savings association, a
United States federal district court held that "actual direct compensatory
damage" in the case of a marketable security meant the value of the repudiated
bonds as of the date of repudiation. If that court's view were applied to
determine PFR's "actual direct compensatory damages" in the event a conservator
or receiver of an Account Originator repudiated the Purchase Agreement pursuant
to which the subject Receivables were conveyed, the amount paid to
Securityholders could, depending upon circumstances existing on the date of the
repudiation, be less than the principal of the Securities and the interest
accrued thereon to the date of payment. See "Certain Legal Aspects of the
Receivables -- Certain Matters Relating to Insolvency."
With respect to Receivables conveyed by PFR to the Transferor, if PFR were
to become subject to a bankruptcy proceeding and the conveyance of Receivables
by PFR to the Transferor is not treated as a sale, but is deemed to create a
security interest in the Receivables conveyed, the Transferor's interest in such
Receivables may be subject to tax or other governmental liens relating to PFR
arising before the Receivables came into existence and to certain administrative
expenses of the bankruptcy proceeding. PFR has taken or will take certain
actions required to perfect the Transferor's interest in the Receivables
conveyed to it by the Account Originators.
In a receivership or conservatorship of an Account Originator, or in a
bankruptcy proceeding involving PFR, if a receiver or conservator for the
Account Originator, or if a bankruptcy trustee for PFR, PFR as debtor in
possession, or a creditor of PFR were to take the view that the transfer of the
Receivables from PFR to the Transferor should be recharacterized as a pledge of
such Receivables, then delays in payments on the Securities or (should the
bankruptcy court rule in favor of any such trustee, debtor in possession or
creditor) reductions in such payments on such Securities could result. In
addition, in a bankruptcy proceeding involving Partners First or PFR, if a
bankruptcy trustee for Partners First, Partners First as debtor in possession,
or a creditor of Partners First, or if a bankruptcy trustee for PFR, PFR as
debtor in possession, or a creditor of PFR were to take the view that any of
Partners First, PFR or the Transferor should be substantively consolidated, then
delays in payments on the Securities or (should the bankruptcy court rule in
favor of any such trustee, debtor in possession or creditor) reductions in such
payments on such Securities could result.
Although the Pooling and Servicing Agreement provides that the Transferor
will transfer all of its right, title, and interest in and to the Receivables to
the Trust, a court could treat such transactions as an assignment of collateral
as security for the benefit of holders of Securities issued by the Trust. It is
possible that the risk of such treatment may be increased by the retention by
the Transferor of the Transferor Security and any other Class of Securities that
may be issued and retained by the Transferor or by the issuance of a
Supplemental Security to an affiliate of the Transferor. The Transferor
represents and warrants in the Pooling and Servicing 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 and will take certain actions required to
perfect the Trust's 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, subject only to tax or government lien or other
nonconsensual liens. If the transfer of the Receivables to the Trust is deemed
to create a security interest therein under the Uniform Commercial Code ("UCC"),
a tax or government lien or other nonconsensual lien on property of the
Transferor arising before Receivables come into existence may have priority over
the Trust's interest in such Receivables. In the event of the insolvency of the
Transferor, certain administrative expenses may also 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 is deemed to have granted a security
interest in the Receivables to the Trust and such security interest was validly
perfected before any insolvency of the Transferor and was not granted or taken
in contemplation of insolvency or with the intent to hinder, delay or defraud
the Transferor or its creditors, such security interest should not be subject to
avoidance in the event of insolvency or receivership of the Transferor, and
payments to the Trust with respect to the Receivables should not be subject to
recovery by a bankruptcy trustee or receiver of the Transferor. If, however,
such a bankruptcy trustee or receiver were to assert a contrary position, delays
in payments on the Securities and possible reductions in the amount of those
payments could occur.
In the event of a Servicer Default relating to the bankruptcy or insolvency
of the Servicer, and no Servicer Default other than such bankruptcy or
insolvency-related Servicer Default exists, the bankruptcy trustee, conservator
or receiver may have the power to prevent either the Trustee or the
Securityholders from appointing a successor Servicer. If the Transferor consents
or fails to object to the appointment of a bankruptcy trustee or conservator,
receiver or liquidator in any bankruptcy, insolvency or similar proceedings of
or relating to the Transferor, or the commencement of an action for the
appointment of a bankruptcy trustee or conservator, receiver or liquidator in
any insolvency or similar proceedings, or for the winding-up,
22
insolvency, bankruptcy, reorganization, conservatorship, receivership or
liquidation of the Transferor's affairs, or notwithstanding an objection by the
Transferor any such action remains undischarged or unstayed for a period of 60
days, or the Transferor admits in writing its inability to pay its debts
generally as they become due, files, or consents or fails to object (or objects
without dismissal of any such filing within 60 days of such filing) to the
filing of, a petition to take advantage of any applicable bankruptcy, insolvency
or reorganization, receivership or conservatorship statute, makes an assignment
for the benefit of its creditors or voluntarily suspends payment of its
obligations (any such event being an "Insolvency Event"), new Principal
Receivables would not be transferred by the Transferor to the Trust. In the
event of an Insolvency Event, the Trustee would sell the Receivables (unless
Holders (as defined herein) of Securities evidencing undivided interests
aggregating more than 50% of the aggregate unpaid principal amount of each
Series (or with respect to any Series with two or more Classes, 50% of the
unpaid principal amount of each Class) and certain other persons specified in
the Supplement for a Series instruct otherwise and provided that a trustee for
the Transferor does not order a sale despite such instructions not to sell),
thereby causing early termination of the Trust. The entire proceeds of such sale
or liquidation will be treated as collections of Receivables and allocated
accordingly among the Securityholders of each Series, the holders of any
Participations and the Transferor. Upon the occurrence of a Pay Out Event, if a
trustee, receiver or conservator is appointed for the Transferor and no Pay Out
Event other than such insolvency of the Transferor exists, the trustee may have
the power to prevent the early sale, liquidation or disposition of the
Receivables and the commencement of the Early Amortization Period or Early
Accumulation Period and may be able to require that new Principal Receivables be
transferred to the Trust. In addition, the trustee, receiver or conservator for
the Transferor may have the power to cause early sale of the Receivables and the
early payment of the Securities or to prohibit the continued transfer of
Receivables to the Trust. See "Certain Legal Aspects of the Receivables --
Certain Matters Relating to Insolvency."
While Partners First is the Servicer, cash collections held by Partners
First may, subject to certain conditions, be commingled and used for the benefit
of Partners First prior to each Transfer Date and, in the event of the
insolvency or bankruptcy of Partners First or, in certain circumstances, the
lapse of certain time periods, the Trust may not have a perfected security
interest in such collections and accordingly, be entitled to such collections.
Partners First will be allowed to make monthly rather than daily deposits of
collections to the Collection Account if either (i) Partners First or an
affiliate of Partners First which has guaranteed the obligations of Partners
First and is otherwise acceptable to the Rating Agencies obtains a short-term
and certificate of deposit rating of at least A-1 and P-1 (or its equivalent) by
the applicable Rating Agency or (ii) Partners First makes other arrangements
that satisfy the Rating Agency Condition. Unless otherwise provided in the
related Prospectus Supplement, if either of the foregoing conditions are not
satisfied, then Partners First will, within five business days, commence the
deposit of collections directly into the Collection Account within two business
days of the Date of Processing.
CONSUMER PROTECTION LAWS. The Accounts and Receivables are subject to
numerous federal and state consumer protection laws which impose requirements on
the solicitation, making, enforcement and collection of consumer loans. Such
laws, as well as any new laws or rulings which may be adopted (including, but
not limited to, federal or state interest rate caps on credit cards), 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 or any subservicer to
comply with such requirements could adversely affect the ability of the
Servicer, as agent for and on behalf of the related Account Originator, to
enforce the Accounts or Receivables.
Pursuant to the Pooling and Servicing Agreement, the Transferor makes
certain representations and warranties relating to the validity and
enforceability of the Accounts and the Receivables and pursuant to the
applicable Purchase Agreement the Account Originators and PFR make similar
representations and warranties with respect to the Receivables conveyed by each
such party. However, it is not anticipated that the Trustee 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 not complied with and such noncompliance
continues beyond the applicable cure period is that the Receivables affected
thereby will be reassigned to the Transferor (for reassignment, in turn, to
PFR). In addition, in the event of the breach of certain representations and
warranties, the Transferor may be obligated to accept the reassignment of the
entire Trust Portfolio. The proceeds of any such reassignment will be deposited
in the Collection Account and treated as collections of Principal Receivables.
If the proceeds from such reassignment and any amounts on deposit in the
Collection Account, the Reserve Account and any amounts available from any
Credit Enhancement are not sufficient to pay any Securities in full, the amount
of principal returned to Securityholders will be reduced and some or all of the
Securityholders will incur a loss. In addition, because the proceeds of any such
reassignment will be distributed to Securityholders as principal prior to the
scheduled date of such repayment, Securityholders would not receive the benefit
of the interest rate on the Securities specified in the applicable Prospectus
23
Supplement for the period of time originally expected on the amount of such
early repayment, and accordingly, Securityholders will bear the reinvestment
risk resulting from faster payment of principal of the Securities. There can be
no assurance that a Securityholder would be able to reinvest such early
repayment amount at a similar rate of return. See "Description of the Pooling
and Servicing Agreement -- Representations and Warranties" and " -- Servicer
Covenants" 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 Securityholders in the Receivables if such laws result
in any Receivables being written off as uncollectible when there are no funds
available pursuant to any applicable Credit Enhancement or other sources. See
"Description of the Pooling and Servicing Agreement -- Defaulted Receivables;
Rebates and Fraudulent Charges."
PROPOSED LEGISLATION -- LIMITATION ON FINANCE CHARGES. Congress and the
states may enact new 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. The potential effect of any such legislation
could be to reduce the yield on the Accounts. If such yield is reduced, a Pay
Out Event or Reinvestment Event could occur, and the Early Amortization Period
or Early Accumulation Period would commence. See "Description of the
Securities -- Pay Out Events and Reinvestment Events."
GENERATION OF ADDITIONAL RECEIVABLES; DEPENDENCY ON CARDHOLDER REPAYMENTS.
On January 29, 1998, each of BKB and Harris contributed to Partners First all of
their respective rights under the credit card accounts in the Partners First
Portfolio, including the Accounts, except (i) the related cardholder agreements,
(ii) all rights to create, enforce and collect receivables and any other amounts
arising under the credit card accounts in the Partners First Portfolio and (iii)
all rights to amend and modify the related cardholder agreements. Under the
Contribution Agreements and the Assistance Agreements, Partners First designated
each of BKB and Harris as the Account Originators with respect to the credit
card accounts in the Partners First Portfolio originated by BKB and Harris,
respectively. Since the March 1998 designation of BKB as the Account Originator
with respect to the credit card accounts in the Partners First Portfolio,
including the Accounts, BKB maintains the cardholder relationships under such
credit card accounts, including the Accounts and any New Accounts originated by
BKB. Upon the anticipated establishment of the Bank, the Bank will maintain the
cardholder relationships under all of the Accounts originated by each of BKB and
Harris. There can be no assurance that holders of Harris credit cards whose
account relationships will be maintained by BKB, or that the holders of BKB and
Harris credit cards, whose account relationships will be maintained by the Bank,
will be willing to continue their credit card relationship with BKB or the Bank,
as applicable. The failure of BKB or the Bank to retain sufficient numbers of
these account relationships could have a material adverse effect on the Trust.
The Receivables may be paid at any time and there is no assurance that there
will be additional Receivables created in the Accounts, that Receivables will be
added to the Trust from Additional Accounts designated to the Trust, or that any
particular pattern of cardholder repayments will occur. The commencement and
continuation of a Controlled Amortization Period or a 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 or Reinvestment
Event and the commencement of the Early Amortization Period or the Early
Accumulation Period. The full payment of the Invested Amount of a Series or
Class is dependent on cardholder repayments and will not be made if such
repayment amounts are insufficient to pay such Series or Class its Invested
Amount in full by the Series Termination Date. The Pooling and Servicing
Agreement provides that the Transferor will be required, and the Transferor
Purchase Agreement provides that PFR and the Transferor will be required
(subject to certain conditions), to designate Additional Accounts, the
Receivables of which will be added to the Trust in the event that the amount of
the Principal Receivables is not maintained at the Required Minimum Principal
Balance (as defined herein) or if the Transferor Amount is less than the
Required Transferor Amount. Under the PFR Purchase Agreement, the receivables in
each newly originated credit card account are sold to PFR. However, if the
Account Originators fail to originate enough new credit card accounts and as a
result Additional Accounts are not designated by the Transferor and PFR when
required, a Pay Out Event or Reinvestment Event may occur and result in the
commencement of an Early Amortization Period or Early Accumulation Period. In
addition, a decrease in the effective yield on the Receivables due to, among
other things, a change in the annual percentage rates applicable to the
Accounts, an increase in the level of delinquencies or an increase in
convenience use (I.E., where cardholders pay their Receivables early and thus
avoid all finance charges on purchases) could cause the commencement of an Early
Amortization Period or Early Accumulation Period as well as result in decreased
protection to Securityholders against defaults under the Accounts.
NON-RELATIONSHIP ACCOUNTS. For business reasons, BKB has excluded from the
BKB Portfolio accounts of cardholders with whom BKB had banking relationships or
potential banking relationships in addition to the credit card relationship.
Accordingly, the Receivables in the Trust which arise under the Accounts
included in the BKB Portfolio include only credit
24
card accounts with cardholders that do not have and are not expected to have any
other significant banking relationship with BKB. Additionally, the Harris
Portfolio includes all of its credit card accounts except corporate accounts.
LIMITATIONS ON LIABILITY. In the event of a breach of a representation or
warranty by BKB or Harris under their respective Purchase Agreements or
Assignment and Assumption Agreements, BKB or Harris, as applicable, will be
liable to PFR for damages. Partners First has agreed to indemnify BKB and Harris
for any losses suffered by BKB or Harris, as applicable, resulting from, among
other things, damages payable to PFR in respect of a breach by BKB or Harris of
any of their respective representations or warranties under the applicable
Assignment and Assumption Agreement, to the extent that BKB or Harris, as
applicable, would not have suffered such losses under the Initial Receivables
Purchase Agreements, and except for any such losses caused by the gross
negligence or willful misconduct of BKB or Harris, as applicable. In each of the
Assistance Agreements, Partners First agrees to indemnify BKB and Harris for any
losses suffered by BKB or Harris, as applicable, resulting from, among other
things, damages payable to PFR in respect of a breach by BKB or Harris of any of
their respective representations or warranties under the Additional Receivables
Purchase Agreements, except to the extent caused by the gross negligence or
willful misconduct of BKB or Harris, as applicable. Under the Additional
Receivables Purchase Agreements, the liability of BKB and Harris for any breach
of any representation or warranty is limited to the amount of any recovery by
BKB or Harris, as applicable, from Partners First pursuant to Partners First's
obligation to indemnify BKB and Harris.
SOCIAL, LEGAL, TECHNOLOGICAL, ECONOMIC AND OTHER FACTORS. Changes in card
use and payment patterns by cardholders result from a variety of social, legal,
technological and economic factors. Social factors include potential changes in
consumers' attitudes towards financing purchases with debt. Legal factors
include changes in the laws affecting creditor's rights. Technological factors
include new methods of payment, such as debit cards, electronic billing and
payment services and personal computer banking services. Economic factors
include the rate of inflation, unemployment levels, tax law changes, bankruptcy
levels and relative interest rates. The use of incentive programs (E.G., gift
awards for card usage) may also affect card use. The Transferor and Partners
First are unable to determine and have no basis to predict whether or to what
extent social, legal, technological or economic factors will affect card use or
repayment patterns. See "The Accounts."
COMPETITION IN THE CREDIT CARD INDUSTRY. The credit card industry is highly
competitive and operates in a legal and regulatory environment increasingly
focused on the cost of services charged for credit cards. As new credit card
issuers seek to enter the market and issuers seek to expand their market share,
there is increased use of advertising, target marketing and pricing competition.
Congress and the states may enact new 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. In addition, certain credit
card issuers assess annual percentage rates or other fees or charges at rates
lower than the rate currently being assessed on most of the Accounts. If
cardholders choose to utilize competing sources of credit, the rate at which new
Receivables are generated in the Accounts may be reduced and certain purchase
and payment patterns with respect to Receivables may be affected. The Trust will
be dependent upon the continued ability of the Account Originators to generate
new Receivables. If the rate at which new Receivables are generated declines
significantly and the Transferor and PFR do not designate Additional Accounts, a
Pay Out Event or Reinvestment Event could occur, in which event an Early
Amortization Period or Early Accumulation Period would commence.
In September 1994, the United States Court of Appeals for the Tenth Circuit
reversed a 1992 Utah federal court decision that the VISA association violated
antitrust laws when it denied membership in VISA to a subsidiary of Sears,
Roebuck & Co., on the basis that another former Sears subsidiary at the time was
the issuer of the Discover credit card, a competitor of the VISA credit card. In
June 1995, the United States Supreme Court declined to review the decision of
the court of appeals. MasterCard has settled a similar lawsuit. This settlement
by MasterCard or a similar lawsuit against VISA could result in increased
competition among issuers of VISA and MasterCard credit cards and thereby have
adverse consequences for members of the MasterCard and VISA associations, such
as the Account Originators.
ABILITY OF THE ACCOUNT ORIGINATORS TO CHANGE TERMS OF THE ACCOUNTS;
DECREASE IN FINANCE CHARGES. Pursuant to the Pooling and Servicing Agreement,
the Transferor is not transferring to the Trust the Accounts but only the
Receivables arising in the Accounts. The Account Originators and, upon the
anticipated establishment of the Bank, the Bank will have the right to determine
the annual percentage rates and the fees which are applicable from time to time
to the Accounts, to alter the Minimum Monthly Payment required under the
Accounts and to change various other terms with respect to the Accounts. A
decrease in the annual percentage rates or a reduction in fees would decrease
the effective yield on the Accounts and could result in the occurrence of a Pay
Out Event or Reinvestment Event and the commencement of an Early Amortization
Period or Early Accumulation Period. An alteration of payment terms may result
in fewer payments on Receivables being made in any month. Under the applicable
Purchase Agreement, each Account Originator agrees that, unless required by law
or unless
25
it deems it necessary to maintain on a competitive basis its credit card
business or a program operated by such credit card business based on a good
faith assessment by it of the nature of the competition with respect to the
credit card business or such program, it will not take any action which would
have the effect of reducing the Portfolio Yield (as defined below) to a level
that could reasonably be expected to cause any Series to experience a Pay Out
Event or Reinvestment Event based on the insufficiency of the Series Adjusted
Portfolio Yield (as defined in the applicable Prospectus Supplement) or any
similar test or take any action that would have the effect of reducing the
Portfolio Yield to less than the highest Average Rate (as defined below) for any
Group. "Portfolio Yield" means, with respect to the Trust as a whole and, with
respect to any Monthly Period, the annualized percentage equivalent of a
fraction (a) the numerator of which is the aggregate of the sum of the Series
Allocable Finance Charge Collections (as defined herein) for all Series during
the immediately preceding Monthly Period calculated on a cash basis after
subtracting therefrom the Series Allocable Defaulted Amount (as defined herein)
for all Series for such Monthly Period and (b) the denominator of which is the
total amount of Principal Receivables as of the last day of such immediately
preceding Monthly Period. Unless otherwise provided in the Prospectus Supplement
with respect to any Series, "Average Rate" means, with respect to any Group, the
percentage equivalent of a decimal equal to the sum of the amounts for each
outstanding Series (or each Class within a Series consisting of more than one
Class) within such Group obtained by multiplying (a) the interest rate for such
Series or Class (adjusted to take into account any payments made pursuant to any
interest rate agreements) and (b) a fraction, the numerator of which is the
aggregate unpaid principal amount of the Securities of such Series or Class and
the denominator of which is the aggregate unpaid principal amount of all
Securities within such Group. In addition, each Account Originator also agrees
that, unless required by law and except as provided above, such Account
Originator will take no action with respect to the applicable credit card
agreements or the applicable credit card guidelines that, at the time of such
action, such Account Originator reasonably believes will have a material adverse
effect on PFR and the Transferor and the Securityholders, as assignees. In
servicing the Accounts, each of the Servicer and any successor Servicer will be
required to exercise the same care and apply the same policies that it exercises
in handling similar matters for its own or other comparable accounts. Except as
specified above, there are no restrictions specified in the Purchase Agreements
on the ability of an Account Originator to change the terms of its Accounts.
There can be no assurances that changes in applicable law, changes in the
marketplace or prudent business practice might not result in a determination by
an Account Originator to decrease customer finance charges, fees or otherwise
take actions which would change other Account terms. Under certain
circumstances, the Transferor will have the right and the Transferor and PFR may
be required from time to time to designate Receivables existing in Additional
Accounts or Participation Interests for inclusion in the Trust. However, such
Additional Accounts or Participation Interests may not be of the same credit
quality or have the same characteristics as the Accounts, the Receivables of
which have been conveyed to the Trust. See "Description of the Pooling and
Servicing Agreement -- Additions of Accounts or Participation Interests."
PRE-FUNDING ACCOUNT. With respect to any Series having a Pre-Funding
Account, in the event there is an insufficient amount of Principal Receivables
in the Trust at the end of the applicable Funding Period, the Securityholders of
such Series will be repaid principal from amounts on deposit in the Pre-Funding
Account (to the extent of such insufficiency) following the end of such Funding
Period, as described more fully in the Prospectus Supplement. As a result of
such repayment, Securityholders would receive a principal payment earlier than
they expected. In addition, Securityholders would not receive the benefit of the
interest rate on the Securities specified in the applicable Prospectus
Supplement for the period of time originally expected on the amount of such
early repayment and, accordingly, Securityholders will bear the reinvestment
risk resulting from faster payment of principal of the Securities. There can be
no assurance that a Securityholder would be able to reinvest such early
repayment amount at a similar return.
PREMIUM OPTION. Under the Pooling and Servicing Agreement the Transferor
may, by exercising the Premium Option, at any time or from time to time
designate a specified percentage of the amount of Receivables arising in all or
a specified portion of the Accounts that otherwise would be treated as Finance
Charge Receivables to be treated as Principal Receivables. The Transferor might
exercise the Premium Option because an increase in the amount of collections of
Principal Receivables could result in a faster repayment of principal to
Securityholders during an Amortization Period or accumulation of principal
during an Accumulation Period. Exercise of the Premium Option by the Transferor
could result in a reduction of the portfolio yield with respect to collections
of Finance Charge Receivables thereby reducing amounts initially allocated to
make interest payments with respect to the Securities and cover losses allocated
to the Securities. See "Description of the Pooling and Servicing
Agreement -- Premium Option."
BASIS RISK. The Accounts generally have finance charges set at a variable
rate above the prime rate or another specified index. Any Class of Securities
offered hereby may bear interest at a floating rate based on a different
floating rate index. If there is a decline in the prime rate or such other
specified index, the amount of collections of Finance Charge Receivables on
26
the Accounts may be reduced, whereas the amounts payable as interest with
respect to the Securities and other amounts required to be funded out of
collections of Finance Charge Receivables may not be similarly reduced.
RISKS OF SWAPS. The Trustee on behalf of the Trust may enter into interest
rate swaps and related caps, floors and collars to minimize the risk to
Securityholders from adverse changes in interest rates. However, such
transactions will not eliminate fluctuations in the value of the Receivables or
prevent such losses if the value of the Receivables decline.
The Trust's ability to hedge all or a portion of its portfolio of
Receivables through transactions in Swaps (as defined herein) depends on the
degree to which interest rate movements in the market generally correlate with
interest rate movements in the Receivables.
The Trust's ability to engage in transactions involving Swaps will depend
on the degree to which the Trust can identify acceptable counterparties (as
defined herein). There can be no assurance that acceptable counterparties will
be available for a specific Swap at any specific time.
The costs to the Trust of hedging transactions vary among the various
hedging techniques and also depend on such factors as market conditions and the
length of the contract. Furthermore, the Trust's ability to engage in hedging
transactions may be limited by tax considerations.
Swaps are not traded on markets regulated by the Commission or the
Commodity Futures Trading Commission, but are arranged through financial
institutions acting as principals or agents. In an over-the-counter environment,
many of the protections afforded to exchange participants are not available. For
example, there are no daily fluctuation limits, and adverse market movements
could therefore continue to an unlimited extent over a period of time. Because
the performance of over-the-counter Swaps is not guaranteed by any settlement
agency, there is a risk of counterparty default.
The Trust may consider taking advantage of investment opportunities in
Swaps that are not presently contemplated for use by the Trust or that are not
currently available but that may be developed, to the extent such opportunities
are both consistent with the Trust's objectives and legally permissible
investments for the Trust. Such opportunities, if they arise, may involve risks
that differ from or exceed those involved in the activities described above and
will be more fully described in the applicable Prospectus Supplement. See
"Description of the Pooling and Servicing Agreement -- Interest Rate Swaps and
Related Caps, Floors and Collars."
LIMITED NATURE OF RATING. Any rating assigned to the Securities of a Series
or a Class by a Rating Agency will reflect such Rating Agency's assessment of
the likelihood that Securityholders of such Series or Class will receive the
payments of interest and principal required to be made under the Pooling and
Servicing Agreement and the related Supplement and will be based primarily on
the value of the Receivables in the Trust and the availability of any Credit
Enhancement with respect to such Series or Class. Any such rating will therefore
generally address credit risk and will not, unless otherwise specified in the
related Prospectus Supplement with respect to any Class or Series offered
hereby, address the likelihood that the principal of, or interest on, any
Securities of such Class or Series will be prepaid, paid on a scheduled date or
paid on any particular date before the applicable Series Termination Date. In
addition, any such rating will not address the possibility of the occurrence of
a Pay Out Event or Reinvestment Event with respect to such Class or Series or
the possibility of the imposition of United States withholding tax with respect
to non-U.S. Securityholders. Further, the available amount of any Credit
Enhancement with respect to any such Series or Class will be limited and will be
subject to reduction from time to time as described in the related Prospectus
Supplement. In addition, the rating of any Series or Class may be dependent upon
the rating of any provider of Series Enhancement for such Series or Class. The
rating of the Securities of a Class or Series will not be a recommendation to
purchase, hold or sell such Securities, and such rating will not comment as to
the marketability of such Securities, any market price or suitability for a
particular investor. There is no assurance that any rating will remain for any
given period of time or that any rating will not be lowered or withdrawn
entirely by a Rating Agency if in such Rating Agency's judgment circumstances so
warrant.
ISSUANCE OF NEW SERIES. The Trust, as a master trust, is expected to issue
new Series from time to time. While the terms of any Series will be specified in
a Supplement, the provisions of a Supplement and, therefore, the terms of any
new Series, will not be subject to the prior review by, or consent of, holders
of the Securities of any previously issued Series. Such terms may include
methods for determining applicable investor percentages and allocating
collections, provisions creating different or additional security or other
Series Enhancements, provisions subordinating such Series to other Series or
subordinating other Series (if the Supplement relating to such other Series so
permits) to such Series, and any other amendment or supplement to the Pooling
and Servicing Agreement which is made applicable only to such Series. The
obligation of the Trustee to issue any new Series is subject to the following
conditions, among others: (a) such issuance will not result in any Rating Agency
reducing or withdrawing its then existing rating of the Securities of any
outstanding Series or Class with respect to
27
which it is a Rating Agency (the notification in writing by each Rating Agency
to the Transferor, the Servicer and the Trustee that any action will not result
in such a reduction or withdrawal is referred to herein as the "Rating Agency
Condition") and (b) the Transferor shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, in the reasonable
belief of the Transferor, such issuance will not (i) result in the occurrence of
a Pay Out Event or Reinvestment Event or (ii) materially adversely affect the
timing or amount of payments to the Securityholders of any Series or Class (any
of the conditions referred to in the preceding clauses (i) and (ii) are referred
to herein as an "Adverse Effect"). There can be no assurance, however, that the
issuance of any other Series, including any Series issued from time to time
hereafter, might not have an impact on the timing or amount of payments received
by a Securityholder. In addition, the Supplements relating to Series which are
part of a Group as described herein may provide that collections of Receivables
allocable to such Series will be reallocated among all Series in the Group.
Consequently, the issuance of new Series in a Group may have the effect of
reducing the amount of collections of Receivables which are reallocated to the
Securities of existing Series in such Group. For example, in a Reallocation
Group, which will provide for the reallocation of collections of Finance Charge
Receivables allocable to a Series among all Series in such Group, an additional
Series which is issued with a larger claim with respect to monthly interest than
that of previously issued Series in such Group (due to a higher interest rate)
will receive a proportionately larger reallocation of collections of Finance
Charge Receivables. Such issuance will reduce the amount of collections of
Finance Charge Receivables which are reallocated to the existing Series in such
Group. Furthermore, there can be no assurance that, for any Series in a Group,
the Trust will issue any other Series in such Group. Accordingly, the
anticipated benefits of sharing or reallocation of collections of Receivables
may not be realized. See "Description of the Pooling and Servicing
Agreement -- New Issuances" and " -- Groups of Series."
ADDITION OF TRUST ASSETS. The Transferor may from time to time designate
Participation Interests to be conveyed to the Trust or may designate Additional
Accounts, the Receivables in which will be conveyed to the Trust. In addition,
under certain circumstances, the Transferor will be obligated to designate
Aggregate Addition Accounts or, at the Transferor's option, Participation
Interests for inclusion in the Trust. "Aggregate Addition Accounts" means
revolving credit card accounts established pursuant to a credit card agreement
between the Account Originators and the person or persons obligated to make
payments thereunder, excluding any merchant, which is designated by the
Transferor to be included as an Account. Aggregate Addition Accounts may be
subject to different eligibility criteria than the Initial Accounts and may
include accounts originated using criteria different from those which were
applied to the Initial Accounts, because such accounts were originated at a
later date or were part of a portfolio of credit card accounts which were not
part of the Initial Accounts or which were acquired from another credit card
issuer. Moreover, Aggregate Addition Accounts may not be accounts of the same
credit quality as those previously included in the Trust. Consequently, there
can be no assurance that such Aggregate Addition Accounts will be of the same
credit quality as the Accounts, the Receivables of which were initially included
in the Trust. In addition, such Aggregate Addition Accounts may consist of
credit card accounts which have different terms than the Accounts, the
Receivables of which are now included in the Trust, including lower periodic
finance charges, which may have the effect of reducing the average yield on the
portfolio of Accounts. The designation of Aggregate Addition Accounts will be
subject to the satisfaction of certain conditions, including that (a) such
addition will satisfy the Rating Agency Condition and (b) the Transferor shall
have delivered to the Trustee a certificate of an authorized officer to the
effect that, in the reasonable belief of the Transferor, such addition will not
have an Adverse Effect. The Transferor expects to convey from time to time to
the Trust the Receivables arising in certain Aggregate Addition Accounts in
accordance with the provisions of the Pooling and Servicing Agreement.
After obtaining the consent of each Rating Agency, the Transferor may also,
from time to time, at its sole discretion, designate newly originated Eligible
Accounts to be included as Accounts ("New Accounts") subject to the limitations
and conditions specified in this paragraph. For purposes of the definition of
New Accounts, Eligible Accounts will be deemed to include only types of
revolving credit card accounts which are included as Initial Accounts or which
have previously been included in any Aggregate Addition if the assignment
related to such Aggregate Addition provides that such type of revolving credit
card account is permitted to be designated as a New Account. Until such time as
each applicable Rating Agency otherwise consents, the number of New Accounts may
be subject to certain restrictions. To the extent New Accounts are designated
for inclusion in the Trust, the Transferor will deliver to the Trustee, at least
semi-annually, an opinion of counsel with respect to the New Accounts included
as Accounts confirming the validity and perfection of each transfer of such New
Accounts. If such opinion of counsel with respect to any New Accounts is not so
received, all Receivables arising in the New Accounts to which such failure
relates will be removed from the Trust. The Transferor will designate New
Accounts subject to the following conditions, among others: (a) the New Accounts
will all be Eligible Accounts; (b) such conveyance will not result in the
occurrence of a Pay Out Event or Reinvestment Event; and (c) such conveyance
will not have been made in contemplation of an Insolvency Event with respect to
the Transferor, PFR, Partners First or any Account Originator. New Accounts and
Aggregate Addition Accounts are collectively referred to herein as "Additional
Accounts."
28
Any Participation Interests to be included as Trust Assets or any Eligible
Accounts, other than New Accounts, to be included as Accounts after January 29,
1998, are collectively referred to herein as an "Aggregate Addition." See
"Description of the Pooling and Servicing Agreement -- Addition of Accounts or
Participation Interests."
ALLOCATIONS. To the extent provided in any Supplement, or any amendment to
the Pooling and Servicing Agreement, all or a portion of the Receivables or
Participation Interests conveyed to the Trust and all collections received with
respect thereto may be allocated to one or more Series or Groups as long as the
Rating Agency Condition shall have been satisfied with respect to such
allocation, and the Servicer shall have delivered an officer's certificate to
the Trustee to the effect that the Servicer reasonably believes such allocation
will not have an Adverse Effect.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds from the sale of the Securities of any Series offered hereby, before
the deduction of expenses, will be paid to the Transferor. Unless otherwise
specified in the related Prospectus Supplement, the Transferor will use such
proceeds to pay PFR the purchase price of the Receivables, which in turn will
apply such amounts to pay the Account Originators the purchase price of the
Receivables acquired from such parties.
THE TRUST
The Trust has been formed pursuant to the Pooling and Servicing Agreement.
The Trust does not and will not engage in any business activity other than
acquiring and holding the Receivables and the other assets of the Trust and
proceeds therefrom, issuing Securities, the Transferor Security, Participations
and any Supplemental Security and making payments thereon and on any Series
Enhancements and related activities. As a consequence, the Trust does not and is
not expected to have any source of capital other than the Trust Assets. The
Trust is administered in accordance with the laws of the State of Delaware.
The Transferor conveyed to the Trust, without recourse, its interests in
all Eligible Receivables existing in the Initial Accounts at the close of
business on January 29, 1998, and will convey to the Trust, without recourse,
its interest in all Eligible Receivables arising under such Accounts thereafter,
in exchange for the net cash proceeds from the sale of one or more Series of
Securities plus the Transferor Security representing the Transferor's Interest.
In addition, the Transferor may convey from time to time to the Trust, without
recourse, except as provided in the Pooling and Servicing Agreement, its
interests in all Eligible Receivables existing in certain Additional Accounts
and Participation Interests, if any, at the close of business on each applicable
date of designation thereof. The Trust Assets consist of the Eligible
Receivables arising under certain VISA and MasterCard revolving credit card
accounts (the "Accounts"), and the proceeds thereof, including recoveries on
charged-off Receivables, any other fees, proceeds of credit insurance policies
relating to the Receivables and may include the right to receive Interchange, if
any, allocable to the Securities, funds on deposit in certain accounts of the
Trust for the benefit of Securityholders, Participation Interests, if any, and
any Credit Enhancement issued with respect to a particular Series (the drawing
on or payment of any Series Enhancement for the benefit of a Series or Class of
Securityholders will not be available to the Securityholders of any other Series
or Class). Pursuant to the Transferor Purchase Agreement, the Transferor has the
right (subject to certain limitations and conditions, including satisfaction of
the Rating Agency Condition) and in some circumstances under the Pooling and
Servicing Agreement is obligated, to require PFR to designate from time to time
Additional Accounts to be included as Accounts and the Transferor will convey to
the Trust, pursuant to the Pooling and Servicing Agreement, its interests in all
Eligible Receivables of such Additional Accounts or Participation Interests.
Under the Pooling and Servicing Agreement, the Transferor may convey
Participation Interests to the Trust. See "Description of the Pooling and
Servicing Agreement -- Additions of Accounts or Participation Interests." In
addition, the Transferor may, but is not obligated to, designate from time to
time Participation Interests or Receivables from Accounts to be removed from the
Trust. See "Description of the Pooling and Servicing Agreement -- Removal of
Accounts."
29
CREDIT CARD ACTIVITIES
GENERAL
The Receivables conveyed and to be conveyed to the Trust pursuant to the
Pooling and Servicing Agreement have been or will be generated from transactions
made by holders of certain credit card accounts (the "Trust Portfolio") that
have been selected from the Partners First Portfolio including the total
portfolio of VISA and MasterCard accounts originated or acquired by BKB (the
"BKB Portfolio") and Harris (the "Harris Portfolio"). The BKB Portfolio includes
all credit card accounts originated or acquired by it with the exception of (i)
those accounts of cardholders who reside in the primary geographic market of BKB
and its affiliates (I.E., Massachusetts, Rhode Island, Connecticut and New
Hampshire), (ii) those accounts of other cardholders having other banking
relationships with BKB or its affiliates and (iii) student, VIP, foreign
accounts and accounts with employees of BKB and its affiliates. The Harris
Portfolio includes all of its credit card accounts except corporate accounts.
Going forward, it is anticipated that BKB and Harris (and, following its
establishment, the Bank) will originate new Accounts to be included in the
Partners First Portfolio. See " -- Account Origination." Such new Accounts will
be originated and serviced following the business model currently used in
originating and servicing the Partners First Portfolio. That business model
evolved from the business model originally developed by BKB and FAMIS. See
" -- Development of the Business Model of Partners First; The Role of FAMIS."
The Partners First Portfolio may in the future also include accounts
originated by financial institutions other than BKB or Harris. Any such other
financial institutions may choose not to include all of their credit card
accounts in the Partners First Portfolio, particularly if, similar to BKB, any
such financial institution chooses to retain its regional or relationship
accounts. See " -- Account Origination." Following the acquisition of any such
new accounts, the receivables arising under such Accounts will be originated and
serviced following the business model currently used in originating and
servicing the Partners First Portfolio. See " -- Development of the Business
Model of Partners First; The Role of FAMIS." Receivables originated by financial
institutions other than BKB and Harris may be included in the Trust Portfolio
upon satisfaction of certain conditions, including the Rating Agency Condition.
It is anticipated that Partners First will continue operating its business as
described herein and that the Account Originators will continue to originate new
Accounts regardless of whether the Bank is established or whether additional
portfolios of accounts are acquired.
The Accounts were generated under the VISA and MasterCard associations of
which BKB and Harris are members. The BKB Portfolio and the Harris Portfolio
include VISA Classic and MasterCard standard accounts, which are standard
accounts, and VISA Gold and Gold MasterCard accounts, which are premium
accounts. Premium accounts are generally subject to stricter underwriting
criteria than standard accounts, including higher income requirements. Premium
accounts generally have higher credit limits and provide cardholders with
services not available to cardholders of standard accounts. For the BKB
originated accounts, the same finance charges are applied to its premium and
standard accounts. In general, for the Harris Portfolio, premium accounts are
priced at a lower annual percentage rate than standard accounts; however, there
are exceptions based on risk profile and cardholder behavior. With regard to
both portfolios, for accounts with an annual membership fee, premium accounts
are assessed a higher fee than standard accounts.
Cardholders may use their VISA and MasterCard credit cards for three types
of transactions: credit card purchases, cash advances and convenience checks
issued by the Account Originator. Cardholders obtain cash advances when they use
their VISA or MasterCard credit card to obtain cash from a financial institution
or via an automated teller machine. Cardholders may also effect balance
consolidations by transferring their balances from credit card accounts at other
financial institutions to their credit card account at the Account Originator.
The balances so transferred are then consolidated with their account at the
Account Originator. Balance consolidations, which have been treated by BKB in
the same manner as purchases and by Harris as cash advances, may be done by
cardholders either at the time an account is originated or anytime thereafter.
The Servicer will treat balance consolidations for the BKB Portfolio in the same
manner as purchases and by the end of 1998, the Servicer will treat balance
consolidations for the Harris Portfolio in the same manner as purchases.
Cardholders also receive and may utilize special convenience checks issued by an
Account Originator. Convenience checks may be used by cardholders to draw
against their VISA and MasterCard credit card accounts at any time. The Servicer
treats such draws in the same manner as cash advances. All amounts due with
respect to purchases, cash advances and convenience checks are included in the
Receivables.
Each cardholder is subject to an agreement with the Account Originator
governing the terms and conditions of the related VISA or MasterCard credit card
account. Pursuant to each such agreement, except as described herein, the
Account Originator reserves the right, subject to advance notice to the
cardholder as may be required by law, to add to, delete or
30
change the terms and conditions of its VISA or MasterCard credit card accounts
at any time, including increasing or decreasing periodic finance charges, fees,
other charges or minimum monthly payment requirements.
DEVELOPMENT OF THE BUSINESS MODEL OF PARTNERS FIRST; THE ROLE OF FAMIS
The Partners First Portfolio will be originated and serviced following a
business model originally established by BankBoston, N.A. ("BankBoston") and
First Annapolis Marketing Information Services, Inc. ("FAMIS"), a wholly owned
subsidiary of First Annapolis Consulting, Inc. ("First Annapolis"). Currently,
under such business model: (i) the functions required to be performed by an
insured financial institution under applicable law and the rules of MasterCard
and VISA are performed by BKB (and, in certain circumstances, may be performed
by Harris) and, as described herein, would be assumed by the Bank following its
establishment; (ii) credit processing, cardholder communication, customer
payment processing, certain collection activities and certain other account
servicing functions are performed by FDR; and (iii) the account marketing and
portfolio management activities, including brand strategy, development of credit
policy and product pricing are performed by Partners First, which also
proactively monitors and supervises FDR's activities to ensure compliance with
performance standards established by Partners First.
In 1995, BankBoston determined to enter the domestic credit card business,
and entered into a contract with FAMIS to facilitate the bank's credit card
activities. BankBoston began soliciting accounts in September 1995. Under its
agreement with BankBoston, FAMIS utilized its database management, data mining,
and predictive modeling techniques to develop credit card performance models.
These models were used by BankBoston, in connection with the origination of new
credit card accounts, to provide a statistical correlation of certain
characteristics of potential cardholders with credit risk and to formulate
target cardholder profiles to be used in monthly direct mailings. Under its
agreement with BankBoston, FAMIS was also responsible for performing most of
BankBoston's account marketing and portfolio management activities, including
functions pertaining to brand strategy and development of credit policy and
product pricing. BankBoston was responsible for the performance of functions
required to be performed by an insured financial institution under applicable
law and the rules of MasterCard and VISA, including entering into credit card
agreements with cardholders, issuing credit cards, making all final credit
decisions and providing certain settlement services.
Concurrent with the formation of its relationship with FAMIS, BankBoston
also entered into an agreement with FDR to provide support to FAMIS primarily
with respect to account servicing. Under the terms of its agreement with
BankBoston, FDR performed account servicing functions including (i) processing
credit requests in accordance with the credit policies developed by FAMIS and
adopted by BankBoston, (ii) communicating with cardholders and potential
cardholders, all final determinations with respect to credit card applications,
(iii) providing credit card "plastics" to customers approved for accounts in
accordance with the models developed by FAMIS and adopted by BankBoston, (iv)
handling customer inquiries and similar customer service functions, (v)
processing customer payments and facilitating settlement of merchant payments
and interchange, and (vi) certain collection activities. FAMIS was responsible
for supervising, on behalf of BankBoston, all of FDR's activities and developed
various systems to perform these monitoring functions proactively. FAMIS also
was responsible for evaluating FDR's compliance with performance standards
established by FAMIS.
In order to consolidate its affiliates' credit card activities, in April
1997, BankBoston formed and transferred all of its customer credit card accounts
to BKB and assigned to BKB its agreements with each of FAMIS and FDR. Additional
accounts generated by other bank affiliates of BankBoston were also subsequently
transferred to BKB.
By mid-1997, BKB and FAMIS had structured a unique business model
(substantially similar to the current model employed by Partners First and
FAMIS) for engaging in the consumer credit card business in which BKB provided
basic functions related to its status as an insured financial institution while
all other account servicing and management functions were performed by
unaffiliated third parties with expertise in those areas. As of December 31,
1997, BKB had approximately $1.7 billion in outstanding credit card receivables
maintained under the business model developed with FAMIS.
Pursuant to an agreement entered into on January 29, 1998, BKB and First
Annapolis entered into a joint venture with Bankmont pursuant to which Partners
First was created. As part of this transaction, Harris, a subsidiary bank of
Bankmont, contributed to Partners First the Harris Portfolio and $115 million in
cash in exchange for a 69% equity interest in Partners First. BKB contributed to
Partners First the BKB Portfolio in exchange for a 19% equity interest in
Partners First. First Annapolis contributed to Partners First substantially all
of the assets and liabilities of FAMIS (approximately 70 employees of FAMIS,
including management, are now employed by Partners First); its models, databases
and intellectual property; its equipment (including sophisticated hardware and
software); and all of its other intangible property (including its marketing and
analysis expertise), in exchange for a 12% equity interest in Partners First. In
exchange for such contributions, Partners First agreed to provide essentially
the same services with respect to the BKB Portfolio and the Harris Portfolio as
FAMIS
31
provided to BankBoston and BKB with respect to their credit card business,
including marketing and account solicitation and management services, and
monitoring FDR's account servicing functions.
Partners First concurrently entered into a services agreement with FDR
pursuant to which FDR performs substantially the same services with respect to
the accounts in the BKB and Harris Portfolios as it performed with respect to
the credit card business of BankBoston and BKB.
Partners First also entered into an Assistance Agreement with BKB pursuant
to which BKB provides similar services with respect to the BKB Portfolio and
Harris Portfolio as BKB had provided with respect to the accounts originated
under its agreement with FAMIS. Under the Assistance Agreement, BKB, as an
Account Originator, acts as the insured financial institution party (either as
the original issuer or by assignment) to the cardholder agreements pertaining to
the BKB Portfolio and the Harris Portfolio. Similar to the prior agreement with
FAMIS, while BKB has adopted the credit policies devised by Partners First, BKB
is responsible for all final credit decisions, as well as providing certain
settlement services with respect to the accounts. Partners First may enter into
an agreement with Harris for the provision of substantially similar services by
Harris with respect to new accounts originated as a result of Harris' marketing
initiatives.
Partners First contemplates that, in the future, it will establish a
federally insured financial institution as a subsidiary (the "Bank"), which will
either be a newly chartered financial institution formed by Partners First, or
an existing financial institution acquired by Partners First and that the Bank
will replace BKB as the Account Originator with respect to the BKB Portfolio and
the Harris Portfolio and consistent therewith, will perform BKB's issuing
functions. At such time, the Purchase Agreements pertaining to the BKB Portfolio
and the Harris Portfolio will be assigned to the Bank, and the Assistance
Agreement with BKB and any similar Assistance Agreement with Harris will be
terminated. It is anticipated that any such new relationship will be structured
in a manner consistent with the current BKB-Partners First arrangement, as well
as the former BankBoston-BKB-FAMIS arrangement, in that the Bank will adopt
credit policies devised by Partners First (in accordance with requirements of
any applicable federal regulatory agencies) and will only perform those limited
credit, issuing and settlement functions as had been performed by BKB, and that
the bulk of the credit card business will be conducted by Partners First with
the assistance of FDR.
BUSINESS STRATEGY
Following the business strategy and credit card performance models
established by FAMIS, Partners First will design and market its credit card
program based on an empirical analysis of the credit card business at the level
of the individual cardholder. Partners First will collect information about
credit card issuers, the consumer credit market, and current as well as
historical behavior of individual customers and prospective customers from both
internal and external sources. Factors which Partners First will consider
include credit scores, balance amounts, purchase types and amounts, finance
charges paid and other indicia of cardholder behavior over time.
It is anticipated that following the establishment of the Bank, the Bank
may enter into alliances with credit card issuers who have concluded, among
other things, that their current size and operational capacities are too limited
to allow them to maintain successful credit card businesses on a stand alone
basis. It is anticipated that such arrangements may involve the selling of such
a credit card issuer's non-strategic accounts to the Bank at fair market value
and the retention by such credit card issuer of those assets it considers
strategic (E.G., relationship or regional accounts). Any such non-strategic
accounts acquired by the Bank would be included as Accounts and the Receivables
arising thereunder added to the Trust only if certain conditions, including the
Rating Agency Condition, are satisfied.
Partners First may provide management and advisory services for the
strategic credit card accounts retained by any such credit card issuer in a
manner analogous to FAMIS's prior relationship with BKB; however, any such
retained strategic credit card accounts would not be included in the Partners
First Portfolio and the receivables arising in such credit card accounts would
not be included in the Trust.
PROCESSING AND SERVICING OF CREDIT CARD ACCOUNTS
Historically, following the business model developed with FAMIS, BKB
delegated the processing, servicing and collection of its accounts to FDR. In
addition, FAMIS performed the functions related to the development of credit
policy and risk management, marketing acquisition and account management, data
mining and FDR oversight as described above in " -- Development of the Business
Model of Partners First; The Role of FAMIS."
Historically, the Harris Portfolio was serviced by Harris' employees in
Buffalo Grove, Illinois. As of January 29, 1998, the accounts in the Harris
Portfolio were maintained on the system utilized by Harris prior to January 29,
1998, which is the
32
CardPac System. FDR has recently acquired the Buffalo Grove facility, has hired
certain of its employees and is servicing the Harris Portfolio. The Harris
Portfolio was converted to the FDR processing system in March 1998.
Continuing the practice established by FAMIS and BankBoston as described
above (see " -- Development of the Business Model of Partners First; The Role of
FAMIS"), Partners First has delegated the majority of the credit card processing
and a significant portion of the account servicing and collection functions to
FDR, a subsidiary of First Data Corp. ("FDC"), pursuant to a seven-year
contract, automatically renewable for an additional two-year period, entered
into on January 29, 1998. Certain database management, data mining and
predictive model creating functions and all daily oversight of FDR and FDR
activities will be performed in-house by employees of Partners First. The
remainder of the processing and servicing work will be performed by a
combination of alternative vendors and in-house staff. FDR facilities currently
located in Omaha, Nebraska, Tulsa, Oklahoma, Buffalo Grove, Illinois, Atlanta,
Georgia, Matteson, Illinois and Phoenix, Arizona are utilized to clear
transactions through the VISA and MasterCard systems, post transactions to
cardholder accounts, create billing statements, provide credit processing and
operational support (including customer service), and perform collections
activity on delinquent accounts according to the policies and procedures
recommended by Partners First. Transactions creating the Receivables flow
through both the VISA and MasterCard systems and the FDR processing system. If
FDR should fail to perform its functions or become insolvent, or should either
the VISA or MasterCard system materially curtail its activities, or should the
Account Originators cease to be members of either VISA or MasterCard
associations for any reason, a Pay Out Event could occur and delays in payments
on the Receivables and possible reductions in the dollar amounts thereof could
also occur.
ACCOUNT ORIGINATION
BankBoston began originating accounts in September 1995 through (i) direct
mail solicitations of individuals residing in the United States who had been
prescreened at credit bureaus on the basis of criteria furnished by FAMIS; (ii)
direct mail solicitations of individuals residing in the United States without
prescreening; (iii) outbound telemarketing programs; and (iv) applicant
initiated requests made at BankBoston's branch offices or by telephone or via
written letter. Consistent with the methodology formulated by FAMIS and
BankBoston, BKB later applied the same credit criteria without distinction among
the foregoing sources of applications, as described below in " -- Underwriting
Procedures." In addition, BKB purchased a credit card portfolio consisting of
approximately 324,000 accounts with outstanding principal receivables of
approximately $311 million in July 1996 from BayBank, N.A., of which
approximately $19 million of Receivables were transferred to the Trust on
January 29, 1998.
In 1966, Harris began originating accounts through applicant initiated
requests. In 1983, Harris began soliciting new cardholders through mass mailings
from bureau extracts. Outbound telemarketing programs conducted in 1994 and 1995
were an additional source of applications for Harris. Credit policy, as
described below in "Underwriting Procedures" does not vary with application
source; however, it has varied over time. In September 1990, Harris purchased a
portfolio of credit card accounts with approximately $207 million of outstanding
receivables from United Jersey Bank ("UJB"). As of December 1997, the UJB
portfolio comprised approximately 36,830 active accounts and $80 million of
receivables outstanding.
In March 1998, Partners First designated BKB as the Account Originator with
respect to the credit card accounts in the Partners First Portfolio, including
the Accounts originated by Harris. Going forward, it is anticipated that BKB and
Harris (and, following its establishment, the Bank) will originate new Accounts
to be included in the Partners First Portfolio. Prior to the establishment of
the Bank, Partners First may also designate other financial institutions as
Account Originators and any such Account Originator would originate credit card
accounts into the Partners First Portfolio. Any such new Accounts will be
originated and serviced following the business model currently used in
originating and servicing the Partners First Portfolio. See " -- Development of
the Business Model of Partners First; The Role of FAMIS." Following the
establishment of the Bank, the Bank will be the sole Account Originator with
respect to the Accounts and any New Accounts. In addition, it is anticipated
that the Bank or Partners First will acquire accounts through the selective
acquisition of portfolios. None of the credit card accounts originated by the
Bank or any Account Originator may be designated as Accounts and none of the
receivables arising under such credit card accounts may be transferred to the
Trust unless certain conditions, including the Rating Agency Condition, are
satisfied.
Going forward, the Account Originators will continue to originate accounts
through pre-approved and non-prescreened direct mail solicitations to
creditworthy consumers on a nationwide basis.
Partners First has developed and will undertake in connection with any
portfolio acquisitions a detailed due diligence process with respect to the
related accounts, including analyzing all available data and other information
pertaining to such accounts, and initiating direct dialogue between Partners
First management officials who are primarily responsible for certain
33
functions (particularly marketing and product management, risk, collections,
credit and legal and regulatory compliance) and their counterparts at any such
prospective account originator.
Partners First generally seeks to acquire accounts which will complement
its existing credit card management strategy. Partners First's due diligence
process focuses on credit quality, card utilization and activation, pricing and
whether the anticipated revenue on the accounts in the portfolio is sufficient
to justify the acquisition thereof.
On April 3, 1998, Partners First purchased a credit card portfolio
consisting of approximately 101,000 Visa and MasterCard consumer revolving
credit card accounts with outstanding principal receivables of approximately
$188 million from Comerica Bank Midwest, N.A. ("Comerica"). Partners First
determined to make this acquisition after concluding, following a detailed due
diligence review with respect to this portfolio, that the acquisition was
consistent with Partners First's portfolio acquisition objectives, as described
above. None of the accounts in the Comerica portfolio has been designated as an
Additional Account. While no decision has been made as to whether receivables in
these accounts originated by Comerica will be added at any time to the Trust,
such a decision may be made in the future. Any such addition would be subject to
the restrictions on additions of Accounts in the Pooling and Servicing
Agreement, including the Rating Agency Condition. See "Description of the
Pooling and Servicing Agreement -- Additions of Accounts or Participation
Interests."
The accounts which Partners First purchased from Comerica have not been
included in the Trust. Such accounts are currently being financed with
borrowings under certain credit lines which are secured by the receivables
arising therein. Going forward, to the extent Partners First determines not to
include the receivables arising in any of such accounts in the Trust, it is
anticipated that such accounts will continue to be financed with borrowings
under such credit lines.
UNDERWRITING PROCEDURES
Historically, Harris, BankBoston and later BKB reviewed all applications
for credit card accounts for completeness and creditworthiness based on credit
underwriting criteria established by BKB and Harris, as applicable. They used
credit reports issued by independent credit reporting agencies and, in the event
of any discrepancies between the application and the credit report and in
certain other circumstances, they verified certain information regarding
applicants.
Going forward, the primary new account source for the Account Originators
will be prescreened direct mail solicitation of qualified prospective
cardholders. Following the model established by FAMIS with respect to the credit
card business of BankBoston and BKB, underwriting criteria included in the
Credit Card Guidelines recommended by Partners First will be utilized by the
Account Originator at the credit bureaus to generate a list of qualifying
prospective cardholders. Account Originators will also obtain credit scores
using scoring models licensed by the credit bureaus from Fair Isaac & Company
("FICO"), which specializes in developing credit scoring models. The credit
scoring models to be used by Account Originators are intended to provide a
general indication, based on the information available, of the applicant's
willingness and ability to repay the applicant's obligations. Credit scoring
will evaluate a potential cardholder's credit profile and certain of the
information provided by the applicant in the credit application in order to
statistically quantify credit risk. Models for credit scoring, similar to those
designed by FAMIS as described above (see " -- Development of the Business Model
of Partners First; The Role of FAMIS"), will be developed by Partners First
using statistics to evaluate common characteristics and their correlation with
credit risk. The credit scoring models used will often be reviewed and updated
to reflect more current statistical data.
Partners First will also use information obtained on behalf of the Account
Originators from various third-party sources and Partners First's internal
database and then apply various predictive models to the list of potential
cardholders supplied by the credit bureaus to determine the most creditworthy
and more profitable prospects to solicit by mail. Potential cardholders who
receive direct mail solicitations will be required to complete and return an
acceptance certificate. The information supplied by the potential cardholder on
the acceptance certificate will be used by Partners First to verify the
potential cardholder's credit information. As part of the verification process
Partners First will review a new credit bureau report and credit score which
will be updated based on the information supplied by the applicant and
established lending criteria. Credit lines will be established by the Account
Originators after this verification process has been completed and will be in an
amount commensurate with the new cardholder's updated credit profile, credit
score and income.
Non-prescreened applicants for credit cards will be reviewed for
completeness and accuracy. The Servicer will credit score all non-prescreened
applicants utilizing a FICO supplied credit scorecard. Applicants who score
above or below pre-set thresholds will be accepted or rejected by the Account
Originators accordingly. Applicants whose credit score lies between these
pre-set thresholds will be reviewed manually by a credit analyst as part of the
determination of the applicant's creditworthiness. Account Originators have the
ability to override decisions made by the scorecard upon receipt of additional
34
information from the applicant. Credit lines will be assigned by the Account
Originators based upon the cardholder's credit score, income and credit profile.
Generally, the Account Originators will issue credit cards that expire two
years after issuance and will reissue credit cards with two-year expiration
dates, so long as the payment behavior and usage of the cardholder satisfy
certain criteria.
ADDITIONAL ACCOUNTS
Eligible Receivables from Additional Accounts, if needed, will be added to
the Trust from accounts originated or acquired by the Account Originators
through pre-approved applications and other sources, as described above. It is
expected that portfolios of credit card accounts purchased by an Account
Originator from other credit card issuers will be added to the Trust from time
to time. Any such addition would be subject to the restrictions on additions of
Accounts in the Pooling and Servicing Agreement, including the Rating Agency
Condition. See "Risk Factors -- Addition of Trust Assets."
BILLING AND PAYMENTS
The VISA and MasterCard credit card accounts of the BKB Portfolio and,
since the conversion of the Harris Portfolio to the FDR system in March 1998,
the Harris Portfolio are currently grouped into twenty-one billing cycles (each,
a "Billing Cycle") ending on various days throughout each month. 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
mailed to such cardholders. FDR sends a monthly billing statement to each BKB
Portfolio cardholder with a debit or credit balance of at least one dollar at
the end of the Billing Cycle or when a finance charge has been imposed. Monthly
statements are sent to each Harris Portfolio cardholder unless (i) the account
has been charged off, (ii) the account has a zero balance with no activity,
(iii) the account is coded as having a bankrupt or deceased cardholder, (iv) the
account activity has been confirmed as fraudulent or (v) the account has had a
credit balance for more than six months.
With respect to the BKB Portfolio, each month cardholders generally are
required to make at least a minimum payment (the "Minimum Monthly Payment")
equal to the sum of (i) the greater of 2.0% of the new balance shown on the
monthly statement or $15, or if the new balance is less than $15, the amount of
the new balance, (ii) any past due amount from prior months, (iii) any amounts
in excess of the credit limit, (iv) any assessed fees, and (v) any credit
insurance premiums.
With respect to the Harris Portfolio, the Minimum Monthly Payment varies
depending on the account and equals (i) for accounts where the current balance
is less than the credit limit, the greater of either 1/33rd or 1/36th (depending
on the account) of the current balance (not including amounts in dispute) or an
amount between $5.00 and $15.00 (depending on the account) and (ii) for accounts
that are overlimit, the amount the account balance is above the credit limit.
Going forward, BKB's policy will generally continue to be applied to new
accounts in the Partners First Portfolio.
With regard to the BKB Portfolio, BKB reserves the option to allow
individual cardholders or groups of cardholders to skip their Minimum Monthly
Payments for one or more months. Finance charges in connection with such skipped
payments continue to accrue, and the amount of the next Minimum Monthly Payment
is determined as described above, based on the account balance at the end of the
next Billing Cycle. The effect of skipped payments is to increase the amount of
Finance Charge Receivables and to decrease the rate of payments of Principal
Receivables during the Billing Cycles for which the offers apply. BKB's policy
will continue to be applied with respect to both new accounts originated by the
Account Originators and accounts from the Harris Portfolio.
Currently, for both the BKB Portfolio and the Harris Portfolio, monthly
periodic finance charges are calculated on both cash advances and purchases by
multiplying the average daily cash advance balance or average daily purchase
balance, as applicable, by the applicable monthly periodic rate. Monthly
periodic finance charges are currently calculated on cash advances and purchases
(including certain fees and unpaid finance charges) from the later of (i) the
date of the transaction or (ii) the first day of the Billing Cycle in which the
transaction is posted to the account, for both the BKB Portfolio and, since the
conversion of the Harris Portfolio to the FDR processing system in March 1998,
the Harris Portfolio. The monthly periodic finance charges in new accounts
originated by the Account Originators will also be calculated in a manner
consistent with this policy. Monthly periodic finance charges are not assessed
in most circumstances on purchases if the new balance shown in the billing
statement is paid by the due date specified in the monthly billing statement, or
if the previous balance is zero. The next statement closing date is on average
28-32 days after the billing date. The average annual percentage rates for
purchases and cash advances for virtually every account are variable rates. For
the BKB Portfolio, the current annual percentage rate for purchases is a
variable rate based on THE WALL STREET JOURNAL prime rate plus a spread
generally ranging from 3.75% to 7.90%. The current annual percentage rate for
cash advances is a variable rate based on THE WALL STREET JOURNAL
35
prime rate plus a spread generally ranging from 5.75% to 9.90%. Spreads in the
BKB Portfolio vary depending on risk profile and cardholder behavior. For the
Harris Portfolio, the current annual percentage rate for both purchases and cash
advances is a variable rate based on THE WALL STREET JOURNAL prime rate plus a
spread generally ranging from 5.90% to 7.90%. Spreads vary depending on account
type (premium or standard), risk profile and behavior.
For the BKB Portfolio, for accounts with an annual membership fee,
generally the annual membership fee ranges from $15.00 to $20.00 for standard
accounts and from $18.00 to $28.00 for premium accounts. Approximately 80% of
BKB Portfolio Accounts are assessed an annual fee. BKB reserves the right to
waive the annual membership fee, or a portion thereof, at its discretion, in
connection with solicitations for new accounts, or when BKB determines a waiver
to be necessary to operate its credit card business on a competitive basis. For
the Harris Portfolio accounts with an annual membership fee, generally the
annual membership fee is $20.00 for standard accounts and $35.00 for premium
accounts. Approximately 13% of the Harris Portfolio accounts are assessed an
annual fee. Harris reserved the right to waive the annual membership fee, or a
portion thereof, at its discretion, in connection with solicitations for new
accounts, or when Harris determined a waiver to be necessary to operate its
credit card business on a competitive basis. In general for the Harris
Portfolio, membership fees have not been waived. Generally, an account is closed
upon determining that the related cardholder is unwilling to pay the fee. The
annual membership fee for both the BKB and the Harris Portfolio accounts is
non-refundable. The annual fee policy for new accounts will mirror the previous
BKB policy of pricing cardholders according to their behavior and risk profile.
Harris Portfolio accounts will be repriced gradually over time to achieve
consistency with this policy. However, certain Harris relationship accounts may
be given a more favorable structure.
With reference to the BKB Portfolio, in addition to the annual membership
fee, accounts are charged certain other fees including: (i) a late fee,
generally in the amount of $25.00 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 of 2.5% of the amount
of the advance subject to a minimum fee of $3.50 per transaction; (iii) a
returned check charge, generally in the amount of $25.00; and (iv) an
over-the-limit fee, generally in the amount of $25.00 with respect to any
account more than a specified amount over its credit limit at the time the
monthly billing statement is created. With reference to the Harris Portfolio, in
addition to the annual membership fee, accounts are charged certain other fees
including: (i) a late fee, generally in the amount of $25.00 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
of 2.0% of the amount of the advance subject to a minimum fee of $3.50; (iii) a
returned check charge, generally in the amount of $25.00; and (iv) an
over-the-limit fee, generally in the amount of $25.00 with respect to any
account more than a specified amount over its credit limit at the time the
monthly billing statement is created. Finance charge policies for new accounts
will mirror the previous BKB policy of pricing cardholders according to their
behavior and risk profile. Harris accounts will be re-priced gradually over time
to achieve consistency with this policy.
With regard to the BKB Portfolio, payments by cardholders are processed and
applied first to annual membership fees, next to billed and unpaid finance
charges, next to any billed fees and other amounts not subject to finance
charges and then to billed and unpaid transactions. Any excess is applied to
unbilled transactions in the order determined by BKB and then to unbilled
finance charges. Since the conversion of the Harris Portfolio to the FDR
processing system in March 1998, Harris Portfolio cardholder payments are
processed and applied in the same manner that the BKB Portfolio is processed and
applied.
With respect to pricing, the accounts in the Harris Portfolio will
gradually be repriced according to the policy established and utilized in
connection with the BKB Portfolio. Annual fees and annual percentage rates will
be assigned to accounts based on risk profile and cardholder behavior. It is
expected that, eventually, most accounts will be subject to the same late,
overlimit, cash advance and returned check fees. There can be no assurance that
monthly periodic finance charges, fees and other charges imposed by the Account
Originators will remain at current levels in the future.
INTERCHANGE
Members participating in the VISA and MasterCard associations receive
certain fees ("Interchange") 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 this
Interchange in connection with cardholder charges for merchandise and services
is passed from banks which clear the transactions for merchants to credit
card-issuing banks. Interchange ranges from approximately 1% to 2% of the
transaction amount, although VISA and MasterCard associations may from time to
time change the amount of Interchange reimbursed to banks issuing their credit
cards. Interchange with respect to each Account Originator will be allocated to
PFR in an amount equal to the product of (i) the total Interchange with respect
to the Account Originator's entire portfolio of credit card accounts and (ii) a
fraction, the numerator of which is the total credit card sales
36
charges arising in the credit card accounts included in the Partner First
Portfolio originated by such Account Originator, and the denominator of which is
the total credit card sales charges arising in the Account Originator's entire
portfolio of credit card accounts. Interchange received by PFR will be allocated
to the Trust in an amount equal to the product of (i) the aggregate Interchange
received by PFR from the Account Originators and (ii) a fraction, the numerator
of which is the total amount of Receivables arising in the Accounts in the Trust
Portfolio and the denominator of which is the total credit card sales charges
arising in all of the credit card accounts in the Partners First Portfolio. Such
amount is an estimate of the actual Interchange and may be greater or less than
the actual amount of the Interchange relating to the Accounts from time to time.
Unless otherwise stated in the related Prospectus Supplement, Interchange will
be included in collections of Finance Charge Receivables for purposes of
calculating the Portfolio Yield for a Series.
COLLECTION OF DELINQUENT ACCOUNTS
With regard to both the Harris Portfolio and the BKB Portfolio, an account
is delinquent if a minimum payment due thereunder is not received by the
Servicer by the time the cardholder's next billing statement is generated, which
is generally within five days after the due date printed in the previous
statement. Delinquent accounts are routed to the pre-collections system at FDR
where they are prioritized and early stage collection efforts are initiated.
These early efforts include the printing of the overdue amount on the next
billing statement and either a telephone call or letter requesting payment of
the past due amount. If these early stage collection efforts are ineffective,
contact by telephone and/or mail is escalated and efforts to collect past due
amounts are made more frequently subject to all applicable legal requirements.
In general, an account is restricted and charging privileges are suspended
when the account becomes fifteen (15) to thirty (30) days past due, or when a
cardholder exceeds the account's credit limit within pre-set parameters. At
sixty (60) days past due, no additional extensions of credit would be authorized
for any reason. Account Originators generally reserve the right to enter into
agreements with delinquent cardholders to extend or otherwise change an
account's payment schedule. A delinquent account could be re-aged once in any
twelve (12) month period if the delinquent cardholder makes a payment equal to
three minimum payments over a ninety (90) day period.
The policy for both portfolios is to charge-off as uncollectible any
account which is six billing cycles past due (i.e., 180 days delinquent). If
notice is received that a cardholder has filed for bankruptcy then the account
is charged-off as soon as is practicable in the month following confirmation of
bankruptcy. Credit evaluation, servicing and charge-off policies and collection
practices may change over time in accordance with the business judgment of the
applicable Account Originator, applicable law, guidelines established by
applicable regulatory authorities and market conditions.
RECOVERIES
The Transferor and the Servicer will be required, pursuant to the terms of
the Pooling and Servicing Agreement, to transfer to the Trust all amounts
received by the Servicer (net of out-of-pocket costs of collecting such amounts,
which the Transferor believes represents an immaterial portion of the total
collections with respect to the Receivables), including insurance proceeds, with
respect to Defaulted Receivables, including amounts received by the Transferor
or the Servicer from the purchaser or transferee with respect to the sale or
other disposition of Defaulted Receivables ("Recoveries"). In the event of any
such sale or other disposition of Receivables, Recoveries will not include
amounts received by the purchaser or transferee of such Receivables but will be
limited to amounts received by the Transferor or the Servicer from the purchaser
or transferee. Collections of Recoveries will be treated as collections of
Principal Receivables; provided, however, that to the extent the aggregate
amount of Recoveries received with respect to any monthly period exceeds the
aggregate amount of Principal Receivables (other than Ineligible Receivables) on
the day such Receivables became Defaulted Receivables for each day in such
monthly period, the amount of such excess will be treated as collections of
Finance Charge Receivables.
For the BKB Portfolio, the Servicer utilizes FDR's facilities to administer
the recovery of defaulted receivables. The Servicer will prioritize defaulted
receivables according to the likelihood of successful recovery and selects a
collection method based on the information supplied by FDC. Included among the
collection methods utilized by the Servicer are primary and secondary
third-party collection agencies, which are retained to recover the defaulted
receivables. As compensation for their services, the collection agencies receive
a percentage of the amounts they collect. For the Harris portfolio, Harris
utilized internal facilities to administer the recovery of defaulted
receivables. Since the conversion of the Harris Portfolio to the FDR processing
system in March 1998, FDR administers the recovery of defaulted receivables in a
manner consistent with BKB originated accounts.
37
FRAUD PREVENTION
Historically, for both the BKB and Harris Portfolios, each organization
reviewed all applications for potential fraud by comparing the information on
the credit card application against the information supplied by the credit
bureaus. In addition, all applications were checked against information supplied
by the Issuers' Clearinghouse, a national fraud database maintained jointly by
VISA and MasterCard. For the BKB Portfolio, once an account is approved,
transactions are monitored by FDR which scores each transaction based upon its
likelihood of being fraudulent. For the Harris Portfolio, the majority of fraud
functions were performed internally; however, both FDR and VISA monitored
transactions and attempted to identify potential fraudulent activity. Potential
fraudulent activity was researched by investigators and, dependent upon their
findings, accounts may be blocked or closed. Going forward, Partners First's
recommended fraud policy will follow that of BKB.
PARTNERS FIRST HOLDINGS, LLC
Partners First Holdings, LLC is a limited liability company organized in
the State of Delaware on December 17, 1997. Its principal executive office is
located at 900 Elkridge Landing Road, Suite 300, Linthicum, MD 21090-2925, and
its telephone number is (410) 865-8700. The Prospectus Supplement for each
Series will provide additional information relating to the Servicer.
Partners First was formed in December 1997 pursuant to a Master Agreement
for the Formation of a Limited Liability Company, dated as of September 2, 1997
(the "Master Formation Agreement"), among BankBoston Corporation, a
Massachusetts corporation, of which BKB is an indirect subsidiary, Bankmont
Financial Corp., a Delaware corporation ("Bankmont"), Harris, which is an
indirect subsidiary of Bankmont, and First Annapolis Consulting, Inc., a
Maryland corporation ("First Annapolis"). The owners of Partners First are BKB,
EFS (U.S.), Inc., a Delaware corporation and subsidiary of Bankmont, and First
Annapolis Marketing Information Services, Inc. ("FAMIS"), a Maryland corporation
and wholly owned subsidiary of First Annapolis. EFS (U.S.), Inc., BKB and FAMIS
have a 69%, 19% and 12% interest, respectively, in the common equity of Partners
First. Partners First has been appointed as Servicer with respect to the
Accounts and the related Receivables. Partners First has delegated substantially
all of its servicing duties to FDR.
PARTNERS FIRST RECEIVABLES FUNDING, LLC
PFRF was organized under the laws of the State of Delaware on January 26,
1998 and is a special purpose wholly owned subsidiary of PFR. PFRF's principal
office is currently located at 900 Elkridge Landing Road, Suite 301, Linthicum,
MD 21090-2925, and its telephone number is (410) 855-8600. The Transferor was
organized for the limited purposes of facilitating the type of transactions
described herein, purchasing, holding, owning and selling receivables, and any
activities incidental to and necessary or convenient for the accomplishment of
such purposes. Neither PFR, as the sole member of the Transferor, nor the
Transferor's board of managers intends to change the business purpose of the
Transferor.
THE ACCOUNTS
The Receivables arise in certain credit card accounts that have been
selected from the total portfolio of MasterCard and VISA accounts in the
Partners First Portfolio on the basis of criteria set forth in the Pooling and
Servicing Agreement. An account must be an Eligible Account to be included in
the Trust Portfolio. On January 29, 1998, the Trust Portfolio represented
approximately 97% of the credit card accounts in the Partners First Portfolio.
Pursuant to the Transferor Purchase Agreement and the Pooling and Servicing
Agreement, the Transferor has the right or may be obligated (subject to certain
limitations and conditions) to require PFR to designate, from time to time,
additional qualifying VISA and MasterCard consumer revolving credit card
accounts to be included as Accounts and to convey to the Transferor for ultimate
conveyance to the Trust all Receivables of such Additional Accounts, whether
such Receivables are then existing or thereafter created. Those Accounts must
meet the eligibility criteria set forth in the Pooling and Servicing Agreement
as of the date the Transferor designates such Accounts as Additional Accounts.
PFR will convey the Receivables then existing or thereafter created under such
Additional Accounts to the Transferor, which in turn will convey such
Receivables to the Trust. Under the Pooling and Servicing Agreement, the
Transferor also has the right to convey Participation Interests to the Trust
subject to the conditions described in the Pooling and Servicing Agreement. See
"Description of the Pooling and Servicing Agreement -- Additions of Accounts or
Participation Interests."
38
As of each date with respect to which Additional Accounts are designated,
PFR will represent and warrant to the Transferor that the Receivables generated
under the Additional Accounts meet the eligibility requirements set forth in the
Transferor Purchase Agreement and the Transferor will represent and warrant to
the Trust that such Receivables or Participation Interests, if any, meet the
eligibility requirements set forth in the Pooling and Servicing Agreement. See
"Description of the Pooling and Servicing Agreement -- Conveyance of
Receivables." Because the Initial Accounts were designated as of January 29,
1998 and subsequent Aggregate Addition Accounts may be designated from time to
time, there can be no assurance that all of such Accounts will continue to meet
the eligibility requirements as of any Series Issuance Date. In the Pooling and
Servicing Agreement the Transferor is required to make certain representations
and warranties with respect to the Accounts and the Receivables as of each
Series Issuance Date (or as of the related addition date with respect to
Additional Accounts). In the event of a breach of any such representation or
warranty by the Transferor, the Transferor may be required to accept
reassignment of the related Receivables and, to the extent such breach relates
to an Account, such Account will no longer be included as an Account. See
"Description of the Pooling and Servicing Agreement -- Representations and
Warranties."
Subject to certain limitations and restrictions, the Transferor may also
designate certain Accounts or Participation Interests, if any, for removal from
the Trust, in which case such Participation Interests or the Receivables of the
Removed Accounts will be reassigned to the Transferor. Throughout the term of
the Trust, the Receivables in the Trust will consist of Receivables generated
under the Accounts, Participation Interests, if any, and the Receivables
generated under Additional Accounts, but will not include the Receivables
generated under Removed Accounts or removed Participation Interests.
The Prospectus Supplement relating to a Series will provide certain
information about the Trust Portfolio as of the date specified. Such information
will include the amount of Principal Receivables, the amount of Finance Charge
Receivables, the range of principal balances of the Accounts and the average
thereof, the range of credit lines of the Accounts and the average thereof, the
range of ages of the Accounts and the average thereof, information with respect
to the geographic distribution of the Accounts, the types of Accounts and
delinquency statistics relating to the Accounts.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued pursuant to the Pooling and Servicing
Agreement and the related Supplement substantially in the forms filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
following summary describes certain terms of the Pooling and Servicing Agreement
and the related Supplement and is qualified in its entirety by reference to the
Pooling and Servicing Agreement and the related Supplement.
The Securities will evidence undivided beneficial interests in the Trust
Assets allocated to such Securities, representing the right to receive from such
Trust Assets funds up to (but not in excess of) the amounts required to make
payments of interest and principal in the manner described below.
The Securities will initially be represented by one or more Securities
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. Unless otherwise stated in the related Prospectus Supplement, the
Securities will be available for purchase in minimum denominations of $1,000 and
integral multiples thereof in book-entry form only. The Transferor has been
informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). Accordingly,
Cede is expected to be the holder of record of the Securities. Except under the
limited circumstances described herein, no Securityholder will be entitled to
receive Securities in fully registered, certificated form ("Definitive
Securities") representing such person's interest in the Securities. Unless and
until Definitive Securities are issued under the limited circumstances described
herein, all references herein to actions by Securityholders shall refer to
actions taken by DTC upon instructions from its Participants (as defined
herein), and all references herein to distributions, notices, reports and
statements to Securityholders shall refer to distributions, notices, reports and
statements to Cede, as the registered holder of the Securities, for distribution
to the beneficial owners of the Securities in accordance with DTC procedures.
See " -- Book-Entry Registration" and " -- Definitive Securities."
Payments of interest and principal will be made on each related Interest
Payment Date to the Securityholders in whose names the Securities were
registered on the last day of the calendar month preceding such Interest Payment
Date, unless otherwise specified in the related Prospectus Supplement (each, a
"Record Date").
39
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement,
Securityholders may hold their Securities through DTC (in the United States) or
Cedel or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
Cede, as nominee for DTC, will hold the global Security or Securities.
Cedel and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective Depositaries (as defined herein) which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC. Citibank, N.A. will act as depositary for Cedel and Morgan
Guaranty Trust Company of New York will act as depositary for Euroclear (in such
capacities, the "Depositaries").
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 UCC 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") and
facilitate the settlement of securities transactions between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Participants include
underwriters, securities brokers and dealers, 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 ("Indirect
Participants").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants (as defined herein) and Euroclear
Participants (as defined herein) will occur in accordance with their respective
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, 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 systems by its Depositary. 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 received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants 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 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.
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest on the Securities from the Trustee through DTC and its Participants.
Under a book-entry format, Securityholders will receive payments after the
related Distribution Date, as the case may be, because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants, which thereafter will be
required to forward them to Indirect Participants or holders of beneficial
interests in the Securities. It is anticipated that the only Securityholder will
be Cede, as nominee of DTC, and that holders of beneficial interests in the
Securities will not be recognized by the Trustee as Securityholders under the
Pooling and Servicing Agreement. Holders of beneficial interests in the
Securities will only be permitted to exercise the rights of Securityholders
under the Pooling and Servicing Agreement indirectly through DTC and its
Participants who in turn will exercise their rights through DTC. The Trustee,
the Transferor, the Servicer and any paying agent, transfer agent or registrar
may treat the registered holder in whose name any Security is registered
(expected to be Cede) as the absolute owner thereof (whether or not such
Security shall be overdue and notwithstanding any notice of ownership or writing
thereon or any notice to the contrary) for the purpose of making payment and for
all other purposes.
40
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 Securities and is required to
receive and transmit distributions of principal of and interest on the
Securities. Participants and Indirect Participants with which holders of
beneficial interests in the Securities have accounts similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
these respective holders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of holders of
beneficial interests in the Securities to pledge Securities to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such Securities, may be limited due to the lack of a Definitive
Security for such Securities.
DTC has advised the Transferor that it will take any action permitted to be
taken by a Securityholder under the Pooling and Servicing Agreement and the
related Supplement only at the direction of one or more Participants to whose
account with DTC the Securities are credited. Additionally, DTC has advised the
Transferor that it may take actions with respect to the Securityholders'
Interest that conflict with other of its actions with respect thereto.
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 securities. Transactions may be settled in Cedel in any of 36
currencies, including United States dollars. Cedel provides to 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 regulation 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. 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.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("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
securities 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. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems 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 Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), underwriters, securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear 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 "Euroclear Provisions"). The Euroclear Provisions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Euroclear Provisions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Securities 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 "U.S. Federal Income Tax Consequences -- Foreign Investors." Cedel or the
Euroclear Operator, as the case
41
may be, will take any other action permitted to be taken by a Securityholder
under the Pooling and Servicing Agreement and the related Supplement on behalf
of a Cedel Participant or 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 Securities 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 SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each Series will be issued as Definitive Securities in fully
registered, certificated form to Security Owners or their nominees 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 discharge properly its responsibilities
as Depository with respect to such Series of Securities, 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, Security Owners evidencing not less than
50% of the aggregate unpaid principal amount of the Securities, 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 Security Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities. Upon surrender by DTC of the
definitive securities representing the Securities and instructions for
re-registration, the Trustee will issue the Securities in the form of Definitive
Securities, and thereafter the Trustee will recognize the holders of such
Definitive Securities as Securityholders under the Pooling and Servicing
Agreement and the related Supplement ("Holders").
Distribution of principal and interest on the Securities will be made by
the Trustee directly to Holders in accordance with the procedures set forth
herein and in the Pooling and Servicing Agreement and the related Prospectus
Supplement. Interest payments and principal payments will be made to Holders in
whose names the Definitive Securities 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 register maintained by the Trustee.
The final payment on any Security (whether Definitive Securities or Securities
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Security on the final payment date at such office or
agency as is specified in the notice of final distribution to Securityholders.
The Trustee will provide such notice to registered Securityholders not later
than the fifth day of the month of the final distribution.
Definitive Securities will be transferable and exchangeable at the offices
of the transfer agent and registrar, which will initially be the Trustee. 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.
INTEREST
Interest will accrue on the Invested Amount or outstanding principal amount
of the Securities of a Series or Class offered hereby at the PER ANNUM rate
either specified in or determined in the manner specified in the related
Prospectus Supplement. Except as otherwise provided herein, collections of
Finance Charge Receivables and certain other amounts allocable to the
Securityholders' Interest of a Series or Class offered hereby will generally be
used to make interest payments to Securityholders of such Series or Class on
each Interest Payment Date specified in the related Prospectus Supplement;
PROVIDED that after the commencement of an Early Amortization Period with
respect to such Series, interest will be distributed to such Securityholders
monthly on each Special Payment Date. If the Interest Payment Dates for a Series
or Class occur less frequently than monthly, such collections or other amounts
(or the portion thereof allocable to such Class) will be deposited in one or
more Interest Funding Accounts and used to make interest payments to
Securityholders of such Series or Class on the following Interest Payment Date.
If a Series has more than one Class of Securities, each such Class may have a
separate Interest Funding Account. Funds on deposit in an Interest Funding
Account will be invested in Eligible Investments. Any earnings (net of losses
and investment expenses) on funds in an Interest Funding Account will be paid
to, or at the direction of, the Transferor except as otherwise specified in any
Supplement. Interest with respect to the Securities of each Series offered
hereby will accrue and be calculated on the basis described in the related
Prospectus Supplement.
42
PRINCIPAL
The Securities of each Series will have a Revolving Period during which
collections of Principal Receivables and certain other amounts otherwise
allocable to the Invested Amount of such Series will, (x) if such Series is a
Principal Sharing Series, be treated as Shared Principal Collections and will be
distributed to, or for the benefit of, the Securityholders of other Series in
such Group or, if not required for such purpose, the holders of the Transferor
Securities or deposited into the Special Funding Account or (y) if such Series
is not a Principal Sharing Series, paid to the holders of the Transferor
Securities or deposited into the Special Funding Account, as more fully
described in the related Prospectus Supplement. Unless an Early Amortization
Period or Early Accumulation Period commences with respect to a Series,
following the Revolving Period with respect to such Series, such Series will
have either a Controlled Accumulation Period or a Controlled Amortization
Period.
During the Controlled Accumulation Period, if any, with respect to a
Series, collections of Principal Receivables and, if so specified in the related
Prospectus Supplement, certain other amounts allocable to the Securityholders'
Interest of such Series (including Shared Principal Collections, if any,
allocable to such Series) will be deposited on each Distribution Date in a
Principal Funding Account and used to make principal distributions to the
Securityholders of such Series or any Class thereof when due. If so specified in
the related Prospectus Supplement, the amount to be deposited in a Principal
Funding Account for any Series offered hereby on any Distribution Date may, but
will not necessarily, be limited to an amount equal to a Controlled Accumulation
Amount specified in such Prospectus Supplement plus any existing deficit
controlled accumulation amount arising from prior Distribution Dates. If the
Prospectus Supplement for a Series so specifies, the amount to be deposited in
the Principal Funding Account on a Distribution Date may be a variable amount.
If a Series has more than one Class of Securities, each Class may have a
separate Principal Funding Account and Controlled Accumulation Amount and the
Controlled Accumulation Period with respect to each Class may commence on
different dates. In addition, the related Prospectus Supplement may describe
certain priorities among such Classes with respect to deposits of principal into
such Principal Funding Accounts.
Subject to certain conditions including those set forth below, upon written
notice to the Trustee, the Servicer may elect to postpone the commencement of
the Controlled Accumulation Period with respect to a Series, and to extend the
length of the Revolving Period of such Series. The Servicer may make such
election only if the Accumulation Period Length (determined as described below)
is less than the number of months specified in the Prospectus Supplement for
such Series. On each Determination Date, until the Controlled Accumulation
Period begins, the Servicer will determine the "Accumulation Period Length,"
which is the number of months expected to be required to fully fund the
Principal Funding Account no later than the Scheduled Payment Date (as defined
in the applicable Prospectus Supplement) for such Series, based on (a) the
expected monthly collections of Principal Receivables expected to be
distributable to the Securityholders of all Series (unless such Series is not a
Principal Sharing Series), assuming a principal payment rate no greater than the
lowest monthly principal payment rate on the Receivables for the preceding
twelve months and (b) the amount of principal expected to be distributable to
Securityholders of Series (which may exclude certain other Series) which are not
expected to be in their Revolving Periods during the Controlled Accumulation
Period of the Series in respect of which the Accumulation Period Length is being
determined. If the Accumulation Period Length is less than the number of months
specified in the Prospectus Supplement for such Series, 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 of a Series based on the Invested Amounts of certain other
Series which are scheduled to be in their Revolving Periods during the
Controlled Accumulation Period for such Series and on increases in the principal
payment rate occurring after the Series Issuance Date for such Series. The
length of the Controlled Accumulation Period for any Series will not be less
than one month. If the Controlled Accumulation Period of a Series is postponed
in accordance with the foregoing, and if a Pay Out Event occurs after the date
originally scheduled as the commencement of the Controlled Accumulation Period,
it is probable that Securityholders would receive some of their principal later
than if the Controlled Accumulation Period had not been so postponed.
During the Controlled Amortization Period, if any, with respect to a
Series, collections of Principal Receivables and certain other amounts allocable
to the Securityholders' Interest of such Series (including Shared Principal
Collections, if any, allocable to such Series) will be used on each Distribution
Date to make principal distributions to any Class of Securityholders then
scheduled to receive such distributions. If so specified in the related
Prospectus Supplement, the amount to be distributed to Securityholders of any
Series offered hereby on any Distribution Date may, but will not necessarily, be
limited to an amount equal to the Controlled Amortization Amount specified in
such Prospectus Supplement plus any existing deficit controlled amortization
amount arising from prior Distribution Dates. If a Series has more than one
Class of Securities, each
43
Class may have a different Controlled Amortization Amount. In addition, the
related Prospectus Supplement may describe certain priorities among such Classes
with respect to such distributions.
During the Early Accumulation Period, if any, with respect to a Series,
collections of Principal Receivables and certain other amounts allocable to the
Securityholders' Interest of such Series (including Shared Principal
Collections, if any, allocated to such Series) will be deposited on each
Distribution Date in a Principal Funding Account and used to make distributions
of principal to the Securityholders of such Series or Class on the Expected
Final Payment Date. The amount to be deposited in the Principal Funding Account
will not be limited to any Controlled Deposit Amount.
During the Early Amortization Period with respect to a Series, collections
of Principal Receivables and certain other amounts allocable to the
Securityholders' Interest of such Series (including Shared Principal
Collections, if any, allocable to such Series) will be distributed as principal
payments to the applicable Securityholders monthly on each Distribution Date
beginning with the first Special Payment Date. During the Early Amortization
Period with respect to a Series, distributions of principal to Securityholders
of such Series will not be subject to any Controlled Deposit Amount or
Controlled Distribution Amount. In addition, upon the commencement of the Early
Amortization Period, any funds on deposit in a Principal Funding Account with
respect to such Series will be paid to the Securityholders of the relevant Class
or Series on the first Special Payment Date.
Funds on deposit in any Principal Funding Account established with respect
to a Class or Series offered hereby will be invested in Eligible Investments and
may be subject to a guarantee or guaranteed investment contract or a deposit
account or other mechanism specified in the related Prospectus Supplement
intended to assure a minimum rate of return on the investment of such funds. In
order to enhance the likelihood of the payment in full of the principal amount
of a Class of Securities offered hereby at the end of a Controlled Accumulation
Period or Early Accumulation Period with respect thereto, such Class may be
subject to a maturity liquidity facility or a deposit account or other similar
mechanism specified in the relevant Prospectus Supplement.
PAY OUT EVENTS AND REINVESTMENT EVENTS
The Revolving Period with respect to a Series will continue through the
date specified in the applicable Prospectus Supplement and the Controlled
Amortization Period or Controlled Accumulation Period will begin at such time,
unless a Pay Out Event or Reinvestment Event occurs. The Early Amortization
Period with respect to such Series will commence when a Pay Out Event occurs or
is deemed to occur and the Early Accumulation Period will occur when a
Reinvestment Event occurs or is deemed to occur. A "Pay Out Event" will occur
with respect to all Series upon the occurrence of an Insolvency Event with
respect to the Transferor. A Pay Out Event may occur with respect to any
specific Series upon the occurrence of any event specified in the related
Prospectus Supplement. Such events may include (i) the Trust becoming subject to
regulation as an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, (ii) the failure by the Transferor to make any
payment or deposit required under the Pooling and Servicing Agreement within a
specified period of the date such payment or deposit is required to be made,
(iii) the breach of specified covenants, representations or warranties contained
in the Pooling and Servicing Agreement, after any applicable notice and cure
period (and, if so specified in the related Prospectus Supplement, only to the
extent such breach has a material adverse effect on the related
Securityholders), (iv) the failure by the Transferor to make a required
designation of Additional Accounts for the Trust within a specified time after
the date such addition is required to be made, (v) a reduction in the Series
Adjusted Portfolio Yield (as defined in the applicable Prospectus Supplement)
below the rates, and for the period, specified in the related Prospectus
Supplement and (vi) the occurrence of a Servicer Default. The Early Amortization
Period with respect to a Series will commence on the day on which a Pay Out
Event occurs or is deemed to occur with respect thereto. If an Early
Amortization Period commences, monthly distributions of principal to the
Securityholders of such Series will begin on the Distribution Date in the
Monthly Period following the Monthly Period in which such Pay Out Event occurs
(such Distribution Date and each following Distribution Date with respect to
such Series, a "Special Payment Date"). Any amounts on deposit in a Principal
Funding Account or an Interest Funding Account with respect to such Series at
such time will be distributed on such first Special Payment Date to the
Securityholders of such Series. If, because of the occurrence of a Pay Out
Event, the Early Amortization Period begins earlier than the scheduled
commencement of a Controlled Amortization Period or prior to an Expected Final
Payment Date, Securityholders will begin receiving distributions of principal
earlier than they otherwise would have and such distributions will not be
subject to the Controlled Deposit Amount or the Controlled Distribution Amount.
As a result, the average life of the Securities may be reduced or increased. If
a Series has more than one Class of Securities, each Class may have different
Pay Out Events which, in the case of any Series of Securities offered hereby,
will be described in the related Prospectus Supplement.
44
A particular Series may have no Pay Out Events or only limited Pay Out
Events, but may have in lieu thereof specified events ("Reinvestment Events")
that end the reinvestment of the Trust in new Receivables and apply available
collections of Principal Receivables to the purchase of Eligible Investments. A
Reinvestment Event may include all or some of the events that constitute Pay Out
Events for other Series. The Early Accumulation Period with respect to a Series
will commence on the day on which a Reinvestment Event occurs or is deemed to
occur with respect thereto. If a Series has more than one Class of Securities,
each Class may have different Reinvestment Events (or may have only Pay Out
Events) which, in the case of any Series of Securities offered hereby, will be
described in the related Prospectus Supplement.
In addition to the consequences of a Pay Out Event or Reinvestment Event
discussed above, if an Insolvency Event shall occur, immediately on the day of
such event the Transferor will cease to transfer Principal Receivables to the
Trust and promptly give notice to the Trustee of such event. Under the terms of
the Pooling and Servicing Agreement, as soon as possible but in any event 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 and on
commercially reasonable terms unless instructions otherwise are received within
a specified period from Securityholders holding Securities evidencing more than
50% of the aggregate unpaid principal amount of each Series of Securities issued
and outstanding (or, with respect to any Series with two or more Classes, 50% of
the aggregate unpaid principal amount of each Class) and each Enhancement
Invested Amount and possibly the vote of other persons specified in the
Supplement for a Series and, for a Series offered hereby, the related Prospectus
Supplement to the effect that such Securityholders or other persons disapprove
of the liquidation of Receivables and wish to continue having Principal
Receivables transferred to the Trust as before such Insolvency Event. The
Trustee will sell, dispose of, or otherwise liquidate the Receivables 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 on the Receivables and applied as described herein and in
each Prospectus Supplement.
If the only Pay Out Event or Reinvestment Event to occur with respect to
any Series is the bankruptcy of the Transferor, the Trustee may not be permitted
to suspend transfers of Receivables to the Trust, and the instructions to sell
the Receivables may not be given effect.
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's Interest (the "Transferor Servicing
Fee"), the holders of any Participations and Securityholders of each Series. The
portion of the Servicing Fee allocable to each Series of Securities on any
Distribution Date (the "Monthly Servicing Fee") 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 Invested Amount (as it may be adjusted in
accordance with the related Supplement) of such Series with respect to the
related Monthly Period. A portion of the Monthly Servicing Fee with respect to a
particular Series may be payable from Interchange allocated to such Series as
specified in the related Supplement and, for a Series offered hereby, the
related Prospectus Supplement. For any Monthly Period, the portion of the
Monthly Servicing Fee payable from Interchange with respect to any Series will
be an amount equal to the portion of collections of Finance Charge Receivables
allocated to the Securityholders' Interest of such Series with respect to such
Monthly Period that is attributable to Interchange (the "Servicer Interchange");
PROVIDED, HOWEVER, that Servicer Interchange for a Monthly Period may not exceed
one-twelfth of the product of (i) the Series Adjusted Invested Amount, as of the
last day of such Monthly Period and (ii) a percentage specified in the
Prospectus Supplement for such Series. In the case of any insufficiency of
Servicer Interchange with respect to any Monthly Period, a portion of the
Monthly Servicing Fee with respect to such Monthly Period will not be paid to
the extent of such insufficiency and in no event shall the Trust, the Trustee,
the holders of any Participations or the Securityholders be liable for the share
of the Servicing Fee to be paid out of Servicer Interchange.
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 Pooling and Servicing Agreement to be payable by
the Trust or the Transferor other than federal, state and local income and
franchise taxes, if any, of the Trust.
45
TERMINATION OF THE TRUST
The Trust and the respective obligations and responsibilities of the
Transferor, the Servicer and the Trustee created pursuant to the Pooling and
Servicing Agreement (other than the obligation of the Trustee to make payments
to Investor Securityholders as hereinafter set forth) shall terminate upon the
earliest to occur of (i) December 31, 2029, (ii) at the option of the
Transferor, the day following the Distribution Date on which the Invested Amount
for each Series is zero and (iii) the day an Insolvency Event has occurred.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
CONVEYANCE OF RECEIVABLES
On January 29, 1998, PFR acquired approximately $1,870,000,000 aggregate
principal amount of Receivables, of which approximately $1,190,000,000 aggregate
principal amount of receivables were conveyed to PFR by BKB and approximately
$680,000,000 aggregate principal amount of receivables were conveyed to PFR by
Harris. Immediately upon giving effect to such transactions, PFR conveyed
approximately $1,846,000,000 aggregate principal amount of Receivables (the
"Initial Receivables") to the Transferor, which in turn transferred the Initial
Receivables to the Trust. The Initial Receivables constituted all of the
Eligible Receivables acquired by PFR from BKB and Harris on January 29, 1998.
Pursuant to the Transferor Purchase Agreement, PFR will sell and assign to the
Transferor for assignment to the Trust all of its interests in the Receivables
then existing under the Accounts and all Receivables thereafter created under
the Accounts, all Recoveries and Interchange allocable to the Trust, and the
proceeds of all of the foregoing. PFR may also sell and assign from time to time
to the Transferor for conveyance to the Trust Receivables in designated
Additional Accounts, and the Transferor may from time to time sell and assign to
the Trust its interest in Participation Interests, all Recoveries and
Interchange allocable to the Trust and the proceeds of all of the foregoing.
On each Series Issuance Date, the Trustee will authenticate and deliver one
or more securities representing the Series or Class of Securities, in each case
against payment to the Transferor of the net proceeds of the sale of the
Securities. On January 29, 1998, the Trustee delivered to the Transferor the
Transferor Security, representing the Transferor's Interest.
In connection with the transfers of the Receivables, each Account
Originator will indicate in its respective computer records that the applicable
Receivables have been conveyed from such party to PFR. PFR will indicate in its
computer records that the Receivables have been conveyed from PFR to the
Transferor and the Transferor will indicate in its records that the Receivables
have been conveyed from the Transferor to the Trust. In addition, the Transferor
will provide or cause to be provided to the Trustee a computer file or a
microfiche list containing a true and complete list showing for each Account, as
of the applicable date of designation, (i) its account number, (ii) the
aggregate amount outstanding in such Account and (iii) except in the case of New
Accounts, the aggregate amount of Principal Receivables in such Account. The
Transferor will retain and will not deliver to the Trustee any other records or
agreements relating to the Accounts or the Receivables. Except as set forth
above, the records and agreements relating to the Accounts and the Receivables
will not be segregated from those relating to other credit card accounts and
receivables, and the physical documentation relating to the Accounts or
Receivables will not be stamped or marked to reflect the transfer of Receivables
to the Transferor or the Trust. The Transferor will file UCC financing
statements with respect to the transfer of the Receivables from the Transferor
to the Trust meeting the requirements of applicable state law. See "Risk
Factors" and "Certain Legal Aspects of the Receivables."
As described below under " -- Additions of Accounts or Participation
Interests," the Transferor has the right (subject to certain limitations and
conditions), and in some circumstances is obligated, to require PFR to designate
from time to time Additional Accounts to be included as Accounts and to convey
to the Transferor (for conveyance by the Transferor to the Trust) all
Receivables in such Additional Accounts, whether such Receivables are then
existing or thereafter created. Each such Additional Account must be an Eligible
Account. In respect of any designation of Additional Accounts, the Transferor
will follow the procedures set forth in the preceding paragraph, except the list
will show information for such Additional Accounts as of the date such
Additional Accounts are identified and selected. Aggregate Addition Accounts
will be selected by the Transferor in a manner which it reasonably believes will
not be materially adverse to the Securityholders. The Transferor has the right
(subject to certain conditions described below under " -- Additions of Accounts
or Participation Interests") to convey Participation Interests to the Trust. In
addition, the Transferor may (under certain circumstances and subject to certain
limitations and conditions) remove the Participation Interests and the
Receivables in certain Accounts as described below under " -- Removal of
Accounts."
46
ELIGIBLE ACCOUNTS AND RECEIVABLES
"Eligible Account" means a revolving credit card account owned by the
applicable Account Originator which, as of the respective date of designation,
(a) is a revolving credit card account in existence and maintained by the
applicable Account Originator, (b) is payable in United States dollars, (c) has
a cardholder whose address is in the United States or its territories or
possessions or a military address, (d) except as provided below has a cardholder
who has not been identified by the Servicer in its computer files as being
involved in any voluntary or involuntary bankruptcy proceeding, (e) has not been
identified as an account with respect to which the related card has been lost or
stolen, (f) is not sold or pledged to any other party except for any sale by the
applicable Account Originator to PFR, (g) does not have receivables which have
been sold or pledged by the applicable Account Originator to any other party
other than PFR, (h) except as provided below, does not have receivables that are
Defaulted Receivables, (i) does not have any receivables that have been
identified by the Servicer or the related cardholder as having been incurred as
a result of fraudulent use of any related credit card, (j) was created in
accordance with the credit card guidelines of the applicable Account Originator,
and (k) with respect to Additional Accounts and certain other accounts, shall
have satisfied the Rating Agency Condition. Accounts which relate to bankrupt
obligors or certain charged-off receivables may be designated as Accounts
provided that the amount of Principal Receivables in any such Account is deemed
to be zero for purposes of all allocations under the Pooling and Servicing
Agreement.
"Eligible Receivable" means each receivable, or interest therein as
contemplated by each Purchase Agreement, (a) which has arisen under an Eligible
Account, (b) which was created in compliance in all material respects with all
requirements of law applicable to the related Account Originator at the time of
the creation of such Receivable and which was created pursuant to a credit card
agreement which complies in all material respects with all requirements of law
applicable to the related Account Originator at the time of the creation of such
Receivable and the requirements of law applicable to Partners First with respect
to such Receivable, (c) with respect to which all material consents, licenses,
approvals or authorizations of, or registrations or declarations with, any
governmental authority required to be obtained, effected or given in connection
with the creation of such Receivable or the execution, delivery, creation and
performance by the related Account Originator of the related credit card
agreements pursuant to which such Receivable was created have been duly obtained
or given and are in full force and effect, (d) as to which at the time of its
transfer to the Trust, the Transferor or the Trust will have good and marketable
title, free and clear of all liens, encumbrances, charges and security interests
(other than any lien for municipal or other local taxes if such taxes are not
then due and payable or if the Transferor is then contesting the validity
thereof in good faith by appropriate proceedings and has set aside on its books
adequate reserves with respect thereto), (e) which is the legal, valid and
binding payment obligation of the related cardholder enforceable against such
cardholder in accordance with its terms, subject to certain bankruptcy or
insolvency related exceptions, (f) 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 and insolvency
related defenses, and (g) which constitutes either an "account" or a "general
intangible" under the applicable UCC as then in effect.
REPRESENTATIONS AND WARRANTIES
The Transferor makes representations and warranties to the Trust in the
Pooling and Servicing Agreement relating to the Accounts and the Receivables as
of each Series Issuance Date (or as of the related addition date with respect to
Additional Accounts) to the effect, among other things, that as of each
applicable date of designation, (a) each Account was an Eligible Account, (b)
each of the Receivables then existing in the Initial Accounts or in the
Additional Accounts, as applicable, is an Eligible Receivable and (c)
thereafter, on the date of creation of any new Receivable, such Receivable is an
Eligible Receivable. If the Transferor breaches any representation and warranty
described in this paragraph in any material respect and such breach remains
uncured for 60 days, or such longer period as may be agreed to by the Trustee
and the Servicer, after the earlier to occur of the discovery of such breach by
the Transferor or receipt of written notice of such breach by the Transferor and
such breach has a material adverse effect on the Securityholders' Interest in
such Receivable, all Receivables with respect to the Account affected
("Ineligible Receivables") will be reassigned to the Transferor on the terms and
conditions set forth below and such Account shall no longer be included as an
Account.
An Ineligible Receivable will be reassigned to the Transferor on or before
the end of the Monthly Period in which such reassignment obligation arises by
the Transferor directing the Servicer to deduct the portion of such Ineligible
Receivable which is a Principal Receivable from the aggregate amount of the
Principal Receivables used to calculate the Transferor Amount. In the event that
the exclusion of the principal portion of an Ineligible Receivable from the
calculation of the Transferor Amount would cause the Transferor Amount to be
less than the Required Transferor Amount, on the Distribution Date following the
Monthly Period in which such reassignment obligation arises the Transferor will
make a deposit into the Special Funding Account in immediately available funds
in an amount equal to the amount by which the Transferor Amount
47
would be reduced below the Required Transferor Amount. The reassignment of any
Ineligible Receivable to the Transferor, and the obligation of the Transferor to
make any deposits into the Special Funding Account as described in this
paragraph, is the sole remedy respecting any breach of the representations and
warranties described in the preceding paragraph with respect to such Receivable
available to the Securityholders or the Trustee on behalf of Securityholders.
PFR will agree, in the Transferor Purchase Agreement, to repurchase from the
Transferor any Ineligible Receivables which shall be reassigned to the
Transferor and to provide the Transferor any amounts necessary to enable the
Transferor to make the deposit referred to above. The term "Transferor Amount"
means at any time of determination, an amount equal to the sum of (i) total
aggregate amount of Principal Receivables in the Trust PLUS (ii) the amount on
deposit in the Special Funding Account at such time PLUS (iii) the aggregate
principal amount on deposit in the Principal Funding Account and the Pre-Funding
Account for each Series MINUS (iv) the aggregate Invested Amounts for all
outstanding Series at such time.
The Transferor also makes representations and warranties to the Trust to
the effect, among other things, that as of each Series Issuance Date it is a
corporation validly existing under the laws of the State of Delaware, it has the
authority to consummate the transactions contemplated by the Pooling and
Servicing Agreement and each Supplement and will further represent to the Trust
on each Series Issuance Date and, with respect to the Additional Accounts, as of
each addition date (a) the Pooling and Servicing Agreement and each Supplement
constitutes a valid, binding and enforceable agreement of the Transferor,
subject to certain bankruptcy or insolvency related exceptions, and (b) the
Pooling and Servicing Agreement and each Supplement constitutes either a valid
sale, transfer and assignment to the Trust of all right, title and interest of
the Transferor in the Receivables, whether then existing or thereafter created,
and the proceeds thereof (including proceeds in any of the accounts established
for the benefit of the Securityholders) and in Recoveries and Interchange
allocable to the Trust or the grant of a first priority perfected security
interest under the applicable UCC in such Receivables and the proceeds thereof
(including proceeds in any of the accounts established for the benefit of the
Securityholders) and in Recoveries and Interchange allocable to the Trust, which
is effective as to each Receivable then existing on such date. In the event of a
material breach of any of the representations and warranties described in this
paragraph that has a material adverse effect on the Securityholders' Interest in
the Receivables or the availability of the proceeds thereof to the Trust (which
determination will be made without regard to whether funds are then available
pursuant to any Series Enhancement), either the Trustee or Securityholders
holding Securities evidencing not less than 50% of the aggregate unpaid
principal amount of all outstanding Securities, by written notice to the
Transferor and the Servicer (and to the Trustee if given by the
Securityholders), may direct the Transferor to accept the reassignment of the
Receivables in the Trust within 60 days of such notice, or within such longer
period specified in such notice. The Transferor will be obligated to accept the
reassignment of such Receivables on the Distribution Date following the Monthly
Period in which such reassignment obligation arises. Such reassignment will not
be required to be made, however, if at the end of such applicable period, the
representations and warranties shall then be true and correct in all material
respects and any material adverse effect caused by such breach shall have been
cured. The price for such reassignment will be an amount equal to the sum of the
amounts specified therefor with respect to each Series in the related
Supplement. The payment of such reassignment price, in immediately available
funds, will be considered a payment in full of the Securityholders' Interest and
such funds will be distributed upon presentation and surrender of the
Securities. If the Trustee or Securityholders give a notice as provided above,
the obligation of the Transferor to make any such deposit will constitute the
sole remedy respecting a breach of the representations and warranties available
to Securityholders or the Trustee on behalf of Securityholders. See "Description
of the Purchase Agreements -- Transferor Purchase Agreement."
It is not required or anticipated that the Trustee will make any initial or
periodic 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 each of the Transferor's representations and warranties or for
any other purpose. In addition, it is not anticipated or required that the
Trustee will make any initial or periodic general examination of the Servicer
for the purpose of establishing the compliance by the Servicer with its
representations or warranties or the performance by the Servicer of its
obligations under the Pooling and Servicing Agreement, any Supplement or for any
other purpose. The Servicer, however, will deliver to the Trustee on or before
March 31 of each calendar year an opinion of counsel with respect to the
validity of the interest of the Trust in and to the Receivables and certain
other components of the Trust.
TRANSFEROR SECURITIES
The Transferor Security represents the undivided interest in the Trust not
represented by the Securities or any Participation issued and outstanding under
the Trust or the rights, if any, of any providers of enhancement to receive
payments from the Trust. The Transferor will initially own the Transferor
Security. The Transferor's Interest at any time represents the right to the
Trust Assets in excess of the Securityholders' Interest, the interest of any
holder of a Participation and Enhancement
48
Invested Amounts of all Series then outstanding. The Transferor Amount will
fluctuate as the amount of the Principal Receivables held by the Trust changes
from time to time. In addition, the Transferor intends to cause the issuance of
Series from time to time and any such issuance will have the effect of
decreasing the Transferor Amount to the extent of the initial Invested Amount of
such Series. The Pooling and Servicing Agreement provides that the Transferor
may exchange a portion of the Transferor Security for one or more additional
securities (each, a "Supplemental Security") for transfer or assignment to a
person designated by the Transferor upon the execution and delivery of a
Supplement to the Pooling and Servicing Agreement (which Supplement shall be
subject to the amendment section of the Pooling and Servicing Agreement to the
extent that it amends any of the terms of the Pooling and Servicing Agreement;
see " -- Amendments"); PROVIDED, that (a) the Rating Agency Condition is
satisfied for such exchange, (b) such exchange will not result in any Adverse
Effect and the Transferor shall have delivered to the Trustee an officer's
certificate to the effect that the Transferor reasonably believes that such
exchange will not, based on the facts known to such officer at the time of such
certification, have an Adverse Effect, (c) the Transferor shall have delivered
to the Trustee a Tax Opinion (as defined herein) with respect to such exchange
and (d) the aggregate amount of Principal Receivables in the Trust as of the
date of such exchange will be greater than the Required Minimum Principal
Balance as of such date. Any subsequent transfer or assignment of a Supplemental
Security by a person other than the Transferor will be subject to the condition
set forth in clause (c) above. On January 29, 1998, the Transferor issued to one
of its affiliates a Supplemental Security representing the excess of the
Transferor Amount over a minimum retained Transferor Amount representing at
least 2.0% of the aggregate Invested Amount of all Series.
ADDITIONS OF ACCOUNTS OR PARTICIPATION INTERESTS
The Transferor has the right under the Transferor Purchase Agreement to
require PFR to designate from time to time Additional Accounts to be included as
Accounts. PFR will convey to the Transferor, which in turn will convey to the
Trust, its interest in all Receivables arising from the Additional Accounts,
whether such Receivables are then existing or thereafter created, subject to the
following conditions, among others: (i) each such Additional Account must be an
Eligible Account; and (ii) except for the addition of New Accounts (a) the
selection of the Aggregate Addition Accounts is done in a manner which it
reasonably believes will not result in an Adverse Effect; and (b) except for the
addition of New Accounts, the Rating Agency Condition shall have been satisfied.
"Adverse Effect" means any action that will result in the occurrence of a Pay
Out Event or Reinvestment Event or materially adversely affect the timing or
amount of payments to the Securityholders of any Series or Class. The Transferor
will be obligated to require PFR to designate Additional Accounts (to the extent
available) if (a) the aggregate amount of Principal Receivables in the Trust on
the last business day of any calendar month is less than the Required Minimum
Principal Balance as of such last day or (b) the Transferor Amount on the last
business day of any calendar month is less than the Required Transferor Amount
as of such last day. In lieu of adding Additional Accounts, the Transferor may
convey Participation Interests to the Trust. Participation Interests may, for
example, include rights in transferors' interests in, or certain credit card
backed securities issued by, other trusts which have as their primary assets
revolving credit card receivables originated or purchased by an Account
Originator. There are currently no Participation Interests held by the Trust and
Participation Interests may be added to the Trust only if the requirements of
the Securities Act applicable thereto have been satisfied including, that such
Participation Interests either have been registered under the Securities Act
and, if purchased from an affiliate of an underwriter in the original
distribution, the Participation Interests are purchased in the secondary market
at least three months after the sale of any unsold allotments from the original
distribution, or that such Participation Interests are entitled to an exemption
from the registration requirements of the Securities Act and have been acquired
by the registrant following the expiration of any holding period applicable
thereto under the Securities Act. In addition, Participation Interests may be
added to the Trust only if the Rating Agency Condition has been satisfied, such
addition will not result in an Adverse Effect and such addition will not cause
an Insolvency Event to occur. "Required Minimum Principal Balance" as of any
date of determination means the sum of the numerators used in the Principal
Allocation Percentage for each Series outstanding on such date MINUS the amount
on deposit in the Special Funding Account MINUS the amount on deposit in the
Principal Funding Account for each Series outstanding on such date MINUS the
amount on deposit in the Pre-Funding Account for each Series outstanding on such
date. The "Series Invested Amount" for a Series will be the amount set forth in
the related Supplement and, for each Series offered hereby, in the related
Prospectus Supplement for such Series, but will generally equal the initial
Invested Amount for a Series.
Each Additional Account must be an Eligible Account at the time of its
designation. However, since Additional Accounts or Participation Interests
created after January 29, 1998 may not have been a part of the portfolio of
accounts of PFR as of January 29, 1998, they may not be of the same credit
quality as the Initial Accounts because such Additional Accounts or
Participation Interests may have been originated at a later date using credit
criteria different from those which were applied to the Initial Accounts or may
have been acquired from another credit card issuer or entity who had different
49
credit criteria. Consequently, the performance of such Additional Accounts or
Participation Interests may be better or worse than the performance of the
Initial Accounts.
REMOVAL OF ACCOUNTS
Subject to the conditions set forth in the next succeeding sentence, the
Transferor may on any day of any Monthly Period, but shall not be obligated to,
acquire all Receivables and proceeds thereof with respect to Removed Accounts
and Participation Interests. The Transferor is permitted to designate and
require reassignment to it of the Receivables from Removed Accounts and
Participation Interests only upon satisfaction of the following conditions: (i)
the Transferor shall have delivered to the Trustee a computer file or microfiche
list containing a true and complete list of all Removed Accounts, such Accounts
to be identified by, among other things, account number and their aggregate
amount of Principal Receivables; (ii) the Transferor shall have delivered an
officer's certificate to the Trustee (with a copy to each Rating Agency) to the
effect that the Transferor reasonably believes that (a) such removal will not
have an Adverse Effect; (b) either (x) no selection procedure reasonably
believed by the Transferor to be materially adverse to the interests of the
Securityholders or the Transferor was utilized in removing the Removed Accounts
from among any pool of Accounts of a similar type or (y) a random selection
procedure was used by the Transferor in selecting the accounts to be removed;
and (c) the Transferor Amount as of the Removal Date (determined after giving
effect to such removal and to the Principal Receivables or Participation
Interests transferred to the Trust on such date) is greater than or equal to the
Required Transferor Amount; and (iii) the Transferor shall have delivered prior
written notice of the removal to each Rating Agency, the Trustee and the
Servicer and, prior to the date on which such Receivables are to be removed, the
Rating Agency Condition shall have been satisfied with respect to such removal.
If on the applicable Removal Date, the long-term unsecured debt obligations of
Partners First or PFR are not rated at least in the third highest rating
category by the Rating Agency, the Transferor will be required to deliver to the
Trustee, with a copy to the Rating Agency, an officer's certificate which shall
have attached to it the relevant fraudulent conveyance statute, if any, and set
forth the factual basis for a conclusion that such Removal would not constitute
a fraudulent conveyance of the Transferor. The foregoing conditions may be
amended with the consent of each Rating Agency but without the consent of
Securityholders if such amendment is required to comply with any accounting or
regulatory restrictions to which the Trust, the Transferor, Partners First PFR
or any Account Originator may become subject.
DISCOUNT OPTION
The Pooling and Servicing Agreement provides that the Transferor may at any
time and from time to time, but without any obligation to do so, designate a
specified fixed or variable percentage based on a formula (the "Discount
Percentage") of the amount of Receivables arising in all or any specified
portion of the Accounts on and after the date such designation becomes effective
that otherwise would have been treated as Principal Receivables to be treated as
Finance Charge Receivables (the "Discount Option Receivables"). Although there
can be no assurance that the Transferor will do so, such designation may occur
because the Transferor determines that the exercise of the discount option is
needed to provide a sufficient yield on the Receivables to cover interest and
other amounts due and payable from collections of Finance Charge Receivables or
to avoid the occurrence of a Pay Out Event or Reinvestment Event relating to the
reduction of the average yield on the portfolio of Accounts in the Trust, if the
related Supplement provides for such a Pay Out Event or Reinvestment Event.
After any such designation, pursuant to the Pooling and Servicing Agreement, the
Transferor may, without notice to or consent of the Securityholders, from time
to time reduce or withdraw the Discount Percentage; PROVIDED, HOWEVER, that such
reduction or withdrawal will occur only if the Transferor delivers to the
Trustee and, in connection with certain Series, providers of Series Enhancement
a certificate of an authorized representative to the effect that, in the
reasonable belief of the Transferor, such reduction or withdrawal would not have
adverse regulatory or other accounting implications for the Transferor. The
Transferor must provide 30 days' prior written notice to the Servicer, the
Trustee, each Rating Agency and, in connection with certain Series, providers of
Series Enhancement of any such designation or reduction or withdrawal, and such
designation or reduction or withdrawal will become effective on the date
specified therein only if (a) the Transferor has delivered to the Trustee and
any such providers of Series Enhancement a certificate of an authorized
representative to the effect that, based on the facts known to such
representative at the time, the Transferor reasonably believes that such
designation or reduction or withdrawal will not at the time of its occurrence
cause a Pay Out Event or Reinvestment Event or an event that, with notice or the
lapse of time or both, would constitute a Pay Out Event or Reinvestment Event,
to occur with respect to any Series and (b) the Transferor has received written
notice from each Rating Agency that such designation or reduction or withdrawal
will satisfy the Rating Agency Condition. On the Date of Processing of any
collections on or after the date the exercise of the discount option takes
effect, the product of (i) a fraction, the numerator of which is the amount of
Discount Option Receivables and the denominator of which is the amount of all of
the Principal Receivables (including Discount Option Receivables) at the end of
the prior Monthly Period and (ii) collections of Receivables that arise in the
Accounts on such day on or
50
after the date such option is exercised that otherwise would be Principal
Receivables will be deemed collections of Finance Charge Receivables and will be
applied accordingly, unless otherwise provided in the related Prospectus
Supplement. Any such designation would result in an increase in the amount of
collections of Finance Charge Receivables, a reduction in the balance of
Principal Receivables and a reduction in the Transferor Amount.
YIELD SUPPLEMENT ACCOUNT
If so specified in the Prospectus Supplement for any Series the Servicer
will establish and maintain the Yield Supplement Account in the name of the
Trustee, on behalf of the Trust, with an Eligible Institution for the benefit of
the Securityholders of such Series. Amounts on deposit in the Yield Supplement
Account (together with investment earnings thereon) will be released and
deposited into the Collection Account in the amounts and at the times specified
in the Prospectus Supplement for such Series. Each such deposit into the
Collection Account will be treated as collections of Finance Charge Receivables
allocable to the Securities of the related Series. The Yield Supplement Account
for any Series will be funded with proceeds from the offering of the Securities
of the related Series.
PREMIUM OPTION
The Pooling and Servicing Agreement provides that the Transferor may at any
time and from time to time, but without any obligation to do so, designate a
specified fixed or variable percentage based on a formula as specified in the
related Prospectus Supplement (the "Premium Percentage") of the amount of
Receivables arising in all or any specified portion of the Accounts on and after
the date such designation becomes effective that otherwise would have been
treated as Finance Charge Receivables to be treated as Principal Receivables
(the "Premium Option Receivables"). After any such designation, pursuant to the
Pooling and Servicing Agreement, the Transferor may, without notice to or
consent of the Securityholders, from time to time reduce or withdraw the Premium
Percentage; PROVIDED, HOWEVER, that such reduction or withdrawal will occur only
if the Transferor delivers to the Trustee and, in connection with certain
Series, providers of Series Enhancement a certificate of an authorized
representative to the effect that, in the reasonable belief of the Transferor,
such reduction or withdrawal would not have adverse regulatory or other
accounting implications for the Transferor. The Transferor must provide 30 days'
prior written notice to the Servicer, the Trustee, each Rating Agency and any
such provider of Series Enhancement of any such designation or reduction or
withdrawal, and such designation or reduction or withdrawal will become
effective on the date specified therein only if (a) the Transferor has delivered
to the Trustee and any such providers of Series Enhancement a certificate of an
authorized representative to the effect that, based on the facts known to such
representative at the time, the Transferor reasonably believes that such
designation or reduction or withdrawal will not at the time of its occurrence
cause a Pay Out Event or Reinvestment Event or an event that, with notice or the
lapse of time or both, would constitute a Pay Out Event or Reinvestment Event,
to occur with respect to any Series and (b) the Transferor has received written
notice from each Rating Agency that such designation or reduction or withdrawal
will satisfy the Rating Agency Condition. On the Date of Processing of any
collections on or after the date the exercise of the premium option takes
effect, the product of (i) a fraction the numerator of which is the amount of
Premium Option Receivables and the denominator of which is the amount of all of
the Finance Charge Receivables (including Premium Option Receivables) at the end
of the prior Monthly Period and (ii) collections of Receivables that arise in
the Accounts on such day on or after the date such option is exercised that
otherwise would be Finance Charge Receivables will be deemed collections of
Principal Receivables and will be applied accordingly, unless otherwise provided
in the related Prospectus Supplement. Any such designation would result in an
increase in the amount of collections of Principal Receivables and a lower
portfolio yield with respect to collections of Finance Charge Receivables than
would otherwise occur. The Transferor might exercise this option because an
increase in the amount of collections of Principal Receivables could result in a
faster repayment of principal to Securityholders during an Amortization Period
or accumulation of principal during an Accumulation Period.
INDEMNIFICATION
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Trustee from and against any loss, liability,
expense, damage or injury suffered or sustained arising out of certain of the
Servicer's actions or omissions with respect to the Trust pursuant to the
Pooling and Servicing Agreement.
Except as provided in the preceding paragraph, the Pooling and Servicing
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 Trustee, the Securityholders, any Credit Enhancer or
any other person for any action taken, or for refraining from taking any action,
in good faith pursuant to the Pooling and Servicing Agreement. However, neither
the Transferor nor the Servicer will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad
51
faith or gross negligence of the Transferor, the Servicer or any such person in
the performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder.
In addition, the Pooling and Servicing 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 Pooling and
Servicing Agreement. The Servicer may, in its sole discretion, undertake any
such legal action which it may deem necessary or desirable for the benefit of
Securityholders with respect to the Pooling and Servicing Agreement and the
rights and duties of the parties thereto and the interests of the
Securityholders thereunder.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Pooling and Servicing Agreement, the Servicer is
responsible for servicing, collecting, enforcing and administering the
Receivables in accordance with customary and usual procedures for servicing
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 any other credit card receivables it, or its affiliates, service.
Pursuant to the Additional Receivables Purchase Agreements, except as
otherwise required by any requirement of law or as is deemed by the related
Account Originator (or any successor thereto under such agreement) to be
necessary in order for it to maintain its credit card business or a program
operated by such credit card business on a competitive basis based on a good
faith assessment by it of the nature of the competition in the credit card
business or such program, an Account Originator will not take any action that
will have the effect of reducing the Portfolio Yield to a level that could
reasonably be expected to cause any Series to experience a Pay Out Event or
Reinvestment Event based on the insufficiency of the Series Adjusted Portfolio
Yield or take any action that would have the effect of reducing the Portfolio
Yield to less than the highest Average Rate for any Group. The related Account
Originator also covenants that unless required by law and except as provided
above, such Account Originator will take no action with respect to the
applicable credit card agreements or the applicable credit card guidelines that,
at the time of such action, such Account Originator reasonably believes will
have a material adverse effect on the Transferor or the Securityholders.
Servicing activities to be performed by the Servicer include collecting and
recording payments, communicating with cardholders, investigating payment
delinquencies, evaluating the increase of credit limits and the issuance of
credit cards, providing billing and tax 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 assistance in
any inspections of the documents and records relating to the Accounts and
Receivables by the Trustee pursuant to the Pooling and Servicing 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 Securityholders and on behalf of the Trustee.
The Pooling and Servicing Agreement provides that the Servicer may delegate
its duties under that agreement to any entity that agrees to conduct such duties
in accordance with the Pooling and Servicing Agreement and the Credit Card
Guidelines. Notwithstanding any such delegation the Servicer will continue to be
liable for all of its obligations under the Pooling and Servicing Agreement.
NEW ISSUANCES
The Pooling and Servicing Agreement provides that, pursuant to any one or
more Supplements, the Transferor may direct the Trustee to authenticate from
time to time new Series subject to the conditions described below (each such
issuance, a "New Issuance"). Each New Issuance will have the effect of
decreasing the Transferor Amount to the extent of the initial Invested Amount of
such new Series. Under the Pooling and Servicing Agreement, the Transferor may
designate, with respect to any newly issued Series: (a) its name or designation;
(b) its initial principal amount (or method for calculating such amount) and its
invested amount in the Trust (the "Invested Amount"), which is generally based
on the aggregate amount of Principal Receivables in the Trust allocated to such
Series, and its Series Invested Amount; (c) its security rate (or formula for
the determination thereof); (d) the interest payment date or dates (each, an
"Interest Payment Date") and the date or dates from which interest shall accrue;
(e) the method for allocating collections to Securityholders of such Series; (f)
any bank accounts to be used by such Series and the terms governing the
operation of any such bank accounts; (g) the percentage used to calculate the
Monthly Servicing Fees; (h) the provider and terms of any form of Series
Enhancement with respect thereto; (i) the terms on which the Securities of such
Series may be repurchased; (j) the Series Termination Date; (k) the number of
Classes of Securities of such Series, and if such Series consists of more than
one Class, the rights and priorities of each such Class; (l) the extent to which
the Securities of such Series will be issuable in temporary or permanent global
form (and, in such case, the depositary for such global security or securities,
the terms and conditions, if any, upon which such global
52
security or securities may be exchanged, in whole or in part, for definitive
securities, and the manner in which any interest payable on such global security
or securities will be paid); (m) whether the Securities of such Series may be
issued in bearer form and any limitations imposed thereon; (n) the priority of
such Series with respect to any other Series; (o) the Group, if any, in which
such Series will be included; and (p) any other relevant terms (all such terms,
the "Principal Terms" of such Series). None of the Transferor, the Servicer, the
Trustee or the Trust is required or intends to obtain the consent of any
Securityholder of any outstanding Series to issue any additional Series. The
Transferor may offer any Series to the public under a Prospectus Supplement or
other Disclosure Document in transactions either registered under the Securities
Act or exempt from registration thereunder, directly, through one or more
underwriters or placement agents, in fixed-price offerings or in negotiated
transactions or otherwise. See "Plan of Distribution." Any such Series may be
issued in fully registered or book-entry form in minimum denominations
determined by the Transferor. The Transferor intends to offer, from time to
time, additional Series.
In addition to the foregoing, it is a condition to the issuance of each
Series offered hereby, that on the related Series Issuance Date, the aggregate
amount of Receivables which are more than 30-days past due, will not exceed 20%
of the aggregate amount of Receivables in the Trust.
The Pooling and Servicing Agreement provides that the Transferor may
designate Principal Terms such that each Series has a Controlled Accumulation
Period or a Controlled Amortization Period that may have a different length and
begin on a different date than such periods for any other Series. Further, one
or more Series may be in their Controlled Accumulation Period or Controlled
Amortization Period while other Series are not. Moreover, each Series may have
the benefits of Series Enhancement issued by enhancement providers different
from the providers of Series Enhancement with respect to any other Series. Under
the Pooling and Servicing Agreement, the Trustee shall hold any such Series
Enhancement only on behalf of the Securityholders of the Series to which such
Series Enhancement relates. With respect to each such Series Enhancement, the
Transferor may deliver a different form of Series Enhancement agreement. The
Transferor also has the option under the Pooling and Servicing Agreement to vary
among Series the terms upon which a Series may be repurchased by the Transferor.
There is no limit to the number of New Issuances the Transferor may cause under
the Pooling and Servicing Agreement. The Trust will terminate only as provided
in the Pooling and Servicing Agreement. There can be no assurance that the terms
of any Series might not have an impact on the timing and amount of payments
received by a Securityholder of another Series.
Under the Pooling and Servicing Agreement and pursuant to a Supplement, a
New Issuance may only occur upon the satisfaction of certain conditions provided
in the Pooling and Servicing Agreement. The obligation of the Trustee to
authenticate the Securities of such new Series and to execute and deliver the
related Supplement is subject to the satisfaction of the following conditions:
(a) on or before the fifth day immediately preceding the date upon which the New
Issuance is to occur, the Transferor shall have given the Trustee, the Servicer
and each Rating Agency written notice of such New Issuance and the date upon
which the New Issuance is to occur; (b) the Transferor shall have delivered to
the Trustee the related Supplement, in form satisfactory to the Trustee,
executed by each party to the Pooling and Servicing Agreement other than the
Trustee; (c) the Transferor shall have delivered to the Trustee any related
Series Enhancement agreement executed by each of the parties to such agreement;
(d) the Trustee shall have received confirmation from each Rating Agency that
such New Issuance will satisfy the Rating Agency Condition; (e) the Transferor
shall have delivered to the Trustee and certain providers of Series Enhancement
a certificate of an authorized officer, dated the date upon which the New
Issuance is to occur, to the effect that the Transferor reasonably believes that
such issuance will not, based on the facts known to such representative at the
time of such certification, have an Adverse Effect; (f) the Transferor shall
have delivered to the Trustee, each Rating Agency and certain providers of
Series Enhancement an opinion of counsel acceptable to the Trustee that for
Federal income tax purposes: (i) following such New Issuance the Trust will not
be deemed to be an association (or publicly traded partnership) taxable as a
corporation; (ii) such New Issuance will not adversely affect the tax
characterization as debt of Securities of any outstanding Series or Class that
were characterized as debt at the time of their issuance; (iii) such New
Issuance will not cause or constitute an event in which gain or loss would be
recognized by any Securityholders; and (iv) except as is otherwise provided in a
Supplement with respect to any Series or Class thereof, the Securities of such
Series or the specified Classes thereof will be properly characterized as debt
(an opinion of counsel to the effect referred to in clauses (i), (ii), (iii) and
(iv) with respect to any action is referred to herein as a "Tax Opinion"); (g)
the aggregate amount of Principal Receivables plus the principal amount of any
Participation Interest shall be greater than the Required Minimum Principal
Balance as of the date upon which the New Issuance is to occur after giving
effect to such issuance; and (h) any other conditions specified in any
Supplement. Upon satisfaction of the above conditions, the Trustee shall execute
the Supplement and issue to the Transferor the Securities of such new Series for
execution and redelivery to the Trustee for authentication.
The Pooling and Servicing Agreement provides that, pursuant to any one or
more supplements to the Pooling and Servicing Agreement (each, a "Participation
Supplement"), the Transferor may direct the Trustee to issue on behalf of the
53
Trust one or more participations (each, a "Participation"), to be delivered to
or upon the order of the Transferor; PROVIDED that (a) the Rating Agency
Condition shall have been satisfied with respect thereto, (b) the Transferor
Amount (excluding the interest represented by any Supplemental Security) shall
not be less than the Required Transferor Amount as of the date of, and after
giving effect to, such issuance and (c) the Transferor shall have delivered to
the Trustee and each Rating Agency a Tax Opinion, dated the date of such
issuance, with respect to such issuance. Any Participation may be transferred or
exchanged only upon satisfaction of the conditions described in clauses (a) and
(c) above. Each Participation will entitle its holder to a specified percentage
(the "Participation Percentage") of all collections of Principal Receivables and
Finance Charge Receivables and any other Trust Assets to the extent specified in
the Participation Supplement.
COLLECTION ACCOUNT
The Servicer has established and maintains, or has caused to be established
and maintains, for the benefit of the Securityholders in the name of the
Trustee, on behalf of the Trust, an account (the "Collection Account") with an
Eligible Institution. "Eligible Institution" means any depository institution
(which may be the Trustee) organized under the laws of the United States or any
one of the states thereof, including the District of Columbia (or any domestic
branch of a foreign bank) which depository institution at all times is a member
of the FDIC and (i) whose short-term unsecured debt obligations are acceptable
to each Rating Agency or (ii) which has a certificate of deposit rating
acceptable to each Rating Agency, except that no such rating will be required of
an institution which maintains a trust fund in a fully segregated trust account
with the corporate trust department of such institution as long as such
institution maintains the credit rating of the applicable Rating Agency in one
of its generic credit rating categories which signifies investment grade and is
a member of the FDIC. Notwithstanding the preceding sentence, any institution
the appointment of which satisfies the Rating Agency Condition will be an
Eligible Institution. Funds in the Collection Account generally will be invested
in (i) obligations issued or fully guaranteed by the United States of America or
any instrumentality or agency thereof when such obligations are backed by the
full faith and credit of the United States of America, (ii) demand deposits,
time deposits or certificates of deposit of depository institutions or trust
companies incorporated under the laws of the United States of America or any
state thereof and subject to supervision and examination by federal or state
banking or depository institution authorities; PROVIDED that at the time of the
Trust's investment or contractual commitment to invest therein, the short-term
debt rating of such depository institution or trust company shall be in the
highest rating category of the applicable Rating Agency, (iii) commercial paper
or other short-term obligations having, at the time of the Trust's investment or
a contractual commitment to invest, a rating in the highest rating category of
the applicable Rating Agency, (iv) demand deposits, time deposits or
certificates of deposit which are fully insured by the FDIC having, at the time
of the Trust's investment therein, a rating in the highest rating category of
the applicable Rating Agency, (v) bankers' acceptances issued by any depository
institution or trust company described in (ii) above, (vi) money market funds
having, at the time of the Trust's investment therein, a rating in the highest
rating category of the applicable Rating Agency, (vii) time deposits, other than
as referred to in (iv) above, with an entity, the commercial paper of such
entity having a credit rating in the highest rating category of the applicable
Rating Agency, (viii) certain repurchase agreements meeting the requirements set
forth in the Pooling and Servicing Agreement, and (ix) any other investment if
the Rating Agency Condition has been satisfied (collectively, "Eligible
Investments"). Any earnings (net of losses and investment expenses) on funds in
the Collection Account will be paid to the Transferor. The Servicer has the
revocable power to withdraw funds from the Collection Account and to instruct
the Trustee to make withdrawals and payments from the Collection Account for the
purpose of carrying out its duties under the Pooling and Servicing Agreement and
any Supplement.
ALLOCATIONS
Pursuant to the Pooling and Servicing Agreement, during each Monthly Period
the Servicer will allocate to each outstanding Series its Series Allocable
Finance Charge Collections, Series Allocable Principal Collections and Series
Allocable Defaulted Amount.
"Series Adjusted Invested Amount" means, with respect to any Series and for
any Monthly Period, the Series Invested Amount for such Series for such Monthly
Period, less the excess, if any, of the cumulative amount (calculated in
accordance with the terms of the related Supplement and, with respect to any
Series offered hereby, the related Prospectus Supplement) of investor
charge-offs allocable to the Invested Amount for such Series as of the last day
of the immediately preceding Monthly Period over the aggregate reimbursement of
such investor charge-offs as of such last day, or such lesser amount as may be
provided in the Supplement for such Series and, with respect to any Series
offered hereby, the related Prospectus Supplement.
54
"Series Allocable Finance Charge Collections," "Series Allocable Principal
Collections" and "Series Allocable Defaulted Amount" mean, with respect to any
Series and for any Monthly Period, the product of (a) the Series Allocation
Percentage and (b) the amount of collections of Finance Charge Receivables
deposited in the Collection Account, the amount of collections of Principal
Receivables deposited in the Collection Account and the amount of all Defaulted
Amounts with respect to such Monthly Period, respectively.
"Series Allocation Percentage" means, with respect to any Series and for
any Monthly Period, the percentage equivalent of a fraction, the numerator of
which is the Series Adjusted Invested Amount as of the last day of the
immediately preceding Monthly Period plus the Series Required Transferor Amount
as of the last day of the immediately preceding Monthly Period and the
denominator of which is the Trust Adjusted Invested Amount plus the sum of all
Series Required Transferor Amounts as of such last day.
"Series Required Transferor Amount" means for any Series an amount
specified in the Supplement for such Series and, for any Series offered hereby,
the related Prospectus Supplement.
"Trust Adjusted Invested Amount" means, with respect to any Monthly Period,
the sum of the Series Adjusted Invested Amounts (as adjusted in any Supplement)
for all outstanding Series plus the principal amount of any Participation then
outstanding.
The Servicer will then allocate amounts initially allocated to a particular
Series between the Securityholders' Interest and the Transferor's Interest for
such Monthly Period as follows:
(i) the Series Allocable Finance Charge Collections and the Series
Allocable Defaulted Amount will at all times be allocated to the Invested
Amount of a Series based on the Floating Allocation Percentage of such
Series; and
(ii) the Series Allocable Principal Collections will at all times be
allocated to the Invested Amount of such Series based on the Principal
Allocation Percentage of such Series.
The "Floating Allocation Percentage" and the "Principal Allocation
Percentage" with respect to any Series will be determined as set forth in the
related Supplement and, with respect to each Series offered hereby, in the
related Prospectus Supplement. Amounts not allocated to the Invested Amount of
any Series as described above will be allocated to the Transferor's Interest.
GROUPS OF SERIES
If so specified in the related Prospectus Supplement, the Securities of a
Series may be included in a Reallocation Group, which is a Group of Series
subject to reallocations of collections of Finance Charge Receivables and other
amounts or obligations among Series in such Group in the manner described below
under " -- Reallocations Among Securities of Different Series within a
Reallocation Group." Collections of Finance Charge Receivables allocable to each
Series in a Reallocation Group will be aggregated and made available for certain
required payments for all Series in such Group. Consequently, the issuance of
new Series in such Group may have the effect of reducing or increasing the
amount of collections of Finance Charge Receivables allocable to the Securities
of other Series in such Group. See "Risk Factors -- Issuance of New Series." The
Prospectus Supplement with respect to a Series offered hereby will specify
whether such Series will be included in a Reallocation Group or another type of
Group, whether any previously issued Series have been included in such a Group
and whether any such Series or any previously issued Series may be removed from
such a Group.
REALLOCATIONS AMONG SECURITIES OF DIFFERENT SERIES WITHIN A REALLOCATION GROUP
GROUP INVESTOR FINANCE CHARGE COLLECTIONS. Any Series offered hereby may,
if so specified in the related Prospectus Supplement, be included in a
Reallocation Group. Other Series issued in the future may also be included in
such Group.
The Servicer will calculate for each Monthly Period Group Investor Finance
Charge Collections (as defined below) for a particular Reallocation Group and on
the following Distribution Date will allocate such amount among the
Securityholders' Interest (including any Enhancement Invested Amount) for all
Series in such Group in the following priority:
(i) Group Investor Monthly Interest (as defined below);
(ii) Group Investor Default Amounts (as defined below);
(iii) Group Investor Monthly Fees (as defined below);
(iv) Group Investor Additional Amounts (as defined below); and
55
(v) the balance PRO RATA among each Series in such Group based on the
current Invested Amount of each such Series.
In the case of clauses (i), (ii), (iii) and (iv), if the amount of Group
Investor Finance Charge Collections is not sufficient to cover each such amount
in full, the amount available will be allocated among the Series in such Group
PRO RATA, based on the claim that each Series has under the applicable clause.
This means, for example, that if the amount of Group Investor Finance Charge
Collections is not sufficient to cover Group Investor Monthly Interest, each
Series in such Group will share such amount PRO RATA, and any Series in such
Group with a claim with respect to monthly interest, overdue monthly interest
and interest on such overdue monthly interest, if applicable, which is larger
than the claim for such amounts for any other Series in such Group (due to a
higher security rate) will receive a proportionately larger allocation than such
other Series.
The amount of Group Investor Finance Charge Collections allocated to the
Securityholders' Interest (including any Enhancement Invested Amount) for a
particular Series offered hereby as described above is referred to herein as
"Redirected Investor Finance Charge Collections."
"Group Investor Additional Amounts" means for any Distribution Date the sum
of the amounts determined with respect to each Series in such Group equal to (a)
an amount equal to the amount by which the Invested Amount of any Class of
Securities or any Enhancement Invested Amounts have been reduced as a result of
investor charge-offs, subordination of principal collections and funding the
investor default amount for any other Class of Securities or Enhancement
Invested Amounts of such Series and (b) if the related Supplement so provides,
the amount of interest at the applicable security rate that has accrued on the
amount described in the preceding clause (a).
"Group Investor Default Amount" means for any Distribution Date the sum of
the amounts determined with respect to each Series in such Group equal to the
product of the Series Allocable Defaulted Amount for such Distribution Date and
the applicable Floating Allocation Percentage for such Distribution Date.
"Group Investor Finance Charge Collections" means for any Distribution Date
the aggregate amount of Investor Finance Charge Collections for such
Distribution Date for all Series in such Group.
"Group Investor Monthly Fees" means for any Distribution Date the Monthly
Servicing Fee for each Series in such Group, any Series Enhancement fees and any
other similar fees which are paid out of Redirected Investor Finance Charge
Collections for such Series pursuant to the applicable Supplement.
"Group Investor Monthly Interest" means for any Distribution Date the sum
of the aggregate amount of monthly interest, including overdue monthly interest
and interest on such overdue monthly interest, if applicable, for all Series in
such Group for such Distribution Date.
Finance Charge Receivables may be allocated and reallocated among Series in
a Group as described below.
Step 1 -- total collections of Finance Charge Receivables are allocated
among Series based on the Series Allocation Percentage for each Series. The
amounts allocated to each Series pursuant to this Step 1 are referred to as
"Series Allocable Finance Charge Collections." See " -- Allocations" above.
Step 2 -- the amount of collections of Finance Charge Receivables allocable
to the Invested Amount (including any Enhancement Invested Amount) of a Series
(the "Investor Finance Charge Collections") is determined by multiplying Series
Allocable Finance Charge Collections for each Series by the applicable Floating
Allocation Percentages. See " -- Allocations" above.
Step 3 -- Investor Finance Charge Collections for all Series in a
particular Reallocation Group (or Group Investor Finance Charge Collections) are
pooled for reallocation to each such Series.
Step 4 -- Group Investor Finance Charge Collections are reallocated to each
Series in such Group based on the Series' respective claim with respect to
interest payable on the Securities or Enhancement Invested Amount (if any) of
such Series, the Defaulted Amount allocable to the Securityholders' Interest of
such Series and the Monthly Servicing Fee and certain other amounts in respect
to such Series. The excess is allocated PRO RATA among the Series in such Group
based on their respective Invested Amounts.
56
SHARING OF EXCESS FINANCE CHARGE COLLECTIONS AMONG EXCESS ALLOCATION SERIES
Any Series offered hereby may be designated as an Excess Allocation Series
(including a Series in a Reallocation Group or other type of Group). Collections
of Finance Charge Receivables and certain other amounts allocable to the
Securityholders' Interest of any Excess Allocation Series in excess of the
amounts necessary to make required payments with respect to such Series
(including payments to the provider of any related Series Enhancement) that are
payable out of collections of Finance Charge Receivables (any such excess, the
"Excess Finance Charge Collections") may be applied to cover any shortfalls with
respect to amounts payable from collections of Finance Charge Receivables
allocable to any other Excess Allocation Series, PRO RATA based upon the amount
of the shortfall with respect to amounts payable from collections of Finance
Charge Receivables, if any, with respect to each other Excess Allocation Series;
PROVIDED, HOWEVER, that the sharing of Excess Finance Charge Collections among
Excess Allocation Series will cease if the Transferor shall deliver to the
Trustee a certificate of an authorized representative to the effect that, in the
reasonable belief of the Transferor, the continued sharing of Excess Finance
Charge Collections among Excess Allocation Series would have adverse regulatory
implications with respect to the Transferor, Partners First or PFR. Following
the delivery by the Transferor of any such certificate to the Trustee there will
not be any further sharing of Excess Finance Charge Collections among such
Series in any such Group. In all cases, any Excess Finance Charge Collections
remaining after covering shortfalls with respect to all outstanding Excess
Allocation Series will be paid to the holders of the Transferor Securities.
While any Series offered hereby may be designated as an Excess Allocation
Series, there can be no assurance that (a) any other Series will be designated
as an Excess Allocation Series, (b) there will be any Excess Finance Charge
Collections with respect to any such other Series for any Monthly Period, (c)
any agreement relating to any Series Enhancement will not be amended in such a
manner as to increase payments to the providers of Series Enhancement and
thereby decrease the amount of Excess Finance Charge Collections available from
such Series or (d) the Transferor will not at any time deliver a certificate as
described above. While the Transferor believes that, based upon applicable rules
and regulations as currently in effect, the sharing of Excess Finance Charge
Collections among Excess Allocation Series will not have adverse regulatory
implications for it, Partners First, or PFR, there can be no assurance that this
will continue to be true in the future.
SHARED PRINCIPAL COLLECTIONS
If the Prospectus Supplement for the related Series provides that such
Series is a Principal Sharing Series, collections of Principal Receivables for
any Monthly Period allocated to the Securityholders' Interest of any such Series
will first be used to cover certain amounts described in the related Prospectus
Supplement (including any required deposits into a Principal Funding Account or
required distributions to Securityholders of such Series in respect of
principal). The Servicer will determine the amount of collections of Principal
Receivables for any Monthly Period (plus certain other amounts described in the
related Prospectus Supplement) allocated to such Series remaining after covering
such required deposits and distributions and any similar amount remaining for
any other Principal Sharing Series plus amounts specified in any Participation
Supplement with respect to any Participation to be treated as shared principal
collections (collectively, "Shared Principal Collections"). The Servicer will
allocate the Shared Principal Collections to cover any principal distributions
to Securityholders and deposits to Principal Funding Accounts for any Principal
Sharing Series that are either scheduled or permitted and that have not been
covered out of collections of Principal Receivables and certain other amounts
allocable to the Securityholders' Interest of such Series (collectively,
"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 respective Principal
Shortfalls of such Series. To the extent that Shared Principal Collections
exceed Principal Shortfalls, the balance will be allocated to the holders of the
Transferor Securities, PROVIDED, that (a) such Shared Principal Collections will
be distributed to the holders of the Transferor Securities only to the extent
that the Transferor Amount is greater than the Required Transferor Amount and
(b) in certain circumstances described below under " -- Special Funding
Account," such Shared Principal Collections will be deposited in the Special
Funding Account. Any such reallocation of collections of Principal Receivables
will not result in a reduction in the Invested Amount of the Series to which
such collections were initially allocated. There can be no assurance that there
will be any Shared Principal Collections with respect to any Monthly Period or
that any Series will be designated as Principal Sharing Series.
PAIRED SERIES
If so provided in the related Supplement, a Prior Series may be paired with
a Paired Series issued by the Trust at or after the commencement of the
Controlled Amortization Period or Controlled Accumulation Period for such Prior
Series. As the Invested Amount of the Prior Series is reduced, the Invested
Amount in the Trust of the Paired Series will increase by an equal amount. Upon
payment in full of the Prior Series, the Invested Amount of such Paired Series
will be equal to the Invested Amount paid to Securityholders of such Prior
Series. If a Pay Out Event or Reinvestment Event occurs with respect
57
to the Prior Series or with respect to the Paired Series when the Prior Series
is in a Controlled Amortization Period or Controlled Accumulation Period, the
Series Allocation Percentage and the Principal Allocation Percentage for the
Prior Series and the Series Allocation Percentage and the Principal Allocation
Percentage for the Paired Series will be reset as provided in the related
Prospectus Supplement and the Controlled Amortization Period, Controlled
Accumulation Period, Early Amortization Period or Early Accumulation Period for
such Series could be lengthened.
SPECIAL FUNDING ACCOUNT
If, on any date, the Transferor Amount is less than or equal to the
Required Transferor Amount, the Servicer shall not distribute to the holders of
the Transferor Securities any collections of Principal Receivables allocable to
a Series or a Group that otherwise would be distributed to such holders, but
shall deposit such funds in an account with an Eligible Institution established
and maintained by the Servicer for the benefit of the Securityholders of each
Series, in the name of the Trustee, on behalf of the Trust, and bearing a
designation clearly indicating that the funds deposited therein are held for the
benefit of the Securityholders of each Series (the "Special Funding Account").
Funds on deposit in the Special Funding Account will be withdrawn and paid to
the holders of the Transferor Securities on any Distribution Date to the extent
that, after giving effect to such payment, the Transferor Amount exceeds the
Required Transferor Amount on such date; PROVIDED, HOWEVER, that if a Controlled
Accumulation Period, Early Accumulation Period, Controlled Amortization Period
or Early Amortization Period commences with respect to any Series, any funds on
deposit in the Special Funding Account will be released from the Special Funding
Account, deposited in the Collection Account and treated as collections of
Principal Receivables to the extent needed to make principal payments due to or
for the benefit of the Securityholders of such Series.
Funds on deposit in the Special Funding Account will be invested by the
Trustee, at the direction of the Servicer, in Eligible Investments. Any earnings
(net of losses and investment expenses) earned on amounts on deposit in the
Special Funding Account during any Monthly Period will be withdrawn from the
Special Funding Account and treated as collections of Finance Charge Receivables
with respect to such Monthly Period.
FUNDING PERIOD; PRE-FUNDING ACCOUNT
For any Series of Securities, the related Prospectus Supplement may specify
that during a Funding Period, the Pre-Funding Amount will be held in a
Pre-Funding Account pending the transfer of additional Receivables to the Trust
or pending the reduction of the Invested Amounts of other Series issued by the
Trust. The related Prospectus Supplement will specify the initial Invested
Amount with respect to such Series, the Full Invested Amount and the date by
which the Invested Amount is expected to equal the Full Invested Amount. The
Invested Amount will increase as Receivables are delivered to the Trust or as
the Invested Amounts of other Series of the Trust are reduced. The Invested
Amount may also decrease due to the occurrence of a Pay Out Event with respect
to such Series as provided in the related Prospectus Supplement.
During the Funding Period, funds on deposit in the Pre-Funding Account for
a Series of Securities will be withdrawn and paid to the Transferor to the
extent of any increases in the Invested Amount. If the Invested Amount does not
for any reason equal the Full Invested Amount by the end of the Funding Period,
any amount remaining in the Pre-Funding Account and any additional amounts
specified in the related Prospectus Supplement will be payable to the
Securityholders of such Series in the manner and at such time as set forth in
the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, funds in the
Pre-Funding Account will be invested by the Trustee in Eligible Investments or
will be subject to a guaranteed rate or investment agreement or other similar
arrangement, and, in connection with each Distribution Date during the Funding
Period, investment earnings on funds in the Pre-Funding Account during the
related Monthly Period will be withdrawn from the Pre-Funding Account and
deposited, together with any applicable payment under a guaranteed rate or
investment agreement or other similar arrangement, into the Collection Account
for distribution in respect of interest on the Securities of the related Series
in the manner specified in the related Prospectus Supplement.
DEFAULTED RECEIVABLES; REBATES AND FRAUDULENT CHARGES
"Defaulted Receivables" for any Monthly Period are Principal Receivables
that were charged-off as uncollectible in such Monthly Period. The "Defaulted
Amount" for any Monthly Period will be an amount (not less than zero) equal to
(a) the excess, if any, of the amount of Defaulted Receivables for such Monthly
Period over the Recoveries for such Monthly Period, minus (b) the amount of any
Defaulted Receivables the assignment or reassignment of which the Transferor or
the Servicer becomes obligated to accept during such Monthly Period (unless an
event relating to bankruptcy, receivership or insolvency has occurred with
respect to the Transferor or the Servicer, in which event the amount of such
Defaulted Receivables will not
58
be added to the sum so subtracted). Receivables in any Account will be
charged-off as uncollectible in accordance with the Credit Card Guidelines and
the Servicer's customary and usual policies and procedures for servicing
revolving credit card and other revolving credit account receivables comparable
to the Receivables. The current policy of Partners First is to charge-off the
receivables in an account when that account becomes 181 days delinquent (or
sooner in the event of receipt of notice of death or bankruptcy of the
cardholder), but such policy may change in the future to conform with regulatory
requirements and applicable law.
If the Servicer adjusts downward the amount of any Principal Receivable
(other than Ineligible Receivables that have been, or are to be, reassigned to
the Transferor) because of a rebate, refund, counterclaim, defense, error,
fraudulent charge or counterfeit charge to a cardholder, or such Principal
Receivable was created in respect of merchandise that was refused or returned by
a cardholder or if the Servicer otherwise adjusts downward the amount of any
Principal Receivable without receiving collections therefor or charging off such
amount as uncollectible (any such downward adjustment, a "Dilution"), the amount
of the Principal Receivables in the Trust with respect to the Monthly Period in
which such adjustment takes place will be reduced by the amount of the
adjustment. Furthermore, in the event that the exclusion of any such Receivables
would cause the Transferor Amount at such time to be less than the Required
Transferor Amount, the Transferor will be required to pay an amount equal to
such deficiency into the Special Funding Account (any such payment, an
"Adjustment Payment").
CREDIT ENHANCEMENT
GENERAL. For any Series, Credit Enhancement may be provided with respect to
one or more Classes thereof. Credit Enhancement with respect to one or more
Classes of a Series offered hereby may include a letter of credit, a cash
collateral account or guaranty, a spread account, a yield supplement account, a
collateral interest, a surety bond, an insurance policy or any other form of
credit enhancement described in the related Prospectus Supplement, or any
combination of the foregoing. Credit Enhancement may also be provided to a Class
or Classes of a Series or to a Series by subordination provisions which require
distributions of principal or interest be made with respect to the Securities of
such Class or Classes or such Series before distributions are made to one or
more Classes of such Series or to another Series (if the Supplement for such
Series so provides). If so specified in the related Prospectus Supplement, any
form of Credit Enhancement may be available to more than one Class or Series to
the extent described therein.
The presence of Credit Enhancement with respect to a Class is intended to
enhance the likelihood of receipt by Securityholders of such Class of the full
amount of principal and interest with respect thereto and to decrease the
likelihood that such Securityholders will experience losses. However, unless
otherwise specified in the related Prospectus Supplement, the Credit
Enhancement, if any, with respect thereto will not provide protection against
all risks of loss and will not guarantee repayment of the entire principal
balance of the Securities and interest thereon. If losses occur that exceed the
amount covered by the Credit Enhancement or that are not covered by the Credit
Enhancement, Securityholders will bear their allocable share of such losses. In
addition, if specific Credit Enhancement is provided for the benefit of more
than one Class or Series, Securityholders of any such Class or Series will be
subject to the risk that such Credit Enhancement will be exhausted by the claims
of Securityholders of other Classes or Series.
If Credit Enhancement is provided with respect to a Series offered hereby,
the related Prospectus Supplement will include a description of (a) the amount
payable under such Credit Enhancement, (b) any conditions to payment thereunder
not otherwise described herein, (c) the conditions (if any) under which the
amount payable under such Credit Enhancement may be reduced and under which such
Credit Enhancement may be terminated or replaced and (d) any provisions of any
agreement relating to such Credit Enhancement material to the Securityholders of
such Series. Additionally, in certain cases, the related Prospectus Supplement
may set forth certain information with respect to the provider of any
third-party Credit Enhancement (the "Credit Enhancer"), including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation or the jurisdiction under which it is chartered
or licensed to do business, (iii) if applicable, the identity of regulatory
agencies that exercise primary jurisdiction over the conduct of its business and
(iv) its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of a date specified in the Prospectus Supplement. If so described
in the related Prospectus Supplement, Credit Enhancement with respect to a
Series offered hereby may be available to pay principal of the Securities of
such Series following the occurrence of certain Pay Out Events or Reinvestment
Events with respect to such Series. In such event, the Credit Enhancer will have
an interest in certain cash flows in respect of the Receivables to the extent
described in such Prospectus Supplement (an "Enhancement Invested Amount") and
may be entitled to the benefit of the Trustee's security interest in the
Receivables, in each case subordinated to the interest of the Securityholders of
such Series.
59
SUBORDINATION. If so specified in the related Prospectus Supplement, one or
more Classes of a Series offered hereby may be subordinated to one or more other
Classes of such Series or a Series may be subordinated to another Series. If so
specified in the related Prospectus Supplement, the rights of the holders of the
subordinated Securities to receive distributions of principal or interest on any
payment date will be subordinated to such rights of the holders of the
Securities that are senior to such subordinated Securities to the extent set
forth in the related Prospectus Supplement. The related Prospectus Supplement
will also set forth information concerning the amount of subordination of a
Class or Classes of subordinated Securities in a Series or of the subordinated
Securities of another Series, the circumstances in which such subordination will
be applicable, the manner, if any, in which the amount of subordination will
decrease over time, and the conditions under which amounts available from
payments that would otherwise be made to holders of such subordinated Securities
will be distributed to holders of Securities that are senior to such
subordinated Securities. The amount of subordination will decrease whenever
amounts otherwise payable to the holders of subordinated Securities are paid to
the holders of the Securities that are senior to such subordinated Securities.
LETTER OF CREDIT. If so specified in the related Prospectus Supplement, a
letter of credit with respect to a Series or Class of Securities offered hereby
may be issued by a bank or financial institution specified in the related
Prospectus Supplement (the "L/C Issuer"). Subject to the terms and conditions
specified in the related Prospectus Supplement, the L/C Issuer will be obligated
to honor drawings under a letter of credit in an aggregate dollar amount (which
may be fixed or may be reduced as described in the related Prospectus
Supplement), net of unreimbursed payments thereunder, equal to the amount
described in the related Prospectus Supplement. The amount available under a
letter of credit will be reduced to the extent of the unreimbursed payments
thereunder.
CASH COLLATERAL ACCOUNT. If so specified in the related Prospectus
Supplement, support for a Series or one or more Classes thereof will be provided
by a guaranty (the "Cash Collateral Guaranty") secured by the deposit of cash or
certain Eligible Investments in an account (the "Cash Collateral Account")
reserved for the beneficiaries of the Cash Collateral Guaranty or by a Cash
Collateral Account alone. The amount available pursuant to the Cash Collateral
Guaranty or the Cash Collateral Account will be the lesser of amounts on deposit
in the Cash Collateral Account and an amount specified in the related Prospectus
Supplement. The related Prospectus Supplement will set forth the circumstances
under which payments are made to beneficiaries of the Cash Collateral Guaranty
from the Cash Collateral Account or from the Cash Collateral Account directly.
RESERVE ACCOUNT. If so specified in the related Prospectus Supplement,
support for a Series or one or more Classes thereof will be provided by the
establishment of a reserve account (the "Reserve Account"). The Reserve Account
may be funded, to the extent provided in the related Prospectus Supplement, by
an initial cash deposit, the retention of certain periodic distributions of
principal or interest otherwise payable to one or more Classes of Securities,
including the subordinated Securities, or both, or the provision of a letter of
credit, guarantee insurance policy other form of credit or any combination
thereof. The Reserve Account will be established to assure the subsequent
distribution of principal or interest on the Securities of such Series or Class
thereof in the manner provided in the related Prospectus Supplement.
YIELD SUPPLEMENT ACCOUNT. If so specified in the related Prospectus
Supplement the Servicer will establish and maintain a Yield Supplement Account
for the benefit of the Securityholders of such Series. Amounts on deposit in the
Yield Supplement Account (together with investment earnings thereon) will be
released and deposited into the Collection Account in the amounts and at the
times specified in the Prospectus Supplement for such Series. Each such deposit
into the Collection Account will be treated as collections of Finance Charge
Receivables allocable to the Securities of the related Series. The Yield
Supplement Account for any Series will be funded with the proceeds from offering
of the Securities of the related Series.
COLLATERAL INTEREST. If so specified in the related Prospectus Supplement,
support for a Series of Securities or one or more Classes thereof may be
provided initially by an uncertificated, subordinated interest in the Trust (the
"Collateral Interest") in an amount initially equal to a percentage of the
Securities of such Series specified in the Prospectus Supplement. References to
Enhancement Invested Amounts herein include Collateral Interests, if any.
SURETY BOND OR INSURANCE POLICY. If so specified in the related Prospectus
Supplement, insurance with respect to a Series or Class of Securities offered
hereby may be provided by one or more insurance companies. Such insurance will
guarantee, with respect to one or more Classes of the related Series,
distributions of interest or principal in the manner and amount specified in the
related Prospectus Supplement.
60
If so specified in the related Prospectus Supplement, a surety bond may be
purchased for the benefit of the holders of any Series or Class of Securities
offered hereby to assure distributions of interest or principal with respect to
such Series or Class of Securities in the manner and amount specified in the
related Prospectus Supplement.
SPREAD ACCOUNT. If so specified in the related Prospectus Supplement,
support for a Series or one or more Classes of a Series offered hereby may be
provided by the periodic deposit of certain available excess cash flow from the
Trust Assets into a spread account intended to assure the subsequent
distributions of interest and principal on the Securities of such Class or
Series in the manner specified in the related Prospectus Supplement.
INTEREST RATE SWAPS AND RELATED CAPS, FLOORS AND COLLARS
The Trustee on behalf of the Trust may enter into interest rate swaps and
related caps, floors and collars to minimize the risk to Securityholders from
adverse changes in interest rates (collectively, "Swaps").
An interest rate Swap is an agreement between two parties
("counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
counterparty pays a floating rate based on one or more referenced interest rates
such as the London Interbank Offered Rate ("LIBOR"), a specified bank's prime
rate, or U.S. Treasury Bill rates. Interest rate Swaps also permit
counterparties to exchange a floating rate obligation based upon one reference
interest rate (such as LIBOR) for a floating rate obligation based upon another
referenced interest rate (such as U.S. Treasury Bill rates).
The Swap market has grown substantially in recent years with a significant
number of banks and financial service firms acting both as principals and as
agents utilizing standardized Swap documentation. Caps, floors and collars are
more recent innovations, and they are less liquid than other Swaps. There can be
no assurance that the Trust will be able to enter into or offset Swaps at any
specific time or at prices or on other terms that are advantageous. In addition,
although the terms of Swaps may provide for termination under certain
circumstances, there can be no assurance that the Trust will be able to
terminate or offset a Swap on favorable terms.
SERVICER COVENANTS
In the Pooling and Servicing Agreement, the Servicer has agreed as to each
Receivable and related Account that it will: (a) duly fulfill all obligations on
its part to be fulfilled under or in connection with the Receivables or the
related Accounts, and will maintain in effect all qualifications required and
comply in all material respects with all requirements of law in order to service
the Receivables and Accounts, the failure to maintain or comply with which would
have a material adverse effect on the Securityholders; (b) not permit any
rescission or cancellation of the Receivables except as ordered by a court of
competent jurisdiction or other governmental authority; (c) do nothing to impair
the rights of the Securityholders in the Receivables or the related Accounts;
and (d) not reschedule, revise or defer payments due on the Receivables except
in accordance with its guidelines for servicing receivables.
Under the terms of the Pooling and Servicing Agreement, all Receivables in
an Account will be assigned and transferred to the Servicer and such Account
will 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 in all material respects and such noncompliance
has not been cured within 60 days (or such longer period as may be agreed to by
the Trustee and the Transferor) thereafter and has a material adverse effect on
the Securityholders' Interest in such Receivables. Such assignment and transfer
will be made when the Servicer deposits an amount equal to the amount of such
Receivables in the Collection Account on the business day preceding the
Distribution Date following the Monthly Period during which such obligation
arises. This transfer and assignment to the Servicer constitutes the sole remedy
available to the Securityholders if such covenant or warranty of the Servicer is
not satisfied and the Trust's interest in any such assigned Receivables will be
automatically assigned to the Servicer.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement except (i) upon determination that the
performance of such duties is no longer permissible under applicable law or (ii)
if such obligations and duties are assumed by any entity that has satisfied the
Rating Agency Condition. 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 Pooling and Servicing Agreement.
Notwithstanding the foregoing, Partners First may assign part or all of its
obligations and duties as
61
Servicer under the Pooling and Servicing Agreement to an affiliate of Partners
First as long as Partners First shall have fully guaranteed the performance of
such obligations and duties under the Pooling and Servicing Agreement.
Any person into which, in accordance with the Pooling and Servicing
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, will be the successor to the Transferor or the Servicer, as the
case may be, under the Pooling and Servicing Agreement.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or Securityholders holding Securities evidencing more than 50% of the aggregate
unpaid principal amount of all Securities, by written notice to the Servicer
(and to the Trustee if given by the Securityholders) (a "Termination Notice"),
may terminate all of the rights and obligations of the Servicer, as Servicer,
under the Pooling and Servicing Agreement and in and to the Receivables and the
proceeds thereof and the Trustee will appoint a new Servicer (a "Service
Transfer"). The rights and interest of the Transferor under the Pooling and
Servicing Agreement in the Transferor's Interest will not be affected by any
Termination Notice or Service Transfer. If within 60 days of receipt of a
Termination Notice the Trustee does not receive any bids from eligible servicers
to act as successor Servicer and receives an officer's certificate from the
Transferor to the effect that the Servicer cannot in good faith cure the
Servicer Default which gave rise to the Termination Notice, the Trustee shall
grant a right of first refusal to the Transferor which would permit the
Transferor at its option to purchase the Securityholders' Interest on the
Distribution Date in the next calendar month. The purchase price for the
Securityholders' Interest shall be equal to the sum of the amounts specified
therefor with respect to each outstanding Series in the related Supplement, and
for any Securities offered hereby, in the Prospectus Supplement.
The Trustee will as promptly as possible, after the giving of a Termination
Notice, appoint a successor Servicer and if no successor Servicer has been
appointed by the Trustee and has accepted such appointment by the time the
Servicer ceases to act as Servicer, all rights, authority, power and obligations
of the Servicer under the Pooling and Servicing Agreement will be vested in the
Trustee. Prior to any Service Transfer, the Trustee will seek to obtain bids
from potential servicers meeting certain eligibility requirements set forth in
the Pooling and Servicing Agreement to serve as a successor Servicer for
servicing compensation not in excess of the Servicing Fee plus any amounts
payable to the Transferor pursuant to the Pooling and Servicing Agreement.
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 payment, transfer or
deposit, on the date the Servicer is required to do so under the Pooling
and Servicing Agreement or any Supplement, which is not cured within a five
business day grace period;
(b) failure on the part of the Servicer duly to observe or perform in
any material respect any other covenants or agreements of the Servicer in
the Pooling and Servicing Agreement or any Supplement which has an Adverse
Effect and which continues unremedied for a period of 60 days after written
notice, or the Servicer assigns its duties under the Pooling and Servicing
Agreement, except as specifically permitted thereunder;
(c) any representation, warranty or certification made by the Servicer
in the Pooling and Servicing Agreement, in any Supplement or in any
certificate delivered pursuant to the Pooling and Servicing Agreement or
any Supplement proves to have been incorrect in any material respect when
made, which has an Adverse Effect on the rights of the Securityholders of
any Series, and which Adverse Effect continues for a period of 60 days
after written notice; or
(d) the occurrence of certain events of bankruptcy, insolvency or
receivership with respect to the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (a) above for a period of ten business days after the
applicable grace period or referred to under clauses (b) or (c) for a period of
60 business days after the applicable grace period, will not constitute a
Servicer Default if such delay or failure could not be prevented by the exercise
of reasonable diligence by the Servicer and such delay or failure was caused by
an act of God or other similar occurrence. Upon the occurrence of any such event
the Servicer will not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the Pooling and
Servicing Agreement and the Servicer must provide the Trustee, the Transferor
and any provider of Series Enhancement prompt notice of such failure or delay by
it, together with a description of its efforts to so perform its obligations.
62
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that on or before March 31 of
each calendar year or such other date as specified in the related Prospectus
Supplement, the Servicer will cause a firm of independent certified public
accountants (who may also render other services to the Servicer or the
Transferor and any affiliates thereof) to furnish a report to the effect that
such accounting firm has made a study and evaluation of the Servicer's internal
accounting controls relative to the servicing of the Accounts and that, on the
basis of such examination, such firm is of the opinion that, assuming the
accuracy of reports by the Servicer's third-party agents, the system of internal
accounting controls in effect on the date of such statement relating to
servicing procedures performed by the Servicer, 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 sections of the Pooling and
Servicing Agreement during the period covered by such report (which shall be the
period from January 1 (or for the initial period, the relevant Series Issuance
Date) of the preceding calendar year to and including December 31 of such
preceding calendar year), except for such exceptions or errors as such firm
shall believe to be immaterial and such other exceptions as shall be set forth
in such statement.
The Pooling and Servicing Agreement provides for delivery to the Trustee on
or before March 31 of each calendar year or such other date as specified in the
related Prospectus Supplement, of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fully performed its obligations
under the Pooling and Servicing Agreement throughout the preceding year, or, if
there has been a default in the performance of any such obligation, specifying
the nature and status of the default.
AMENDMENTS
The Pooling and Servicing Agreement and any Supplement may be amended from
time to time (including in connection with the issuance of a Supplemental
Security, addition of a Participation Interest, allocation of assets in the
Trust to a Series or Group, or to change the definition of Monthly Period,
Determination Date or Distribution Date) by the Servicer, the Transferor and the
Trustee, and without the consent of the Securityholders of any Series, PROVIDED
that (i) an opinion of counsel for the Transferor is addressed and delivered to
the Trustee to the effect that the conditions precedent to any such amendment
have been satisfied, (ii) the Transferor shall have delivered to the Trustee a
certificate of an officer of the Transferor to the effect that the Transferor
reasonably believes that such amendment will not have an Adverse Effect and
(iii) the Rating Agency Condition shall have been satisfied with respect
thereto.
The Pooling and Servicing Agreement or any Supplement may be amended by the
Transferor, the Servicer and the Trustee with the consent of the Securityholders
evidencing not less than 66 2/3% of the aggregate unpaid principal amount of the
Securities of all affected Series for which the Transferor has not delivered an
officer's certificate stating that there will be no Adverse Effect, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Pooling and Servicing Agreement or any Supplement or of
modifying in any manner the rights of Securityholders. No such amendment,
however, may (a) reduce in any manner the amount of, or delay the timing of,
deposits or distributions on any Security without the consent of each
Securityholder, (b) (i) change the definition or the manner of calculating the
Securityholders' Interest or the Invested Amount or (ii) reduce the aforesaid
percentage of the aggregate unpaid principal amount of the Securities the
holders of which are required to consent to any such amendment, in each case
without the consent of each Securityholder or (c) adversely affect the rating of
any Series or Class by a Rating Agency without the consent of the holders of
Securities of such Series or Class evidencing not less than 66 2/3% of the
aggregate unpaid principal amount of the Securities of such Series or Class.
Promptly following the execution of any amendment to the Pooling and Servicing
Agreement (other than an amendment described in the preceding paragraph), the
Trustee will furnish written notice of the substance of such amendment to each
Securityholder. Notwithstanding the foregoing, any Supplement executed in
connection with the issuance of one or more new Series of Securities will not be
considered an amendment to the Pooling and Servicing Agreement.
LIST OF SECURITYHOLDERS
Upon written request of any Holder or group of Holders of Securities of any
Series or of all outstanding Series of record holding Securities evidencing not
less than 10% of the aggregate unpaid principal amount of the Securities of such
Series or all Series, as applicable, the Trustee will afford such Holder or
Holders of Securities access during business hours to the current list of
Securityholders of such Series or of all outstanding Series, as the case may be,
for purposes of communicating with other Holders of Securities with respect to
their rights under the Pooling and Servicing Agreement. See "Description of the
Securities -- Book-Entry Registration" and " -- Definitive Securities."
63
The Pooling and Servicing Agreement does not provide for any annual or
other meetings of Securityholders.
THE TRUSTEE
The Bank of New York will act as trustee under the Pooling and Servicing
Agreement. The corporate trust office of The Bank of New York is located at 101
Barclay Street, New York, New York 10286. The Transferor and the Servicer and
their respective affiliates may from time to time enter into normal banking and
trustee relationships with the Trustee and its affiliates. The Trustee or the
Transferor may hold Securities in their own names; PROVIDED, HOWEVER, any
Securities so held shall not be entitled to participate in any decisions made or
instructions given to the Trustee by the Securityholders as a group. In
addition, for purposes of meeting the legal requirements of certain local
jurisdictions, the Trustee shall have the power to appoint a co-trustee or
separate trustees of all or any part of the Trust. In the event of such
appointment, all rights, powers, duties and obligations shall be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in
any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee, who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
DESCRIPTION OF THE PURCHASE AGREEMENTS
PFR PURCHASE AGREEMENTS
On January 29, 1998, each of BKB and Harris entered into three separate
receivables purchase agreements with PFR providing for the sale by BKB or
Harris, as applicable, to PFR of all of its right, title and interest in and to
the (i) receivables in existence on January 29, 1998 which were not more than 29
days past due as of January 29, 1998 (the "Current Initial Receivables Purchase
Agreement"), (ii) receivables in existence on January 29, 1998 which were at
least 30 days past due as of January 29, 1998 and certain other receivables
which were otherwise impaired (the "Overdue Initial Receivables Purchase
Agreement" and together with the Current Initial Receivables Purchase Agreement,
the "Initial Receivables Purchase Agreements") and (iii) all receivables arising
in the Accounts (including any Additional Accounts) originated by BKB or Harris,
as applicable, which arise after January 29, 1998 (the "Additional Receivables
Purchase Agreements"). Each of BKB and Harris entered into separate assignment
and assumption agreements with PFR (each, an "Assignment and Assumption
Agreement" and together with the Initial Receivables Purchase Agreements and the
Additional Receivables Purchase Agreements, the "Original PFR Purchase
Agreements"), pursuant to which (i) each of BKB and Harris assigned to PFR all
of their respective right, title and interest in, to and under the receivables
subject to the applicable Initial Receivables Purchase Agreement and (ii) PFR
assumed all obligations with respect to such receivables. In connection with
such sale of receivables to PFR, each of BKB and Harris indicated in its
respective computer records that the subject receivables were sold to PFR. In
addition, each of BKB and Harris will provide to PFR a computer file or a
microfiche list containing a true and complete list showing each Account owned
by BKB or Harris, as applicable, identified by account number and by total
outstanding balance of the related receivables on the applicable date of
designation or addition date for Additional Accounts, as the case may be. Each
of BKB and Harris, as seller, under the applicable Original PFR Purchase
Agreement, filed UCC financing statements meeting the requirements of applicable
state law in each of the jurisdictions in which the books and records relating
to the Accounts are maintained with respect to the Receivables. See "Risk
Factors -- Characteristics as a Sale; Insolvency and Receivership Risks" and
"Certain Legal Aspects of the Receivables."
Under the Additional Receivables Purchase Agreements, each newly originated
Additional Account will, subject to certain conditions, be deemed to be an
Account. Each of BKB and Harris are required under their respective Additional
Receivables Purchase Agreement to take all actions necessary to comply, or to
enable PFR to comply, with the requirements under the Transferor Purchase
Agreement relating to Additional Accounts.
REPRESENTATIONS AND WARRANTIES; INITIAL RECEIVABLES PURCHASE AGREEMENTS. In
each Initial Receivables Purchase Agreement, each of BKB and Harris represented
and warranted to PFR that, as of January 29, 1998, (a) each Initial Receivables
Purchase Agreement constituted a valid and binding obligation of BKB or Harris,
as applicable; (b) it was the sole owner of all right, title and interest in, to
and under all of the receivables sold by it to PFR, and had the right, power and
authority to sell and transfer the subject receivables to PFR; (c) the
receivables sold by it to PFR were not subject to any assignment, lien, charge,
encumbrance or security interest, except as specified in the related cardholder
agreements (other than the right of cardholders to assert claims and defenses
pursuant to applicable laws); (d) to the best of its knowledge, the related
Accounts were not subject to claims, offsets or adjustments and represented the
legal, valid and binding obligations of the cardholders (other than the right of
cardholders to assert claims and defenses pursuant to applicable laws); (e) it
was in compliance with the applicable cardholder agreements, except where the
failure to so comply would not have had a material adverse effect on
64
the Receivables; and (f) it was licensed to participate in programs offered by
VISA and MasterCard to the full extent necessary to generate the subject
receivables.
REPRESENTATIONS AND WARRANTIES; ASSIGNMENT AND ASSUMPTION AGREEMENTS. Each
of BKB and Harris represented and warranted to PFR in their respective
Assignment and Assumption Agreement, that as of January 29, 1998, (a) the
Assignment and Assumption Agreement and each of the related Initial Receivables
Purchase Agreements constituted a valid and binding obligation of BKB or Harris,
as applicable; (b) each of the Receivables conveyed by it to PFR was free and
clear of any lien (other than liens permitted under the Pooling and Servicing
Agreement) of any person claiming through or under BKB or Harris, as applicable,
and each of their respective affiliates; (c) the Assignment and Assumption
Agreement and the related Additional Receivables Purchase Agreements each
constituted a valid sale, transfer and assignment to PFR of all right, title and
interest of BKB or Harris, as applicable, in its respective Receivables and the
proceeds thereof and the Interchange and Recoveries payable pursuant thereto, or
if such is not the case, such agreements constituted a grant of a first priority
perfected security interest in such property to PFR; (d) each Account designated
by BKB or Harris, as applicable, as an Eligible Account, was an Eligible
Account; (e) each subject Receivable then existing and designated as an Eligible
Receivable was an Eligible Receivable; and (f) no event of insolvency had
occurred with respect to BKB or Harris, as applicable, and the transfer of the
subject Receivables had not been made in contemplation of the occurrence
thereof.
REPRESENTATIONS AND WARRANTIES; ADDITIONAL RECEIVABLES PURCHASE AGREEMENTS.
Each of BKB and Harris represents and warrants to PFR in their respective
Additional Receivables Purchase Agreement that (a) as of the date of the
Additional Receivables Purchase Agreement and as of each date of designation of
Additional Accounts thereunder, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Additional Receivables Purchase Agreement; (b) the Additional Receivables
Purchase Agreement constitutes a valid and binding obligation of BKB or Harris,
as applicable; (c) each of the Receivables conveyed by it to PFR is free and
clear of any lien (except for liens permitted under the Pooling and Servicing
Agreement) of any person claiming through or under BKB or Harris, as applicable,
or any of their respective affiliates; (d) the Additional Receivables Purchase
Agreement constitutes a valid sale, transfer and assignment to PFR of all right,
title and interest of each of BKB or Harris, as applicable, in their respective
Receivables and the proceeds thereof and the Interchange and Recoveries payable
pursuant thereto, or if the Additional Receivables Purchase Agreement does not
constitute a sale of such property, then it constitutes a grant of a first
priority perfected security interest in such property to PFR; (e) as of January
29, 1998, each Account was, and as of each date of designation of Additional
Accounts under the Additional Receivables Purchase Agreement, each Additional
Account will be, an Eligible Account; and (f) as of January 29, 1998 and as of
each date of designation of Additional Accounts under the Additional Receivables
Purchase Agreement, each Receivable generated thereunder was or will be, on such
date of designation, an Eligible Receivable.
ADDITIONAL PFR PURCHASE AGREEMENTS. Going forward, PFR may enter into
additional receivables purchase agreements with Account Originators providing
for the purchase by PFR of receivables arising under revolving consumer credit
card accounts originated by financial institutions other than BKB or Harris
("Additional PFR Purchase Agreements"). Any Additional PFR Purchase Agreements
will contain terms and conditions, and will be subject to representations and
warranties of the related Account Originator, substantially similar to those
found in the Original PFR Purchase Agreements entered into by BKB and Harris on
January 29, 1998.
TRANSFEROR PURCHASE AGREEMENT
SALE OF RECEIVABLES. Pursuant to the Transferor Purchase Agreement, PFR
sold to the Transferor all its right, title and interest in and to (i) all of
the Eligible Receivables acquired by PFR from the Account Originators and all of
the Eligible Receivables created in the Accounts following the date of the
Transferor Purchase Agreement and (ii) the Eligible Receivables in each
Additional Account designated from time to time for inclusion as an Account as
of the date of such designation, whether such Eligible Receivables shall then be
existing or shall thereafter be created.
In connection with such sale of the Receivables to the Transferor, PFR
indicated in its computer records that the Receivables had been sold to PFRF by
it and PFRF indicated in its files that such Receivables were to be sold or
transferred by it to the Trust. In addition, PFR will provide or cause to be
provided to the Transferor a computer file or a microfiche list containing a
true and complete list showing each Account identified by account number and by
total outstanding balance of the related Receivables on the applicable Series
date of designation or addition date for Additional Accounts, as the case may
be. The records of PFR and agreements relating to the Receivables will be marked
to evidence such sale or transfer. PFR, as debtor/seller, and PFRF, as the
secured party/purchaser, filed or caused to be filed, and will file or cause to
be filed, UCC financing statements meeting the requirements of applicable state
law in each of the jurisdictions in which the books and
65
records relating to the Accounts are maintained with respect to the Receivables.
See "Risk Factors -- Characteristics as a Sale; Insolvency and Receivership
Risks" and "Certain Legal Aspects of the Receivables."
Pursuant to the Transferor Purchase Agreement, the Transferor will, subject
to certain conditions, designate Additional Accounts to be included as Accounts
under the Transferor Purchase Agreement, if such designation of Additional
Accounts is required under the Pooling and Servicing Agreement. See "Description
of the Pooling and Servicing Agreement -- Additions of Accounts or Participation
Interests."
REPRESENTATIONS AND WARRANTIES. In the Transferor Purchase Agreement, PFR
represented and warranted to the Transferor to the effect that, among other
things, (a) as of the date of the Transferor Purchase Agreement and as of each
date of designation of Additional Accounts under the Transferor Purchase
Agreement, it was and will be duly organized and in good standing and that it
had and will have the authority to consummate the transactions contemplated by
the Transferor Purchase Agreement, (b) as of January 29, 1998, each Account was,
and as of each date of designation of Additional Accounts under the Transferor
Purchase Agreement, each Additional Account will be, an Eligible Account and (c)
as of January 29, 1998 and as of each date of designation of Additional Accounts
under the Transferor Purchase Agreement, each Receivable generated thereunder
was or will be, on such date of designation, an Eligible Receivable. If the
breach of any representation and warranty set forth in the Transferor Purchase
Agreement results in the requirement that the Transferor accept retransfer of an
Ineligible Receivable, then PFR will be obligated to repurchase any such
Ineligible Receivable from the Transferor on the date of such retransfer. The
purchase price for any such Ineligible Receivable will be the principal amount
thereof plus applicable finance charges.
PFR also represented and warranted to the Transferor that, among other
things, as of the date of the Transferor Purchase Agreement and as of each date
of designation of Additional Accounts (a) the Transferor Purchase Agreement
constituted and will constitute a valid and binding obligation of PFR and (b)
the Transferor Purchase Agreement constituted and will constitute a valid sale
to the Transferor of all right, title and interest of PFR in and to the
Receivables then existing and thereafter created in the Accounts and in the
proceeds thereof, or if the Transferor Purchase Agreement does not constitute a
sale of such property, then it constitutes a grant of a first priority perfected
security interest in such property to the Transferor. If the breach of any of
the representations and warranties described in this paragraph results in the
obligation of the Transferor under the Pooling and Servicing Agreement to accept
retransfer of the Receivables, PFR will repurchase the Receivables retransferred
to the Transferor for an amount of cash at least equal to the amount of cash the
Transferor is required to deposit under the Pooling and Servicing Agreement in
connection with such retransfer.
FORMATION TRANSACTIONS; ACCOUNT ORIGINATION
CONTRIBUTION AGREEMENTS. Pursuant to the Contribution Agreements, on
January 29, 1998, each of BKB and Harris contributed to Partners First all of
their respective rights under the credit card accounts in the Partners First
Portfolio, except (i) the related cardholder agreements, (ii) all rights to
create, enforce and collect the receivables and any other amounts owing under
the Partners First Portfolio and (iii) all rights to amend and modify the
related cardholder agreements (collectively, the "Retained Rights"). Under the
Contribution Agreements and the Assistance Agreements, Partners First has the
right to designate the financial institutions that will exercise the Retained
Rights with respect to the Partners First Portfolio. On January 29, 1998,
Partners First designated BKB and Harris as the Account Originators with respect
to the credit card accounts in the Partners First Portfolio originated by BKB or
Harris, respectively. Until March 1998, each of BKB and Harris remained Account
Originators and exercised the Retained Rights with respect to the Accounts
originated by BKB and Harris, as applicable. In March 1998, Partners First
designated BKB as the sole Account Originator with respect to the existing
credit card accounts in the Partners First Portfolio, including the Accounts.
Going forward, Harris may continue to be an Account Originator with respect to
new credit card accounts originated through Harris' marketing efforts, including
any New Accounts. Prior to the establishment of the Bank, Partners First may
designate other financial institutions as Account Originators, and any such
Account Originators would originate credit card accounts into the Partners First
Portfolio. In addition, it is anticipated that upon the establishment or
acquisition by Partners First of the Bank, Partners First will designate the
Bank as the sole Account Originator with respect to the credit card accounts in
the Partners First Portfolio, including the Accounts and any New Accounts, and,
in connection therewith, each of BKB and Harris will cease to be an Account
Originator. As an Account Originator, the Bank would also originate credit card
accounts. However, none of the credit card accounts originated by the Bank or
any other Account Originator may be designated as Accounts and none of the
related receivables may be transferred to the Trust unless certain conditions,
including the Rating Agency Condition, are satisfied.
ASSISTANCE AGREEMENTS. Pursuant to the Assistance Agreements, each of BKB
and Harris appointed Partners First as its sole and exclusive agent to exercise
all of its rights and perform all of its obligations with respect to the credit
card accounts
66
in the Partners First Portfolio originated by BKB and Harris, as applicable,
except for the power to determine the terms under which new credit card accounts
will be originated, whether to extend credit under the credit card accounts and
to effect Interchange settlement. In connection with such appointment, Partners
First authorized each of BKB and Harris to use, on a non-exclusive basis,
Partners First's rights under the credit card accounts in the Partners First
Portfolio and related assets including certain proprietary information related
thereto, to the extent necessary for each of BKB and Harris to perform the
foregoing functions. In its capacity as agent under the Assistance Agreements,
Partners First will perform certain functions, including making recommendations
with respect to the Credit Card Guidelines, administering the Credit Card
Guidelines, managing the Partners First Portfolio, arranging for the billing and
collection of any receivables arising thereunder, and otherwise servicing and
administering the credit card accounts in the Partners First Portfolio and the
related receivables.
Under the rules of the VISA and MasterCard associations, only certain
financial institutions may directly issue credit cards and advance credit under
the credit card accounts which bear the names and service marks of VISA or
MasterCard. The Assistance Agreements were required in connection with the
designation of BKB and Harris as Account Originators because Partners First is
not a financial institution. On a going forward basis the Bank and other
financial institutions, if any, designated by Partners First as Account
Originators, will enter into assistance agreements with Partners First in the
form of, or substantially similar to, the Assistance Agreement executed by each
of BKB and Harris.
LIMITATIONS ON LIABILITY
In the event of a breach of a representation or warranty by BKB or Harris
under their respective Purchase Agreements or Assignment and Assumption
Agreements, BKB or Harris, as applicable, will be liable to PFR for damages.
Partners First has agreed to indemnify BKB and Harris for any losses suffered by
BKB or Harris, as applicable, resulting from damages payable to PFR in respect
of a breach by BKB or Harris of any of their respective representations or
warranties under the applicable Assignment and Assumption Agreement, to the
extent that BKB or Harris, as applicable, would not have suffered such losses
under the Initial Receivables Purchase Agreements, and except for any such
losses caused by the gross negligence or willful misconduct of BKB or Harris, as
applicable. In each of the Assistance Agreements, Partners First agrees to
indemnify BKB and Harris for any losses suffered by BKB or Harris, as
applicable, resulting from, among other things, damages payable to PFR in
respect of a breach by BKB or Harris of any of their respective representations
or warranties under the Additional Receivables Purchase Agreements, except to
the extent caused by the gross negligence or willful misconduct of BKB or
Harris, as applicable. Under the Additional Receivables Purchase Agreements, the
liability of BKB and Harris for any breach of any representation or warranty is
limited to the amount of any recovery by BKB or Harris, as applicable, from
Partners First pursuant to Partners First's obligation to indemnify BKB and
Harris.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
Under the PFR Purchase Agreements, the Account Originators sell the
Receivables to PFR. Under the Transferor Purchase Agreement, PFR sells the
Eligible Receivables it acquired from the Account Originators to the Transferor.
Under the Pooling and Servicing Agreement, the Transferor, in turn, transfers
the Eligible Receivables to the Trust. Each Account Originator, PFR and the
Transferor represents and warrants that its respective transfers constitute
valid sales and assignments of all of its respective right, title and interest
in and to the Receivables subject to the Purchase Agreement to which it is a
party. The Transferor also represents and warrants that, if the transfer of
Receivables by the Transferor to the Trust is deemed to create a security
interest under the UCC, there exists a valid, subsisting and enforceable first
priority perfected security interest in the Receivables in existence at the time
of the formation of the Trust or at the date of designation of any Additional
Accounts, as the case may be, in favor of the Trust and a valid, subsisting and
enforceable first priority perfected security interest in the Receivables
created thereafter in favor of the Trust on and after their creation, in each
case until termination of the Trust. For a discussion of the Trust's rights
arising from these representations and warranties not being satisfied, see
"Description of the Pooling and Servicing Agreement -- Representations and
Warranties."
Each Account Originator, PFR and the Transferor represents that the
Receivables are "accounts" or "general intangibles" for purposes of the UCC.
Both the sale of accounts and the transfer of accounts as security for an
obligation are treated under Article 9 of the UCC as creating a security
interest therein and are subject to its provisions and the filing of an
appropriate financing statement or statements is required to perfect the
interest of the Trust in the Receivables. If a transfer of general intangibles
is deemed to create a security interest rather than a sale, Article 9 of the UCC
applies and filing an appropriate financing statement or statements is also
required in order to perfect the security interest of the Trust. Financing
statements covering the Receivables will be filed under the UCC to protect the
Transferor and the Trust if any of the transfers
67
under the Purchase Agreements or the Pooling and Servicing Agreements are deemed
to be subject to the UCC. If a transfer of general intangibles is deemed to be a
sale, then the UCC is not applicable and no further action under the UCC is
required to protect the Trust's interest from third parties.
There are certain limited circumstances under the UCC in which prior or
subsequent transferees of Receivables coming into existence after January 29,
1998 could have an interest in such Receivables with priority over the Trust's
interest. A tax or other government lien or other nonconsensual lien on property
of an Account Originator, PFR or 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. Furthermore, if the FDIC were appointed as a
conservator or receiver of an Account Originator, the conservator's or
receiver's administrative expenses may also have priority over the interest of
the Trust in such related Receivables. Under the Purchase Agreements, however,
each Account Originator and PFR warrants that it has transferred the Receivables
free and clear of the lien of any third party. In addition, each Account
Originator and PFR covenants that it will not sell, pledge, assign, transfer or
grant any lien on any Receivable (or any interest therein) other than pursuant
to the Purchase Agreement to which it is a party.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Transferor will not engage in any activities except purchasing accounts
receivable from PFR, forming trusts, transferring such accounts receivable to
such trusts, issuing notes or securities and engaging in activities incident to,
or necessary or convenient to accomplish, the foregoing. The Transferor has no
intention of filing a voluntary petition under the United States Bankruptcy Code
or any similar applicable state law so long as the Transferor is solvent and
does not reasonably foresee becoming insolvent.
Each Account Originator and PFR has represented and warranted in the
Purchase Agreements to which it is a party that the transfer of Receivables
pursuant to such Purchase Agreement is a valid sale and assignment of the
Receivables or if not a sale of the Receivables, a grant of a first priority
perfected security interest in the Receivables. In addition, each Account
Originator, PFR and the Transferor have treated and will treat the transaction
described in the Purchase Agreement to which it is a party as sales of the
Receivables. Each Account Originator has taken or will take all actions that are
required under the UCC to perfect PFR's interest in the Receivables conveyed to
PFR by such Account Originator. PFR has taken or will take all actions that are
required under the UCC to perfect the Transferor's ownership interest in the
Receivables. However, in the event of an insolvency, receivership or
conservatorship of an Account Originator, it is possible that a receiver or
conservator could attempt to recharacterize the transfer by such Account
Originator as a pledge of the subject Receivables rather than a true sale. The
Federal Deposit Insurance Act ("FDIA"), as amended by FIRREA, which became
effective August 9, 1989, sets forth certain powers that the FDIC could exercise
if it were appointed as conservator or receiver of an Account Originator. Among
other things, the FDIA grants such a conservator or receiver the power to
repudiate contracts of, and to request a stay of up to 90 days of any judicial
action or proceeding involving, an Account Originator. In the event that PFR
were to become a debtor in a bankruptcy case and a creditor or
trustee-in-bankruptcy of such debtor or such debtor itself were to take the
position that the sale of Receivables from PFR to the Transferor should be
recharacterized as a pledge of such Receivables to secure a borrowing from such
debtor, then delays in payments of collections of Receivables to the Transferor
(and therefore to the Trust and to Securityholders) could occur and (should the
court rule in favor of any such trustee, debtor in possession or creditor)
reductions in the amount of such payments could result.
To the extent that (i) an Account Originator granted a security interest in
the Receivables, (ii) the interest was validly perfected before the insolvency
of the Account Originator, (iii) the interest was not taken or granted in
contemplation of the Account Originator's insolvency or with the intent to
hinder, delay or defraud the Account Originator or its respective creditors,
(iv) the applicable Purchase Agreement is continuously a record of such Account
Originator and (v) the applicable Purchase Agreement represents a bona fide and
arm's length transaction undertaken for adequate consideration in the ordinary
course of business, such valid perfected security interest of PFR should be
enforceable (to the extent of PFR's "actual direct compensatory damages")
notwithstanding the insolvency of, or the appointment of a receiver or
conservator for, the Account Originator and payments to the Trust with respect
to the Receivables (up to the amount of such damages) should not be subject to
an automatic stay of payment or to recovery by the FDIC as conservator or
receiver of the Account Originator. If, however, the FDIC were to require the
Transferor to establish its right to those payments by submitting to and
completing the administrative claims procedure established under FIRREA, or the
conservator or receiver were to request a stay of proceedings with respect to
the Account Originator as provided under FIRREA, delays in payments on the
Securities and possible reductions in the amount of those payments could occur.
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
collateralized borrowings. The RTC Policy Statement states that
68
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. In a 1993 case
involving zero-coupon bonds, however, a federal district court held that the RTC
was instead obligated to pay bondholders 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.
In the event of an insolvency, receivership or conservatorship of an
Account Originator, and a creditor or conservator of the Account Originator were
to request a court to order that the Account Originator should be substantively
consolidated with the Transferor, delays in payments on the Securities or
possible reductions in such payments could result. In addition, in the event of
an insolvency, receivership, conservatorship or bankruptcy of PFR, and a
creditor or bankruptcy trustee of PFR or PFR itself, as debtor in possession,
were to request a court to order that PFR should be substantively consolidated
with the Transferor, delays in payments on the Securities and possible
reductions in such payments could result.
The Transferor will take all actions that are required under the UCC to
perfect the Trust's interest in the Receivables and the Transferor has warranted
to the Trust that the Trust will have a first priority security interest therein
and, with certain exceptions, in the proceeds thereof. Nevertheless, a tax or
government lien or other nonconsensual lien on property of the Transferor
arising prior to the time a Receivable is conveyed to the Trust may have
priority over the interest of the Trust in such Receivable. The Transferor has
been structured such that (i) the voluntary or involuntary application for
relief under Bankruptcy Code or similar applicable state laws, and (ii) the
substantive consolidation of the Transferor and PFR are unlikely. The Transferor
is a separate, special purpose subsidiary, the certificate of formation of which
provides that it shall not file a voluntary petition for relief under Bankruptcy
Code without the unanimous affirmative vote of all of its directors. Pursuant to
the Pooling and Servicing Agreement, the Trustee covenants that it will not at
any time institute against the Transferor any bankruptcy, reorganization or
other proceedings under any federal or state bankruptcy or similar law. In
addition, certain other steps will be taken to avoid the Transferor's becoming a
debtor in a bankruptcy case. Notwithstanding such steps, if the Transferor were
to become a debtor in a bankruptcy case, and a bankruptcy trustee for the
Transferor or a creditor of the Transferor or the Transferor itself were to take
the position that the transfer of the Receivables from the Transferor to the
Trust should be recharacterized as a pledge of such Receivables, then delays in
payments on the Securities and possible reductions in the amount of such
payments could result.
Upon the appointment of a bankruptcy trustee, receiver or conservator or
upon the commencement of a bankruptcy, receivership, conservatorship or similar
proceeding with respect to PFRF, the Servicer will promptly give notice thereof
to the Trustee and a Pay Out Event or Reinvestment Event may occur with respect
to a Series (or all of the Series). Pursuant to the Pooling and Servicing
Agreement, newly created Receivables will not be transferred to the Trust on and
after any such appointment or voluntary liquidation. In the event of an
Insolvency Event, the Trustee will proceed to sell, dispose of or otherwise
liquidate the Receivables in a commercially reasonable manner and on
commercially reasonable terms, unless within a specified period of time
Securityholders representing undivided interests aggregating more than 50% of
the Invested Amount of each Series of Securities issued and outstanding (or,
with respect to any Series with two or more Classes, 50% of the Invested Amount
of each Class) and each Enhancement Invested Amount and possibly certain other
persons specified in the Supplement for a Series instruct otherwise (assuming
that the bankruptcy trustee, conservator or receiver does not order such a sale
despite such instructions). The Trustee will sell, dispose of, or otherwise
liquidate the Receivables in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from the sale of the Receivables
would be treated as collections of the Receivables and deposited into the
Collection Account and after distribution of such amounts the Trust will
terminate. This procedure could be delayed, as described above. In addition,
upon the occurrence of a Pay Out Event or Reinvestment Event, if a trustee in
bankruptcy, a conservator or receiver is appointed for the Transferor and no Pay
Out Event or Reinvestment Event other than such conservatorship or receivership
or bankruptcy or insolvency of the Transferor exists, the bankruptcy trustee,
conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of the Early
Amortization Period or Early Accumulation Period and may be able to require that
new Principal Receivables be transferred to the Trust. In addition, the trustee,
receiver or conservator for the Transferor may have the power to cause early
sale of the Receivables and the early payment of the Securities or to prohibit
the continued transfer of Receivables to the Trust. See "Description of the
Securities -- Pay Out Events and Reinvestment Events."
While Partners First is the Servicer, cash collections held by Partners
First may, subject to certain conditions, be commingled and used for the benefit
of Partners First prior to each Distribution Date and, in the event of the
bankruptcy, insolvency, receivership or conservatorship of Partners First or, in
certain circumstances, the lapse of certain time periods, the Trust may not have
a perfected security interest in such collections and accordingly, be entitled
to such collections. Partners
69
First will be allowed to make monthly rather than daily deposits of collections
to the Collection Account if Partners First obtains a short-term and certificate
of deposit rating of at least A-1 and P-1 (or its equivalent) by the applicable
Rating Agency, or Partners First makes other arrangements that satisfy the
Rating Agency Condition. Unless otherwise provided in the related Prospectus
Supplement, if any of the foregoing conditions are not satisfied, then Partners
First will, within five business days, commence the deposit of collections
directly into the Collection Account within two business days of the Date of
Processing.
In the event of a Servicer Default relating to the bankruptcy or insolvency
of the Servicer, and no Servicer Default other than such bankruptcy or
insolvency related Servicer Default exists, the bankruptcy trustee or the
Servicer as debtor in possession, or the conservator or receiver, as the case
may be, may have the power to prevent either the Trustee or the Securityholders
from appointing a successor Servicer. See "Description of the Pooling and
Servicing Agreement -- Servicer Default."
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 Account Originator, the most significant federal laws
include the Federal Truth-in-Lending, Equal Credit Opportunity, Fair Credit
Billing, Electronic Funds Transfer, Fair Credit Reporting and Fair Debt
Collection Practices Acts. These statutes impose various disclosure requirements
either before or when an Account is opened, or both, and at the end of monthly
billing cycles, and, in addition, limit cardholder liability for unauthorized
use, prohibit certain discriminatory practices in extending credit, and regulate
practices followed in collections. In addition, cardholders are entitled under
these laws to have payments and credits applied to the credit card account
promptly and to request prompt resolution of billing errors. The Trust may be
liable for certain violations of consumer protection laws that apply to the
Receivables, either as assignee from the Transferor (as the applicable Account
Originator's assignee) with respect to obligations arising before transfer of
the Receivables to the Trust or as the 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 the obligation to
pay the amount of Receivables owing. All Receivables that were not created in
compliance in all material respects with the requirements of such laws (if such
noncompliance has a material adverse effect on the Securityholders' interest
therein) will be reassigned to the Transferor and ultimately back to PFR. The
Servicer has also agreed in the Pooling and Servicing Agreement to indemnify the
Trust, among other things, for any liability arising from such violations. For a
discussion of the Trust's rights if the Receivables were not created in
compliance in all material respects with applicable laws, see "Description of
the Pooling and Servicing Agreement -- Representations and Warranties."
Application of federal and state bankruptcy and debtor relief laws would
affect the interests of the Securityholders if such laws result in any
Receivables being written off as uncollectible. See "Description of the Pooling
and Servicing Agreement -- Defaulted Receivables; Rebates and Fraudulent
Charges."
PROPOSED LEGISLATION
Congress and the states may enact new 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. The potential effect
of any such legislation could be to reduce the yield on the Accounts. If such
yield is reduced, a Pay Out Event or Reinvestment Event could occur, and the
Early Amortization Period or Early Accumulation Period would commence. See
"Description of the Securities -- Pay Out Events and Reinvestment Events."
U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, summarizing certain anticipated Federal income
tax consequences of the purchase, ownership and disposition of the Securities of
a Series, is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), proposed, temporary and final Treasury regulations
thereunder, and published rulings and court decisions in effect as of the date
hereof, all of which are subject to change, possibly retroactively. This
discussion does not address every aspect of the Federal income tax laws that may
be relevant to Security Owners of a Series in light of their personal investment
circumstances or to certain types of Security Owners of a Series subject to
special treatment under the Federal income tax laws (for example, banks and life
insurance companies). PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS WITH REGARD TO THE FEDERAL TAX CONSEQUENCES OF THE PURCHASE,
70
OWNERSHIP, OR DISPOSITION OF INTERESTS IN SECURITIES, AS WELL AS THE TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY, OR OTHER
TAXING JURISDICTION.
CHARACTERIZATION OF THE SECURITIES AS INDEBTEDNESS
Special tax counsel to the Transferor ("Special Tax Counsel") specified in
the related Prospectus Supplement will, upon issuance of a Series of Securities,
issue an opinion to the Transferor based on the assumptions and qualifications
set forth in the opinion that the Securities of such Series that are offered
pursuant to a Prospectus Supplement (the "Offered Securities," and for purposes
of this section "U.S. Federal Income Tax Consequences," the term "Security
Owner" refers to a holder of a beneficial interest in an Offered Security) will
be treated as indebtedness for Federal income tax purposes. However, opinions of
counsel are not binding on the Internal Revenue Service (the "IRS") and there
can be no assurance that the IRS could not successfully challenge this
conclusion.
The Transferor expresses in the Pooling and Servicing Agreement its intent
that for Federal, state and local income or franchise tax purposes, the Offered
Securities of each Series will be indebtedness secured by the Receivables. The
Transferor agrees and each Securityholder and Security Owner, by acquiring an
interest in an Offered Security, agrees or will be deemed to agree to treat the
Offered Securities of such Series as indebtedness for Federal, state and local
income or franchise tax purposes. However, because different criteria are used
to determine the non-tax accounting characterization of the transactions
contemplated by the Pooling and Servicing Agreement, the Transferor expects to
treat such transaction, for regulatory and financial accounting purposes, as a
sale of an ownership interest in the Receivables and not as a debt obligation.
In general, whether for Federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured indebtedness for Federal income tax purposes,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Unless otherwise set forth in a
Prospectus Supplement, it is expected that, as set forth in its opinion, Special
Tax Counsel will analyze and rely on several factors in reaching its opinion
that the weight of the benefits and burdens of ownership of the Receivables has
not been transferred to the Security Owners.
In some instances, courts have held that a taxpayer is bound by a
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Unless otherwise specified in a
Prospectus Supplement, it is expected that Special Tax Counsel will advise that
the rationale of those cases will not apply to the transaction evidenced by a
Series of Securities, because the form of the transaction, as reflected in the
operative provisions of the documents, either is not inconsistent with the
characterization of the Offered Securities of such Series as debt for Federal
income tax purposes or otherwise makes the rationale of those cases inapplicable
to this situation.
TAXATION OF INTEREST INCOME OF SECURITYHOLDERS
As set forth above, it is expected that, unless otherwise specified in a
Prospectus Supplement, Special Tax Counsel will issue an opinion to the
Transferor that the Offered Securities will constitute indebtedness for Federal
income tax purposes, and accordingly, interest thereon will be includible in
income by Security Owners as ordinary income when received (in the case of a
cash basis taxpayer) or accrued (in the case of an accrual basis taxpayer) in
accordance with their respective methods of tax accounting. Interest received on
the Offered Securities may also constitute "investment income" for purposes of
certain limitations of the Code concerning the deductibility of investment
interest expense.
While it is not anticipated that the Offered Securities will be issued at a
greater than DE MINIMIS discount, under applicable Treasury regulations (the
"Regulations") the Offered Securities may nevertheless be deemed to have been
issued with original issue discount ("OID"). This could be the case, for
example, if interest payments for a Series are not treated as "qualified stated
interest" because the IRS determines that (i) no reasonable legal remedies exist
to compel timely payment and (ii) the Offered Securities do not have terms and
conditions that make the likelihood of late payment (other than a late payment
that occurs within a reasonable grace period) or nonpayment a remote
contingency. The Regulations provide that, for purposes of the foregoing test,
the possibility of nonpayment due to default, insolvency, or similar
circumstances, is ignored. Although this does not directly apply to the Offered
Securities (because they have no actual default provisions) the Transferor
intends to take the position that, because nonpayment can occur only as a result
of events beyond its control (principally, loss rates and payment delays on the
Receivables substantially in excess of those anticipated), nonpayment is a
remote contingency. Based on the foregoing, and on the fact that generally
interest will accrue on the Offered Securities at a
71
"qualified floating rate," the Transferor intends to take the position that
interest payments on the Offered Securities constitute qualified stated
interest. If, however, interest payments for a Series were not classified as
"qualified stated interest," all of the taxable income to be recognized with
respect to the Offered Securities would be includible in income as OID but would
not be includible again when the interest is actually received.
If the Offered Securities are in fact issued at a greater than DE MINIMIS
discount or are treated as having been issued with OID under the Regulations,
the following rules will apply. The excess of the "stated redemption price at
maturity" of an Offered Security over the original issue price (in this case,
the initial offering price at which a substantial amount of the Offered
Securities are sold to the public) will constitute OID. A Security Owner must
include OID in income as interest over the term of the Offered Security under a
constant yield method. In general, OID must be included in income in advance of
the receipt of cash representing that income. In the case of a debt instrument
as to which the repayment of principal may be accelerated as a result of the
prepayment of other obligations securing the debt instrument (a "Prepayable
Instrument"), the periodic accrual of OID is determined by taking into account
both the prepayment assumptions used in pricing the debt instrument and the
prepayment experience. If this provision applies to a Class of Securities (which
is not clear), the amount of OID which will accrue in any given "accrual period"
may either increase or decrease depending upon the actual prepayment rate.
Accordingly, each Security Owner should consult its own tax advisor regarding
the impact to it of the OID rules if the Offered Securities are issued with OID.
Under the Regulations, a holder of a Security issued with DE MINIMIS OID must
include such OID in income proportionately as principal payments are made on a
Class of Securities.
A holder who purchases an Offered Security at a discount from its adjusted
issue price 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 Security, and for the deferral of
interest deductions with respect to debt incurred to acquire or carry the
Offered Security.
A subsequent holder who purchases an Offered Security at a premium may
elect to amortize and deduct this premium over the remaining term of the Offered
Security in accordance with rules set forth in Section 171 of the Code.
SALE OF A SECURITY
In general, a Security Owner will recognize gain or loss upon the sale,
exchange, redemption, or other taxable disposition of an Offered Security
measured by the difference between (i) the amount of cash and the fair market
value of any property received (other than amounts attributable to, and taxable
as, accrued interest) and (ii) the Security Owner's tax basis in the Offered
Security (as increased by any OID or market discount previously included in
income by the holder and decreased by any deductions previously allowed for
amortizable bond premium and by any payments reflecting principal or OID
received with respect to such Security). Subject to the market discount rules
discussed above and to the holding requirement for preferential capital gain
treatment, any such gain or loss generally will be such capital gain, PROVIDED
that the Offered Security was held as a capital asset and PROVIDED, FURTHER,
that if the rules applicable to Prepayable Instruments apply, any OID not
previously accrued will be treated as ordinary income. The maximum ordinary
income rate for individuals, estates, and trusts exceeds the maximum such
capital gains rate for such taxpayers. In addition, capital losses generally may
be used only to offset capital gains.
TAX CHARACTERIZATION OF THE TRUST
The Pooling and Servicing Agreement permits the issuance of Classes of
Securities that are treated for Federal income tax purposes either as
indebtedness or as an interest in a partnership. Accordingly, the Trust could be
characterized either as (i) a security device to hold Receivables securing the
repayment of the Securities of all Series or (ii) a partnership in which the
Transferor and certain classes of Securityholders are partners, and which has
issued debt represented by other Classes of Securities (including, unless
otherwise specified in a Supplement, the Offered Securities). In connection with
the issuance of Securities of any Series, Special Tax Counsel will render an
opinion to the Transferor, based on the assumptions and qualifications set forth
therein, that under then current law, the issuance of the Securities of such
Series will not cause the Trust to be characterized for Federal income tax
purposes as an association (or publicly traded partnership) taxable as a
corporation.
The opinion of Special Tax Counsel with respect to Offered Securities and
the Trust will not be binding on the courts or the IRS. It is possible that the
IRS could assert that, for purposes of the Code, the transaction contemplated by
this Prospectus and a related Prospectus Supplement constitutes a sale of the
Receivables (or an interest therein) to the Security Owners of one or more
Series or Classes and that the proper classification of the legal relationship
between the Transferor and some or all of the Security Owners or Securityholders
of one or more Series resulting from the transaction is that of a partnership
(including a publicly traded partnership) or a publicly traded partnership
taxable as a corporation. Unless otherwise specified
72
in a Prospectus Supplement for a Series, the Transferor intends to treat the
securities of each Series that are sold to investors as indebtedness for Federal
income tax purposes and intends to treat any Participation as a shared ownership
interest in the Receivables, rather than an interest in a partnership.
Accordingly, the Transferor currently does not intend to file the Federal income
tax reports that would apply if any Class of Securities or any Participation was
treated as an interest in a partnership or corporation (unless, as is permitted
by the Pooling and Servicing Agreement, an interest in the Trust is issued or
sold that is intended to be classified as an interest in a partnership).
If the Trust were treated in whole or in part as a partnership in which
some or all Security Owners of one or more Series were partners, that
partnership could be classified as a publicly traded partnership taxable as a
corporation. A partnership will be classified as a publicly traded partnership
taxable as a corporation if equity interests therein are traded on an
"established securities market," or are "readily tradeable" on a "secondary
market" or its "substantial equivalent" unless certain exceptions apply. One
such exception would apply if the Trust is not engaged in a "financial business"
and 90% or more of its income consists of interest and certain other types of
passive income. Because Treasury regulations do not clarify the meaning of a
"financial business" for this purpose, it is unclear whether this exception
applies. The Transferor intends to take measures designed to reduce the risk
that the Trust could be classified as a publicly traded partnership taxable as a
corporation by reason of trading of interests in the Trust other than the
Offered Securities and other securities with respect to which an opinion is
rendered that such securities constitute debt for Federal income tax purposes.
Although the Transferor expects that such measures would be successful, there
can be no absolute assurance that the Trust could not become a publicly traded
partnership, because certain of the actions necessary to comply with such
exceptions are not fully within the control of the Transferor.
If a transaction were treated as creating a partnership between the
Transferor and the Security Owners or Securityholders of one or more Series, the
partnership itself would not be subject to Federal income tax (unless it were to
be characterized as a publicly traded partnership taxable as a corporation);
rather, the partners of such partnership, including the Security Owners or
Securityholders of such Series, would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of a Security
Owner could differ if the Offered Securities were held to constitute partnership
interests, rather than indebtedness. Moreover, unless the partnership were
treated as engaged in a trade or business, 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 Securities. Finally, all or a
portion of any taxable income allocated to a Security Owner that is a pension,
profit-sharing or employee benefit plan or other tax exempt entity (including an
individual retirement account) might, under certain circumstances, constitute
"unrelated business taxable income" which generally would be taxable to the
holder under the Code. Partnership characterization also may have adverse state
and local income or franchise tax consequences for a Security Owner.
If it were determined that a transaction created an entity classified as an
association or as a publicly traded partnership taxable as a corporation, the
Trust would be subject to Federal income tax at corporate income tax rates on
the income it derives from the Receivables, which would reduce the amounts
available for distribution to the Security Owners, possibly including Security
Owners of a Class that is treated as indebtedness. Such classification may also
have adverse state and local tax consequences that would reduce amounts
available for distribution to Security Owners. Cash distributions to the
Security Owners (except any Class not recharacterized as an equity interest)
generally would be treated as dividends for tax purposes to the extent of such
deemed corporation's earnings and profits.
FASIT
Certain provisions of the Code provide for the creation of a new type of
entity for federal income tax purposes, the "financial asset securitization
investment trust" ("FASIT"). While these provisions became effective September
1, 1997, many technical issues concerning FASITs must be addressed by Treasury
regulations (which have not yet been issued). The Pooling and Servicing
Agreement may be amended in accordance with the provisions thereof to provide
that the Transferor may cause a FASIT election to be made for the Trust if the
Transferor delivers to the Trustee an opinion of counsel to the effect that, for
Federal income tax purposes, (i) the issuance of FASIT regular interests will
not adversely affect the tax characterization as debt of Securities of any
outstanding Series or Class that were characterized as debt at the time of their
issuance, (ii) following such issuance the Trust will not be deemed to be an
association (or publicly traded partnership) taxable as a corporation and (iii)
such issuance will not cause or constitute an event in which gain or loss would
be recognized by any Securityholder or the Trust.
73
FOREIGN INVESTORS
As set forth above, it is expected that Special Tax Counsel will render an
opinion, upon issuance, that the Offered Securities will be treated as debt for
U.S. Federal income tax purposes. The following information describes the U.S.
Federal income tax treatment of investors that are not U.S. persons ("Foreign
Investors") if the Offered Securities are treated as debt. The term "Foreign
Investor" means any person other than (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is includible in gross income for U.S. Federal income
tax purposes, regardless of its source or (iv) a trust the income of which is
includible in gross income for U.S. Federal income tax purposes, regardless of
its source or, for tax years beginning after December 31, 1996 (and, if a
trustee so elects, for tax years ending after August 20, 1996), a trust if a
U.S. court is able to exercise primary supervision over the administration of
such trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of such trust.
Interest, including OID, paid to a Foreign Investor will be subject to U.S.
withholding taxes at a rate of 30% unless (x) the income is "effectively
connected" with the conduct by such Foreign Investor of a trade or business in
the United States evidenced by IRS Form 4224, signed by the Security Owner or
such owner's Agent, claiming exemption from withholding of tax on income
effectively connected with the conduct of a trade or business in the United
States; (y) the Foreign Investor delivers IRS Form 1001, signed by the Security
Owner or such Security Owner's Agent, claiming exemption from withholding under
an applicable tax treaty; or (z) the Foreign Investor and each securities
clearing organization, bank, or other financial institution that holds the
Offered Securities on behalf of the customer in the ordinary course of its trade
or business, in the chain between the Security Owner and the U.S. person
otherwise required to withhold the U.S. tax, complies with applicable
identification requirements and, in addition (i) the non-U.S. Security Owner
does not actually or constructively own 10 percent or more of the total combined
voting power of all classes of stock of the Transferor entitled to vote (or of a
profits or capital interest of the Trust if characterized as a partnership),
(ii) the non-U.S. Security Owner is not a controlled foreign corporation that is
related to the Transferor (or a trust treated as a partnership) through stock
ownership, (iii) the non-U.S. Security Owner is not a bank receiving interest
described in Code Section 881(c)(3)(A), (iv) such interest is not contingent
interest described in Code Section 871(h)(4), and (v) the non-U.S. Security
Owner does not bear certain relationships to any holder of the Transferor
Security other than the Transferor or any holder of the Securities of any Series
not properly characterized as debt. Applicable identification requirements
generally will be satisfied if there is delivered to a securities clearing
organization (i) IRS Form W-8 signed under penalties of perjury by the Security
Owner, stating that the Security Owner is not a U.S. person and providing such
Security Owner's name and address. In the case of (x), (y) or (z) the
appropriate form will be effective provided that (a) the applicable form is
delivered pursuant to applicable procedures and is properly transmitted to the
United States entity otherwise required to withhold tax and (b) none of the
entities receiving the form has actual knowledge that the Security Owner is a
U.S. person.
Recently finalized Treasury regulations (the "Withholding Regulations")
could affect the procedures to be followed by a Foreign Investor in complying
with United States Federal withholding, backup withholding and information
reporting rules. The Withholding Regulations are not currently effective but
will be effective for payments made after December 31, 1999. Prospective
investors are urged to consult their tax advisors regarding the effect, if any,
of the Withholding Regulations on the purchase, ownership, and disposition of
the Offered Securities.
A Security Owner that is a nonresident alien or foreign corporation will
not be subject to U.S. Federal income tax on gain realized upon the sale,
exchange, or redemption of an Offered Security, provided that (i) such gain is
not effectively connected with the conduct of a trade or business in the United
States, (ii) in the case of a Security Owner that is an individual, such
Security Owner is not present in the United States for 183 days or more during
the taxable year in which such sale, exchange, or redemption occurs, and (iii)
in the case of gain representing accrued interest, the conditions described in
the second preceding paragraph are satisfied.
If the interests of the Security Owners of a Series were reclassified as
interests in a partnership (not taxable as a corporation), such
recharacterization could cause a Foreign Investor to be treated as engaged in a
trade or business in the United States. In such event the Security Owner of such
Series would be required to file a Federal income tax return and, in general,
would be subject to Federal income tax, including branch profits tax in the case
of a Securityholder that is a corporation, on its net income from the
partnership. Further, the partnership would be required, on a quarterly basis,
to pay withholding tax equal to the sum, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. The tax withheld from each foreign partner would be credited against
such foreign partner's U.S. Federal income tax liability.
74
DEFEASANCE
The Securities are subject to defeasance in certain circumstances. It is
not clear under the existing authorities whether defeasance would, for Federal
income tax purposes, result in a deemed taxable sale or exchange of the
Securities in exchange for the amounts deposited in the Principal Funding
Account and the Reserve Account as a result of the defeasance; however, if such
a sale or exchange were deemed to occur, each Securityholder would thereafter be
deemed to own its PRO RATA share of the assets in which such amount is invested,
and would be required to report its taxable income on such basis.
STATE AND LOCAL TAXATION
GENERAL. State income tax consequences to each Securityholder will depend
upon the provisions of the state tax laws to which the Securityholder 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 is different,
it is impossible to predict the tax consequences to the Securityholders in all
of the state taxing jurisdictions in which they are already subject to tax.
Securityholders are urged to consult their own tax advisors with respect to
state taxes.
ILLINOIS. Some of the activities to be undertaken by the Servicer in
servicing and collecting the Receivables will take place in Illinois. Illinois
imposes an income tax on corporations doing business in Illinois measured by
their net income apportioned to Illinois. This discussion is based upon present
provisions of Illinois law and regulations, and applicable judicial or ruling
authority, all of which are subject to change, which change may be retroactive.
No opinion of counsel or ruling from the Illinois Department of Revenue will be
sought on any of the issues discussed below.
Assuming (i) the Securities are treated as indebtedness and (ii) the Trust
is not a taxable entity for Federal income tax purposes, this treatment will
also apply for Illinois tax purposes. Pursuant to this treatment,
Securityholders not otherwise subject to Illinois tax would not become subject
to such tax solely because of their ownership of the Securities. Securityholders
already subject to taxation in Illinois as corporations, however, could be
required to pay tax on the income generated from ownership of the Securities.
In the alternative, if the Securities are treated as interests in a
partnership (not taxable as a corporation) for Federal income tax purposes, the
same treatment would also apply for Illinois tax purposes. In such case,
Illinois could view the partnership as doing business in Illinois, and the
entity (or the Securityholders) could be subject to Illinois income and personal
property replacement taxes. Such taxes could reduce amounts available for
distribution to Securityholders. Also, a Securityholder not otherwise subject to
taxation in Illinois could become subject to Illinois income taxes as a result
of its mere ownership of Securities.
If the Securities are instead treated as ownership interests in a "publicly
traded partnership" taxable as a corporation, then the entity could be subject
to Illinois income taxes. Such taxes could reduce amounts available for
distribution to Securityholders. While there is no authority directly on point,
a Securityholder not otherwise subject to tax in Illinois should not become
subject to Illinois taxes as a result of its mere ownership of such an interest.
Finally, even if the Securities are properly classified as debt obligations
for Federal Income tax purposes, they might be treated as debt obligations of an
entity owned by the Seller and the holders of any other interest in the Trust
(including any Collateral Interest). That entity could be subject to Illinois
income taxes. Such taxes could reduce amounts available for distribution to
Securityholders. A Securityholder not otherwise subject to tax in Illinois would
not become subject to Illinois taxes as a result of its mere ownership of
Securities.
MASSACHUSETTS. Some of the activities to be undertaken by the Servicer in
servicing the Receivables will take place in Massachusetts. This discussion is
based upon present provisions of Massachusetts law and regulations, and
applicable judicial and 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 Massachusetts Department of Revenue.
Assuming the Securities are treated as indebtedness and the Trust is
treated as a security device for Federal income tax purposes, this treatment
will also apply for Massachusetts tax purposes. Pursuant to this treatment, the
Trust will not be subject to Massachusetts income tax and Securityholders not
otherwise subject to Massachusetts tax would not become subject to such tax
solely because of their ownership of Securities.
75
Alternatively, if any of the Securities or any other interests in the Trust
(including any Collateral Interest) were treated as interests in a partnership
for Federal income tax purposes, the same treatment would apply for
Massachusetts tax purposes. In such case, Massachusetts could view the
partnership as a corporate trust doing business in Massachusetts, and the Trust
could be subject to Massachusetts income tax at a rate of up to 12% on its net
income apportioned to Massachusetts. Such tax could reduce amounts available for
distribution to Securityholders. A Securityholder not otherwise subject to
taxation in Massachusetts would not become subject to Massachusetts income taxes
as a result of its mere ownership of Securities.
OTHER STATES. 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 Securities would be treated
as indebtedness or the Trust would be taxable by any particular state.
ERISA CONSIDERATIONS
GENERAL
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan 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 plan. A violation
of these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and the Code for such persons. ERISA also imposes
certain duties on persons who are fiduciaries of plans subject to ERISA. Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a plan is considered to be a
fiduciary of such plan (subject to certain exceptions not here relevant). Plan
fiduciaries must determine whether the acquisition and holding of the Securities
of a Series and the operations of the Trust would result in direct or indirect
prohibited transactions under ERISA and Section 4975 of the Code. The operations
of the Trust could result in prohibited transactions if Benefit Plans (as
defined below) that purchase the Securities of a Series are deemed to own an
interest in the underlying assets of the Trust. There may also be an improper
delegation of the responsibility to manage Benefit Plan assets if Benefit Plans
that purchase the Securities are deemed to own an interest in the underlying
assets of the Trust.
Pursuant to a final regulation (the "Final Regulation") issued by the
United States Department of Labor ("DOL") concerning the definition of what
constitutes the "plan assets" of an employee benefit plan or other retirement
arrangement subject to ERISA or Section 4975 of the Code including without
limitation an individual retirement account ("IRA") (collectively referred to as
"Benefit Plans"), if a Benefit Plan invests in an "equity interest" of an entity
that is neither a "publicly-offered security" nor a security issued by an
investment company registered under the Investment Company Act of 1940, as
amended, the Benefit Plan's assets include both the equity interest and an
undivided interest in each of the entity's underlying assets, unless it is
established that the entity is an "operating company" or equity participation by
"benefit plan investors" is not "significant." Under the Final Regulation,
equity participation in an entity by "benefit plan investors" is "significant"
on any date if, immediately after the most recent acquisition of any equity
interest in the entity (other than a publicly-offered class of equity), 25% or
more of the value of any class of equity interests in the entity (other than a
publicly-offered class) is held by "benefit plan investors." The term "benefit
plan investor" is defined in the Final Regulation as (a) any employee benefit
plan (as defined in Section 3(3) of ERISA), whether or not it is subject to the
provisions of Title I of ERISA, (b) any plan described in Section 4975(e)(1) of
the Code and (c) any entity whose underlying assets include plan assets by
reason of any such plan's investment in the entity.
EXCEPTION FOR PUBLICLY OFFERED SECURITIES
It is likely that the Securities will be deemed for purposes of ERISA to
constitute "equity interests" in the Trust, and equity participation by Benefit
Plan Investors in certain Classes of Securities may be significant. However, as
noted above, the Final Regulation contains an exception that provides that if a
Benefit Plan acquires a "publicly offered security," the assets of the issuer
will not be deemed to be "plan assets" of the investing Benefit Plan.
A publicly-offered security is a security that is (i) freely transferable,
(ii) part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another and (iii) either is (A) part of a
class of securities registered under Section 12(b) or 12(g) of the Exchange Act
or (B) sold to the Benefit 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.
76
Unless otherwise provided in the related Prospectus Supplement, it is
anticipated that interests in the Securities of a Series will meet the criteria
of publicly-offered securities as set forth above. The underwriters expect
(although no assurances can be given) that interests in certain Classes of
Securities of each Series, as specified in the related Prospectus Supplement,
will be held by at least 100 independent investors at the conclusion of the
offering for such Series; there will be no restrictions imposed on the transfer
of interests in the Securities of such Classes of such Series; and interests in
the Securities of such Classes of such Series 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.
CONSEQUENCES IF SECURITIES OF A SERIES DO NOT QUALIFY AS PUBLICLY OFFERED
SECURITIES
If interests in the Securities of a Series fail to meet the criteria of
publicly-offered securities and investment by benefit plan investors is or
becomes significant so that the Trust's assets are deemed to include assets of
Benefit Plans that are Securityholders, transactions involving the Trust and
"parties in interest" or "disqualified persons" with respect to such Benefit
Plans might be prohibited under Section 406 of ERISA and Section 4975 of the
Code unless an exemption is applicable. In particular, the Transferor, the
originators of the Receivables or any underwriter of such Series may be
considered to be a party in interest, disqualified person or fiduciary with
respect to an investing Benefit Plan. Thus, for example, if a participant in any
Benefit Plan is a cardholder of one of the Accounts, under DOL interpretations
the purchase of interests in Securities by such plan could constitute a
prohibited transaction. Five class exemptions issued by the DOL that could apply
in such event are DOL Prohibited Transaction Class Exemption ("PTCE") 84-14
(Class Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers), 91-38 (Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds), 90-1 (Class Exemption for Certain
Transactions Involving Insurance Company Pooled Separate Accounts), 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). There is no assurance, however, that these exemptions, even if
all of the conditions specified therein are satisfied, or any other exemption
will apply to all transactions involving the Trust's assets.
IN LIGHT OF THE FOREGOING, FIDUCIARIES OF A BENEFIT PLAN CONSIDERING THE
PURCHASE OF INTERESTS IN SECURITIES OF ANY SERIES SHOULD CONSULT THEIR OWN
COUNSEL AS TO WHETHER SUCH SECURITIES WILL QUALIFY AS "PUBLICLY OFFERED
SECURITIES" UNDER THE FINAL REGULATION AND WHETHER, UNDER THE GENERAL FIDUCIARY
STANDARDS OF INVESTMENT PRUDENCE AND DIVERSIFICATION, AN INVESTMENT IN
SECURITIES OF ANY SERIES IS APPROPRIATE FOR THE BENEFIT PLAN TAKING INTO ACCOUNT
THE OVERALL INVESTMENT POLICY OF THE BENEFIT PLAN AND THE COMPOSITION OF THE
BENEFIT PLAN'S INVESTMENT PORTFOLIO. In addition, fiduciaries should consider
the consequences that would apply if the Trust's assets were considered plan
assets, the applicability of exemptive relief from the prohibited transaction
rules and whether all conditions for such exemptive relief would be satisfied.
SPECIAL CONSIDERATIONS APPLICABLE TO INSURANCE COMPANY GENERAL ACCOUNTS
In particular, insurance companies considering the purchase of interests in
Securities of any Series should consult their own employee benefits counsel or
other appropriate counsel with respect to the United States Supreme Court's
decision in JOHN HANCOCK MUTUAL LIFE INSURANCE CO. v. HARRIS TRUST & SAVINGS
BANK, 510 U.S. 86 (1993) ("JOHN HANCOCK"), and the applicability of PTCE 95-60.
In JOHN HANCOCK, the Supreme Court held that assets held in an insurance
company's general account may be deemed to be "plan assets" under certain
circumstances; however, PTCE 95-60 may exempt some of the transactions that
could occur as the result of the acquisition and holding of interests in
Securities of a Series by an insurance company general account from the
penalties normally associated with prohibited transactions. Accordingly,
investors should analyze whether JOHN HANCOCK and PTCE 95-60 or any other
exemption may have an impact with respect to their purchase of the Securities of
any Series.
In addition, insurance companies considering the purchase of Securities
using assets of a general account should consult their own employee benefits
counsel or other appropriate counsel with respect to the effect of the Small
Business Job Protection Act of 1996 which added a new Section 401(c) to 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 DOL is
required to issue final
77
regulations (the "General Account Regulations") 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 intended 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 Regulations 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 may result on the basis of a claim that the assets of the general
account of an insurance company constitute the plan 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.
To date, the DOL has issued proposed regulations under Section 401(c). It
should be noted that, if adopted in the form in which proposed, the General
Account Regulations may not exempt the assets of insurance company general
accounts from treatment as "plan assets" after December 31, 1998.
PLAN OF DISTRIBUTION
The Transferor may sell Securities (a) through underwriters or dealers, (b)
directly to one or more purchasers, or (c) through agents. The related
Prospectus Supplement will set forth the terms of the offering of any Securities
offered hereby, including, without limitation, the names of any underwriters,
the purchase price of such Securities and the proceeds to the Transferor from
such sale, any underwriting discounts and other items constituting underwriters'
compensation, any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers.
If underwriters are used in a sale of any Securities of a Series offered
hereby, such Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. Such Securities may be offered to the public either through
underwriting syndicates represented by managing underwriters or by underwriters
without a syndicate. Unless otherwise set forth in the related Prospectus
Supplement, the obligations of the underwriters to purchase such Securities will
be subject to certain conditions precedent, and the underwriters will be
obligated to purchase all of such Securities if any of such Securities are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
Securities may also be sold directly by the Transferor or through agents
designated by the Transferor from time to time. Any agent involved in the offer
or sale of Securities will be named, and any commissions payable by the
Transferor to such agent will be set forth, in the related Prospectus
Supplement. Unless otherwise indicated in the related Prospectus Supplement, any
such agent will act on a best efforts basis for the period of its appointment.
Any underwriters, agents or dealers participating in the distribution of
Securities may be deemed to be underwriters, and any discounts or commissions
received by them on the sale or resale of Securities may be deemed to be
underwriting discounts and commissions, under the Securities Act. Agents and
underwriters may be entitled under agreements entered into with the Transferor
and the Bank to indemnification by the Transferor and the Bank against certain
civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments that the agents or underwriters may be
required to make in respect thereof. Agents and underwriters may be affiliates
or customers of, engage in transactions with, or perform services for, the
Transferor and the Bank or their affiliates in the ordinary course of business.
LEGAL MATTERS
Certain legal matters and Federal income tax matters relating to the
issuance of the Securities will be passed upon for the Transferor and the Trust
by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal
matters will be passed upon for the Underwriters by the counsel named in the
Prospectus Supplement.
78
INDEX OF DEFINED TERMS
TERMS PAGE(S)
- ----------------------------------------------------------------------------------------------------------------- ----------
Account Originator............................................................................................... 5
Accounts......................................................................................................... 1, 8, 29
Accumulation Period Length....................................................................................... 43
Additional Accounts.............................................................................................. 28
Additional PFR Purchase Agreements............................................................................... 65
Additional Receivables Purchase Agreements....................................................................... 64
Adjustment Payment............................................................................................... 59
Adverse Effect................................................................................................... 28, 49
Aggregate Addition............................................................................................... 28
Aggregate Addition Accounts...................................................................................... 29
Assignment and Assumption Agreement.............................................................................. 64
Assistance Agreement............................................................................................. 5
Average Rate..................................................................................................... 26
Bank............................................................................................................. 6, 20, 32
BankBoston....................................................................................................... 4, 31
Bankmont......................................................................................................... 38
Benefit Plans.................................................................................................... 76
Billing Cycle.................................................................................................... 35
BKB.............................................................................................................. 1, 5
BKB Portfolio.................................................................................................... 30
Cash Collateral Account.......................................................................................... 60
Cash Collateral Guaranty......................................................................................... 60
Cede............................................................................................................. 3, 39
Cedel............................................................................................................ 12
Cedel Participants............................................................................................... 41
Class............................................................................................................ 1
Code............................................................................................................. 70
Collateral Interest.............................................................................................. 60
Collection Account............................................................................................... 54
Comerica......................................................................................................... 34
Commission....................................................................................................... 3
Contribution Agreement........................................................................................... 5
Controlled Accumulation Amount................................................................................... 14
Controlled Accumulation Period................................................................................... 13
Controlled Amortization Amount................................................................................... 15
Controlled Amortization Period................................................................................... 14
Controlled Deposit Amount........................................................................................ 14
Controlled Distribution Amount................................................................................... 15
Cooperative...................................................................................................... 41
counterparties................................................................................................... 60
Credit Card Guidelines........................................................................................... 6
Credit Enhancement............................................................................................... 18
Credit Enhancer.................................................................................................. 59
Current Initial Receivables Purchase Agreement................................................................... 64
Date of Processing............................................................................................... 18
Defaulted Amount................................................................................................. 58
Defaulted Receivables............................................................................................ 58
Definitive Securities............................................................................................ 39
Depositaries..................................................................................................... 40
Depository....................................................................................................... 39
Determination Date............................................................................................... 18
Dilution......................................................................................................... 59
79
TERMS PAGE(S)
- ----- ----------
Disclosure Document.............................................................................................. 10
Discount Option Receivables...................................................................................... 50
Discount Percentage.............................................................................................. 50
Distribution Date................................................................................................ 18
DOL.............................................................................................................. 76
DTC.............................................................................................................. 3
Early Accumulation Period........................................................................................ 14
Early Amortization Period........................................................................................ 15
Eligible Account................................................................................................. 47
Eligible Institution............................................................................................. 54
Eligible Investments............................................................................................. 54
Eligible Receivable.............................................................................................. 47
Enhancement Invested Amount...................................................................................... 9, 59
ERISA............................................................................................................ 76
Euroclear........................................................................................................ 12
Euroclear Operator............................................................................................... 41
Euroclear Participants........................................................................................... 41
Euroclear Provisions............................................................................................. 41
Excess Allocation Series......................................................................................... 15
Excess Finance Charge Collections................................................................................ 57
Exchange Act..................................................................................................... 3
Expected Final Payment Date...................................................................................... 12
FAMIS............................................................................................................ 4, 31, 38
FASIT............................................................................................................ 73
FDC.............................................................................................................. 21, 33
FDIA............................................................................................................. 68
FDIC............................................................................................................. 21
FDR.............................................................................................................. 4
FICO............................................................................................................. 34
Final Regulation................................................................................................. 76
Finance Charge Receivables....................................................................................... 11
FIRREA........................................................................................................... 21
First Annapolis.................................................................................................. 31, 38
Floating Allocation Percentage................................................................................... 55
Foreign Investor................................................................................................. 74
Foreign Investors................................................................................................ 74
Full Invested Amount............................................................................................. 17
Funding Period................................................................................................... 17
General Account Regulations...................................................................................... 78
Group............................................................................................................ 8
Group Investor Additional Amounts................................................................................ 56
Group Investor Default Amount.................................................................................... 56
Group Investor Finance Charge Collections........................................................................ 56
Group Investor Monthly Fees...................................................................................... 56
Group Investor Monthly Interest.................................................................................. 56
Harris........................................................................................................... 1, 5
Harris Portfolio................................................................................................. 30
Holders.......................................................................................................... 42
Indirect Participants............................................................................................ 40
Ineligible Receivables........................................................................................... 47
Initial Accounts................................................................................................. 11
Initial Receivables.............................................................................................. 7, 46
Initial Receivables Purchase Agreements.......................................................................... 64
80
TERMS PAGE(S)
- ----- ----------
Insolvency Event................................................................................................. 23
Interchange...................................................................................................... 8, 36
Interest Funding Account......................................................................................... 12
Interest Payment Date............................................................................................ 52
Invested Amount.................................................................................................. 52
Investor Finance Charge Collections.............................................................................. 56
IRA.............................................................................................................. 76
IRS.............................................................................................................. 71
John Hancock..................................................................................................... 77
L/C Issuer....................................................................................................... 60
LIBOR............................................................................................................ 61
Master Formation Agreement....................................................................................... 38
MasterCard....................................................................................................... 8
Minimum Monthly Payment.......................................................................................... 35
Monthly Period................................................................................................... 9
Monthly Servicing Fee............................................................................................ 45
New Accounts..................................................................................................... 28
New Issuance..................................................................................................... 52
Offered Securities............................................................................................... 71
OID.............................................................................................................. 71
Original PFR Purchase Agreements................................................................................. 64
Overdue Initial Receivables Purchase Agreement................................................................... 64
Paired Series.................................................................................................... 16
Participants..................................................................................................... 40
Participation.................................................................................................... 10, 54
Participation Interests.......................................................................................... 8
Participation Percentage......................................................................................... 54
Participation Supplement......................................................................................... 10, 53
Partners First................................................................................................... 4
Partners First Portfolio......................................................................................... 5
Pay Out Event.................................................................................................... 44
PFR.............................................................................................................. 38
PFR Purchase Agreement........................................................................................... 7
PFRF............................................................................................................. 1, 4
Pooling and Servicing Agreement.................................................................................. 1
Portfolio Yield.................................................................................................. 26
Pre-Funding Account.............................................................................................. 17
Pre-Funding Amount............................................................................................... 17
Premium Option Receivables....................................................................................... 51
Premium Percentage............................................................................................... 51
Prepayable Instrument............................................................................................ 72
Principal Allocation Percentage.................................................................................. 16, 55
Principal Commencement Date...................................................................................... 12
Principal Funding Account........................................................................................ 14
Principal Receivables............................................................................................ 11
Principal Sharing Series......................................................................................... 11
Principal Shortfalls............................................................................................. 57
Principal Terms.................................................................................................. 53
Prior Series..................................................................................................... 16
Prospectus Supplement............................................................................................ 1
PTCE............................................................................................................. 77
Purchase Agreements.............................................................................................. 7
Rating Agency.................................................................................................... 19
81
TERMS PAGE(S)
- ----- ----------
Rating Agency Condition.......................................................................................... 28
Reallocation Group............................................................................................... 16
Receivables...................................................................................................... 1, 8
Record Date...................................................................................................... 39
Recoveries....................................................................................................... 8, 37
Redirected Investor Finance Charge Collections................................................................... 56
Regulations...................................................................................................... 71
Reinvestment Events.............................................................................................. 45
Removed Accounts................................................................................................. 11
Required Minimum Principal Balance............................................................................... 49
Required Transferor Amount....................................................................................... 9
Reserve Account.................................................................................................. 60
Retained Rights.................................................................................................. 5, 66
Revolving Period................................................................................................. 13
RTC.............................................................................................................. 21
RTC Policy Statement............................................................................................. 21, 68
Securities....................................................................................................... 1
Securities Act................................................................................................... 3
Security Owner................................................................................................... 71
Security Owners.................................................................................................. 3
Security Rate.................................................................................................... 3
Securityholders.................................................................................................. 3
Securityholders' Interest........................................................................................ 9
Series........................................................................................................... 1, 4
Series Adjusted Invested Amount.................................................................................. 54
Series Allocable Defaulted Amount................................................................................ 55
Series Allocable Finance Charge Collections...................................................................... 55
Series Allocable Principal Collections........................................................................... 55
Series Allocation Percentage..................................................................................... 55
Series Cut-Off Date.............................................................................................. 13
Series Enhancement............................................................................................... 8
Series Invested Amount........................................................................................... 49
Series Issuance Date............................................................................................. 13
Series Required Transferor Amount................................................................................ 55
Series Termination Date.......................................................................................... 13
Service Transfer................................................................................................. 62
Servicer......................................................................................................... 1, 4
Servicer Default................................................................................................. 62
Servicer Interchange............................................................................................. 45
Servicing Fee.................................................................................................... 4, 45
Shared Principal Collections..................................................................................... 57
Special Funding Account.......................................................................................... 58
Special Payment Date............................................................................................. 44
Special Tax Counsel.............................................................................................. 71
Supplement....................................................................................................... 10
Supplemental Securities.......................................................................................... 10
Supplemental Security............................................................................................ 49
Swaps............................................................................................................ 61
Tax Opinion...................................................................................................... 53
Termination Notice............................................................................................... 62
Transfer Date.................................................................................................... 18
Transferor....................................................................................................... 1, 4
Transferor Amount................................................................................................ 9, 48
82
TERMS PAGE(S)
- ----- ----------
Transferor Purchase Agreement.................................................................................... 7
Transferor Securities............................................................................................ 10
Transferor Security.............................................................................................. 10
Transferor Servicing Fee......................................................................................... 45
Transferor's Interest............................................................................................ 9
Trust............................................................................................................ 1, 4
Trust Adjusted Invested Amount................................................................................... 55
Trust Assets..................................................................................................... 8
Trust Portfolio.................................................................................................. 30
Trustee.......................................................................................................... 1, 4
UCC.............................................................................................................. 22
UJB.............................................................................................................. 33
VISA............................................................................................................. 8
Withholding Regulations.......................................................................................... 74
Yield Supplement Account......................................................................................... 12
83
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRANSFEROR. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER OR A SOLICITATION BY ANYONE IN ANY STATE IN
WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE TRANSFEROR SINCE THE DATE HEREOF OR THEREOF
OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
SUMMARY OF SERIES TERMS.............................. S-3
RISK FACTORS......................................... S-16
MATURITY CONSIDERATIONS.............................. S-16
THE PARTNERS FIRST PORTFOLIO......................... S-18
THE RECEIVABLES...................................... S-22
USE OF PROCEEDS...................................... S-24
PARTNERS FIRST....................................... S-24
SERIES PROVISIONS.................................... S-25
UNDERWRITING......................................... S-45
LEGAL MATTERS........................................ S-46
INDEX OF DEFINED TERMS............................... S-47
ANNEX-I.............................................. A-1
PROSPECTUS
PROSPECTUS SUPPLEMENT................................ 3
REPORTS TO SECURITYHOLDERS........................... 3
AVAILABLE INFORMATION................................ 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...... 3
PROSPECTUS SUMMARY................................... 4
RISK FACTORS......................................... 20
USE OF PROCEEDS...................................... 29
THE TRUST............................................ 29
CREDIT CARD ACTIVITIES............................... 30
PARTNERS FIRST HOLDINGS, LLC......................... 38
PARTNERS FIRST RECEIVABLES FUNDING, LLC.............. 38
THE ACCOUNTS......................................... 38
DESCRIPTION OF THE SECURITIES........................ 39
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT... 46
DESCRIPTION OF THE PURCHASE AGREEMENTS............... 64
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES............. 67
U.S. FEDERAL INCOME TAX CONSEQUENCES................. 70
STATE AND LOCAL TAXATION............................. 75
ERISA CONSIDERATIONS................................. 76
PLAN OF DISTRIBUTION................................. 78
LEGAL MATTERS........................................ 78
INDEX OF DEFINED TERMS............................... 79
------------------
UNTIL SEPTEMBER , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED SECURITIES
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[PARTNERS FIRST LOGO APPEARS HERE]
PARTNERS FIRST CREDIT
CARD MASTER TRUST
$528,000,000 CLASS A
SERIES 1998-3 FLOATING RATE
ASSET BACKED SECURITIES
$113,000,000 CLASS B
SERIES 1998-3 FLOATING RATE
ASSET BACKED SECURITIES
PARTNERS FIRST RECEIVABLES
FUNDING, LLC
TRANSFEROR
PARTNERS FIRST HOLDINGS, LLC
SERVICER
--------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------
MERRILL LYNCH & CO.
BANCBOSTON SECURITIES INC.
CREDIT SUISSE FIRST BOSTON
NESBITT BURNS SECURITIES INC.
SALOMON SMITH BARNEY
JUNE , 1998