-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NNqqmLGBaTRNGP4/FVpB1EJXU9g97X9UVRkEa2NfUxQbGnlaXWjs9zXGbNoW/pTD N9w3ItBEpjUtnCs1MA0uog== 0000893220-97-000611.txt : 19970327 0000893220-97-000611.hdr.sgml : 19970327 ACCESSION NUMBER: 0000893220-97-000611 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14120 FILM NUMBER: 97564105 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19044 BUSINESS PHONE: 2156574000 MAIL ADDRESS: STREET 1: BRANDYWINE CORPORATE CENTER STREET 2: 650 NAAMANS ROAD CITY: CLAYMONT STATE: DE ZIP: 19703 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-K 1 FORM 10-K, ADVANTA CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 or ----------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________to________ Commission File No. 0-14120 Advanta Corp. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Delaware 23-1462070 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) organization) Welsh & McKean Roads, P. O. Box 844, Spring House, Pennsylvania 19477 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 657-4000 --------------- Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered None N/A Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value Class B Common Stock, $.01 par value 6-3/4% Convertible Class B Preferred Stock, Series 1995 Stock Appreciation Income Linked Securities (SAILS)(SM) Class A Right Class B Right - -------------------------------------------------------------------------------- (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. 2 State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $ 525,168,654.75 as of March 1, 1997 which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by officers and directors of the Company (however, this does not constitute a representation or acknowledgment that any of such individuals is an affiliate of the Registrant). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 1, 1997 there were 18,168,896 shares of the Registrant's Class A Common Stock, $.01 par value, outstanding and 25,988,917 shares of the Registrant's Class B Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
Document Form 10-K Reference - -------- ------------------- Definitive Proxy Statement relating to the Part III, Items 10-13 Registrant's 1997 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than 120 days following the end of the Registrant's last fiscal year, and referred to herein as the "Proxy Statement".
2 3 PART I ITEM 1. BUSINESS. OVERVIEW Advanta Corp. (the "Company") serves consumers and small businesses through innovative products and services primarily via direct, cost effective delivery systems. The Company primarily originates and services credit cards and mortgages. Other products include small-ticket equipment leasing, auto finance, credit insurance and deposit products. The Company utilizes customer information attributes including credit assessments, usage patterns, and other characteristics enhanced by proprietary information to match customer profiles with appropriate products. At year end 1996 assets under management totaled $19 billion. Approximately 72% of total revenues are derived from credit cards marketed through targeted direct mail campaigns. For the past several years, the Company's strategy has been to market this product in the form of a no annual fee, low variable-rate gold card. The Company has successfully grown to one of the ten largest issuers of gold cards and ranks among the top 15 bankcard issuers worldwide. Personal Finance Services which include mortgages and auto loans contribute 13% of total revenues with a managed loan portfolio of $2.8 billion. Mortgage loans are originated directly with consumers, as well as through conduit relationships and wholesale purchases from brokers and other financial institutions. The Company was incorporated in Delaware in 1974 as Teachers Service Organization, Inc., the successor to a business originally founded in 1951. In January 1988, the Company's name was changed from TSO Financial Corp. to Advanta Corp. The Company's principal executive office is located at Welsh & McKean Roads, P. O. Box 844, Spring House, Pennsylvania 19477-0844. The Company's telephone number at its principal executive office is (215) 657-4000. References to the Company in this Report include its consolidated subsidiaries unless the context otherwise requires. ADVANTA PERSONAL PAYMENT SERVICES During 1995, the Company's consumer credit card unit adopted the name Advanta Personal Payment Services, which more appropriately captures the unit's mission and its goal of expansion into new delivery systems. The credit card, a vehicle enabling the consumer to transact purchases and facilitate borrowing, offers utility to the consumer that may move beyond its traditional platform. For example, "smart" credit cards (credit cards containing a microchip processor) and on-line payment delivery systems associated with a credit card account are nascent technologies which may in the future be a part of Advanta Personal Payment Services. The Company, which has been in the credit card business since 1983, issues gold (i.e., premium) and standard MasterCard(R)* and VISA(R)* credit cards nationwide. The Company has built a substantial cardholder base which, as of December 31, 1996, totaled 5.7 million accounts and $12.7 billion in managed receivables. The gold card strategy has produced a portfolio with approximately 80% of balances from customers holding a gold card. This contrasts with the bankcard industry as a whole, which is composed of 43% gold (versus standard) cards. The Company believes its concentration of gold card balances to be the highest among the top twenty domestic bankcard issuers. The top twenty bankcard issuers, as of December 31, 1996, accounted for more than 75% of all domestic balances outstanding. Both gold and standard - -------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc.; VISA(R) is a federally registered servicemark of VISA, U.S.A., Inc. 3 4 accounts undergo the same credit analysis, but gold accounts have higher initial credit limits because of the cardholders' stronger credit record. In addition, gold accounts generally offer a wider variety of services to cardholders. The primary method of account acquisition is direct mail solicitation. The Company generally uses credit scoring by independent third parties and proprietary market segmentation and targeting models to target its mailings to profitable segments of the market. In 1982, the Company acquired Colonial National Bank USA, the name of which was changed to Advanta National Bank USA ("AUS") in May 1996. As a national bank, AUS has the ability to make loans to consumers without many of the restrictions found in various state usury and licensing laws, to negotiate variable rate loans, to generate funds economically in the form of deposits insured by the Federal Deposit Insurance Corporation ("FDIC"), and to include in its product mix a MasterCard and VISA credit card program. In 1995, the Company chartered Advanta National Bank ("ANB") to complement the credit card activities of AUS. ANB is a type of limited purpose national bank known as a "credit card bank" whose lending activities are limited to consumer credit card lending. See "Government Regulation -- Advanta National Bank USA and Advanta National Bank." Prior to the establishment of ANB, substantially all of the Company's credit card receivables and bank deposits were originated by AUS. However, at December 31, 1996, ANB accounted for $5.6 billion of the Company's total of $12.7 billion of managed credit card assets, as well as $716 million of the total $1.9 billion of bank deposits and all of the $836 million of medium term bank notes. MasterCard and VISA license banks, such as AUS and ANB (together the "Banks") and other financial institutions, to issue credit cards using their trademarks and to utilize their interchange networks. Cardholders may use their cards to make purchases at participating merchants or to obtain cash advances at participating financial institutions. Cardholders may also use special credit line drafts issued by the Banks to draw against their Visa or MasterCard credit lines for cash, purchases or balance transfers. Each credit card transaction is submitted to a merchant bank which remits to the merchant the purchase amount less a merchant discount fee, and submits the purchase to the card issuing bank for payment through the appropriate settlement system. The card issuing bank receives an interchange fee as compensation for the funding and credit and fraud risk that it takes when its customers use its credit card. MasterCard or VISA sets the interchange fee as a percentage of each card transaction (currently averaging approximately 1.4%). The Company generates interest and other income from its credit card business through finance charges assessed on outstanding loans, interchange income, cash advance and other credit card fees, and securitization income as described below. Credit card income also includes fees paid by credit card customers for product enhancements they may select, and revenues paid to the Banks by third parties for the right to market their products to the Company's credit card customers. Most of the Company's MasterCard and VISA credit cards carry no annual fee, and those credit cards which do include an annual fee generally have lower fees than those charged by many of the Company's competitors. The Company believes that this characteristic of no or low annual fee credit cards has appealed to consumers, and that the Company's credit cards have also appealed to consumers because of their competitive interest rates, credit lines, quality service, and payment terms. The interest rates on the majority of the Company's credit card receivables are variable, tied either to the prime rate or the London interbank offered rate ("LIBOR"). This variable rate structure helps the Company maintain net interest margins in both rising and declining interest rate environments. While the Company believes that its credit card offers will continue to appeal to consumers for the reasons stated, the Company also notes that for several years competition has 4 5 been increasing in the credit card industry. At the same time, the U.S. consumer has become a generally more sophisticated and demanding user of credit. These forces are likely to produce significant changes in the industry. The Company is devoting substantial resources to meeting the challenges and taking advantage of the opportunities which management sees emerging in the industry. In 1994 through 1996, this included significant focus on balance transfer initiatives, in which the Company encouraged new and existing customers to transfer account balances they were maintaining with other credit card issuers to an AUS or ANB account with a lower interest rate. Approximately 42% of the new credit card sales generated in 1996 resulted from balance transfer business. Also in these years, most of the Company's new credit card accounts carried low "introductory" interest rates, which repriced upwards after an introductory period of up to one year. In addition, as part of the strategy to broaden and deepen its relationship with the consumer, the Company has launched some proprietary branded credit card products. These products were crafted to meet identified long-term consumer needs and are expected to establish relationships with consumers that will be lasting. The Company intends to continue exploring new approaches to the credit card market. The following table shows the geographic distribution by state of total managed credit card receivables among the top five states, together with the impaired credit card receivables in those states as of December 31, 1996:
PERCENT OF PERCENT OF TOTAL TOTAL PERCENT OF CREDIT TOTAL PORTFOLIO IMPAIRED IMPAIRED TO CARD RECEIVABLES IMPAIRED BY STATE BY STATE TOTAL RECEIVABLES ---------------- -------- -------- -------- ----------------- (Dollars in millions) California $ 1,943.8 $ 59.4 15.3% 18.7% .5% New York 1,008.9 28.5 8.0 9.0 .2 Texas 906.9 24.9 7.1 7.8 .2 Florida 763.3 24.3 6.0 7.6 .2 Illinois 520.3 11.4 4.1 3.6 .1 Other 7,548.2 169.3 59.5 53.3 1.3 ---------- ------ ----- ----- ---- TOTAL $12,691.4 $317.8 100.0% 100.0% 2.5% --------- ------ ----- ----- ---
Since 1988, AUS has been active in the credit card securitization market, and since its inception in 1995, ANB has likewise been active, together securitizing $3.4 billion of credit card receivables in 1996. The Company continues to recognize income on a monthly basis from the securitized receivables. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 of the Notes to Consolidated Financial Statements. The Banks' securitization program provides a number of benefits: diversifying the Banks' funding base, providing liquidity, reducing regulatory capital requirements, lowering the cost of funds and providing a source of variable-rate funding to complement the variable-rate credit card portfolio. Additionally, until September 30, 1996, securitization was important in helping to limit the on-balance sheet growth of AUS to less than 7% per annum. See "Government Regulation -- the Company." Furthermore, the Banks continue to own the credit card accounts and customer relationships, which the Company believes continue to build significant long-term value. While the Company believes that securitization will continue to be a reliable source of funding, there is 5 6 no assurance that the Company will be able to continue securitizations in amounts or under terms comparable to its securitizations to date. A securitization involves the transfer by the Company of the receivables generated by a pool of credit card accounts to a securitization trust. Certificates issued by the trust and sold to investors represent undivided ownership interests in receivables transferred to the trust. The securitization results in removal of the receivables from the Company's balance sheet for financial and regulatory accounting purposes. For tax purposes, the investor certificates are characterized as a collaterized debt financing of the Company. The trust receives finance and other charges paid by the credit card customers and pays a rate of return on a monthly or quarterly basis to the certificate holders. While in most cases the rate of return paid to investors is variable in order to match the pricing dynamics of the underlying receivables, the Company also uses fixed rate securitizations in certain circumstances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Asset/Liability Management." Credit losses on the securitized receivables are paid from the funds in the trust. The Company continues to service the accounts for a fee, approximately 2.0% of the securitized receivables. Excess spread (defined as finance charges plus miscellaneous fees less interest paid to certificate holders, credit losses and servicing fees) is first retained to build up a reserve fund to a certain level, after which amounts are remitted to the Company. The Company's relationship with its credit card customers is not affected by the securitization. Investors in the trust receive payments only of interest during the first three to eight and one-half years of the trust. Thereafter, an amortization period (generally between six and ten months) commences, during which the certificate holders are entitled to payment of principal and interest. Acceleration of the commencement of the amortization period (which may occur in limited circumstances) on a securitization would accelerate the Company's funding requirement. Upon full repayment of principal to the certificate holders, whether as a result of normal or accelerated amortization, the trust's lien on the accounts terminates and all related receivables and funds held in the trust, including the reserve fund, are transferred to the Company. ADVANTA PERSONAL FINANCE SERVICES Formerly designated Advanta Mortgage, the newer name Advanta Personal Finance Services ("APFS") reflects the growing diversification and product array of this business unit, which in 1995 expanded to include both Advanta Mortgage and Advanta Finance, and in 1996 launched an automobile financing business, Advanta Auto Finance. Advanta Mortgage Corp. USA originates, purchases, securitizes, and services non-conforming credit first and second mortgage loans directly, through its subsidiaries, and for AUS's "Advanta Mortgage USA" Division (collectively, "Advanta Mortgage"). Loan production is generated through multiple distribution channels including two centralized, direct to consumer origination centers (each one dedicated to a specific product), a broker network serviced by selected sales locations, correspondent relationships and purchases from other financial institutions. In 1995, Advanta Mortgage developed and tested a Home Equity Line of Credit product, from which annual loan production volume grew to $53 million in 1996. During 1995 a new business channel, "Advanta Finance," was launched, offering loans directly to the consumer through a branch office system. Through December 31, 1996, fifty branches have been opened offering first and second lien mortgage loans similar to those offered by Advanta Mortgage. Advanta Finance production activity for 1996 grew to $137 million. In 1996, Advanta Auto Finance began offering loans secured by automobiles to sub-prime customers, largely through correspondent relationships, with originations totaling $104 million. The combined origination volume for APFS for 1996 was $1.5 billion. 6 7 Advanta Mortgage originates and purchases loans, generally funding these loans through sales or securitizations which have been structured to qualify as real estate mortgage investment conduits ("REMICs") under the Internal Revenue Code. In a securitization, Advanta Mortgage typically sells receivables to a trust for cash while retaining an interest in the loans securitized. The cash purchase price is generated through an offering of pass-through certificates by the trust. The purchasers of the pass-through certificates are generally entitled to the principal collected and a portion of the interest collected on the underlying loans while Advanta Mortgage retains the "excess spread." The excess spread represents the excess of the interest and fees paid by borrowers on the underlying loans over the sum of the pass-through rate of interest payable to the certificate holders, credit losses, a servicing fee which is paid to the Company in its role as servicer, and certain transaction related costs. During 1996, Advanta Mortgage securitized $1.4 billion of loans. The excess spread is received over the life of the loans. However, in accordance with generally accepted accounting principles ("GAAP"), Advanta Mortgage recognizes an amount which approximates the estimated present value of the excess spread as a component of mortgage banking income in the fiscal period in which the loans are sold. The gain recognized reflects estimates of the impact of future credit losses and loan prepayments. Other basic sources of income to Advanta Mortgage are net interest income on loans outstanding pending their sale, and loan servicing income, including subservicing of loans which were never owned by the Company. See Note 1 of Notes to Consolidated Financial Statements. Advanta Mortgage's subservicing portfolio at December 31, 1996 totals $3.7 billion of third party loans serviced for a fee. During the year, the Company assumed $3.1 billion of new servicing for third parties. The Company has experienced significant growth in this portfolio over the past two years as a result of its favorable reputation in the sub-prime market and anticipates continued expansion of its market presence. The Company bears no credit risk on this portfolio but it does bear operational risk with respect to its servicing obligations. Subserviced loans are not included in the Company's managed portfolio. Advanta Mortgage's managed portfolio of receivables includes owned loans (generally held for sale) and the loans it services in which it retains an interest in the excess spread. At December 31, 1996, owned personal finance loans receivable totaled $376 million while total managed receivables were $2.8 billion. In contrast to the subserviced loans, the performance of the managed portfolio, including loans sold by the Company, can materially impact ongoing income from Personal Finance activities. See Note 1 of Notes to Consolidated Financial Statements. At December 31, 1996, the total serviced portfolio, including the "subserviced" portfolio, was $6.4 billion. Approximately 85% of the managed portfolio is secured by first lien position loans and the balance is secured by second lien position loans. Approximately 75% of the managed portfolio is comprised of fixed rate loans while the remainder represents adjustable rate loans. At December 31, 1996, total personal finance loans managed, and the nonperforming loans included in these totals, are concentrated in the following five states: 7 8
PERCENT OF PERSONAL PERCENT OF PERCENT OF NONPERFORMING FINANCE TOTAL PORTFOLIO BY NONPERFORMING BY TO TOTAL LOANS NONPERFORMING STATE STATE LOANS ----- ------------- ----- ----- ----- (Dollars in Millions) California $ 501.9 $24.9 18.2% 26.7% .9% New York 208.3 7.7 7.6 8.3 .3 Maryland 194.2 7.4 7.1 7.9 .3 New Jersey 193.9 12.0 7.0 12.9 .4 Pennsylvania 184.8 7.6 6.7 8.2 .3 Other 1,470.6 33.5 53.4 36.0 1.2 -------- ----- ----- ----- --- TOTAL $2,753.7 $93.1 100.0% 100.0% 3.4% -------- ----- ----- ----- ---
Geographic concentration carries a risk of increased delinquency and/or loss if a specific area suffers an economic downturn. Advanta Mortgage monitors economic conditions in those regions through market and trend analyses. A Credit Policy Committee meets throughout the year to update lending policies based on the results of analyses, which may include abandoning lending activities in economically unstable areas of the country. The Company believes that the concentrations of nonperforming loans reflected in the preceding table are not necessarily reflective of general economic conditions in each region, but rather reflect the credit risk inherent in the different grades of loans originated in each area. The interest rate charged and the maximum loan-to-value ratio permitted with respect to each grade of loans are adjusted to compensate for the credit risk inherent in the loan grade. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - -- Provision for Credit Losses" and "-- Credit Risk Management -- Asset Quality." ADVANTA BUSINESS SERVICES In late 1994, the Company's subsidiary, Advanta Leasing Corp., changed its name to Advanta Business Services Corp. ("ABS"), reflecting the Company's intention to expand its offerings to small business customers. The name change followed the Company's introduction, in July 1994, of a business purpose MasterCard credit card as a supplement to its commercial equipment leasing business. Both lines of business continue to expand. The commercial equipment leasing business is generated primarily through third party referrals from manufacturers or distributors of equipment as well as independent brokers. Most contact with these referral sources is made from the Company's ABS headquarters in Voorhees, New Jersey, using extensive direct marketing operations. These operations include a staff of telephone sales representatives who are assigned to specific industries, and backed by the Company's direct mail advertising program. Additional business is also generated from direct contact with customers through these same channels. Leasing originations volume, measured by the cost of the equipment included in new lease contracts, continued to grow, from a total of $251 million in 1995 to $337 million in 1996. While much of this growth is due to increased penetration of existing markets, such as office machinery, security systems and computers, some has been the result of expansion into additional market segments. The most significant of these are leasing programs for certain industrial and agricultural equipment and programs for leasing equipment to agencies of State and local governments. The Company's growth in its traditional markets has been the result, in part, of an expanded National Accounts program which seeks referral business from larger distributors and manufacturers. 8 9 The business-purpose credit card operation grew from 23,412 to 78,599 accounts with balances of $306 million as of December 31, 1996. Again, direct marketing techniques, primarily direct mail to prospective customers, are the source of new accounts. This marketing program is the result of extensive and ongoing testing of various campaigns, with success of each campaign measured by both the cost of acquisition of new business, and the credit performance of the resulting business. The "Advanta Business Card" is marketed by ABS and issued by its affiliate, Advanta Financial Corp. (see "Government Regulation -- Advanta Financial Corp."). ADVANTA INSURANCE COMPANIES The Company mainly offers specialty credit related insurance products and services to its existing customer base. The focus of these products is on the customers' ability to repay their debt in the event of certain circumstances. Enrollment in these programs is achieved through the utilization of either direct mail or telemarketing distribution channels. Through unaffiliated insurance carriers, the Company generally makes available a combined credit life, disability and unemployment product, an accidental death product, or equipment insurance to Advanta's lending and leasing customers. The Company's insurance subsidiaries reinsure 100% of these risks from the insurance carriers on a coinsurance basis. In consideration for assumption of these risks the insurance subsidiaries receive reinsurance premiums equal to 100% of the net premiums collected by the insurance carriers, less a ceding fee as defined by the reinsurance treaties, and all acquisition expenses, premium taxes and loss payments made by the carriers on these risks. Under the terms of certain reinsurance treaties the subsidiaries are either obligated to maintain in trust for the benefit of an insurance carrier an amount equal to 100% of the unearned premiums and all statutory reserves for future incurred loss payments or have certain of these loss reserves, as defined, withheld by an insurance carrier. Credit life insurance for credit card customers insures the life of the borrower (and any joint borrower) and provides for the payment to the primary beneficiary (the lender) in the event of the borrower's death of a benefit generally equal to the unpaid principal balance, subject to a maximum amount equal to the lesser of the borrower's balance at the date of death or $10,000. Credit disability and unemployment insurance for credit card customers generally provide for the payment of the minimum monthly payment required on the debt outstanding at the commencement of the primary borrower's inability to work as a result of disability or involuntary unemployment, until the customer is able to return to work or obtains other employment, subject to a maximum equal to the lesser of the borrower's balance at the date of unemployment or disability or $10,000. Commencing in 1992 and 1995, AUS and ANB, respectively, began making available to their credit card customers in certain states the option to purchase a debt cancellation agreement called Credit Protection Plus(R). Under the terms of the agreement, AUS or ANB will forgive the credit card borrower's balance in the event of the death or permanent disability of either the primary or joint (if purchased) credit card borrower up to the lesser of $10,000, the customer's balance or the customer's credit limit at the date of death or permanent disability. In addition, the agreement provides for the suspension of the contractual principal payment obligation and the waiver of all interest and service fees in the event that either the primary or joint (if purchased) credit card borrower is unable to work due to involuntary unemployment or short-term disability, from the date of initial unemployment or disability to the sooner of twelve months thereafter or the date the customer is able to return to work or obtains other employment. The Banks have purchased from the Company's insurance subsidiaries insurance protection against excess losses, as defined, incurred from providing these services. 9 10 The Company also offers other specialty-based insurance products to its customers. In consideration the lending institution receives an expense reimbursement percentage of insurance revenues collected. Approximately 90% of the Company's total insurance revenues are derived from the offering of the combined insurance product and services to credit card customers of AUS and ANB. ADVANTA PARTNERS Advanta Partners LP is a private venture capital equity investment firm formed in 1994. The firm focuses primarily on growth capital financings, restructurings and management buyouts in the financial services and information services industries. The investment objective of Advanta Partners is to earn attractive returns by building the long-term values of the businesses in which it invests. Advanta Partners combines transaction expertise, management skills and a broad contact base with strong industry-specific knowledge which is further enhanced by its relationship with the Company. DEVELOPMENTAL INITIATIVES The Company has initiated a number of new programs focused on creating new products, entering new markets and expanding the Company's channels of delivery. As part of the Company's expansion into new markets, in 1995 the Company formed a joint venture with The Royal Bank of Scotland to market, issue and service bankcards in the United Kingdom. While initial mailings have generated positive response, this effort was not material to the Company in 1996. The Company believes that the joint venture will not be material to earnings in 1997. Additionally, the Company has developed and launched several branded credit card products. The Company is continuing to explore new product concepts and expects to introduce new products in 1997. (See "Advanta Personal Payment Services"). Simultaneously, the Company is exploring new technologies and delivery systems related to payment services. The Company continues to engage in research and development activities with respect to products and services outside the financial services sector. DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS The Company offers a range of insured deposit products as well as uninsured bank notes through AUS and ANB and offers uninsured investment products of Advanta Corp. through both direct and underwritten sales of debt securities. In December 1996, Advanta Capital Trust I, a statutory business trust established by the Company, issued $100,000,000 of 8.99% Capital Securities, maturing in December 2026. The securities represent a preferred beneficial interest in the assets of the trust. The proceeds of that offering were lent to the Company for general corporate purposes (See Note 7 of the Notes to Consolidated Financial Statements). In October 1995, the Company ceased selling subordinated retail investment notes, and instead began offering senior retail investment notes which (like the previous subordinated notes) are marketed by print advertising and direct mail solicitations to existing and prospective individual investors. In addition to the senior retail investment note program, the Company has filed a senior debt shelf registration with the Securities and Exchange Commission covering $1.6 billion of securities. As of December 31, 1996 $500 million was outstanding and $1.1 billion remained available for sale under this shelf. The Company also filed a "universal shelf" registration statement in June 1995 for $500 million of debt and/or equity securities. In July 1995, $92.5 million of 6 3/4% Convertible Class B Preferred Stock was issued under that shelf. Other than through the retail investment Note Program described in this paragraph, investments in the Company's senior debt securities 10 11 are primarily marketed to institutional investors. In June of 1996, the Company renegotiated its revolving bank line of credit to extend the term to approximately four years and to increase the amount to an aggregate of $1 billion available to the Parent, AUS and ANB. Of the $1 billion revolving bank line of credit, a maximum of $500 million is available to the Parent. This new line provided by a consortium of domestic and foreign banks further strengthens the funding capacity of the Company. Bank deposit products include at AUS: demand deposits, money market savings, statement savings accounts, and retail certificates of deposit; and at both AUS and ANB: large denomination certificates of deposit (certificates of $100,000 or more). Consumer deposit business at AUS is generated from repeat sales to existing depositors and from new depositors attracted by newspaper advertising and direct mail solicitations. ANB is limited to the issuance of deposits having a minimum size of $100,000. The deposits and senior debt securities of the Banks have investment grade ratings from the nationally recognized rating agencies. These ratings, which were first achieved in 1993 for AUS, and in 1995 for ANB, have allowed the Banks to further diversify their funding sources. The Banks, in September 1995, filed an offering circular with the Office of the Comptroller of the Currency for $2 billion in senior bank term debt and $250 million in subordinated bank term debt. As of December 31, 1996, $1.1 billion of senior bank debt was outstanding under that offering circular. At December 31, 1996, ANB has $68 million in subordinated debt outstanding which it has issued to its parent company. In addition to the funding diversity provided by the debt issuance capacity of the Company and the debt and deposit raising capabilities of the Banks, Advanta Financial Corp. ("AFC") has been taking deposits in the form of certificates of deposit since January 1992. AFC is an FDIC-insured industrial loan corporation organized under the laws of the State of Utah. As of December 31, 1996, AFC's funding capacity was not material to the Company. GOVERNMENT REGULATION THE COMPANY The Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company owns AUS, which is a "bank" as defined under the BHCA as amended by the Competitive Equality Banking Act of 1987 ("CEBA"). However, under certain grandfathering provisions of CEBA, the Company is not required to register as a bank holding company under the BHCA because AUS, which takes demand deposits but does not make commercial loans, did not come within the BHCA's definition of the term "bank" prior to the enactment of CEBA and it complies with certain restrictions set forth in CEBA, such as limiting its activities to those in which it was engaged prior to March 5, 1987 and , prior to September 30, 1996, limiting its growth rate to not more than 7% per annum. The 7% growth cap on AUS was terminated as of September 30, 1996 by statutory amendment of the BHCA. The elimination of this cap created substantial new flexibility with respect to asset/liability management for AUS, leading the Company to evaluate the corporate structure of AUS and ANB. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management - -- Liquidity, Funding and Capital Resources." Continuing CEBA restrictions also prohibit AUS from cross-marketing products or services of an affiliate that are not permissible for bank holding companies under the BHCA. In addition, the Company complies with certain other restrictions set forth in CEBA, such as not acquiring control of more than 5% of the stock or assets of an additional "bank" or "savings association" as defined for these purposes under the BHCA. Consequently, the Company is not subject to examination by the Federal Reserve Board (other than for purposes of assuring continued compliance with the CEBA restrictions referenced in this paragraph). Should the Company or AUS cease complying with the 11 12 restrictions set forth in CEBA, registration as a bank holding company under the BHCA would be required. Registration as a bank holding company is not automatic. The Federal Reserve Board may deny an application if it determines that control of a bank by a particular company will cause undue interference with competition or that such company lacks the financial or managerial resources to serve as a source of strength to its subsidiary bank. While the Company believes that it meets the Federal Reserve Board's managerial standards and that its ownership of AUS has improved the bank's competitiveness, should the Company be required to apply to become a bank holding company the outcome of any such application cannot be certain. Registration as a bank holding company would subject the Company and its subsidiaries to inspection and regulation by the Federal Reserve Board. Although the Company has no plans to register as a bank holding company at this time, the Company believes that registration would not restrict, curtail, or eliminate any of its activities at current levels, except that some portions of the current business operations of the Company's insurance subsidiaries would have to be discontinued, the effects of which would not be material. However, the Company is actively exploring additional lines of business, some of which the Company would not be able to pursue as a registered bank holding company under the BHCA. Under CEBA, neither ANB nor AFC, is considered a "bank" for purposes of the BHCA, and so the Company's ownership of these institutions does not impact the Company's exempt status under the BHCA. ANB is a "credit card bank" under CEBA, and as such is subject to certain restrictions, including that it may only engage in credit card operations, it may not offer checking or transaction accounts, and it may only accept time deposits in amounts of $100,000 or more. ADVANTA NATIONAL BANK USA AND ADVANTA NATIONAL BANK (THE "BANKS") The Company acquired AUS in 1982 and organized ANB in 1995. Both of the Banks are national banking associations organized under the laws of the United States of America. The headquarters and respective sole branches of both AUS and ANB are currently located in Wilmington, Delaware. ANB was chartered to complement the credit card activities of AUS. ANB is a "credit card bank," a class of FDIC-insured depository institution created under CEBA, which can only engage in credit card operations, can only accept deposits in denominations of $100,000 or more, may not offer transaction (e.g., checking) accounts, may only maintain one office for the collection of deposits, and may not engage in commercial lending activities. The Company conducts substantially all of its consumer credit card lending business through the Banks, and conducts a large portion of its mortgage lending business through AUS. The Banks are subject primarily to regulation and periodic examination by the Office of the Comptroller of the Currency (the "Comptroller"). Such regulation relates to the maintenance of reserves for certain types of deposits, the maintenance of certain financial ratios, transactions with affiliates and a broad range of other banking practices. As national banks, the Banks are subject to provisions of federal law which restrict their ability to extend credit to their affiliates or pay dividends to their parent company. See "Dividends and Transfers of Funds." The Banks are subject to capital adequacy guidelines approved by the Comptroller. These guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. As of December 31, 1996, the minimum required ratio of total capital to risk-weighted assets (including certain off-balance sheet items) was 8%. At least half of the total capital is to be comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock ("Tier 1 capital"). The remainder may consist of other preferred stock, certain hybrid debt/equity instruments, a limited amount of term subordinated 12 13 debt or a limited amount of the reserve for possible credit losses ("Tier 2 capital"). In addition, the Comptroller has also adopted a minimum leverage ratio (Tier 1 capital divided by total average assets) of 3% for national banks that meet certain specified criteria, including that they have the highest regulatory rating. Under this guideline, the minimum leverage ratio would be at least 1 or 2 percentage points higher for national banks that do not have the highest regulatory rating, for national banks undertaking major expansion programs, and for other national banks in certain circumstances. As of December 31, 1996, AUS's Tier 1 capital ratio was 10.15%, its combined Tier 1 and Tier 2 capital ratio was 15.84%, and its leverage ratio was 7.35%. At December 31, 1996, ANB's Tier 1 capital ratio was 11.13%, its combined Tier 1 and Tier 2 capital ratio was 17.20%, and its leverage ratio was 7.15%. Recognizing that the risk-based capital standards address only credit risk (and not interest rate, liquidity, operational or other risks), the Comptroller has indicated that many national banks will be expected to maintain capital in excess of the minimum standards. As indicated above, each of the Banks' respective capital levels currently exceed the minimum standards. To date, the Comptroller has not required either of the Banks to maintain capital in excess of the minimum standards. However, there can be no assurance that such a requirement will not be imposed in the future, or if it is, what higher standard will be applicable. In addition, pursuant to certain provisions of the FDIC Improvement Act of 1991 ("FDICIA") and regulations promulgated thereunder with respect to prompt corrective action, FDIC-insured institutions such as the Banks may only accept brokered deposits without FDIC permission if they meet certain capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are "well-capitalized." To be "well-capitalized," a bank must have a ratio of total capital to risk-weighted assets of not less than 10%, Tier 1 capital to risk-weighted assets of not less than 6%, and a Tier 1 leverage ratio of not less than 5%. As of December 31, 1996, the most recent notifications from the Comptroller categorized each of AUS and ANB as well capitalized under the regulatory framework for prompt corrective action. The Company intends to maintain AUS and ANB, at a minimum, as "adequately capitalized" banks under this regulatory framework. ADVANTA FINANCIAL CORP. In January 1992, Advanta Financial Corp. ("AFC") opened for business and began accepting deposits. AFC is an FDIC-insured industrial loan corporation organized under the laws of the State of Utah and is subject to examination and regulation by both the FDIC and the Utah Department of Financial Institutions. At December 31, 1996, AFC had deposits of $51 million and total assets of $102 million. Currently, AFC's principal activities consist of small ticket equipment lease financing and issuance of the "Advanta Business Card" credit card marketed by ABS. The Company anticipates that AFC's managed receivables base of Advanta Business Card loans will continue to grow in 1997. LENDING AND LEASING ACTIVITIES The Company's activities as a lender are also subject to regulation under various federal and state laws including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Community Reinvestment Act, the Electronic Funds Transfer Act, and the Fair Credit Reporting Act. Provisions of those statutes, and related regulations, among other matters, require disclosure to borrowers of finance charges in terms of an annual percentage rate, prohibit certain discriminatory practices in extending credit, require the Company's FDIC-insured depository institutions to serve the banking needs of their local communities, and regulate the dissemination and use of information relating to a borrower's creditworthiness. Certain of these statutes and regulations also apply to the Company's leasing activities. In addition, Advanta Mortgage, Advanta Finance and their respective subsidiaries are 13 14 subject to licensure and regulation in various states as mortgage bankers, mortgage brokers, and originators, sellers and servicers of mortgage loans. DIVIDENDS AND TRANSFERS OF FUNDS There are various legal limitations on the extent to which AUS, ANB or AFC can finance or otherwise supply funds through dividends, loans or otherwise to the Company and its affiliates. The prior approval of the Comptroller is required if the total of all dividends declared by either of the Banks in any calendar year exceeds that institution's net profits (as defined) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus accounts. In addition, neither AUS nor ANB may pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. The Comptroller also has authority under the Financial Institutions Supervisory Act to prohibit a national bank from engaging in any unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the Comptroller could claim that a dividend payment might under some circumstances be an unsafe or unsound practice. AUS, ANB and AFC are also subject to restrictions under Sections 23A and 23B of the Federal Reserve Act. These restrictions limit the transfer of funds by the depository institution to the Company and certain other affiliates, as defined in that Act, in the form of loans, extensions of credit, investments or purchases of assets, and they require generally that the depository institution's transactions with its affiliates be on terms no less favorable to the bank than comparable transactions with unrelated third parties. These transfers by any one institution to the Company or any single affiliate are limited in amount to 10% of the depository institution's capital and surplus and transfers to all affiliates are limited in the aggregate to 20% of the depository institution's capital and surplus. Furthermore, such loans and extensions of credit are also subject to various collateral requirements. In addition, in order for the Company to maintain its grandfathered exemption under CEBA, neither AUS nor ANB may make any loans to the Company or any of its subsidiaries. REGULATION OF INSURANCE The Company's insurance subsidiaries are subject to the laws and regulations of, and supervision by, the states in which they are domiciled or have obtained authority to transact insurance business. These states have adopted laws and regulations which govern all marketing, administration and financial operations of an insurance company, including dividend payments and financial solvency. In addition, the insurance subsidiaries have registered as an Arizona Holding Company which requires approval of transactions between all affiliated entities. The maximum dividend that any of the insurance subsidiaries can distribute to its parent in any twelve month period without prior approval of the State of Arizona Department of Insurance is the lesser of 10% of the subsidiary's statutory surplus or for any given 12 month period, its net income (if a life insurance company) or net investment income (if a property and casualty insurance company). The State of Arizona has adopted minimum risk-based capital standards as developed by the National Association of Insurance Commissioners. Risk-based capital is the quantification of an insurer's surplus requirements based on financial balances and underwriting activity risks. The ratio of an insurer's total adjusted capital and surplus, as defined, is compared to various levels of risk-based capital to determine what intervention, if any, is required by either the insurance company or an insurance department. All of the insurance companies meet all risk-based capital standards and require no action by any party. 14 15 The Company's insurance subsidiaries reinsure risks whose underwriting insurance practices and rates are regulated in part or fully by state insurance departments. These rates are continually being reviewed and modified by the state insurance departments based on prior historical experience. Any modifications may impact the future profitability of the Company's insurance subsidiaries. GENERAL Because the banking and finance businesses in general are the subject of such extensive regulation at both the state and federal levels, and because numerous legislative and regulatory proposals are advanced each year which, if adopted, could affect the Company's profitability or the manner in which the Company conducts its activities, the Company cannot now predict the extent of the impact of any such new laws or regulations. Various legislative proposals have been introduced in Congress in recent years, including, among others, proposals relating to imposing a statutory cap on credit card interest rates, and permitting affiliations between banks and commercial or securities firms. It is impossible to determine whether any of these proposals will become law and, if so, what impact they will have on the Company. In 1994, Congress adopted the Interstate Banking and Branching Efficiency Act, which statute permits nationwide interstate bank acquisitions beginning in 1995, and interstate bank branching in 1997 (or earlier at a state's option). The Company does not currently believe that the changes in the country's banking system wrought by this statute will materially impact the Company's business. COMPETITION As a marketer of credit products, the Company faces intense competition from numerous providers of financial services. Many of these companies are substantially larger and have more capital and other resources than the Company. Competition among lenders can take many forms including convenience in obtaining a loan, customer service, size of loans, interest rates and other types of finance or service charges, duration of loans, the nature of the risk which the lender is willing to assume and the type of security, if any, required by the lender. Although the Company believes it is generally competitive in most of the geographic areas in which it offers its services, there can be no assurance that its ability to market its services successfully or to obtain an adequate yield on its loans will not be impacted by the nature of the competition that now exists or may develop. In both domestic and international VISA and MasterCard markets, the Company competes with national, regional, and local issuers. Additionally, American Express and the Discover Card represent additional competition in the general purpose credit card markets in the United States. The Company does not believe that single purpose credit cards such as oil company, department store or telephone credit cards represent a significant competitive threat. In recent years, a large segment of customers have been attracted to credit card issuers largely on the basis of product features, including price and credit limit; as such, customer loyalty may be limited. As a result, account and balance attrition can be significant factors in the credit card industry. In seeking investment funds from the public, the Company faces competition from banks, savings institutions, money market funds, credit unions and a wide variety of private and public entities which sell debt securities, some of which are publicly traded. Many of the competitors are larger and have more capital and other resources than the Company. Competition relates to such matters as rate of return, collateral, insurance or guarantees applicable to the investment (if any), 15 16 the amount required to be invested, convenience and the cost to and conditions imposed upon the investor in investing and liquidating his investment (including any commissions which must be paid or interest forfeited on funds withdrawn), customer service, service charges, if any, and the taxability of interest. EMPLOYEES As of December 31, 1996, the Company had 3,541 employees, up from 2,409 employees at the end of 1995. The Company believes that it has good relationships with its employees. None of its employees are represented by a collective bargaining unit. CAUTIONARY STATEMENTS Information or statements provided by the Company from time to time may contain certain "forward-looking information" including information relating to anticipated earnings per share, anticipated returns on equity, anticipated growth in managed loans outstanding and credit card accounts, anticipated net interest margins, anticipated operations costs and employment growth, anticipated marketing expense or anticipated delinquencies and charge-offs. The cautionary statements provided below are being made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act for any such forward-looking information. Many of the following important factors discussed below as well as other factors have also been discussed in the Company's prior public filings. The Company cautions readers that any forward-looking information provided by the Company is not a guarantee of future performance and that actual results may differ materially from those in the forward-looking information as a result of various factors, including but not limited to: -- The impact of repricing accounts and the overall product mix of accounts on the Company's net interest margins; the actual amount of accounts (and related loan balances) repriced and the level and type of account originations at that time; and the ability of the Company on a competitive basis to use account management techniques to retain repriced accounts and the related loan balances. In the fourth quarter of 1996 the Company contractually repriced $100 million of credit card accounts. In the first quarter of 1997, approximately $2.9 billion of credit card accounts will be repriced upwards from their low introductory rates and the Company anticipates that an additional $1.6 billion will be similarly repriced upwards in the second quarter. If the repriced accounts experience greater attrition than expected it could have an adverse financial effect on the Company. -- Increased credit losses (including increases due to a worsening of general economic conditions), increased collection costs associated with rising delinquency levels, costs associated with an increase in the number of customers seeking protection under the bankruptcy laws, resulting in accounts being charged off as uncollectible, and costs and other effects of fraud by third parties or customers. -- Intense and increasing competition from numerous providers of financial services who may employ various competitive strategies. The Company faces competition from national, regional and local issuers of bankcards in each of its markets, some of which have substantially greater resources than the Company. Additionally, the Company competes with other general purpose credit card providers. More of the Company's competitors have begun pricing credit card products at attractive interest rates, including rates at or below those currently charged by the Company. 16 17 -- The effects of interest rate fluctuations on the Company's net interest margin and the value of its assets and liabilities; the continued legal or commercial availability of techniques (including interest rate swaps and similar financial instruments, loan repricing, hedging and other techniques) used by the Company to manage the risk of such fluctuations and the continuing operational viability of those techniques and the accounting and regulatory treatment of such instruments. -- Difficulties or delays in the securitization of the Company's receivables and the resulting impact on the cost and availability of such funding. Such difficulties and delays may result from changes in the availability of credit enhancement in securitizations, the current legal, regulatory, accounting and tax environment and adverse change in the performance of the securitized assets. -- Changes in the Company's aggregate accounts or loan balances and the growth rate thereof, including changes resulting from factors such as shifting product mix, amount of actual marketing investment made by the Company, attrition of accounts and loan balances (to competing card issuers in connection with repricing of customers or otherwise) and general economic conditions and other factors beyond the control of the Company. Customers have been attracted to credit card issuers largely on the basis of price, credit limit and other product features and, once an account is originated, customer loyalty may be limited. -- The impact of "seasoning" (the average age of a lender's portfolio) on the Company's level of delinquencies and losses which may require higher loan loss reserves for on-balance sheet assets, and may adversely impact credit card, personal finance and business loan and lease securitization income. The addition of account originations or balances and the attrition of such accounts or balances could significantly impact the seasoning of the overall portfolio. -- The amount, and rate of growth in, the Company's expenses (including employee and marketing expenses) as the Company's business develops or changes and the Company expands into new market areas; the acquisition of assets (interest-earning, fixed or other); the effects of changes within the Company's organization or in its compensation and benefit plans; and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. -- The amount, type and cost of financing available to the Company, and any changes to that financing including any impact from changes in the Company's debt ratings; and the activities of parties with which the Company has agreements or understandings, including any activities affecting any investment. -- Difficulties or delays in the development, production, testing and marketing of products or services, including, but not limited to, a failure to implement new product or service programs when anticipated, the failure of customers to accept these products or services when planned, losses associated with the testing of new products or services or financial, legal or other difficulties as may arise in the course of such implementation. - The effects of, and changes in, monetary and fiscal policies, laws and regulations (financial, consumer regulatory or otherwise), other activities of governments, agencies and similar organizations, and social and economic conditions, such as inflation, and changes in taxation of the Company's earnings. 17 18 -- The costs and other effects of legal and administrative cases and proceedings, settlements and investigations, claims and changes in those items, developments or assertions by or against the Company or its subsidiaries; adoptions of new, or changes in existing, accounting policies and practices and the application of such policies and practices. ITEM 2. PROPERTIES. The Company owns four buildings totaling 308,278 square feet and leases an additional 315,733 square feet in 10 buildings in the Pennsylvania suburbs of Philadelphia. This includes the Company's principal executive offices located in Spring House, Pennsylvania. In the adjoining states of New Jersey and Delaware the Company owns 2 buildings totaling 178,000 square feet and leases 75,881 square feet in 3 buildings. The Company's five offices located in Utah, California and Colorado total 315,486 square feet. In summary the Company occupies 1,193,378 square feet of leased and owned space in 20 buildings located in 6 states. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 18 19 Advanta Corp. and Subsidiaries EXECUTIVE OFFICERS OF THE REGISTRANT Each of the executive officers of the Company listed below was elected by the Board of Directors, to serve at the pleasure of the Board in the capacities indicated.
NAME AGE OFFICE DATE ELECTED ---- --- ------ ------------ Dennis Alter 54 Chairman of the Board 1972 Alex W. Hart 56 Chief Executive Officer and Director 1995 William A. Rosoff 53 Vice Chairman and Director 1996 James J. Allhusen 48 Executive Vice President and Group 1997 Executive, Advanta Personal Payment Services William J. Razzouk 49 Chief Executive Officer of Advanta 1996 Information Services Arthur D. Kranzley 46 Senior Vice President 1995 Albert E. Lindenberg 44 President and Director, Advanta Business 1988 Services Charles H. Podowski 50 President and Director, Advanta 1995 Insurance Companies Milton Riseman 60 President and Director, Advanta Mortgage 1994 Corp. USA and Subsidiaries John W. Roblin 51 Senior Vice President and Chief 1995 Information Officer David D. Wesselink 54 Senior Vice President and Chief 1993 Financial Officer
20 Advanta Corp. and Subsidiaries
NAME AGE OFFICE DATE ELECTED Renee Booth 38 Senior Vice President, Human Resources 1996 Christopher S. Derganc 44 Senior Vice President, Corporate 1996 Administration Jeffrey D. Beck 48 Vice President and Treasurer 1992 John J. Calamari 42 Vice President, Finance 1988 Michael A. Girman 47 Vice President, Audit and Control 1991 Gene S. Schneyer 43 Vice President, Secretary and General 1989 Counsel
Mr. Alter became Executive Vice President and a director of the Company's predecessor organization in 1967. He was elected President and Chief Executive Officer in 1972, and Chairman of the Board of Directors in August 1985. In February 1986, he relinquished the title of President, and in August 1995 he relinquished the title of Chief Executive Officer. Mr. Alter remains Chairman of the Board of Directors. Mr. Hart joined the Company in March 1994 as a Director and Executive Vice Chairman. He became Chief Executive Officer in August 1995. For the five years prior to joining the Company he had been President and Chief Executive Officer of MasterCard International, Inc., a worldwide association of over 29,000 member financial institutions. Prior to joining MasterCard in November 1988, Mr. Hart was Executive Vice President of First Interstate Bancorp, Los Angeles, California. Mr. Rosoff joined the Company in January 1996 as a Director and Vice Chairman. Prior to joining the Company, Mr. Rosoff was a long time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen, the Company's outside counsel, where he advised the Company for over 20 years. While at Wolf, Block, Schorr and Solis-Cohen he served as both Chairman of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff is a Trustee of Atlantic Realty Trust, a publicly held real estate investment trust, and Chairman of the Board of RMH Teleservices, a publicly held company that is a leading provider of telemarketing services, on an outsourced basis, to Fortune 500 companies. Mr. Allhusen was elected Executive Vice President of the Company in October 1995 and Group Executive of Advanta Personal Payment Services, the Company's credit card operations, in January 1997 Prior to joining the Company, from 1990 Mr. Allhusen served Standard Chartered Bank in various capacities, most recently as General Manager for the Middle East and South Asia region located in Dubai, United Arab Emirates. Prior to joining Standard Chartered Bank, Mr. Allhusen worked for Household Bank from 1986 to 1990 as its President, Midwest Division. Mr. Razzouk joined the Company in September 1996 as Chief Executive Officer of Advanta Information Services. Prior to joining the Company, Mr. Razzouk served as President and Chief Operating Officer of America Online, a position from which he resigned after a brief tenure. He is most widely known by his former role as Executive Vice President and head of Worldwide Customer Operations for Federal Express, a position he held from 1993 to early 1996. In his earlier years at Federal Express, Mr. Razzouk rose from Vice President of Electronic Sales in 1983 to Vice President of Sales in North America in 1986 to Senior Vice President of Sales and Customer Service in 1990. Mr. Razzouk has served on the board of LaQuinta Inns, Inc. since 1996. 21 Advanta Corp. and Subsidiaries Mr. Kranzley was elected Senior Vice President of the Company in October 1995. For five years prior to joining the Company Mr. Kranzley was Senior Vice President and General Manager of Debit Products for MasterCard International. In this capacity Mr. Kranzley also served as President and Chief Executive Officer of Maestro U.S.A., Inc., the membership corporation of the Maestro global, on-line point-of-sale debit program in the United States. Mr. Lindenberg had been the Chairman of the Board and President of an equipment leasing business, LeaseComm Financial Corporation ("LeaseComm"), from that company's inception in June 1985 until its purchase by the Company. Following the acquisition, Mr. Lindenberg was elected President and Chief Executive Officer of Advanta Business Services, the successor to LeaseComm. Prior to starting LeaseComm, Mr. Lindenberg had been with First Pennsylvania Bank, Philadelphia, Pennsylvania since 1982, where he had served in various capacities, most recently as Vice President of the national division responsible for that bank's commercial lending activities in leasing and electronics. Mr. Podowski was elected President of the Advanta Insurance Companies in April 1995. Prior to joining the Company, Mr. Podowski served CIGNA Corporation in various capacities for seventeen years, most recently as Senior Vice President in their International Division, with responsibility for CIGNA's life insurance subsidiaries in Asia and Australia. Prior to joining CIGNA Mr. Podowski worked for The Chase Manhattan Bank, N.A. Mr. Riseman came to the Company in June 1992 as Senior Vice President, Administration. In February 1994, Mr. Riseman became President and Director of Advanta Mortgage Corp. USA and its subsidiaries. Prior to joining the Company, Mr. Riseman had 27 years of experience with Citicorp, most recently as Director of Training and Development. Prior to that he held Citicorp positions as Business Manager for the Long Island Region, Head of Policy and Administration for New York's Retail Bank, and Chairman of Citicorp Acceptance Co. which was involved in the financing and leasing of autos and financing of mobile homes. Mr. Roblin became Senior Vice President and Chief Information Officer in December 1994. Prior to joining Advanta, Mr. Roblin spent nineteen years with the Chubb Group of Insurance Companies in Warren, New Jersey holding a variety of positions. He was the Chief Information Officer and a Managing Director of Chubb from 1986 through 1991. In 1991 he joined USF&G in Baltimore as Chief Information Officer and Senior Vice President until 1993. After a year as an independent consultant, he briefly joined the Personal Lines Division of the Travelers Insurance Companies in Hartford, Connecticut as Chief Information Officer from May 1994 to November 1994. Mr. Wesselink joined the Company in November 1993 as Senior Vice President and Chief Financial Officer after serving as Vice President and Treasurer of Household International for the previous seven years. Prior to that, he served in various capacities at Household from 1971, including Vice President and Director of Research, Group Vice President and Chief Financial Officer, and Senior Vice President and Chief Financial Officer of Household Finance Corporation. Mr. Wesselink serves on the board of CFC International, a specialty chemical company. Mr. Derganc became the Company's Senior Vice President, Corporate Administration in December 1996, prior to which he served the Company as Vice President of Corporate Development from June 1993. Prior to joining the Company he was a Partner in the Financial Advisory Services Group of Coopers & Lybrand for 12 years where he led a wide variety of consulting engagements involving mergers, acquisitions and business reorganizations. Ms. Booth joined the Company in October 1996 as Senior Vice President, Human Resources. Prior to joining the Company, Ms. Booth served as Vice President and General Manager of Hay Management Consultants in Philadelphia where she was employed for 11 years. There she was responsible for directing consultant activities across diverse industry and human resources practice areas. Mr. Beck joined the Company in 1986 as Senior Vice President of Advanta National Bank USA (formerly, Colonial National Bank USA) and was elected Vice President and Treasurer of the Company in 1992. Prior to joining the Company, he was Vice President at Fidelity Bank, N.A., responsible for asset/liability planning, as well as for managing a portfolio of investment securities held at the bank. From 1970 through 1980, he served in various treasury and planning capacities for Wilmington Trust Company. Mr. Calamari joined the Company as Vice President, Finance in May 1988. From May 1985 through April 1988, Mr. Calamari served in various capacities in the accounting departments of Chase Manhattan Bank, N.A. and its subsidiaries, culminating in the position of Chief Financial Officer of Chase Manhattan of Maryland. From 1976 until May 1985, Mr. Calamari was an accountant with the public accounting firm of Peat, Marwick, Mitchell in New York. 22 Advanta Corp. and Subsidiaries Mr. Girman joined the Company as Vice President, Accounting Operations, Policies and Procedures in July 1988, and was elected Vice President, Audit and Control, in April 1991. Prior to joining the Company, Mr. Girman served as Vice President, Management Accounting and Accounting Policies and Procedures for The Chase Manhattan Bank (USA), N.A. from April 1985. Mr. Schneyer joined the Company as Associate General Counsel in September 1986 and was elected to the offices of Vice President, Secretary and General Counsel in March 1989. Prior to joining the Company, from October 1983 Mr. Schneyer was an attorney in the Legal Department of Allied-Signal, Inc., Morristown, New Jersey. 23 Advanta Corp. and Subsidiaries PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the National Market tier of The Nasdaq Stock Market(SM) under the symbols ADVNB (Class B non-voting common stock) and ADVNA (Class A voting common stock). Following are the high, low and closing sale prices and cash dividends declared for the last two years as they apply to each class of stock:
Cash Dividends Quarter Ended: High Low Close Declared Class B: - ----------------------------------------------------------------------------------------------------------- March 1995 $32.25 $24.50 $31.25 $.08 June 1995 38.75 30.75 37.75 .08 September 1995 42.50 36.00 42.50 .08 December 1995 45.00 35.13 36.38 .108 March 1996 49.25 33.75 47.50 .108 June 1996 52.50 43.50 45.25 .108 September 1996 48.25 39.75 42.75 .108 December 1996 48.50 38.25 40.88 .132 Class A: - ----------------------------------------------------------------------------------------------------------- March 1995 $34.75 $25.50 $33.50 $.067 June 1995 42.50 33.00 41.69 .067 September 1995 46.25 39.50 45.00 .067 December 1995 48.88 37.50 38.25 .09 March 1996 53.50 34.75 52.00 .09 June 1996 58.25 46.50 51.00 .09 September 1996 53.00 41.00 46.00 .09 December 1996 50.00 40.00 42.75 .11
At December 31, 1996, the Company had approximately 1,050 and 660 holders of record of Class B and Class A common stock, respectively. RECENT SALES OF UNREGISTERED SECURITIES On December 17, 1996, Advanta Capital Trust I, a newly formed statutory business trust established by the Company (the "Trust"), issued to two institutional investors, in a private offering exempt from registration pursuant to section 4(2) of the Securities Act of 1933, as amended, $100 million of 8.99% Capital Securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The aggregate offering price for the Capital Securities was $100 million and the aggregate commission paid by the Company was $1 million. The sole assets of the Trust consist of $100 million of 8.99% junior subordinated debentures issued by the Company due December 17, 2026. See Note 7 to Consolidated Financial Statements. 24 Advanta Corp. and Subsidiaries ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts) Year Ended December 31, 5 Year 1996 1995 1994 1993 1992 1991 CAGR(2) ----------- ----------- ---------- ---------- ---------- ---------- ------ SUMMARY OF OPERATIONS Net operating revenues(1) $ 850,977 $ 615,914 $ 447,837 $ 334,224 $ 266,320 $ 207,347 33% Net interest income 78,265 72,900 70,381 78,644 73,176 73,990 1 Noninterest revenues 806,532 543,014 395,808 255,580 193,144 133,357 43 Provision for credit losses 96,862 53,326 34,198 29,802 47,138 55,461 12 Operating expenses 523,174 350,685 266,784 181,167 142,082 112,567 36 Income before income taxes and extraordinary items 264,761 211,903 165,207 123,255 77,100 39,319 46 Income before extraordinary items 175,657 136,677 106,063 77,920 48,037 25,165 47 Net income 175,657 136,677 106,063 76,647 48,037 25,165 47 ----------- ----------- ---------- ---------- ---------- ---------- -- PER COMMON SHARE DATA Income before extraordinary items $ 3.89 $ 3.20 $ 2.58 $ 1.95 $ 1.38 $ .81 37% Net income 3.89 3.20 2.58 1.92 1.38 .81 37 Cash dividends declared (3) Class A .380 .290 .217 .167 .107 .063 43 Class B .456 .348 .260 .200 .104 N/A * Book value 18.06 14.35 11.12 8.82 5.22 3.70 37 Average shares used to compute EPS(4) 45,073 42,670 41,046 39,777 34,590 31,044 8 Closing stock price Class A 42.75 38.25 26.25 33.25 21.58 11.50 30 Class B 40.88 36.38 25.25 29.00 19.33 N/A * ----------- ----------- ---------- ---------- ---------- ---------- -- FINANCIAL CONDITION -- YEAR END Investments and money market instruments $ 1,671,309 $ 1,090,047 $ 671,661 $ 542,222 $ 521,567 $ 270,267 44% Gross receivables Owned 2,656,641 2,762,927 1,964,444 1,277,305 998,244 1,273,420 16 Securitized 13,632,552 9,452,428 6,190,793 3,968,856 2,721,726 1,573,164 54 Managed 16,289,193 12,215,355 8,155,237 5,246,161 3,719,970 2,846,584 42 Total assets Owned 5,583,959 4,524,259 3,113,048 2,140,195 1,775,067 1,716,350 27 Managed 19,216,511 13,976,687 9,303,841 6,109,051 4,496,793 3,289,514 42 Deposits 1,860,058 1,906,601 1,159,358 1,254,881 1,204,486 1,205,035 9 Long-term debt 1,393,095 587,877 666,033 368,372 173,668 112,609 65 Stockholders' equity 852,036 672,964 441,690 342,741 174,870 118,859 48 Capital securities(5) 100,000 0 0 0 0 0 * Stockholders' equity, long-term debt and capital securities 2,345,131 1,260,841 1,107,723 711,113 348,538 231,468 59 ----------- ----------- ---------- ---------- ---------- ---------- -- SELECTED FINANCIAL RATIOS Return on average assets 3.16% 4.06% 4.47% 3.91% 2.82% 1.63% * Return on average common equity 25.31 26.15 26.97 27.50 33.32 27.09 * Return on average total equity(6) 22.07 24.75 26.97 27.50 33.32 27.09 * Equity/managed assets(6) 4.95 4.81 4.75 5.61 3.89 3.61 * Equity/owned assets(6) 17.05 14.87 14.19 16.01 9.85 6.93 * Dividend payout 10.75 9.97 9.24 9.56 7.69 7.85 * Managed net interest margin(7) 6.32 5.87 6.72 7.77 8.05 7.54 * As a percentage of managed receivables Total loans 30 days or more delinquent(8) 5.4 3.3 2.7 3.6 5.0 5.6 * Net charge-offs (8) 3.2 2.2 2.3 2.9 3.4 3.2 * Other operating expenses 2.9 2.9 3.7 4.1 4.4 4.6 * ----------- ----------- ---------- ---------- ---------- ---------- --
(1) Excludes gains on sales of credit card relationships in 1996 and 1994. (2) Compound annual growth rate from December 31, 1991. (3) 1992 cash dividends include dividends for three quarters on the Class B common stock and the full year on the Class A common stock, adjusted to reflect the effective stock split. (4) Includes common stock equivalents. 1996 and 1995 amounts include equivalent shares related to convertible Class B Preferred stock. (5) Represents Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of the Company. (6) In 1996, return on average total equity, equity/managed assets and equity/owned assets include capital securities as equity. The ratios without capital securities were 22.31%, 4.43% and 15.26%, respectively. (7) Combination of owned interest-earning assets/interest-bearing liabilities and securitized credit card assets/liabilities. (8) The 1996 figures reflect the adoption of a new charge-off methodology in August 1996 relating to credit card bankruptcies (see Asset Quality). * Not meaningful. 25 Advanta Corp. and Subsidiaries ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS OVERVIEW Net income for 1996 of $175.7 million increased $39.0 million or 29% from the $136.7 million reported for 1995. Earnings per share of $3.89 increased 22% from the $3.20 reported for 1995. Earnings in 1996 reflected a $5.4 billion or 56% increase in average managed receivables, and a $263.5 million or 49% rise in noninterest revenues derived principally from securitized receivables and a $33.8 million gain on the sale of credit card customer relationships. The securitization of $1.4 billion of mortgage and home equity loans in 1996, 158% greater than in 1995, also contributed to the increase in noninterest revenues, as income from personal finance loans (mortgage, home equity and auto loans) was up $58.6 million or 116% from 1995. Credit card securitization activities were affected by the adoption in the third quarter of 1996 of a new charge-off methodology relating to bankruptcies (see Asset Quality), the upward repricing of interest rates and fees, increases in charge-offs and the related impact on reserves, all of which had an approximate $50 million impact (earnings increase) in 1996, as well as a 57% increase in average securitized receivables. Total other operating expenses (excluding the amortization of credit card deferred origination costs, net) increased 56%, consistent with the increase in average managed receivables. Thus, the operating expense ratio was 2.9% for both 1996 and 1995. Asset quality indicators tracked unfavorably, as the total managed charge-off rate increased to 3.2% in 1996 from 2.2% in 1995. The 30-day and over delinquency rate on managed receivables increased to 5.4% at December 31, 1996 from 3.3% at year end 1995. The 1996 indicators reflect the new charge-off methodology relating to credit card bankruptcies. Without this change, the managed charge-off rate and the 30-day and over delinquency rate on managed receivables would have been 3.5% and 5.2%, respectively. The changes in the delinquency and charge-off rates from year to year reflect the trend in unsecured consumer credit quality which is being experienced throughout the industry. This trend is continuing in the first quarter of 1997. Over the last three years, average managed receivables have grown at a compound annual rate of 53%. This receivable growth has greatly contributed to higher net income and earnings per share. A significant component of this receivable growth strategy is the Company's continuing efforts to market "risk-adjusted" credit card products, whereby credit cards are issued with lower rates to customers whose credit quality is expected to result in a lower rate of credit losses (the "risk-adjusted pricing strategy"). The Company's pricing structure on its credit card products also reflects low "introductory" credit card rates, which reprice upwards after an introductory period of up to one year. It is estimated that approximately $3 billion of receivables will reprice upwards in the first quarter of 1997. At repricing, most of the receivables on these credit cards will have been securitized, and consequently, the enhanced revenues on those receivables will be recorded primarily as increased noninterest revenues (securitization income). Although this will not affect the owned net interest margin, it is expected that it will positively impact the managed net interest margin. Net income for 1995 of $136.7 million increased $30.6 million or 29% from the $106.1 million reported for 1994. Earnings per share of $3.20 increased 24% from the $2.58 reported for 1994. Earnings grew in 1995 primarily as a result of a 56% increase in average managed receivables, from $6.1 billion in 1994 to $9.5 billion in 1995, partially offset by an approximate 13% contraction in the managed net interest margin. Noninterest revenues of $543.0 million in 1995 increased $147.2 million or 37% from $395.8 million in 1994. This increase was primarily due to a 62% increase in average securitized receivables. The operating expense ratio decreased to 2.9% in 1995 from 3.7% in 1994. The total managed charge-off rate for 1995 fell to 2.2% from 2.3% in 1994. On March 17, 1997, the Company announced that it expects to report 1997 results well below previous expectations. The Company stated it expects to report a loss in the area of $20 million, or approximately $0.44 cents per share, for the first quarter, and to report net profit for full-year 1997 of approximately $1.50 per share. This interruption in the Company's historical pattern of strong financial results reflects a number of factors, including continuing increases in consumer bankruptcies and charge-offs and lower receivable balances than originally anticipated in its credit card business. The Company's mortgage financing, leasing and insurance businesses continue to perform well. In addition to considering other strategic alternatives with its financial and other advisors, the Company is pursuing a number of steps to return the Company to its historical levels of financial performance by increasing revenues and stemming credit card losses. This Annual Report on Form 10-K contains forward-looking statements, including but not limited to projections of future earnings, that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The most significant among these risks and uncertainties are: (1) the Company's managed net interest margin, which in turn is affected by the Company's success in originating new credit card accounts, the receivables volume and initial pricing of new accounts, the impact of repricing existing accounts and account attrition, the mix of account types and interest rate fluctuations; (2) the level of delinquencies and charge-offs; and (3) the level of expenses. Earnings also may be affected by factors that affect consumer debt, competitive pressures and the ratings on debt of the Company and its subsidiaries. Additional risks that may affect the Company's future performance are detailed elsewhere in this Annual Report on Form 10-K and in the Company's other filings with the Securities and Exchange Commission. NET INTEREST INCOME Net interest income represents the excess of income generated from interest-earning assets, including on-balance sheet receivables, investments and money market instruments over the interest paid on interest-bearing liabilities, primarily deposits and debt. 26 Advanta Corp. and Subsidiaries Net interest income of $78.3 million for 1996 increased $5.4 million or 7% from 1995 as a result of a $1.7 billion or 63% increase in average interest-earning assets, largely offset by a lower owned net interest margin, which fell to 1.84% in 1996 from 2.80% in 1995. The lower owned net interest margin resulted from a 99 basis point decrease in the yield on average interest-earning assets as a significant amount of credit cards on the balance sheet are at introductory rates, partially offset by a 34 basis point decrease in the cost of funds. Net interest income of $72.9 million for 1995 increased $2.5 million or 4% from 1994 as a result of a $737 million or 37% increase in average interest-earning assets, largely offset by a lower owned net interest margin, which fell to 2.80% in 1995 from 3.67% in 1994. The lower owned net interest margin primarily resulted from a 124 basis point increase in the cost of funds. Credit card, personal finance, and business loan and lease receivable securitization activity shifts revenues from interest income to noninterest revenues. This ongoing securitization activity reduces the level of higher-yielding receivables on the balance sheet while proportionately increasing the balance sheet levels of new lower-yielding receivables and money market assets. Net interest income on securitized credit card balances is reflected in credit card securitization income. Net interest income on securitized mortgage and other personal finance loans is reflected in income from personal finance activities, and net interest income on securitized business loans and leases is reflected in business loan and lease other revenues. All securitization income is included in noninterest revenues. See Note 1 to Consolidated Financial Statements. Average managed credit card receivables of $12.2 billion for 1996 increased $4.5 billion or 58% from 1995. This increase resulted from the successful marketing of low introductory rate credit cards which generated approximately 1.7 million new accounts. In 1996, average owned credit card receivables were $2.6 billion compared to $1.6 billion in 1995. Average managed personal finance loans increased to $2.1 billion in 1996, a 38% increase from $1.5 billion in 1995. The average balance of owned personal finance loans increased to $243 million in 1996 from $185 million in 1995. Personal finance loan originations of $1.5 billion in 1996 were up $728 million or 94% from 1995. Yields on owned personal finance loans increased to 10.62% from 9.38% in 1995 reflecting a lower proportion of nonperforming loans on the balance sheet in 1996 versus the prior year. Average managed business loans and leases of $604 million increased $289 million or 92% from 1995. Average owned balances of business loans and leases increased $116 million or 138% during 1996 primarily due to the success of the business credit card, as originations increased 552% from $80 million in 1995 to $519 million in 1996. Additionally, during 1996, the Company completed its first business card securitizations totaling $229 million of receivables. Yields on owned business loans and leases decreased to 11.97% in 1996 from 12.59% in 1995. The owned average cost of funds dropped to 6.12% from 6.46% in 1995. The Company has utilized derivatives to manage interest rate risk (see discussion under "Derivatives Activities"). The following table provides an analysis of both owned and managed interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets) for 1994 through 1996. Average owned loan and lease receivables and the related interest revenues include certain loan fees. 27 Advanta Corp. and Subsidiaries INTEREST RATE ANALYSIS
($ in thousands) Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 -------------------------------- -------------------------------- ------------------------------ AVERAGE AVERAGE Average Average Average Average BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- ON-BALANCE SHEET Interest-earning assets: Receivables: Credit cards $ 2,594,997 $ 220,547 8.50% $1,580,352 $ 163,637 10.35% $1,171,266 $117,661 10.05% Personal finance loans(1) 242,946 25,812 10.62 184,855 17,334 9.38 119,919 9,809 8.18 Business loans and leases(2) 200,052 23,951 11.97 84,216 10,603 12.59 60,437 8,681 14.36 Other loans 12,270 1,045 8.52 5,979 446 7.46 3,893 280 7.19 ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- Total receivables 3,050,265 271,355 8.90 1,855,402 192,020 10.35 1,355,515 136,431 10.06 Federal funds sold 166,454 8,853 5.32 141,031 8,210 5.82 103,674 4,437 4.28 Interest-bearing deposits 524,505 34,154 6.51 371,826 22,243 5.98 196,468 10,216 5.20 Tax-free securities(3) 8,052 502 6.23 60,412 3,654 6.05 81,761 4,858 5.94 Taxable investments 704,641 36,808 5.22 296,700 16,121 5.43 250,535 11,899 4.75 ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- Total interest earning assets(4) $ 4,453,917 $ 351,672 7.90% $2,725,371 $ 242,248 8.89% $1,987,953 $167,841 8.44% =========== ========== ===== ========== ========== ===== ========== ======== ===== Interest-bearing liabilities: Deposits Savings $ 302,125 $ 15,728 5.21% $ 270,550 $ 17,728 6.55% $ 269,583 $ 11,411 4.23% Time deposits under $100,000 582,887 34,430 5.91 547,710 31,618 5.77 560,015 27,543 4.92 Time deposits of $100,000 or more 999,613 60,721 6.07 380,918 23,466 6.16 217,683 9,314 4.28 ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- Total deposits 1,884,625 110,879 5.88 1,199,178 72,812 6.07 1,047,281 48,268 4.61 Debt 1,856,034 118,612 6.39 981,816 67,908 6.92 583,317 36,347 6.23 Other borrowings 664,529 40,209 6.05 388,340 25,312 6.52 185,298 10,143 5.47 ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- Total interest-bearing liabilities 4,405,188 269,700 6.12 2,569,334 166,032 6.46 1,815,896 94,758 5.22 Net noninterest-bearing liabilities 48,729 -- -- 156,037 -- -- 172,057 -- -- ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- Sources to fund interest- earning assets $ 4,453,917 $ 269,700 6.06% $2,725,371 $ 166,032 6.09% $1,987,953 $ 94,758 4.77% =========== ========== ===== ========== ========== ===== ========== ======== ===== Net interest spread -- -- 1.78% -- -- 2.43% -- -- 3.22% =========== ========== ===== ========== ========== ===== ========== ======== ===== Net interest margin -- -- 1.84% -- -- 2.80% -- -- 3.67% =========== ========== ===== ========== ========== ===== ========== ======== ===== OFF-BALANCE SHEET Average balance on securitized: Credit cards $ 9,574,549 -- -- $6,105,575 -- -- $3,507,801 -- -- Personal finance loans(1) 1,890,101 -- -- 1,355,383 -- -- 1,105,610 -- -- Business loans and leases(2) 403,745 -- -- 230,696 -- -- 141,421 -- -- ----------- ---------- ----- ---------- ---------- ----- ---------- -------- ----- Total average securitized receivables 11,868,395 -- -- 7,691,654 -- -- 4,754,832 -- -- Total average managed receivables $14,918,660 -- -- $9,547,056 -- -- $6,110,347 -- -- =========== ========== ===== ========== ========== ===== ========== ======== ===== MANAGED NET INTEREST ANALYSIS(5) Interest-earning assets $14,028,466 $1,712,557 12.21% $8,830,946 $1,081,779 12.25% $5,495,754 $665,009 12.10% Interest-bearing liabilities $13,979,737 $ 826,379 5.91% $8,674,909 $ 563,385 6.49% $5,323,697 $295,880 5.56% Net interest spread -- -- 6.30% -- -- 5.76% -- -- 6.54% Net interest margin -- -- 6.32% -- -- 5.87% -- -- 6.72% =========== ========== ===== ========== ========== ===== ========== ======== =====
(1) Includes mortgage, home equity and auto loans beginning in 1996. (2) Includes leases and business cards beginning in 1996. (3) Interest and average rate computed on a tax equivalent basis using a statutory rate of 35%. (4) Includes assets held and available for sale, and nonaccrual loans and leases. (5) Combination of owned interest-earning assets/owned interest-bearing liabilities and securitized credit card assets/liabilities. 28 Advanta Corp. and Subsidiaries INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET The following table presents the effects of changes in average volume and interest rates on individual financial statement line items on a tax equivalent basis and including certain loan fees. Changes not solely due to volume or rate have been allocated on a pro rata basis between volume and rate. The effects on individual financial statement line items are not necessarily indicative of the overall effect on net interest income.
($ in thousands) 1996 VS. 1995 1995 vs. 1994 ---------------------------------- -------------------------------- INCREASE (DECREASE) Increase (Decrease) DUE TO Due to ---------------------------------- -------------------------------- VOLUME RATE TOTAL Volume Rate Total --------- -------- --------- -------- -------- -------- Interest income from: Loan and lease receivables: Credit cards $ 78,867 $(21,957) $ 56,910 $42,852 $ 3,124 $45,976 Personal finance loans(1) 5,968 2,510 8,478 5,921 1,604 7,525 Business loans and leases(2) 13,843 (495) 13,348 2,799 (877) 1,922 Other loans 528 71 599 155 11 166 Federal funds sold 1,227 (584) 643 1,888 1,885 3,773 Interest-bearing deposits 9,796 2,115 11,911 10,296 1,730 12,026 Tax-free securities (3,264) 112 (3,152) (1,295) 92 (1,203) Taxable investments 21,286 (599) 20,687 2,376 1,846 4,222 -------- -------- -------- ------- -------- ------- Total interest income(3) 128,251 (18,827) 109,424 64,992 9,415 74,407 -------- -------- -------- ------- -------- ------- Interest expense on: Deposits: Savings 2,656 (4,656) (2,000) 41 6,276 6,317 Time deposits under $100,000 2,041 771 2,812 (593) 4,668 4,075 Time deposits of $100,000 or more 37,593 (338) 37,255 8,925 5,227 14,152 Debt 55,476 (4,772) 50,704 27,158 4,403 31,561 Other borrowings 16,577 (1,680) 14,897 12,907 2,262 15,169 -------- -------- -------- ------- -------- ------- Total interest expense 114,343 (10,675) 103,668 48,438 22,836 71,274 -------- -------- -------- ------- -------- ------- Net interest income $ 13,908 $ (8,152) $ 5,756 $16,554 $(13,421) $ 3,133 -------- -------- -------- ------- -------- -------
(1) Includes mortgage, home equity and auto loans beginning in 1996. (2) Includes leases and business cards beginning in 1996. (3) Includes income from assets held and available for sale. 29 Advanta Corp. and Subsidiaries MANAGED PORTFOLIO DATA The Company analyzes its financial results on a managed basis as well as analyzing data as reported under generally accepted accounting principles. The following table provides selected information on a managed basis, as well as a managed income statement including the effects of credit card securitizations on selected line items of the Company's Consolidated Income Statements for the past three years.
($ in thousands) Year Ended December 31, - ------------------------------------------------------------------------------------------------------------- 1996 1995 1994 ----------- ----------- ---------- Balance Sheet Data: Average managed receivables $14,918,660 $ 9,547,056 $6,110,347 Managed receivables 16,289,193 12,215,355 8,155,237 Total managed assets 19,216,511 13,976,687 9,303,841 Managed net interest margin (on a fully tax equivalent 6.32% 5.87% 6.72% basis) As a percentage of gross managed receivables: Total loans 30 days or more delinquent: New methodology (see Asset Quality) 5.4% -- -- Prior methodology (pro forma) 5.2% 3.3% 2.7% Net charge-offs: New methodology (see Asset Quality) 3.2% -- -- Prior methodology (pro forma) 3.5% 2.2% 2.3% Managed Income Statement: Net interest income $ 882,471 $ 515,078 $ 366,427 Provision for credit losses 483,581 211,061 126,728 Noninterest revenues 389,045 258,571 192,292 Operating expenses 523,174 350,685 266,784 ----------- ----------- ---------- Income before income taxes $ 264,761 $ 211,903 $ 165,207 =========== =========== ==========
With respect to the Managed Income Statement, net interest income includes owned net interest income and securitized net interest income. In the Consolidated Income Statements, securitized net interest income is reported as noninterest revenues. In addition, the provision for credit losses includes the amount by which the provision for credit losses would have been higher had the securitized receivables remained as owned and the provision for credit losses been equal to actual reported charge-offs (see Asset Quality). Noninterest revenues exclude the net interest income and credit losses associated with the securitized credit card receivables. PROVISION FOR CREDIT LOSSES The provision for credit losses of $96.9 million in 1996 increased $43.5 million or 82% from $53.3 million in 1995. The increase was primarily due to higher charge-offs on owned receivables, which increased 66% from $42.5 million in 1995 to $70.6 million in 1996 and to the higher levels of impaired assets which continued to increase throughout the year. The provision for credit losses of $53.3 million in 1995 increased $19.1 million or 56% from $34.2 million in 1994. The increase was primarily due to an increase in the desired level of reserves given the increase in impaired assets and delinquency levels during 1995. A description of the credit performance of the loan portfolio is set forth under the section entitled "Credit Risk Management." 30 Advanta Corp. and Subsidiaries NONINTEREST REVENUES
($ in thousands) - -------------------------------------------------------------------------- 1996 1995 1994 -------- -------- -------- Gain on sale of credit cards $ 33,820 $ 0 $ 18,352 Other noninterest revenues: Credit card securitization income 258,066 183,360 149,043 Credit card servicing income 176,567 117,369 68,960 Income from personal finance activities 109,167 50,541 37,586 Credit card interchange income 102,804 92,439 71,740 Business loan and lease other revenues 61,622 41,050 21,551 Insurance revenues, net 38,175 30,146 12,734 Equity securities gains 6,522 15,386 0 Other 19,789 12,723 15,842 -------- -------- -------- Total other noninterest revenues $772,712 $543,014 $377,456 -------- -------- -------- Total noninterest revenues $806,532 $543,014 $395,808 ======== ======== ========
Noninterest revenues of $806.5 million in 1996 increased $263.5 million or 49% from $543.0 million in 1995. The increase includes a $33.8 million gain on the sale of credit card customer relationships in June 1996. Excluding this gain, noninterest revenues increased $229.7 million or 42% from 1995. This rise resulted primarily from income derived from increased securitization activity in all areas, as described below. Due to the securitization of credit card receivables, activity from securitized account balances, which otherwise would be reported as net interest income and charge-offs, is reported in securitization income and servicing income, both of which are included in noninterest revenues. Credit card securitization activities were affected by the adoption in the third quarter of 1996 of a new charge-off methodology relating to bankruptcies (see Asset Quality), the upward repricing of interest rates and fees, increases in charge-offs and the related impact on reserves, all of which had an approximate $50 million impact (earnings increase) in 1996, as well as a 57% increase in average securitized receivables. See Note 1 to Consolidated Financial Statements for further description of securitization income. The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and will be applied prospectively. The adoption of SFAS 125 is not expected to have a material effect on the Company's financial statements. Credit card servicing income, which represents fees paid to the Company for continuing to service accounts which have been securitized, increased to $176.6 million in 1996 from $117.4 million in 1995, in line with the increase in securitized credit cards. Such fees generally approximate 2% of securitized receivables. Interchange income represents fees that are payable by merchants to the credit card issuer for sale transactions. Total interchange income, which represents approximately 1.4% of credit card purchases, increased 11% to $102.8 million in 1996 from $92.4 million in 1995. 31 Advanta Corp. and Subsidiaries During 1996, the Company securitized $1.4 billion of mortgage and home equity loans compared to $542 million in 1995. As a result, income from personal finance activities of $109.2 million for 1996 increased 116% from $50.5 million in 1995. See Note 1 to Consolidated Financial Statements for a description of income from personal finance activities. Business loan and lease other revenues increased $20.6 million to $61.6 million in 1996 primarily due to a 75% growth in average securitized business loans and leases from 1995. Insurance revenues, net, were $38.2 million in 1996, an increase of $8.0 million over 1995. This growth is attributed to the successful marketing of insurance products in the credit card, personal finance, and business loan and lease areas. Noninterest revenues of $543.0 million in 1995 increased $147.2 million or 37% from $395.8 million in 1994, primarily due to increases in credit card securitization, servicing and interchange income, as well as higher business loan and lease and insurance revenues. Noninterest revenues for 1994 included an $18.4 million gain on the sale of credit card customer relationships. OPERATING EXPENSES
($ in thousands) - ----------------------------------------------------------------------------------------------------------- 1996 1995 1994 -------- -------- -------- Amortization of credit cards deferred origination costs, net $ 88,517 $ 72,258 $ 39,381 Other operating expenses: Salaries and employee benefits 182,666 116,681 88,681 External processing 42,814 28,407 22,618 Professional fees 40,247 14,937 10,985 Marketing 31,975 25,374 32,339 Postage 25,700 18,518 12,732 Credit card fraud losses 23,611 20,029 16,654 Equipment expense 22,752 12,751 9,293 Telephone expense 16,116 11,959 8,615 Occupancy expense 14,827 9,254 8,425 Credit and collection expense 13,784 9,039 7,604 Other 20,165 11,478 9,457 ======== ======== ======== Total other operating expenses $434,657 $278,427 $227,403 -------- -------- -------- Total operating expenses $523,174 $350,685 $266,784 ======== ======== ======== At year end: Number of accounts managed (000's) 5,984 5,031 3,968 Number of employees 3,541 2,409 1,753 For the year: Other operating expenses as a percentage of average managed receivables 2.9% 2.9% 3.7% -------- -------- --------
The amortization of credit card deferred origination costs, net, increased from $72.3 million in 1995 to $88.5 million in 1996. This increase resulted primarily from amortization related to the increased spending on credit card origination costs that were incurred over the last eighteen months (see Note 1 of Notes to Consolidated Financial Statements). Total other operating expenses of $434.7 million for 1996 were up $156.3 million or 56% from $278.4 million in 1995. The increase in total other operating expenses is attributable, in part, to a $66.0 million or 57% increase in salaries and employee benefits as a result of an increase in the number of employees from 2,409 at year-end 1995 to 3,541 at year-end 1996, including the addition of senior management to assist in the strategic growth of the various business units. Other factors affecting the increase in other operating expenses were a $25.3 million or 169% increase in professional fees primarily as a result of corporate strategic initiatives as well as an overall increase in credit card related costs comparable to the 58% increase in average managed credit card receivables. 32 Advanta Corp. and Subsidiaries The amortization of credit card deferred origination costs, net, increased from $39.4 million in 1994 to $72.3 million in 1995. This increase resulted primarily from amortization related to the $80.6 million of credit card origination costs that were incurred since the fourth quarter of 1994 (see Note 1 of Notes to Consolidated Financial Statements). Total other operating expenses of $278.4 million for 1995 were up $51.0 million or 22% from $227.4 million in 1994. Part of the increase in total other operating expenses resulted from a $28.0 million or 32% increase in salaries and employee benefits. Other factors affecting the increase in other operating expenses were a $5.8 million or 26% increase in external processing resulting primarily from a 27% increase in the number of accounts managed year-to-year, and an overall increase in credit card related costs. INCOME TAXES The Company's consolidated income tax expense was $89.1 million for 1996, or an effective tax rate of 34%, compared to tax expense of $75.2 million, or a 36% effective rate, in 1995 and tax expense of $59.1 million, or a 36% effective rate, in 1994. The decrease in the effective tax rate from 1995 to 1996 resulted from a higher level of insurance-related activities, tax credits from investments and lower levels of state income taxes. ASSET/LIABILITY MANAGEMENT The financial condition of Advanta Corp. is managed with a focus on maintaining high credit quality standards, disciplined interest rate risk management and prudent levels of leverage and liquidity. INTEREST RATE SENSITIVITY Interest rate sensitivity refers to net interest income variability resulting from mismatches between asset and liability indices (basis risk) and the effects which changes in market interest rates have on asset and liability repricing mismatches (gap risk). The Company attempts to minimize the impact of market interest rate fluctuations on net interest income and net income by regularly evaluating the risk inherent in its asset and liability structure, including securitized assets. This risk arises from continuous changes in the Company's asset/liability mix, market interest rates, the yield curve, prepayment trends and the timing of cash flows. Computer simulations are used to evaluate net interest income volatility under varying rate, spread and volume projections over monthly time periods of up to two years. In managing its interest rate sensitivity position, the Company periodically securitizes receivables, sells and purchases assets, alters the mix and term structure of its funding base, changes its investment portfolio and short-term investment position, and uses derivative financial instruments. Derivative financial instruments are used to manage exposures to changes in interest rates and foreign exchange rates and create match funding of assets and liabilities. Derivative financial instruments, by policy, are not used for any speculative purposes (see discussion under "Derivatives Activities"). The Company has primarily utilized variable rate funding in pricing its credit card securitization transactions in an attempt to match the variable rate pricing dynamics of the underlying receivables sold to the trusts. Variable rate funding is used on the balance sheet as well, in support of unsecuritized receivables which carry variable rates. Although credit card receivable rates are generally set at a spread over a floating rate index, they often contain interest rate floors. These floors have the impact of converting the credit card receivables to fixed rate receivables in a low interest rate environment. In addition, the Company at times offers fixed rate pricing to consumers for the introductory rate period of its credit cards. In instances when a significant portion of credit card receivables carry fixed rate introductory pricing or are at their floors, the Company may convert part of the underlying funding to a fixed rate by using interest rate hedges, swaps and fixed rate securitizations. In pricing mortgage and business loan and lease securitizations, both fixed rate and variable rate funding are used depending upon the characteristics of the underlying receivables and the overall interest rate risk exposure to the Company. Additionally, basis risk exists in on-balance sheet 33 Advanta Corp. and Subsidiaries funding as well as in securitizing credit card receivables at a spread over the London interbank offered rate ("LIBOR") when the rate on the underlying assets is indexed to the prime rate. The Company measures the basis risk resulting from potential variability in the spread between prime and LIBOR and incorporates such risk into the asset and liability management process. During 1996, substantially all new credit cards were issued using LIBOR as the repricing index. The effect of this change is the reduction of prime/LIBOR basis risk over time. The Company continues to seek cost-effective alternatives for minimizing this risk. Interest rate fluctuations affect net interest income at virtually all financial institutions. While interest rate volatility does have an effect on net interest income, other factors also contribute significantly to changes in net interest income. Specifically, within the credit card portfolio, pricing decisions and customer behavior regarding convenience usage affect the yield on the portfolio. These factors may counteract or exacerbate income changes due to fluctuating interest rates. The Company closely monitors interest rate movements, competitor pricing and consumer behavioral changes in its ongoing analysis of net interest income sensitivity. LIQUIDITY, FUNDING AND CAPITAL RESOURCES The Company's goal is to maintain an adequate level of liquidity, both long and short-term, through active management of both assets and liabilities. During 1996, the Company, through its subsidiaries, securitized $3.4 billion of credit card receivables, $1.4 billion of mortgage and home equity loans and $363 million of business loans and leases. Cash generated from these transactions was temporarily invested in short-term, high quality investments at money market rates awaiting redeployment to pay down borrowings and to fund future receivable growth. See the Consolidated Statements of Cash Flows for more information regarding liquidity, funding and capital resources. In addition, see Note 5 to the Consolidated Financial Statements and the Supplemental Schedules thereto for additional information regarding the Company's investment portfolio. Over the last nine years, the Company has successfully accessed the securitization market to efficiently support its growth strategy. While securitization should continue to be a reliable source of funding for the Company, other funding sources are available and include deposits, medium-term notes, senior and subordinated debt, repurchase agreements, committed and uncommitted bank lines, bank notes, federal funds purchased and the ability to sell assets and raise additional equity. In February 1995, the Company's wholly owned subsidiary, Advanta National Bank ("Advanta National" or "ANB"), a Delaware based credit card bank, commenced operations. The Company's initial capitalization of Advanta National was $50 million, consisting of $25 million in common stock and $25 million of additional paid in capital. Additional capital totaling $114 million and $39 million was contributed during 1996 and 1995, respectively, in order to maintain Advanta National as a "well capitalized" bank under applicable regulations. As a credit card bank, Advanta National is limited to one office, can engage only in consumer credit card operations and cannot accept deposits other than savings and time deposits of $100,000 or more. Advanta National had total assets of $2.2 billion at December 31, 1996. Funding diversification is an essential component of the Company's liquidity management. The debt securities of Advanta Corp., Advanta National Bank USA ("AUS"), and ANB investment-grade ratings from the nationally recognized rating agencies throughout 1996. These ratings allowed the Company to further diversify its funding sources. In March 1997, the various rating agencies lowered their ratings on the debt securities of each of Advanta Corp., AUS and ANB by one or two grades. As of March 17, 1997, debt of the two banks, AUS and ANB, was still rated at or above the lowest level of investment grade by each agency; debt of the parent company, Advanta Corp., maintained investment grade ratings (at or above the lowest investment grade level) from three of the rating agencies, but was rated one level below investment grade by Standard & Poors and two levels below investment grade by Moody's Investors Service. Efforts continue to develop new sources of funding, both through previously untapped customer segments and through developing new financing structures. In August 1995, in a public offering, the Company sold 2,500,000 depositary shares each representing a one-hundredth interest in a share of Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995 (SAILS). On September 15, 1999, unless either previously redeemed by the Company or converted at the option of the holder, each share of the SAILS will automatically convert into 100 shares of Class B Common Stock. Proceeds from the offering, net of underwriting discount, were approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including financing the growth of its subsidiaries. 34 Advanta Corp. and Subsidiaries In September 1995, AUS and Advanta National (the "Banks") established a $2.25 billion bank note program. Under this program, the Banks may issue an aggregate of $2.0 billion of senior bank notes and $250 million of subordinated bank notes. These notes may have maturities ranging from seven days to fifteen years from date of issuance. In July 1996, the Company's $510 million revolving credit facility was replaced with a new $1 billion revolving credit facility. A portion of this facility is available to the Banks as well. Also, in July, the Company filed a shelf registration statement with the Securities and Exchange Commission for $1.6 billion of debt securities. On December 17, 1996, Advanta Capital Trust I, a newly formed statutory business trust established by the Company (the "Trust"), issued in a private offering to two institutional investors $100 million of capital securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The sole assets of the Trust consist of $100 million of 8.99% junior subordinated debentures issued by the Company due December 17, 2026 (the "Junior Subordinated Debentures"). The Capital Securities will be subject to mandatory redemption under certain circumstances, including at any time on or after December 17, 2006 upon the optional prepayment by the Company of the Junior Subordinated Debentures. The Company has guaranteed the obligations of the Trust. The Company used the proceeds from the sale for general corporate purposes. At the Advanta parent company level, steady building of liquidity and capital in 1996 and 1995 was achieved as a result of $135 million of net dividends from subsidiaries in 1996 and $66.1 million in 1995. The Board of Directors currently intends to have the Company pay regular quarterly dividends to its shareholders, maintaining an approximate 20% premium on the dividend paid on the Class B common shares; however, the Company plans to reinvest the majority of its earnings to support future growth. In the fourth quarter of 1996, the quarterly dividends on the Class A Common and Class B Common shares were raised to $.11 and $.132 respectively, from the previous levels of $.09 and $.108. At December 31, 1996, the Company was carrying $1.5 billion of loans available for sale. The fair value of such loans was in excess of their carrying value at year end. In connection with liquidity and asset/liability management, the Company had $1.7 billion of investments available for sale at December 31, 1996. See Note 19 to the Consolidated Financial Statements for fair value disclosures. The following tables detail the composition of the deposit base and the composition of debt and other borrowings at year end for each of the past five years. COMPOSITION OF DEPOSIT BASE
($ in millions) - -------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1996 1995 1994 1993 1992 ----------------- ----------------- ----------------- ----------------- ----------------- Amount % Amount % Amount % Amount % Amount % ---------- --- ---------- --- ---------- --- ---------- --- ---------- --- Demand deposits $ 28.3 1% $ 91.7 5% $ 64.5 5% $ 33.4 3% $ 24.8 2% Money market savings 329.7 18 277.5 14 301.7 26 220.7 17 210.7 17 Time deposits of $100,000 or less $ 978.6 53 965.5 51 691.0 60 961.4 77 926.8 77 Time deposits of more than 523.5 28 571.9 30 102.2 9 39.4 3 42.2 4 $100,000 ---------- --- ---------- --- ---------- --- ---------- --- ---------- --- Total deposits $ 1,860.1 100% $ 1,906.6 100% $ 1,159.4 100% $ 1,254.9 100% $ 1,204.5 100% ========== === ========== === ========== === ========== === ========== ===
35 Advanta Corp. and Subsidiaries COMPOSITION OF DEBT AND OTHER BORROWINGS
($ in millions) As of December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- ---------------- --------------- --------------- AMOUNT % Amount % Amount % Amount % Amount % -------- --- -------- --- -------- --- ------- --- ------- --- Subordinated notes and certificates $ 71.1 3% $ 76.2 4% $ 282.1 20% $ 301.3 63% $ 271.1 83% Senior notes and certificates 208.3 8 200.6 11 0 0 0 0 0 0 Subordinated debentures 0 0 0 0 0 0 0 0 33.2 10 Short-term bank notes 309.3 13 25.0 1 85.0 6 0 0 0 0 Medium-term bank notes 835.6 34 322.7 18 0 0 0 0 0 0 5 1/8% notes, due 1996 0 0 150.0 8 149.9 11 149.9 32 0 0 Medium-term notes 880.8 36 504.7 28 359.7 25 15.0 3 0 0 Term fed funds 10.0 0 443.0 25 309.0 22 0 0 0 0 Securities sold under agreements to repurchase 0 0 0 0 86.5 6 0 0 0 0 Lines of credit and term funding arrangements 0 0 0 0 50.0 4 7.5 2 16.5 5 Other borrowings 147.0 6 81.8 5 80.9 6 0 0 7.1 2 -------- --- -------- --- -------- --- ------- --- ------- --- Total debt and other borrowings $2,462.1 100% $1,804.0 100% $1,403.1 100% $ 473.7 100% $ 327.9 100% ======== === ======== === ======== === ======= === ======= ===
Previously, as a grandfathered institution under the Competitive Equality Banking Act of 1987 ("CEBA"), the Company had to limit AUS's average on-balance sheet asset growth to 7% per annum. For the fiscal CEBA year ended September 30, 1996, AUS's average assets did not exceed the allowable amount and, accordingly, AUS was in full compliance with CEBA growth limits. However, on September 30, 1996 this growth rate provision of CEBA was repealed which has created substantial new flexibility with respect to asset/liability management for AUS and ultimately the Company. The timing and size of securitizations, on-balance sheet liability structure and rapid changes in balance sheet structure have frequently been due to the management of AUS's balance sheet within this growth constraint. As a result of the elimination of this growth restriction, the Company is currently evaluating the corporate structure of its two banking subsidiaries. In addition to AUS's total deposits of $1.2 billion, deposits at December 31, 1996 included $705.1 million of time deposits at Advanta National and $50.4 million of deposits at Advanta Financial Corp. ("AFC"), a Utah state-chartered, FDIC-insured industrial loan corporation. AFC's assets and operations are not currently material to the Company, and the Company does not expect them to become material in the near term. While there are no specific capital requirements for Advanta Corp., the Office of the Comptroller of the Currency requires that AUS and Advanta National maintain a risk-based capital ratio of at least 8%. Both banks were in excess of the required level and exceeded the minimum capital level of 10% required for designation as a "well-capitalized" depository institution. At December 31, 1996 and 1995, AUS's risk-based capital ratio was 15.84% and 11.56%, respectively. Advanta National's risk-based capital ratio at December 31, 1996 and 1995 was 17.20% and 12.28%, respectively. The Company intends to take the necessary actions to maintain AUS and Advanta National, at a minimum, as "adequately capitalized" banks. In addition, the Company's insurance subsidiaries are subject to certain capital, deposit and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. At December 31, 1996 and 1995 the insurance subsidiaries were in compliance with all requisite rules and regulations. 36 Advanta Corp. and Subsidiaries CAPITAL EXPENDITURES The Company spent $78.4 million for capital expenditures in 1996, primarily for the purchase of land and a building in Pennsylvania, leasehold improvements to both the Company's new headquarters and a Colorado office building, additional space in existing buildings, office and voice communication equipment and furniture and fixtures. This compared to $20.6 million for capital expenditures in 1995 and $24.1 million in 1994. In 1997, the Company anticipates capital expenditures to be comparable to those of 1996 to accommodate growth in its operating units. DERIVATIVES ACTIVITIES The Company utilizes derivative financial instruments for the purpose of managing its exposure to interest rate and foreign currency risks. The Company has a number of mechanisms in place that enable it to monitor and control both market and credit risk from these derivatives activities. At the broader level, all derivatives strategies are managed under a hedging policy approved by the Board of Directors that details the use of such derivatives and the individuals authorized to execute derivatives transactions. All derivatives strategies must be approved by the Company's senior management (President, Chief Executive Officer, Chief Financial Officer and Treasurer). As part of this approval process, a market risk analysis is completed to determine the potential impact on the Company from severe negative (stressed) movements in the market. By policy, derivatives transactions may only be used to manage the Company's exposure to interest rate and foreign currency risks or for cost reduction and may not be used for speculative purposes. As such, the impact of any derivatives transaction is calculated using the Company's asset/liability model to determine its suitability. The Company's Investment Committee (a management committee) has a counterparty credit policy. This policy details the maximum credit exposure, transaction limit and transaction term for counterparties based on an internally assigned Investment Committee credit rating. Internal counterparty credit ratings reflect the credit ratings from nationally recognized rating agencies, as well as other significant credit factors where appropriate. Each counterparty's credit quality is reviewed as new information becomes available, and, in any case, at least quarterly. Activities with counterparties will be suspended if there is reason to believe that their credit quality is below the Company's set standards. For each counterparty, credit exposure amounts are calculated in a stress environment and represent the maximum aggregate credit exposure from derivatives and other capital market transactions the Company is willing to accept from an individually approved counterparty. To manage counterparty exposure, the Company also uses negotiated agreements that establish threshold exposure amounts for each counterparty above which the Company has the right to call for and receive collateral for the amount of such excess, thereby limiting its exposure to the threshold amount. The threshold levels can be fixed or may change as the credit rating of the counterparty changes, and in all cases, the threshold levels are well below the maximum allowable exposure amounts described above. Counterparty master agreements and any collateral agreements, by policy, must be signed prior to the execution of any derivatives transactions with a counterparty. To date, substantially all master agreements with counterparties have included bilateral collateral agreements. As such, the potential exposure from a particular counterparty is limited to the maximum threshold level for that counterparty. The Company has a treasury middle office independent of the trading function, which measures, monitors and reports on credit, market and liquidity risk exposures from capital markets, hedging and derivative product activities. It is the responsibility of this department to ensure compliance with respect to the hedging policy, including the counterparty transaction limits, transaction terms and trader authorizations. In addition, this department marks each derivatives position to market on a weekly basis using both internal and external models. These models have been benchmarked against a sample of 37 Advanta Corp. and Subsidiaries derivatives dealers' valuation models for accuracy. Position and counterparty exposure reports are generated and used to manage collateral requirements of the counterparty and the Company. All of these procedures and processes are designed to provide reasonable assurance that prior to and after the execution of any derivatives strategy, market, credit and liquidity risks are fully analyzed and incorporated into the Company's asset/liability and risk measurement models and the proper accounting treatment for the transaction is identified and executed. During 1996, the FASB issued its exposure draft for accounting for hedging and derivatives. This draft, an attempt to standardize accounting treatment for derivatives and hedging, would materially alter the accounting treatment for the use of such instruments in the reduction of interest rate risk. The FASB is currently reviewing comments received on the exposure draft. The Company is unable to predict the outcome of these deliberations at this time. CREDIT RISK MANAGEMENT Management regularly reviews the loan portfolio in order to evaluate the adequacy of the reserve for credit losses. The evaluation includes such factors as the inherent credit quality of the loan portfolio, past experience, current economic conditions, projected credit losses and changes in the composition of the loan portfolio. The reserve for credit losses is maintained for on-balance sheet receivables. The on-balance sheet reserve is intended to cover all credit losses inherent in the owned loan portfolio. With regard to securitized assets, anticipated losses and related recourse reserves are reflected in the calculations of Securitization Income, Amounts due from Credit Card Securitizations and Other Assets. Recourse reserves are intended to cover all probable credit losses over the life of the securitized receivables. Management evaluates both its on-balance sheet and recourse reserve requirements and, as appropriate, effects additions to and/or transfers between these accounts. The reserve for credit losses on a consolidated basis was $89.2 million, or 3.4% of owned receivables, at December 31, 1996, compared to $53.5 million, or 1.9% of owned receivables, at December 31, 1995. The reserve for credit losses on a consolidated basis was $41.6 million, or 2.1% of owned receivables, in 1994. ASSET QUALITY Impaired assets include both nonperforming assets (personal finance loans and business loans and leases past due 90 days or more, real estate owned, bankrupt, decedent and fraudulent credit card accounts, and off-lease equipment) and accruing loans past due 90 days or more on credit cards. The carrying value for real estate owned is based on net realizable value after taking into account holding costs and costs of disposition and is reflected in other assets. Gross interest income that would have been recorded in 1996 and 1995 for owned nonperforming assets, had interest been accrued throughout the year in accordance with the assets' original terms, was approximately $3.7 million and $4.0 million, respectively. The amount of interest on nonperforming assets included in income for 1996 and 1995 was $.7 million and $1.3 million, respectively. In the third quarter of 1996, the Company adopted a new charge-off methodology related to bankrupt credit card accounts, providing for up to a 90-day (rather than up to a 30-day) investigative period following notification of the bankruptcy petition, prior to charge-off. This new methodology is consistent with others in the credit card industry. The 1996 credit statistics set forth in the following table reflect this change in methodology. On the total managed portfolio, impaired assets were $420.5 million, or 2.6% of receivables, at year end 1996 compared to $167.1 million, or 1.4% of receivables, in 1995. Nonperforming assets on the total managed portfolio were $191.7 million, or 1.2% of receivables, compared to $82.2 million, or .7%, in 1995. The total managed charge-off rate for 1996 was 3.2%, compared to 2.2% for 1995. The charge-off rate on managed credit cards was 3.7% for 1996 compared to 2.5% for 1995. As of March 17, 1997, the Company was projecting estimated 1997 charge-off rates on the total managed portfolio of 5.2%-5.6% for the first quarter and 5.0%-6.0% for the full year, and rates on managed credit cards of 6.6%-7.0% for the first quarter and 6.5%-7.5% for the full year. 38 Advanta Corp. and Subsidiaries The 30 day and over delinquency rate on the managed portfolio rose to 5.4% at December 31, 1996 compared to 3.3% at December 31, 1995. The 30 day and over delinquency rate on managed credit cards was 5.0% at year end 1996 compared to 2.6% at year end 1995. As of March 17, 1997, the Company was projecting estimated 30 day and over delinquency rates as of March 31, 1997 of 5.7%-6.1% of the total managed portfolio, and of 5.2%-5.6% of managed credit cards. Past due loans represent accruing loans that are past due 90 days or more as to collection of principal and interest. Credit card receivables, except those on bankrupt, decedent and fraudulent accounts, continue to accrue interest until the time they are charged off at 186 days contractual delinquency. In contrast, all personal finance loans and business loans and leases are put on nonaccrual status when they become 90 days past due. During 1994, the Company implemented a new policy for the charge-off of mortgage loans. Under this policy, when a nonperforming mortgage loan becomes twelve months delinquent, the Company writes down the loan to its net realizable value, regardless of anticipated collectibility. Consequently, in 1994, all mortgage loans that had been twelve or more months delinquent, as well as any mortgages that became twelve months delinquent during the year were written down to their net realizable value. 39 Advanta Corp. and Subsidiaries The following tables provide a summary of reserves, impaired assets, delinquencies and charge-offs for the past five years:
(in thousands) December 31, - --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- CONSOLIDATED-MANAGED Nonperforming assets $191,668 $ 82,171 $ 61,587 $ 63,589 $ 57,797 Accruing loans past due 90 days or more 228,845 84,892 40,837 31,514 34,890 Impaired assets 420,513 167,063 102,424 95,103 92,687 Total loans 30 days or more delinquent 886,717 404,072 220,390 186,297 184,670 As a percentage of gross receivables: Nonperforming assets 1.2% .7% .8% 1.2% 1.6% Accruing loans past due 90 days or more 1.4% .7% .5% .6% .9% Impaired assets 2.6% 1.4% 1.3% 1.8% 2.5% Total loans 30 days or more delinquent: New methodology(1) 5.4% Prior methodology(2) 5.2% 3.3% 2.7% 3.6% 5.0% Net charge-offs: Amount $479,992 $212,865 $139,676 $122,715 $108,606 As a percentage of gross receivables: New methodology(1) 3.2% Prior methodology(2) 3.5% 2.2% 2.3% 2.9% 3.4% -------- -------- -------- -------- -------- CREDIT CARDS-MANAGED Nonperforming assets $ 89,064 $ 20,516 $ 14,227 $ 10,881 $ 7,592 Accruing loans past due 90 days or more 228,822 84,878 40,721 31,489 34,890 Impaired assets 317,886 105,394 54,948 42,370 42,482 Total loans 30 days or more delinquent 632,083 262,299 133,121 94,035 99,308 As a percentage of gross receivables: Nonperforming assets .7% .2% .2% .3% .3% Accruing loans past due 90 days or more 1.8% .8% .6% .8% 1.3% Impaired assets 2.5% 1.1% .8% 1.1% 1.6% Total loans 30 days or more delinquent: New methodology(1) 5.0% Prior methodology(2) 4.6% 2.6% 2.0% 2.4% 3.7% Net charge-offs: Amount $451,239 $193,160 $115,218 $105,966 $100,465 As a percentage of gross receivables: New methodology(1) 3.7% Prior methodology(2) 4.1% 2.5% 2.5% 3.5% 4.5% -------- -------- -------- -------- -------- PERSONAL FINANCE LOANS-MANAGED(3)(4) Nonperforming assets $ 93,101 $ 56,743 $ 44,678 $ 50,418 $ 46,755 Total loans 30 days or more delinquent 194,412 106,223 65,966 75,747 69,962 As a percentage of gross receivables: Nonperforming assets 3.4% 3.2% 3.3% 4.4% 5.1% Total loans 30 days or more delinquent 7.1% 5.9% 4.9% 6.6% 7.7% Net charge-offs: Amount $ 14,981 $ 13,836 $ 20,709 $ 13,991 $ 5,924 As a percentage of gross receivables .7% .9% 1.7% 1.3% .8% -------- -------- -------- -------- ---------- BUSINESS LOANS AND LEASES-MANAGED(5) Nonperforming assets $ 9,503 $ 4,912 $ 2,682 $ 2,290 $ 3,432 Total loans 30 days or more delinquent 59,880 35,274 20,972 16,476 15,320 As a percentage of receivables: Nonperforming assets 1.2% 1.3% 1.0% 1.3% 2.5% Total loans 30 days or more delinquent 7.3% 9.3% 7.9% 9.7% 11.1% Net charge-offs: Amount $ 13,777 $ 5,846 $ 3,747 $ 2,759 $ 2,352 As a percentage of receivables 2.3% 1.9% 1.9% 1.9% 2.2% -------- -------- -------- -------- --------
(1) The 1996 figures reflect the adoption of a new charge-off methodology in August 1996 relating to credit card bankruptcies (see Asset Quality). (2) Pro forma calculation reflecting charge-off of all credit card bankruptcies within 30 days of notification. (3) In 1994, the Company implemented a new mortgage loan charge-off policy (see Asset Quality). (4) Includes mortgage, home equity and auto loans beginning in 1996. (5) Includes leases and business cards beginning in 1996. 40 Advanta Corp. and Subsidiaries ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED BALANCE SHEETS
(in thousands) December 31, --------------------------- 1996 1995 ----------- ---------- ASSETS Cash $ 165,875 $ 45,714 Federal funds sold 338,926 146,375 Interest-bearing deposits 546,783 410,709 Investments available for sale 785,600 532,963 Loan and lease receivables, net: Available for sale 1,476,146 1,079,478 Other loan and lease receivables, net 1,136,857 1,699,771 ---------- ---------- Total loan and lease receivables, net 2,613,003 2,779,249 Premises and equipment (at cost, less accumulated depreciation of $53,979 in 1996 and $37,621 in 1995) 108,130 43,453 Amounts due from credit card securitizations 399,359 190,819 Other assets 626,283 374,977 ---------- ---------- TOTAL ASSETS $5,583,959 $4,524,259 ========== ========== LIABILITIES Deposits: Noninterest-bearing $ 28,302 $ 91,721 Interest-bearing 1,831,756 1,814,880 ---------- ---------- Total deposits 1,860,058 1,906,601 Long-term debt 1,393,095 587,877 Other borrowings 1,068,989 1,216,127 Other liabilities 309,781 140,690 ---------- ---------- TOTAL LIABILITIES 4,631,923 3,851,295 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of the Company 100,000 0 STOCKHOLDERS' EQUITY (SEE NOTE 9) Class A preferred stock, $1,000 par value: Authorized, issued and outstanding - 1,010 shares in 1996 and 1995 1,010 1,010 Class B preferred stock, $.01 par value: Authorized - 1,000,000 shares; Issued - 25,000 shares in 1996 and 1995 0 0 Class A common stock, $.01 par value; Authorized - 200,000,000 shares; Issued - 17,945,471 shares in 1996 and 17,481,022 shares in 1995 179 175 Class B common stock, $.01 par value Authorized - 200,000,000 shares; Issued - 25,592,764 shares in 1996 and 24,007,352 shares in 1995 256 240 Additional paid-in capital, net 309,250 280,294 Retained earnings, net 541,383 391,245 Less: Treasury stock at cost, 1,231 Class B common shares in 1996 (42) 0 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 852,036 672,964 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,583,959 $4,524,259 ========== ==========
See Notes to Consolidated Financial Statements 41 Advanta Corp. and Subsidiaries CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data) Year Ended December 31, 1996 1995 1994 --------- -------- -------- Interest income: Loans and leases $267,823 $189,983 $135,429 Investments: Taxable 79,640 46,574 26,552 Exempt from federal income tax 502 2,375 3,158 -------- -------- -------- Total investments 80,142 48,949 29,710 -------- -------- -------- Total interest income 347,965 238,932 165,139 -------- -------- -------- Interest expense: Deposits 110,879 72,812 48,268 Debt 118,612 67,908 36,347 Other borrowings 40,209 25,312 10,143 -------- -------- -------- Total interest expense 269,700 166,032 94,758 -------- -------- -------- Net interest income 78,265 72,900 70,381 -------- -------- -------- Provision for credit losses 96,862 53,326 34,198 -------- -------- -------- Net interest income after provision for credit losses (18,597) 19,574 36,183 Noninterest revenues: Gain on sale of credit cards 33,820 0 18,352 Other noninterest revenues 772,712 543,014 377,456 -------- -------- -------- Total noninterest revenues 806,532 543,014 395,808 -------- -------- -------- Operating expenses: Amortization of credit card deferred origination costs, net 88,517 72,258 39,381 Other operating expenses 434,657 278,427 227,403 -------- -------- -------- Total operating expenses 523,174 350,685 266,784 -------- -------- -------- Income before income taxes 264,761 211,903 165,207 Provision for income taxes 89,104 75,226 59,144 -------- -------- -------- Net income $175,657 $136,677 $106,063 ======== ======== ======== Earnings per common share (See Note 1) $ 3.89 $ 3.20 $ 2.58 ======== ======== ======== Weighted average common shares outstanding 45,073 42,670 41,046 ======== ======== ========
See Notes to Consolidated Financial Statements 42 Advanta Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ($ in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Unrealized Investment Total Class A Class B Class A Class B Additional Deferred Holding Stock- Preferred Preferred Common Common Paid-In Compen- Gains Retained Treasury holder's Stock Stock Stock Stock Capital sation (Losses) Earnings Stock Equity --------- --------- -------- ------ -------- -------- ------- -------- ----- -------- Balance at Dec. 31, 1993 $ 1,010 $ 0 $ 172 $ 226 $177,654 $(11,008) $ 524 $174,163 $ 0 $342,741 Change in unrealized appreciation of investments (7,062) (7,062) Preferred and common cash dividends declared (9,877) (9,877) Exercise of stock options 1 2 1,671 184 1,858 Issuance of stock: Benefit plans 3 11,543 (9,542) 636 2,640 Amortization of deferred compensation 5,327 5,327 Termination-benefit plans (190) 1,010 (820) 0 Net Income 106,063 106,063 --------- --------- -------- ------ -------- -------- ------- -------- ------- -------- Balance at Dec. 31, 1994 1,010 0 173 231 190,678 (14,213) (6,538) 270,349 0 441,690 Change in unrealized appreciation of investments 6,258 6,258 Preferred and common cash dividends declared (15,501) (15,501) Exercise of stock options 2 3 2,049 59 2,113 Issuance of stock: Public offering 0 88,927 88,927 Benefit plans 6 18,360 (16,523) 1,296 3,139 Amortization of deferred compensation 7,661 7,661 Termination/tax benefit- benefit plans 1,917 1,438 (1,355) 2,000 Net Income 136,677 136,677 --------- --------- -------- ------ -------- -------- ------- -------- ------- -------- Balance at Dec. 31, 1995 1,010 0 175 240 301,931 (21,637) (280) 391,525 0 672,964 Change in unrealized appreciation of investments (338) (338) Preferred and common cash dividends declared (24,588) (24,588) Exercise of stock options 4 7 7,503 7,514 Issuance of stock: Benefit plans 9 36,000 (33,815) 2,228 4,422 Amortization of deferred compensation 11,960 11,960 Termination/tax benefit- benefit plans 5,045 2,263 (2,270) 5,038 Foreign currency translation adjustment (593) (593) Net Income 175,657 175,657 --------- --------- -------- ------ -------- -------- ------- -------- ------- -------- Balance at Dec. 31, 1996 $ 1,010 $ 0 $ 179 $ 256 $350,479 $(41,229) $ (618) $542,001 $ (42) $852,036 ========= ========= ======== ====== ======== ======== ======= ======== ======= ========
See Notes To Consolidated Financial Statements 43 Advanta Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands) Year Ended December 31, --------------------------------------------------- 1996 1995 1994 ------------ ----------- ----------- OPERATING ACTIVITIES Net income $ 175,657 $ 136,677 $ 106,063 Adjustments to reconcile net income to net cash provided by operating activities: Equity securities gains (4,074) (6,776) 0 Depreciation and amortization of intangibles 19,335 10,802 7,907 Provision for credit losses 96,862 53,326 34,198 Change in other assets and amounts due from securitizations (287,798) (127,931) (43,599) Change in other liabilities 147,276 51,757 27,616 Gain on securitization of receivables (89,843) (35,652) (27,189) ------------ ----------- ----------- Net cash provided by operating activities 57,415 82,203 104,996 INVESTING ACTIVITIES Purchase of investments available for sale (30,770,841) (3,313,555) (1,804,963) Proceeds from sale of investments available for sale 1,119,231 1,683,934 623,663 Proceeds from maturing investments available for sale 29,388,538 1,430,276 1,159,702 Change in fed funds sold and interest-bearing deposits (303,435) (202,262) (34,973) Change in credit card receivables, excluding sales (3,329,603) (4,179,735) (2,787,652) Proceeds from sales/securitizations of receivables 5,385,055 4,331,739 2,738,740 Purchase of personal finance loan/lease portfolios (288,753) (214,094) (143,804) Principal collected on personal finance loans 60,544 30,945 25,753 Personal finance loans made to customers (1,267,073) (608,064) (451,892) Purchase of premises and equipment (84,167) (20,652) (24,088) Proceeds from sale of premises and equipment 574 20 647 Excess of cash collections over income recognized on direct financing leases 78,282 38,910 21,691 Equipment purchased for direct financing lease contracts (325,729) (235,773) (160,080) Change in business card receivables, excluding sales (262,064) (43,684) (2,769) Net change in other loans (11,553) (4,062) (75) ------------ ----------- ----------- Net cash used by investing activities (610,994) (1,306,057) (840,100) FINANCING ACTIVITIES Change in demand and savings deposits (11,277) 3,023 112,048 Proceeds from deposits sold 0 30,018 0 Proceeds from sales of time deposits 1,481,557 1,322,388 448,624 Payments for maturing time deposits (1,516,823) (608,186) (656,195) Change in repurchase agreements and term fed funds (433,000) 47,545 395,455 Proceeds from issuance of subordinated/senior debt 41,076 59,256 39,437 Payments on redemption of subordinated/senior debt (38,541) (64,642) (58,618) Proceeds from issuance of medium-term notes 720,545 165,052 344,787 Payments on maturity of medium-term notes (494,400) (20,000) 0 Change in notes payable 837,210 212,730 127,489 Proceeds from issuance of capital securities 100,000 0 0 Proceeds from issuance of stock 11,974 94,179 4,498 Cash dividends paid (24,581) (15,501) (9,877) ------------ ----------- ----------- Net cash provided by financing activities 673,740 1,225,862 747,648 ------------ ----------- ----------- Net increase in cash 120,161 2,008 12,544 Cash at beginning of year 45,714 43,706 31,162 Cash at end of year $ 165,875 $ 45,714 $ 43,706 ============ =========== ===========
See Notes to Consolidated Financial Statements 44 Advanta Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Advanta Corp. (the "Company"), a Delaware corporation, is a financial services company which provides a variety of products to consumers and small businesses. The Company services approximately 6 million customers and manages receivables in excess of $16 billion. The Company issues credit cards primarily through its two wholly owned subsidiaries Advanta National Bank USA ("AUS") and Advanta National Bank ("Advanta National" or "ANB", and together with AUS, "the Banks"). Substantially all of the Company's credit card processing is performed by a single outside third party processor. Total managed credit card receivables at December 31, 1996 totaled $12.7 billion. The Company also operates through other wholly owned subsidiaries including: Advanta Mortgage Corp. USA ("AMC") which originates mortgage loans, Advanta Business Services Corp. ("ABS") which provides small ticket equipment leases and markets business credit cards to businesses, and Advanta Life Insurance Company which reinsures or writes various credit insurance products available to the Company's customers. Managed receivables for AMC and ABS totaled approximately $2.8 billion and $.8 billion, respectively, at December 31, 1996. PRINCIPLES OF CONSOLIDATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. BASIS OF PRESENTATION The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The ultimate results could differ from those estimates. Certain prior-period amounts have been reclassified to conform with current-year classifications. CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES Credit Card Origination Costs The Company accounts for credit card origination costs under Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"). This accounting standard requires certain loan and lease origination fees and costs to be deferred and amortized over the life of a loan or lease. Origination costs are defined under this standard to include costs of loan origination associated with transactions with independent third parties and certain costs relating to underwriting activities and preparing and processing loan documents. The Company engages third parties to solicit and originate credit card account relationships. Amounts deferred under these arrangements approximated $54.6 million in 1996, $71.9 million in 1995 and $55.2 million in 1994. The Company amortizes deferred credit card origination costs following the consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") regarding the acquisition of individual credit card accounts from independent third parties (EITF Issue 93-1). Under this consensus amounts paid to third parties are deferred and amortized on a straight-line basis over one year. Costs incurred for originations which were initiated prior to May 20, 1993 continue to be amortized over a 60 month period as was the practice prior to the EITF Issue 93-1 consensus. Credit Card Securitization Income 45 Advanta Corp. and Subsidiaries Since 1988, the Company, through its subsidiaries AUS and Advanta National, has completed credit card securitizations totaling $12.2 billion in receivables. See Note 3 and Note 16. In each transaction, credit card receivables were transferred to a trust and interests in the trust were sold to investors for cash. The Company records excess servicing income on credit card securitizations representing additional cash flow from the receivables initially sold based on estimates of the repayment term, including prepayments. As the estimates used to record excess servicing income are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Excess servicing income recorded at the time of each transaction is substantially offset by the establishment of recourse reserves for anticipated charge-offs. During the "revolving period" of each trust, income is recorded based on additional cash flows from the new receivables which are sold to the trusts on a continual basis to replenish the investors' interest in trust receivables which have been repaid by the credit cardholders. Credit card securitization activities were affected by the adoption in the third quarter of 1996 of a new charge-off methodology relating to bankruptcies (see Credit Losses below), the upward repricing of interest rates and fees, increases in charge-offs and the related impact on reserves, all of which had an approximate $50 million impact (earnings increase) in 1996, as well as a 57% increase in average securitized receivables. MORTGAGE LOAN ORIGINATION FEES The Company generally charges origination fees ("points") for mortgage loans where permitted under state law. Origination fees, net of direct origination costs, are deferred and amortized over the contractual life of the loan. However, upon the sale or securitization of the loans, the unamortized portion of such fees is recognized and included in the computation of the gain on sale. LOAN AND LEASE RECEIVABLES AVAILABLE FOR SALE Loan and lease receivables available for sale represent receivables currently on the balance sheet that the Company generally intends to sell or securitize within the next six months. These assets are reported at the lower of cost or fair market value. INVESTMENTS AVAILABLE FOR SALE Investments available for sale include securities that the Company sells from time to time to provide liquidity and in response to changes in the market. Debt and equity securities classified as Available for Sale are reported at market value under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, unrealized gains and losses on these securities (except those held by the Company's venture capital unit, Advanta Partners LP) are reported as a separate component of stockholders' equity and included in retained earnings. Changes in the fair value of Advanta Partners LP investments are reported in noninterest revenues as equity securities gains or losses. The fair value of publicly traded investments takes into account their quoted market prices with adjustments made for liquidity or sale restrictions. For investments that are not publicly traded, estimates of fair value have been made by management that considered several factors including the investees' financial results, conditions and prospects, and the values of comparable public companies. Because of the nature of these investments, the equity method of accounting is not used in situations where the Company has a greater than 20 percent ownership interest. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses various derivative financial instruments ("derivatives") such as interest rate swaps and caps, forward contracts, options on securities, and financial futures as part of its risk management strategy to reduce interest rate and foreign currency exposures, and where appropriate, to synthetically lower its cost of funds. Derivatives are classified as hedges or synthetic alterations of specific on-balance sheet items, off-balance sheet items or anticipated transactions. In order for derivatives to qualify for hedge accounting treatment the following conditions must be met: 1) the underlying item being hedged by derivatives exposes the Company to interest rate or foreign currency risks, 2) the derivative used serves to reduce the Company's sensitivity to interest rate or foreign currency risks, and 3) the derivative used is designated and deemed effective in hedging the Company's exposure to interest rate or foreign currency risks. In addition to meeting these conditions, anticipatory hedges must demonstrate that the anticipated transaction being hedged is probable to occur and the expected terms of the transaction are identifiable. 46 Advanta Corp. and Subsidiaries For derivatives designated as hedges of interest rate exposure, gains or losses are deferred and included in the carrying amounts of the related item exposing the Company to interest rate risk and ultimately recognized in income as part of those carrying amounts. For derivatives designated as hedges of foreign currency exposure, gains or losses are reported in stockholders' equity. Accrual accounting is applied for derivatives designated as synthetic alterations with income and expense recorded in the same category as the related underlying on-balance sheet or off-balance sheet item synthetically altered. Gains or losses resulting from early terminations of derivatives are deferred and amortized over the remaining term of the underlying balance sheet item or the remaining term of the derivative, as appropriate. Derivatives not qualifying for hedge or synthetic accounting treatment would be carried at market value with realized and unrealized gains and losses included in noninterest revenues. At December 31, 1996, 1995 and 1994, all the Company's derivatives qualified as hedges or synthetic alterations. INCOME FROM PERSONAL FINANCE ACTIVITIES The Company, through its subsidiaries, sells mortgage and home equity loans through both secondary market securitizations and whole loan sales, typically with servicing retained. Income is recognized at the time of sale approximately equal to the present value of the anticipated future cash flows resulting from the retained yield adjusted for an assumed prepayment rate, net of any anticipated charge-offs, and allowing for a normal servicing fee. As these estimates are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Changes in the anticipated future cash flows, as well as the receipt of cash flows which differ from those projected, affect the recognition of current and future income from personal finance activities. Also included in income is any difference between the net sales proceeds and the carrying value of the mortgage loans sold at the time of the transaction. See Note 3 and Note 16. The carrying value includes deferred loan origination fees and costs which include certain fees and costs related to acquiring and processing a loan held for resale. These deferred origination fees and costs are netted against income from personal finance activities when the loans are sold. Income from personal finance activities includes loan servicing fees equal to .5% of the outstanding balance of securitized loans less amortization of previously recorded mortgage servicing assets and loan servicing fees on mortgage loan portfolios which were never owned by the Company ("contract servicing"). INCOME FROM BUSINESS LOAN AND LEASE SECURITIZATIONS The Company, through its subsidiaries, sells business loans and leases through secondary market securitizations. The Company records excess servicing income on lease securitizations approximately equal to the present value of the anticipated future cash flows net of anticipated charge-offs, partially offset by deferred initial direct costs, transaction expenses and estimated credit losses under certain recourse requirements of the transactions. Also included in income is the difference between the net sales proceeds and the carrying amount of the receivables sold. Subsequent to the initial sale, securitization income is recorded in proportion to the actual cash flows received from the trusts. The Company records excess servicing income on business card securitizations representing additional cash flow from the receivables initially sold based on estimates of the repayment term, including prepayments. Excess servicing income recorded at the time of each transaction is substantially offset by the establishment of recourse reserves for anticipated charge-offs. As the estimates to record excess servicing income are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. During the "revolving period" of each trust, income is recorded based on additional cash flows from the new receivables which are sold to the trusts on a continual basis to replenish the investors' interest in trust receivables which have been repaid by the credit cardholders. See Note 3 and Note 16. INSURANCE Reinsurance premiums, net of commissions on credit life, disability and unemployment policies on credit cards, are earned monthly based upon the outstanding balance of the underlying receivables. Insurance premiums are earned ratably over the period of insurance coverage provided. The cost of acquiring new reinsurance is deferred and amortized over the respective periods in order to match the expense with the anticipated revenue. Insurance loss reserves are based on estimated settlement amounts for both reported losses and incurred but not reported losses. 47 Advanta Corp. and Subsidiaries CREDIT LOSSES The Company's charge-off policy, as it relates to consumer credit card accounts, is to charge-off a receivable, if not paid, at 186 days contractual delinquency. Accounts suspected of being fraudulent are written off after a 90 day investigation period, unless the investigation shows no evidence of fraud. In the third quarter of 1996, the Company adopted a new charge-off methodology related to bankrupt credit card accounts, providing for up to a 90-day (rather than up to a 30-day) investigative period following notification of the bankruptcy petition, prior to charge-off. This new methodology is consistent with others in the credit card industry. During 1994, the Company implemented a new policy for the charge-off of nonperforming mortgage loans. Under this policy, the Company charges off potential losses on all nonperforming mortgages that have become twelve months delinquent, regardless of anticipated collectibility. During the 1994 transition period, losses with respect to both mortgages that became twelve months delinquent in 1994, as well as those mortgages that had been twelve months or more delinquent, were charged off. PREMISES AND EQUIPMENT Premises, equipment, computers and software are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are charged to expense as incurred. GOODWILL Goodwill, representing the cost of investments in subsidiaries and affiliated companies in excess of net assets acquired at acquisition, is amortized on a straight-line basis for a period of up to 25 years. STOCK-BASED COMPENSATION The FASB has issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The Company chose to apply certain allowable accounting provisions, and as such continues to account for these plans under APB Opinion No. 25. No adjustments to reported net income or earnings per share are required, however certain disclosures required under SFAS 123 are reported in Note 11. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. EARNINGS PER SHARE Earnings per common share are computed by dividing net earnings after Class A preferred stock dividends by the average number of shares of common stock and common stock equivalents outstanding during each year. The outstanding Class A preferred stock is not a common stock equivalent. The outstanding Class B preferred stock is mandatorily convertible into common stock and thus is considered a common stock equivalent. CASH FLOW REPORTING For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks. Cash paid during 1996, 1995 and 1994 for interest was $241.1 million, $147.2 million and $91.5 million, respectively. Cash paid for taxes during these periods were $45.1 million, $43.9 million and $60.9 million, respectively. RECENT ACCOUNTING PRONOUNCEMENTS 48 Advanta Corp. and Subsidiaries The FASB has issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and will be applied prospectively. Under SFAS 125, a transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. SFAS 125 requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. The adoption of SFAS 125 is not expected to have a material effect on the Company's financial statements. NOTE 2. LOAN AND LEASE RECEIVABLES Loan and lease receivables consisted of the following:
December 31, ------------------------------ 1996 1995 ----------- ----------- Credit cards(A) $ 2,045,219 $ 2,338,280 Personal finance loans(B)(C) 376,260 321,711 Business loans and leases(D) 214,327 93,660 Other loans 20,835 9,276 ----------- ----------- Gross loan and lease receivables 2,656,641 2,762,927 ----------- ----------- Add: Deferred origination costs, net of deferred fees(E) 45,546 69,816 Less: Reserve for credit losses: Credit cards (76,084) (36,889) Personal finance loans (8,785) (3,360) Business loans and leases (4,241) (977) Other (74) (12,268) ----------- ----------- Total (89,184) (53,494) ----------- ----------- Net loan and lease receivables $ 2,613,003 $ 2,779,249 =========== ===========
(A) Includes credit card receivables available for sale of $1.1 billion and $776.7 million in 1996 and 1995, respectively. (B) Includes mortgage, home equity and auto loans beginning in 1996. (C) Includes personal finance loan receivables available for sale of $337.3 million and $279.4 million in 1996 and 1995, respectively and is net of unearned income of $2.5 million in 1996. (D) Includes business loans and leases available for sale of $71.9 million and $18.0 million in 1996 and 1995, respectively, and is net of unearned income of $20.9 million and $15.9 million in 1996 and 1995, respectively. Also includes residual interest for both years. (E) Includes approximately $4.0 million and $5.3 million in 1996 and 1995, respectively, related to loan and lease receivables available for sale. 49 Advanta Corp. and Subsidiaries Receivables serviced for others consisted of the following items:
December 31, ---------------------------- 1996 1995 ----------- ---------- Credit cards $10,646,177 $7,692,463 Personal finance loans(A) 2,377,430 1,475,871 Business loans and leases 608,945 284,094 ----------- ---------- Total $13,632,552 $9,452,428 =========== ==========
(A) Excludes mortgage loans which were not originated by the Company, but which the Company services for a fee ("contract servicing"). Contract servicing receivables were $3.7 billion and $.6 billion at December 31, 1996 and 1995, respectively. The geographic concentration of managed receivables was as follows:
December 31, ------------------------------------------------------ 1996 1995 ----------------------- ----------------------- RECEIVABLES % Receivables % ----------- ----- ----------- ----- California $ 2,559,128 15.7% $ 2,043,281 16.7% New York 1,283,895 7.9 983,832 8.1 Texas 1,003,641 6.2 692,665 5.7 Florida 902,692 5.5 640,859 5.3 New Jersey 731,055 4.5 599,867 4.9 All other 9,808,782 60.2 7,254,851 59.3 Total managed receivables $16,289,193 100.0% $12,215,355 100.0% =========== ===== =========== =====
In the normal course of business, the Company makes commitments to extend credit to its credit card customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. The Company does not require collateral to support this financial commitment. At December 31, 1996 and 1995, the Company had $41.2 billion and $33.3 billion, respectively, of commitments to extend credit outstanding for which there is potential credit risk. The Company believes that its customers' utilization of these lines of credit will continue to be substantially less than the amount of the commitments, as has been the Company's experience to date. At December 31, 1996 and 1995, outstanding managed consumer and business credit card receivables represented 32% and 30%, respectively, of outstanding commitments. NOTE 3. CREDIT CARD, PERSONAL FINANCE AND BUSINESS LOAN AND LEASE SECURITIZATIONS AUS and Advanta National together had securitized credit card receivables outstanding of $10.6 billion at December 31, 1996. In each securitization transaction, credit card receivables were transferred to a trust which issued certificates representing ownership interests in the trust primarily to institutional investors. The Banks retained a participation interest in each trust, reflecting the excess of the total amount of receivables transferred to the trust over the portion represented by certificates sold to investors. The retained participation interests in the credit card trusts were $.9 billion and $1.5 billion at December 31, 1996 and 1995, respectively. Although the Banks continue to service the underlying credit card accounts and maintain the customer relationships, these transactions are treated as sales for financial reporting purposes to the extent of the investors' interests in the trusts. Accordingly, the associated receivables are not reflected on the balance sheet. The Banks are subject to certain recourse provisions in connection with these securitizations. At December 31, 1996 and 1995, the Banks had reserves of $334.6 million and $167.4 million, respectively, related to these recourse provisions. These reserves are netted against the amounts due from credit card securitizations. At December 31, 1996, the Company had amounts receivable from credit card securitizations, including related interest-bearing deposits, of $733.3 million, $333.9 million of which constitutes amounts which are subject to liens by the providers of the credit enhancement facilities for the individual securitizations and is net of amounts awaiting distribution to investors. At December 31, 1995, the amounts receivable were $453.2 million and amounts subject to lien (net of amounts due to investors) were $262.4 million. 50 Advanta Corp. and Subsidiaries At December 31, 1996, the Company had $2.4 billion of securitized personal finance loans outstanding which are subject to certain recourse provisions. The Company had reserves of $64.4 million and $27.2 million at year end 1996 and 1995, respectively, related to these recourse provisions which are netted against the excess mortgage servicing rights. See Note 16. At December 31, 1996, the Company had amounts receivable from personal finance loan sales and securitizations of $260.2 million, $96.5 million of which was subject to liens. At December 31, 1995, the amounts receivable and amounts subject to lien were $162.4 million and $58.1 million, respectively. At December 31, 1996, the Company had $609 million of securitized business loans and leases outstanding which are subject to certain recourse provisions. There were reserves of $22.2 million and $15.3 million at year end 1996 and 1995, respectively, related to these recourse provisions which are netted against the excess servicing on business loan and lease securitizations. See Note 16. The Company had accounts receivable from business loan and lease securitizations of $27.6 million at year end 1996 and $22.2 million at year end 1995, of which $8.1 million and $7.5 million, respectively, were subject to liens by providers of the credit enhancement facilities. Total interest in residuals for business loan and lease assets sold at December 31, 1996 and 1995, was $32.1 million and $22.4 million respectively, and is also subject to recourse provisions. As indicated in Note 1, recourse reserves are established at the time of the securitization transactions based on anticipated future cash flows, prepayment rates and charge-offs. As these estimates are influenced by factors outside of the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. NOTE 4. RESERVE FOR CREDIT LOSSES The reserve for credit losses for lending and leasing transactions is established to reflect losses anticipated from delinquencies that have already occurred. In estimating the reserve, management relies on historical experience by loan type adjusted for any known trends in the portfolio. As these estimates are influenced by factors outside of the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Any adjustments to the reserves (net of transfers between on-and off-balance sheet reserves) are reported in the Consolidated Income Statements in the periods they become known. 51 Advanta Corp. and Subsidiaries The following table displays five years of reserve history: RESERVE FOR CREDIT LOSSES
Year Ended December 31, .................................. .............. ............... .............. ............. ............ 1996 1995 1994 1993 1992 - ------------------------------------------------- --------------- ------------- -------------- ------------ Balance at January 1 $ 53,494 $ 41,617 $ 31,227 $ 40,228 $ 36,355 Provision for credit losses 96,862 53,326 34,198 29,802 47,138 Transfer of reserves from/(to) recourse reserves 3,000 1,100 11,485 (12,027) (3,300) Reserves on receivables purchased 6,404 0 0 0 0 Gross credit losses: Credit cards (73,466) (41,779) (28,646) (33,805) (46,477) Personal finance loans (3,473) (6,038) (11,731) (2,247) (1,488) Business loans and leases (3,444) (1,413) (1,053) (1,376) (1,930) Other loans (13) (38) (44) (93) (73) .................................. .............. ............... .............. ............. ............ Total credit losses (80,396) (49,268) (41,474) (37,521) (49,968) .................................. .............. ............... .............. ............. ............ Recoveries: Credit cards 8,945 6,354 5,958 10,182 9,095 Personal finance loans 414 76 42 40 37 Business loans and leases 442 274 139 429 663 Other loans 19 15 42 94 208 - ---------------------------------- -------------- --------------- -------------- ------------- ------------ Total recoveries 9,820 6,719 6,181 10,745 10,003 - ---------------------------------- -------------- --------------- -------------- ------------- ------------ Net credit losses (70,576) (42,549) (35,293) (26,776) (39,965) - ---------------------------------- -------------- --------------- -------------- ------------- ------------ Balance at December 31 $ 89,184 $ 53,494 $ 41,617 $ 31,227 $ 40,228 - ---------------------------------- -------------- --------------- -------------- ------------- ------------
NOTE 5. INVESTMENTS AVAILABLE FOR SALE Investments available for sale consisted of the following:
December 31, - ------------------------------ ---------------------------- ----------------------------------------------- --------- 1996 1995 - ------------------------------ --------- ---------- ---------- --------- ---------- ---------- ---------- -------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value - ------------------------------- --------- ---------- ---------- --------- ---------- ---------- ---------- -------- U. S. Treasury & other U.S. Government Securities $645,113 $ 21 $ (677) $644,457 $405,614 $ 70 $ (286) $405,398 State and municipal securities 3,640 38 0 3,678 24,239 52 0 24,291 Collateralized mortgage obligations 7,624 9 (108) 7,525 8,066 0 (101) 7,965 Mortgage- backed securities 41,493 45 (464) 41,074 36,599 0 (103) 36,496 Equity securities 55,115 21,155 (6,250) 70,020 37,860 4,307 (250) 41,917 Other 18,850 0 (4) 18,846 16,897 0 (1) 16,896 - ------------ --------- --------- --------- -------- -------- --------- -------- -------- Total $771,835 $21,268 $(7,503) $785,600 $529,275 $ 4,429 $ (741) $532,963 - ------------ --------- --------- --------- -------- -------- --------- -------- --------
- ------------ ---------------------------------------- 1994 - ------------ --------- --------- --------- -------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value - ------------ --------- --------- --------- -------- U. S. Treasury & other U.S. Government Securities $192,994 $ 0 $ (4,509) $188,485 State and municipal securities 78,884 0 (1,676) 77,208 Collateralized mortgage obligations 8,584 0 (672) 7,912 Mortgage- backed securities 34,555 0 (2,829) 31,726 Equity securities 13,056 0 (372) 12,684 Other 745 0 (1) 744 - ------------ -------- ----- -------- -------- Total $328,818 $ 0 $(10,059) $318,759 - ------------ -------- ----- -------- --------
52 Advanta Corp. and Subsidiaries At December 31, 1996, investment securities with a book value of $2,916 were pledged at the Federal Reserve Bank. At December 31, 1995, investment securities with a book value of $4,139 were pledged at the Federal Reserve Bank and as collateral for derivatives transactions. At December 31, 1996, 1995 and 1994, investment securities with a book value of $6,395, $6,281, and $7,133, respectively, were deposited with insurance regulatory authorities to meet statutory requirements or held by a trustee for the benefit of primary insurance carriers. At December 31, 1996, $13,765 of net unrealized gains on securities was included in investments available for sale. During 1996, the net change in unrealized gains/losses on available for sale securities included as a separate component of stockholders' equity was a decrease of $338. Maturity of investments available for sale at December 31, 1996 was as follows:
Amortized Market Cost Value ..................... Due in 1 year $592,720 $592,639 Due after 1 but within 5 years 54,293 53,734 Due after 5 but within 10 years 1,740 1,762 Due after 10 years 0 0 - ----------------------------------------------------------- Subtotal 648,753 648,135 Mortgage-backed CMO and MBS 49,117 48,599 Equity and other securities 73,965 88,866 - ----------------------------------------------------------- Total investments $771,835 $785,600 - -----------------------------------------------------------
During 1996, proceeds from sales of available for sale securities were $1,114,000. Gross gains of $2,492 and losses of $110 were realized on these sales. Of the gross gains, $2,448 relate to investments held by the Company's venture capital unit. Proceeds during 1995 were $1,689,000. Gross gains of $8,666 and losses of $320 were realized on these sales. Of the gross gains, $8,610 related to an investment held by the Company's venture capital unit. Proceeds during 1994 were $624,000. Gross gains of $118 and losses of $596 were realized on these sales. The specific identification method was the basis used to determine the amortized cost in computing realized gains and losses. 53 Advanta Corp. and Subsidiaries NOTE 6. DEBT Debt consisted of the following:
December 31, ............................ 1996 1995 ........... ........... SENIOR DEBT RediReserve certificates $ 4,952 $ 4,203 6 month senior notes 4,857 4,629 12 month senior notes 66,955 46,372 18 month senior notes (5.83%-6.35%) 7,855 6,534 24 month senior notes (5.87%-7.58%) 41,911 37,600 30 month senior notes (5 45%-7.14%) 13,599 16,730 48 month senior notes (5.60%-8.16%) 10,440 19,939 60 month senior notes (5.83%-10.08%) 48,108 55,604 5 1/8% notes due 1996 0 149,955 Medium-term notes, fixed (6.00%-8.36%) 627,835 289,735 Medium-term notes, floating 253,000 215,000 Short-term bank notes (5.43%-6.07%) 309,349 24,999 Medium-term bank notes, fixed (5.59%-7.18%) 530,086 297,737 Medium-term bank notes, floating 305,481 24,970 Other senior notes 9,639 8,961 - ------------------------------------------------------------ ----------- Total senior debt $ 2,234,067 $ 1,202,968 SUBORDINATED DEBT Subordinated notes (5.45%-10.08%) $ 21,275 $ 26,523 7% subordinated bank notes due 2003 49,739 49,699 ............................................................ ........... Total subordinated debt $ 71,014 $ 76,222 ............................................................ ........... Total debt $ 2,305,081 $ 1,279,190
Less short-term debt & certificates $ (911,986) $ (691,313) - ------------------------------------------------------------ ----------- Long-term debt $ 1,393,095 $ 587,877 ============================================================ ===========
The Company's senior floating rate notes were priced based on a factor of LIBOR. At December 31, 1996 the rates on these notes varied from 5.63% to 6.01%. The annual maturities of long-term debt at December 31, 1996 for the years ending December 31 are as follows: $469.4 million in 1998; $237.5 million in 1999; $155.0 million in 2000; $446.4 million in 2001; and $84.8 million thereafter. The average interest cost of the Company's debt during 1996, 1995 and 1994 was 6.39%, 6.92%, and 6.23%, respectively. NOTE 7. MANDATORILY REDEEMABLE PREFERRED SECURITIES On December 17, 1996, Advanta Capital Trust I, a newly formed statutory business trust established by the Company (the "Trust"), issued in a private offering to two institutional investors $100 million of Company-obligated mandatorily redeemable preferred securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The sole assets of the Trust consist of $100 million of 8.99% junior subordinated debentures issued by the Company due December 17, 2026 (the "Junior Subordinated Debentures"). The Capital Securities will be subject to mandatory redemption under certain circumstances, including at any time on or after December 17, 2006 (upon the optional prepayment by the Company of the junior subordinated debentures) at an amount per Capital Security equal to 104.495% of the principal amount declining ratably on each December 17 thereafter to 100% on December 17, 2016, plus accrued and unpaid distributions thereon. The Company has guaranteed the obligations of the Trust. The Company used the proceeds from the sale for general corporate purposes. 54 Advanta Corp. and Subsidiaries NOTE 8. CAPITAL STOCK The number of shares of capital stock was as follows:
Issued and Outstanding December 31, -------------------------- 1996 1995 -------------------------- (In thousands) Class A preferred- $1,000 par value; Authorized, 1,010 1 1 ............................................................... Class B preferred--- $.01 par value; Authorized, 1,000,000 25 25 ............................................................... Class A voting common stock-$.01 par value; Authorized, 200,000,000 17,945 17,481 Class B non-voting common stock $.01 par value; Authorized, 200,000,000 25,593 24,007 Less treasury stock: Class B 1 0 - --------------------------------------------------------------- Total common stock 43,537 41,488 ===============================================================
The Class A Preferred Stock is entitled to 1/2 vote per share and a non-cumulative dividend of $140 per share per year, which must be paid prior to any dividend on the common stock. Dividends were declared on the Class A Preferred Stock for the first time in 1989 and have continued through 1996 as the Company paid dividends on its common stock. The redemption price of the Class A Preferred Stock is equivalent to the par value. The Class B Preferred Stock pays a 6 3/4% dividend per share per year (equal to $249.75 per share) and must be paid prior to any dividend on the common stock. NOTE 9. ISSUANCE OF PREFERRED STOCK On August 21, 1995, in a public offering, the Company sold 2,500,000 depositary shares each representing a one-hundredth interest in a share of Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995 (SAILS). The SAILS (and thereby the related depositary shares) are not redeemable by the Company before September 15, 1998. The call price of each of the depositary shares will be $37.6244 declining periodically to $37.00 at September 15, 1999 (the mandatory conversion date). On September 15, 1999, unless either previously redeemed by the Company or converted at the option of the holder, each share of the SAILS will automatically convert into 100 shares of Class B Common Stock. Proceeds from the offering, net of underwriting discount, were approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including financing the growth of its subsidiaries. NOTE 10. INCOME TAXES Income tax expense consisted of the following components:
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------------------------------------- Current: Federal $78,037 $55,184 $54,246 State 5,346 4,943 4,948 - ------------------------------------------------------------- 83,383 60,127 59,194 - ------------------------------------------------------------- Deferred: Federal 5,800 14,316 (613) State (79) 783 563 - ------------------------------------------------------------- 5,721 15,099 (50) - ------------------------------------------------------------- Total tax expense $89,104 $75,226 $59,144 - -------------------------------------------------------------
55 Advanta Corp. and Subsidiaries Current taxes payable include the earnings of certain subsidiaries which are not included in the consolidated federal income tax return. The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
Year Ended December 31, ------------------------------------ 1996 1995 1994 ------------------------------------ Statutory federal income tax $92,740 $74,166 $57,822 State income taxes, net of federal income tax benefit 3,423 3,722 3,582 Nontaxable investment income (443) (984) (1,149) Insurance income (4,492) 0 0 Tax credits (1,231) 0 0 Other (893) (1,678) (1,111) - ------------------------------------------------------------------- Consolidated tax expense $89,104 $75,226 $59,144 ===================================================================
56 Advanta Corp. and Subsidiaries Deferred taxes are determined based on the estimated future tax effects of the differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. The net deferred tax asset/(liability) is comprised of the following:
December 31, ............................... 1996 1995 ............................... Deferred taxes: Gross assets $112,861 $ 75,851 Gross liabilities (83,226) (59,445) - -------------------------------------------------------------- Total deferred taxes $ 29,635 $ 16,406 - --------------------------------------------------------------
The Company concluded that a valuation allowance against the deferred tax asset at December 31, 1996 and 1995 is not necessary. Realization of the deferred tax asset is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows:
December 31, - -------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------- SFAS 91 $(17,870) $(23,899) Loan losses 26,851 20,197 Mortgage banking income 6,623 9,767 Securitization income (35,415) (35,546) Leasing income 56,447 41,901 Other (7,001) 3,986 - -------------------------------------------------------------------- Net deferred tax assets $ 29,635 $ 16,406 - --------------------------------------------------------------------
NOTE 11. BENEFIT PLANS The Company has adopted several management incentive plans designed to provide incentives to participating employees to remain in the employ of the Company and devote themselves to its success. Under these plans, eligible employees were given the opportunity to elect to take portions of their anticipated or "target" bonus payments for future years in the form of restricted shares of common stock (with each plan covering three performance years). To the extent that such elections were made (or, for executive officers, were required by the terms of such plans), restricted shares were issued to employees, with the number of shares granted to employees determined by dividing the amount of future bonus payments the employee had elected to receive in stock by the market price as determined under the incentive plans. The restricted shares are subject to forfeiture should the employee terminate employment with the Company prior to vesting. Restricted shares vest 10 years from the date of grant, but with respect to the restricted shares issued under each plan, vesting was and will be accelerated annually with respect to one-third of the shares, to the extent that the employee and the Company met or meet their respective performance goals for a given plan performance year. When newly eligible employees elect to participate in a plan, the number of shares issued to them with respect to their "target" bonus payments for the relevant plan performance years is determined based on the average market price of the stock for the 90 days prior to eligibility. The following table summarizes the Company's incentive plans:
Plan Performance Original Stock Shares Shares Years Covered Price Issued Vested - -------------------------------------------------------------------------------- AMIPWISE III 1996-1998 $17.00 796,042 0 AMIPWISE IV 1999-2001 $25.00 732,252 0 - --------------------------------------------------------------------------------
The weighted average fair value of shares issued on or after January 1, 1995 are: $35 for 77,517 AMIPWISE III shares and $26 for 450,321 AMIPWISE IV shares issued in 1995, and $42 for both 277,219 AMIPWISE III shares and 281,931 AMIPWISE IV shares issued in 1996. 57 Advanta Corp. and Subsidiaries At December 31, 1996, a total of 1,565,904 shares issued under these and the predecessor plans to AMIPWISE III were subject to restrictions and were included in the number of shares outstanding. At December 31, 1996 the Company had two stock option plans and accounts for these plans under APB Opinion No. 25, under which no compensation expense has been recognized. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1996 1995 ...................................................................... Net Income As reported $175,657 $136,677 Pro forma 168,193 119,718 Earnings per share As reported $ 3.89 $ 3.20 Pro forma 3.73 2.81 - ----------------------------------------------------------------------
Because SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The Company's two stock option plans together authorize the grant to employees and directors of options to purchase an aggregate of 10.2 million shares of common stock. The Company presently intends only to issue options to purchase Class B common stock. Options generally vest over a four-year period and expire 10 years after the date of grant. Shares available for future grant were approximately 3.4 million at December 31, 1996, and 97 thousand at December 31, 1995. Transactions under the plans for the three years ended December 31, 1996, were as follows:
1994 1995 1996 ----------------------------------------------------------------------------------------- (shares in thousands) Weighted Weighted Weighted Number of average Number of average Number of average Shares exercise price Shares exercise price Shares exercise price .......................................................................................................................... Outstanding at beginning of year 3,039 $10 3,415 $14 4,381 $21 Granted 762 29 1,363 34 578 39 Exercised (313) 5 (300) 6 (699) 9 Terminated (73) 17 (97) 27 (151) 30 - -------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 3,415 14 4,381 21 4,109 25 - -------------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 2,145 2,015 2,138 Weighted average fair value of options granted during the year N/A $19.34 $19.87
The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------------------------ (shares in thousands) Weighted average Number Number Outstanding remaining Weighted average exercisable Weighted average Range of Exercise Prices at 12/31/96 contractual life exercise price at 12/31/96 exercise price .......................................................................................................................... $ 1 to 10 555 3.0 years $ 3 555 $ 3 11 to 20 694 5.1 12 694 12 21 to 30 1,084 6.9 26 607 25 31 to 40 1,458 8.7 35 259 34 40 to 52 318 9.2 44 23 42 - -------------------------------------------------------------------------------------------------------------------------- $ 1 to 52 4,109 6.6 25 2,138 16 - --------------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants for 1995 and 1996: risk-free interest rates of 6.7 percent and 6.0 percent, respectively; expected dividend yields of 1 percent; expected lives of 10 years; expected volatility of 41 percent. The Company also has outstanding options to purchase 87 thousand shares of common stock at a price range of $1.52 to $4.75 per share, which were not issued pursuant to either of the stock option plans. All of these shares were issued prior to January 1, 1995 and were vested at December 31, 1996. 58 Advanta Corp. and Subsidiaries The Company has an Employee Stock Purchase Plan which allows employees and directors to purchase Class B common stock at a 15% discount from the market price without paying brokerage fees. The Company reports this 15% discount as compensation expense. During 1996, shares were issued under the plan from unissued stock or from treasury stock at the average market price on the day of purchase. The Company has a tax-deferred employee savings plan which provides employees savings and investment opportunities, including the ability to invest in the Company's Class B common stock. The employee savings plan provides for discretionary Company contributions equal to a portion of the first 5% of an employee's compensation contributed to the plan. For the three years ended December 31, 1996, 1995 and 1994, the Company contributions equaled 100% of the first 5% of participating employees' compensation contributed to the plan. The expense for this plan totaled $2,546, $2,027 and $1,565 in 1996, 1995, and 1994, respectively. All shares purchased by the plan for the three years ended December 31, 1996, 1995 and 1994 were acquired from the Company at the market price on each purchase date or were purchased on the open market. The Company offers an elective, nonqualified deferred compensation plan to qualified executives and nonemployee directors, which allows them to defer a portion of their cash compensation on a pretax basis. The plan contains provisions related to minimum contribution levels and deferral periods with respect to any individual's participation. The plan participant makes irrevocable elections at the date of deferral as to deferral period and date of distribution. Interest is credited to the participant's account at the rate of 125% of the 10 Year Rolling Average Interest Rate on 10-Year U.S. Treasury Notes. Distribution from the plan may be either at retirement or at an earlier date, and can be either in a lump sum or in installment payments. The Company has purchased life insurance contracts with a face value of $53.4 million to fund this plan. NOTE 12. CREDIT CARD SALES In June 1996, the Company, through its subsidiary AUS, sold certain credit card customer relationships and the related receivables balance to a domestic bank. The receivables associated with these relationships represented less than 2% of the Company's managed credit card portfolio as of June 30, 1996. The Company recorded a $33.8 million net gain related to this transaction. In April 1994, the Company, through its subsidiary AUS, reached an agreement with NationsBank of Delaware, N.A., to sell certain credit card customer relationships which at that time represented approximately $150 million of securitized credit card receivables. In the second quarter of 1994, the Company recorded an $18.4 million pretax gain on the sale related to the value associated with the customer relationships. In addition, the Company deferred a portion of the proceeds related to the excess spread of the receivables to be generated over the remaining life of the securitization trust, which terminated in the second quarter of 1995. These proceeds were recognized as securitization income over the related period. NOTE 13. COMMITMENTS AND CONTINGENCIES The Company leases office space in several states under leases accounted for as operating leases. Total rent expense for all of the Company's locations for the years ended December 31, 1996, 1995 and 1994 was $8.5 million, $4.9 million and $5.4 million, respectively. The future minimum lease payments of all non-cancelable operating leases are as follows:
Year Ended December 31, - ---------------------------------------------------------------- 1997 $ 8,598 ................................................................ 1998 7,299 ................................................................ 1999 5,296 ................................................................ 2000 4,666 ................................................................ 2001 3,572 - ---------------------------------------------------------------- Thereafter 13,044 - ----------------------------------------------------------------
59 Advanta Corp. and Subsidiaries NOTE 14. OTHER BORROWINGS The Company had a revolving credit facility of $1.0 billion and money market bid lines of $265 million at December 31, 1996. There is a quarterly facility fee of up to 35 basis points on the total amount of the revolving credit facility. There is no facility fee on the money market bid lines as they are uncommitted facilities. At December 31, 1996, the Company had borrowed $40 million on the money market bid lines. Under the revolving credit facility, the Company is subject to various loan covenants, including the maintenance of certain fixed financial ratios and conditions, limitations on mergers and acquisitions, and limitations on liens on property and other assets.
The composition of other borrowings was as follows: December 31, - ------------------------------------------------------------------------ 1996 1995 ........................................................................ Term fed funds $ 10,000 $ 443,000 Short-term debt 911,986 691,313 Other borrowings 147,003 81,814 - ------------------------------------------------------------------------ Total $1,068,989 $1,216,127 ========================================================================
The following table displays information related to selected types of short-term borrowings:
1996 1995 - --------------------------------------------------------------------------------------- AMOUNT RATE Amount Rate - --------------------------------------------------------------------------------------- At year end: Securities sold under repurchase agreements $ 0 0.00% $ 0 0.00% Term fed funds 10,000 5.42 443,000 5.83 - --------------------------------------------------------------------------------------- Total $ 10,000 5.42% $443,000 5.83% - --------------------------------------------------------------------------------------- Average for the year: Securities sold under repurchase agreements $ 149,791 5.31% $ 25,008 5.97% Term fed funds and fed funds purchased 100,793 5.71 199,166 6.10 - --------------------------------------------------------------------------------------- Total $ 250,584 5.47% $224,174 6.09% - --------------------------------------------------------------------------------------- Maximum month-end balance Securities sold under repurchase agreements $ 1,027,695 $ 29,813 Term fed funds and fed funds purchased 263,000 455,250 =======================================================================================
The weighted average interest rates were calculated by dividing the interest expense for the period for such borrowings by the average amount of short-term borrowings outstanding during the period. 60 Advanta Corp. and Subsidiaries NOTE 15. SELECTED INCOME STATEMENT INFORMATION
NONINTEREST REVENUES - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Gain on sale of credit cards $ 33,820 $ 0 $ 18,352 Other noninterest revenues: Credit card securitization income 258,066 183,360 149,043 Credit card servicing income 176,567 117,369 68,960 Income from personal finance activities 109,167 50,541 37,586 Credit card interchange income 102,804 92,439 71,740 Business loan and lease other revenues 61,622 41,050 21,551 Insurance revenues, net 38,175 30,146 12,734 Equity securities gains 6,522 15,386 0 Other 19,789 12,723 15,842 - -------------------------------------------------------------------------------- Total other noninterest revenues $772,712 $543,014 $377,456 ================================================================================ Total noninterest revenues $806,532 $543,014 $395,808 ================================================================================
OPERATING EXPENSES - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Amortization of credit card deferred origination costs, net $ 88,517 $ 72,258 $ 39,381 Other operating expenses: Salaries and employee benefits 182,666 116,681 88,681 External processing 42,814 28,407 22,618 Professional fees 40,247 14,937 10,985 Marketing 31,975 25,374 32,339 Postage 25,700 18,518 12,732 Credit card fraud losses 23,611 20,029 16,654 Equipment expense 22,752 12,751 9,293 Telephone expense 16,116 11,959 8,615 Occupancy expense 14,827 9,254 8,425 Credit and collection expense 13,784 9,039 7,604 Other 20,165 11,478 9,457 Total other operating expenses $434,657 $278,427 $227,403 ================================================================================ Total operating expenses $523,174 $350,685 $266,784 ================================================================================
61 Advanta Corp. and Subsidiaries NOTE 16. SELECTED BALANCE SHEET INFORMATION
INTEREST-BEARING DEPOSITS - --------------------------------------------------------------- December 31, - --------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------- Amounts due from credit card trusts(A) $333,923 $262,392 Amounts due from mortgage trusts(A) 96,460 58,105 Amounts due from business loan and leasing trusts(A) 8,099 7,479 Other interest-bearing deposits 108,301 82,733 =============================================================== Total interest-bearing deposits $546,783 $410,709 ===============================================================
(A) Represents initial deposits and subsequent excess collections up to the required amount on each of the credit card, mortgage and business loan and lease securitizations. Also includes amounts to be distributed to investors.
OTHER ASSETS - ------------------------------------------------------------------------ December 31, ........................................................................ 1996 1995 ........................................................................ Excess mortgage servicing rights $149,418 $ 96,194 Prepaid assets 117,934 69,170 Accrued interest receivable 101,021 67,681 Deferred costs 42,252 20,670 Current and deferred federal income taxes 28,169 15,823 Investments in operating leases 17,276 11,928 Due from trustees mortgage 14,298 8,095 Excess servicing - leasing 14,205 11,813 Goodwill 5,795 4,983 Due from trustees - business loans and leasing 5,326 2,941 Other real estate(A) 2,513 3,333 Other 128,076 62,346 ======================================================================== Total other assets $626,283 $374,977 ========================================================================
(A) Carried at the lower of cost or fair market value. At December 31, 1996 and 1995, the Company had $399.4 million and $190.8 million, respectively, of amounts due from credit card securitizations. These amounts include excess servicing, accrued interest receivable and other amounts related to these securitizations and are net of recourse reserves established.
OTHER LIABILITIES ...................................................................... December 31, ......................................................................... 1996 1995 ......................................................................... Deferred fees and other reserves $ 86,877 $ 46,058 Accounts payable and accrued expenses 59,432 32,831 Accrued interest payable 55,320 29,012 Current and deferred state income taxes 10,300 9,026 Other 97,852 23,763 ========================================================================= Total other liabilities $309,781 $140,690 =========================================================================
62 Advanta Corp. and Subsidiaries NOTE 17. CASH, DIVIDEND AND LOAN RESTRICTIONS In the normal course of business, the Company and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in cash, debt and dividend restrictions. The Federal Reserve Act imposes various legal limitations on the extent to which banks that are members of the Federal Reserve System can finance or otherwise supply funds to certain of their affiliates. In particular, AUS and Advanta National are subject to certain restrictions on any extensions of credit to, or other covered transactions, such as certain purchases of assets, with the Company or its affiliates. Such restrictions prevent both banks from lending to the Company and its affiliates unless such extensions of credit are secured by U.S. Government obligations or other specified collateral. Further, such secured extensions of credit by AUS and Advanta National are limited in amount: (a) as to the Company or any such affiliate, to 10 percent of each bank's capital and surplus, and (b) as to the Company and all such affiliates in the aggregate, to 20 percent of each bank's capital and surplus. Under certain grandfathering provisions of the Competitive Equality Banking Act of 1987, the Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so long as the Company and AUS continue to comply with certain restrictions on their activities. With respect to AUS, these restrictions include limiting the scope of its activities to those in which it was engaged prior to March 5, 1987. Since AUS was not making commercial loans at that time, it must continue to refrain from making commercial loans, which would include any loans to the Company or any of its subsidiaries, in order for the Company to maintain its grandfathered exemption under the BHCA. The Company has no present plans to register as a bank holding company under the BHCA. Advanta National, as a credit card bank, must also refrain from making commercial loans, which would include any loans to the Company or any of its subsidiaries. AUS and Advanta National are also subject to various legal limitations on the amount of dividends that can be paid to their parent, Advanta Corp. Each bank is eligible to declare a dividend provided that it is not greater than the current year's net profits plus net profits of the preceding two years, as defined. During 1996, AUS paid $107 million of dividends to Advanta Corp. while $63 million of dividends were paid during 1995. At December 31, 1996, total stockholders' equity of the Company's banking and insurance affiliates approximated $434.2 million, of which $35.0 million was available for payment of dividends without prior approval by the applicable regulatory authority. NOTE 18. CAPITAL RATIOS AUS and Advanta National are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the institutions' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each institution must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The institutions' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require each institution to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that as of December 31, 1996, each institution meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notifications from the Office of the Comptroller of the Currency (the "OCC") categorized each institution as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized each institution must maintain minimum total risk-based and Tier I risk-based capital and Tier I leverage ratios as set forth in the following table. There are no conditions or events since those notifications that management believes have changed either institution's category. 63 Advanta Corp. and Subsidiaries
Actual - ----------------------------------------------------------------- Amount Ratio - ----------------------------------------------------------------- As of December 31, 1995 Total Capital (to Risk Weighted Assets) AUS $193,718 11.56% ANB 113,066 12.28 Tier I Capital (to Risk Weighted Assets) AUS 122,354 7.30 ANB 74,066 8.04 Tier I Capital (to Average Assets) AUS 122,354 6.79 ANB 74,066 7.87 As of December 31, 1996 Total Capital (to Risk Weighted Assets) AUS $179,649 15.84% ANB 241,534 17.20 Tier I Capital (to Risk Weighted Assets) AUS 115,237 10.15 ANB 156,287 11.13 Tier I Capital (to Average Assets) AUS 115,237 7.35 ANB 156,287 7.15 - -----------------------------------------------------------------
To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Purposes Action Provisions - --------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- As of December 31, 1995 Total Capital (to Risk Weighted Assets) AUS $134,086 Greater Than or Equal To 8.0 % $167,067 Greater Than or Equal To 10.0 % ANB 73,665 Greater Than or Equal To 8.0 92,082 Greater Than or Equal To 10.0 Tier I Capital (to Risk Weighted Assets) AUS 67,043 Greater Than or Equal To 4.0 100,564 Greater Than or Equal To 6.0 ANB 73,665 Greater Than or Equal To 8.0(1) 73,665 Greater Than or Equal To 8.0(1) Tier I Capital (to Average Assets) AUS 50,282 Greater Than or Equal To 3.0 83,804 Greater Than or Equal To 5.0 ANB 27,625 Greater Than or Equal To 3.0 46,041 Greater Than or Equal To 5.0 As of December 31, 1996 Total Capital (to Risk Weighted Assets) AUS $ 90,820 Greater Than or Equal To 8.0 % $113,525 Greater Than or Equal To 10.0 % ANB 112,359 Greater Than or Equal To 8.0 140,449 Greater Than or Equal To 10.0 Tier I Capital (to Risk Weighted Assets) AUS 45,410 Greater Than or Equal To 4.0 68,115 Greater Than or Equal To 6.0 ANB 112,359 Greater Than 8.0(1) 112,359 Greater Than of Equal To 8.0(1) Tier I Capital (to Average Assets) AUS 34,058 Greater Than or Equal To 3.0 56,763 Greater Than or Equal To 5.0 ANB 42,135 Greater Than or Equal To 3.0 70,225 Greater Than or Equal To 5.0 - ---------------------------------------------------------------------------------------------------------------------------
(1) Supplementary agreement with the OCC requires ANB to maintain a Tier I capital ratio of at least 8% during the first three years of operation (until February 1998) as well as a minimum Tier I capital level of $50 million. NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ----------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------------------------- Financial assets: Cash $ 165,875 $ 165,875 $ 45,714 $ 45,714 Federal funds sold 338,926 338,926 146,375 146,375 Interest-bearing deposits 546,783 546,783 410,709 410,709 Investments available for sale 785,600 785,600 532,963 532,963 Loans, net of reserve for credit losses 2,613,003 2,629,797 2,779,249 2,846,166 Amounts due from credit card securitizations 399,359 399,359 190,819 236,483 Excess mortgage servicing rights 149,418 155,266 96,194 105,024 Financial liabilities: Demand and savings deposits $ 358,429 $ 358,469 $ 369,224 $ 369,224 Time deposits and debt 3,806,710 3,813,634 2,816,567 2,830,590 Other borrowings 157,003 156,984 524,814 525,246 Off-balance sheet financial instruments Asset/(Liability): Interest rate swaps and swaptions $ 0 $ 9,788 $ 0 $ 3,198 Interest rate options: Caps purchased 273 1,766 1,228 1,211 Caps written (272) (1,845) (4,330) (1,703) Corridors/collars 831 (748) 66 (1,033) Forward contracts 0 573 0 (1,294) Intangibles: Credit card customer relationships on- and off-balance sheet $ 0 $ 2,460,700 $ 0 $ 1,841,900 -----------------------------------------------------------
64 Advanta Corp. and Subsidiaries The above values do not necessarily reflect the premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. In addition, these values, derived from the methods and assumptions described below, do not consider the potential income taxes or other expenses that would be incurred on an actual sale of an asset or settlement of a liability. With respect to the fair value of liabilities, the above table is prepared on the basis that the amounts necessary to discharge such liabilities represent fair value. The Company's off-balance sheet financial instruments relate to managing the interest rate sensitivity position as described in Note 21. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS For these short-term instruments, the carrying amount is a reasonable estimate of the fair value. INVESTMENTS For investment securities held to maturity and those available for sale, the fair values are based on quoted market prices, dealer quotes or estimated using quoted market prices for similar securities. LOANS, NET OF RESERVE FOR CREDIT LOSSES For consumer credit card receivables, business card receivables and personal finance loans, the fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for these loans also includes the estimated value of the portion of the interest payments and fees which are not sold with the securities backed by these types of loans. The value of the retained interest payments (i.e., excess servicing) is estimated by discounting the future cash flows, adjusted for prepayments, net of anticipated charge-offs and allowing for the value of the servicing. The value of direct finance lease receivables and other loans is estimated based on the market prices of similar receivables with similar characteristics. AMOUNTS DUE FROM CREDIT CARD SECURITIZATIONS AND EXCESS MORTGAGE SERVICING RIGHTS The fair values of the excess servicing rights component of amounts due from credit card securitizations and excess mortgage servicing rights are estimated by discounting the future cash flows at rates which management believes to be reasonable. However, because there is no active market for these financial instruments, management has no basis to determine whether the fair values presented above would be indicative of the value negotiated in an actual sale. The future cash flows used to estimate the fair values of these financial instruments are adjusted for prepayments, net of anticipated charge-offs under recourse provisions, and allow for the value of servicing. For the other components of amounts due from credit card securitizations, the carrying amount is a reasonable estimate of the fair value. DEMAND AND SAVINGS DEPOSITS The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. This fair value does not include any benefit that may result from the low cost of funding provided by these deposits compared to the cost of borrowing funds in the market. TIME DEPOSITS AND DEBT The fair value of fixed-maturity certificates of deposit and notes is estimated using the rates currently offered for deposits and notes of similar remaining maturities. 65 Advanta Corp. and Subsidiaries OTHER BORROWINGS The other borrowings are all at variable interest rates and therefore the carrying value approximates a reasonable estimate of the fair value. INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS The fair value of interest rate swaps, options and forward contracts (used for managing interest rate and foreign currency risks) is the estimated amount that the Company would pay or receive to terminate the agreement at the reporting date, taking into account current interest and foreign exchange rates and the current creditworthiness of the counterparty. CREDIT CARD CUSTOMER RELATIONSHIPS (BOTH ON- AND OFF-BALANCE SHEET) The fair value of the credit card relationships, which are not financial instruments, is estimated using a credit card valuation model which considers the value of the existing receivables together with the value of new receivables and the associated fees generated from existing cardholders over the remaining life of the portfolio. COMMITMENTS TO EXTEND CREDIT Although the Company had $28.2 billion of unused commitments to extend credit, there is no market value associated with these commitments, as any fees charged are consistent with the fees charged by other companies at the reporting date to enter into similar agreements. NOTE 20. CALCULATION OF EARNINGS PER COMMON SHARE The following table shows the calculation of earnings per common share for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 --------- --------- --------- Net income $ 175,657 $ 136,677 $ 106,063 less: Preferred 'A' dividends (141) (141) (141) --------- --------- --------- Net income available to common shares $ 175,516 $ 136,536 $ 105,922 Average common stock outstanding 40,795 39,723 38,877 Common stock equivalents: Restricted stock and options 2,210 2,206 2,169 Mandatorily convertible Preferred 'B' stock (see Note 9) 2,068 741 0 --------- --------- --------- Weighted average shares outstanding 45,073 42,670 41,046 ========= ========= ========= Earnings per common share $ 3.89 $ 3.20 $ 2.58 ========= ========= =========
NOTE 21. DERIVATIVE FINANCIAL INSTRUMENTS In managing its interest rate sensitivity and foreign currency positions, the Company may use derivative financial instruments. These instruments are used for the express purpose of managing its interest rate and foreign currency exposures and are not used for any trading or speculative activities. As of December 31, 1996 and 1995, all of the Company's derivatives were designated as hedges or synthetic alterations and were accounted for as such. 66 Advanta Corp. and Subsidiaries The following table summarizes by notional amounts the Company's derivatives instruments as of December 31, 1996 and 1995:
1996 1995 ---------- ---------- Interest rate swaps $1,560,444 $ 867,835 Swaptions 153,000 0 Interest rate options: Caps written 1,413,222 1,360,000 Caps purchased 365,000 270,000 Corridors/collars 500,000 575,000 Forward contracts 386,680 190,652 ========== ========== Total $4,378,346 $3,263,487 ========== ==========
The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of the Company's exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives contracts. Credit risk associated with derivatives arises from the potential for a counterparty to default on its obligations. The Company attempts to limit credit risk by only transacting with highly creditworthy counterparties and requiring master netting and collateral agreements for all interest rate swap and interest rate option contracts. All derivative counterparties are associated with organizations having securities rated as investment grade by independent rating agencies. The list of eligible counterparties, setting of counterparty limits, and monitoring of credit exposure is controlled by the Investment Committee, a management committee. The Company's credit exposure to derivatives, with the exception of caps written, is represented by contracts with a positive fair value without giving consideration to the value of any collateral exchanged -- see Note 19. For caps written, credit exposure does not exist since the counterparty has performed its obligation to pay the Company a premium payment. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. Based on its interest rate sensitivity analyses, the Company enters into interest rate swaps to more effectively manage the impact of fluctuating interest rates on its net interest income and noninterest revenues. The Company has used interest rate swaps to synthetically alter the cash flows on certain deposit, debt, and off-balance sheet credit card and leasing securitizations. As of December 31, 1996, the Company used interest rate swaps, including swaptions, for the following purposes: $976.3 million to effectively convert fixed rate debt to a LIBOR based variable rate, and $737.1 million to effectively convert certain off-balance sheet variable pass-through rate home equity and leasing securitizations to a fixed rate. As of December 31, 1995, the Company used $250.0 million to effectively convert certain variable rate deposits to a fixed rate, $203.8 million to effectively convert fixed rate debt to a LIBOR based variable rate, and $414.0 million to effectively convert certain off-balance sheet variable pass-through rate credit card and leasing securitizations to a fixed rate. In 1995, as part of its asset/liability risk management process, the Company elected to terminate $285.9 million of interest rate swaps which were effectively converting certain fixed rate debt to a variable rate based on LIBOR. Gains or losses resulting from these interest rate swap terminations are deferred and amortized to interest expense over the remaining life of the underlying fixed rate debt. 67 Advanta Corp. and Subsidiaries The following table summarizes by notional amounts the Company's interest rate swap and swaption activity by major category for the periods presented:
Receive Pay Fixed Rate Fixed Rate Total - --------------------------------------------------------------------- Balance at 1/1/94 $ 150,000 $ 500,000 $ 650,000 Additions 309,735 0 309,735 Maturities 0 (500,000) (500,000) - --------------------------------------------------------------------- Balance at 12/31/94 459,735 0 459,735 Additions 30,000 625,962 655,962 Net accretion 0 38,038 38,038 Terminations (285,900) 0 (285,900) - --------------------------------------------------------------------- Balance at 12/31/95 203,835 664,000 867,835 Additions 635,000 594,804 1,229,804 Net accretion 0 41,805 41,805 Maturities (26,000) (400,000) (426,000) --------------------------------------- Balance at 12/31/96 $ 812,835 $ 900,609 $ 1,713,444 =====================================================================
Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase or sell a financial instrument at a future date for a specified price from the writer of the option. Interest rate caps and floors are option-like contracts that require the seller (writer) to pay the purchaser at specified future dates the amount by which a specified market interest rate exceeds the cap rate or falls below the floor rate, multiplied against a notional amount. A corridor is also an option-like contract which is the simultaneous purchase and sale of separate interest rate caps where each cap is referenced to a different interest rate index. A collar is an option-like contract which is the simultaneous purchase of an interest rate cap and the sale of an interest rate floor using the same reference interest rate index. As part of managing its balance sheet and liquidity position, the Company periodically securitizes and sells credit cards, business loans and leases. For credit enhancement purposes, certain variable pass-through rate credit card and business loan and lease securitizations were issued with embedded or purchased interest rate caps. These rate caps, however, were not needed to satisfy asset/liability management strategies. In order to achieve its desired interest rate sensitivity structure and further reduce the effective pass-through rate of the securitization, the Company has synthetically altered the interest rate structure on certain off-balance sheet credit card, business loan and lease securitizations by writing interest rate caps to offset the embedded and purchased rate caps attached to them. The premiums received or paid for writing or purchasing such cap contracts with third parties are included in other assets and are amortized to noninterest revenues over the life of the contract. Any obligations which may arise under these contracts are recorded in noninterest revenues on an accrual basis. As of December 31, 1996, unamortized premiums for caps written and purchased amounted to $272 thousand and $273 thousand, respectively. The weighted average maturities for caps written and purchased were 2.7 years and 4.3 years, respectively. As of December 31, 1995, unamortized premiums for caps written and purchased amounted to $4.3 million and $1.2 million, respectively. The weighted average maturities for caps written and purchased were 2.9 years and 2.8 years, respectively. When the Company periodically securitizes and sells credit card receivables, the receivables sold to the securitization trust may carry rates which are indexed to the prime rate, whereas the securitization certificates issued from the trust may be priced at a spread over LIBOR. The Company is exposed to interest rate risk to the extent that these two rate indices react differently to changes in market interest rates. The Company may choose to hedge its excess servicing revenues from the risk of spread compression between the prime rate and LIBOR by entering into corridor transactions which effectively fix a prime/LIBOR spread. In addition, variable rate receivables sold to a variable pass-through rate securitization trust may contain introductory fixed rates which expose the Company to interest rate risk during the receivables' introductory period. The Company may choose to hedge the risk of interest rate spread compression by entering into collar transactions which effectively lock in a minimum interest rate spread in a changing interest rate environment. 68 Advanta Corp. and Subsidiaries Premiums paid or received for entering into corridor and collar transactions are included in other assets or other liabilities and are amortized to noninterest revenues over the life of the contract. Any obligations which may arise under these contracts are recorded to noninterest revenues on an accrual basis. As of December 31, 1996 and 1995, unamortized premiums received for corridor and collar transactions amounted to $831 thousand and $66 thousand, respectively. As of December 31, 1996 and 1995, the weighted average maturities of corridor and collar transactions were 2.2 years and 8 months, respectively. Forward contracts are commitments to either purchase or sell a financial instrument at a future date for a specified price and may be settled in cash or through delivery of the underlying financial instrument. The Company regularly securitizes and sells fixed rate mortgage, business loan and lease receivables. The Company may choose to hedge the changes in the market value of its fixed rate loans and commitments designated for anticipated securitizations by selling U.S. Treasury securities for forward settlement. The maximum and average terms of hedges of anticipated mortgage loan sales is four and two months, respectively. Gains and losses from forward sales are deferred and included in the measurement of the dollar basis of the loans sold. Realized gains of $3.4 million and realized losses of $1.8 million were deferred as of December 31, 1996 and 1995, respectively. In addition, the Company periodically issues fixed pass-through rate credit card securitizations, fixed rate bank notes and capital securities. The Company is exposed to interest rate risk to the extent that rates rise before the issuance of the anticipated fixed rate obligations. The Company may choose to hedge the interest costs associated with anticipated obligations by selling securities for forward settlement. Gains or losses resulting from these hedges are deferred and amortized to interest expense over the life of the underlying obligation. The maximum and average terms of these types of anticipatory hedges are two months. As of December 31, 1996 and 1995, unamortized losses on hedges of anticipated fixed interest rate obligations amounted to $1.7 million and $2.2 million, respectively and the remaining weighted average amortization period was 3.3 years and 4.3 years, respectively. The Company also has foreign currency risk to the extent that its net investment in the joint venture with the Royal Bank of Scotland is not funded with local currency. The Company may choose to hedge its foreign exchange risk by selling foreign currency for forward settlement. The maximum and average terms of hedges of foreign currency exposure is thirty days. Losses from foreign currency forward contracts are included in stockholders' equity and amounted to $2.3 million and $4 thousand as of December 31, 1996 and December 31, 1995, respectively. 69 Advanta Corp. and Subsidiaries The following table discloses the Company's interest rate swaps by major category, notional value, weighted average interest rates, and annual maturities for the periods presented.
Balances maturing in: Balance at --------------------------------------------------------------------------------------------------- 12/31/96 1997 1998 1999 2000 2001 2002 2003 2005 2006 --------------------------------------------------------------------------------------------------------------- Pay Fixed/Receive Variable: Notional Value $ 900,609 $ 10,500 $ 80,000 $ 73,000 $ 46,553 $305,410 $22,000 $ 83,084 $280,062 $ 0 Weighted Average Pay Rate 5.97% 5.88% 5.44% 5.35% 5.72% 6.03% 5.97% 6.46% 6.12% 0.00% Weighted Average Receive Rate 5.58% 5.50% 5.55% 5.55% 5.83% 5.67% 5.48% 5.43% 5.38% 0.00% Receive Fixed/Pay Variable: Notional Value $ 812,835 $136,835 $114,000 $ 91,000 $ 0 $406,000 $ 0 $ 50,000 $ 0 $15,000 Weighted Average 6.63% 6.74% 6.44% 6.57% 0.00% 6.62% 0.00% 6.90% 0.00% 6.71% Receive Rate Weighted Average Pay Rate 5.28% 5.49% 5.52% 5.54% 0.00% 5.00% 0.00% 5.50% 0.00% 5.56% Total Notional Value $1,713,444 $147,335 $194,000 $164,000 $ 46,553 $711,410 $22,000 $133,084 $280,062 $15,000 Total Weighted Average Rates on Swaps: Pay Rate 5.64% 5.52% 5.49% 5.45% 5.72% 5.45% 5.97% 6.10% 6.12% 5.56% Receive Rate 6.08% 6.65% 6.07% 6.12% 5.83% 6.21% 5.48% 5.98% 5.38% 6.71% ---------- -------- -------- -------- -------- -------- ------- -------- -------- -------
70 Advanta Corp. and Subsidiaries REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS OF ADVANTA CORP.: We have audited the accompanying consolidated balance sheets of Advanta Corp. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanta Corp. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Philadelphia, PA January 21, 1997 REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING TO THE STOCKHOLDERS OF ADVANTA CORP.: The management of Advanta Corp. and its subsidiaries is responsible for the preparation, content, integrity and objectivity of the financial statements contained in this Annual Report. These financial statements have been prepared in accordance with generally accepted accounting principles and as such must, by necessity, include amounts based upon estimates and judgments made by management. The other financial information in the Annual Report was also prepared by management and is consistent with the financial statements. Management maintains a system of internal controls that provides reasonable assurance as to the integrity and reliability of the financial statements. This control system includes: (l) organizational and budgetary arrangements which provide reasonable assurance that errors or irregularities would be detected promptly, (2) careful selection of personnel and communications programs aimed at assuring that policies and standards are understood by employees, (3) a program of internal audits, and (4) continuing review and evaluation of the control program itself. The financial statements in this Annual Report have been audited by Arthur Andersen LLP, independent public accountants. Their audits were conducted in accordance with generally accepted auditing standards and considered the Company's system of internal controls to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Their report is printed herewith. /s/ ALEX W. HART /s/ DAVID D. WESSELINK /s/ JOHN J. CALAMARI - ------------------- ---------------------- -------------------- Alex W. Hart David D. Wesselink John J. Calamari Chief Executive Senior Vice President Vice President, Officer and Chief Financial Officer Finance 71 Advanta Corp. and Subsidiaries SUPPLEMENTAL SCHEDULES MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(in thousands) December 31, - --------------------------------------------------------------------- 1996 - --------------------------------------------------------------------- Maturity: 3 months or less $260,027 Over 3 months through 6 months 178,174 Over 6 months through 12 months 259,359 Over 12 months 150,102 - --------------------------------------------------------------------- Total $847,662 - ---------------------------------------------------------------------
COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the National Market tier of the Nasdaq Stock Market under the symbols ADVNB (Class B non-voting common stock and ADVNA (Class A voting common stock). Following are the high, low and closing sale prices and cash dividends declared for the last two years as they apply to each class of stock:
Cash Dividends Quarter Ended: High Low Close Declared - --------------------------------------------------------------------------------- Class B: - --------------------------------------------------------------------------------- March 1995 $ 32.25 $ 24.50 $ 31.25 $ .08 June 1995 38.75 30.75 37.75 .08 September 1995 42.50 36.00 42.50 .08 December 1995 45.00 35.13 36.38 .108 March 1996 49.25 33.75 47.50 .108 June 1996 52.50 43.50 45.25 .108 September 1996 48.25 39.75 42.75 .108 December 1996 48.50 38.25 40.88 .132 - --------------------------------------------------------------------------------- Class A: - --------------------------------------------------------------------------------- March 1995 $ 34.75 $ 25.50 $ 33.50 $ .067 June 1995 42.50 33.00 41.69 .067 September 1995 46.25 39.50 45.00 .067 December 1995 48.88 37.50 38.25 .09 March 1996 53.50 34.75 52.00 .09 June 1996 58.25 46.50 51.00 .09 September 1996 53.00 41.00 46.00 .09 December 1996 50.00 40.00 42.75 .11 - ---------------------------------------------------------------------------------
At December 31, 1996, the Company had approximately 1,050 and 660 holders of record Class B and Class A common stock, respectively. 72 Advanta Corp. and Subsidiaries QUARTERLY DATA (Unaudited)
(In thousands, except per share data) 1996 ------------------------------------------------------ December 31, September 30, June 30, March 31, ------------------------------------------------------ Interest income $ 90,754 $ 101,118 $ 83,447 $ 72,646 Interest expense 68,736 77,697 67,332 55,935 ------------------------------------------------------ Net interest income 22,018 23,421 16,115 16,711 Provision for credit losses 29,899 24,230 27,651 15,082 Net interest income after provision for credit losses (7,881) (809) (11,536) 1,629 ------------------------------------------------------ Noninterest revenues: Gain on sale of credit cards 0 0 33,820 0 Other noninterest revenues 218,832 209,338 173,513 171,029 ------------------------------------------------------ Total noninterest revenues 218,832 209,338 207,333 171,029 Operating expenses 143,925 141,309 127,445 110,495 ------------------------------------------------------ Income before income taxes 67,026 67,220 68,352 62,163 ------------------------------------------------------ Net income $ 45,151 $ 44,356 $ 45,120 $ 41,030 ------------------------------------------------------ Earnings per common share $ 1.00 $ 0.98 $ 1.00 $ 0.91 ------------------------------------------------------ Weighted average common shares outstanding 45,245 45,181 45,239 44,875 ------------------------------------------------------
1995 ------------------------------------------------------ December 31, September 30, June 30, March 31, ------------------------------------------------------ Interest income $ 74,487 $ 56,482 $ 48,557 $ 59,406 Interest expense 50,829 41,522 35,571 38,110 ------------------------------------------------------ Net interest income 23,658 14,960 12,986 21,296 Provision for credit losses 25,215 10,603 8,583 8,925 ------------------------------------------------------ Net interest income after provision for credit losses (1,557) 4,357 4,403 12,371 Noninterest revenues 161,721 136,221 130,849 114,223 Operating expenses 102,377 86,296 83,871 78,141 ------------------------------------------------------ Income before income taxes 57,787 54,282 51,381 48,453 ------------------------------------------------------ Net income $ 37,580 $ 34,914 $ 33,400 $ 30,783 ------------------------------------------------------ Earnings per common share $ 0.85 $ 0.81 $ 0.80 $ 0.74 ------------------------------------------------------ Weighted average common shares outstanding 44,349 43,133 41,772 41,438 ------------------------------------------------------
73 Advanta Corp. and Subsidiaries SUPPLEMENTAL SCHEDULES ALLOCATION OF RESERVE FOR CREDIT LOSSES
December 31, ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % Amount % ---------------------------------------------------------------------------------- Credit cards $76,084 85% $36,889 69% $27,486 66% $25,859 83% $35,743 89% Personal finance loans(1) 8,785 10 3,360 6 5,164 12 2,706 9 2,926 7 Business loans and leases(2) 4,241 5 977 2 1,076 3 1,826 6 1,442 4 Other 74 -- 12,268 23 7,891 19 836 2 117 -- ------- --- ------- --- ------- --- ------- --- ------- --- Total $89,184 100% $53,494 100% $41,617 100% $31,227 100% $40,228 100% ==================================================================================
COMPOSITION OF GROSS RECEIVABLES
($ in thousands) December 31, ----------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % Amount % ----------------------------------------------------------------------------------------------- Credit cards $2,045,219 77% $2,338,280 85% $1,730,176 88% $1,131,367 89% $737,485 74% Personal finance 376,260 14 321,711 12 142,874 7 91,340 7 212,273 21 loans(1) Business loans and leases(2) 214,327 8 93,660 3 86,157 5 51,008 4 46,712 5 Other loans 20,835 1 9,276 -- 5,237 -- 3,590 -- 1,774 -- ----------------------------------------------------------------------------------------------- Total $2,656,641 100% $2,762,927 100% $1,964,444 100% $1,277,305 100% $998,244 100% ===============================================================================================
(1) Includes mortgage, home equity and auto loans beginning in 1996. (2) Includes leases and business cards beginning in 1996. YIELD AND MATURITY OF INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1996
($ in thousands) Maturing ------------------------------------------------------------------------------------- After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years ------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government securities $592,153 5.60% $52,304 6.06% $ 0 0.00% $ 0 0.00% State and municipal securities(1) 486 6.06 1,431 7.11 1,761 7.80 0 0.00 Other(2) 1,030 2.96 2,871 6.84 7,738 7.04 38,312 7.00 ------------------------------------------------------------------------------------- Total $593,669 5.60% $56,606 6.13% $9,499 7.18% $38,312 7.00% =====================================================================================
(1) Yield computed on a taxable equivalent basis using a statutory rate of 35%. (2) Equity investments and other securities without a stated maturity are excluded from this table. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 74 Advanta Corp. and Subsidiaries PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The text of the Proxy Statement under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" are hereby incorporated by reference, as is the text in Part I of this Report under the caption, "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. The text of the Proxy Statement under the captions "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Election of Directors--Committees, Meetings and Compensation of the Board of Directors", "--Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and "--Other Matters" are hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The text of the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" are hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The text of the Proxy Statement under the captions "Election of Directors--Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and "--Other Matters" are hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. The following Financial Statements, Schedules, and Other Information of the Registrant and its subsidiaries are included in this Form 10-K: (a)(1) Financial Statements 1. Consolidated Balance Sheets at December 31, 1996 and 1995. 2. Consolidated Income Statements for each of the three years in the period ended December 31, 1996. 3. Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1996. 4. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996. 5. Notes to Consolidated Financial Statements. (a)(2) Schedules 1. Schedule I--Condensed Financial Information of Registrant. 2. Schedule II--Valuation and Qualifying Accounts. 3. Report of Independent Public Accountants on Supplemental Schedules. Other statements and schedules are not being presented either because they are not required or the information required by such statements and schedules is presented elsewhere in the financial statements. (a)(3) Exhibits 3-a Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 33-53475), filed June 10, 1994) , as amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 3-b By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K for the year dated March 17, 1997). 75 Advanta Corp. and Subsidiaries 4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including Form of Debenture. 4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992). 4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993). 4-d Specimen of 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-e Deposit Agreement, dated as of August 15, 1995, among Advanta Corp. and Mellon Securities Trust Company and the Holders from Time to Time of the Depositary Receipts Described Therein in Respect of the 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (with form of Depositary Receipt as an exhibit thereto) (incorporated by reference to Exhibit 4.10 to the Company's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-f Senior Trust Indenture, dated as of October 23, 1995, between the Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-62601), filed September 13, 1995). 4-g Indenture dated as of December 17, 1996 between Advanta Corp. and The Chase Manhattan Bank, as trustee relating to the Junior Subordinated Debentures (filed herewith). 4-h Declaration of Trust dated as of December 5, 1996 of Advanta Capital Trust I (filed herewith). 4-i Amended and Restated Declaration of Trust dated as of December 17, 1996 for Advanta Capital Trust I (filed herewith). 4-j Registration Rights Agreement dated as of December 11, 1996 between Advanta Corp. and the Initial Purchasers of the Advanta Capital Trust I Capital Securities (filed herewith). 4-k Series A Capital Securities Guarantee Agreement dated as of December 17, 1996 (filed herewith). 9 Inapplicable. 10-a Registrant's Stock Option Plan, as amended (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).+ 10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).+ 10-c Advanta Management Incentive Plan, as amended (filed herewith).+ 10-d* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983. 10-e* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983. 10-f Agreement dated as of January 21, 1994 between the Registrant and Alex W. Hart (incorporated by reference to Exhibit 10-h to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994).+ 10-g* Indenture of Trust dated May 11, 1984 between Linda M. Ominsky, as settlor, and Dennis Alter, as trustee. 10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda A. Ominsky, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File 33-58660), filed February 23, 1993). 76 Advanta Corp. and Subsidiaries 10-h Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (No. 33-33350), filed February 21, 1990).+ 10-i Advanta Corp. Executive Deferral Plan (incorporated by reference to the Exhibit 10-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995), as amended by Amendment No. 2 thereto (filed herewith).+ 10-j Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by reference to Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995), as amended (Amendment filed herewith).+ 10-k Advanta Management Incentive Plan With Stock Election II (incorporated by reference to Exhibit 10-o to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991).+ 10-l Amended and Restated Master Pooling and Servicing Agreement between Advanta National Bank USA and The Chase Manhattan Bank, formerly Chemical Bank, as Trustee, dated as of April 1, 1992 (incorporated by reference to Exhibit 4.1 to Advanta National's Registration Statement on Form S-1 (No. 33-49602), filed with Amendment No. 1 thereto on August 19, 1992). 10-m Advanta Management Incentive Plan With Stock Election III, as amended (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.+ 10-n Life Insurance Benefit for Certain Key Executives and Directors (filed herewith).+ 10-o Revolving Credit and Competitive Loan Agreement, dated as of July 26, 1996, by and among Advanta Corp., Advanta National Bank and Advanta National Bank USA (the "Borrowers"), The Chase Manhattan Bank, as Agent for the Banks (as defined in the Agreement), Nationsbanc Capital Markets, Inc., as syndication agent and PNC Bank, National Association, as documentation agent (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10-p Advanta Management Incentive Plan With Stock Election IV, as amended (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10-q Amended and Restated Agreement of Limited Partnership of Advanta Partners LP, dated as of October 1, 1996 (filed herewith). 10-r Pooling and Servicing Agreement between Advanta National Bank USA and Bankers Trust Company, as Trustee, dated December 1, 1993, as amended May 23, 1994 (incorporated by reference to Exhibit 4.1 to Advanta National's Registration Statement on Form S-3 (No. 33-79986), filed June 8, 1994) 10-s Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-t Agreement dated September 5, 1996 between the Registrant and William J. Razzouk (file herewith).+ 11 Inapplicable. 12 Inapplicable. 13 Inapplicable. 16 Inapplicable. 18 Inapplicable. 21 Subsidiaries of the Registrant (filed herewith). 22 Inapplicable. 77 Advanta Corp. and Subsidiaries 23 Consent of Independent Public Accountants (filed herewith). 24 Powers of Attorney (included on the signature page hereof). 27 Financial Data Schedule (filed herewith). 28 Inapplicable. 99 Inapplicable. * Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985. + Management contract or compensatory plan or arrangement. 78 Advanta Corp. and Subsidiaries (b) Reports on Form 8-K 1. A Report on Form 8-K was filed by the Company on October 17, 1996 regarding consolidated earnings of the Company and its subsidiaries for the fiscal quarter ended September 30, 1996. Summary earnings and balance sheet information as of that date were filed with such report. 2. A Report on Form 8-K was filed by the Company on January 22, 1997 regarding consolidated earnings for the Company and its subsidiaries for the fiscal quarter and fiscal year ended December 31, 1996. Summary earnings and balance sheet information as of that date were filed with such report. 3. A Report on Form 8-K was filed by the Registrant on March 17, 1997 reporting on certain announcements made by the Company that day, the adoption of a shareholder rights plan and amendments to the Company's By-laws. Summary estimated earnings and financial information for the fiscal quarter ending March 31, 1997 and the fiscal year ending December 31, 1997 were filed with such report. 79 Advanta Corp. and Subsidiaries SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Advanta Corp. Dated: March 26, 1997 By: /s/ Alex W. Hart ---------------------------------- Alex W. Hart, Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby constitute and appoint Dennis Alter, Alex W. Hart, William A. Rosoff, John J. Calamari, David D. Wesselink and Gene S. Schneyer, or any of them (with full power to each of them to act alone), his or her true and lawful attorney in-fact and agent, with full power of substitution, for him or her and on his or her behalf to sign, execute and file an Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1996 relating to the Advanta Corp. and any or all amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 26th day of March, 1997. Name Title ---- ----- /s/ Dennis Alter Chairman of the Board - ------------------------------- Dennis Alter /s/ Alex W. Hart Chief Executive Officer and Director - ------------------------------- Alex W. Hart /s/ William A. Rosoff Vice Chairman and Director - ------------------------------- William A. Rosoff /s/ David D. Wesselink Senior Vice President and Chief Financial - ------------------------------- Officer David D. Wesselink /s/ John J. Calamari Vice President, Finance and Chief - ------------------------------- Accounting Officer John J. Calamari 80 Advanta Corp. and Subsidiaries Name Title ---- ----- /s/ Arthur P. Bellis Director - ---------------------------- Arthur P. Bellis /s/ Max Botel Director - ---------------------------- Max Botel /s/ Richard J. Braemer Director - ---------------------------- Richard J. Braemer /s/ William C. Dunkelberg Director - ---------------------------- William C. Dunkelberg /s/ Dana Becker Dunn Director - ---------------------------- Dana Becker Dunn /s/ Robert C. Hall Director - ---------------------------- Robert C. Hall /s/ James E. Ksansnak Director - ---------------------------- James E. Ksansnak - ---------------------------- Director Ronald Lubner /s/ Ronald J. Naples Director - ---------------------------- Ronald J. Naples /s/ Phillip A. Turberg Director - ---------------------------- Phillip A. Turberg 81 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES To Advanta Corp.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated January 21, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedules listed in Item 14(a)(2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Philadelphia, PA January 21, 1997 82 ADVANTA CORP. & SUBSIDIARIES December 31, 1996 Schedule I - Condensed Financial Information of Registrant Parent Company Only CONDENSED BALANCE SHEETS (Dollars in thousands)
December 31, ------------------------ 1996 1995 ---------- ---------- ASSETS Cash $ 93,019 $ 81,337 Investments available for sale 32,960 107,451 Other assets, principally investments in and advances to wholly owned subsidiaries 2,023,559 1,373,926 ---------- ---------- Total assets $2,149,538 $1,562,714 ========== ========== LIABILITIES Accrued expenses and other liabilities $ 43,984 $ 7,965 Subordinated debt and other borrowings 1,253,518 881,785 ---------- ---------- Total liabilities 1,297,502 889,750 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock 1,010 1,010 Common stock 435 415 Other stockholders' equity 850,591 671,539 ---------- ---------- Total stockholders' equity 852,036 672,964 ---------- ---------- Total liabilities and stockholders' equity $2,149,538 $1,562,714 ========== ==========
83 Schedule I (cont'd) Parent Company Only CONDENSED STATEMENTS OF INCOME (Dollars in thousands)
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- Income: Dividends from subsidiaries $ 135,006 $ 76,000 $ 39,000 Interest 62,144 53,745 23,983 Other 40,107 27,130 15,724 --------- --------- --------- Total income 237,257 156,875 78,707 --------- --------- --------- Expenses: General and administrative 86,425 59,129 42,948 Interest 72,219 69,105 34,787 --------- --------- --------- Total expenses 158,644 128,234 77,735 --------- --------- --------- Income before income taxes and equity in subsidiaries 78,613 28,641 972 Benefit for income taxes 24,784 20,469 16,419 --------- --------- --------- Income before equity in undistributed net profit of subsidiaries 103,397 49,110 17,391 Equity in undistributed net profit of subsidiaries 72,260 87,567 88,672 --------- --------- --------- Net income $ 175,657 $ 136,677 $ 106,063 ========= ========= =========
84 Schedule I (Cont'd) Parent Company Only Statements of Cash Flows
Year Ended December 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- OPERATING ACTIVITIES Net Income $ 175,657 $ 136,677 $ 106,063 Adjustments to reconcile net income to net cash used by operating activities: Equity in net profit of subsidiaries (207,266) (163,567) (127,672) Dividends received from subsidiaries 135,006 76,000 39,000 Depreciation and amortization of intangibles 1,375 964 414 Change in other assets (265,658) (159,599) (2,823) Change in accrued liabilities 51,853 8,387 7,865 - ------------------------------------------------------------------------------------------------------------------- Net cash provided/(used) by operating activities (109,033) (101,138) 22,847 INVESTING ACTIVITIES Net change in premises & equipment (9,408) (1,901) (2,810) Purchase of investments available for sale (3,754,047) (637,917) (1,161,420) Proceeds from sales of investments available for sale 77,404 340,177 295,196 Proceeds from maturing investments available for sale 3,771,981 373,410 797,233 - ------------------------------------------------------------------------------------------------------------------- Net cash provided/(used) by investing activities 85,930 73,769 (71,801) FINANCING ACTIVITIES Change in lines of credit 40,000 (50,000) 50,000 Proceeds from issuance of subordinated/senior debt 41,036 147,200 39,398 Payments on redemption of subordinated/senior debt (38,541) (152,626) (58,618) Change in repurchase agreements 0 (52,975) 52,975 Increase in affiliate borrowings (324,341) (35,444) (389,949) Proceeds from issuance of medium-term notes 720,545 165,052 344,787 Payments on maturity of medium-term notes (494,400) (20,000) 0 Proceeds from issuance of affiliate subordinated debentures 103,093 0 0 Cash dividends paid (24,581) (15,501) (9,877) Issuance of stock 11,974 94,179 4,498 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 34,785 79,885 33,214 - ------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash 11,682 52,516 (15,740) Cash at beginning of year 81,337 28,821 44,561 Cash at end of year $ 93,019 $ 81,337 $ 28,821 ===================================================================================================================
85 Schedule II ADVANTA Corp. & Subsidiaries Valuation & Qualifying Accounts ($000's)
Column A Column B Column C Column D Column E -------- -------- ---------------------- -------- -------- Additions ---------------------- Year Balance Charged Charged to Balance Ended at to Other at December Beginning Costs and Accounts Deductions End 31, Description of Period Expenses (Describe) (Describe) of Period - --------------------------------------------------------------------------------------------------------------------------------- 1996 Reserve for losses on securitized credit cards 167,425 0 553,884 (1) 386,719 (2)(3) 334,590 Reserve for credit losses and prepayments on securitized personal finance loans (4) 30,606 0 71,050 (1)(3) 17,280 (2)(5) 84,376 Reserve for losses on securitized business loans and leases (6) 15,302 0 17,649 (1) 10,776 (2) 22,175 Reserve for uncollectable receivables & unbillable fees 0 0 0 0 0 1995 Reserve for losses on securitized credit cards 74,471 0 250,689 (1) 157,735 (2) 167,425 Reserve for credit losses and prepayments on securitized personal finance loans (4) 19,767 0 24,933 (1) 14,094 (2)(7) 30,606 Reserve for losses on securitized business loans and leases (6) 9,671 0 10,338 (1) 4,707 (2) 15,302 Reserve for uncollectable receivables & unbillable fees 0 0 0 0 0 1994 Reserve for losses on securitized credit cards 96,377 0 70,624 (1) 92,530 (2) 74,471 Reserve for credit losses and prepayments on securitized personal finance loans (4) 40,513 0 15,441 (1) 36,187 (2)(8) 19,767 Reserve for losses on securitized business loans and leases (6) 5,298 0 7,420 (1) 3,047 (2) 9,671 Reserve for uncollectable receivables & unbillable fees 23 16 0 39 (2) 0
(1) Amounts netted against securitization income. (2) Relates to net charge-offs. (3) Includes $14.0MM transferred from off-balance sheet credit card reserves to off-balance mortgage reserves. (4) Includes mortgage and home equity loans. (5) Includes $3.0MM transferred from off-balance sheet reserves to on-balance sheet reserves. (6) Includes business credit cards and leases. (7) Includes $1.0MM transferred from off-balance sheet reserves to on-balance sheet reserves. (8) Includes $12.8MM transferred from off-balance sheet to on-balance sheet reserves. EX-4.G 2 INDENTURE DATED DECEMBER 17, 1996 1 Exhibit 4-g ADVANTA CORP. INDENTURE Dated as of December 17, 1996 THE CHASE MANHATTAN BANK as Trustee 8.99% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES DUE DECEMBER 17, 2026 2 Table of Contents
Page ---- ARTICLE I DEFINITIONS Additional Interest...................................... -1- Adjusted Treasury Rate................................... -1- Advanta Capital Trust.................................... -2- Affiliate................................................ -2- Authenticating Agent..................................... -2- Bankruptcy Law........................................... -2- Board of Directors....................................... -2- Board Resolution......................................... -2- Business Day............................................. -2- Capital Securities....................................... -2- Capital Securities Guarantee............................. -3- Commission............................................... -3- Common Securities........................................ -3- Common Securities Guarantee.............................. -3- Common Stock............................................. -3- Company.................................................. -3- Company Request.......................................... -3- Comparable Treasury Issue................................ -4- Comparable Treasury Price................................ -4- Compounded Interest...................................... -4- Custodian................................................ -4- Declaration.............................................. -4- Default.................................................. -4- Deferred Interest........................................ -4- Definitive Securities.................................... -4- Depositary............................................... -4- Dissolution Event........................................ -5- Event of Default......................................... -5- Exchange Act............................................. -5- Exchange Offer........................................... -5- Extended Interest Payment Period......................... -5- Global Security.......................................... -5- Indebtedness for Money Borrowed.......................... -5- Indenture................................................ -5- Initial Optional Redemption Date......................... -5- Interest Payment Date.................................... -5- Liquidated Damages....................................... -5-
3 Table of Contents (cont'd)
Page ---- Maturity Date............................................ -5- Mortgage................................................. -5- Non Book-Entry Capital Securities........................ -5- Officers................................................. -6- Officers' Certificate.................................... -6- Opinion of Counsel....................................... -6- Optional Redemption Price................................ -6- Other Debentures......................................... -6- Other Guarantees......................................... -6- outstanding.............................................. -6- Person................................................... -7- Predecessor Security..................................... -7- Principal office of the Trustee,......................... -7- Purchase Agreement....................................... -7- Property Trustee......................................... -7- Quotation Agent.......................................... -7- Redemption Price......................................... -7- Reference Treasury Dealer Quotations..................... -7- Registration Rights Agreement............................ -7- Remaining Life........................................... -8- Responsible Officer,..................................... -8- Restricted Security...................................... -8- Rule 144A................................................ -8- Securities............................................... -8- Securities Act........................................... -8- Securityholder........................................... -8- Security Register........................................ -8- Senior Indebtedness...................................... -8- Series A Securities...................................... -8- Series B Securities...................................... -8- Special Event............................................ -9- Special Event Redemption Price........................... -9- Subsidiary............................................... -9- Trustee.................................................. -9- Trust Indenture Act of 1939.............................. -9- Trust Securities........................................ -10- U.S. Government Obligations............................. -10-
-ii- 4 Table of Contents (cont'd)
Page ---- ARTICLE II SECURITIES SECTION 2.01. Forms Generally................................ -10- SECTION 2.02. Execution and Authentication................... -10- SECTION 2.03. Form and Payment............................... -11- SECTION 2.04. Legends........................................ -11- SECTION 2.05. Global Security................................ -11- SECTION 2.06. Interest....................................... -13- SECTION 2.07. Transfer and Exchange.......................... -14- SECTION 2.08. Replacement Securities......................... -15- SECTION 2.09. Treasury Securities............................ -16- SECTION 2.10. Temporary Securities........................... -16- SECTION 2.11. Cancellation................................... -17- SECTION 2.12. Defaulted Interest............................. -17- ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest..... -18- SECTION 3.02. Offices for Notices and Payments, etc.......... -18- SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office......................................... -19- SECTION 3.04. Provision as to Paying Agent................... -19- SECTION 3.05. Certificate to Trustee......................... -20- SECTION 3.06. Compliance with Consolidation Provisions....... -20- SECTION 3.07. Limitation on Dividends........................ -20- SECTION 3.08. Covenants as to Advanta Capital Trust.......... -21- SECTION 3.09. Payment of Expenses............................ -21- SECTION 3.10. Payment Upon Resignation or Removal............ -22- ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists......................... -22- SECTION 4.02. Preservation and Disclosure of Lists........... -23- SECTION 4.03 Reports of the Company.......................... -24- SECTION 4.04. Reports by the Trustee......................... -25-
-iii- 5 Table of Contents (cont'd)
Page ---- ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.01. Events of Default.............................. -25- SECTION 5.02. Payment of Securities on Default; Suit Therefor -27- SECTION 5.03. Application of Moneys Collected by Trustee..... -29- SECTION 5.04. Proceedings by Securityholders................. -29- SECTION 5.05. Proceedings by Trustee......................... -30- SECTION 5.06. Remedies Cumulative and Continuing............. -31- SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders................. -31- SECTION 5.08. Notice of Defaults............................. -32- SECTION 5.09. Undertaking to Pay Costs....................... -32- ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of the Trustee..... -32- SECTION 6.02. Reliance on Documents, Opinions, etc........... -34- SECTION 6.03. No Responsibility for Recitals, etc............ -35- SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities -35- SECTION 6.05. Moneys to be Held in Trust..................... -36- SECTION 6.06. Compensation and Expenses of Trustee........... -36- SECTION 6.07. Officers' Certificate as Evidence.............. -36- SECTION 6.08. Conflicting Interest of Trustee................ -37- SECTION 6.09. Eligibility of Trustee......................... -37- SECTION 6.10. Resignation or Removal of Trustee.............. -37- SECTION 6.11. Acceptance by Successor Trustee................ -39- SECTION 6.12. Successor by Merger, etc....................... -39- SECTION 6.13. Limitation on Rights of Trustee as a Creditor.. -40- SECTION 6.14. Authenticating Agents.......................... -40- ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders...................... -41- SECTION 7.02. Proof of Execution by Securityholders.......... -42- SECTION 7.03. Who Are Deemed Absolute Owners................. -42-
-iv- 6 Table of Contents (cont'd)
Page ---- SECTION 7.04. Securities Owned by Company Deemed Not Outstanding.................................... -42- SECTION 7.05. Revocation of Consents; Future Holders Bound... -43- ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purpose of Meetings............................ -43- SECTION 8.02. Call of Meetings by Trustee.................... -44- SECTION 8.03. Call of Meetings by Company or Securityholders. -44- SECTION 8.04. Qualifications for Voting...................... -44- SECTION 8.05. Regulations.................................... -44- SECTION 8.06. Voting......................................... -45- ARTICLE IX AMENDMENTS SECTION 9.01. Without Consent of Securityholders............. -46- SECTION 9.02. With Consent of Securityholders................ -47- SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures........................ -48- SECTION 9.04. Notation on Securities......................... -48- SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee.............. -48- ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.01 Company May Consolidate, etc., on Certain Terms -49- SECTION 10.02. Opinion of Counsel to be Given Trustee........ -49- ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Indenture........................ -49- SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee.... -50- SECTION 11.03. Paying Agent to Repay Moneys Held............. -50- SECTION 11.04. Return of Unclaimed Moneys.................... -51-
-v- 7 Table of Contents (cont'd)
Page ---- SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations................... -51- SECTION 11.06. Reinstatement................................. -52- ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. Indenture and Securities Solely Corporate Obligations................................... -53- ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Successors.................................... -53- SECTION 13.02. Official Acts by Successor Corporation........ -53- SECTION 13.03. Surrender of Company Powers................... -53- SECTION 13.04. Address for Notices, etc...................... -54- SECTION 13.05. Governing Law................................. -54- SECTION 13.06. Evidence of Compliance with Conditions Precedent..................................... -54- SECTION 13.07. Business Days................................. -54- SECTION 13.08. Trust Indenture Act to Control................ -55- SECTION 13.09. Table of Contents, Headings, etc.............. -55- SECTION 13.10. Execution in Counterparts..................... -55- SECTION 13.11. Separability.................................. -55- SECTION 13.12. Assignment.................................... -55- SECTION 13.13. Acknowledgment of Rights...................... -55- ARTICLE XIV REDEMPTION OF SECURITIES; NO SINKING FUND SECTION 14.01. Special Event Redemption...................... -56- SECTION 14.02. Optional Redemption by Company................ -56- SECTION 14.03. No Sinking Fund............................... -57- SECTION 14.04. Notice of Redemption; Selection of Securities. -57- SECTION 14.05. Payment of Securities Called for Redemption... -58- ARTICLE XV SUBORDINATION OF SECURITIES
-vi- 8 Table of Contents (cont'd)
Page ---- SECTION 15.01. Agreement to Subordinate...................... -59- SECTION 15.02. Default on Senior Indebtedness................ -59- SECTION 15.03. Liquidation; Dissolution; Bankruptcy.......... -60- SECTION 15.04. Subrogation................................... -61- SECTION 15.05. Trustee to Effectuate Subordination........... -62- SECTION 15.06. Notice by the Company......................... -62- SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness.................................. -63- SECTION 15.08. Subordination May Not Be Impaired............. -64- ARTICLE XVI EXTENSION OF INTEREST PAYMENT PERIOD SECTION 16.01. Extension of Interest Payment Period.......... -64- SECTION 16.02. Notice of Extension........................... -65-
-vii- 9 THIS INDENTURE, dated as of December 17, 1996, between Advanta Corp., a Delaware corporation (hereinafter sometimes called the "Company"), and The Chase Manhattan Bank, as trustee (hereinafter "Trustee"). W I T N E S S E T H: In consideration of the premises, and the purchase of the Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities, as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, or which are by reference therein defined in the Securities Act, shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. The following terms have the meanings given to them in the Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Depository; (iv) Capital Security Certificate; (v) Property Trustee; (vi) Administrative Trustees; and (vii) Direct Action. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Headings are used for convenience of reference only and do not affect interpretation. The singular includes the plural and vice versa. "Additional Interest" shall have the meaning set forth in Section 2.06(c). "Adjusted Treasury Rate" shall mean, with respect to any redemption date pursuant to Section 14.01, the rate per annum equal to (i) the yield, under the heading which represents the average for the immediately prior week, appearing in the most recently published statistical release designated "H.15 (519)" or any successor publication which is published weekly by the Federal Reserve Board and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the maturity corresponding to the Remaining Life, yields for the two 10 published maturities most closely corresponding to the Remaining Life shall be interpolated, and the Adjusted Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date, in each case calculated on the third Business Day preceding the redemption date, plus in each case (a) 1.25% if such redemption occurs on or prior to December 31, 1997 and (b) 0.50% in all other cases. "Advanta Capital Trust" shall mean Advanta Capital Trust I, a Delaware business trust created for the purpose of issuing its undivided beneficial interests in connection with the issuance of Securities under this Indenture. "Affiliate"shall mean, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding the power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by, or under common control with, the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any officer or director of the specified Person, and (f) if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner. "Authenticating Agent" shall mean any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.14. "Bankruptcy Law" shall mean Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" shall mean either the Board of Directors of the Company or any duly authorized committee of that board. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" shall mean, with respect to any series of Securities, any day other than a Saturday or a Sunday or a day on which banking institutions in New York, New York or Wilmington, Delaware are authorized or required by law or executive order to close. "Capital Securities" shall mean undivided beneficial interests in the assets of Advanta Capital Trust which rank pari passu with the Common Securities issued by Advanta 2 11 Capital Trust; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, redemption and other payments to which they are entitled. References to "Capital Securities" shall include, collectively, any Series A Capital Securities and Series B Capital Securities. "Capital Securities Guarantee" shall mean any guarantee that the Company may enter into with The Chase Manhattan Bank or other Persons that operate directly or indirectly for the benefit of holders of Capital Securities of Advanta Capital Trust and shall include a Series A Capital Securities Guarantee and a Series B Capital Securities Guarantee with respect to the Series A Capital Securities and the Series B Capital Securities, respectively. "Commission" shall mean the United States Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities" shall mean undivided beneficial interests in the assets of Advanta Capital Trust that rank pari passu with Capital Securities issued by Advanta Capital Trust; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, redemption and other payments to which they are entitled. "Common Securities Guarantee" shall mean any guarantee that the Company may enter into with any Person or Persons that operate directly or indirectly for the benefit of holders of Common Securities of Advanta Capital Trust. "Common Stock" shall mean the Class A Common Stock, par value $0.01 per share, of the Company, or the Class B Common Stock, par value $0.01 per share, of the Company, or any other class of stock resulting from changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. "Company" shall mean Advanta Corp., a Delaware corporation, and, subject to the provisions of Article X, shall include its successors and assigns. "Company Request" or "Company Order" shall mean a written request or order signed in the name of the Company by the Chairman, the Chief Executive Officer, the President, a Vice Chairman, a Vice President or Treasurer of the Company, and delivered to the Trustee. 3 12 "Comparable Treasury Issue" shall mean the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life of the Securities that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life of the Securities. If no United States Treasury security has a maturity which is within a period from three months before to three months after the Initial Optional Prepayment Date, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Adjusted Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month, using such securities. "Comparable Treasury Price" shall mean, with respect to any redemption date pursuant to Section 14.01, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities"' or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (A) the average of five Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than five such Reference Treasury Dealer Quotations (the Trustee to have discretion as to the number of Reference Treasury Dealer Quotations obtained), the average of all such Quotations. "Compounded Interest" shall have the meaning set forth in Section 16.01. "Custodian" shall mean any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Declaration" shall mean the Amended and Restated Declaration of Trust of Advanta Capital Trust, dated as of December 17, 1996. "Default" shall mean any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Deferred Interest" shall have the meaning set forth in Section 16.01. "Definitive Securities" shall mean those securities issued in fully registered certificated form not otherwise in global form. "Depositary" shall mean, with respect to Securities of any series, for which the Company shall determine that such Securities will be issued as a Global Security, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Exchange Act or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to Section 2.05(d). 4 13 "Dissolution Event" shall mean the liquidation of Advanta Capital Trust pursuant to the Declaration, and the distribution of the Securities held by the Property Trustee to the holders of the Trust Securities issued by Advanta Capital Trust pro rata in accordance with the Declaration. "Event of Default" shall mean any event specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Offer" shall mean the offer that may be made pursuant to the Registration Rights Agreement (i) by the Company to exchange Series B Securities for Series A Securities and to exchange a Series B Capital Securities Guarantee for a Series A Capital Securities Guarantee and (ii) by Advanta Capital Trust to exchange Series B Capital Securities for Series A Capital Securities. "Extended Interest Payment Period" shall have the meaning set forth in Section 16.01. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System. "Global Security" shall mean, with respect to the Securities, a Security executed by the Company and delivered by the Trustee to the Depositary or pursuant to the Depositary's instruction, all in accordance with the Indenture, which shall be registered in the name of the Depositary or its nominee. "Indebtedness for Money Borrowed" shall mean any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments. "Indenture" shall mean this instrument as originally executed or, if amended as herein provided, as so amended. "Initial Optional Redemption Date" shall mean December 17, 2006. "Interest Payment Date" shall have the meaning set forth in Section 2.06. "Liquidated Damages" shall have the meaning set forth in the Registration Rights Agreement. "Maturity Date" shall mean December 17, 2026. 5 14 "Non Book-Entry Capital Securities" shall have the meaning set forth in Section 2.05. "Officers" shall mean any of the Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President or the Treasurer of the Company. "Officers' Certificate" shall mean a certificate signed by two Officers and delivered to the Trustee. "Opinion of Counsel" shall mean a written opinion of counsel, who may be an employee of the Company, and who shall be acceptable to the Trustee. "Optional Redemption Price" shall have the meaning set forth in Section 14.02. "Other Debentures" shall mean all junior subordinated debentures (other than the Securities) issued by the Company from time to time and sold to trusts to be established by the Company (if any), in each case similar to Advanta Capital Trust. "Other Guarantees" shall mean all guarantees to be issued by the Company with respect to capital securities (if any) and issued to other trusts to be established by the Company (if any), in each case similar to Advanta Capital Trust. The term "outstanding" when used with reference to Securities, shall, subject to the provisions of Section 7.04, mean, as of any particular time, all Securities authenticated and delivered by the Trustee or an Authenticating Agent under this Indenture, except (a) Securities theretofore canceled by the Trustee or an Authenticating Agent or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as in Article Fourteen provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the 6 15 Trustee is presented that any such Securities are held by bona fide holders in due course. "Person" shall mean any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security shall mean every previous Security evidencing all or a portion of the same debt and as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. "Principal office of the Trustee," or other similar term, shall mean the principal office of the Trustee, at which at any particular time its corporate trust business shall be administered. "Purchase Agreement" shall mean the Purchase Agreement dated December 11, 1996 among the Company, Advanta Capital Trust and the initial purchasers named therein. "Property Trustee" shall have the same meaning as set forth in the Declaration. "Quotation Agent" shall mean the Reference Treasury Dealer appointed by the Company. "Redemption Price" shall mean the Special Event Redemption Price or the Optional Redemption Price, as the context requires. "Reference Treasury Dealer" shall mean (i) Merrill Lynch Government Securities, Inc. and its successors; provided, however, that if the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer selected by the Company. "Reference Treasury Dealer Quotations" shall mean, with respect to each Reference Treasury Dealer and any redemption date pursuant to Section 14.01, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) at 5:00 p.m., New York City time, on the third Business Day preceding such redemption date quoted in writing to the Trustee by such Reference Treasury Dealer. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of December 11, 1996, by and among the Company, the Trust and the Initial Purchasers named therein as such agreement may be amended, modified or supplemented from time to time. 7 16 "Remaining Life" shall mean the period from and including any redemption date pursuant to Section 14.01 of this Indenture to and including the Initial Optional Prepayment Date. "Responsible Officer," when used with respect to the Trustee, shall mean any officer of the Trustee with direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Security" shall mean Securities that bear or are required to bear the legends set forth in Exhibit A hereto, other than those legends to be set forth on a Global Security. "Rule 144A" shall mean Rule 144A under the Securities Act, as such Rule may be amended from time to time, or under any similar rule or regulation hereafter adopted by the Commission. "Securities" shall mean, collectively, the Series A Securities and the Series B Securities. "Securities Act" shall mean the Securities Act of 1933 as amended. "Securityholder," "holder of Securities" or other similar terms, shall mean any Person in whose name at the time a particular Security is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. "Security Register" shall mean (i) prior to a Dissolution Event, the list of holders provided to the Trustee pursuant to Section 4.01, and (ii) following a Dissolution Event, any security register maintained by a security registrar for the Securities appointed by the Company following the execution of a supplemental indenture providing for transfer procedures as provided for in Section 2.07(a). "Senior Indebtedness" shall mean all Indebtedness for Money Borrowed, whether outstanding on the date of execution of this Indenture or hereafter created, assumed or incurred, unless the terms thereof specifically provide that it is not superior in right of payment to the Securities, and any deferrals, renewals or extensions of such Senior Indebtedness. "Series A Securities" shall mean the Company's 8.99% Series A Junior Subordinated Deferrable Interest Debentures due December 17, 2026, as authenticated and issued under this Indenture. "Series B Securities" shall mean the Company's 8.99% Series B Junior Subordinated Deferrable Interest Debentures due December 17, 2026, as authenticated and issued under this Indenture. 8 17 "Special Event" shall mean the receipt by Advanta Capital Trust and the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein; or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after December 17, 1996, there is more than an insubstantial risk that (i) Advanta Capital Trust is, or will be within 90 days of the date of such opinion, subject to United States Federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within 90 days of the date of such opinion will not be, deductible by the Company, in whole or in part, for United States Federal income tax purposes, or (iii) Advanta Capital Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Special Event Redemption Price" shall mean, with respect to any redemption of the Securities pursuant to Section 14.01 hereof, an amount in cash equal to the greater of (i) 100% of the principal amount of the Securities or (ii) the sum, as determined by a Quotation Agent, of the present values of 104.4950% of the principal amount of the Securities, together with scheduled payments of interest on the Securities for the Remaining Life, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus, in each case, any accrued and unpaid interest thereon, including Compounded Interest and Additional Interest, if any, to the date of such redemption. "Subsidiary" shall mean, with respect to any Person, (i) any corporation at least a majority of whose outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Trustee" shall mean the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article Six hereof, shall also include its successors and assigns as Trustee hereunder. "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture except as provided in Section 9.03; provided, 9 18 however, that, in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" shall mean, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Securities" shall mean the Capital Securities and the Common Securities, collectively. "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. ARTICLE II SECURITIES SECTION 2.01. Forms Generally. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, the terms of which are incorporated in and made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject or usage. Each Security shall be dated the date of its authentication. The Securities shall be issued in denominations of $1,000 and integral multiples thereof. SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. 10 19 A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Security has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Securities shall be substantially as set forth in Exhibit A hereto. The Trustee shall, upon a Company Order, authenticate for original issue up to, and the aggregate principal amount of Securities outstanding at any time may not exceed, $103,093,000 aggregate principal amount of the Securities, except as provided in Sections 2.07, 2.08, 2.10 and 14.05. SECTION 2.03. Form and Payment. Except as provided in Section 2.05, the Securities shall be issued in fully registered certificated form without interest coupons. Principal of and premium, if any, and interest on the Securities issued in certificated form will be payable, the transfer of such Securities will be registrable and such Securities will be exchangeable for Securities bearing identical terms and provisions at the office or agency of the Trustee or at the office of such paying agent(s) as the Company may designate from time to time; provided, however, that payment of interest may be made at the option of the Company (i) by check mailed to the holder at such address as shall appear in the Security Register or (ii) by transfer to an account maintained by the Person entitled thereto, provided that proper transfer instructions have been received in writing by the relevant record date. Notwithstanding the foregoing, so long as the holder of any Securities is the Property Trustee, the payment of the principal of and premium, if any, and interest (including Compounded Interest and Additional Interest, if any) on such Securities held by the Property Trustee will be made in immediately available funds at such place and to such account as may be designated by the Property Trustee. SECTION 2.04. Legends. (a) Except as permitted by subsection (b) of this Section 2.04 or as otherwise determined by the Company in accordance with applicable law, each Security shall bear the applicable legends relating to restrictions on transfer pursuant to the securities laws in substantially the form set forth on Exhibit A hereto. (b) The Company shall issue and the Trustee shall authenticate Series B Securities in exchange for Series A Securities accepted for exchange in the Exchange Offer, which Series B Securities shall not bear the legends required by subsection (a) above, in each case unless the Trustee is notified in writing by the Company that the holder of such Series A Securities is either (A) a broker-dealer who purchased such Series A Securities directly from the Company for resale pursuant to Rule 144A or any other available exemption under the Securities Act, (B) a Person participating in the distribution of the Series A Securities or (C) a Person who is an affiliate (as defined in Rule 144 under the Securities Act) of the Company. SECTION 2.05. Global Security. 11 20 (a) In connection with a Dissolution Event, (i) if any Capital Securities are held in book-entry form, the related Definitive Securities shall be presented to the Trustee (if an arrangement with the Depositary has been maintained) by the Property Trustee in exchange for one or more Global Securities (as may be required pursuant to Section 2.07) in an aggregate principal amount equal to the aggregate principal amount of all outstanding Securities, to be registered in the name of the Depositary, or its nominee, and delivered by the Trustee to the Depositary, or a custodian therefor, for crediting to the accounts of its participants pursuant to the instructions of the Administrative Trustees; the Company upon any such presentation shall execute one or more Global Securities in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with this Indenture; and payments on the Securities issued as a Global Security will be made to the Depositary; and (ii) if any Capital Securities are held in certificated form, the related Definitive Securities may be presented to the Trustee by the Property Trustee and any Capital Security certificate which represents Capital Securities other than Capital Securities in book-entry form ("Non Book-Entry Capital Securities") will be deemed to represent beneficial interests in Securities presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Capital Securities until such Capital Security certificates are presented to the Security Registrar for transfer or reissuance, at which time such Capital Security certificates will be canceled and a Security, registered in the name of the holder of the Capital Security certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Capital Security certificate canceled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with the Indenture. Upon the issuance of such Securities, Securities with an equivalent aggregate principal amount that were presented by the Property Trustee to the Trustee will be deemed to have been canceled. (b) The Global Securities shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon; provided, that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee, in accordance with instructions given by the Company as required by this Section 2.05. 12 21 (c) The Global Securities may be transferred, in whole but not in part, only to another nominee of the Depositary or to a successor Depositary selected or approved by the Company, or to a nominee of such successor Depositary. (d) If at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary or the Depositary has ceased to be a clearing agency registered under the Exchange Act, and a successor Depositary is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company will execute, and the Trustee, upon written notice from the Company, will authenticate and make available for delivery, the Definitive Securities, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security, in exchange for such Global Security. If there is an Event of Default, the Depositary shall have the right to exchange the Global Securities for Definitive Securities. In addition, the Company may at any time determine that the Securities shall no longer be represented by a Global Security. In the event of such an Event of Default or such a determination, the Company shall execute, and, subject to Section 2.07, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and make available for delivery, the Definitive Securities, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security, in exchange for such Global Security. Upon the exchange of the Global Security for such Definitive Securities, in authorized denominations, the Global Security shall be canceled by the Trustee. Such Definitive Securities issued in exchange for the Global Security shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Securities to the Depositary for delivery to the Persons in whose names such Definitive Securities are so registered. SECTION 2.06. Interest. (a) Each Security will bear interest at the rate of 8.99% per annum (the "Coupon Rate") from the most recent date to which interest has been paid or, if no interest has been paid, from December 17, 1996, until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the Coupon Rate, compounded semi-annually, payable (subject to the provisions of Article XVI) semi-annually in arrears on June 17 and December 17of each year (each, an "Interest Payment Date"); commencing on June 17, 1997, to the Person in whose name such Security or any predecessor Security is registered, at the close of business on the regular record date for such interest installment, which shall be the first day of the month in which the relevant Interest Payment Date falls. (b) Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. In the event that any Interest Payment Date falls on a day that is not a Business Day, then payment of interest payable on such date will be made on the next 13 22 succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. (c) During such time as the Property Trustee is the holder of any Securities, the Company shall pay any additional amounts on the Securities as may be necessary in order that the amount of Distributions then due and payable by the Advanta Capital Trust on the outstanding Securities shall not be reduced as a result of any additional taxes, duties and other governmental charges to which Advanta Capital Trust has become subject as a result of a Special Event ("Additional Interest"). SECTION 2.07. Transfer and Exchange. (a) Transfer Restrictions. The Series A Securities, and those Series B Securities with respect to which any Person described in Section 2.04(b)(A), (B) or (C) is the beneficial owner, may not be transferred except in compliance with any legend contained in Exhibit A unless otherwise determined by the Company in accordance with applicable law. Upon any distribution of the Securities following a Dissolution Event, the Company and the Trustee shall enter into a supplemental indenture pursuant to Section 9.01 to provide for the transfer restrictions and procedures with respect to the Securities substantially similar to those contained in the Declaration to the extent applicable in the circumstances existing at such time. (b) General Provisions Relating to Transfers and Exchanges. To permit registrations of transfers and exchanges, the Company shall execute, and the Trustee shall authenticate Definitive Securities and Global Securities. All Definitive Securities and Global Securities issued upon any registration of transfer or exchange of Definitive Securities or Global Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Definitive Securities or Global Securities surrendered upon such registration of transfer or exchange. No service charge shall be made to a holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith. The Company shall not be required to (i) issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Securities for redemption under Article Fifteen hereof and ending at the close of business on the day of such mailing; or (ii) register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. Prior to due presentment for the registration of a transfer of any Security, the Company, the Trustee and any agent of the Company or the Trustee may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and premium, if any, and interest on such 14 23 Securities, and neither the Company or the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. (c) Exchange of Series A Securities for Series B Securities. The Series A Securities may be exchanged for Series B Securities pursuant to the terms of the Exchange Offer. The Trustee shall make the exchange as follows: The Company shall present the Trustee with an Officers' Certificate certifying the following: (A) upon issuance of the Series B Securities, the transactions contemplated by the Exchange Offer have been consummated; and (B) the principal amount of Series A Securities properly tendered in the Exchange Offer that are represented by a Global Security and the principal amount of Series A Securities properly tendered in the Exchange Offer that are represented by Definitive Securities, the name of each holder of such Definitive Securities, the principal amount, at maturity, properly tendered in the Exchange Offer by each such holder and the name and address to which Definitive Securities for Series B Securities shall be registered and sent for each such holder. The Trustee, upon receipt of (i) such Officers' Certificate, (ii) an Opinion of Counsel (x) to the effect that the Series B Securities have been registered under Section 5 of the Securities Act and the Indenture has been qualified under the Trust Indenture Act and (y) with respect to the matters set forth in Section 3(p) of the Registration Rights Agreement and (iii) a Company Order, shall authenticate (A) a Global Security for Series B Securities in an aggregate principal amount equal to the aggregate principal amount of Series A Securities represented by a Global Security indicated in such Officers' Certificate as having been properly tendered and (B) Definitive Securities representing Series B Securities registered in the names of, and in the principal amounts indicated in, such Officers' Certificate. If the principal amount at maturity of the Global Security for the Series B Securities is less than the principal amount at maturity of the Global Security for the Series A Securities, the Trustee shall make an endorsement on such Global Security for the Series A Securities indicating a reduction in the principal amount at maturity represented thereby. The Trustee shall deliver such Definitive Securities for Series B Securities to the holders thereof as indicated in such Officers' Certificate. SECTION 2.08. Replacement Securities. 15 24 If any mutilated Security is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements for replacements of Securities are met. An indemnity bond must be supplied by the holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Security is replaced. The Company or the Trustee may charge for its expenses in replacing a Security. Every replacement Security is an obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Securities duly issued hereunder. SECTION 2.09. Treasury Securities. In determining whether the holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or any Affiliate of the Company shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so considered. SECTION 2.10. Temporary Securities. Pending the preparation of Definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and make available for delivery, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise reproduced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company shall cause Definitive Securities to be prepared without unreasonable delay. The Definitive Securities shall be printed, typewritten, lithographed or engraved, or provided by any combination thereof, or in any other manner permitted by the rules and regulations of any applicable securities exchange, all as determined by the officers executing such Definitive Securities. After the preparation of Definitive Securities, the temporary Securities shall be exchangeable for Definitive Securities upon surrender of the temporary Securities at the office or agency maintained by the Company for such purpose pursuant to Section 3.02 hereof, without charge to the holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute, and the Trustee shall authenticate and make available for delivery in exchange therefor, the same aggregate principal amount of Definitive Securities of authorized denominations. Until so 16 25 exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as Definitive Securities. SECTION 2.11. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall retain or destroy canceled Securities in accordance with its normal practices (subject to the record retention requirement of the Exchange Act) unless the Company directs them to be returned to it. The Company may not issue new Securities to replace Securities that have been redeemed or paid or that have been delivered to the Trustee for cancellation. All canceled Securities not destroyed by the Trustee shall be delivered to the Company. SECTION 2.12. Defaulted Interest. Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (a) or clause (b) below: (a) The Company may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (b). 17 26 (b) The Company may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustees of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.13. CUSIP Numbers. The Company in issuing the Securities may use CUSIP numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Securityholders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest. The Company covenants and agrees, for the benefit of the holders of the Securities, that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Securities at the place, at the respective times and in the manner provided herein. The Company further covenants to pay any and all amounts including, without limitation, Liquidated Damages, if any, on the dates and in the manner required under the Registration Rights Agreement. SECTION 3.02. Offices for Notices and Payments, etc. So long as any of the Securities remains outstanding, the Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Securities may be presented for payment, an office or agency where the Securities may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Securities or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, any such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in the Borough of Manhattan, The City of New York, or shall fail to give such notice of the location or of any change in the location thereof, presentations and 18 27 demands may be made and notices may be served at the principal corporate trust office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside the Borough of Manhattan, The City of New York, where the Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in the Borough of Manhattan, The City of New York, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof; provided, further, that the Company shall at all times maintain a paying agent in each such office or agency. SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.04. Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 3.04, (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Securities (whether such sums have been paid to it by the Company or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities; and (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities) to make any payment of the principal of and premium or interest on the Securities when the same shall be due and payable. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of any 19 28 failure to take such action and of any failure by the Company (or by any other obligor under the Securities) to make any payment of the principal of and premium, if any, or interest on the Securities when the same shall become due and payable. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for the Securities by any paying agent hereunder, as required by this Section 3.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04. SECTION 3.05. Certificate to Trustee. The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year in each year, commencing with the first fiscal year ending after the date hereof, so long as Securities are outstanding hereunder, an Officers' Certificate, one of the signers of which shall be the principal executive, principal financial or principal accounting officer of the Company, stating that (i) in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained herein and (ii) whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.06. Compliance with Consolidation Provisions. The Company will not, while any of the Securities remain outstanding, consolidate with, or merge into any other Person, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article Ten hereof are complied with. SECTION 3.07. Limitation on Dividends. The Company will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (which includes common and preferred stock) or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Company (including any Other Debentures) that rank pari passu with or junior in right of payment to the Securities or (iii) make any guarantee payments with respect to any guarantee by the Company of the debt securities of any Subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Securities (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock of the Company, (b) any declaration of a dividend in 20 29 connection with the implementation of a stockholder's rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a result of a reclassification of the Company's capital stock or the exchange or the conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees or any of the Company's dividend reinvestment plans) if at such time (i) there shall have occurred any event of which the Company has actual knowledge that (a) with the giving of notice or the lapse of time, or both, would constitute an Event of Default and (b) in respect of which the Company shall not have taken reasonable steps to cure, (ii) if such Securities are held by the Property Trustee, the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (iii) the Company shall have given notice of its election of the exercise of its right to extend the interest payment period pursuant to Section 16.01 and any such extension shall be continuing. SECTION 3.08. Covenants as to Advanta Capital Trust. In the event Securities are issued to Advanta Capital Trust or a trustee of such trust in connection with the issuance of Trust Securities by Advanta Capital Trust, for so long as such Trust Securities remain outstanding, the Company will (i) maintain 100% direct ownership of the Common Securities of Advanta Capital Trust; provided, however, that any successor of the Company, permitted pursuant to Article Ten, may succeed to the Company's ownership of such Common Securities, (ii) use its reasonable efforts to cause Advanta Capital Trust (a) to remain a business trust, except in connection with a distribution of Securities, the redemption of all of the Trust Securities of Advanta Capital Trust or certain mergers, consolidations or amalgamations, each as permitted by the Declaration of Advanta Capital Trust, and (b) to continue to be treated as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes and (iii) to use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an individual beneficial interest in the Securities. SECTION 3.09. Payment of Expenses. In connection with the offering, sale and issuance of the Securities to the Advanta Capital Trust and in connection with the sale of the Trust Securities by the Advanta Capital Trust, the Company, in its capacity as borrower with respect to the Securities, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Securities, including commissions to the initial purchasers payable pursuant to the Purchase Agreement, fees and expenses in connection with any exchange offer or other 21 30 action to be taken pursuant to the Registration Rights Agreement and compensation of the Trustee in accordance with the provisions of Section 6.06; (b) pay all costs and expenses of the Advanta Capital Trust (including, but not limited to, costs and expenses relating to the organization of the Advanta Capital Trust, the offering, sale and issuance of the Trust Securities (including commissions to the initial purchasers in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of Advanta Capital Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Advanta Capital Trust assets; (c) be primarily and fully liable for any indemnification obligations arising with respect to the Declaration; (d) pay any and all taxes (other than United States withholding taxes attributable to Advanta Capital Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of Advanta Capital Trust; and (e) pay all other fees, expenses, debts and obligations (other than the Trust Securities) related to Advanta Capital Trust. SECTION 3.10. Payment Upon Resignation or Removal. Upon termination of this Indenture or the removal or resignation of the Trustee, unless otherwise stated, the Company shall pay to the Trustee all amounts accrued and owing to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.7 of the Declaration, the Company shall pay to the Delaware Trustee or the Property Trustee, as the case may be, all amounts accrued and owing to the date of such termination, removal or resignation. ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: 22 31 (a) on a semi-annual basis on each regular record date for the Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that no such lists need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar. SECTION 4.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of the Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities or with holders of all Securities with respect to their rights under this Indenture and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within five Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02; or (2) inform such applicants as to the approximate number of holders of all Securities, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the 23 32 form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities, by receiving and holding the same, agrees with Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.03 Reports of the Company. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the date on which the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) that the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports that may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. 24 33 (c) The Company covenants and agrees to transmit by mail to all holders of Securities, as the names and addresses of such holders appear upon the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 4.03 as may be required by rules and regulations prescribed from time to time by the Commission. (d) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). (e) So long as is required for an offer or sale of the Securities to qualify for an exemption under Rule 144A under the Securities Act, the Company shall, upon request, provide the information required by clause (d)(4) thereunder to each holder and to each beneficial owner and prospective purchaser of Securities identified by any holder of Restricted Securities, unless such information is furnished to the Commission pursuant to Section 13 or 15(d) of the Exchange Act. SECTION 4.04. Reports by the Trustee. (a) The Trustee shall transmit to Securityholders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Trustee shall, within sixty days after each May 15 following the date of this Indenture, commencing May 15, 1997, deliver to Securityholders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a). (b) A copy of each such report shall, at the time of such transmission to Securityholders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee when the Securities are listed on any stock exchange. ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.01. Events of Default. One or more of the following events of default shall constitute an Event of Default hereunder (whatever the reason for such Event of Default and whether it shall be 25 34 voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon any Security or Other Debenture when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms hereof shall not constitute a default in the payment of interest for this purpose; (b) default in the payment of all or any part of the principal of (or premium, if any, on) any Security or Other Debenture as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration of maturity or otherwise; (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in the performance of which or the breach of which is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due. If an Event of Default with respect to Securities at the time outstanding occurs and is continuing, then in every such case the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities then outstanding may declare the principal amount of all Securities to be due and payable immediately, by a notice in writing to the Company (and 26 35 to the Trustee if given by the holders of the outstanding Securities), and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that, if at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay (A) all matured installments of interest upon all the Securities and the principal of and premium, if any, on any and all Securities that shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest specified in the Securities to the date of such payment or deposit) and (B) such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and (ii) any and all Events of Default under the Indenture shall have been cured, waived or otherwise remedied as provided herein, then, in every such case, the holders of a majority in aggregate principal amount of the Securities then outstanding, by written notice to the Company and to the Trustee, may rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission and annulment or for any other reason, or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Securities shall continue as though no such proceeding had been taken. SECTION 5.02. Payment of Securities on Default; Suit Therefor. The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Securities as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Securities as and when the same shall have become due and payable, whether at maturity of the Securities or upon redemption or by declaration or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Securities, the whole amount that then shall have become due and payable on all such Securities for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the Securities are held by Advanta Capital Trust or a trustee of such trust, without duplication of 27 36 any other amounts paid by Advanta Capital Trust or trustee in respect thereof) upon the overdue installments of interest at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Securities and collect in the manner provided by law out of the property of the Company or any other obligor on the Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Securities under Title 11, United States Code, or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. 28 37 Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. SECTION 5.03. Application of Moneys Collected by Trustee. Any moneys collected by the Trustee shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of all amounts due the Trustee under Section 6.06, including the costs and expenses of collection applicable to the Securities and reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article Fifteen; Third: In case the principal of the outstanding Securities in respect of which moneys have been collected shall not have become due and be unpaid, to the payment of the amounts then due and unpaid upon Securities for principal of (and premium, if any) and interest on the Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference of priority of any kind, according to the amounts due on such Securities for principal (and premium, if any) and interest, respectively; and Fourth: To the Company. 29 38 SECTION 5.04. Proceedings by Securityholders. No holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Security to receive payment of the principal of (premium, if any) and interest on such Security, on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder, and by accepting a Security hereunder it is expressly understood, intended and covenanted by the taker and holder of every Security with every other such taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. For the protection and enforcement of the provisions of this Section , each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. The Company and the Trustee acknowledge that pursuant to the Declaration, the holders of Capital Securities are entitled, in the circumstances and subject to the limitations set forth therein, to commence a Direct Action with respect to any Event of Default under this Indenture and the Securities. SECTION 5.05. Proceedings by Trustee. 30 39 In case an Event of Default occurs with respect to Securities and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06. Remedies Cumulative and Continuing. All powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Securities, and no delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein, and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in aggregate principal amount of the Securities at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such action or proceeding so directed, if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Securities, the holders of a majority in aggregate principal amount of the Securities at the time outstanding may on behalf of the holders of all of the Securities waive any past default or Event of Default and its consequences, except a default (a) in the payment of principal of or premium, if any, or interest on any of the Securities or (b) in respect of covenants or provisions hereof that cannot be modified or amended without the consent of the holder of each Security affected; provided, however, that if the Securities are held by the Property Trustee, such waiver or modification to such waiver shall not be effective until the holders of a majority in aggregate 31 40 liquidation amount of Trust Securities shall have consented to such waiver or modification to such waiver; provided further, that if the consent of the holder of each outstanding Security is required, such waiver shall not be effective until each holder of the Trust Securities shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture, and the Company, the Trustee and the holders of the Securities shall be restored to their former positions and rights hereunder, respectively; no such waiver, however, shall extend to any subsequent or other default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08. Notice of Defaults. The Trustee shall, within 90 days after the occurrence of a default with respect to the Securities, mail to all Securityholders, as the names and addresses of such holders appear upon the Security register, notice of all defaults known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (c) of Section 5.01); provided that, except in the case of default in the payment of the principal of or premium, if any, or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee determines in good faith that the withholding of such notice is in the interests of the Securityholders; provided further, that in the case of any default of the character specified in Section 5.01(c) no such notice to Securityholders shall be given until at least 60 days after the occurrence thereof, but shall be given within 90 days after such occurrence. SECTION 5.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the same shall have become due and payable. 32 41 ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of the Trustee. With respect to the holders of the Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default that may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (that has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and 33 42 (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture and that adequate indemnity against such risk is not reasonably assured to it. SECTION 6.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01: (a) the Trustee may rely, and shall be protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein may be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed), and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; provided, however, that nothing contained herein shall relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived), to exercise such of the rights and powers vested in it by this Indenture, 34 43 and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of a majority in aggregate principal amount of the outstanding Securities; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; (h) the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Securities unless either (1) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Securities or by any holder of the Securities; and (i) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith, without negligence or willful misconduct and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. SECTION 6.03. No Responsibility for Recitals, etc. The recitals contained herein and in the Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Securities or the proceeds of any Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Security registrar, in its individual or any other capacity, may become the owner or 35 44 pledgee of Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Security registrar. SECTION 6.05. Moneys to be Held in Trust. Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 6.06. Compensation and Expenses of Trustee. The Company, as borrower, covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. 36 45 SECTION 6.07. Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof is herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08. Conflicting Interest of Trustee. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 6.09. Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10. Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof to the holders of the Securities at their addresses as they shall appear on the Security register. Upon receiving such notice of resignation, the Company shall promptly 37 46 appoint a successor trustee or trustees by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security for at least six months may, subject to the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur -- (1) the Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months; (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder; or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Trustee and nominate a successor trustee, which shall be deemed appointed as successor trustee unless within 10 days after such nomination the Company objects thereto; provided, however, that if no successor trustee shall have been so appointed and shall have accepted appointment within 30 days after such removal, 38 47 the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.10 provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; provided, however, that on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. No successor trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09. Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the holders of Securities at their addresses as they shall appear on the Security register. If the Company fails to mail such notice within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.12. Successor by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the 39 48 Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated. If at such time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee, and in all such cases such certificates shall have the full force that the Securities or this Indenture elsewhere provides that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13. Limitation on Rights of Trustee as a Creditor. The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. SECTION 6.14. Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Securities issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $5,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section , it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, 40 49 consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.14, without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.14, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Securityholders as the names and addresses of such holders appear on the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company, as borrower, agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article Eight, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of 41 50 Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 7.02. Proof of Execution by Securityholders. Subject to the provisions of Section 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03. Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Security registrar may deem the Person in whose name such Security shall be registered upon the Security Register to be, and may treat him as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of and premium, if any, and interest on such Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. SECTION 7.04. Securities Owned by Company Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities that are owned by the Company or any other obligor on the Securities or by any Person directly 42 51 or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities that a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not the Company or any such other obligor or person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05. Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Security specified in this Indenture in connection with such action, any holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Securities the holders of which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purpose of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article Eight for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article Five; 43 52 (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Six; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Securities under any other provision of this Indenture or under applicable law. SECTION 8.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Securities at their addresses as they shall appear on the Security Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03. Call of Meetings by Company or Securityholders. In case at any time the Company, pursuant to a resolution of the Board of Directors, or the holders of at least 10% in aggregate principal amount of the Securities then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in the Borough of Manhattan, City of New York for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04. Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Securities or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in 44 53 regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it deems appropriate. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 8.04, at any meeting each holder of Securities or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 8.06. Voting. The vote upon any resolution submitted to any meeting of holders of Securities shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. The holders of the Securities shall vote for all purposes as a single class. Any record so signed and verified shall be conclusive evidence of the matters therein stated. 45 54 ARTICLE IX AMENDMENTS SECTION 9.01. Without Consent of Securityholders. The Company and the Trustee may from time to time and at any time amend the Indenture, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company pursuant to Article Ten hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the Securityholders as the Board of Directors and the Trustee shall consider to be for the protection of the Securityholders, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such amendment may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided, that any such action shall not, as evidenced by an Opinion of Counsel delivered to the Trustee, materially adversely affect the interests of the holders of the Securities; (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities; (f) to make provision for transfer procedures, certification, book-entry provisions, the form of restricted securities legends, if any, to be placed on Securities, and all other matters required pursuant to Section 2.07 or otherwise necessary, desirable or appropriate in connection with the issuance of Securities to holders of Capital Securities in the event of a distribution of Securities by Advanta Capital Trust following a Dissolution Event; 46 55 (g) to qualify or maintain qualification of this Indenture under the Trust Indenture Act; or (h) to make any change that does not adversely affect the rights of any Securityholder in any material respect. The Trustee is hereby authorized to join with the Company in the execution of any supplemental indenture to effect such amendment, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any amendment to the Indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. With Consent of Securityholders. With the consent (evidenced as provided in Section 7.01) of the holders of a majority in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time amend the Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such amendment shall without the consent of the holders of each Security then outstanding and affected hereby (i) extend the Maturity Date of any Security, or reduce the rate or extend the time of payment of interest thereon (except as contemplated by Article Sixteen), or reduce the principal amount thereof, or change any of the redemption provisions applicable thereto, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Securities the holders of which are required to consent to any such amendment to the Indenture; provided, however, that if the Securities are held by Advanta Capital Trust, such amendment shall not be effective until the holders of a majority in liquidation amount of Trust Securities shall have consented to such amendment; provided, further, that if the consent of the holder of each outstanding Security is required, such amendment shall not be effective until each holder of the Trust Securities shall have consented to such amendment. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any supplemental indenture affecting such amendment, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture, unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this 47 56 Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section , the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article Nine shall comply with the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Nine, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. Notation on Securities. Securities authenticated and delivered after the execution of any supplemental indenture affecting such series pursuant to the provisions of this Article Nine may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities then outstanding. SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental 48 57 indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.01 Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company, as the case may be), or successive consolidations or mergers in which the Company, as the case may be, or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property and assets as an entirety or substantially as an entirety to any Person if the securities issued in exchange for the Securities in such transaction shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Indentures had been issued at the date of the execution hereof; provided, however, that the Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Company or sell, convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to the Company, unless (i) in case the Company consolidates with or merges into another Person or conveys or transfers its properties and assets substantially as an entirety to any Person, the successor Person is organized under the laws of the United States or any State or the District of Columbia, and such successor Person expressly assumes the Company's obligations on the Securities and (ii) immediately after giving effect thereto, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing. SECTION 10.02. Opinion of Counsel to be Given Trustee The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or lease, and any assumption, permitted or required by the terms of this Article Ten complies with the provisions of this Article Ten. 49 58 ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore canceled, or (b) all the Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay on the Maturity Date or upon redemption all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to the Maturity Date or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of or premium, if any, or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.02, 2.07, 2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.06, 6.10 and 11.04 shall survive, and the Trustee, on demand of the Company accompanied by any Officers' Certificate and an Opinion of Counsel to the effect that all conditions to the satisfaction and discharge of this Indenture pursuant to this Section 11.01 have been satisfied, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Securities. SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee. Subject to the provisions of Section 11.04, all moneys and U.S. Government Obligations deposited with the Trustee pursuant to Sections 11.01 or 11.05 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Securities for the payment of which such moneys or U.S. Government Obligations have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest. 50 59 The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 11.05 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the holders of outstanding Securities. SECTION 11.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Securities (other than the Trustee) shall, upon written demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 11.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of or premium, if any, or interest on Securities and not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of or premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations. The Company shall be deemed to have been Discharged (as defined below) from its respective obligations with respect to the Securities on the 91st day after the applicable conditions set forth below have been satisfied with respect to the Securities any time after the applicable conditions set forth below have been satisfied: (a) The Company shall have deposited or caused to be deposited irrevocably with the Trustee or the Defeasance Agent (as defined below) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee and the Defeasance Agent, if any, to pay and discharge each installment of principal of and interest and premium, if any, on the outstanding Securities on the dates such installments of principal, interest or premium are due; 51 60 (b) if the Securities are then listed on any national securities exchange, the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that the exercise of the option under this Section 11.05 would not cause such Securities to be delisted from such exchange; (c) no Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit; (d) the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that holders of the Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of the exercise of the option under this Section 11.05 and will be subject to United States federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised, and such opinion shall be accompanied by a private letter ruling to that effect received from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service; and (e) the Company has delivered to the Trustee and the Defeasance Agent, if any, an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture relating to the Securities (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (i) the rights of holders of Securities to receive, from the trust fund described in clause (a) above, payment of the principal of and the premium, if any, and interest on the Securities when such payments are due; (ii) the Company's obligations with respect to the Securities under Sections 2.07, 2.08, 5.02 and 11.04; and (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder. "Defeasance Agent" means another financial institution which is eligible to act as Trustee hereunder and which assumes all of the obligations of the Trustee necessary to enable the Trustee to act hereunder. In the event such a Defeasance Agent is appointed pursuant to this Section , the following conditions shall apply: (1) The Trustee shall have approval rights over the document appointing such Defeasance Agent and the document setting forth such Defeasance Agent's rights and responsibilities; 52 61 (2) The Defeasance Agent shall provide verification to the Trustee acknowledging receipt of sufficient money and/or U.S. Government Obligations to meet the applicable conditions set forth in this Section 11.05. SECTION 11.06. Reinstatement. If the Trustee or any Defeasance Agent is unable to apply any money in accordance with Section 11.05 by reason of any legal proceeding or by reason of any order or judgement of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to 11.05 until such time as the Trustee or any Defeasance Agent is permitted to apply all such money in accordance with Section 11.05. ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor Person to the Company, either directly or through the Company under any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. 53 62 SECTION 13.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.03. Surrender of Company Powers. The Company by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company, as the case may be, and as to any successor Person. SECTION 13.04. Address for Notices, etc. Any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company may be given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for the purpose) to the Company, Welsh and McKean Road, P.O. Box 844, Spring House, Pennsylvania 19477, Attention: Gene S. Schneyer, Esquire. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 450 West 33rd Street, 15th Floor, New York, New York 10001, Attention: Corporate Trustee Administration Department. SECTION 13.05. Governing Law. This Indenture and each Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State, without regard to conflicts of laws principles thereof. SECTION 13.06. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture 54 63 shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.07. Business Days. In any case where the date of payment of principal of or premium, if any, or interest on the Securities will not be a Business Day, the payment of such principal of or premium, if any, or interest on the Securities need not be made on such date but may be made on the next succeeding Business Day, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date. SECTION 13.08. Trust Indenture Act to Control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 13.09. Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.10. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11. Separability In case any one or more of the provisions contained in this Indenture or in the Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of the Securities, but this Indenture and the Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 55 64 SECTION 13.12. Assignment. The Company will have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company, as the case may be, will remain liable for all such obligations. Subject to the foregoing, the Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 13.13. Acknowledgment of Rights. The Company acknowledges that, with respect to any Securities held by Advanta Capital Trust or a trustee of such trust, if the Property Trustee of such trust fails to enforce its rights under this Indenture as the holder of the Securities held as the assets of Advanta Capital Trust any holder of Capital Securities may institute legal proceedings directly against the Company to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay principal of or premium, if any, or interest on the Securities when due, the Company acknowledges that a holder of Capital Securities may directly institute a Direct Action against the Company for enforcement of payment to such holder of the principal of or premium, if any, or interest on the Securities having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such holder on or after the respective due date specified in the Securities. ARTICLE XIV REDEMPTION OF SECURITIES; NO SINKING FUND SECTION 14.01. Special Event Redemption. Subject to the provisions of this Article Fourteen, if a Special Event has occurred and is continuing prior to the Initial Optional Redemption Date, then the Company shall have the right, upon (i) not less than 45 days written notice to the Trustee and (ii) not less than 30 days nor more than 60 days written notice to the Securityholders, to redeem the Securities, in whole (but not in part), within 90 days following the occurrence of such Special Event at the Special Event Redemption Price. Following a Special Event, the Company shall take such action as is necessary to promptly determine the Special Event Redemption Price, including without limitation the appointment by the Company of a Quotation Agent. The Special Event Redemption Price shall be paid prior to 12:00 noon, New York City time, on the date of such redemption or such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an amount sufficient to pay the Special Event Redemption Price by 10:00 a.m., New York City time, on the date such Special Event Redemption Price is to be paid. 56 65 SECTION 14.02. Optional Redemption by Company. (a) Subject to the provisions of this Article Fourteen, the Company shall have the right to redeem the Securities, in whole or in part, from time to time, on or after the Initial Optional Redemption Date, at a redemption price set forth below (expressed as a percentage of the outstanding principal amount to be redeemed) plus, in each case, accrued and unpaid interest thereon (including Additional Interest and Compounded Interest, if any) to the applicable date of redemption (the "Optional Redemption Price") if redeemed during the 12-month period beginning December 17 of the year indicated below.
Year Percentage ---- ---------- 2006 104.4950% 2007 104.0455% 2008 103.5960% 2009 103.1465% 2010 102.6970% 2011 102.2475% 2012 101.7980% 2013 101.3485% 2014 100.8990% 2015 100.4995% 2016 and thereafter 100.000% --------
If the Securities are only partially redeemed pursuant to this Section 14.02, the Securities will be redeemed pro rata or by lot or by any other method as the Trustee shall determine; provided, that if at the time of redemption the Securities are registered as a Global Security, the Depositary shall determine, in accordance with its procedures, the principal amount of such Securities held by each participant (and, indirectly, beneficial owner) of a Security to be redeemed. The Optional Redemption Price shall be paid prior to 12:00 noon, New York City time, on the date of such redemption or at such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an amount sufficient to pay the Optional Redemption Price by 10:00 a.m., New York City time, on the date such Optional Redemption Price is to be paid. (b) Notwithstanding the first sentence of Section 14.02(a), upon the entry of an order for dissolution of the Advanta Capital Trust by a court of competent jurisdiction, the Securities thereafter will be subject to optional redemption, in whole only, but not in part, on or after the Initial Optional Redemption Date, at the applicable optional 57 66 redemption price set forth in Section 14.02(a) and otherwise in accordance with this Article Fourteen. SECTION 14.03. No Sinking Fund. The Securities are not entitled to the benefit of any sinking fund. SECTION 14.04. Notice of Redemption; Selection of Securities. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Securities in accordance with their terms, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. Each such notice of redemption shall specify the CUSIP number, if any, of the Securities to be redeemed, the date fixed for redemption, the redemption price at which the Securities are to be redeemed (or the method by which such redemption price is to be calculated), the place or places of payment that payment will be made upon presentation and surrender of the Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Securities are to be redeemed the notice of redemption shall specify the numbers of the Securities to be redeemed. In case any Security is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m., New York City time, on the redemption date specified in the notice of redemption given as provided in this Section , the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the appropriate Redemption Price, together with accrued interest to the date fixed for redemption. The Company will give the Trustee notice not less than 45 days prior to the redemption date as to the aggregate principal amount of Securities to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Securities or portions thereof (in integral multiples of $1,000, except as otherwise set forth in the applicable form of Security) to be redeemed. 58 67 SECTION 14.05. Payment of Securities Called for Redemption. If notice of redemption has been given as provided in Section 14.04, the Securities or portions of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Redemption Price, together with interest accrued to the date fixed for redemption (subject to the rights of holders of Securities on the close of business on a regular record date in respect of an Interest Payment Date occurring on or prior to the redemption date), and on and after said date (unless the Company shall default in the payment of such Securities at the Redemption Price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price, together with interest accrued thereon to the date fixed for redemption (subject to the rights of holders of Securities on the close of business on a regular record date in respect of an Interest Payment Date occurring on or prior to the redemption date). Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. ARTICLE XV SUBORDINATION OF SECURITIES SECTION 15.01. Agreement to Subordinate. The Company covenants and agrees, and each holder of Securities issued hereunder likewise covenants and agrees, that the Securities shall be issued subject to the provisions of this Article Fifteen, and each holder of a Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of and premium, if any, and interest on all Securities issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article Fifteen shall prevent the occurrence of any Default or Event of Default hereunder. 59 68 SECTION 15.02. Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, or in the event that the maturity of any Senior Indebtedness has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption payments) of or premium, if any, or interest on the Securities. In the event of the acceleration of the maturity of the Securities, then no payment shall be made by the Company with respect to the principal (including redemption payments) of or premium, if any, or interest on the Securities until the holders of all Senior Indebtedness outstanding at the time of such acceleration shall receive payment in full of all Senior Indebtedness (including any amounts due upon acceleration). In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing, within 90 days of such payment, of the amounts then due and owing on such Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of such Senior Indebtedness. SECTION 15.03. Liquidation; Dissolution; Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on account of the principal (and premium, if any) or interest on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article Fifteen, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under the Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, 60 69 as their respective interests may appear, to the extent necessary to pay all such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, and their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article Fifteen, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Fifteen with respect to the Securities to the payment of Senior Indebtedness that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the sale, conveyance, transfer or lease of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article Ten of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other Person shall, as a part of such consolidation, merger, sale, conveyance, transfer or lease, comply with the conditions stated in Article Ten of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04. Subrogation. Subject to the payment in full of all Senior Indebtedness, the rights of the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or 61 70 securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article Fifteen, and no payment over pursuant to the provisions of this Article Fifteen to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Securities, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article Fifteen are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness on the other hand. Nothing contained in this Article Fifteen or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under the Indenture, subject to the rights, if any, under this Article Fifteen of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article Fifteen, the Trustee, subject to the provisions of Article Six of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Fifteen. SECTION 15.05. Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article Fifteen and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. 62 71 SECTION 15.06. Notice by the Company The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article Fifteen. Notwithstanding the provisions of this Article Fifteen or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article Fifteen, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article Six of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Article Six of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company, as the case may be (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article Fifteen, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article Fifteen, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Upon any payment or distribution of assets of the Company referred to in this Article Fifteen, the Trustee and the Securityholders shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and 63 72 other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Fifteen. SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article Fifteen in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Fifteen, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article Six of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article Fifteen or otherwise. Nothing in this Article Fifteen shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06. SECTION 15.08. Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, as the case may be, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, as the case may be, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article Fifteen or the obligations hereunder of the holders of the Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the 64 73 collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, as the case may be, and any other Person. ARTICLE XVI EXTENSION OF INTEREST PAYMENT PERIOD SECTION 16.01. Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 10 consecutive semiannual periods, including the first such semi-annual period during such extension period (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable; provided, that no Extended Interest Payment Period may extend beyond the Maturity Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 16.01, will bear interest thereon at the Coupon Rate compounded semi-annually for each semi-annual period of the Extended Interest Payment Period ("Compounded Interest"). At the end of the Extended Interest Payment Period, the Company shall pay all interest accrued and unpaid on the Securities, including any Additional Interest and Compounded Interest (together, "Deferred Interest") that shall be payable to the holders of the Securities in whose names the Securities are registered in the Security Register on the first record date after the end of the Extended Interest Payment Period. Before the termination of any Extended Interest Payment Period, the Company may further defer payments of interest by further extending such period; provided, that such period, together with all such previous and further extensions within such Extended Interest Payment Period, shall not exceed 10 consecutive semi-annual periods, including the first such semi-annual period during such Extended Interest Payment Period, or extend beyond the Maturity Date of the Securities. Upon the termination of any Extended Interest Payment Period and the payment of all Deferred Interest then due, the Company may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. SECTION 16.02. Notice of Extension. (a) If the Property Trustee is the only registered holder of the Securities at the time the Company selects an Extended Interest Payment Period, the Company shall give written notice to the Administrative Trustees, the Property Trustee and the Trustee of its election of such Extended Interest Payment Period at least five Business Days before the earlier of (i) the next succeeding date on which distributions on the Trust Securities issued by Advanta Capital Trust would have been payable except for such election, or (ii) the date the Advanta Capital Trust is required to give notice of the record date, or the date such Distributions 65 74 are payable, to any national securities exchange or to holders of the Capital Securities issued by Advanta Capital Trust, but in any event at least five Business Days before such record date. (b) If the Property Trustee is not the only holder of the Securities at the time the Company elects an Extended Interest Payment Period, the Company shall give the holders of the Securities and the Trustee written notice of its election of such Extended Interest Payment Period at least 10 Business Days before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to any national securities exchange. (c) The semi-annual period in which any notice is given pursuant to paragraphs (a) or (b) of this Section 16.02 shall be counted as one of the 10 semi-annual periods permitted in the maximum Extended Interest Payment Period permitted under Section 16.01. The Chase Manhattan Bank hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture 66 75 to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. ADVANTA CORP. By: /s/ David D. Wesselink ---------------------------------------- Name: David D. Wesselink Title: Senior Vice President & Chief Financial Officer THE CHASE MANHATTAN BANK, AS TRUSTEE By: /s/ Sheik Wiltshire ---------------------------------------- Name: Sheik Wiltshire Title: Second Vice President 67 76 EXHIBIT A (FORM OF FACE OF SECURITY) [IF THE SECURITY IS A GLOBAL SECURITY, INSERT: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO A-I 77 LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE CORPORATION, AND (ii) PURSUANT TO CLAUSE (D), TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE REVERSE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEREE TO THE COMPANY. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. A-II 78 No. ADVANTA CORP. 8.99% SERIES A JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE DECEMBER 17, 2026 Advanta Corp., a Delaware corporation (the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to or registered assigns, the principal sum of One Hundred Three Million Ninety-Three Thousand Dollars ($103,093,000) on December 17, 2026 (the "Maturity Date"), unless previously redeemed, and to pay interest on the outstanding principal amount hereof from December 17, 1996, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, semi-annually (subject to deferral as set forth herein) in arrears on June 17 and December 17 of each year, commencing June 17, 1997, at the rate of 8.99% per annum until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded semi-annually. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months and, for any period less than a full calendar month, the number of days elapsed in such month. In the event that any date on which the principal of (or premium, if any) or interest on this Security is payable is not a Business Day, then payment payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the first day of the month in which the relevant interest payment date falls. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the holders on such regular record date and may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the holders of Securities not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The principal of (and premium, if any) and interest on this Security shall be payable at the office or agency of the Trustee in New York, New York maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that, payment of A-III 79 interest may be made at the option of the Company by (i) check mailed to the holder at such address as shall appear in the Security Register or (ii) by transfer to an account maintained by the Person entitled thereto, provided that proper written transfer instructions have been received by the relevant record date. Notwithstanding the foregoing, so long as the Holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest on this Security will be made in immediately available funds at such place and to such account as may be designated by the Property Trustee. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Security shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Security are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to be executed. ADVANTA CORP. Dated: By: ______________________________ Name: Title: Attest: By: ______________________________ Name: Title: A-IV 80 (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture. The Chase Manhattan Bank, as Trustee By: ______________________________ Authorized Officer A-V 81 (FORM OF REVERSE OF SECURITY) This Security is one of the Securities of the Company (herein sometimes referred to as the "Securities"), specified in the Indenture, all issued or to be issued under and pursuant to an Indenture, dated as of December 17, 1996 (the "Indenture"), duly executed and delivered between the Company and The Chase Manhattan Bank, as Trustee (the "Trustee"), to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Securities. Upon the occurrence and continuation of a Special Event prior to December 17, 2006, the Company shall have the right to redeem this Security in whole (but not in part) at the Special Event Redemption Price. "Special Event Redemption Price" shall mean an amount in cash equal to the greater of (i) 100% of the principal amount hereof or (ii) the sum, as determined by a Quotation Agent, of the present values of 104.4950% of the principal amount hereof, together with scheduled payments of interest hereon for the Remaining Life, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus, in each case, any accrued and unpaid interest thereon, including Compounded Interest and Additional Interest, if any, to the date of such redemption. In addition, the Company shall have the right to redeem this Security, in whole or in part, at any time on or after December 17, 2006, at the Optional Redemption Price as set forth below (expressed as a percentage of the outstanding principal amount to be redeemed) plus, in each case, accrued and unpaid interest thereon (including Additional Interest and Compounded Interest, if any) to the applicable date of redemption if redeemed during the 12-month period beginning December 17 of the year indicated below.
Year Percentage ---- ---------- 2006 104.4950% 2007 104.0455% 2008 103.5960% 2009 103.1465% 2010 102.6970% 2011 102.2475% 2012 101.7980% 2013 101.3485% 2014 100.8990% 2015 100.4495%
A-VI 82 2016 and thereafter 100.000% --------
The Optional Redemption Price or the Special Event Redemption Price, as the case requires, shall be paid prior to 12:00 noon, New York City time, on the date of such redemption or at such earlier time as the Company determines, provided, that the Company shall deposit with the Trustee an amount sufficient to pay the applicable Redemption Price by 10:00 a.m., New York City time, on the date such Redemption Price is to be paid. Any redemption pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days notice. If the Securities are only partially redeemed by the Company pursuant to an Optional Redemption, the Securities will be redeemed pro rata or by lot or by any other method as the Trustee shall determine. In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Securities may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of a majority in aggregate principal amount of the Securities at the time outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of each holder of Securities then outstanding and affected thereby, (i) extend the Maturity Date of any Securities, or reduce the principal amount thereof, or change any redemption provisions applicable thereto, or reduce the rate or extend the time of payment of interest thereon (subject to Article Sixteen of the Indenture), or make the principal of, or interest or premium on, the Securities payable in any coin or currency other than U.S. dollars, or impair or affect the right of any holder of Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Securities at the time outstanding affected thereby, on behalf of all of the holders of the Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Securities or a default in respect of any covenant or provision under which the Indenture cannot be modified or amended without the consent of each holder of Securities then outstanding. Any such consent or waiver by the holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future A-VII 83 holders and owners of this Security and of any Security issued in exchange heretofore or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Security at the time and place and at the rate and in the money herein prescribed. The Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period, and not to extend beyond the Maturity Date of the Securities (an "Extended Interest Payment Period" ), at the end of which period the Company shall pay all interest then accrued and unpaid together with interest thereon at the rate specified for the Securities to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extended Interest Payment Period, the Company may further defer payments of interest by further extending such Extended Interest Payment Period, provided that such Extended Interest Payment Period, together with all such previous and further extensions within such Extended Interest Payment Period, shall not exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extended Interest Payment Period, or extend beyond the Maturity Date of the Securities. Upon the termination of any such Extended Interest Payment Period and the payment of all accrued and unpaid interest and any additional amounts then due, the Company may commence a new Extended Interest Payment Period, subject to the foregoing requirements. The Company has agreed that it will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (which includes common and preferred stock) or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Company that rank pari passu with or junior in right of payment to the Securities or make any guarantee payments with respect to any guarantee by the Company of the debt securities or any Subsidiary of the Company if such guarantee ranks pari passu or junior in right of payment to the Securities (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholder's rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a result of a reclassification of the Company's capital stock or the exchange or the conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the exchange or conversion of such capital stock or the security being exchanged or converted and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, A-VIII 84 officers or employees or any of the Company's dividend reinvestment plans) if at such time (i) there shall have occurred any event of which the Company has actual knowledge that (a) is, or with the giving of notice or the lapse of time, or both, would be, an Event of Default and (b) in respect of which the Company shall not have taken reasonable steps to cure, (ii) if such Securities are held by Advanta Capital Trust, the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (iii) the Company shall have given notice of its election of the exercise of its right to extend the interest payment period and any such extension shall be continuing. The Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to the transfer restrictions limitations as may be contained herein and therein from time to time, this Security is transferable by the holder hereof on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Security, the Company, the Trustee, any paying agent and the registrar may deem and treat the holder hereof as the absolute owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF. A-IX EX-4.H 3 DECLARATION OF TRUST DATED DECEMBER 5, 1996 1 EXHIBIT 4-h DECLARATION OF TRUST Dated as of December 5, 1996 2 DECLARATION OF TRUST OF December 5, 1996 DECLARATION OF TRUST ("Declaration") dated and effective as of December 5, 1996 by the Trustees (as defined herein), the Sponsor (as defined herein), and by the holders, from time to time, of undivided beneficial interests in the Trust to be issued pursuant to this Declaration; WHEREAS, the Trustees and the Sponsor desire to establish a trust (the "Trust") pursuant to the Business Trust Act (as defined herein) for the sole purpose of (i) issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust (ii) holding certain Debentures of the Debenture Issuer (each as defined herein) and (iii) engaging in only those other activities necessary, advisable or incidental thereto; and NOW, THEREFORE, it being the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Act and that this Declaration constitutes the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. ARTICLE I DEFINITIONS SECTION 1.1 Definitions Unless the context otherwise requires: (a) Capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration of Trust as modified, supplemented or amended from time to time; 1 3 (d) all reference in this Declaration to Articles and Sections are to Articles and Sections of this Declaration unless otherwise specified; (e) a reference to the singular includes the plural and vice versa; (f) a reference to any Person shall include its successors and assigns; (g) a reference to any agreement or instrument shall mean such agreement or instrument as supplemented, modified, amended and restated and in effect from time to time; and (h) a reference to any statute, law, rule or regulation, shall include any amendments thereto and any successor, statute, law, rule or regulation. "Administrative Trustee" means any Trustee other than the Delaware Trustee and the Property Trustees (and which are sometimes referred to herein and in the Certificate of Trust as the "Regular Trustees"). "Advanta" means Advanta Corp., a Delaware Corporation or any successor entity in a merger. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Business Day" means any day other than a day on which banking institutions in New York, New York or in Wilmington, Delaware are authorized or required by any applicable law or executive order to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Sections 3801 et seq., as it may be amended from time to time, or any successor legislation. "Capital Security" means a security representing an undivided interest in the assets of the Trust with such terms as may be set out in any amendment to this Declaration. "Certificate of Trust" has the meaning set forth in Section 2.7. "Commission" means the Securities and Exchange Commission. "Common Security" means a security representing an undivided beneficial interest in the assets of the Trust with such terms as may be set out in any amendment to this Declaration. 2 4 "Company Indemnified Person" means (a) any Administrative Trustee; (b) any Affiliate of any Administrative Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrative Trustee; or (d) any employee or agent of the Trust or its Affiliates. "Covered Person" means any officer, director, shareholder, partner, member, representative, employee or agent of the Trust or the Trust's Affiliates. "Debenture Issuer" means Advanta in its capacity as the issuer of the Debentures under the Indenture. "Debentures" means Debentures to be issued by the Debenture Issuer and acquired by the Trust. "Debenture Trustee" means the original trustee under the Indenture until a successor is appointed thereunder, and thereafter means any such successor trustee. "Delaware Trustee" has the meaning set forth in Section 3.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Fiduciary Indemnified Person" has the meaning set forth in Section 4.3(b). "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the indenture to be entered into between Advanta and the Debenture Trustee pursuant to which the Debentures are to be issued. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Property Trustee" has the meaning set forth in Section 3.1. "Securities" means collectively the Common Securities and the Capital Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Sponsor" means Advanta in its capacity as sponsor of the Trust. 3 5 "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. ARTICLE II ORGANIZATION SECTION 2.1 Name The Trust created by this Declaration is named "Advanta Capital Trust I". The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrative Trustees. SECTION 2.2 Office The address of the principal office of the Trust is 501 Carr Road, Wilmington, Delaware, 19809, Attention: David D. Wesselink, Administrative Trustee. On ten Business Days written notice to the holders of Securities, the Administrative Trustees may designate another principal office. SECTION 2.3 Purpose The exclusive purposes and functions of the Trust are (a) to issue and sell Securities, (b) purchase and hold certain Debentures of the Debenture Issuer and (c) engage in only those other activities necessary, advisable or incidental thereto. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor Trust. SECTION 2.4 Authority Subject to the limitations provided in this Declaration, the Administrative Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by the Administrative Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust. In dealing with the Administrative Trustees acting on behalf of the Trust, no person shall be required to inquire into the authority of the Administrative Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Administrative Trustees as set forth in this Declaration. 4 6 SECTION 2.5 Title to Property of the Trust Legal title to all assets of the Trust shall be vested in the Trust. SECTION 2.6 Powers of the Trustees The Administrative Trustees shall have the exclusive power and authority to cause the Trust to engage in the following activities: (a) to issue and sell the Capital Securities and the Common Securities in accordance with this Declaration; provided, however, that the Trust may issue no more than one series of Capital Securities and no more than one series of Common Securities, and, provided further, that there shall be no interests in the Trust other than the Securities; (b) in connection with the issue and sale of the Capital Securities, at the direction of the Sponsor, to: (i) execute, if necessary, an offering memorandum (the "Offering Memorandum") in preliminary and final form prepared by the Sponsor, in relation to the offering and sale of Capital Securities (i) to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), (ii) to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), and (iii) outside the United States to non-U.S. persons in offshore transactions in reliance on Regulation S under the Securities Act; (ii) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Capital Securities in any State or foreign jurisdiction in which the Sponsor has determined to qualify or register such Capital Securities for sale; (iii) execute and deliver letters, documents, or instruments with The Depository Trust Company relating to the Capital Securities; (iv) execute and enter into subscription agreements, purchase agreements, registration rights agreements and other related agreements providing for the sale of the Common Securities and the Capital Securities; (c) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and provide for reasonable compensation for such services; 5 7 (d) to incur expenses that are necessary or incidental to carry out any of the purposes of this Declaration, which expenses shall be paid for by the Sponsor in all respects; and (e) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing. SECTION 2.7 Filing of Certificate of Trust On or after the date of execution of this Declaration, the Trustees shall cause the filing of the Certificate of Trust for the Trust in the form attached hereto as Exhibit A (the "Certificate of Trust") with the Secretary of State of the State of Delaware. SECTION 2.8 Duration of Trust The Trust, absent termination pursuant to the provisions of Section 5.2, shall have existence for thirty-one (31) years from the date hereof. SECTION 2.9 Responsibilities of the Sponsor In connection with the issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare the Offering Memorandum, including any amendments or supplements thereto; (b) to determine the State and foreign jurisdictions in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States and foreign jurisdictions; and (c) to negotiate the terms of subscription agreements, purchase agreements, registration rights and other related agreements providing for the sale of the Common Securities and Capital Securities. SECTION 2.10 Declaration Binding on Holders of Securities Every Person by virtue of having become a holder of a Security or any interest therein in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. 6 8 ARTICLE III TRUSTEES SECTION 3.1 Trustees The number of Trustees initially shall be four (4), and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Sponsor. The Sponsor is entitled to appoint or remove without cause any Trustee at any time; provided, however that the number of Trustees shall in no event be less than two (2); provided further that one (1) Trustee, in the case of a natural person, shall be a person who is a resident of the State of Delaware or which, if not a natural person, is an entity which has its principal place of business in the State of Delaware (the "Delaware Trustee") and (2) there shall be at least one Administrative Trustee who is an employee or officer of, or is affiliated with, the Sponsor. Except as expressly set forth in this Declaration, if there are more than two Administrative Trustees, any power of such Administrative Trustees may be exercised by, or with the consent of, a majority of such Administrative Trustees; provided that if there are two Administrative Trustees, any power of such Administrative Trustees shall be exercised by both Administrative Trustees; provided further that if there is only one Administrative Trustee, all powers of the Administrative Trustees shall be exercised by such one Administrative Trustee. The initial Administrative Trustees shall be: Richard A. Greenawalt William A. Rosoff David D. Wesselink The initial Delaware Trustee shall be: Chase Manhattan Bank Delaware Prior to the issuance of the Capital Securities and Common Securities, the Sponsor shall appoint another trustee (the "Property Trustee") meeting the requirements of the Trust Indenture Act of 1939, as amended, by the execution of an amendment to this Declaration executed by the Administrative Trustees, the Sponsor, the Property Trustee and the Delaware Trustee. SECTION 3.2 Delaware Trustee. Notwithstanding any other provision of this Declaration, the Delaware Trustee shall not be entitled to exercise any of the powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Administrative Trustees described in this Declaration. The Delaware Trustee shall be a Trustee for the sole and limited purpose of 7 9 fulfilling the requirements of Section 3807 of the Business Trust Act. Notwithstanding anything herein to the contrary, the Delaware Trustee shall not be liable for the acts or omissions to act of the Trust or of the Administrative Trustees and shall not be liable for its own acts of omissions to act except such acts as the Delaware Trustee is expressly obligated or authorized to undertake under this Declaration or the Business Trust Act and except for the negligence or willful misconduct of the Delaware Trustee. The Delaware Trustee may resign by giving ten days' prior written notice of such resignation to the Sponsor; provided, however, that no such resignation shall be effective until a successor Delaware trustee has been appointed and accepted such appointment. SECTION 3.3 Execution of Documents. (a) Unless otherwise determined by the Administrative Trustees, and except as otherwise required by the Business Trust Act, any Administrative Trustee is, or if there are more than two Administrative Trustees, any two Administrative Trustees are, authorized to execute on behalf of the Trust any documents which the Administrative Trustees have the power and authority to cause the Trust to execute pursuant to Section 2.6; and (b) an Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents shish the Administrative Trustees have power and authority to cause the Trust to execute pursuant to Section 2.6. SECTION 3.4 Not Responsible for Recitals or Sufficiency of Declaration. The recitals contained in this Declaration shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration. ARTICLE IV LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 4.1 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for 8 10 any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions; and (b) an Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statement as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which distributions to holders of Securities might properly be paid. SECTION 4.2 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person; (b) unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise; and (c) whenever in this Declaration an Indemnified Person is permitted or required to make a decision; 9 11 (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 4.3 Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed actions, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contneendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. 10 12 (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 4.3(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 4.3(a) (unless ordered by a court) shall be made by the Debenture Issuer only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Administrative Trustees by a majority vote of a quorum consisting of such Administrative Trustees who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security holder of the Trust. (v) Expenses (including attorneys' fees) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 4.3(a) shall be paid by the Debenture Issuer in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitle to be indemnified by the Debenture Issuer as authorized in this Section 4.3(a) Notwithstanding the foregoing , no advance shall be make by the Debenture Issuer if a determination is reasonably and promptly made (i) by the Administrative Trustees by a majority vote of a quorum of disinterested Administrative Trustees, (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion or (iii) the Common Security holder of the Trust, that based upon the facts known to the Administrative Trustees, counsel or the Common Security holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Administrative Trustees, independent legal counsel or the Common Security holder reasonably determine that such person deliberately breached his duty to the Trust or the Common Security or Capital Security holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 4.3(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of 11 13 the Debenture Issuer or Capital Security holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 4.3(a) shall be deemed to be provided by a contract between the Debenture Issuer and each Company Indemnified Person who serves in such capacity at any time while this Section 4.3(a) is in effect. Any repeal or modification of this Section 4.3(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Debenture Issuer would have the power to indemnify him against such liability under the provisions of this Section 4.3(a). (viii) For purposes of this Section 4.3(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any Person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 4.3(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 4.3(a) shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be a Company Indemnified Person and shall insure to the benefit of the heirs, executors and administrators of such a Person. (b) The Sponsor agrees to indemnify the (i) the Delaware Trustee, (ii) any Affiliate of the Delaware Trustee, and (iii) any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Delaware Trustee (each of the Persons in (i) through (iii) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 4.3(b) shall survive the resignation or removal of the Delaware Trustee and the termination of this Declaration. SECTION 4.4 Outside Businesses. Any Covered Person, the Sponsor and the Delaware Trustee may engage in or possess an interest in other business ventures of any nature or description, independently 12 14 or with others, similar or dissimilar to the business of the Trust, and the Trust and the holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor or the Delaware Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor and the Delaware Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person and the Delaware Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for or may act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE V AMENDMENTS, TERMINATION, MISCELLANEOUS SECTION 5.1 Amendments. At any time before the issue of any Securities, this Declaration may be amended by, and only by, a written instrument executed by all of the Administrative Trustees and the Sponsor. SECTION 5.2 Termination of Trust. (a) The Trust shall terminate and be of no further force or effect: (i) upon the bankruptcy of the Sponsor; (ii) upon the filing of a certificate of dissolution or its equivalent with respect to the Sponsor or the revocation of the Sponsor's charter or of the Trust's certificate of trust; (iii) upon the entry of a decree of judicial dissolution of the Sponsor or the Trust; and (iv) before the issuance of any Securities, with the consent of all of the Administrative Trustees and the Sponsor. (b) As soon as is practicable after the occurrence of an event referred to in Section 5.2(a), the Trustees shall file a certificate of cancellation with the Secretary of State of the State of Delaware. 13 15 SECTION 5.3 Governing Law. THIS DECLARATION AND THE RIGHTS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICT OF LAWS. SECTION 5.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 5.5 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 5.6 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which its is held invalid, shall not be affected thereby. SECTION 5.7 Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one of such counterpart signature pages. All of such counterpart signature pages shall be read as through one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 14 16 IN WITNESS WHEREOF, the undersigned have caused this Declaration to be executed as of the day and year first above written. /s/ Richard A. Greenawalt ------------------------- Name: Richard A. Greenawalt As Administrative Trustee /s/ William A. Rosoff --------------------- Name: William A. Rosoff As Administrative Trustee /s/ David D. Wesselink ---------------------- Name: David D. Wesselink As Administrative Trustee Chase Manhattan Bank Delaware By: /s/ John J. Casin ----------------- Name: John J. Cashin Title: Senior Trust Officer Advanta Corp., as Sponsor By: /s/ William A. Rosoff --------------------- Name: William A. Rosoff Title: Vice Chairman 15 17 Exhibit I CERTIFICATE OF TRUST The undersigned, the trustees of Advanta Capital Trust I, desiring to form a business trust pursuant to Delaware Business Trust Act, 12 Del. C. Section 3810, hereby certify as follows: (a) The name of the business trust being formed hereby (the "Trust") is "Advanta Capital Trust I." (b) The name and business address of the trustee of the Trust which has its principal place of business in the State of Delaware is as follows: Chase Manhattan Bank Delaware 1201 Market Street Wilmington, Delaware 19801 Attention: Corporate Trust Administration (c) This Certificate of Trust shall be effective as of the date of the filing. Dated: December 4, 1996 ---------------------------------- Name: William A. Rosoff Title: Regular Trustee ---------------------------------- Name: Richard A. Greenawalt Title: Regular Trustee ---------------------------------- Name: David D. Wesselink Title: Regular Trustee Chase Manhattan Bank Delaware By: ------------------------------- Name: John J. Cashin Title: Senior Trust Officer 16 EX-4.I 4 AMENDED AND RESTATED DECLARATION OF TRUST 12/17/96 1 Exhibit 4-i AMENDED AND RESTATED DECLARATION OF TRUST OF ADVANTA CAPITAL TRUST I Dated as of December 17, 1996 2 CROSS-REFERENCE TABLE*
Section of Trust Indenture Act Section of of 1939, as amended Declaration 310(c)..........................................................................Section 5.3 311(a)..........................................................................Section 2.2 311(b)..........................................................................Section 2.2 312(b)..........................................................................Section 2.2 313.............................................................................Section 2.3 314.............................................................................Section 2.4 314(a)..........................................................................Section 3.6 314(c)..........................................................................Section 2.5 316(a)..........................................................................Section 2.6 316(c)..........................................................................Section 3.6 317(a)..........................................................................Section 3.8 317(b)..........................................................................Section 3.8
- ------------------- * This Cross-Reference Table does not constitute part of the Declaration and shall not affect the interpretation of any of its terms or provisions. 3 AMENDED AND RESTATED DECLARATION OF TRUST OF ADVANTA CAPITAL TRUST I Dated as of December 17, 1996 AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated and effective as of December 17, 1996, by the Trustees (as defined herein), the Sponsor (as defined herein) and by the holders, from time to time, of undivided beneficial interests in the Trust to be issued pursuant to this Declaration; WHEREAS, the Withdrawing Trustees (as defined herein) and the Sponsor established Advanta Capital Trust I (the "Trust"), a trust formed under the Delaware Business Trust Act pursuant to a Declaration of Trust dated as of December 5, 1996 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on December 5, 1996, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain Debentures of the Debenture Issuer (each as hereinafter defined); WHEREAS, as of the date hereof, no interests in the Trust have been issued; WHEREAS, the Withdrawing Trustees are resigning as Trustees upon the execution of this Declaration and the Administrative Trustees (as defined herein) are being appointed as Trustees upon the execution of this Declaration. WHEREAS, all of the Trustees and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; and NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration and, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the Trustees, intending to be legally bound hereby, agree as follows: 4 ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires: (a) Capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Administrative Trustee" has the meaning set forth in Section 5.1. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Agent" means any Paying Agent, Registrar or Exchange Agent. "Authorized Officer" of a Person means any other Person that is authorized to legally bind such former Person. "Book Entry Interest" means a beneficial interest in a Global Certificate registered in the name of a Clearing Agency or its nominee, ownership and transfers of which shall be maintained and made through book entries by a Clearing Agency as described in Section 9.4. "Business Day" means any day other than a Saturday or a Sunday or a day on which banking institutions in the City of New York or Wilmington, Delaware are authorized or required by law or executive order to close. -2- 5 "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code 3801 et seq., as it may be amended from time to time or any successor legislation. "Capital Security Beneficial Owner" means, with respect to a Book Entry Interest, a Person who is the beneficial owner of such Book Entry Interest, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Capital Securities" means, collectively, the Series A Capital Securities and the Series B Capital Securities. "Capital Securities Guarantee" means, collectively, the Series A Capital Securities Guarantee and the Series B Capital Securities Guarantee. "Capital Security Certificate" has the meaning set forth in Section 9.4. "Clearing Agency" means an organization registered as a "Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as depositary for the Capital Securities and in whose name or in the name of a nominee of that organization shall be registered a Global Certificate and which shall undertake to effect book entry transfers and pledges of the Capital Securities. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Clearing Agency effects book entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Time" means the "Closing Time" under the Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the United States Securities and Exchange Commission as from time to time constituted, or if any time after the execution of this Declaration such Commission is not existing and performing the duties now assigned to it under applicable Federal securities laws, then the body performing such duties at such time. "Common Securities" has the meaning specified in Section 7.1(a). "Common Securities Guarantee" means the Common Securities Guarantee Agreement dated as of December 17, 1996 of the Sponsor in respect of the Common Securities. "Company Indemnified Person" means (a) any Administrative Trustee; (b) any Affiliate of any Administrative Trustee; (c) any officers, directors, shareholders, members, -3- 6 partners, employees, representatives or agents of any Administrative Trustee; or (d) any officer, employee or agent of the Trust or its Affiliates. "Corporate Trust Office" means the office of the Property Trustee at which the corporate trust business of the Property Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at 450 W. 33rd Street, 15th Floor, New York, New York 10001. "Covered Person" means: (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holders of Securities. "Debenture Issuer" means Advanta Corp., a Delaware corporation, or any successor entity resulting from any consolidation, amalgamation, merger or other business combination, in its capacity as issuer of the Debentures under the Indenture. "Debenture Trustee" means The Chase Manhattan Bank, a New York banking corporation, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means, collectively, the Series A Debentures and the Series B Debentures. "Default" means an event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Definitive Capital Securities" shall have the meaning set forth in Section 7.3(d). "Delaware Trustee" has the meaning set forth in Section 5.2. "Direct Action" shall have the meaning set forth in Section 3.8(e). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 6.1. "DTC" means The Depository Trust Company, the initial Clearing Agency. "Event of Default" in respect of the Securities means an Event of Default (as defined in the Indenture) that has occurred and is continuing in respect of the Debentures. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Exchange Agent" has the meaning set forth in Section 7.4. -4- 7 "Exchange Offer" means the offer that may be made pursuant to the Registration Rights Agreement (i) by the Trust to exchange Series B Capital Securities for Series A Capital Securities and (ii) by the Debenture Issuer to exchange Series B Debentures for Series A Debentures and the Series B Capital Securities Guarantee for the Series A Capital Securities Guarantee. "Exchange Offer Registration Statement" has the meaning set forth in Section 14.1. "Fiduciary Indemnified Person" has the meaning set forth in Section 10. 4(b). "Global Capital Security" has the meaning set forth in Section 7.3(b). "Holder" means a Person in whose name a Security is registered, such Person being a beneficial owner within the meaning of the Business Trust Act. "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture dated as of December 17, 1996, among the Debenture Issuer and the Debenture Trustee, as amended from time to time. "Initial Optional Redemption Date" has the meaning set forth in Section 4(b) of Annex I hereto. "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Legal Action" has the meaning set forth in Section 3.6(g). "Like Amount" has the meaning set forth in Section 3 of Annex I hereto. "Majority in liquidation amount" means, with respect to the Trust Securities, except as provided in the terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. -5- 8 "Offering Memorandum" has the meaning set forth in Section 3.6(b). "Officers' Certificate" means, with respect to any Person, a certificate signed by the Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President, the Treasurer, the Comptroller, or the Secretary or an Assistant Secretary of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that each officer signing the Certificate has read the covenant or condition and the definitions relating thereto: (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" shall mean a written opinion of counsel, who may be an employee of the Sponsor, and who shall be acceptable to the Property Trustee. "Participants" has the meaning set forth in Section 7.3(b). "Paying Agent" has the meaning specified in Section 7.4. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Property Trustee" has the meaning set forth in Section 5.3(a). "Property Trustee Account" has the meaning set forth in Section 3.8(c). "Purchase Agreement" means the Purchase Agreement for the initial offering and sale of Capital Securities in the form of Exhibit C. "QIBs" shall mean qualified institutional buyers as defined in Rule 144A. "Quorum" means a majority of the Administrative Trustees or, if there are only two Administrative Trustees, both of them. -6- 9 "Registrar" has the meaning set forth in Section 7.4. "Registration Rights Agreement" means the Registration Rights Agreement dated as of December 11, 1996 by and among the Trust, the Debenture Issuer and the Initial Purchasers named therein, as amended from time to time. "Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Responsible Officer" means, with respect to the Property Trustee, any officer within the Corporate Trust Office of the Property Trustee with direct responsibility for the administration of this Declaration and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Restricted Definitive Capital Securities" has the meaning set forth in Section 7.3(d). "Restricted Capital Security" means a Capital Security required by Section 9.2 to contain a Restricted Securities Legend. "Restricted Securities Legend" has the meaning set forth in Section 9.2. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act, or any successor rule or regulation. "Rule 144" means Rule 144 under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Rule 144A" means Rule 144A under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Securities" or "Trust Securities" means the Common Securities and the Capital Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Securities Guarantees" means the Common Securities Guarantee and the Capital Securities Guarantee. "Series A Capital Securities" has the meaning specified in Section 7.1(a). -7- 10 "Series A Capital Securities Guarantee" means the Series A Capital Securities Guarantee Agreement dated as of December 17, 1996 between the Sponsor and The Chase Manhattan Bank, as guarantee trustee, in respect of the Series A Capital Securities. "Series A Debentures" means the 8.99% Series A Junior Subordinated Deferrable Interest Debentures due December 17, 2026 of the Debenture Issuer issued pursuant to the Indenture. "Series B Capital Securities" has the meaning specified in Section 7.1(a). "Series B Capital Securities Guarantee" means the Guarantee Agreement to be entered in connection with the Exchange Offer by the Sponsor in respect of the Series B Capital Securities. "Series B Debentures" means the 8.99 % Series B Junior Subordinated Deferrable Interest Debentures due December 17 , 2026 of the Debenture Issuer issued pursuant to the Indenture. "Special Event" has the meaning set forth in Section 4(c) of Annex I hereto. "Special Event Redemption Price" has the meaning set forth in Section 4(c) of Annex I hereto. "Sponsor" means Advanta Corp., a Delaware corporation, or any successor Person resulting from any merger, consolidation, amalgamation or other business combination, in its capacity as sponsor of the Trust. "Successor Entity" has the meaning specified in Section 3.15(b). "Successor Property Trustee" has the meaning specified in Section 3.8(f). "Successor Securities" has the meaning specified in Section 3.15(b). "Super Majority" has the meaning set forth in Section 2.6(a)(ii). "10% in liquidation amount" means, with respect to the Trust Securities, except as provided in the terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. -8- 11 "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue as trustee of the Trust in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Unrestricted Global Capital Security" has the meaning set forth in Section 9.2(b). "Withdrawing Trustees" means the Trustees other than the Delaware Trustee who executed the Original Declaration. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee that is a Trustee for the purposes of the Trust Indenture Act. (c) If and to the extent that any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 2.2 Lists of Holders of Securities. -9- 12 (a) Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide the Property Trustee, unless the Property Trustee is Registrar for the Securities (i) within five (5) days after each record date for payment of Distributions, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Holders of the Securities ("List of Holders") as of such record date, provided that neither the Sponsor nor the Administrative Trustees on behalf of the Trust shall be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Property Trustee by the Sponsor and the Administrative Trustees on behalf of the Trust, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Property Trustee. The Property Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity), provided that the Property Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Property Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Property Trustee. Within 60 days after May 15 of each year, commencing May 15,1997, the Property Trustee shall provide to the Holders of the Capital Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Property Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Property Trustee. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as are required by Section 314 (if any) of the Trust Indenture Act and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver. -10- 13 (a) The Holders of a Majority in liquidation amount of Capital Securities may, by vote, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default in respect of the Capital Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of greater than a majority in aggregate principal amount of the holders of the Debentures (a "Super Majority") to be waived under the Indenture, the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate liquidation amount of the Capital Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such Default shall cease to exist, and any Event of Default with respect to the Capital Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Default or an Event of Default with respect to the Capital Securities or impair any right consequent thereon. Any waiver by the Holders of the Capital Securities of an Event of Default with respect to the Capital Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Declaration without any further act, vote, or consent of the Holders of the Common Securities. (b) The Holders of a Majority in liquidation amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of a Super Majority to be waived, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate liquidation amount of the Common Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; -11- 14 provided further, each Holder of Common Securities will be deemed to have waived any such Event of Default and all Events of Default with respect to the Common Securities and its consequences if all Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated, and until such Events of Default have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of the Capital Securities and only the Holders of the Capital Securities will have the right to direct the Property Trustee in accordance with the terms of the Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon such waiver, any such default shall cease to exist and any Event of Default with respect to the Common Securities arising therefrom shall be deemed to have been cured for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Common Securities or impair any right consequent thereon. (c) A waiver of an Event of Default under the Indenture by the Property Trustee, at the direction of the Holders of the Capital Securities, constitutes a waiver of the corresponding Event of Default under this Declaration. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7 Event of Default; Notice. (a) The Property Trustee shall, within 90 days after a Responsible Officer obtains knowledge of the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Securities, notices of all Defaults with respect to the Securities actually known to a Responsible Officer of the Property Trustee, unless such Defaults have been cured before the giving of such notice; provided that, except for a Default in the payment of principal of (or premium, if any) or interest on any of the Debentures, the Property Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Property Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Securities. (b) The Property Trustee shall not be deemed to have knowledge of any Default or Event of Default except: (i) a default under Sections 5.01(a) and 5.01(b) of the Indenture; or (ii) any Default or Event of Default as to which the Property Trustee shall have received written notice or of which a Responsible Officer of the Property Trustee charged with the administration of the Declaration shall have actual knowledge. -12- 15 (c) Within five Business Days after the occurrence of any Event of Default actually known to the Property Trustee, the Property Trustee shall transmit notice of such Event of Default to the holders of the Capital Securities, the Administrative Trustees and the Sponsor, unless such Event of Default shall have been cured or waived. The Sponsor and the Administrative Trustees shall file annually with the Property Trustee a certification as to whether or not they are in compliance with all the conditions and covenants applicable to them under this Declaration. ARTICLE III ORGANIZATION SECTION 3.1 Name. The Trust is named "Advanta Capital Trust I" as such name may be modified from time to time by the Administrative Trustees following written notice to the Property Trustee, the Delaware Trustee and the Holders of Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrative Trustees. SECTION 3.2 Office. The address of the principal office of the Trust is c/o Advanta Corp., 501 Carr Road, Wilmington, DE 19809. On ten Business Days prior written notice to the Property Trustee, the Delaware Trustee and the Holders of Securities, the Administrative Trustees may designate another principal office. SECTION 3.3 Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell Securities, (b) use the proceeds from the sale of the Securities to acquire the Debentures, and (c) except as otherwise limited herein, to engage in only those other activities necessary, advisable or incidental thereto, including without limitation, those activities specified in Section 3.6. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, mortgage or pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. SECTION 3.4 Authority. Subject to the limitations provided in this Declaration and to the specific duties of the Property Trustee, the Administrative Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by the Administrative Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust and an action taken by the Property Trustee on behalf of the Trust in accordance with its powers shall -13- 16 constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. SECTION 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Property Trustee Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Administrative Trustees. The Administrative Trustees shall have the exclusive power, duty and authority to cause the Trust to engage in the following activities: (a) to issue and sell the Capital Securities and the Common Securities in accordance with this Declaration; provided, however, that except, in the case of (i) and (ii), as contemplated in Section 7.1(a), (i) the Trust may issue no more than one series of Capital Securities and no more than one series of Common Securities, (ii) there shall be no interests in the Trust other than the Securities, and (iii) the issuance of Securities shall be limited to a simultaneous issuance of both Capital Securities and Common Securities at any Closing Time, (b) in connection with the issue and sale of the Capital Securities and the consummation of the Exchange Offer, at the direction of the Sponsor, to: (i) prepare and execute, if necessary, an offering memorandum (the "Offering Memorandum") in preliminary and final form prepared by the Sponsor, in relation to the offering and sale of Series A Capital Securities to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to institutional "accredited investors" (as defined in Rule 501(i)(1), (2), (3) or (7) under the Securities Act) and to execute and file with the Commission, at such time as determined by the Sponsor, any Registration Statement, including any amendments thereto, as contemplated by the Registration Rights Agreement; (ii) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Capital Securities in any State in which the Sponsor has determined to qualify or register such Capital Securities for sale; (iii) at the direction of the Sponsor, execute and file an application, prepared by the Sponsor, to the New York Stock Exchange or any other national stock -14- 17 exchange or the Nasdaq Stock Market's National Market for listing or inclusion of the Capital Securities; (iv) execute and deliver letters, documents, or instruments with DTC and other Clearing Agencies relating to the Capital Securities; (v) if required, execute and file with the Commission a registration statement on Form 8-A, including any amendments thereto, prepared by the Sponsor, relating to the registration of the Capital Securities under Section 12(b) or 12(g) of the Exchange Act as the case may be; and (vi) execute and enter into the Purchase Agreement and the Registration Rights Agreement providing for the sale of the Capital Securities and take any and all actions necessary, advisable or appropriate to satisfy the Trust's obligations thereunder; it being acknowledged that Initial Individual Trustees have performed the actions described in clauses (i), (iv) and (vi) on behalf of the Trust prior to the date hereof and that such actions are hereby ratified, approved and confirmed in all respects. (c) to acquire the Series A Debentures with the proceeds of the sale of the Series A Capital Securities and the Common Securities and to exchange, or to direct the Property Trustee in writing to exchange, the Series A Debentures for a like principal amount of Series B Debentures, pursuant to the Exchange Offer; provided, however, that the Administrative Trustees shall cause legal title to the Debentures to be held of record in the name of the Property Trustee for the benefit of the Holders of the Capital Securities and the Holders of Common Securities; (d) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of a Special Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Capital Securities and Holders of Common Securities as to such actions and applicable record dates; (f) to take all actions and perform such duties as may be required of the Administrative Trustees pursuant to the terms of the Securities; (g) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; -15- 18 (h) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (j) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Property Trustee, which certificate may be executed by any Administrative Trustee; (k) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (l) to act as, or appoint another Person to act as, Registrar and Exchange Agent for the Securities or to appoint a Paying Agent for the Securities as provided in Section 7.4 except for such time as such power to appoint a Paying Agent is vested in the Property Trustee; (m) to give prompt written notice to the Property Trustee and to Holders of the Securities of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (n) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing; (o) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created; (p) to take any action, not inconsistent with this Declaration or with applicable law, that the Administrative Trustees determine in their discretion to be necessary, advisable or incidental to carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) causing the Trust to be classified for United States federal income tax purposes as a grantor trust; and -16- 19 (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes; (q) to take all action necessary to consummate the Exchange Offer or otherwise cause the Capital Securities to be registered pursuant to an effective registration statement in accordance with the provisions of the Registration Rights Agreement; and (r) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Administrative Trustees, on behalf of the Trust. The Administrative Trustees must exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Administrative Trustees shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Subject to this Section 3.6, the Administrative Trustees shall have none of the powers or the authority of the Property Trustee set forth in Section 3.8. Any expenses incurred by the Administrative Trustees pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. SECTION 3.7 Prohibition of Actions by the Trust and the Trustees. The Trust shall not, and the Trustees (including the Property Trustee) shall not, engage in any activity other than as required or authorized by this Declaration. The Trust shall not: (a) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of Securities pursuant to the terms of this Declaration and of the Securities; (b) acquire any assets other than as expressly provided herein: (c) possess Trust property for other than a Trust purpose; (d) make any loans or incur any indebtedness other than loans represented by the Debentures; (e) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; -17- 20 (f) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (g) other than as provided in this Declaration or Annex I to this Declaration, (i) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters to the effect that such modification will not cause more than an insubstantial risk that for United States federal income tax purposes the Trust will not be classified as a grantor trust. SECTION 3.8 Powers and Duties of the Property Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Holders of the Securities. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Section 5.6. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Administrative Trustees or to the Delaware Trustee (if the Property Trustee does not also act as Delaware Trustee). (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Trustee Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Trustee Account and make payments to the Holders of the Capital Securities and Holders of the Common Securities from the Property Trustee Account in accordance with Section 6.1. Funds in the Property Trustee Account shall be held uninvested until disbursed in accordance with this Declaration. The Property Trustee Account shall be an account that is maintained with a banking institution the rating on whose long-term unsecured indebtedness is at least equal to the rating assigned to the Capital Securities by a "nationally recognized statistical rating organization", as that term is defined for purposes of Rule 436(g)(2) under the Securities Act; -18- 21 (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Administrative Trustees in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain events. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of the Securities. (e) Subject to Section 3.9(a), the Property Trustee shall take any Legal Action which arises out of or in connection with an Event of Default of which a Responsible Officer of the Property Trustee has actual knowledge or the Property Trustee's duties and obligations under this Declaration or the Trust Indenture Act and if the Property Trustee shall have failed to take such Legal Action, the Holders of the Capital Securities may take such Legal Action, to the same extent as if such Holders of Capital Securities held an aggregate principal amount of Debentures equal to the aggregate liquidation amount of such Capital Securities, without first proceeding against the Property Trustee or the Trust; provided however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay the principal of or premium, if any, or interest on the Debentures on the date such principal, premium, if any, or interest is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Holders of the Common Securities will be subrogated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Capital Securities in such Direct Action. Except as provided in the preceding sentences, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (f) The Property Trustee shall not resign as a Trustee unless either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of Securities pursuant to the terms of the Securities; or (ii) a successor Trustee possessing the qualifications to act as Property Trustee under Section 5.3 (a "Successor Property Trustee") has been appointed and has accepted that appointment in accordance with Section 5.6(b). -19- 22 (g) The Property Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer of the Property Trustee occurs and is continuing, the Property Trustee shall, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of the Securities. (h) The Property Trustee shall be authorized to undertake any actions set forth in Section 317(a) of the Trust Indenture Act. (i) For such time as the Property Trustee is the Paying Agent, the Property Trustee may authorize one or more Persons to act as additional Paying Agents and to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to all securities and any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any such additional Paying Agent may be removed by the Property Trustee at any time the Property Trustee remains as Paying Agent and a successor Paying Agent or additional Paying Agents may be (but are not required to be) appointed at any time by the Property Trustee. (j) Subject to this Section 3.8, the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 3.6. The Property Trustee must exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Property Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee. (a) The Property Trustee, before the occurrence of any Event of Default and after the curing or waiving of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and in the Securities and no implied covenants shall be read into this Declaration against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Property Trustee has actual knowledge, the Property Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Declaration shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: -20- 23 (A) the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Declaration and in the Securities and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration and in the Securities, and no implied covenants or obligations shall be read into this Declaration against the Property Trustee; and (B) in the absence of bad faith on the part of the Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Property Trustee and conforming to the requirements of this Declaration; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration; (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Declaration; (iv) no provision of this Declaration shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or indemnity reasonably satisfactory to the Property Trustee against such risk or liability is not reasonably assured to it; (v) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Property Trustee Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Declaration and the Trust Indenture Act; (vi) the Property Trustee shall have no duty or liability for or with -21- 24 respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Property Trustee Account maintained by the Property Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Sponsor with their respective duties under this Declaration, nor shall the Property Trustee be liable for any default or misconduct of the Administrative Trustees or the Sponsor. SECTION 3.10 Certain Rights of Property Trustee. (a) Subject to the provisions of Section 3.9: (i) the Property Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Administrative Trustees contemplated by this Declaration may be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Declaration, the Property Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrative Trustees; (iv) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or registration thereof; (v) the Property Trustee may consult with counsel or other experts of its selection and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted -22- 25 by it hereunder in good faith and in accordance with such advice or opinion, such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees, and the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (vi) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any Holder, unless such Holder shall have provided to the Property Trustee security and indemnity, reasonably satisfactory to the Property Trustee, against the costs, expenses (including reasonable attorneys' fees and expenses and the expenses of the Property Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Property Trustee; provided, that, nothing contained in this Section 3.10(a)(vi) shall be taken to relieve the Property Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Declaration; (vii) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Property Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) any action taken by the Property Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Property Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Property Trustee's or its agent's taking such action; (x) whenever in the administration of this Declaration the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders of the Securities which instructions may only be given by the Holders of the same proportion in liquidation amount of the Securities as -23- 26 would be entitled to direct the Property Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (iii) shall be protected in conclusively relying on or acting in or accordance with such instructions; (xi) except as otherwise expressly provided by this Declaration, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; and (xii) the Property Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence or willful misconduct, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Declaration. (b) No provision of this Declaration shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 3.11 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Administrative Trustees or the Property Trustee described in this Declaration. Except as set forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. In the event the Delaware Trustee shall at any time be required to take any action or perform any duty hereunder, the Delaware Trustee shall be entitled to the benefits of Section 3.9(b)(ii)-(vii) and Section 3.10 as if such sections referred to the Delaware Trustee rather than the Property Trustee. No implied covenants or obligations shall be read into this Declaration against the Delaware Trustee. SECTION 3.12 Execution of Documents. Unless otherwise determined by the Administrative Trustees, and except as otherwise required by the Business Trust Act, any Administrative Trustee is authorized to execute on behalf of the Trust any documents that the Administrative Trustees have the power and authority to execute pursuant to Section 3.6; provided that, the Registration Statement referred to in Section 3.6(b)(i), including any amendments thereto, shall be signed by all of the Administrative Trustees. SECTION 3.13 Not Responsible for Recitals or Issuance of Securities. -24- 27 The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration or the Securities. SECTION 3.14 Duration of Trust. The Trust, unless terminated pursuant to the provisions of Article VIII hereof, shall have existence up to December 17, 2027. -25- 28 SECTION 3.15 Mergers. (a) The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any Person, except as described in Section 3.15(b) and (c). (b) The Trust may, at the request of the Sponsor, with the consent of the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees and without the consent of the Holders of the Securities, the Delaware Trustee or the Property Trustee, merge with or into, consolidate, amalgamate or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, a trust organized as such under the laws of any State; provided that: (i) such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints a trustee of the Successor Entity that possesses the same powers and duties as the Property Trustee as the holder of the Debentures; (iii) the Successor Securities are listed or included for trading, or any Successor Securities will be listed or included for trading upon notification of issuance, on any national securities exchange or with another organization on which the Capital Securities are then listed or included; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization; (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of such Holders' interests in the new entity); (vi) such Successor Entity has a purpose identical to that of the Trust; -26- 29 (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Sponsor has received an opinion of an independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of the Holders' interest in the new entity); and (B) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and (viii) the Sponsor or any permitted successor or assignee owns all of the common securities of such Successor Entity and guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Capital Securities Guarantee and the Common Securities Guarantee. (c) Notwithstanding Section 3.15(b), the Trust shall not, except with the consent of Holders of 100% in liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the Successor Entity not to be classified as a grantor trust for United States federal income tax purposes. ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities. At the Closing Time, the Sponsor will purchase all of the Common Securities then issued by the Trust, in an amount at least equal to 3% of the capital of the Trust, at the same time as the Series A Capital Securities are issued and sold. SECTION 4.2 Responsibilities of the Sponsor. In connection with the issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare the Offering Memorandum and to prepare for filing by the Trust with the Commission any Registration Statement, including any amendments thereto as contemplated by the Registration Rights Agreement; -27- 30 (b) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States; (c) if deemed necessary or advisable by the Sponsor, to prepare for filing by the Trust an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market for listing or inclusion of the Capital Securities: (d) if deemed necessary or advisable by the Sponsor, to prepare for filing by the Trust with the Commission a registration statement on Form 8-A relating to the registration of the Capital Securities under Section 12(b) or 12(g) of the Exchange Act, as the case may be, including any amendments thereto; and (e) to negotiate the terms of the Purchase Agreement and the Registration Rights Agreement providing for the sale of the Capital Securities. SECTION 4.3 Right to Proceed. The Sponsor acknowledges the rights of the Holders of Capital Securities, in the event that a failure of the Trust to pay Distributions on the Capital Securities is attributable to the failure of the Company to pay interest or principal on the Debentures, to institute a proceeding directly against the Debenture Issuer for enforcement of its payment obligations on the Debentures. ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees: Appointment of Co-Trustee. The number of Trustees initially shall be five (5), and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holders of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided however that, the number of Trustees shall in no event be less than two (2); provided further that (1) one Trustee shall be the Delaware Trustee; (2) there shall be at least one Trustee who is an employee or officer of, or is affiliated with, the Sponsor (an "Administrative Trustee"); -28- 31 and (3) one Trustee shall be the Property Trustee for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. Notwithstanding the above, unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust's property may at the time be located, the Holders of a Majority in liquidation amount of the Common Securities acting as a class at a meeting of the Holders of the Common Securities, and the Administrative Trustees shall have power to appoint one or more Persons either to act as a co-trustee, jointly with the Property Trustee, of all or any part of the Trust's property, or to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in such capacity any property, title, right or power deemed necessary or desirable, subject to the provisions of this Declaration. In case an Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make any such appointment of a co-trustee. SECTION 5.2 Delaware Trustee. For so long as required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be: (a) a natural person who is a resident of the State of Delaware; or (b) if not a natural person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, provided that, if the Property Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Property Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. The initial Delaware Trustee shall be: Chase Manhattan Bank Delaware 1201 Market Street Wilmington, DE 19801 Attention: Corporate Trustee Administration Department SECTION 5.3 Property Trustee: Eligibility. (a) There shall at all times be one Trustee (the "Property Trustee") which shall act as Property Trustee which shall: (i) not be an Affiliate of the Sponsor; and -29- 32 (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or other Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Property Trustee shall cease to be eligible to so act under Section 5.3(a), the Property Trustee shall immediately resign in the manner and with the effect set forth in Section 5.6(c). (c) If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. (d) The Capital Securities Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the proviso contained in paragraph (1) of Section 310(b) of the Trust Indenture Act. (e) The initial Property Trustee shall be: The Chase Manhattan Bank 450 W. 33rd Street, 15th Floor New York, New York 10001 Attention: Corporate Trustee Administration Department SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally. Each Administrative Trustee and the Delaware Trustee (unless the Property Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. -30- 33 SECTION 5.5 Administrative Trustees. (a) The Withdrawing Trustees shall cease to be Trustees as of the execution of this Declaration and, effective as of such time, the Administrative Trustees shall be the Persons identified as such on the signature pages of this Declaration. (b) Except as expressly set forth in this Declaration and except if a meeting of the Administrative Trustees is called with respect to any matter over which the Administrative Trustees have power to act, any power of the Administrative Trustees may be exercised by, or with the consent of, any one such Administrative Trustee. (c) Unless otherwise determined by the Administrative Trustees, and except as otherwise required by the Business Trust Act or applicable law, any Administrative Trustee is authorized to execute on behalf of the Trust any documents which the Administrative Trustees have the power and authority to cause the Trust to execute pursuant to Section 3.6; provided, that, the Registration Statement referred to in Section 3.6, including any amendments thereto, shall be signed by all of the Administrative Trustees; and (d) An Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents which the Administrative Trustees have power and authority to cause the Trust to execute pursuant to Section 3.6. SECTION 5.6 Appointment, Removal and Resignation of Trustees. (a) Subject to Section 5.6(b), Trustees may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; (ii) unless an Event of Default shall have occurred and be continuing after the issuance of any Securities, by vote of the Holders of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; and (iii) if an Event of Default shall have occurred and be continuing after the issuance of the Securities, with respect to the Property Trustee or the Delaware Trustee, by vote of Holders of a Majority in liquidation amount of the Capital Securities voting as a class at a meeting of Holders of the Capital Securities. (b) (i) The Trustee that acts as Property Trustee shall not be removed in accordance with Section 5.6(a) until a Successor Property Trustee has been appointed and has -31- 34 accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the removed Property Trustee, the Administrative Trustees and the Sponsor; and (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with this Section 5.6(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the removed Delaware Trustee, the Administrative Trustees and the Sponsor. (c) A Trustee appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) No such resignation of the Trustee that acts as the Property Trustee shall be effective: (A) until a Successor Property Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor and the resigning Property Trustee; or (B) until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the holders of the Securities; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee. (d) The Holders of the Common Securities shall use their best efforts to promptly appoint a Successor Delaware Trustee or Successor Property Trustee, as the case may be, if the Property Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 5.6. (e) If no Successor Property Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.6 within 60 days after delivery of an instrument of resignation or removal, the Property Trustee or Delaware Trustee resigning or being removed, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper and -32- 35 prescribe, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. (f) No Property Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Property Trustee or successor Delaware Trustee, as the case may be. SECTION 5.7 Vacancies among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1, or if the number of Trustees is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.6. SECTION 5.8 Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 5.6, the Administrative Trustees in office, regardless of their number, shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Declaration. SECTION 5.9 Meetings. If there is more than one Administrative Trustee, meetings of the Administrative Trustees shall be held from time to time upon the call of any Administrative Trustee. Regular meetings of the Administrative Trustees may be held at a time and place fixed by resolution of the Administrative Trustees. Notice of any in-person meetings of the Administrative Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before such meeting. Notice of any telephonic meetings of the Administrative Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of an Administrative Trustee at a meeting shall constitute a waiver of notice of such meeting except where an Administrative Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Administrative Trustees may be taken at a meeting by vote of a majority of the Administrative Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided -33- 36 that a Quorum is present, or without a meeting by the unanimous written consent of the Administrative Trustees. In the event there is only one Administrative Trustee, any and all action of such Administrative Trustee shall be evidenced by a written consent of such Administrative Trustee. SECTION 5.10 Delegation of Power. (a) Any Administrative Trustee may, by power of attorney, to the extent permitted by applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 3.6, including any registration statement or amendment thereto filed with the Commission, or making any other governmental filing; and (b) the Administrative Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. Section 5.11 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Property Trustee or the Delaware Trustee or any Administrative Trustee that is not a natural person, as the case may be, may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Property Trustee or the Delaware Trustee, as the case may be, shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Property Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Property Trustee or the Delaware Trustee, as the case may be, hereunder, provided such corporation shall be otherwise qualified and eligible under this Article V, without the execution or filing of any paper or any further act on the part of any of the parties hereto. ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. If and to the extent that the Debenture Issuer makes a payment of interest (including Compounded Interest (as defined in the Indenture) and Additional Interest (as defined in the Indenture)), premium and/or principal on the Debentures held by the Property Trustee or Liquidated Damages (as defined in the Registration Rights Agreement) or any other payments pursuant to the Registration Rights Agreement with respect to the Debentures held by the Property Trustee (the amount of any such payment being a "Payment Amount"), the Property -34- 37 Trustee shall and is directed, to the extent funds are available for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities. (a) The Administrative Trustees shall on behalf of the Trust issue one class of capital securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Series A Capital Securities") and one class of common securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Common Securities"). The Administrative Trustees shall on behalf of the Trust issue one class of capital securities representing undivided beneficial interests in the Trust having such terms as set forth in Annex I (the "Series B Capital Securities") in exchange for Series A Capital Securities accepted for exchange in the Exchange Offer, which Series B Capital Securities shall not bear the legends required by Section 9.2(i) unless the Holder of such Series A Capital Securities is either (A) a broker-dealer who purchased such Series A Capital Securities directly from the Trust for resale pursuant to Rule 144A or any other available exemption under the Securities Act, (B) a Person participating in the distribution of the Series A Capital Securities or (C) a Person who is an affiliate (as defined in Rule 144A) of the Trust. The Trust shall issue no securities or other interests in the assets of the Trust other than the Capital Securities and the Common Securities. (b) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (c) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable. (d) Every Person, by virtue of having become a Holder or a Capital Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. SECTION 7.2 Execution and Authentication. (a) The Securities shall be signed on behalf of the Trust by an Administrative Trustee. In case any Administrative Trustee of the Trust who shall have signed any of the Securities shall cease to be such Administrative Trustee before the Securities so signed shall be delivered by the Trust, such Securities nevertheless may be delivered as though the Person who signed such Securities had not ceased to be such Administrative Trustee; and any Securities may be signed on behalf of the Trust by such persons who, at the actual date of execution of such -35- 38 Security, shall be the Administrative Trustees of the Trust, although at the date of the execution and delivery of the Declaration any such person was not such a Administrative Trustee. (b) One Administrative Trustee shall sign the Capital Securities for the Trust by manual or facsimile signature. Unless otherwise determined by the Trust, such signature shall, in the case of Common Securities, be a manual signature. A Capital Security shall not be valid until authenticated by the manual signature of an authorized signatory of the Property Trustee. The signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. Upon a written order of the Trust signed by one Administrative Trustee, the Property Trustee shall authenticate the Capital Securities for original issue. The aggregate number of Capital Securities outstanding at any time shall not exceed the number set forth in Annex I hereto except as provided in Section 7.6. The Property Trustee may appoint an authenticating agent acceptable to the Trust to authenticate Capital Securities. An authenticating agent may authenticate Capital Securities whenever the Property Trustee may do so. Each reference in this Declaration to authentication by the Property Trustee includes authentication by such agent. An authenticating agent has the same rights as the Property Trustee to deal with the Sponsor or an Affiliate. SECTION 7.3 Form and Dating. (a) The Capital Securities and the Property Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 and the Common Securities shall be substantially in the form of Exhibit A-2, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates representing the Securities may be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Trust, as evidenced by the execution thereof by one or more Administrative Trustees. The Securities may have letters, "CUSIP" or other numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the one or more Administrative Trustees, as evidenced by their execution thereof). The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibit A-1 to the Property Trustee in writing. Each Capital Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1 and A-2 are part of the terms of this Declaration and to the extent applicable, the Property Trustee and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. (b) Global Securities. Securities offered and sold to QIBs in reliance on Rule 144A, as provided in the Purchase Agreement, shall be issued in the form of one or more -36- 39 permanent global Securities in definitive, fully registered form without Distribution coupons with the appropriate global legends and Restricted Securities Legend set forth in Exhibit A-1 hereto (a "Global Capital Security"), which shall be deposited on behalf of the purchasers of the Capital Securities represented thereby with the Property Trustee, as custodian for the Clearing Agency, and registered in the name of the Clearing Agency or a nominee of the Clearing Agency, duly executed by the Trust and authenticated by the Property Trustee as hereinafter provided. The number of Capital Securities represented by the Global Capital Security may from time to time be increased or decreased by adjustments made on the records of the Property Trustee and the Clearing Agency or its nominee as hereinafter provided. (c) Book-Entry Provisions. This Section 7.3(c) shall apply only to the Global Capital Securities and such other Capital Securities in global form as may be authorized by the Trust to be deposited with or on behalf of the Clearing Agency. The Administrative Trustees shall execute and the Property Trustee shall, in accordance with this Section 7.3, authenticate and make available for delivery initially one or more Global Capital Securities that (i) shall be registered in the name of Cede & Co. or other nominee of such Clearing Agency and (ii) shall be delivered by the Trustee to such Clearing Agency or pursuant to such Clearing Agency's written instructions or held by the Property Trustee as custodian for the Clearing Agency. Members of, or participants in, the Clearing Agency ("Participants") shall have no rights under this Declaration with respect to any Global Capital Security held on their behalf by the Clearing Agency or by the Property Trustee as the custodian of the Clearing Agency or under such Global Capital Security, and the Clearing Agency may be treated by the Trust, the Property Trustee and any agent of the Trust or the Property Trustee as the absolute owner of such Global Capital Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Trust, the Property Trustee or any agent of the Trust or the Property Trustee from giving effect to any written certification, proxy or other authorization furnished by the Clearing Agency or impair, as between the Clearing Agency and its Participants, the operation of customary practices of such Clearing Agency governing the exercise of the rights of a holder of a beneficial interest in any Global Capital Security. (d) Definitive Capital Securities. Except as provided in Section 7.9, owners of beneficial interests in a Global Capital Security will not be entitled to receive physical delivery of certificated Capital Securities ("Definitive Capital Securities"). Purchasers of Securities who are "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and who are not QIBs will receive Capital Securities in the form of individual certificates in definitive, fully registered form without distribution coupons and with the Restricted Securities Legend set forth in Exhibit A-1 hereto ("Restricted Definitive Capital Securities"); provided, however, that upon registration of transfer of such Restricted Definitive Capital Securities to a QIB, such Restricted Definitive Capital Securities will, unless the Global Capital Security has previously been exchanged, be exchanged for an interest in a Global Capital Security pursuant to the provisions of Section 9.2. Restricted Definitive Capital Securities will bear the Restricted -37- 40 Securities Legend set forth on Exhibit A-1 unless removed in accordance with this Section 7.3 or Section 9.2. SECTION 7.4 Registrar, Paying Agent and Exchange Agent. The Trust shall maintain in the Borough of Manhattan, The City of New York, (i) an office or agency where Capital Securities may be presented for registration of transfer ("Registrar"), (ii) an office or agency where Capital Securities may be presented for payment ("Paying Agent") and (iii) an office or agency where Securities may be presented for exchange ("Exchange Agent"). The Registrar shall keep a register of the Capital Securities and of their transfer. The Trust may appoint the Registrar, the Paying Agent and the Exchange Agent and may appoint one or more co-registrars, one or more additional paying agents and one or more additional exchange agents in such other locations as it shall determine. The term "Registrar" includes any additional registrar, "Paying Agent" includes any additional paying agent and the term "Exchange Agent" includes any additional exchange agent. The Trust may change any Paying Agent, Registrar, co-registrar or Exchange Agent without prior notice to any Holder. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees. The Trust shall notify the Property Trustee of the name and address of any Agent not a party to this Declaration. If the Trust fails to appoint or maintain another entity as Registrar, Paying Agent or Exchange Agent, the Property Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent, Registrar or Exchange Agent. The Trust, through the Administrative Trustees, shall act as Paying Agent, Registrar, co-registrar and Exchange Agent for the Common Securities. The Trust initially appoints the Property Trustee as Registrar, Paying Agent and Exchange Agent for the Capital Securities. SECTION 7.5 Paying Agent to Hold Money in Trust. The Trust shall require each Paying Agent other than the Property Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Property Trustee all money held by the Paying Agent for the payment of liquidation amounts or Distributions on the Securities, and will notify the Property Trustee if there are insufficient funds for such purpose. While any such insufficiency continues, the Property Trustee may require a Paying Agent to pay all money held by it to the Property Trustee. The Trust at any time may require a Paying Agent to pay all money held by it to the Property Trustee and to account for any money disbursed by it. Upon payment over to the Property Trustee, the Paying Agent (if other than the Trust or an Affiliate of the Trust) shall have no further liability for the money. If the Trust or the Sponsor or an Affiliate of the Trust or the Sponsor acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 7.6 Replacement Securities. -38- 41 If the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken or if such Security is mutilated and is surrendered to the Trust or in the case of the Capital Securities to the Property Trustee, the Administrative Trustees on behalf of the Trust shall issue and the Property Trustee shall authenticate a replacement Security if the Property Trustee's requirements are met. An indemnity bond must be provided by the Holder which, in the judgment of the Property Trustee, is sufficient to protect the Trustees, the Sponsor or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Trust may charge such Holder for its expenses in replacing a Security. Every replacement Security is an additional beneficial interest in the Trust. SECTION 7.7 Outstanding Capital Securities. The Capital Securities outstanding at any time are all the Capital Securities authenticated by the Property Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Capital Security is replaced, paid or purchased pursuant to Section 7.6 hereof, it ceases to be outstanding unless the Property Trustee receives proof satisfactory to it that the replaced, paid or purchased Capital Security is held by a bona fide purchaser. If Capital Securities are considered paid in accordance with the terms of this Declaration, they cease to be outstanding and Distributions on them shall cease to accumulate. A Capital Security does not cease to be outstanding because one of the Trust, the Sponsor or an Affiliate of the Sponsor holds the Security. SECTION 7.8 Capital Securities in Treasury. In determining whether the Holders of the required amount of Securities have concurred in any direction, waiver or consent, Capital Securities owned by the Trust, the Sponsor or an Affiliate of the Sponsor, as the case may be, shall be disregarded and deemed not to be outstanding, except that for the purposes of determining whether the Property Trustee shall be fully protected in relying on any such direction, waiver or consent, only Securities which a Responsible Officer of the Property Trustee actually knows are so owned shall be so disregarded. -39- 42 SECTION 7.9 Temporary Securities. (a) Until Definitive Securities are ready for delivery, the Trust may prepare and, in the case of the Capital Securities, the Property Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Trust considers appropriate for temporary Securities. Without unreasonable delay, the Trust shall prepare and, in the case of the Capital Securities, the Property Trustee shall authenticate Definitive Securities in exchange for temporary Securities. (b) A Global Capital Security deposited with the Clearing Agency or with the Property Trustee as custodian for the Clearing Agency pursuant to Section 7.3 shall be transferred to the beneficial owners thereof in the form of certificated Capital Securities only if such transfer complies with Section 9.2 and (i) the Clearing Agency notifies the Company that it is unwilling or unable to continue as Clearing Agency for such Global Capital Security or if at any time such Clearing Agency ceases to be a "clearing agency" registered under the Exchange Act and a clearing agency is not appointed by the Sponsor within 90 days of such notice, (ii) a Default or an Event of Default has occurred and is continuing or (iii) the Trust at its sole discretion elects to cause the issuance of certificated Capital Securities. (c) Any Global Capital Security that is transferable to the beneficial owners thereof in the form of certificated Capital Securities pursuant to this Section 7.9 shall be surrendered by the Clearing Agency to the Property Trustee located in the Borough of Manhattan, The City of New York, to be so transferred, in whole or from time to time in part, without charge, and the Property Trustee shall authenticate and make available for delivery, upon such transfer of each portion of such Global Capital Security, an equal aggregate liquidation amount of Securities of authorized denominations in the form of certificated Capital Securities. Any portion of a Global Capital Security transferred pursuant to this Section shall be registered in such names as the Clearing Agency shall direct. Any Capital Security in the form of certificated Capital Securities delivered in exchange for an interest in the Restricted Global Capital Security shall, except as otherwise provided by Sections 7.3 and 9.1, bear the Restricted Securities Legend set forth in Exhibit A-1 hereto. (d) Subject to the provisions of Section 7.9(c), the Holder of a Global Capital Security may grant proxies and otherwise authorize any Person, including Participants and Persons that may hold interests through Participants, to take any action which such Holder is entitled to take under this Declaration or the Securities. (e) In the event of the occurrence of any of the events specified in Section 7.9(b), the Trust will promptly make available to the Property Trustee a reasonable supply of certificated Capital Securities in fully registered form without distribution coupons. -40- 43 SECTION 7.10 Cancellation. The Trust at any time may deliver Capital Securities to the Property Trustee for cancellation. The Registrar, Paying Agent and Exchange Agent shall forward to the Property Trustee any Capital Securities surrendered to them for registration of transfer, redemption, exchange or payment. The Property Trustee shall promptly cancel all Capital Securities, surrendered for registration of transfer, redemption, exchange, payment, replacement or cancellation and shall dispose of canceled Capital Securities in accordance with its customary procedures unless any Administrative Trustee otherwise directs the Property Trustee in writing. The Trust may not issue new Capital Securities to replace Capital Securities that it has paid or that have been delivered to the Property Trustee for cancellation or that any Holder has exchanged. SECTION 7.11 CUSIP Numbers. The Trust in issuing the Capital Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Property Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders of Capital Securities; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Capital Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Capital Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Sponsor will promptly notify the Property Trustee of any change in the "CUSIP" numbers. ARTICLE VIII TERMINATION OF TRUST SECTION 8.1 Termination of Trust. (a) The Trust shall automatically terminate: (i) upon the bankruptcy of the Sponsor; (ii) upon the filing of a certificate of dissolution or liquidation or its equivalent with respect to the Sponsor; or the revocation of the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iii) following the distribution of a Like Amount of the Debentures to the Holders of the Securities, provided that the Property Trustee has received written notice from the Sponsor directing the Property Trustee to terminate the Trust (which direction is optional, and except as otherwise expressly provided below, within the discretion of the Sponsor) and provided, further, that such direction and such distribution is conditioned on the Administrative Trustees' receipt of an opinion of an independent tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may -41- 44 rely on published rulings of the Internal Revenue Service, to the effect that the Holders of the Securities will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust and the distribution of Debentures; (iv) upon the entry of a decree of judicial dissolution of the Trust by a court of competent jurisdiction; (v) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; (vi) upon the repayment of the Debentures or at such time as no Debentures are outstanding; or (vii) the expiration of the term of the Trust provided in Section 3.14. (b) As soon as is practicable after the occurrence of an event referred to in Section 8.1(a), the Administrative Trustees shall file a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 3.9 and Article X shall survive the termination of the Trust. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities. (a) Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Securities. Any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (b) Subject to this Article IX, Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration. Any transfer or purported transfer of any Capital Security not made in accordance with this Declaration shall be null and void. (c) The Sponsor may not transfer the Common Securities. (d) The Property Trustee shall provide for the registration of Capital Securities and of the transfer of Capital Securities, which will be effected without charge but only upon payment (with such indemnity as the Property Trustee may require) in respect of any -42- 45 tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Capital Securities, the Property Trustee shall cause one or more new Capital Securities to be issued in the name of the designated transferee or transferees. Every Capital Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Property Trustee duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Capital Security surrendered for registration of transfer shall be delivered to the Property Trustee and canceled in accordance with Section 7.10. A transferee of a Capital Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Capital Security. By acceptance of a Capital Security, each transferee shall be deemed to have agreed to be bound by this Declaration. SECTION 9.2 Transfer Procedures and Restrictions. (a) General. Except as otherwise provided in Section 9.2(b), if Capital Securities are issued upon the registration of transfer, exchange or replacement of Capital Securities bearing the Restricted Securities Legend set forth in Exhibit A-1 hereto, or if a request is made to remove such Restricted Securities Legend on Capital Securities, the Capital Securities so issued shall bear the Restricted Securities Legend, or the Restricted Securities Legend shall not be removed, as the case may be, unless there is delivered to the Trust and the Property Trustee such satisfactory evidence, which shall include an Opinion of Counsel, as may be reasonably required by the Trust and the Property Trustee, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof are made pursuant to an exception from the registration requirements of the Securities Act or, with respect to Restricted Securities, that such Securities are not "restricted" within the meaning of Rule 144. Upon provision of such satisfactory evidence, the Property Trustee, at the written direction of the Trust, shall authenticate and deliver Capital Securities that do not bear the legend. (b) Transfers After Effectiveness of a Registration Statement. After the effectiveness of a Registration Statement with respect to any Capital Securities, all requirements pertaining to legends on such Capital Securities will cease to apply, and beneficial interests in a Capital Security in global form without legends will be available to transferees of such Capital Securities, upon exchange of the transferring Holder's Restricted Definitive Capital Security or directions to transfer such Holder's beneficial interest in the Global Capital Security. No such transfer or exchange of a Restricted Definitive Capital Security or of an interest in the Global Capital Security shall be effective unless the transferor delivers to the Property Trustee a certificate in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1. Except as otherwise provided in Section 9.2(m), after the effectiveness of a Registration Statement, the Trust shall issue and the Property Trustee, upon a written order of the Trust signed by one Administrative Trustee, shall authenticate a Capital Security in global form without the Restricted Securities Legend (the "Unrestricted Global Capital Security") to deposit with the Clearing Agency to evidence transfers of beneficial interests from the (i) Global Capital Security and (ii) Restricted Definitive Capital Securities. -43- 46 (c) Transfer and Exchange of Definitive Capital Securities. When Definitive Capital Securities are presented to the Registrar or co-registrar (x) to register the transfer of such Definitive Capital securities or (y) to exchange such Definitive Capital Securities which became mutilated, destroyed, defaced, stolen or lost, for an equal number of Definitive Capital Securities, the Registrar or co-registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Capital Securities surrendered for registration of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Trust and the Registrar or co-registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (ii) in the case of Definitive Capital Securities that are Restricted Definitive Capital Securities: (A) if such Restricted Capital Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Restricted Capital Securities are being transferred: (i) a certification from the transferor in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1, and (ii) if the Trust or Registrar so requests, evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Restricted Securities Legend. (d) Restrictions on Transfer of a Definitive Capital Security for a Beneficial Interest in a Global Capital Security. A Definitive Capital Security may not be exchanged for a beneficial interest in a Global Capital Security except upon satisfaction of the requirements set forth below. Upon receipt by the Property Trustee of a Definitive Capital Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Property Trustee, together with: (i) if such Definitive Capital Security is a Restricted Capital Security, certification from the transferor in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1; and (ii) whether or not such Definitive Capital Security is a Restricted Capital Security, written instructions directing the Property Trustee to make, or to direct -44- 47 the Clearing Agency to make, an adjustment on its books and records with respect to the appropriate Global Capital Security to reflect an increase in the number of the Capital Securities represented by such Global Capital Security; then the Property Trustee shall cancel such Definitive Capital Security and cause, or direct the Clearing Agency to cause, the aggregate number of Capital Securities represented by the appropriate Global Capital Security to be increased accordingly. If no Global Capital Securities are then outstanding, the Trust shall issue and the Property Trustee shall authenticate, upon written order of any Administrative Trustee, an appropriate number of Capital Securities in global form. (e) Transfer and Exchange of Global Capital Securities. Subject to Section 9.02(f), the transfer and exchange of Global Capital Securities or beneficial interests therein shall be effected through the Clearing Agency, in accordance with this Declaration (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Clearing Agency therefor. (f) Transfer of a Beneficial Interest in a Global Capital Security for a Definitive Capital Security. (i) Any Person having a beneficial interest in a Global Capital Security may upon request, but only upon 20 days prior notice to the Property Trustee, and if accompanied by the information specified below, exchange such beneficial interest for a Definitive Capital Security representing the same number of Capital Securities. Upon receipt by the Property Trustee from the Clearing Agency or its nominee on behalf of any Person having a beneficial interest in a Global Capital Security of written instructions or such other form of instructions as is customary for the Clearing Agency or the Person designated by the Clearing Agency as having such a beneficial interest in a Restricted Capital Security and a certification from the transferor (in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1), which may be submitted by facsimile, then the Property Trustee will cause the aggregate number of Capital Securities represented by Global Capital Securities to be reduced on its books and records and, following such reduction, the Trust will execute and the Property Trustee will authenticate and make available for delivery to the transferee a Definitive Capital Security. (ii) Definitive Capital Securities issued in exchange for a beneficial interest in a Global Capital Security pursuant to this Section 9.2(f) shall be registered in such names and in such authorized denominations as the Clearing Agency, pursuant to instructions from its Participants or indirect participants or otherwise, shall instruct the Property Trustee in writing. The Property Trustee shall deliver such Capital Securities to the Persons in whose names such Capital Securities are so registered in accordance with such instructions of the Clearing Agency. -45- 48 (g) Restrictions on Transfer and Exchange of Global Capital Securities. Notwithstanding any other provisions of this Declaration (other than the provisions set forth in subsection (h) of this Section 9.2), a Global Capital Security may not be transferred as a whole except by the Clearing Agency to a nominee of the Clearing Agency or another nominee of the Clearing Agency or by the Clearing Agency or any such nominee to a successor Clearing Agency or a nominee of such successor Clearing Agency. (h) Authentication of Definitive Capital Securities. If at any time: (i) there occurs a Default or an Event of Default which is continuing; or (ii) the Trust, in its sole discretion, notifies the Property Trustee in writing that it elects to cause the issuance of Definitive Capital Securities under this Declaration; then the Trust will execute, and the Property Trustee, upon receipt of a written order of the Trust signed by one Administrative Trustee requesting the authentication and delivery of Definitive Capital Securities to the Persons designated by the Trust, will authenticate and make available for delivery Definitive Capital Securities, equal in number to the number of Capital Securities represented by the Global Capital Securities, in exchange for such Global Capital Securities. (i) Legend. (i) Except as permitted by the following paragraph (ii), each Capital Security certificate evidencing the Global Capital Securities and the Definitive Capital Securities (and all Capital Securities issued in exchange therefor or substitution thereof) shall bear a legend (the "Restricted Securities Legend") in substantially the following form: THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR -46- 49 TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) ONLY (A) TO THE COMPANY (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (D), TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE REVERSE OF THIS CAPITAL SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEREE TO THE TRUST. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. -47- 50 (ii) Upon any sale or transfer of a Restricted Capital Security (including any Restricted Capital Security represented by a Global Capital Security) pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 under the Securities Act after such registration statement ceases to be effective: (A) in the case of any Restricted Capital Security that is a Definitive Capital Security, the Registrar shall permit the Holder thereof to exchange such Restricted Capital Security for a Definitive Capital Security that does not bear the Restricted Securities Legend and rescind any restriction on the transfer of such Restricted Capital Security; and (B) in the case of any Restricted Capital Security that is represented by a Global Capital Security, the Registrar shall permit the Holder of such Global Capital Security to exchange such Global Capital Security for another Global Capital Security that does not bear the Restricted Securities Legend. (j) Cancellation or Adjustment of Global Capital Security. At such time as all beneficial interests in a Global Capital Security have either been exchanged for Definitive Capital Securities to the extent permitted by this Declaration or redeemed, repurchased or canceled in accordance with the terms of this Declaration, such Global Capital Security shall be canceled by the Property Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Capital Security is exchanged for Definitive Capital Securities, Capital Securities represented by such Global Capital Security shall be reduced and an adjustment shall be made on the books and records of the Property Trustee (if it is then the custodian for such Global Capital Security) with respect to such Global Capital Security, by the Property Trustee or the Securities Custodian, to reflect such reduction. (k) Obligations with Respect to Transfers and Exchanges of Capital Securities. (i) To permit registrations of transfers and exchanges, the Trust shall execute and the Property Trustee shall authenticate Definitive Capital Securities and Global Capital Securities at the Registrar's or co-registrar's request in accordance with the terms of this Declaration. (ii) Registrations of transfers or exchanges will be effected without charge, but only upon payment (with such indemnity as the Trust or the Sponsor may require) in respect of any tax or other governmental charge that may be imposed in relation to it. (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange (a) Capital Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Capital Securities for redemption and ending at the close of business on the -48- 51 day of such mailing; or (b) any Capital Security so selected for redemption in whole or in part, except the unredeemed portion of any Capital Security being redeemed in part. (iv) Prior to the due presentation for registration of transfer of any Capital Security, the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the Person in whose name a Capital Security is registered as the absolute owner of such Capital Security for the purpose of receiving Distributions on such Capital Security and for all other purposes whatsoever, and none of the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Capital Securities issued upon any registration of transfer or exchange pursuant to the terms of this Declaration shall evidence the same security and shall be entitled to the same benefits under this Declaration as the Capital Securities surrendered upon such registration of transfer or exchange. (l) No Obligation of the Property Trustee. (i) The Property Trustee shall have no responsibility or obligation to any beneficial owner of a Global Capital Security, a Participant in the Clearing Agency or other Person with respect to the accuracy of the records of the Clearing Agency or its nominee or of any Participant thereof, with respect to any ownership interest in the Capital Securities or with respect to the delivery to any Participant, beneficial owner or other Person (other than the Clearing Agency) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Capital Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Capital Securities shall be given or made only to or upon the order of the registered Holders (which shall be the Clearing Agency or its nominee in the case of a Global Capital Security). The rights of beneficial owners in any Global Capital Security shall be exercised only through the Clearing Agency subject to the applicable rules and procedures of the Clearing Agency. The Property Trustee may conclusively rely and shall be fully protected in relying upon information furnished by the Clearing Agency or any agent thereof with respect to its Participants and any beneficial owners. (ii) The Property Trustee and Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Declaration or under applicable law with respect to any transfer of any interest in any Capital Security (including any transfers between or among Clearing Agency Participants or beneficial owners in any Global Capital Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Declaration, and to examine the same to determine substantial compliance as to form with the express requirements hereof. -49- 52 (m) Exchange of Series A Capital Securities for Series B Capital Securities. The Series A Capital Securities may be exchanged for Series B Capital Securities pursuant to the terms of the Exchange Offer. The Property Trustee shall make the exchange as follows: The Sponsor shall present the Property Trustee with an Officers' Certificate certifying the following: (A) upon issuance of the Series B Capital Securities, the transactions contemplated by the Exchange Offer have been consummated; and (B) the number of Series A Capital Securities properly tendered in the Exchange Offer that are represented by a Global Capital Security and the number of Series A Capital Securities properly tendered in the Exchange Offer that are represented by Definitive Capital Securities, the name of each Holder of such Definitive Capital Securities, the liquidation amount of Capital Securities properly tendered in the Exchange Offer by each such Holder and the name and address to which Definitive Capital Securities for Series B Capital Securities shall be registered and sent for each such Holder. The Property Trustee, upon receipt of (i) such Officers' Certificate, (ii) an Opinion of Counsel (x) to the effect that the Series B Capital Securities have been registered under Section 5 of the Securities Act and the Indenture has been qualified under the Trust Indenture Act and (y) with respect to the matters set forth in Section 3(p) of the Registration Rights Agreement and (iii) a Company Order, shall authenticate (A) a Global Capital Security for Series B Capital Securities in aggregate liquidation amount equal to the aggregate liquidation amount of Series A Capital Securities represented by a Global Capital Security indicated in such Officers' Certificate as having been properly tendered and (B) Definitive Capital Securities representing Series B Capital Securities registered in the names and in the liquidation amounts, indicated in such Officers' Certificate. If, upon consummation of the Exchange Offer, less than all the outstanding Series A Capital Securities shall have been properly tendered and not withdrawn, the Property Trustee shall make an endorsement on the Global Capital Security for Series A Capital Securities indicating the reduction in the number and aggregate liquidation amount represented thereby as a result of the Exchange Offer. The Trust shall deliver such Definitive Capital Securities for Series B Capital Securities to the Holders thereof as indicated in such Officers' Certificate. (n) Minimum Transfers. Series A Capital Securities may only be transferred in minimum blocks of $100,000 aggregate liquidation amount until such Series A Capital Securities are registered pursuant to an effective registration statement filed under the Securities Act. -50- 53 SECTION 9.3 Deemed Security Holders. The Trustees may treat the Person in whose name any Security shall be registered on the books and records of the Trust as the sole owner of such Security for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Security on the part of any Person, whether or not the Trust shall have actual or other notice thereof. SECTION 9.4 Book Entry Interests. Global Capital Securities shall initially be registered on the books and records of the Trust in the name of Cede & Co., the nominee of the Clearing Agency, and no Capital Security Beneficial Owner will receive a definitive certificate for a Capital Security (a "Capital Security Certificate") representing such Capital Security Beneficial Owner's interests in such Global Capital Securities, except as provided in Section 9.2. Unless and until definitive, fully registered Capital Securities certificates have been issued to the Capital Security Beneficial Owners pursuant to Section 9.2: (a) the provisions of this Section 9.4 shall be in full force and effect; (b) the Trust and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Declaration (including the payment of Distributions on the Global Capital Securities and receiving approvals, votes or consents hereunder) as the Holder of the Capital Securities and the sole holder of the Global Certificates and shall have no obligation to the Capital Security Beneficial Owners; (c) to the extent that the provisions of this Section 9.4 conflict with any other provisions of this Declaration, the provisions of this Section 9.4 shall control; and (d) the rights of the Capital Security Beneficial Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Capital Security Beneficial Owners and the Clearing Agency and/or the Clearing Agency Participants and receive and transmit payments of Distributions on the Global Certificates to such Clearing Agency Participants. DTC will make book entry transfers among the Clearing Agency Participants. SECTION 9.5 Notices to Clearing Agency. Whenever a notice or other communication to the Capital Security Holders is required under this Declaration, the Trustees shall give all such notices and communications specified herein to be given to the Holders of the Global Capital Security to the Clearing Agency, and shall have no notice obligations to the Capital Security Beneficial Owners. -51- 54 SECTION 9.6 Appointment of Successor Clearing Agency. If any Clearing Agency elects to discontinue its services as securities depositary with respect to the Capital Securities the Administrative Trustees may, in their sole discretion, appoint a successor Clearing Agency with respect to such Capital Securities. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability. (a) Except as expressly set forth in this Declaration, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and (ii) be required to pay to the Trust or to any Holder of Securities any deficit upon dissolution of the Trust or otherwise. (b) The Sponsor shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Capital Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. SECTION 10.2 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes -52- 55 are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 10.3 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between any Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities; the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or -53- 56 (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 10.4 Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by -54- 57 law, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Administrative Trustees by a majority vote of a quorum consisting of such Administrative Trustees who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorneys' fees and expenses) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Sponsor as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (i) by the Administrative Trustees by a majority vote of a quorum of disinterested Administrative Trustees, (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion or (iii) the Common Security Holder of the Trust, that, based upon the facts known to the Administrative Trustees, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that such Person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Administrative Trustees, independent legal counsel or Common Security Holder reasonably determine that such Person deliberately breached his duty to the Trust or its Common or Capital Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Capital Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Sponsor and each Company Indemnified Person who -55- 58 serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Debenture Issuer would have the power to indemnify him against such liability under the provisions of this Section 10.4(a). (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any Person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person. (b) The Sponsor agrees to indemnify, to full extent permitted by law, the (i) Property Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Property Trustee or the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Property Trustee or the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any and all loss, liability, damage, claim or expense including taxes (other than taxes based on the income of such Fiduciary Indemnified Person) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the resignation or removal of the Property Trustee or the Delaware Trustee and the satisfaction and discharge of this Declaration. SECTION 10.5 Compensation of Property Trustee and Delaware Trustee. The Sponsor agrees to pay the Property Trustee and the Delaware Trustee, from time to time such compensation for all services rendered by the Property Trustee and the -56- 59 Delaware Trustee hereunder as may be mutually agreed upon in writing by the Sponsor and the Property Trustee or the Delaware Trustee, as the case may be, and, except as otherwise expressly provided herein, to reimburse the Property Trustee and the Delaware Trustee upon its or their request for all reasonable expenses, disbursements and advances incurred or made by the Property Trustee or the Delaware Trustee, as the case may be, in accordance with the provisions of this Declaration, except any such expense, disbursement or advance as may be attributable to its or their negligence or bad faith. SECTION 10.6 Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor, the Delaware Trustee, or the Property Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Property Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year. The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. SECTION 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Administrative Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust -57- 60 shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Administrative Trustees. (b) The Administrative Trustees shall cause to be prepared and delivered to each of the Holders of Securities, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss; (c) The Administrative Trustees shall cause to be duly prepared and delivered to each of the Holders of Securities, any annual United States federal income tax information statement, required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrative Trustees shall endeavor to deliver all such information statements within 30 days after the end of each Fiscal Year of the Trust. (d) The Administrative Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Administrative Trustees on behalf of the Trust with any state or local taxing authority. SECTION 11.3 Banking. The Trust shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Trustee Account and no other funds of the Trust shall be deposited in the Property Trustee Account. The sole signatories for such accounts shall be designated by the Administrative Trustees; provided, however, that the Property Trustee shall designate the signatories for the Property Trustee Account. SECTION 11.4 Withholding. The Trust and the Administrative Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrative Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claimed over -58- 61 withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by: (i) the Administrative Trustees (or, if there are more than two Administrative Trustees, a majority of the Administrative Trustees); (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee; and (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless, in the case of any proposed amendment, the Property Trustee shall have first received an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee shall have first received: (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (B) an Opinion of Counsel (who may be counsel to the Sponsor or the Trust) that (x) such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities) and -59- 62 (y) all conditions precedent to the execution and delivery of such amendment have been satisfied; provided, however, that the Property Trustee shall not be required to sign any such amendment, and (iii) to the extent the result of such amendment would be to: (A) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; or (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act; (c) At such time after the Trust has issued any Securities that remain outstanding, any amendment that would adversely affect the rights, privileges or preferences of any Holder of Securities may be effected only with such additional requirements as may be set forth in the terms of such Securities; (d) Section 9.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders of the Securities; (e) Article Four shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Common Securities; (f) The rights of the holders of the Common Securities under Article V to increase or decrease the number of, and appoint and remove Trustees shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Common Securities; and (g) Notwithstanding Section 12.1(c), this Declaration may be amended without the consent of the Holders of the Securities to: (i) cure any ambiguity, correct or supplement any provision in this Declaration that may be inconsistent with any other provision of this Declaration or to make any other provisions with respect to matters or questions arising under this Declaration which shall not be inconsistent with the other provisions of the Declaration; and (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United -60- 63 States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that in the case of clause (i), such action shall not adversely affect in any material respect the interests of the Holders of the Securities, and any amendments of this Declaration shall become effective when notice thereof is given to the Holders of the Securities. SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrative Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading. The Administrative Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Administrative Trustees one or more notices in a writing stating that the signing Holders of Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of Securities calling a meeting shall specify in writing the Security certificates held by the Holders of Securities exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of Securities: (i) notice of any such meeting shall be given to all the Holders of Securities having a right to vote thereat at least seven days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders of Securities is permitted or required under this Declaration or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders of Securities. Any action that may be taken at a meeting of the Holders of Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of Securities owning not less than the minimum amount of Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders of Securities having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders of Securities entitled to vote who have not consented in writing. The Administrative Trustees may specify that any written ballot submitted to the Security Holder for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrative Trustees; -61- 64 (ii) each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of Securities executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation; (iii) each meeting of the Holders of the Securities shall be conducted by the Administrative Trustees or by such other Person that the Administrative Trustees may designate; and (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Capital Securities are then listed or trading, otherwise provides, the Administrative Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee. The Trustee that acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Property Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee that: (a) The Property Trustee is a New York banking corporation with trust powers and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) The execution, delivery and performance by the Property Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Property Trustee. This Declaration has been duly executed and delivered by the Property Trustee and constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against -62- 65 it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) The execution, delivery and performance of this Declaration by the Property Trustee does not conflict with or constitute a breach of the charter or by-laws of the Property Trustee; and (d) No consent, approval or authorization of, or registration with or notice to, any New York State or federal banking authority is required for the execution, delivery or performance by the Property Trustee of this Declaration. SECTION 13.2 Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) The Delaware Trustee is duly organized, validly existing and in good standing under the laws of the State of Delaware, with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration: (b) The execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee. This Declaration has been duly executed and delivered by the Delaware Trustee and constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) No consent, approval or authorization of, or registration with or notice to, any federal or Delaware banking authority is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and (d) The Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware. -63- 66 ARTICLE XIV REGISTRATION RIGHTS SECTION 14.1 REGISTRATION RIGHTS AGREEMENT; LIQUIDATED DAMAGES. The Holders of the Series A Capital Securities, the Series A Debentures and the Series A Capital Securities Guarantee (collectively, the "Registrable Securities") are entitled to the benefits of a Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Sponsor and the Trust have agreed for the benefit of the Holders of Registrable Securities that, unless otherwise provided in the Registration Rights Agreement: (i) they will, at the Sponsor's cost, within 150 days after December 17, 1996 (the "Issue Date"), file a Registration Statement (the "Exchange Registration Statement") relating an Exchange Offer pursuant to which each issuer of such respective Registrable Securities would issue amounts of such Registrable Securities as are accepted in the Exchange Offer which shall be identical in all respects to those exchanged, except they will have been registered under the Securities Act and will no longer be subject to transfer restrictions under the Securities Act or the $100,000 minimum aggregate principal or liquidation amount transfer restriction and, if required pursuant to the terms of the Registration Rights Agreement, file a shelf registration statement (the "Shelf Registration Statement") with the Commission with respect to resales of the Registrable Securities, (ii) they will use their best efforts to cause such Exchange Registration Statement and/or Shelf Registration Statement, as the case requires, to be declared effective by the Commission within 180 days after the Issue Date and (iii) they will use their best efforts to maintain the Shelf Registration Statement, if any, continuously effective under the Securities Act until the third anniversary of the effectiveness of the Shelf Registration Statement or such earlier date as is provided in the Registration Rights Agreement (the "Effectiveness Period"). All references herein to such Registrable Securities shall be deemed to include, as the context may require, the Registrable Securities into which such Securities have been exchanged pursuant to the Exchange Offer ("Exchange Securities") and all reference to numbers or amounts of such Securities shall be deemed to include, as the context may require, such Exchanged Securities. Capitalized terms used in this Article XIV but not otherwise defined herein shall have the meanings ascribed to such terms in the Registration Rights Agreement. If (i) (A) neither the Exchange Offer Registration Statement nor a Shelf Registration Statement is filed with the Commission on or prior to the 150th day after the Issue Date or (B) notwithstanding that the Debenture Issuer and the Trust have consummated or will consummate an Exchange Offer, the Debenture Issuer and the Trust are required to file a Shelf Registration Statement and such Shelf Registration Statement is not filed on or prior to the date required by the Registration Rights Agreement, then commencing on the day after the applicable required filing date, additional Distributions shall accumulate on the liquidation amount of the Capital Securities at a rate of 0.25% per annum; or (ii) (A) neither the Exchange Offer Registration Statement nor a Shelf Registration Statement is declared effective by the Commission on or prior to the 30th day after the applicable required filing date or (B) notwithstanding that the Debenture -64- 67 Issuer and the Trust have consummated or will consummate an Exchange Offer, the Debenture Issuer and the Trust are required to file a Shelf Registration Statement and such Shelf Registration Statement is not declared effective by the Commission on or prior to the 30th day after the date such Shelf Registration Statement was required to be filed, then, commencing on the 31st day after the applicable required filing date, additional Distributions shall accumulate on the liquidation amount of the Capital Securities at a rate of 0.25% per annum; or (iii) (A) the Trust has not exchanged Exchange Capital Securities for all Capital Securities or the Debenture Issuer has not exchanged Exchange Guarantees or Exchange Subordinated Debentures for all Guarantees or Subordinated Debentures validly tendered, in accordance with the terms of the Exchange Offer on or prior to the 30th day after the date on which the Exchange Offer Registration Statement was declared effective or (B) if applicable, the Shelf Registration Statement has been declared effective and such Shelf Registration Statement ceases to be effective at any time prior to the expiration of the Rule 144 (k) Period (other than after such time as all Capital Securities have been disposed of thereunder or otherwise cease to be Registrable Securities), additional Distributions shall accumulate on the liquidation amount of the Capital Securities at a rate of 0.25% per annum commencing on (x) the 31st day after such effective date, in the case of (A) above, or (y) the day such Shelf Registration Statement ceases to be effective in the case of (B) above; provided, however, that the additional Distributions rate on the liquidation amount of the Capital Securities may not exceed in the aggregate 0.25% per annum; provided, further, however, that (1) upon the filing of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of clause (i) above), (2) upon the effectiveness of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of clause (ii) above), or (3) upon the exchange of Exchange Capital Securities, Exchange Guarantees and Exchange Subordinated Debentures for all Capital Securities, Guarantees and Subordinated Debentures tendered (in the case of clause (iii)(A) above), or upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) above), additional Distributions on the liquidation amount of the Capital Securities as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accumulate. Any amounts of additional Distributions due pursuant to clauses (i), (ii) or (iii) above will be payable in cash on June 17 and December 17 of each year to the Holders on the first day of the month in which the relevant Distribution date falls. ARTICLE XV MISCELLANEOUS SECTION 15.1 Notices. -65- 68 All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Administrative Trustees at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders of the Securities): Advanta Capital Trust I c/o Advanta Corp. 501 Carr Road Wilmington, DE 19809 Attention: Jeffrey D. Beck (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as Delaware Trustee may give notice of to the Holders of the Securities): Chase Manhattan Bank Delaware 1201 Market Street Wilmington, DE 19801 Attention: Corporate Trustee Administration Department (c) if given to the Property Trustee, at the Property Trustee's mailing address set forth below (or such other address as the Property Trustee may give notice of to the Holders of the Securities): The Chase Manhattan Bank 450 W. 33rd Street, 15th Floor New York, New York 10001 Attention: Corporate Trustee Administration Department (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Trust): Advanta Corp. Welsh & McKean Avenues P.O. Box 844 Spring House, PA 19477-0844 Attention: Gene S. Schneyer, Esq., Vice-President and General Counsel -66- 69 (e) if given to any other Holder, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 15.2 Governing Law. This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. SECTION 15.3 Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. SECTION 15.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 15.5 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 15.6 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. -67- 70 SECTION 15.7 Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. -68- 71 IN WITNESS WHEREOF, the undersigned has caused these presents to be executed as of the day and year first above written.
/s/ William A. Rosoff /s/ Jeffrey D. Beck - --------------------------------------------- ------------------------------------------ William A. Rosoff, as Withdrawing Trustee Jeffrey D. Beck, as Administrative Trustee /s/ Richard A. Greenawalt /s/ Ronald V. Samuels - --------------------------------------------- ------------------------------------------ Richard A. Greenawalt, as Withdrawing Trustee Ronald V. Samuels, as Administrative Trustee /s/ David D. Wesselink /s/ Vera Regoli - --------------------------------------------- ------------------------------------------ David D. Wesselink, as Withdrawing Trustee Vera Regoli, as Administrative Trustee ADVANTA CORP. CHASE MANHATTAN BANK DELAWARE as Sponsor as Delaware Trustee By: /s/ David D. Wesselink By: /s/ John J. Cashin --------------------------------------------- ------------------------------------------ Name: David D. Wesselink Name: John J. Cashin Title: Senior Vice President & Title: Senior Trust Officer Chief Financial Officer THE CHASE MANHATTAN BANK as Property Trustee By: /s/ Sheik Wiltshire ------------------------------ Name: Sheik Wiltshire Title: Second Vice President
-69- 72 ANNEX I TERMS OF 8.99% SERIES A/SERIES B CAPITAL SECURITIES 8.99% COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust, dated as of December 17, 1996 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities (collectively, the "Securities") are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration or, if not defined in such Declaration, as defined in the Offering Memorandum referred to below in Section 2(c) of this Annex I): 1. Designation and Number. (a) Capital Securities. 100,000 Series A Capital Securities of the Trust and 100,000 Series B Capital Securities of the Trust, each series with an aggregate liquidation amount with respect to the assets of the Trust of one hundred million dollars ($100,000,000), as provided in the Purchase Agreement, and each with a liquidation amount with respect to the assets of the Trust of $1,000 per Security, are hereby designated for the purposes of identification only as "8.99 % Series A Capital Securities" and "8.99 % Series B Capital Securities", respectively (collectively, the "Capital Securities"). The certificates evidencing the Capital Securities shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Capital Securities are listed. (b) Common Securities. 3,093 Common Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of three million ninety-three thousand dollars ($3,093,000) and a liquidation amount with respect to the assets of the Trust of $1,000 per Security, are hereby designated for the purposes of identification only as "8.99% Common Securities" (the "Common Securities"). The certificates evidencing the Common Securities shall be substantially in the form of Exhibit A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. 2. Distributions. (a) Distributions payable on each Security shall be fixed at a rate per annum of 8.99% (the "Coupon Rate") of the liquidation amount of $1,000 per Security (the "Liquidation Amount"), such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period shall bear additional Distributions thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). Pursuant to the Registration Rights Agreement, in certain limited circumstances the Debenture Issuer shall be required to pay Liquidated Damages (as defined in the Registration Rights Agreement) with respect to the Debentures. The term "Distributions", as used herein, includes A-1 73 distributions of any such interest and Liquidated Damages payable unless otherwise stated. A Distribution shall be payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. (b) Distributions on the Securities shall be cumulative, shall accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from December 17, 1996 and shall be payable semi-annually in arrears on June 17 and December 17 of each year, commencing on June 17, 1997 (each, a "Distribution Date"), except as otherwise described below. Distributions shall be computed on the basis of a 360-day year consisting of twelve 30-day months and for any period less than a full calendar month on the basis of the actual number of days elapsed in such month. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such period (each an "Extension Period"), during which Extension Period no interest shall be due and payable on the Debentures, provided that no Extension Period shall extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions shall also be deferred. Despite such deferral, Distributions shall continue to accumulate with additional Distributions thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, or extend beyond the Maturity Date of the Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. (c) Distributions on the Securities shall be payable to the Holders thereof as they appear on the books and records of the Trust on the first day of the month in which the relevant Distribution Date occurs, which Distribution Dates correspond to the interest payment dates on the Debentures. Subject to any applicable laws and regulations and the provisions of the Declaration, each such payment in respect of the Capital Securities shall be made as described under the heading "Description of the Capital Securities -- Form, Denomination, Book-Entry Procedures and Transfer" in the Offering Memorandum dated December 11, 1996, of the Debenture Issuer and the Trust relating to the Securities and the Debentures. The relevant record dates for the Common Securities shall be the same as the record dates for the Capital Securities. Distributions payable on any Securities that are not punctually paid on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, shall cease to be payable to the Holder on the relevant record date, and such defaulted Distribution shall instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with the Indenture. If any date on which Distributions are payable on the Securities is not a Business Day, then payment of the Distribution payable on such date shall be A-2 74 made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined herein) among the Holders of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of any termination of the Trust or the Sponsor otherwise gives notice of its election to liquidate the Trust pursuant to Section 8.1(a)(iii) of the Declaration, the Trust shall be liquidated by the Administrative Trustees as expeditiously as the Administrative Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to the Holders of the Securities a Like Amount (as defined below) of the Debentures, unless such distribution is determined by the Property Trustee not to be practicable, in which event such Holders shall be entitled to receive out of the assets of the Trust legally available for distribution to Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the aggregate of the liquidation amount of $1,000 per Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). "Like Amount" means (i) with respect to a redemption of the Securities, Securities having a Liquidation Amount equal to the principal amount of Debentures to be paid in accordance with their terms and (ii) with respect to a distribution of Debentures upon the liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Securities of the Holder to whom such Debentures are distributed. If, upon any such liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets on hand legally available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Securities shall be paid on a Pro Rata basis. 4. Redemption and Distribution. (a) Upon the repayment of the Debentures in whole or in part, at maturity or upon early redemption (either at the option of the Debenture Issuer or pursuant to a Special Event, as described below), the proceeds from such repayment shall be simultaneously applied by the Property Trustee (subject to the Property Trustee having received notice no later than 45 days prior to such repayment) to redeem a Like Amount of the Securities at a redemption price equal to (i) in the case of the repayment of the Debentures at maturity, the Maturity Redemption Price (as defined below), (ii) in the case of the optional redemption of the Debentures upon the occurrence and continuation of a Special Event prior to December 17, 2006, the Special Event Redemption Price (as defined below) and (iii) in the case of the optional redemption of the Debentures on or after December 17, 2006, the Optional Redemption Price (as defined below). The Maturity Redemption Price, the Special Event A-3 75 Redemption Price and the Optional Redemption Price are referred to collectively as the "Redemption Price". Holders shall be given not less than 30 nor more than 60 days prior written notice of such redemption. (b) (i) The "Maturity Redemption Price", with respect to a redemption of Securities, shall mean an amount equal to the principal of and accrued interest on the Debentures as of the maturity date thereof. (ii) In the case of an optional redemption, if fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Capital Securities shall be redeemed Pro Rata and the Capital Securities to be redeemed shall be determined as described in Section 4(f)(ii) below. Upon the entry of an order for the dissolution of the Trust by a court of competent jurisdiction, the Debentures thereafter will be subject to optional repayment, in whole, but not in part, on or after December 17, 2006. The Debenture Issuer shall have the right (subject to the conditions in the Indenture) to elect to redeem the Debentures in whole or in part at any time on or after December 17, 2006 (the "Initial Optional Redemption Date"), upon not less than 30 days and not more than 60 days notice, at the Optional Redemption Price and, simultaneous with such redemption, to cause a Like Amount of the Securities to be redeemed by the Trust at the Optional Redemption Price on a Pro Rata basis. "Optional Redemption Price" shall mean a price equal to the percentage of the liquidation amount of Securities to be redeemed plus accumulated and unpaid Distributions thereon, if any, to the date of such redemption if redeemed during the 12 month period beginning December 17 of the years indicated below: A-4 76
Year Percentage ---- ---------- 2006 104.4950% 2007 104.0455% 2008 103.5960% 2009 103.1465% 2010 102.6970% 2011 102.2475% 2012 101.7980% 2013 101.3485% 2014 100.8990% 2015 100.4495% 2016 and thereafter 100%
(c) If at any time a Special Event (as defined below) occurs prior to the Initial Optional Redemption Date, the Debenture Issuer shall have the right (subject to the conditions set forth in the Indenture) upon not less than 30 nor more than 60 days notice, to redeem the Debentures in whole, but not in part, within the 90 days following the occurrence of such Special Event (the "90 Day Period"), and, simultaneous with such redemption, to cause a Like Amount of the Securities to be redeemed by the Trust at the Special Event Redemption Price on a Pro Rata basis. "Special Event" shall occur upon receipt by the Debenture Issuer and an Administrative Trustee of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after December 17, 1996, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Debenture Issuer on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. A-5 77 "Special Event Redemption Price" shall mean a price equal to the greater of (i) 100% of the liquidation amount of Securities to be redeemed or (ii) the sums as determined by a Quotation Agent (as defined in the Indenture), of the present values of the liquidation amount and premium payable with respect to an optional redemption of Securities on the Initial Optional Redemption Date, together with scheduled payments of Distributions from the redemption date to and including the Initial Optional Redemption Date, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Indenture), plus, in each case, accumulated and unpaid Distributions thereon, if any, to the date of such redemption. (d) On and from the date fixed by the Administrative Trustees for any distribution of Debentures and liquidation of the Trust: (i) the Securities will no longer be deemed to be outstanding, (ii) the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee), as the Holder of the Capital Securities, shall receive a registered global certificate or certificates representing the Debentures to be delivered upon such distribution and any certificates representing Securities not held by the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) shall be deemed to represent beneficial interests in a Like Amount of Debentures until such certificates are presented to the Debenture Issuer or its agent for transfer or reissue. (e) The Trust may not redeem fewer than all the outstanding Securities unless all accumulated and unpaid Distributions have been paid on all Securities for all semi-annual Distribution periods terminating on or before the date of redemption. (f) The procedure with respect to redemptions or distributions of Debentures shall be as follows: (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") shall be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, shall be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(f)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the Securities to be redeemed shall be redeemed Pro Rata from each Holder of Capital Securities, it being understood that, in respect of Capital Securities registered in the name of and held of A-6 78 record by the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) or any nominee, the distribution of the proceeds of such redemption shall be made to the Clearing Agency and disbursed by such Clearing Agency in accordance with the procedures applied by such agency or nominee. (iii) If Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, (which notice will be irrevocable), then (A) with respect to Capital Securities issued in book-entry form, by 12:00 noon, New York City time, on the redemption date, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related redemption or maturity of the Debentures by 10:00 a.m., New York City time, on the maturity date or the date of redemption, as the case requires, the Property Trustee shall deposit irrevocably with the Clearing Agency or its nominee (or successor Clearing Agency or its nominee) funds sufficient to pay the applicable Redemption Price with respect to such Capital Securities and shall give the Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the relevant Clearing Agency Participants, and (B) with respect to Capital Securities issued in certificated form and Common Securities, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Property Trustee shall pay the relevant Redemption Price to the Holders of such Securities by check mailed to the address of the relevant Holder appearing on the books and records of the Trust on the redemption date. If a Redemption/Distribution Notice shall have been given and funds deposited as required, if applicable, then immediately prior to the close of business on the date of such deposit, or on the redemption date, as applicable, Distributions shall cease to accumulate on the Securities so called for redemption and all rights of Holders of such Securities so called for redemption shall cease, except the right of the Holders of such Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Securities shall cease to be outstanding. (iv) Payment of accumulated and unpaid Distributions on the Redemption Date of the Securities shall be subject to the rights of Holders of Securities on the close of business on a regular record date in respect of a Distribution Date occurring on or prior to such Redemption Date. Neither the Administrative Trustees nor the Trust shall be required to register or cause to be registered the transfer of (i) any Securities beginning on the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Securities for redemption or (ii) any Securities selected for redemption except the unredeemed portion of any Security being redeemed. If any date fixed for redemption of Securities is not a Business Day, then payment of the Redemption Price payable on such date shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Property Trustee or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, Distributions on such Securities shall continue to accumulate from the original redemption date to A-7 79 the actual date of payment, in which case the actual payment date shall be considered the date fixed for redemption for purposes of calculating the Redemption Price. (v) Redemption/Distribution Notices shall be sent by the Property Trustee on behalf of the Trust to (A) in respect of the Capital Securities, the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) if the Global Certificates have been issued or, if Definitive Capital Security Certificates have been issued, to the Holder thereof, and (B) in respect of the Common Securities to the Holder thereof. (vi) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws and banking laws and to the provisions contained in the Purchase Agreement), the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. 5. Voting Rights - Capital Securities. (a) Except as provided under Sections 5(b) and 7 and as otherwise required by law and the Declaration, the Holders of the Capital Securities shall have no voting rights. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.07 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in liquidation amount of all outstanding Capital Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Capital Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Capital Securities except by subsequent vote of such Holders. The Property Trustee shall notify each Holder of Capital Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Capital Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an opinion of counsel experienced in such matters to the effect that the Trust shall not be classified as an association taxable as a corporation for United States federal income tax purposes on account of such action. If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (or in the case of redemption, on the redemption date), then a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures (a A-8 80 "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Common Securities Holder shall be subrogated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Capital Securities in such Direct Action. Except as provided in the second preceding sentence, the Holders of Capital Securities shall not be able to exercise directly any other remedy available to the holders of the Debentures. Any approval or direction of Holders of Capital Securities may be given at a separate meeting of Holders of Capital Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Property Trustees shall cause a notice of any meeting at which Holders of Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Capital Securities. Each such notice shall include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consent. No vote or consent of the Holders of the Capital Securities shall be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of Capital Securities are entitled to vote or consent under any of the circumstances described above any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b), 6(c), and 7 as otherwise required by law and the Declaration, the Holders of the Common Securities shall have no voting rights. (b) Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by the Holder of the Common Securities. If a Debenture Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by the Holders of a Majority in liquidation amount of the outstanding Capital Securities. In no event shall the holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrative Trustees, which voting rights are vested exclusively in the Sponsor as the holder of the Common Securities. No resignation or removal of a Trustee and no appointment of a successor trustee shall be effective until the acceptance of appointment by the successor trustee in accordance with the provisions of the Declaration. (c) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on such Debenture Trustee with A-9 81 respect to the Debentures, (ii) waive any past default that is waivable under Section 5.07 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in liquidation amount of all outstanding Common Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Common Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Common Securities except by subsequent vote of such Holders. The Property Trustee shall notify each Holder of Common Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Common Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an opinion of counsel experienced in such matters to the effect that the Trust shall not be classified as an association taxable as a corporation for United States federal income tax purposes on account of such action. If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (or in the case of redemption, on the redemption date), then a Holder of Common Securities may institute a Direct Action for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures on or after the respective due date specified in the Debentures. In connection with Direct Action, the rights of the Common Securities Holder shall be subordinated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Common Securities in such Direct Action. Except as provided in the second preceding sentence, the Holders of Common Securities shall not be able to exercise directly any other remedy available to the holders of the Debentures. Any approval or direction of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Administrative Trustees shall cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice shall include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities shall be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. A-10 82 7. Amendments to Declaration and Indenture. In addition to the requirements set out in Section 12.1 of the Declaration, the Declaration may be amended from time to time by the Sponsor, the Property Trustee and the Administrative Trustees, without the consent of the Holders of the Securities (i) to cure any ambiguity, correct or supplement any provisions in the Declaration that may be inconsistent with any other provisions, or to make any other provisions with respect to matters or questions arising under the Declaration which shall not be inconsistent with the other provisions of the Declaration, or (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust shall be classified for United States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust shall not be required to register as an "Investment Company" under the Investment Company Act; provided however, that in the case of clause (i), such action shall not adversely affect in any material respect the interests of any Holder of Securities, and any amendments of the Declaration shall become effective when notice thereof is given to the Holders of the Securities. The Declaration may be amended by the Trustees and the Sponsor with (i) the consent of Holders representing a Majority in liquidation amount of all outstanding Securities, and (ii) receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment shall not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status as an Investment Company under the Investment Company Act, provided that, without the consent of each Holder of Trust Securities, the Declaration may not be amended to (i) change the amount or timing of any Distribution on, or the payment required to be made in respect of the Securities or any redemption provisions or otherwise adversely affect the amount of any Distribution or other payment required to be made in respect of the Securities as of a specified date or (ii) restrict the right of a Holder of Securities to institute suit for the enforcement of any such payment on or after such date. 8. Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities pro rata according to the aggregate liquidation amount of Capital Securities held by the relevant Holder relative to the aggregate liquidation amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of Common Securities pro rata according to the aggregate liquidation amount of Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. 9. Ranking. A-11 83 The Capital Securities rank pari passu with the Common Securities and payment thereon shall be made Pro Rata with the Common Securities, except that, if an Event of Default under the Declaration occurs and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the Holders of the Capital Securities shall be paid in full the Distributions, Redemption Price, Liquidation Distribution and other payments to which they are entitled at such time. 10. Acceptance of Securities Guarantee and Indenture. Each Holder of Capital Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Capital Securities Guarantee and the Common Securities Guarantee, respectively, including the subordination provisions therein and to the provisions of the Indenture. 11. No Preemptive Rights. The Holders of the Securities shall have no preemptive rights to subscribe for any additional securities. 12. Miscellaneous. These terms constitute a part of the Declaration. The Sponsor shall provide a copy of the Declaration, the Capital Securities Guarantee or the Common Securities Guarantee (as may be appropriate), the Indenture (including any supplemental indenture) to a Holder without charge on written request to the Sponsor at its principal place of business. A-12 84 EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] [IF THIS GLOBAL SECURITY IS A GLOBAL CAPITAL SECURITY, INSERT: THIS CAPITAL SECURITY IS A GLOBAL CAPITAL SECURITY WITHIN THE MEANING OF THE DECLARATION HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (THE "CLEARING AGENCY") OR A NOMINEE OF THE CLEARING AGENCY. THIS CAPITAL SECURITY IS EXCHANGEABLE FOR CAPITAL SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE CLEARING AGENCY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE DECLARATION AND NO TRANSFER OF THIS CAPITAL SECURITY (OTHER THAN A TRANSFER OF THIS CAPITAL SECURITY AS A WHOLE BY THE CLEARING AGENCY TO A NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE CLEARING AGENCY TO THE CLEARING AGENCY OR ANOTHER NOMINEE OF THE CLEARING AGENCY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS CAPITAL SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST, A NEW YORK CORPORATION ("DTC") TO THE TRUST OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CAPITAL SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO., OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., OR TO SUCH PERSON AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL A1-1 85 SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (D), TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE REVERSE OF THIS CAPITAL SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEREE TO THE TRUST. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. A1-2 86 Certificate Number: Number of Capital Securities CUSIP NO. Certificate Evidencing Capital Securities of ADVANTA CAPITAL TRUST I 8.99% Series __ Capital Securities (liquidation amount of $1,000 per Capital Security) ADVANTA CAPITAL TRUST I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _________(the "Holder") is the registered owner of ________securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 8.99 % Series Capital Securities (liquidation amount of $1,000 per Capital Security) (the "Capital Securities"). The Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 17, 1996 as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee and the Indenture to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Capital Securities Guarantee to the extent provided therein. By acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of indirect beneficial ownership in the Debentures. A1-3 87 IN WITNESS WHEREOF, the Trust has executed this certificate this 17th day of December, 1996. ADVANTA CAPITAL TRUST I By:_____________________________________ Name: Administrative Trustee PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Capital Securities referred to in the within-mentioned Declaration. Dated: ______________, THE CHASE MANHATTAN BANK as Property Trustee By:_____________________________________ Authorized Officer A1-4 88 [FORM OF REVERSE OF SECURITY] Distributions payable on each Capital Security will be fixed at a rate per annum of 8.99% (the "Coupon Rate") of the liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). Pursuant to the Registration Rights Agreement, in certain limited circumstances the Debenture Issuer will be required to pay Liquidated Damages (as defined in the Registration Rights Agreement) with respect to the Debentures. The term "Distributions", as used herein, includes such cash distributions and any such interest and such Liquidated Damages payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. Distributions on the Capital Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or, if any Distributions have been paid, from December 17, 1996 and will be payable semi-annually in arrears, on June 17 and December 17 of each year, commencing on June 17, 1997, except as otherwise described below. Distributions shall be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than a full calendar month, the number of days elapsed in such month. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive calendar semiannual periods, including the first such semi-annual period during such extension period (each an "Extension Period"), provided that no Extension Period shall extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, semi-annual Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 10 consecutive semi-annual periods, including the first semiannual period during such Extension Period, or extend beyond the Maturity Date of the Debentures. Payments of accumulated Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Subject to certain conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time liquidate the Trust and cause the Debentures to be distributed to the holders of the Securities in liquidation of the Trust or, simultaneous with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. A1-5 89 The Capital Securities shall be redeemable as provided in the Declaration. A1-6 90 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: ________________________________ ________________________________ ________________________________ (Insert assignee's social security or tax identification number) ________________________________ ________________________________ ________________________________ (Insert address and zip code of assignee) and irrevocably appoints ________________________________ ________________________________ ________________________________agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date:________________ Signature:_____________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:_________________________ ____________________________ * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. A1-7 91 [Include the following if the Capital Security bears a Restricted Capital Securities Legend -- In connection with any transfer of any of the Capital Securities evidenced by this certificate, the undersigned confirms that such Capital Securities are being: CHECK ONE BOX BELOW (1) / / exchanged for the undersigned's own account without transfer; or (2) / / transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) / / to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act of 1933 that is acquiring the Capital Securities for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act of 1933; or (4) / / transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933; or (5) / / transferred pursuant to an effective registration statement. Unless one of the boxes is checked, the Exchange Agent will refuse to register any of the Capital Securities evidenced by this certificate in the name of any person other than the registered Holder thereof; provided, however, that if box (3) or (4) is checked, the Exchange Agent may require, prior to registering any such transfer of the Capital Securities such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act; provided further, that (i) if box (2) is checked, the transferee must also certify that it is a qualified institutional buyer as defined in Rule 144A or (ii) if box (3) is checked, the transferee must also provide to the Exchange Agent a Transferee Letter of Representation in the form attached to the Offering Memorandum of the Trust dated December 11, 1996; provided, further, that after the date that a Registration Statement has been filed and so long as such Registration Statement continues to be effective, the Exchange Agent may only permit transfers for which box (5) has been checked. --------------------------------- Signature A1-8 92 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS COMMON SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS COMMON SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS COMMON SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS COMMON SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS COMMON SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (D), TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE REVERSE OF THIS COMMON SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEREE TO THE TRUST. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS COMMON SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. A2-1 93 Certificate Number Number of Common Securities Certificate Evidencing Common Securities of Advanta Capital Trust I 8.99% Common Securities (liquidation amount of $1,000 per Common Security) ADVANTA CAPITAL TRUST I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that Advanta Corp., a Delaware corporation (the "Holder"), is the registered owner of ________________ (__________) common securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 8.99 % Common Securities (liquidation amount of $1,000 per Common Security) (the "Common Securities"). The Common Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 17, 1996 as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Common Securities Guarantee and the Indenture (including any supplemental indenture) to a Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Sponsor is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Common Securities Guarantee to the extent provided therein. By acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. A2-2 94 IN WITNESS WHEREOF, the Trust has executed this certificate this ________ day of ________, 19___. ADVANTA CAPITAL TRUST I By:_____________________________________ Name: Administrative Trustee A2-3 95 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be fixed at a rate per annum of 8.99% (the "Coupon Rate") of the liquidation amount of $1,000 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semiannually at the Coupon Rate (to the extent permitted by applicable law). Pursuant to the Registration Rights Agreement, in certain limited circumstances the Debenture Issuer will be required to pay Liquidated Damages (as defined in the Registration Rights Agreement) with respect to the Debentures. The term "Distributions", as used herein, includes such cash distributions and any such interest and such Liquidated Damages payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds available therefor. Distributions on the Common Securities will be cumulative, will accrue from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from December 17, 1996 and will be payable semi-annually in arrears, on June 17 and December 17 of each year, commencing on June 17, 1997, except as otherwise described below. Distributions will be computed on the basis of a 360-day year consisting of twelve 30 day months and, for any period less than a full calendar month, the number of days elapsed in such month. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive calendar semi-annual periods, including the first such semi-annual period during such extension period (each an "Extension Period"), provided that no Extension Period shall extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, or extend beyond the Maturity Date of the Debentures. Payments of accrued Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Subject to certain conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time liquidate the Trust and cause the Debentures to be distributed to the holders to the Securities in liquidation of the Trust or, simultaneous with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Common Securities shall be redeemable as provided in the Declaration. A2-4 EX-4.J 5 REGISTRATION RIGHTS AGREE. DATED DECEMBER 11, 1996 1 Exhibit 4-j REGISTRATION RIGHTS AGREEMENT Dated December 11, 1996 by and among ADVANTA CORP.; ADVANTA CAPITAL TRUST I and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED and SALOMON BROTHERS INC as Initial Purchasers 2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into on December 11, 1996 by and among ADVANTA CORP., a Delaware corporation (the "Company"), ADVANTA CAPITAL TRUST I, a business trust formed under the laws of the state of Delaware (the "Trust"), and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("Merrill Lynch") and SALOMON BROTHERS, INC (together, the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement dated December 11, 1996 (the "Purchase Agreement"), among the Company, as issuer of the 8.99 % Series A Junior Subordinated Deferrable Interest Debentures due December 17, 2026 (the "Subordinated Debentures"), the Trust and the Initial Purchasers, which provides for, among other things, the sale by the Trust to the Initial Purchasers of 100,000 of the Trust's 8.99% Series A Capital Securities, liquidation amount $1,000 per Capital Security (the "Capital Securities"), the proceeds of which will be used by the Trust to purchase Subordinated Debentures. The Capital Securities, together with the Subordinated Debentures and the Company's guarantee of the Capital Securities (the "Capital Securities Guarantee") are collectively referred to as the "Securities." In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company and the Trust have agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Advice" shall have the meaning set forth in the last paragraph of Section 3 hereof. "Applicable Period" shall have the meaning set forth in Section 3(t) hereof. "Business Day" shall mean a day that is not a Saturday, a Sunday, or a day on which banking institutions in New York, New York or in Wilmington, Delaware are authorized or required to be closed. "Closing Time" shall mean the Closing Time as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble to this Agreement and also includes the Company's successors and permitted assigns. -2- 3 "Declaration" or "Declaration of Trust" shall mean the Amended and Restated Declaration of Trust, dated as of the Closing Time, by the trustees named therein and the Company as sponsor. "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Trust; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Effectiveness Period" shall have the meaning set forth in Section 2(b) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Exchange Offer" shall mean the offer by the Company and the Trust to the Holders to exchange all of the Registrable Securities (other than Private Exchange Securities) for a like principal amount of Exchange Securities pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Period" shall have the meaning set forth in Section 2(a) hereof. "Exchange Securities" shall mean (i) with respect to the Subordinated Debentures, the 8.99% Series B Junior Subordinated Deferrable Interest Debentures due December 17, 2026 (the "Exchange Debentures") containing terms identical to the Subordinated Debentures (except that they will not contain terms with respect to the transfer restrictions under the Securities Act, will not require transfers thereof to be in minimum blocks of $100,000 principal amount and will not provide for any increase in the interest rate thereon), (ii) with respect to the Capital Securities, the Trust's 8.99% Series B Capital Securities, liquidation amount $1,000 per Capital Security (the "Exchange Capital Securities") which will have terms identical to the Capital Securities (except they will not contain terms with respect to transfer restrictions under the Securities Act, will not require minimum transfers thereof to be in blocks of $100,000 liquidation amount and will not provide for any increase in the distribution rate thereon) and (iii) with respect to the Capital Securities Guarantee, the Company's guarantee (the "Exchange Capital Securities Guarantee") of the Exchange Capital Securities which will have terms identical to the Capital Securities Guarantee. -3- 4 "Holder" shall mean each of the Initial Purchasers, for so long as they own any Registrable Securities, and each of their respective successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture or Declaration of Trust. "Indenture" shall mean the Indenture relating to the Subordinated Debentures and the Exchange Debentures dated as of December 17, 1996 among the Company, as issuer, and The Chase Manhattan Bank, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Purchasers" shall have the meaning set forth in the preamble to this Agreement. "Inspectors" shall have the meaning set forth in Section 3(n) hereof. "Issue Date" shall mean the date of original issuance of the Securities. "Liquidated Damages" shall have the meaning set forth in Section 2(e) hereof. "Majority Holders" shall mean the Holders of a majority of the aggregate liquidation amount of outstanding Capital Securities. "Participating Broker-Dealer" shall have the meaning set forth in Section 3(t) hereof. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, limited liability company, or a government or agency or political subdivision thereof. "Private Exchange" shall have the meaning set forth in Section 2(a) hereof. "Private Exchange Securities" shall have the meaning set forth in Section 2(a) hereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including posteffective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble to this Agreement. -4- 5 "Records" shall have the meaning set forth in Section 3(n) hereof. "Registration Default" shall have the meaning set forth in Section 2(e) hereof. "Registrable Securities" shall mean the Securities and, if issued, the Private Exchange Securities; provided, however, that Securities or Private Exchange Securities, as the case may be, shall cease to be Registrable Securities when (i) a Registration Statement with respect to such Securities or Private Exchange Securities for the exchange or resale thereof, as the case may be, shall have been declared effective under the Securities Act and such Securities or Private Exchange Securities, as the case may be, shall have been disposed of pursuant to such Registration Statement, (ii) such Securities or Private Exchange Securities, as the case may be, shall have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Securities Act, (iii) such Securities or Private Exchange Securities, as the case may be, shall have ceased to be outstanding or (iv) with respect to the Securities, such Securities have been exchanged for Exchange Securities upon consummation of the Exchange Offer and are thereafter freely tradeable by the holder thereof (other than an affiliate of the Company). "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and the reasonable fees and expenses of its counsel) that is required to be retained by any Holder of Registrable Securities in accordance with the rules and regulations of the NASD, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities) and compliance with the rules of the NASD, (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, and in preparing or assisting in preparing, printing and distributing any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) the fees and disbursements of counsel for the Company and of the independent certified public accountants of the Company, including the expenses of any "cold comfort" letters required by or incident to such performance and compliance, (vi) the fees and expenses of the Trustee, and any exchange agent or custodian, (vii) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges, and (viii) the reasonable fees and expenses of any special experts retained by the Company in connection with any Registration Statement. "Registration Statement" shall mean any registration statement of the Company and the Trust which covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration -5- 6 Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Rule 144(k) Period" shall mean the period of three years (or such shorter period as may hereafter be referred to in Rule 144(k) under the Securities Act (or similar successor rule)) commencing on the Issue Date. "SEC" shall mean the United States Securities and Exchange Commission. "Securities" shall have the meaning set forth in the preamble to this Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Event" shall have the meaning set forth in Section 2(b) hereof. "Shelf Registration Event Date" shall have the meaning set forth in Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company and the Trust pursuant to the provisions of Section 2(b) hereof which covers all of the Registrable Securities or all of the Private Exchange Securities, as the case may be, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "TIA" shall have the meaning set forth in Section 3(1) hereof. "Trustees" shall mean any and all trustees with respect to (i) the Capital Securities under the Declaration, (ii) the Subordinated Debentures under the Indenture and (iii) the Capital Securities Guarantee. 2. Registration Under the Securities Act. (a) Exchange Offer. To the extent not prohibited by any applicable law or applicable interpretation of the staff of the SEC, the Company and the Trust shall, for the benefit of the Holders, at the Company's cost, use their best efforts to (i) cause to be filed with the SEC within 150 days after the Issue Date an Exchange Offer Registration Statement on an appropriate form under the Securities Act covering the Exchange Offer, (ii) cause such Exchange -6- 7 Offer Registration Statement to be declared effective under the Securities Act by the SEC not later than the date which is 180 days after the Issue Date, and (iii) keep such Exchange Offer Registration Statement effective for not less than 30 calendar days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders. Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Trust shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities for a like principal amount of Exchange Debentures or a like liquidation amount of Exchange Capital Securities, together with the Exchange Guarantee, as applicable (assuming that such Holder is not an affiliate of the Company within the meaning of Rule 405 under the Securities Act and is not a broker-dealer tendering Registrable Securities acquired directly from the Company for its own account, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing the Exchange Securities) to transfer such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company and the Trust shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Exchange Offer open for acceptance for a period of not less than 30 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (iii) utilize the services of the Depositary for the Exchange Offer: (iv) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York City time, on the last Business Day of the Exchange Period, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Securities delivered for exchange, and a statement that such Holder is withdrawing his election to have such Securities exchanged; (v) notify each Holder that any Security not tendered by such Holder in the Exchange Offer will remain outstanding and continue to accrue interest or accumulate distributions, as the case may be, but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and (vi) otherwise comply in all respects with all applicable laws relating to the Exchange Offer. -7- 8 If any Initial Purchaser determines upon advice of its outside counsel that it is not eligible to participate in the Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment in the initial distribution, as soon as practicable upon receipt by the Company and the Trust of a written request from such Initial Purchaser, the Company and the Trust, as applicable, shall issue and deliver to such Initial Purchaser in exchange (the "Private Exchange") for the Securities held by such Initial Purchaser, a like liquidation amount of Capital Securities of the Trust, together with the Exchange Guarantee, or a like principal amount of the Subordinated Debentures of the Company, as applicable, that are identical (except that such securities may bear a customary legend with respect to restrictions on transfer pursuant to the Securities Act) to the Exchange Securities (the "Private Exchange Securities") and which are issued pursuant to the Indenture, the Declaration or the Guarantee (which provides that the Exchange Securities will not be subject to the transfer restrictions set forth in the Indenture or the Declaration, as applicable, and that the Exchange Securities, the Private Exchange Securities and the Securities will vote and consent together on all matters as one class and that neither the Exchange Securities, the Private Exchange Securities nor the Securities will have the right to vote or consent as a separate class on any matter). The Private Exchange Securities shall be of the same series as the Exchange Securities and the Company and the Trust will seek to cause the CUSIP Service Bureau to issue the same CUSIP Numbers for the Private Exchange Securities as for the Exchange Securities issued pursuant to the Exchange Offer. As soon as practicable after the close of the Exchange Offer and, if applicable, the Private Exchange, the Company and the Trust, as the case requires, shall: (i) accept for exchange all Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer or the Private Exchange; (ii) deliver, or cause to be delivered, to the applicable Trustee for cancellation all Securities or portions thereof so accepted for exchange by the Company; and (iii) issue, and cause the applicable Trustee under the Indenture, the Declaration or the Guarantee, as applicable, to promptly authenticate and deliver to each Holder, new Exchange Securities or Private Exchange Securities, as applicable, equal in principal amount to the principal amount of the Subordinated Debentures or equal in liquidation amount to the liquidation amount to the Capital Securities (together with the guarantee thereof) as are surrendered by such Holder. Distributions on each Exchange Capital Security and interest on each Exchange Debenture and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last date on which a Distribution or interest was paid on the Capital Security or the Subordinated Debenture surrendered in exchange therefore or, if no Distribution or interest has been paid on such Capital Security or Subordinated Debenture, from the Issue Date. To the extent not prohibited by any law or applicable interpretation of the staff of the SEC, the Company and the Trust shall use their best efforts to complete the Exchange -8- 9 Offer as provided above, and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the staff of the SEC. Each Holder of Registrable Securities that wishes to exchange such Registrable Securities for Exchange Securities in the Exchange Offer will be required to make certain customary representations in connection therewith, including, in the case of any Holder of Capital Securities, representations that (i) it is not an affiliate of the Trust or the Company, (ii) the Exchange Securities to be received by it were acquired in the ordinary course of its business and (iii) at the time of the Exchange Offer, it has no arrangement with any person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Capital Securities. The Company and the Trust shall inform the Initial Purchasers, after consultation with the Trustee, of the names and addresses of the Holders to which the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. Upon consummation of the Exchange Offer in accordance with this Section 2(a), the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Registrable Securities that are Private Exchange Securities and Exchange Securities held by Participating Broker-Dealers, and the Company and the Trust shall have no further obligation to register the Registrable Securities (other than Private Exchange Securities) pursuant to Section 2(b) of this Agreement. (b) Shelf Registration. In the event that (i) the Company, the Trust or the Majority Holders reasonably determine, after conferring with counsel (which may be in-house counsel), that the Exchange Offer Registration provided in Section 2(a) above is not available because of any change in law or because of then prevailing interpretations of the staff of the SEC, (ii) the Company shall determine in good faith that there is a reasonable likelihood that, or a material uncertainty exists as to whether, consummation of the Exchange Offer would result in a material adverse tax consequence to the Company, (iii) the Exchange Offer Registration Statement is not declared effective within 180 days of the Issue Date or (iv) upon the request of any Initial Purchaser with respect to any Registrable Securities held by it, if such Initial Purchaser is not permitted, in the reasonable opinion of Brown & Wood LLP, pursuant to applicable law or applicable interpretations of the staff of the SEC, to participate in the Exchange Offer and thereby receive securities that are freely tradeable without restriction under the Securities Act and applicable blue sky or state securities laws (any of the events specified in (i)-(iv) being a "Shelf Registration Event" and the date of occurrence thereof, the "Shelf Registration Event Date"), the Company and the Trust shall, at their cost, use their best efforts to cause to be filed as promptly as practicable after such Shelf Registration Event Date, as the case may be, and, in any event, within 45 days after such Shelf Registration Event Date (which shall be no earlier than 75 days after the Closing Time), a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities, and shall use their best efforts to have such Shelf Registration Statement declared effective by the SEC as soon as practicable. No Holder of Registrable Securities shall be entitled to include any of its Registrable Securities in -9- 10 any Shelf Registration pursuant to this Agreement unless and until such Holder agrees in writing to be bound by all of the provisions of this Agreement applicable to such Holder and furnishes to the Company and the Trust in writing, within 15 days after receipt of a request therefor, such information as the Company and the Trust may, after conferring with counsel with regard to information relating to Holders that would be required by the SEC to be included in such Shelf Registration Statement or Prospectus included therein, reasonably request for inclusion in any Shelf Registration Statement or Prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company and the Trust all information with respect to such Holder necessary to make the information previously furnished to the Company or the Trust by such Holder not materially misleading. The Company and the Trust agree to use their best efforts to keep the Shelf Registration Statement continuously effective for the Rule 144(k) Period (subject to extension pursuant to the last paragraph of Section 3 hereof) or for such shorter period that will terminate when all of the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or cease to be outstanding (the "Effectiveness Period"). The Company and the Trust shall not permit any securities other than Registrable Securities to be included in the Shelf Registration. The Company and the Trust will, in the event a Shelf Registration Statement is declared effective, provide to each Holder a reasonable number of copies of the Prospectus that is a part of the Shelf Registration Statement, notify each such Holder when the Shelf Registration has become effective and use their best efforts to take certain other actions as are required to permit certain unrestricted resales of the Registrable Securities. The Company and the Trust further agree, if necessary, to supplement or amend the Shelf Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company and the Trust agree to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or 2(b) hereof and will reimburse the Initial Purchasers for the reasonable fees and disbursements of Brown & Wood LLP, counsel for the Initial Purchasers, incurred in connection with the Exchange Offer and, if applicable, the Private Exchange Offer, and either Brown & Wood LLP or any one other counsel designated in writing by the Majority Holders to act as counsel for the Holders of the Registrable Securities in connection with a Shelf Registration Statement, which other counsel shall be reasonably satisfactory to the Company. Except as provided herein, each Holder shall pay all expenses of its counsel, underwriting discounts and commissions and transfer taxes if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. -10- 11 (d) Effective Registration Statement. An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. The Company and the Trust will be deemed not to have used their best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if either of them voluntarily takes any action that would result in any such Registration Statement not being declared effective or in the Holders of Registrable Securities covered thereby not being able to exchange or offer and sell such Registrable Securities during that period, unless such action is required by applicable law. (e) Liquidated Damages. In the event that (i) (A) neither the Exchange Offer Registration Statement nor a Shelf Registration Statement is filed with the SEC on or prior to the 150th day after the Issue Date or (B) notwithstanding that the Company and the Trust have consummated or will consummate an Exchange Offer, the Company and the Trust are required to file a Shelf Registration Statement and such Shelf Registration Statement is not filed on or prior to the date required by Section 2(b) hereof, then commencing on the day after the applicable required filing date, additional interest shall accrue on the principal amount of the Subordinated Debentures, and additional Distributions shall accumulate on the liquidation amount of the Capital Securities, each at a rate of 0.25% per annum; (ii) (A) neither the Exchange Offer Registration Statement nor a Shelf Registration Statement is declared effective by the SEC on or prior to the 30th day after the applicable required filing date or (B) notwithstanding that the Company and the Trust have consummated an Exchange Offer, the Company and the Trust are required to file a Shelf Registration Statement and such Shelf Registration Statement is not declared effective by the SEC on or prior to the 30th day after the date such Shelf Registration Statement was required to be filed, then, commencing on the 31st day after the applicable required filing date, additional interest shall accrue on the principal amount of the Subordinated Debentures and additional distributions shall accumulate on the liquidation amount of the Capital Securities, each at a rate of 0.25% per annum; or (iii) (A) the Trust has not exchanged Exchange Capital Securities for all Capital Securities or the Company has not exchanged Exchange Guarantees or Exchange Subordinated Debentures for all Guarantees or Subordinated Debentures validly tendered, in accordance with the terms of the Exchange Offer, on or prior to the 30th day after the date on which the Exchange Offer Registration Statement was declared effective or (B) if applicable, the Shelf Registration Statement has been declared effective and such Shelf Registration Statement ceases to be effective at any time prior to the expiration of the Rule 144(k) Period (other than after such time -11- 12 as all Capital Securities have been disposed of thereunder or otherwise cease to be Registrable Securities), then additional interest shall accrue on the principal amount of Subordinated Debentures, and additional distributions shall accumulate on the liquidation amount of the Capital Securities, each at a rate of 0.25% per annum commencing on (x) the 31st day after such effective date, in the case of (A) above, or (y) the day such Shelf Registration Statement ceases to be effective in the case of (B) above; provided, however, that neither the additional interest rate on the Subordinated Debentures, nor the additional distribution rate on the liquidation amount of the Capital Securities, may exceed in the aggregate 0.25% per annum; provided further, however, that (1) upon the filing of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of clause (i) above), (2) upon the effectiveness of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of clause (ii) above), or (3) upon the exchange of Exchange Capital Securities, Exchange Guarantees and Exchange Subordinated Debentures for all Capital Securities, Guarantees and Subordinated Debentures tendered (in the case of clause (iii)(A) above), or upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) above), additional interest on the Subordinated Debentures, and additional distributions on the liquidation amount of the Capital Securities as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue or accumulate, as the case may be. Any amounts of additional interest and additional distributions due pursuant to Section 2(e)(i), (ii) or (iii) above will be payable in cash on the relevant record dates for the payment of interest and distributions pursuant to the Indenture and the Declaration, respectively. (f) Specific Enforcement. Without limiting the remedies available to the Holders, the Company and the Trust acknowledge that any failure by the Company or the Trust to comply with its obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, any Holder may obtain such relief as may be required to specifically enforce the Company's and the Trust's obligations under Section 2(a) and Section 2(b) hereof. 3. Registration Procedures. In connection with the obligations of the Company and the Trust with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company and the Trust shall use their best efforts to: (a) prepare and file with the SEC a Registration Statement or Registration Statements as prescribed by Sections 2(a) and 2(b) hereof within the relevant time period specified in Section 2 hereof on the appropriate form under the Securities Act, which form (i) shall be selected by the Company and the Trust, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements -12- 13 required by the SEC to be filed therewith; and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; provided, however, that if (1) such filing is pursuant to Section 2(b), or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Securities, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Company and the Trust shall furnish to and afford the Holders of the Registrable Securities and each such Participating Broker-Dealer, as the case may be, covered by such Registration Statement, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed. The Company and the Trust shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document if the Majority Holders or such Participating Broker-Dealer, as the case may be, their counsel or the managing underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the Effectiveness Period or the Applicable Period, as the case may be; and cause each Prospectus to be supplemented, if so determined by the Company or the Trust or requested by the SEC, by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all securities covered by each Registration Statement during the Effectiveness Period or the Applicable Period, as the case may be, in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Securities included in the Shelf Registration Statement, at least three Business Days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advise each such Holder that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders; and (ii) furnish to each Holder of Registrable Securities included in the Shelf Registration Statement and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto, and such other documents as such Holder or underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities; and (iii) consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities included in the Shelf Registration Statement in connection with the -13- 14 offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (d) in the case of a Shelf Registration, register or qualify, by the time the applicable Registration Statement is declared effective by the SEC, the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing in advance of such date of effectiveness, and do any and all other acts and things that may be reasonably necessary or advisable to enable such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that neither the Company nor the Trust shall be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process in any jurisdiction where it would not otherwise be subject to such service of process or (iii) subject itself to taxation in any such jurisdiction if it is not then so subject; (e) in the case of (1) a Shelf Registration or (2) Participating Broker-Dealers from whom the Company or the Trust has received prior written notice that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(t) hereof, are seeking to sell Exchange Securities and are required to deliver Prospectuses, notify each Holder of Registrable Securities, or such Participating Broker-Dealers, as the case may be, their counsel and the managing underwriters, if any, promptly and promptly confirm such notice in writing (i) when a Registration Statement has become effective and when any post-effective amendment or supplement thereto becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement or Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the qualification of the Registrable Securities or the Exchange Securities to be offered or sold by any Participating Broker-Dealer in any jurisdiction described in paragraph 3(d) hereof or the initiation of any proceedings for that purpose, (iv) in the case of a Shelf Registration, if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, any of the representations and warranties of the Company and the Trust contained in any purchase agreement, securities sales agreement or other similar agreement, ceases to be true and correct in all material respects, (v) of the happening of any event or the failure of any event to occur or the discovery of any facts or otherwise, during the Effectiveness Period, that makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or that causes such Registration Statement or Prospectus to fail to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were -14- 15 made, not misleading and (vi) of the Company and the Trust's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities included within the coverage of such Shelf Registration Statement, without charge, at least one conformed copy of each Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and in such denominations (consistent with the provisions of the Indenture and the Declaration) and registered in such names as the selling Holders or the underwriters may reasonably request at least two Business Days prior to the closing of any sale of Registrable Securities pursuant to such Shelf Registration Statement; (i) in the case of a Shelf Registration or an Exchange Offer Registration, upon the occurrence of any circumstance contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or fail to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and to notify each Holder to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder hereby agrees to suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) in the case of a Shelf Registration, a reasonable time prior to the filing of any document that is to be incorporated by reference into a Registration Statement or a Prospectus after the initial filing of a Registration Statement, provide a reasonable number of copies of such document to the Holders, and make such of the representatives of the Company and the Trust as shall be reasonably requested by the Holders of Registrable Securities or the Initial Purchasers on behalf of such Holders available for discussion of such document; -15- 16 (k) obtain a CUSIP number for all Exchange Capital Securities and the Capital Securities (and if the Trust has made a distribution of the Subordinated Debentures to the Holders of the Capital Securities, the Subordinated Debentures or the Exchange Subordinated Debentures) as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with printed certificates for the Exchange Securities or the Registrable Securities, as the case may be, in a form eligible for deposit with the Depositary; (l) cause the Indenture, the Declaration, the Guarantee and the Exchange Guarantee to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA") in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, and effect such changes to such documents as may be required for them to be so qualified in accordance with the terms of the TIA and execute, and use its best efforts to cause the relevant trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable such documents to be so qualified in a timely manner; (m) in the case of a Shelf Registration, enter into such agreements (including underwriting agreements) as are customary in underwritten offerings and take all such other appropriate actions as are reasonably requested in order to expedite or facilitate the registration or the disposition of such Registrable Securities, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, if requested by (x) any Initial Purchaser, in the case where an Initial Purchaser holds Securities acquired by it as part of its initial distribution and (y) other Holders of Securities covered thereby: (i) make such representations and warranties to Holders of such Registrable Securities and the underwriters (if any), with respect to the business of the Trust, the Company and its subsidiaries as then conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and the Trust and updates thereof (which may be in the form of a reliance letter) in form and substance reasonably satisfactory to the managing underwriters (if any) and the Holders of a majority in principal amount of the Registrable Securities being sold, addressed to each selling Holder and the underwriters (if any) covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions); (iii) obtain "cold comfort" letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters from the independent certified public accountants of the Company and the Trust (and, if necessary, any other independent certified public accountants of any subsidiary of the Company and the Trust or of any business acquired by the Company and the Trust for which financial statements and financial data are, or are required to be, included in the Registration Statement), -16- 17 addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by such underwriters in accordance with Statement on Auditing Standards No. 72; and (iv) if an underwriting agreement is entered into, ensure that the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 4 hereof (or such other provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Registrable Securities covered by such Registration Statement and the managing underwriters or agents) with respect to all parties to be indemnified pursuant to said Section (including, without limitation, such underwriters and selling Holders). The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder; (n) if (1) a Shelf Registration is filed pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer that seeks to sell Exchange Securities during the Applicable Period, make reasonably available for inspection by any selling Holder of such Registrable Securities being sold, or each such Participating Broker-Dealer, as the case may be, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating Broker-Dealer, as the case may be, or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Trust, the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Trust, the Company and its subsidiaries to supply all relevant information in each case reasonably requested by any such Inspector in connection with such Registration Statement; provided, however, that the foregoing inspection and information gathering shall be coordinated on behalf of the Holders by Merrill Lynch and on behalf of the other parties, by one counsel designated as described in Section 2(c) hereof. Records that the Company and the Trust determine, in good faith, to be confidential and any records that it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a material misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or is necessary in connection with any action, suit or proceeding or (iii) the information in such Records has been made generally available to the public. Each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to agree in writing that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Trust or the Company unless and until such is made generally available to the public. Each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to -17- 18 further agree in writing that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; (o) comply with all applicable rules and regulations of the SEC so long as any provision of this Agreement shall be applicable and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods; (p) upon consummation of an Exchange Offer or a Private Exchange, if requested by a Trustee, obtain an opinion of counsel to the Company addressed to the Trustee for the benefit of all Holders of Registrable Securities participating in the Exchange Offer or the Private Exchange, as the case may be, and which includes an opinion that (i) the Company or the Trust, as the case requires, has duly authorized, executed and delivered the Exchange Securities and Private Exchange Securities and (ii) each of the Exchange Securities or the Private Exchange Securities, as the case may be, constitutes a legal, valid and binding obligation of the Company or the Trust, as the case requires, enforceable against the Company or the Trust, as the case requires, in accordance with its respective terms (in each case, with customary exceptions); (q) if an Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Registrable Securities by Holders to the Company or the Trust, as applicable (or to such other Person as directed by the Company or the Trust, respectively), in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be, the Company or the Trust, as applicable, shall mark, or cause to be marked, on such Registrable Securities delivered by such Holders,that such Registrable Securities are being cancelled in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be; in no event shall such Registrable Securities be marked as paid or otherwise satisfied; (r) cooperate with each seller of Registrable Securities covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities, and their respective counsel, in connection with any filings required to be made with the NASD; -18- 19 (s) take all other reasonable steps necessary to effect the registration of the Registrable Securities covered by a Registration Statement contemplated hereby; (t) (A) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," which section shall be reasonably acceptable to the Initial Purchasers or another representative of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer (a "Participating Broker-Dealer") that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Securities to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of the Initial Purchasers or such other representative, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Securities for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Securities, (ii) furnish to each Participating Broker-Dealer that has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request (each of the Company and the Trust hereby consents to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto by any Person subject to the prospectus delivery requirements of the Securities Act, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Securities covered by the Prospectus or any amendment or supplement thereto), (iii) keep the Exchange Offer Registration Statement effective and amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such Persons must comply with such requirements under the Securities Act and applicable rules and regulations in order to resell the Exchange Securities; provided, however, that such period shall not be required to exceed 90 days (or such longer period if extended pursuant to the last sentence of Section 3 hereof) (the "Applicable Period"), and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in -19- 20 connection with any resale of Exchange Securities received in respect of such Registrable Securities pursuant to the Exchange Offer"; and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and delivering a Prospectus in connection with the exchange of Registrable Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act; and (B) in the case of any Exchange Offer Registration Statement, to deliver to the Initial Purchasers or to another representative of the Participating Broker-Dealers, if requested by any such Initial Purchasers or such other representative of the Participating Broker-Dealers, on behalf of the Participating Broker-Dealers upon consummation of the Exchange Offer (i) an opinion of counsel in form and substance reasonably satisfactory to the Initial Purchasers or such other representative of the Participating Broker-Dealers, covering the matters customarily covered in opinions requested in connection with Exchange Offer Registration Statements and such other matters as may be reasonably requested (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions), (ii) an officers' certificate containing certifications substantially similar to those set forth in Section 5(f) of the Purchase Agreement and such additional certifications as are customarily delivered in a public offering of debt securities and (iii) as well as upon the effectiveness of the Exchange Offer Registration Statement, a comfort letter, in each case, in customary form if permitted by Statement on Auditing Standards No. 72. The Company or the Trust may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company or the Trust, as applicable, such information regarding such seller as may be required by the staff of the SEC to be included in a Registration Statement. The Company or the Trust may exclude from such registration the Registrable Securities of any seller that unreasonably fails to furnish such information within a reasonable time after receiving such request. The Company shall have no obligation to register under the Securities Act the Registrable Securities of a seller that so fails to furnish such information. In the case of (1) a Shelf Registration Statement or (2) Participating Broker-Dealers that have notified the Company and the Trust that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(t) hereof, are seeking to sell Exchange Securities and are required to deliver Prospectuses, each Holder agrees that, upon receipt of any notice from the Company or the Trust of the happening of any event of the kind described in Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or until it is advised in writing (the "Advice") by the Company and the Trust that the use of the applicable Prospectus may be resumed, and, if so -20- 21 directed by the Company and the Trust, such Holder will deliver to the Company or the Trust (at the Company's or the Trust's expense, as the case requires) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities or Exchange Securities, as the case may be, current at the time of receipt of such notice. If the Company or the Trust shall give any such notice to suspend the disposition of Registrable Securities or Exchange Securities, as the case may be, pursuant to a Registration Statement, the Company and the Trust shall use their best efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to the Registration Statement and shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement by the number of days in the period from and including the date of the giving of such notice to and including the date when the Company and the Trust shall have made available to the Holders (x) copies of the supplemented or amended Prospectus necessary to resume such dispositions or (y) the Advice. 4. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company and the Trust shall, jointly and severally, indemnify and hold harmless each Initial Purchaser, each Holder, each underwriter who participates in an offering of the Registrable Securities, each Participating Broker-Dealer, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of their respective directors, officers, employees and agents, as follows: (i) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto), covering Registrable Securities or Exchange Securities, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the prior written consent of the Company; and -21- 22 (iii) from and against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of counsel chosen by such Holder, such Participating Broker-Dealer, or any underwriter (except to the extent otherwise expressly provided in Section 4(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 4(a); provided, however, that (i) this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished in writing to the Company or the Trust by such Holder, such Participating Broker-Dealer or any underwriter with respect to such Holder, Participating Broker-Dealer or any underwriter, as the case may be, expressly for use in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) and (ii) the Company and the Trust shall not be liable to any such Holder, Participating Broker-Dealer, any underwriter or controlling person, with respect to any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary Prospectus to the extent that any such loss, liability, claim, damage or expense of any Holder, Participating Broker-Dealer, any underwriter or controlling person results from the fact that such Holder, any underwriter or Participating Broker-Dealer sold Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final Prospectus as then amended or supplemented if the Company had previously furnished copies thereof to such Holder, underwriter or Participating Broker-Dealer and the loss, liability, claim, damage or expense of such Holder, underwriter, Participating Broker-Dealer or controlling person results from an untrue statement or omission of a material fact contained in the preliminary Prospectus which was corrected in the final Prospectus. Any amounts advanced by the Company or the Trust to an indemnified party pursuant to this Section 4 as a result of such losses shall be returned to the Company or the Trust if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company or the Trust. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Trust, any underwriter and the other selling Holders and each of their respective directors, officers (including each officer of the Company and the Trust who signed the Registration Statement), employees and agents and each Person, if any, who controls the Company, the Trust, any underwriter or any other selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity -22- 23 with written information furnished to the Company or the Trust by such selling Holder with respect to such Holder expressly for use in the Registration Statement (or any amendment thereto), or any such Prospectus (or any amendment or supplement thereto); provided, however, that, in the case of Shelf Registration Statement, no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Shelf Registration Statement. (c) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, enclosing a copy of all papers properly served on such indemnified party, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability that it may have under this Section 4, except to the extent that it is materially prejudiced by such failure. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which an indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) In order to provide for just and equitable contribution in circumstances under which any of the indemnity provisions set forth in this Section 4 is for any reason held to be unavailable to the indemnified parties although applicable in accordance with its terms, the Company, the Trust, and the Holders shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company, the Trust, and the Holders, as incurred; provided, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Company, the Trust, and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and-expenses of the nature contemplated by such indemnity agreement in such proportion as shall be appropriate to reflect the relative fault of the Company and Trust, on the one hand, and the Holders, on the other hand, with respect to the statements or omissions which resulted in such loss, liability, claim, damage or expense, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault of the Company and the Trust, on the one hand, and of the Holders, on the other hand, shall be -23- 24 determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Trust, on the one hand, or by or on behalf of the Holders, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Trust and the Holders of the Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 4 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the relevant equitable considerations. For purposes of this Section 4, each affiliate of a Holder, and each director, officer, employee, agent and Person, if any, that controls a Holder or such affiliate within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Holder, and each director of each of the Company or the Trust, each officer of each of the Company or the Trust who signed the Registration Statement, and each Person, if any, that controls each of the Company and the Trust within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as each of the Company or the Trust. 5. Participation in Underwritten Registrations. No Holder may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents reasonably required under the terms of such underwriting arrangements. 6. Selection of Underwriters. The Holders of Registrable Securities covered by the Shelf Registration Statement that desire to do so may sell the securities covered by such Shelf Registration in an underwritten offering. In any such underwritten offering, the underwriter or underwriters and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Registrable Securities included in such offering; provided, however, that such underwriters and managers must be reasonably satisfactory to the Company and the Trust. 7. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the Company or the Trust is subject to the reporting requirements of Section 13 or 15 of the Exchange Act and any Registrable Securities remain outstanding, the Company and the Trust, as the case may be, will use their best efforts to file the reports required to be filed by either of them under the Securities Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the SEC thereunder; provided, that if either of them ceases to be so required to file such reports, it will, upon the request of any Holder of Registrable Securities (a) make publicly available such information as is necessary to permit sales of such Holder's securities pursuant to Rule 144 under the Securities Act, (b) deliver such information to a prospective purchaser as is necessary -24- 25 to permit sales of such Holder's securities pursuant to Rule 144A under the Securities Act and take such further action as any Holder of Registrable Securities may reasonably request, and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time, to enable such Holder to sell its Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, (ii) Rule 144A under the Securities Act, as such rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company and the Trust will deliver to such Holder a written statement as to whether either of them has complied with such requirements. (b) No Inconsistent Agreements. Neither the Company nor the Trust has entered into, nor will the Company or the Trust on or after the date of this Agreement enter into, any agreement that is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's or the Trust's other issued and outstanding securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company and the Trust have obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or departure; provided, that no amendment, modification or supplement or waiver or consent to the departure with respect to the provisions of Section 4 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder of Registrable Securities. Notwithstanding the foregoing sentence, (i) this Agreement may be amended, without the consent of any Holder of Registrable Securities, by written agreement signed by the Company, the Trust and Merrill Lynch, to cure any ambiguity, correct or supplement any provision of this Agreement that may be inconsistent with any other provision of this Agreement or to make any other provisions with respect to matters or questions arising under this Agreement that shall not be inconsistent with other provisions of this Agreement, (ii) this Agreement may be amended, modified or supplemented, and waivers and consents to departures from the provisions hereof may be given, by written agreement signed by the Company, the Trust and Merrill Lynch to the extent that any such amendment, modification, supplement, waiver or consent is, in their reasonable judgment, necessary or appropriate to comply with applicable law (including any interpretation of the Staff of the SEC) or any change therein and (iii) to the extent any provision of this Agreement relates to the Initial Purchasers, such provision may be amended, modified or supplemented, and waivers or consents to departures from such provisions may be given, by written agreement signed by Merrill Lynch, the Company and the Trust. -25- 26 (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company or the Trust by means of a notice given in accordance with the provisions of this Section 7(d), which address initially is, with respect to the Initial Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the Company or the Trust, initially at the Company's address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 7(d). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Initial Purchasers, including, without limitation and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiary. Each of the Initial Purchasers shall be a third party beneficiary of the agreements made hereunder between the Company and the Trust, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. -26- 27 (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW YORK. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Securities Held by the Company, the Trust or its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company, the Trust or its affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. -27- 28 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ADVANTA CORP. By: /s/ David D. Wesselink ------------------------------------------------ Name: David D. Wesselink Title: Senior Vice President and Chief Financial Officer ADVANTA CAPITAL TRUST I By: /s/ David D. Wesselink ------------------------------------------------ Name: David D. Wesselink Trustee -28- 29 Confirmed and accepted as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED SALOMON BROTHERS INC By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Lee Shavel ------------------------------------ Authorized Signatory On its behalf and on behalf of Salomon Brothers Inc -29- EX-4.K 6 SERIES A CAPITAL SECURITIES GUARANTEE AGREEMENT 1 EXHIBIT 4-k ======================================== SERIES A CAPITAL SECURITIES GUARANTEE AGREEMENT Advanta Corp. Dated as of December 17, 1996 ======================================== TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INTERPRETATION -2- SECTION 1.1 Definitions and Interpretation -2- ARTICLE II TRUST INDENTURE ACT -5- SECTION 2.1 Trust Indenture Act; Application -5- SECTION 2.2 Lists of Holders of Securities -6- SECTION 2.3 Reports by the Capital Securities Guarantee Trustee -6- SECTION 2.4 Periodic Reports to Capital Securities Guarantee Trustee -6- SECTION 2.5 Evidence of Compliance with Conditions Precedent -7- SECTION 2.6 Events of Default; Waiver -7- SECTION 2.7 Event of Default; Notice -7- SECTION 2.8 Conflicting Interests -7- ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE -8- SECTION 3.1 Powers and Duties of the Capital Securities Guarantee Trustee -8- SECTION 3.2 Certain Rights of Capital Securities Guarantee Trustee -10-
2 SECTION 3.3. Not Responsible for Recitals or Issuance of Series A Capital Securities Guarantee -12- ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE -12- SECTION 4.1 Capital Securities Guarantee Trustee; Eligibility -12- SECTION 4.2 Appointment, Removal and Resignation of Capital Securities Guarantee Trustee -13- ARTICLE V GUARANTEE -14- SECTION 5.1 Guarantee -14- SECTION 5.2 Waiver of Notice and Demand -14- SECTION 5.3 Obligations Not Affected -14- SECTION 5.4 Rights of Holders -15- SECTION 5.5 Guarantee of Payment -16- SECTION 5.6 Subrogation -16- SECTION 5.7 Independent Obligations -16- ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION -16- SECTION 6.1 Limitation of Transactions -16- SECTION 6.2 Ranking -17- ARTICLE VII TERMINATION -17- SECTION 7.1 Termination -17- ARTICLE VIII INDEMNIFICATION -18- SECTION 8.1 Exculpation -18- SECTION 8.2 Indemnification -18- ARTICLE IX MISCELLANEOUS -19- SECTION 9.1 Successors and Assigns -19- SECTION 9.2 Amendments -19- SECTION 9.3 Notices -19- SECTION 9.4 Exchange Offer -20- SECTION 9.5 Benefit -21- SECTION 9.6 Governing Law -21-
3 SERIES A CAPITAL SECURITIES GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Series A Capital Securities Guarantee"), dated as of December 17, 1996 is executed and delivered by Advanta Corp., a Delaware corporation (the "Guarantor"), and The Chase Manhattan Bank, as trustee (sometimes referred to hereinafter as the "Capital Securities Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Series A Capital Securities (as defined herein) of Advanta Capital Trust I, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of December 17, 1996, among the trustees of the Issuer, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer (i) is issuing on the date hereof 100,000 capital securities, having an aggregate liquidation amount of $100,000,000, such capital securities being designated the 8.99% Series A Capital Securities (collectively the "Series A Capital Securities") and (ii) in connection with an Exchange Offer (as defined in the Declaration) will execute and deliver the Series B Capital Securities Guarantee (as defined in the Declaration) for the benefit of Holders of the Series B Capital Securities (as defined in the Declaration). WHEREAS, as incentive for the Holders to purchase the Series A Capital Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Series A Capital Securities Guarantee, to pay to the Holders of the Series A Capital Securities the Guarantee Payments (as defined below), and the Guarantor agrees to make certain other payments on the terms and conditions set forth herein. WHEREAS, the Guarantor is executing and delivering a guarantee agreement (the "Common Securities Guarantee"), for the benefit of the holders of the Common Securities (as defined herein), the terms of which provide that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee are subordinated, to the extent and in the manner set forth in the Common Securities Guarantee, to the rights of Holders of Series A Capital Securities and the Series B Capital Securities to receive Guarantee Payments under this Series A Capital Securities Guarantee and the Series B Capital Securities Guarantee, as the case may be. NOW, THEREFORE, in consideration of the purchase by each Holder of Series A Capital Securities, which purchase the Guarantor hereby acknowledges shall benefit the Guarantor, the Guarantor executes and delivers this Series A Capital Securities Guarantee for the benefit of the Holders. 4 ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Definitions and Interpretation In this Series A Capital Securities Guarantee, unless the context otherwise requires: (a) Capitalized terms used in this Series A Capital Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) Terms defined in the Declaration as at the date of execution of this Series A Capital Securities Guarantee have the same meaning when used in this Series A Capital Securities Guarantee unless otherwise defined in this Series A Capital Securities Guarantee; (c) a term defined anywhere in this Series A Capital Securities Guarantee has the same meaning throughout; (d) all references to "the Series A Capital Securities Guarantee" or "this Series A Capital Securities Guarantee" are to this Series A Capital Securities Guarantee as modified, supplemented or amended from time to time; (e) all references in this Series A Capital Securities Guarantee to Articles and Sections are to Articles and Sections of this Series A Capital Securities Guarantee, unless otherwise specified; (f) a term defined in the Trust Indenture Act has the same meaning when used in this Series A Capital Securities Guarantee, unless otherwise defined in this Series A Capital Securities Guarantee or unless the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" shall mean any day other than a Saturday or a Sunday, or a day on which banking institutions in New York, New York or Wilmington, Delaware are authorized or required by law or executive order to close. 5 "Capital Securities Guarantee Trustee" shall mean The Chase Manhattan Bank, until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Series A Capital Securities Guarantee and thereafter means each such Successor Capital Securities Guarantee Trustee. "Common Securities" shall mean the securities representing common undivided beneficial interests in the assets of the Issuer. "Corporate Trust Office" shall mean the office of the Capital Securities Guarantee Trustee at which the corporate trust business of the Capital Securities Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at 450 West 33rd Street, 15th Floor, New York, New York 10001. "Covered Person" shall mean any Holder or beneficial owner of Series A Capital Securities. "Debentures" shall mean the series of subordinated debt securities of the Guarantor designated the 8.99% Series A Junior Subordinated Deferrable Interest Debentures due December 17, 2026 held by the Property Trustee (as defined in the Declaration) of the Issuer. "Event of Default" shall mean a default by the Guarantor on any of its payment or other obligations under this Series A Capital Securities Guarantee. "Guarantee Payments" shall mean the following payments or distributions, without duplication, with respect to the Series A Capital Securities, to the extent not paid or made by the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Declaration) that are required to be paid on such Series A Capital Securities to the extent the Issuer has funds on hand legally available therefor at such time, (ii) the redemption price, including all accumulated and unpaid Distributions to the date of redemption (the "Redemption Price") to the extent the Issuer has funds on hand legally available therefor at such time, with respect to any Series A Capital Securities called for redemption by the Issuer, and (iii) upon a voluntary or involuntary termination and liquidation of the Issuer (other than in connection with the distribution of Debentures to the Holders in exchange for Series A Capital Securities as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accumulated and unpaid Distributions on the Series A Capital Securities to the date of payment, to the extent the Issuer has funds on hand legally available therefor, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer. If an Event of Default has occurred and is continuing, no Guarantee Payments under the Common Securities Guarantee with respect to the Common Securities or any guarantee payment under any Other Common Securities Guarantees shall be made until the Holders of Series A Capital Securities shall be paid in full the Guarantee Payments to which they are entitled under this Series A Capital Securities Guarantee. 6 "Holder" shall mean any holder, as registered on the books and records of the Issuer, of any Series A Capital Securities; provided, however, that, in determining whether the holders of the requisite percentage of Series A Capital Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor. "Indemnified Person" shall mean the Capital Securities Guarantee Trustee, any Affiliate of the Capital Securities Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Capital Securities Guarantee Trustee. "Indenture" shall mean the Indenture dated as of December 17, 1996 among the Guarantor (the "Debenture Issuer") and The Chase Manhattan Bank, as trustee, pursuant to which the Debentures are to be issued to the Property Trustee of the Issuer. "Majority in liquidation amount of the Series A Capital Securities" shall mean, except as provided by the Trust Indenture Act, a vote by Holder(s) of Series A Capital Securities, voting separately as a class, of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Series A Capital Securities. "Officers' Certificate" shall mean, with respect to any person, a certificate signed by the Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President or the Treasurer of the Guarantor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Series A Capital Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (c) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Other Common Securities Guarantees" shall have the same meaning as "Other Guarantees" in the Common Securities Guarantee. 7 "Other Debentures" shall mean all junior subordinated debentures issued by the Guarantor from time to time and sold to trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. "Other Guarantees" shall mean all guarantees to be issued by the Guarantor with respect to capital securities (if any) similar to the Series A Capital Securities issued by trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. "Person" shall mean a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Registration Rights Agreement" shall mean the Registration Rights Agreement, dated as of December 11, 1996 by and among the Guarantor, the Issuer and the Initial Purchasers named therein as such agreement may be amended, modified or supplemented from time to time. "Responsible Officer" shall mean, with respect to the Capital Securities Guarantee Trustee, any officer within the Corporate Trust Office of the Capital Securities Guarantee Trustee with direct responsibility for the administration of this Series A Capital Securities Guarantee and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Capital Securities Guarantee Trustee" shall mean a successor Capital Securities Guarantee Trustee possessing the qualifications to act as Capital Securities Guarantee Trustee under Section 4.1. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended. "Trust Securities" shall mean the Common Securities and the Series A Capital Securities and Series B Capital Securities, collectively. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application (a) This Series A Capital Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Series A Capital Securities Guarantee and shall, to the extent applicable, be governed by such provisions; and 8 (b) if and to the extent that any provision of this Series A Capital Securities Guarantee limits, qualifies or conflicts with the duties imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2 Lists of Holders of Securities (a) The Guarantor shall provide the Capital Securities Guarantee Trustee (unless the Capital Securities Guarantee Trustee is otherwise the registrar of the Capital Securities) with a list, in such form as the Capital Securities Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Series A Capital Securities ("List of Holders") as of such date, (i) within one Business Day after June 1 and December 1 of each year, and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Capital Securities Guarantee Trustee; provided, that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Capital Securities Guarantee Trustee by the Guarantor. The Capital Securities Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Capital Securities Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Capital Securities Guarantee Trustee Within 60 days after May 15 of each year, commencing May 15, 1997, the Capital Securities Guarantee Trustee shall provide to the Holders of the Series A Capital Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Capital Securities Guarantee Trustee shall also comply with the requirements of section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Capital Securities Guarantee Trustee The Guarantor shall provide to the Capital Securities Guarantee Trustee such documents, reports and information as required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Capital Securities Guarantee Trustee is for informational purposes only and the Capital Securities Guarantee Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Guarantor's 9 compliance with any of its covenants hereunder (as to which the Capital Securities Guarantee Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 2.5 Evidence of Compliance with Conditions Precedent The Guarantor shall provide to the Capital Securities Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Series A Capital Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 14(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver The Holders of a Majority in liquidation amount of Series A Capital Securities may, by vote, on behalf of the Holders of all of the Series A Capital Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Series A Capital Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7 Event of Default; Notice (a) The Capital Securities Guarantee Trustee shall, within 90 days after the occurrence of a default with respect to this Capital Securities Guarantee, mail by first class postage prepaid, to all Holders of the Series A Capital Securities, notices of all defaults actually known to a Responsible Officer of the Capital Securities Guarantee Trustee, unless such defaults have been cured before the giving of such notice; provided, that, except in the case of default in the payment of any Guarantee Payment, the Capital Securities Guarantee Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Capital Securities Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the holders of the Series A Capital Securities. (b) The Capital Securities Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Capital Securities Guarantee Trustee shall have received written notice, or a Responsible Officer of the Capital Securities Guarantee Trustee charged with the administration of the Declaration shall have obtained actual knowledge, of such Event of Default. SECTION 2.8 Conflicting Interests 10 The Declaration shall be deemed to be specifically described in this Series A Capital Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Capital Securities Guarantee Trustee (a) This Series A Capital Securities Guarantee shall be held by the Capital Securities Guarantee Trustee for the benefit of the Holders of the Series A Capital Securities, and the Capital Securities Guarantee Trustee shall not transfer this Series A Capital Securities Guarantee to any Person except a Holder of Series A Capital Securities exercising his or her rights pursuant to Section 5.4(b) or to a Successor Capital Securities Guarantee Trustee on acceptance by such Successor Capital Securities Guarantee Trustee of its appointment to act as Successor Capital Securities Guarantee Trustee. The right, title and interest of the Capital Securities Guarantee Trustee shall automatically vest in any Successor Capital Securities Guarantee Trustee, and such vesting and succession of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Capital Securities Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Capital Securities Guarantee Trustee has occurred and is continuing, the Capital Securities Guarantee Trustee shall enforce this Series A Capital Securities Guarantee for the benefit of the Holders of the Series A Capital Securities. (c) The Capital Securities Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Series A Capital Securities Guarantee, and no implied covenants shall be read into this Series A Capital Securities Guarantee against the Capital Securities Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall exercise such of the rights and powers vested in it by this Series A Capital Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Series A Capital Securities Guarantee shall be construed to relieve the Capital Securities Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: 11 (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Capital Securities Guarantee Trustee shall be determined solely by the express provisions of this Series A Capital Securities Guarantee, and the Capital Securities Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Series A Capital Securities Guarantee, and no implied covenants or obligations shall be read into this Series A Capital Securities Guarantee against the Capital Securities Guarantee Trustee; and (B) in the absence of bad faith on the part of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Capital Securities Guarantee Trustee and conforming to the requirements of this Series A Capital Securities Guarantee; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Series A Capital Securities Guarantee; (ii) the Capital Securities Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Capital Securities Guarantee Trustee, unless it shall be proved that the Capital Securities Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Capital Securities Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in liquidation amount of the Series A Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee, or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Series A Capital Securities Guarantee; and (iv) no provision of this Series A Capital Securities Guarantee shall require the Capital Securities Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of 12 any of its duties or in the exercise of any of its rights or powers, if the Capital Securities Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Series A Capital Securities Guarantee or indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 3.2 Certain Rights of Capital Securities Guarantee Trustee (a) Subject to the provisions of Section 3.1: (i) The Capital Securities Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting, upon any resolution, certificate, statement instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Series A Capital Securities Guarantee may be sufficiently evidenced by an Officers' Certificate. (iii) Whenever, in the administration of this Series A Capital Securities Guarantee, the Capital Securities Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Capital Securities Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Capital Securities Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof). (v) The Capital Securities Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Capital Securities Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Series A Capital Securities Guarantee from any court of competent jurisdiction. 13 (vi) The Capital Securities Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Series A Capital Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Capital Securities Guarantee Trustee such security and indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Capital Securities Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Capital Securities Guarantee Trustee; provided, that nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Capital Securities Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Series A Capital Securities Guarantee. (vii) The Capital Securities Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Capital Securities Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii) The Capital Securities Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Capital Securities Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (ix) Any action taken by the Capital Securities Guarantee Trustee or its agents hereunder shall bind the Holders of the Series A Capital Securities, and the signature of the Capital Securities Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Capital Securities Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Series A Capital Securities Guarantee, both of which shall be conclusively evidenced by the Capital Securities Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Series A Capital Securities Guarantee the Capital Securities Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or 14 right or taking any other action hereunder, the Capital Securities Guarantee Trustee (i) may request instructions from the Holders of a Majority in liquidation amount of the Series A Capital Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions. (xi) The Capital Securities Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Series A Capital Securities Guarantee. (b) No provision of this Series A Capital Securities Guarantee shall be deemed to impose any duty or obligation on the Capital Securities Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Capital Securities Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Capital Securities Guarantee Trustee shall be construed to be a duty. SECTION 3.3. Not Responsible for Recitals or Issuance of Series A Capital Securities Guarantee The recitals contained in this Series A Capital Securities Guarantee shall be taken as the statements of the Guarantor, and the Capital Securities Guarantee Trustee does not assume any responsibility for their correctness. The Capital Securities Guarantee Trustee makes no representation as to the validity or sufficiency of this Series A Capital Securities Guarantee. ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 4.1 Capital Securities Guarantee Trustee; Eligibility (a) There shall at all times be a Capital Securities Guarantee Trustee that shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Securities and Exchange Commission to act as an institutional trustee 15 under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Capital Securities Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Capital Securities Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Capital Securities Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Capital Securities Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2 Appointment, Removal and Resignation of Capital Securities Guarantee Trustee (a) Subject to Section 4.2(b), the Capital Securities Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Capital Securities Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor. (c) The Capital Securities Guarantee Trustee shall hold office until a Successor Capital Securities Guarantee Trustee shall have been appointed or until its removal or resignation. The Capital Securities Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Capital Securities Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor and the resigning Capital Securities Guarantee Trustee. 16 (d) If no Successor Capital Securities Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery of an instrument of removal or resignation, the Capital Securities Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Capital Securities Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Capital Securities Guarantee Trustee. (e) No Capital Securities Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Capital Securities Guarantee Trustee. (f) Upon termination of this Series A Capital Securities Guarantee or removal or resignation of the Capital Securities Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Capital Securities Guarantee Trustee all amounts due to the Capital Securities Guarantee Trustee accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE SECTION 5.1 Guarantee The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2 Waiver of Notice and Demand The Guarantor hereby waives notice of acceptance of this Series A Capital Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3 Obligations Not Affected The obligations, covenants, agreements and duties of the Guarantor under this Series A Capital Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, 17 covenant, term or condition relating to the Series A Capital Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Series A Capital Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Series A Capital Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Series A Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Series A Capital Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; (g) the consummation of the Exchange Offer; or (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor with respect to the Guarantee Payments shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4 Rights of Holders (a) The Holders of a Majority in liquidation amount of the Series A Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee in respect of this Series A Capital Securities Guarantee or exercising any trust or 18 power conferred upon the Capital Securities Guarantee Trustee under this Series A Capital Securities Guarantee. (b) If the Capital Securities Guarantee Trustee fails to enforce such Series A Capital Securities Guarantee, any Holder of Series A Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Capital Securities Guarantee Trustee's rights under this Series A Capital Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Capital Securities Guarantee Trustee or any other person or entity. The Guarantor waives any right or remedy to require that any action be brought first against the Issuer or any other person or entity before proceeding directly against the Guarantor. SECTION 5.5 Guarantee of Payment This Series A Capital Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6 Subrogation The Guarantor shall be subrogated to all (if any) rights of the Holders of Series A Capital Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Series A Capital Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Series A Capital Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Series A Capital Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7 Independent Obligations The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Series A Capital Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Series A Capital Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (h), inclusive, of Section 5.3 hereof. 19 ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions So long as any Capital Securities remain outstanding, the Guarantor shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock (which includes common and preferred stock) or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Guarantor (including any Other Debentures) that rank pari passu with or junior in right of payment to the Debentures or (iii) make any guarantee payments with respect to any guarantee by the Guarantor of the debt securities of any subsidiary of the Guarantor (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Debentures (other than (a) dividends or distributions in shares of, or options, warrants, rights to subscribe for or purchase shares of, common stock of the Guarantor, (b) any declaration of a dividend in connection with the implementation of a stockholder's rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a result of a reclassification of the Guarantor's capital stock or the exchange or the conversion of one class or series of the Guarantor's capital stock for another class or series of the Guarantor's capital stock, (e) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of common stock related to the issuance of common stock or rights under any of the Guarantor's benefit plans for its directors, officers or employees or any of the Guarantor's dividend reinvestment plans) if at such time (i) there shall have occurred any event of which the Guarantor has actual knowledge that (a) is, or with the giving of notice or the lapse of time, or both, would be, an Event of Default and (b) in respect of which the Guarantor shall not have taken reasonable steps to cure, (ii) if such Debentures are held by the Property Trustee, the Guarantor shall be in default with respect to its payment of any obligations under this Series A Capital Securities Guarantee or (iii) the Guarantor shall have given notice of its election of the exercise of its right to extend the interest payment period pursuant to Section 16.01 of the Indenture and any such extension shall be continuing. SECTION 6.2 Ranking This Series A Capital Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to Senior Indebtedness (as defined in the Indenture), to the same extent and in the same manner that the Debentures are subordinated to Senior Indebtedness pursuant to the Indenture (except as indicated below), it being understood that the terms of Article XV of the Indenture shall apply to the obligations of the Guarantor under this Series A Capital Securities Guarantee as if (x) such Article XV were set forth herein in full and (y) 20 such obligations were substituted for the term "Securities" appearing in such Article XV, except that with respect to Section 15.03 of the Indenture only, the term "Senior Indebtedness" shall mean all liabilities of the Guarantor, whether or not for money borrowed (other than obligations in respect of Other Guarantees), (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any Other Guarantee (as defined herein) and any Other Common Securities Guarantee and any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. ARTICLE VII TERMINATION SECTION 7.1 Termination This Series A Capital Securities Guarantee shall terminate (i) upon full payment of the Redemption Price (as defined in the Declaration) of all Series A Capital Securities, or (ii) upon liquidation of the Issuer, the full payment of the amounts payable in accordance with the Declaration or the distribution of the Debentures to the Holders of all of the Series A Capital Securities. Notwithstanding the foregoing, this Series A Capital Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Series A Capital Securities must restore payment of any sums paid under the Series A Capital Securities or under this Series A Capital Securities Guarantee. ARTICLE VIII INDEMNIFICATION SECTION 8.1 Exculpation (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Series A Capital Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Series A Capital Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the 21 Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Series A Capital Securities might properly be paid. SECTION 8.2 Indemnification The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.2 shall survive the termination of this Series A Capital Securities Guarantee. ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns All guarantees and agreements contained in this Series A Capital Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Series A Capital Securities then outstanding. SECTION 9.2 Amendments Except with respect to any changes that do not materially adversely affect the rights of Holders (in which case no consent of Holders will be required), this Series A Capital Securities Guarantee may only be amended with the prior approval of the Holders of a Majority in liquidation amount of the Securities (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined). The provisions of Section 12.2 of the Declaration with respect to meetings of Holders of the Securities apply to the giving of such approval. SECTION 9.3 Notices All notices provided for in this Series A Capital Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: 22 (a) If given to the Issuer, in care of the Administrative Trustee at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Capital Securities Guarantee Trustee and the Holders of the Series A Capital Securities): Advanta Capital Trust I c/o Advanta Corp. 501 Carr Road Wilmington, Delaware 19809 Attention: Jeffrey Beck Telecopy: (302) 791-6540 (b) If given to the Capital Securities Guarantee Trustee, at the Capital Securities Guarantee Trustee's mailing address set forth below (or such other address as the Capital Securities Guarantee Trustee may give notice of to the Holders of the Series A Capital Securities): The Chase Manhattan Bank 450 West 33rd Street 15th Floor New York, New York 10001 Attention: Corporate Trustee Administration Department Telecopy: (212) 946-8161 (c) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Capital Securities Guarantee Trustee and the Holders of the Series A Capital Securities): Advanta Corp. Welsh and McKean Roads P.O. Box 844 Spring House, Pennsylvania 19477 Attention: Gene S. Schneyer, Esquire Telecopy: (215) 444-5025 (d) If given to any Holder of Series A Capital Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. 23 SECTION 9.4 Exchange Offer In the event an Exchange Offer Registration Statement (as defined in the Registration Rights Agreement) becomes effective and the Issuer issues any Series B Capital Securities in the Exchange Offer, the Guarantor will enter into a new capital securities guarantee agreement, in substantially the same form as this Series A Capital Securities Guarantee, with respect to the Series B Capital Securities. SECTION 9.5 Benefit This Series A Capital Securities Guarantee is solely for the benefit of the Holders of the Series A Capital Securities and, subject to Section 3.1(a), is not separately transferable from the Series A Capital Securities. SECTION 9.6 Governing Law THIS SERIES A CAPITAL SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. THIS SERIES A CAPITAL SECURITIES GUARANTEE is executed as of the day and year first above written. ADVANTA CORP., as Guarantor By: /s/ Name: Title: THE CHASE MANHATTAN BANK, as Capital Securities Guarantee Trustee By: /s/ Name: Title: EX-10.C 7 ADVANTA MNGT INCENTIVE PLAN, AS AMENDED 1 EXHIBIT 10-C ADVANTA CORP. ADVANTA MANAGEMENT INCENTIVE PLAN A. Plan Objectives The objectives of the Plan are to: - Reward outstanding performance. - Link the business planning process, including attainment of key Corporate and SBU priorities with the compensation system. - Provide competitive incentive compensation opportunities to recruit and retain key employees. - Control fixed compensation expense by introducing a variable pay element funded by meeting key financial and individual performance objectives. B. Eligibility - To be approved by the Compensation Committee of the Board of Directors, based on recommendations of the Chairman and President. Generally, the Plan shall be limited to senior level exempt employees in a position to substantially contribute to attainment of annual goals, and with a base salary of at least $60,000. However, exceptions to this may be recommended by the Chairman and President. Participants in this Plan shall not participate in any other annual incentive program other than the Advanta Management Incentive Plan With Stock Election II, III or IV ("AMIPWISE"). - Generally, there are four classes of participation:
Class Participants ----- ------------ A Chairman/CEO and President/Chief Operating Officer B SBU Heads of Credit Cards, Second Mortgages and Leasing, as well as the Executive Vice President/Chief Financial Officer and the Senior Vice President, Administration C Corporate Vice Presidents (VPs of HR, CIS, Legal, Accounting and Treasury) and senior level staff with salaries equal to or greater than $75,000
2 D All other participants with salaries from $60,000
C. Size of Incentive Awards and Plan Cost - Each class has a Guideline Incentive Opportunity expressed as a percentage of base salary. Salary is defined as the base salary in effect on January 1 of the plan year. If an individual becomes a participant after January 1, base salary shall be the salary in effect on the first day of participation. - Attainment of targeted performance goals will produce an award equal to the Guideline Award. - Performance above or below goals will produce a correspondingly greater or smaller award. The Maximum Award will be paid when both the Company or the SBU, as applicable, exceeds its earnings goal and individual performance exceeds the performance goal. Combinations of these elements will produce different awards. - The maximum award is 200% of the Guideline Award. - Guideline and Maximum awards are shown below for each level of performance.
Participant Normal Guideline Maximum Class Award* Award* ----- ------ ------ A 75% 150% B 50% 100% C** 20-35% 40% D** 10-15% 20-30%
* Expressed as a percentage of base salary. Intermediate performance awards determined by interpolation. ** Awards determined by financial performance and MBO achievement. D. Award Generating Approach - Awards will be based on the degree to which the Company's annual Corporate and SBU profit goals are achieved, and on individual performance for participants in Class C and Class D. Profits will be measured by Pretax Operating Profit contributions at the SBU and Corporate levels. Individual performance will be reviewed against MBO achievement. 3 E. Minimum Performance Levels - No incentive payment shall be made if the Company/SBU does not achieve its Threshold Profit Performance Goal. The threshold performance level shall be 75% of Profit Performance Goal. - Profit goals for Corporate and SBU units shall be identified and calibrated with the award schedule. Annual profit goals shall be approved by the Compensation Committee. - The threshold insures interest in the Plan at a low but acceptable level of performance. Performance goal at maximum is established to provide for increasingly larger awards at performance levels significantly above target. Awards are calibrated to match the appropriate level of performance. Class A participants and Class B and C (non-SBU) participants will only receive bonuses if threshold Corporate earnings are achieved. Class B SBU heads and Class C SBU participants will only receive bonuses if threshold SBU earnings are achieved. F. Plan Administration - The Plan is administered by the Compensation Committee of the Board of Directors. The President shall provide recommendations to the Committee. These recommendations shall include: - annual profit targets, - participation recommendations, - profit performance and quality evaluation at the close of the fiscal year, - award recommendations at the close of the year, and - acting on other matters which may affect administration of the Plan. 4 - The Chairman and President may recommend exceptions to policy described herein for eligibility and award size. However, exceptions shall not be approved that would materially impact the cost and intent of the Plan. - Total awards cannot exceed Plan maximums, and all awards are subject to Compensation Committee review and approval. G. Form and Timing of Payments - Incentive awards will be paid at such time as the Compensation Committee and the Board of Directors determine with respect to any Plan year. Awards will be paid in cash, except to the extent that a participant in the Plan has made an election under AMIPWISE (or has been required thereunder) to have an award paid in shares of the Company's Common Stock. H. Partial Participation - In the event a participant is hired or promoted to an eligible position after the beginning of the Plan year, his or her award shall be prorated for actual participation during the Plan year. I. Termination of Employment - In the event of the resignation or discharge of a participant during the Plan year, participation in the Plan generally will be suspended and no award will be earned for that Plan year. - In the event of disability, death, or retirement of the participant during the Plan year (as defined under the Company's policies), the participant or his or her beneficiary shall be paid a pro rata amount based on time employed during the period or an amount as determined by the Committee in its sole discretion. EX-10.I 8 AMEND #2 TO EXECUTITVE DEFERRAL PLAN 1 Exhibit 10-i ADVANTA CORP. EXECUTIVE DEFERRAL PLAN AMENDMENT NO. 2 WHEREAS, ADVANTA CORP. ("ADVANTA") maintains the ADVANTA Corp. Executive Deferral Plan ("Plan"); and WHEREAS, ADVANTA desires the Plan be amended to modify the claims procedures thereunder; and WHEREAS, Article 15 of the Plan permits ADVANTA to amend the Plan; NOW, THEREFORE, the Plan is hereby amended, as follows: 1. A new Section 16.11 is hereby added, effective immediately, to read in its entirety: 16.11 CLAIMS. If, pursuant to the provisions of the Plan, the Administrative Committee denies the claim of a Participant for benefits under the Plan, the Administrative Committee shall provide written notice, within ninety (90) days after receipt of the claim, setting forth in a manner calculated to be understood by the claimant: a. the specific reasons for such denial; b. the specific reference to the Plan provisions on which the denial is based; c. a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is needed; and d. an explanation of the Plan's claim review procedure and the time limitations of this subsection applicable thereto. The Participant whose claim for benefits has been denied may request review by the Administrative Committee of the denied claim by notifying the Administrative Committee in writing within sixty (60) days after receipt of the notification of claim denial. As part of said review procedure, the claimant or his authorized representative may review pertinent documents and submit issues and comments to the Administrative Committee in writing. The Administrative Committee shall render its decision to the claimant in writing in a manner calculated to be understood by the claimant not later than sixty (60) days after 2 receipt of the request for review, unless special circumstances require an extension of time, in which case decision shall be rendered as soon after the sixty-day period as possible, but not later than one hundred and twenty (120) days after receipt of the request for review. The decision on review shall state the specific reasons therefor and the specific Plan reference on which it is based. 2. The present Section 16.11 is hereby redesignated Section 16.12 and the first sentence thereof is hereby amended, effective immediately, to read: "16.12 ARBITRATION. Any claim, dispute or other matter in question of any kind relating to this Plan not settled through the claims procedures established by the Committee in accordance with the provisions of Section 16.11 of the Plan shall be settled by Arbitration in accordance with the Rules of the American Arbitration Association." 3. In all other respects the Plan is hereby ratified and confirmed. -2- EX-10.J 9 AMENDMENT TO NON-EMPLOYEE DIRECTORS DEFERRAL PLAN 1 Exhibit 10-j AMENDMENT TO THE ADVANTA CORP. NON-EMPLOYEE DIRECTOR DEFERRAL PLAN 1. Section 1.10 of the Plan is hereby amended in its entirety to read: "1.10. DIRECTOR shall mean an non-employee member of the Board of Directors of the Company and any non-employee member of the Board of Directors of Advanta Partners, L.P." 2. In all other respects, the Plan is hereby ratified and confirmed. EX-10.N 10 LIFE INSURANCE BENEFIT FOR EXECUTIVES & DIRECTORS 1 EXHIBIT 10-N As a taxable executive benefit, the Company pays the premiums for life insurance policies on the lives of non-employee Directors and certain key executives. The executive or Board member has the right to designate the beneficiary under the applicable life insurance policy. Messrs. Alter and Hart are each covered by a $5,000,000 policy. Messrs.Rosoff, Allhusen, Lindenberg, Wesselink and Riseman are each covered by a $1,000,000 policy. Mr. Kranzley is covered by a $650,000 policy. Mr. Podowski is covered by a $700,000 policy. Mr. John is covered by a $850,000 policy. Each non-employee Director is covered by a $500,000 policy. All of the life insurance policies are owned by the Company, with the exception of the policy providing coverage for Mr. Riseman which is owned by him. Upon termination of employment, each executive (other than Mr. Riseman) is entitled to acquire the insurance policy from the Company upon payment to the Company of an amount equal to the cash value of the policy at that time. The policies insuring the non-employee Directors are term life insurance policies, on which there is no build-up in cash value. In addition to the above, in 1993 two split-dollar life insurance policies were purchased to separately insure the life of Dennis Alter and the joint lives of Mr. Alter and his spouse in the amounts of $10,000,000 and $50,000,000, respectively. The proceeds of these policies are payable to beneficiaries designated by Mr. Alter. Premiums paid by the Company pursuant to these policies will be refunded to the Company on termination of, or payment of benefits under, the policies, and any cash surrender value in excess of such premiums may be paid to Mr. Alter's beneficiary. EX-10.Q 11 AMENDED AND RESTATED AGREE OF LIMITED PARTNERSHIP 1 EXHIBIT 10 q AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ADVANTA PARTNERS LP __________________________ Dated as of October 1, 1996 2 TABLE OF CONTENTS Page ARTICLE I - DEFINITIONS................................................... 1 1.01 Defined Terms........................................................ 1 ARTICLE II - CONTINUATION OF THE PARTNERSHIP.............................. 9 2.01. Formation and duration of the Partnership........................... 9 2.02. Name of the Partnership............................................. 9 2.03. Activity of the Partnership......................................... 9 2.04. Offices of the Partnership.......................................... 10 2.05. Title to Partnership Property....................................... 11 2.06. Representations and Warranties...................................... 11 ARTICLE III - INITIAL CAPITAL AND CONTRIBUTED CAPITAL..................................................... 16 3.01. Initial Capital; Contributed Capital; Initial Contribution; Admission of Additional Partners.................... 16 3.02. Failure of the Class A Limited Partner to Make Additional Contributions or Advances or to Maintain its Commitment............................ 18 3.03. Contributions by the General Partner................................ 18 ARTICLE IV - CAPITAL ACCOUNT AND PROFITS OR LOSSES........................ 18 4.01. Capital Accounts.................................................... 18 4.02. Allocation of Partners' Profits and Losses.......................... 19 4.03. Allocations with Respect to Transferred Interests................... 21 4.04. Minimum Allocations to the General Partners......................... 21 4.05. Allocations with Respect to Certain Carried Interests............... 21 ARTICLE V - VALUATIONS.................................................... 22 5.01. Valuation of Portfolio Investments Owned by the Partnership................................................ 22 ARTICLE VI - DISTRIBUTIONS................................................ 24 6.01. Distributions....................................................... 24 6.02. Taxes Withheld...................................................... 28 -i- 3 ARTICLE VII - ADDITIONAL CAPITAL CONTRIBUTIONS BY SPECIAL LIMITED PARTNERS................................... 29 7.01 Opportunity to Participate........................................... 29 7.02 Procedures relating to Additional Capital Contributions by Special Limited Partners.......................... 29 ARTICLE VIII - MANAGEMENT.................................................. 31 8.01. Authority of the Board of Directors.................................. 31 8.02. Certain Compensation Matters......................................... 33 8.03. Services of the General Partner and Board of Directors....................................................... 34 8.04. Compensation and Dealings with Partnership........................... 34 8.05. No Loans to Partners, Etc............................................ 34 8.06. Liability of the General Partner, Board of Directors Members and Others.................................... 35 8.07. Limitations on the Limited Partners.................................. 38 ARTICLE IX - RECORDS AND BANK ACCOUNTS..................................... 38 9.01. Books and Records.................................................... 38 9.02. Accounting Basis and Fiscal Year..................................... 38 9.03. Financial Reports.................................................... 38 9.04. Bank Accounts........................................................ 39 ARTICLE X - ASSIGNABILITY AND PURCHASE OF INTERESTS........................ 40 10.01. Substitution and Assignment of a Partner's Interest................................................. 40 10.02. Admission of Additional Partners.................................... 40 10.03. Withdrawal of Partners.............................................. 40 ARTICLE XI - DISSOLUTION AND TERMINATION................................... 41 11.01. Event of Dissolution................................................ 41 11.02. Liquidation......................................................... 41 ARTICLE XII - PURCHASE RIGHT OF ADVANTA.................................... 43 12.01. Advanta's Purchase Right............................................ 43 ARTICLE XIII- GENERAL PROVISIONS........................................... 44 13.01. Power of Attorney................................................... 44 13.02. Indulgences, Etc.................................................... 44 -ii- 4 13.03. Controlling Law...................................................... 44 13.04. Notices.............................................................. 45 13.05. Schedules............................................................ 46 13.06. Binding Nature of Agreement.......................................... 46 13.07. Execution in Counterparts............................................ 46 13.08. Provisions Separable................................................. 46 13.09. Entire Agreement; Amendment.......................................... 47 13.10. Section Headings..................................................... 47 13.11. Gender, Etc. ........................................................ 47 13.12. Number of Days....................................................... 47 13.13. Interpretation....................................................... 47 Exhibit A - Investment Amounts of Special Limited Partners -iii- 5 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ADVANTA PARTNERS LP AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") made as of October 1, 1996, by and among Advanta GP Corp., a Delaware corporation ("Advanta GP"), as General Partner, Advanta Investment Corp., a Delaware corporation ("Advanta"), as a Class A Limited Partner, Messrs. Mitchell L. Hollin, Michael Najjar and Gary H. Neems as Class B Limited Partners, and Robert Hall, Robert Rock and James Stern as Special Limited Partners. W I T N E S S E T H The parties hereto are partners of a limited partnership known as Advanta Partners LP (the "Partnership") and wish to amend and restate the Partnership's Agreement of Limited Partnership dated as of May 6, 1994, as previously amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto dated as of May 9, 1995, January 30, 1996, and May 21, 1996 respectively, to reflect the acquisition by the Partnership of the interests in the Partnership held by AP Capital, Inc. and Anthony P. Brenner and to reflect certain other changes to such Agreement. NOW, THEREFORE, in consideration of the foregoing and of the covenants and agreements herein contained, and intending to be legally bound hereby, the parties hereto agree that the Partnership's Agreement of Limited Partnership, as amended, is hereby amended and restated to read in its entirety as follows: ARTICLE I DEFINITIONS 1.01. Defined Terms. Unless the context otherwise requires, each capitalized term used in this Agreement shall have the meaning given to that term either in this Section or elsewhere in this Agreement where that term is defined. A definition shall be equally applicable to both the single and plural form. "Accounting Firm" means Arthur Andersen LLP, which is to be responsible for auditing the financial statements of the 6 Partnership, or such other independent public accounting firm chosen by the Board of Directors. "Accounting Period" means the period during which Profits or Losses are to be calculated under this Agreement, which will normally be a period of one year commencing January 1, but may be of shorter duration should the context require a shorter period. "Act" means the Pennsylvania Revised Uniform Limited Partnership Act, as amended. "Acting Member" shall have the meaning given to such term within Section 8.06. "Advanta" means Advanta Investment Corp., the Class A Limited Partner. "Advances" shall have the meaning given to such term within Section 3.01(d). "Affiliate" means, when used with respect to any specified Person, any other Person that, either directly or indirectly through one or more intermediaries, Controls, is Controlled By or is Under Common Control With such specified Person. "Agreement" means this Agreement of Limited Partnership, as it may be amended from time to time. "Allocation and Vesting Agreement" shall have the meaning set forth in Section 6.01(a)(i)(E) hereof. "AP101 Distribution" shall mean a distribution by Advanta Partners 101 LP pursuant to Section 6.1(a)(i)(D) of the Advanta Partners 101 LP partnership agreement to the Partnership and Advanta 101 GP. "Appraised Value" shall have the meaning given to such term within Section 12.01. The appraisers selected to provide the Appraised Value shall not have any ongoing economic relationships with Advanta or its Affiliates. "Asset Value" means, with respect to any Partnership Asset, the asset's Adjusted Basis for federal income tax purposes, except that the Asset Values of all Partnership Assets shall be adjusted to equal their respective fair market -2- 7 values (as determined by the Board of Directors in the manner provided in Section 5.01), in accordance with this Agreement and the rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv)(f), except as otherwise provided herein, as of: (a) the date of the acquisition of any additional Partnership Interest by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the date of the distribution of more than a de minimis amount of Partnership Assets (other than money) to a Partner; or (c) the date of the termination of the Partnership under Section 708(b)(i)(B) of the Code. Subsequent to any such adjustment of the Asset Value of any Partnership Asset, the Asset Value shall thereafter be adjusted for the Depreciation taken into account with respect to such Partnership Asset for purposes of computing Profit and Loss, and the Capital Accounts shall be adjusted in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(g). "Bankruptcy" means with respect to any Person, such Person has become insolvent or that a petition shall have been filed by or against such Person as a "debtor" and the adjudication of such Person as bankrupt under the provisions of the bankruptcy laws of the United States of America shall have commenced, or that such Person shall have made an assignment for the benefit of its creditors generally or a receiver shall have been appointed for substantially all of the property and assets of such Person. "Board of Directors" means the board of directors of the General Partner, as provided for in Section 8.01 hereof. "Business Plan" means the written business plan of the Partnership and as adopted and modified from time to time by the Board of Directors. "Capital Account" of a Partner means the individual Capital Account established and maintained in accordance with Section 4.01 hereof. "Carried Interest" shall have the meaning given to such term in Section 6.01(a) hereof. "Class A Limited Partner" means Advanta Investment Corp. "Class A Limited Partner's Investment" means the sum of the Class A Limited Partner's Contribution and Advances -3- 8 made with respect to, allocated to, or directly or indirectly used in connection with, a particular Portfolio Investment. "Class B Limited Partners" means Messrs. Hollin, Najjar and Neems (but in no event shall be deemed to refer to any other Person who had previously been a Class B Limited Partner prior to the date of this Agreement). "Code" means the Internal Revenue Code of 1986, as amended. "Commitment" shall have the meaning given to such term in Section 3.01(c) hereof. "Contributed Capital" means capital contributions made by a Partner to the Partnership and not repaid to such Partner, including such Partner's Initial Capital, but excluding any Advances. "Contribution" means Contributed Capital of the Class A Limited Partner. "Control" (including "Controlled By" and "Under Common Control With") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Defended Person" shall have the meaning given to such term within Section 8.06. "Depreciation" means, for each fiscal year, an amount equal to the depreciation, amortization and other cost recovery deductions allowable with respect to an asset for such period, except that if the Asset Value of an asset differs from its Adjusted Basis at the beginning of such year, Depreciation shall be an amount which bears the same ratio to such beginning Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis. If the amount of any depreciation, amortization or cost recovery deduction for such year is zero, Depreciation shall be determined by reference to beginning Asset Value, using any reasonable method selected by the General Partner. "Dissolution" of a Partner which is not a natural Person means that such Partner has terminated its existence, -4- 9 whether partnership or corporate, wound up its affairs and dissolved. "Effective Date" means June 1, 1994. "GEII" means Great Expectations International, Inc., a Delaware corporation. "General Partner" means a Person who is a general partner of the Partnership and shall include Advanta GP and any other Person who may hereafter be admitted to the Partnership as a General Partner pursuant to the provisions of the Agreement. "Hollin" means Mitchell L. Hollin. "Hurdle Rate" means an 8% cumulative return, compounded annually, on the Class A Limited Partner's Investment calculated with respect to a Portfolio Investment. "Incompetency" of an individual means that such individual shall have been judged incompetent or insane by decree of a court of appropriate jurisdiction. "Initial Capital" shall have the meaning given to such term in Section 3.01(a) hereof. "Initial Partners" means the parties hereto on the Effective Date. "Initial Term" means the initial term of the Partnership commencing on the Effective Date and ending on the ten-year anniversary of the Effective Date, or such shorter term as provided for in the Agreement. "Interest in the Partnership" or "Partnership Interest" means the interest in the Partnership which each Partner receives in return for such Partner's Contributed Capital, and in the case of the Class A Limited Partner, also for making Advances. "Investment" means, (i) with respect to the Partnership, the total amount paid or contributed by the Partnership to, or with respect to the securities of, any entity in which a Portfolio Investment has been or is hereafter made; (ii) with respect to the Special Limited Partners, means the aggregate capital contribution and purchase price paid for their Partnership Interests pursuant to the provisions of Section 7.02 -5- 10 and (iii) with respect to the Class A Limited Partner, the Class A Limited Partner's Investment. "Investment Notice" has the meaning set forth in Section 7.02(a). "Limited Partner" shall mean a Person who is a limited partner of the Partnership and shall include the Class A Limited Partner, the Class B Limited Partners, the Special Limited Partners and any other Person who may hereafter be admitted to the Partnership as a limited partner pursuant to the provisions of the Agreement. "Najjar" means Michael Najjar. "Neems" means Gary H. Neems. "Non-Portfolio Income" means income from temporary investments such as short-term government securities, certificates of deposit, bank deposits and commercial paper in which Partnership funds are invested until invested in a manner intended to achieve the purposes of the Partnership, reduced by any related expenses of maintaining such short-term investments. "Outside Director" means a member of the Board of Directors who is not an Affiliate of any Partner. "Partner" means a Person who is a General Partner and/or Limited Partner in the Partnership. "Partnership Assets" means all assets and property, whether tangible or intangible and whether real, personal or mixed, at any time owned by the Partnership. "Person" means any individual, corporation, partnership, joint venture, association, trust or other organization or any government, or any agency or political subdivision of any government. "Portfolio Investments" means investments of the Partnership other than temporary investments of the type referred to in the definition of Non-Portfolio Income. "Profits or Losses" means, for each Accounting Period, an amount equal to the Partnership's taxable income or loss for such Accounting Period, determined by the Accounting Firm at the close of the relevant Accounting Period, including, -6- 11 without limitation, each item of Partnership income, gain, loss or deduction, taking into account the following adjustments and any other adjustments necessary in order to comply with Treasury Regulations Section 1.704-1(b)(2) (iv) including the rules for revaluations of Partnership Assets: (a) all income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profit or Loss shall be added to such taxable income or loss; (b) any expenditure of the Partnership described in Section 705(a)(2) (B) of the Code or treated as an expenditure described in such Code Section and not otherwise taken into account in computing Profit or Loss shall be subtracted from such taxable income or loss; (c) gain or loss resulting from any disposition of Partnership Assets with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Asset Value of the Partnership Assets disposed of, notwithstanding that the adjusted income tax basis of such Partnership Assets differs from its Asset Value; (d) in lieu of the depreciation, amortization or other cost recovery deductions taken into account in computing taxable income or loss, there shall be taken into account the deduction for such items computed in accordance with the definition of Depreciation; (e) in the event the Asset Value of any Partnership Asset is adjusted pursuant to the definition of Asset Value set forth in this Section 1.01 or any other provision of this Agreement, the amount of such adjustment shall be taken into account as income or loss from the disposition of such asset for purposes of computing Profits or Losses; and (f) any items of income specially allocated under Paragraph 4.02(b) shall be excluded from Profits or Losses. "Restricted Investments" means Portfolio Investments of the Partnership subject to a restriction impairing the free marketability thereof or transferability under any applicable securities laws. "Securities" has the meaning given to such term in Section 2.03. -7- 12 "Shared Portfolio Investment Percentage" means, with respect to the Special Limited Partners and the Class A Limited Partner, the percentage determined by dividing the Investment of the respective Partner in the Shared Portfolio Investment by the aggregate of the Investments of all of the Special Limited Partners and the Class A Limited Partner's Investment with respect to the Shared Portfolio Investment, as these amounts may be determined from time to time. "Shared Portfolio Investment" means a Portfolio Investment with respect to which any of the Special Limited Partners have made additional capital contributions pursuant to Article VII hereof. "Shortfall" means any unpaid Hurdle Rate and/or loss of the Class A Limited Partner's Investment experienced by the Class A Limited Partner with respect to the liquidation of any Portfolio Investment other tan GEII. "Special Limited Partners" means Robert Hall, Robert Rock and James Stern and any other Persons who may join in this Agreement from time to time as Special Limited Partners pursuant to the provisions of Section 3.01(g). "Specified Amount" has the meaning given to such term in Section 6.01(a)(iv). "Term" means the term of the Partnership. "Unrealized Loss" means, as of any date, for each Portfolio Investment where the Class A Limited Partner's unreturned Contribution in a Portfolio Investment other than GEII exceeds the Value of the Partnership's unliquidated investment in such Portfolio Investment, the amount of such excess of unreturned Contribution over such Value. "Value" means the value of a Portfolio Investment determined in accordance with Section 5.01 hereof. "Withholding Tax Act" shall have the meaning given to such term within Section 6.02. -8- 13 ARTICLE II CONTINUATION OF THE PARTNERSHIP 2.01. Formation and Continuation of the Partnership. The parties hereto hereby continue the Partnership as a limited partnership under the Act. This agreement shall continue until the tenth anniversary of the Effective Date unless extended or earlier terminated in accordance with the terms hereof. The General Partner shall cause to be filed on behalf of the Partnership such partnership, and such assumed or fictitious name, certificate or certificates as may be required by law. At least three (3) months prior to the fifth anniversary of the Effective Date, the end of the Initial Term and any extended Term, the board of directors of the Class A Limited Partner will make decisions concerning the continuation of the Class A Limited Partner's financial commitment to the Partnership and shall promptly provide the General Partner with a written notification of such decision. Based upon such decisions and subject to the acceptance of such decisions by the General Partner, the General Partner and the Class A Limited Partner will amend the Agreement (if the decisions of the board of directors of the Class A Limited Partner call for an amendment to the Agreement) to extend the Term and to expand, contract or leave unchanged the size and terms of the Commitment, as applicable. Notwithstanding the foregoing, the Class A Limited Partner can elect to dissolve the Partnership at any time, upon providing the General Partner with at least thirty (30) days prior written notification of such election. 2.02. Name of the Partnership. The name of the Partnership shall be Advanta Partners LP or such other name as may hereafter be selected by the General Partner. 2.03. Activity of the Partnership. (a) The Partnership is formed for the purpose of making investments with the objective of seeking capital appreciation. The Partnership will concentrate on opportunities primarily in financial services and secondarily in information/database services. Portfolio Investment situations will include equity and equity-related investments in a range of growth capital and restructuring financings, leveraged and unleveraged acquisitions, including management LBO's, and special situations. The Partnership will not acquire an equity interest in a business in which the Partnership would, upon such acquisition, own 100% of the equity of such business nor enter -9- 14 into strategic joint ventures without the prior approval of a majority of the Board of Directors. If the Partnership proposes to make a Portfolio Investment which would be considered of a type which is part of the Class A Limited Partner's core business except for certain characteristics which would make such investments unsuitable for the Class A Limited Partner, such Portfolio Investments will be made and liquidated by the Partnership only with the prior approval of a majority of the Board of Directors. The Partnership's Portfolio Investments will be made consistent with the Partnership's Business Plan. It is expected that the Partnership will play a proactive role in its Portfolio Investments, seeking to add value to such Portfolio Investments. Nothing contained in the Agreement and nothing in Advanta Corp.'s relationship with the Partnership shall restrict Advanta Corp. from doing whatever transactions, and making whatever investments, it chooses. (b) Subject to the principles and limitations set forth in subsection (a) above, the Partnership may invest in both marketable and non-marketable securities, including without limitation, common and preferred stock, debentures, bonds, royalties, promissory notes, evidences of indebtedness, warrants, options, subscription rights of and other participating interests in corporations, partnerships, joint ventures, trusts, proprietorships, other business entities, governments and governmental agencies, and puts, calls, options and other rights or obligations to purchase, sell or subscribe for any of the foregoing and any other similar instruments and documents whether now known or hereafter devised which are or may hereafter be known or referred to as securities (all such items being hereinafter collectively referred to as "Securities"), and may deal in such ways as is customary and in the ordinary course of business of an investment partnership, and in connection therewith, with the prior approval of a majority of the Board of Directors, as to the amount and extent, to borrow funds not exceeding in principal amount at any one time outstanding 10% of total Contributed Capital. The Partnership may arrange for managerial and other support for Persons in which it invests. Subject to the restrictions and provisions contained in Section 8.01, the Partnership shall engage in the activities set forth in this Section 2.03 and no others, except as shall be incidental or related thereto or which may be necessary or desirable in connection therewith. 2.04. Offices of the Partnership. The principal office of the Partnership shall be initially located at Five Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044. A -10- 15 secondary office satisfactory to the Class A Limited Partner, will be established in New York City. The Board of Directors may establish such other offices of the Partnership in one or more places as it may from time to time determine. 2.05. Title to Partnership Property. All property owned by the Partnership, whether real or personal, tangible or intangible, shall be and shall be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of any such property. The Partnership may hold any of its assets in its own name or in the name of one or more nominees, which nominee may be such individuals, corporations, partnerships, trusts or other Persons as the General Partner shall determine. 2.06. Representations and Warranties. (a) The General Partner represents and warrants to the other parties hereto as follows: (1) The General Partner is a corporation duly organized and validly existing under the Delaware General Corporation Law, and has all requisite power and authority to perform its obligations under and carry on the business contemplated by this Agreement. (2) Neither the execution and delivery of this Agreement nor the performance by such General Partner of any of the transactions or obligations contemplated hereunder will result in any violation of any of the terms or provisions of (i) the articles of incorporation or bylaws of such General Partner, (ii) (whether or not with notice or the passage of time or otherwise) any material agreement to which such General Partner or any Affiliate of such General Partner is a party or by which it is otherwise bound, or (iii) any currently existing law, rule, license, regulation, judgment, order, ruling or decree governing or affecting the operation of the Partnership or such General Partner. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission, other governmental authority or instrumentality, or any securities or commodities exchange or self-regulatory organization is or was required prior to the execution of this Agreement by or with respect to such General Partner or the Partnership in connection with the execution and delivery of this Agreement or the performance of the transactions contemplated hereby. -11- 16 (3) All necessary action on the part of such General Partner duly to approve the execution, delivery and performance of this Agreement by it has been taken and this Agreement has been duly executed and delivered by it and constitutes a legal, valid and binding obligation of such General Partner, enforceable against it in accordance with its terms. (4) Such General Partner agrees to use reasonable efforts to cause the Partnership to be classified for federal income tax purposes as a partnership rather than as an association taxable as a corporation during the life of the Partnership, but in no event shall it have any liability or obligation if it is not so classified as a result of future changes in laws or regulations or changes in interpretation of existing laws or regulations. Any costs or expenses relating to or arising from the use of such efforts shall be borne by the Partnership. (b) The Class A Limited Partner represents and warrants to the other parties hereto as follows: (1) Such Limited Partner is a corporation duly organized and validly existing under the Delaware General Corporation Law and has all requisite power and authority to perform its obligations under this Agreement. (2) Neither the execution and delivery of this Agreement nor the performance by such Limited Partner of any of the transactions or obligations contemplated hereunder will result in any violation of any of the terms or provisions of (i) the certificate of incorporation or bylaws of such Limited Partner, (ii) (whether or not with notice or the passage of time or otherwise) any material agreement to which such Limited Partner or any Affiliate of such Limited Partner is a party or by which it is otherwise bound, or (iii) any currently existing law, rule, license, regulation, judgment, order, ruling or decree governing or affecting the operation of the Partnership or such Limited Partner. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission, other governmental authority or instrumentality, or any securities or commodities exchange or self-regulatory organization is or was required prior to the execution of this Agreement by or with respect to such Limited Partner or the Partnership in connection with the execution and delivery of this Agreement or the performance of the transactions contemplated hereby. -12- 17 (3) All necessary action on the part of such Limited Partner duly to approve the execution, delivery and performance of this Agreement by it has been taken and this Agreement has been duly executed and delivered by it and constitutes a legal, valid and binding obligation of such Limited Partner, enforceable against it in accordance with its terms. (c) Each Class B Limited Partner and Special Limited Partner represents and warrants to the other parties hereto as follows: (1) Neither the execution and delivery of this Agreement nor the performance by such Limited Partner of any of the transactions or obligations contemplated hereunder will result in any violation of any of the terms or provisions of (i) (whether or not with notice or the passage of time or otherwise) any material agreement to which such Limited Partner or any Affiliate of such Limited Partner is a party or by which it is otherwise bound, or (ii) any currently existing law, rule, license, regulation, judgment, order, ruling or decree governing or affecting the operation of the Partnership or such Limited Partner. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission, other governmental authority or instrumentality, or any securities or commodities exchange or self-regulatory organization is or was required prior to the execution of this Agreement by or with respect to such Limited Partner or the Partnership in connection with the execution and delivery of this Agreement or the performance of the transactions contemplated hereby. (2) This Agreement has been duly executed and delivered by such Limited Partner and constitutes a legal, valid and binding obligation of such Limited Partner, enforceable against such Limited Partner in accordance with its terms. (d) Each Limited Partner represents and warrants to the other parties hereto as follows: (1) The Limited Partner has acquired or will acquire such Limited Partner's Interest in the Partnership for such Limited Partner's own account as principal for investment and not with a view to the resale or other disposition of all or any part thereof or any interest therein. (2) If an individual, the Limited Partner: (i) is at least 18 years of age; (ii) has adequate means of -13- 18 providing for the Limited Partner's current needs and personal contingencies; (iii) has no need for liquidity in the Limited Partner's investment in Interest in the Partnership; and (iv) all of the Limited Partner's investments in and commitments to non-liquid investments are, and after the purchase of the Interest in the Partnership will be, reasonable in relation to the Limited Partner's net worth and current needs and shall not cause the Limited Partner's overall commitments to such investments to become disproportionate or excessive. (3) The Limited Partner is able to bear the economic risk of losing the Limited Partner's entire investment in the Interest in the Partnership. (4) The Limited Partner understands that the Interests in the Partnership have not been registered under the Securities Act of 1933, as amended (the "Act") or the securities laws of any state, and are being offered and sold in reliance upon an exemption to such registration and are subject to substantial restrictions on transfer. (5) The Limited Partner understands that no public or private market for the Interests in the Partnership is likely to develop and that since the Interests in the Partnership have not been registered under the Act, the Limited Partner cannot and the Limited Partner agrees and understands that the Limited Partner will not sell or otherwise transfer and dispose of any of the Interest in the Partnership unless a registration statement with respect to such transfer or disposition is in effect under the Act and any other applicable state or federal securities laws or such transfer or disposition is exempt from registration under the Act or is otherwise in compliance with other relevant state or federal securities laws or unless the General Partner or the Partnership approve such a sale or transfer (which approval may be withheld). The Limited Partner further understands that: (A) the Partnership has no obligation or intention to register the Interest in the Partnership for resale under any federal or state securities laws or to take any action (including the filing of reports or the publication of information required by Rule 144 under the Act) that would make available any exemption from the registration requirements of such laws; and (B) the Limited Partner therefore may have to be precluded from selling or otherwise transferring or disposing of any of the Interest in the Partnership for an indefinite period of time or at any particular time and may therefore have to bear the economic risk of an investment in the Interest in the Partnership for an indefinite period of time. The Limited -14- 19 Partner further acknowledges that the Interest in the Partnership may not be sold without the express written consent of the General Partner and compliance with all relevant provisions of the Partnership Agreement, plus all applicable filing fees. The Limited Partner also acknowledges that the Limited Partner will be responsible for compliance with all conditions on transfer imposed by any blue sky or state securities law administrator and will hold the Partnership and the General Partner harmless from any breach thereof. (6) The Limited Partner understands that no federal or state agency has approved or disapproved of the Interest in the Partnership, passed upon or endorsed the merits of the offering thereof, or made any finding or determination as to the fairness of the Interest in the Partnership for investment. (7) If the Limited Partner is a corporation, partnership, trust or other entity, it is authorized and qualified to become a limited partner in, and authorized to make its capital contribution to the Partnership and it has not been formed for the purpose of acquiring Interest in the Partnership. (8) The Limited Partner has such knowledge and experience in financial and business matters that the Limited Partner is capable of evaluating the merits and risks of the Limited Partner's investment in the Partnership and of making an informed investment decision, and the Limited Partner has obtained, in the judgment of the Limited Partner, sufficient information from the Partnership to evaluate the merits and risks of such investment. (9) The Limited Partner understands that the Interest in the Partnership is being offered and sold in reliance on specific exemptions from the registration requirements of federal and state securities laws and that the General Partner and the Partnership are relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments, and understandings set forth herein in order to determine the applicability of such exemptions. -15- 20 ARTICLE III INITIAL CAPITAL AND CONTRIBUTED CAPITAL 3.01. Initial Capital; Contributed Capital; Initial Contribution; Admission of Additional Partners. (a) Each Initial Partner made an initial capital contribution to the Partnership in the amount of $100. Such amount is such Partner's "Initial Capital". (b) Prior to the date of this Agreement, each Initial Partner has paid to the Partnership in cash such Partner's Initial Capital. (c) In addition to the Class A Limited Partner's Initial Capital, the Class A Limited Partner agrees to make available to the Partnership during the Initial Term an aggregate of $100 million in Contributions (the "Commitment") for Portfolio Investments. The Class A Limited Partner has, prior to the date of this Agreement, already contributed a portion of such amount. Following authorization by the Board of Directors of a Portfolio Investment consistent with the limitations set forth in Section 8.01(b), the Class A Limited Partner will provide the funds it has been called upon by the Partnership's Board of Directors to provide as the Limited Partner's Contribution for such Portfolio Investment, in accordance with the timetable established by the Board of Directors. (d) In addition to the Class A Limited Partner's Commitment, upon request made from time to time by the General Partner, the Class A Limited Partner agrees to periodically advance the cash necessary ("Advances") to fund the operating budget of the Partnership during the Initial Term. The Class A Limited Partner's Initial Capital constitutes an Advance. The initial operating budget of the Partnership has been accepted by the Class A Limited Partner. Operating budgets thereafter will be established by the Board of Directors after receiving recommendations with respect thereto from the General Partner. The Class A Limited Partner's Advances will be allocated among Portfolio Investments as follows: (i) Following the end of each fiscal year in which one or more Portfolio Investments are consummated, the amount of accumulated (i.e., not yet allocated because no Portfolio Investments were made in such fiscal year or not yet -16- 21 allocated as hereinafter provided) Advances as of the close of such fiscal year, plus the Hurdle Rate with respect thereto, will be allocated in full to such Portfolio Investments pro rata in accordance with the dollar amount of the Class A Limited Partner's Contributions to such consummated Portfolio Investments. For purposes of applying the Hurdle Rate to Advances, all Advances made in a calendar year will be deemed to have been made on July 1 of such year, except that all Advances made during 1994 will be deemed to have been made on September 15, 1994. (ii) If the amount of Advances and associated Hurdle Rate allocated to a particular Portfolio Investment under Section 3.01(d)(i) above would be greater than 20% of the amount of the Class A Limited Partner's Contributions (minus the associated Hurdle Rate) to such Portfolio Investment, such excess will not be allocated to such Portfolio Investment but will be carried forward, increased by the Hurdle Rate, to be allocated, pursuant to Section 3.01(d)(i), at the end of the succeeding year or years. (e) Other than the Hurdle Rate payable to the Class A Limited Partner, no interest shall accrue on any Contributed Capital and no Partner shall have the right to withdraw or to be repaid any Contributed Capital except as and to the extent specifically provided elsewhere in this Agreement. (f) Each time the Class A Limited Partner makes a Contribution or an Advance, 1.01% of each such Contribution and Advance shall be credited to Advanta GP. Such amounts credited to Advanta GP shall carry a Hurdle Rate, shall, if Contributions, be credited against the Class A Limited Partner's Commitment, and shall, if Advances, be allocated to Portfolio Investments in the same proportions as the Class A Limited Partner's Advances. Such amounts shall also be deemed to be included in the Class A Limited Partner's Investment, and shall be combined with all other components of the Class A Limited Partner's Investment for purposes of distributions pursuant to Subsections 6.01(a)(i)(A) through (D) and for purposes of computing the Class A Limited Partner's Shared Portfolio Investment Percentage. (g) From time to time the Board of Directors may admit to the Partnership Outside Directors as Special Limited Partners. Such admission will be effected by an agreement signed by the Special Limited Partners to be admitted by which they agree to be bound by this Agreement as Special Limited Partners, provided that such agreement is accepted by the Partnership. -17- 22 Concurrent with such admission to the Partnership, each Special Limited Partner shall pay such Special Limited Partner's Initial Capital. Effective as of such admission, Exhibit A to the Partnership Agreement shall be appropriately modified by the General Partner to reflect such admission and the Investment Amounts of the Special Limited Partners so admitted. 3.02. Failure of the Class A Limited Partner to Make Additional Contributions or Advances or to Maintain its Commitment. At any time upon thirty (30) days' prior written notice to the General Partner, the Class A Limited Partner may reduce its Commitment to any level, including zero. If the Board of Directors calls upon the Class A Limited Partner to make Contributions and/or Advances as contemplated by the Agreement and the Class A Limited Partner refuses or fails to do so (even if prior notice of a reduction of the Commitment had not been given), or if the Class A Limited Partner reduces its Commitment to any extent, such failure or reduction shall not constitute a breach by the Class A Limited Partner of its obligation hereunder, but the Board of Directors shall independently have the right to dissolve the Partnership under Article XI, at any time, upon providing the Partners with at least thirty (30) days prior written notification of such election. 3.03. Contribution by the General Partner. On any date on which, pursuant to this Article III, Limited Partners each make payments of Contributed Capital, the General Partner shall have contributed cash, in the aggregate, equal to 1.01% of the aggregate cash Contributed Capital paid by the Limited Partners as of each such date. Amounts credited under Section 3.01(f) shall be deemed to meet, in part, the requirements of this Section 3.03. ARTICLE IV CAPITAL ACCOUNTS AND PROFITS OR LOSSES 4.01. Capital Accounts. (a) A separate capital account (the "Capital Account") shall be established and maintained for each Partner. The Capital Account of each Partner shall be credited with the amount of such Partner's Contributed Capital, all Profits allocated to such Partner pursuant to Article IV, and any items of income or gain which are specially allocated pursuant to -18- 23 Section 4.02(b); and shall be debited with the sum of (i) all Losses and deductions of the Partnership allocated to such Partner pursuant to Article IV and (ii) all cash and the Asset Value of any property (net of liabilities assumed by such Partner and the liabilities to which such property is subject) distributed by the Partnership to such Partner. To the extent not provided for in the preceding sentence, the Capital Accounts of the Partners shall be adjusted in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv), as the same may be amended or revised. Any references in any Section of this Agreement to the Capital Account of a Partner shall be deemed to refer to such Capital Account as the same may be credited or debited from time to time as set forth above. In the event of any transfer of any Interest in the Partnership in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (b) Except as otherwise specified in Section 11.02(h), no Partner shall be required to pay to the Partnership or to any other Partner the amount of any negative balance which may exist from time to time in such Partner's Capital Account. 4.02. Allocation of Partners' Profits or Losses. (a) Except as provided in Sections 4.03 and 4.04, the Profits or Losses of the Partnership for any applicable Accounting Period shall be allocated among the Partners in the following order and priority: (i) first, an amount of the gross income of the Partnership shall be allocated to Partners receiving distributions on account of the Hurdle Rate pursuant to Section 6.01(a)(i)(B); and (ii) second, Profits and all Losses shall be allocated among the Partners so as to produce, as nearly as possible, Capital Account balances for the Partners (taking into account all prior allocations and distributions, including any allocations under clause (i)) which would equal the amount to which the Partners would be entitled as a liquidating distribution from the Partnership pursuant to Section 11.02(b) and as if the net proceeds available for distribution were an amount equal to the aggregate positive balance in the Partners' Capital Accounts computed after taking into account all allocations of Profit and Loss (or items thereof) for the fiscal period, including those pursuant to this Section 4.02; provided, -19- 24 however, that if the allocation of all or any portion of the Partnership Losses (or items thereof) causes the Capital Account(s) of a Partner or Partners to exceed the amount that they are obligated to restore, or are deemed obligated to restore pursuant to Treasury Regulation Section 1.704-2(g) or (i), the excess, if any, shall be allocated to those Partners, if any, having positive remaining Capital Account balances, in proportion to their relative percentage interests, to the extent of any such positive balances, and thereafter in accordance with the Partners' respective economic risk of loss with respect to any indebtedness to which the remaining Loss or deductions are attributable. (b) Allocations of Partnership Profit or Loss (or items thereof) shall be made consistent with the requirements of Treasury Regulation Section 1.704-2(e), including, without limitation, those provisions relating to allocations of income and deductions attributable to non-recourse debt and partner non-recourse debt. Allocations that would conform to those required by a "minimum gain chargeback" (as defined in Treasury Regulation Section 1.704-2(f)) in addition to the requirements of Treasury Regulation Section 1.704-1(b) (2) (ii) (d), relating to a "qualified income offset," and Treasury Regulation Section 1.704-2(i) (4), relating to the chargeback on account of a decrease in minimum gain attributable to partner non-recourse debt, shall be made in a manner, at a time, and in the amounts consistent with those provisions. (c) Except as provided otherwise in this Agreement, for income tax purposes, all items of Partnership income, gain, loss or deduction, and any other allocations not otherwise provided for shall be allocated among the General Partner and the Limited Partners, as a class, in the same proportions they share Profits or Losses, as the case may be, for the relevant Accounting Period. (d) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, items of income, gains, loss and deduction with respect to any property contributed to the capital of the Partnership, shall, solely for federal income tax purposes, be allocated among the Partners so as to take into account any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its Asset Value. In the event the Asset Value of any Partnership asset is adjusted pursuant to this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take into account any variation between the Adjusted Basis of -20- 25 such asset and its Asset Value in the same manner as under Section 704(c) of the Code and applicable Treasury Regulations, including under Section 704(b) of the Code. Allocations pursuant to this Section 4.02(d) are solely for purposes of federal, state and local taxes and shall not affect or be taken into account in computing Capital Accounts, Profits, Losses and other items or distributions pursuant to this Agreement. 4.03. Allocations With Respect to Transferred Interests. If Partnership Interests are transferred in accordance with this Agreement, there shall be allocated to the transferor Partner and the transferee Partner during the fiscal year of transfer the product of: (i) the Partnership's Profits or Losses allocable to such Partnership Interest for such fiscal year; and (ii) a fraction, the numerator of which is the number of days such Partner held such Partnership Interest during such fiscal year and the denominator of which is the total number of days in such fiscal year; provided, however, that the Board of Directors may, in its sole discretion (subject to the provisions of Sections 706(d) of the Code), allocate such Profits or Losses by closing the books of the Partnership immediately after the transfer of such Partnership Interest, and provided further, in the case of the sale or other disposition of a Portfolio Investment, Profits or Losses from such sale or other disposition shall be allocated as of the date of such sale or other disposition and distributions of the net proceeds from such sale or other disposition shall be made to the parties who were Partners on the date of such sale or other disposition as if no transfer had been made and all Partners' Capital Accounts shall be adjusted accordingly. 4.04. Minimum Allocations to the General Partner. Except as provided in Section 4.02(d), any of the provisions of this Agreement to the contrary notwithstanding, the General Partner shall be allocated, pro rata in accordance with their respective Contributed Capital, at least 1% of each material item of Partnership income, gain, loss, deduction and credit. 4.05. Allocations with Respect to Certain Interests. Allocations of Profits or Losses of the Partnership (or items thereof) with respect to vested percentages in the Carried Interest (as determined under Section 6.01(a)(i)(E) hereof) in a Portfolio Investment or the vested Percentages of a Shared Portfolio Investment shall be made as though the Partnership assets consisted only of the Portfolio Investments acquired by the Partnership during the period of time of the particular Class -21- 26 B Limited Partner's employment by the Partnership, or the Shared Portfolio Investments with respect to which the particular Special Limited Partner has an interest. In making the determinations required by this Section 4.05, the Board of Directors shall apply the principles set forth in Section 6.01(a)(i)(E). ARTICLE V VALUATIONS 5.01. Valuation of Portfolio Investments Owned by the Partnership. A value determined pursuant to this Section shall be referred to as a "Value". The Value of Portfolio Investments owned by the Partnership and other determinations of Value required under this Agreement shall be determined by the General Partner in accordance with the principles set forth below, subject to approval by the Board of Directors based on the consistent application of said principles and such other guidelines as the General Partner and the Board of Directors may approve from time to time: (a) Subject to the specific standards set forth below, the Value of Portfolio Investments shall be their estimated fair value and shall be determined from time to time as required by Article VI hereof or at such other time and for such other purposes as may be deemed necessary or appropriate in the reasonably exercised sole discretion of the Board of Directors. In determining the value of the Interest of any Partner in the Partnership or in any accounting among the Partners or any of them, no value shall be placed on the goodwill or name of the Partnership, and no tax reserves shall be set up for unrealized gains or profits. (b) If traded on one or more securities exchanges, the Value of a share or other unit of such Security shall be deemed to be the average of the closing prices for such Security for the last ten days in which the Security traded (or if there shall have been no sale, the average of the closing bid and ask prices) on the principal exchange on which such Security is traded). (c) If actively traded over-the-counter, the Value of a share or other unit of such Security shall be deemed -22- 27 to be the average of the closing sale prices for such Security for the last ten days for which such sale prices are available as reported by Nasdaq, if the Securities are included in the Nasdaq National Market, otherwise as reported by the National Quotation Bureau. (d) If there is no active public market, the Value of Securities shall be the estimated fair value thereof, as determined in good faith by the Board of Directors, taking into consideration the cost of such Securities, developments concerning the issuer of such Securities subsequent to the acquisition of such Securities, the financial data and projections of such issuer provided to the Partnership and such other factor or factors as the Board of Directors may deem relevant; provided, however, that the Value of such Securities shall, in any event, be based upon the price at which the issuer thereof has issued securities of the same class as the Securities being valued (or securities convertible into or exchangeable for such Securities) in a substantial placement in which at least 50% of the securities sold were purchased by investors unaffiliated with the Partners, unless (i) the issuer of the Securities has been self-financing for the preceding two fiscal years or (ii) there is strong and convincing evidence to support a different value. (e) The Value of publicly traded Securities shall reflect, where appropriate, a discount to reflect a lack of depth or liquidity in the relevant market. (f) With respect to Securities which are Restricted Investments, the Value of such Securities shall be discounted by an amount which, in the good faith judgment of the Board of Directors, reflects the effect of the restrictions on transfer on the Value of such Securities, including, without limitation, the remaining period of time, under applicable federal and state securities laws, that such restrictions on transfer will continue and the nature and extent of any available registration rights. (g) The Value of Portfolio Investments other than cash and Securities shall be the estimated fair value thereof as determined in good faith by the Board of Directors. (h) For purposes of this Agreement, Securities or other properties distributed to the Partners shall be valued in accordance with this Article V, as of the date of distribution. -23- 28 (i) Notwithstanding the foregoing, if the Board of Directors and the General Partner believe there is strong and convincing evidence to fix the Value of a Security at an amount other than the amount called for by the foregoing provisions, the Board of Directors and the General Partner may fix the Value at such other amount. (j) Notwithstanding the foregoing, in calculating Value for purposes of calculating and determining the existence and extent of an Unrealized Loss, such Value shall not reflect, with respect to any Securities, any discount of the types described in Subparagraphs 5.01(e) and (f) above. ARTICLE VI DISTRIBUTIONS 6.01 Distributions. (a) The General partner shall be obligated to distribute to the Partners all dividends, interest, principal repayments or other distributions received from a Portfolio Investment, and all proceeds realized by the Partnership from the sale or disposition (whether for cash or for securities, including any exercise of Advanta's purchase option under Section 12.01) of any Portfolio Investment, subject to Sections 6.01(a) (vii) and 6.01(f) hereof. Distributions may be in cash or in kind; provided, however, that all Partners shall receive proceeds of any particular distribution in the same form, whether in cash or in kind. Except as otherwise provided in this Agreement, all distributions in accordance with this Section 6.01(a) shall be made in the following order and priority: (i) All distributions, including liquidating distributions, shall be made to the Partners as follows: (A) first, to the Class A Limited Partner to return the Class A Limited Partner's Investment in such Portfolio Investment, subject to Section 6.01(a) (iii) below; provided, however, that if the Portfolio Investment is a Shared Portfolio Investment, the distributions pursuant to this clause (A) shall be made to the Class A Limited Partner and the Special Limited Partners, in proportion to their respective Shared Portfolio Investment Percentage, to return to them their respective Investment in the Shared Portfolio Investment, to the extent of their Investment in the Shared Portfolio Investment; -24- 29 (B) second, to the Class A Limited Partner to pay the Hurdle Rate attributable to such Portfolio Investment; provided however, that if the Portfolio Investment is a Shared Portfolio Investment, the distributions pursuant to this clause (B) shall be made to the Class A Limited Partner and the Special Limited Partners to pay their respective Hurdle Rates with respect to the Shared Portfolio Investment, pro rata in accordance with the amount of their Hurdle Rate that is unpaid at the date of distribution; (C) third, to the Class A Limited Partner to pay the amount of any of the Class A Limited Partner's Shortfalls; (D) fourth, to the Class A Limited Partner to pay the amount of any Unrealized Loss not previously distributed to the Class A Limited Partner; (E) With the remainder divided 80% to the Class A Limited Partner and the Special Limited Partners as a class, 5% to Advanta GP, and 15% (the "Carried Interest") to the Class A Limited Partner and the Class B Limited Partners, as a class. The Carried Interest shall vest in the Class B Limited Partners, and shall be allocated among the Class B Limited Partners, in accordance with an Allocation and Vesting Agreement dated as of May 9, 1995, as such Agreement may be amended from time to time (the "Allocation and Vesting Agreement"). The portion of the Carried Interest not allocated to the Class B Limited Partners under the Allocation and Vesting Agreement shall be allocated solely to the Class A Limited Partner. The distributions to the Class A Limited Partner and the Special Limited Partners, as a class, shall be allocated among them based on their respective Shared Portfolio Investment Percentages. If the Portfolio Investment is not a Shared Portfolio Investment, the Shared Portfolio Investment Percentage of the Special Limited Partners shall be 0%. (F) Distributions made to the Special Limited Partners, as a class, shall be allocated among them in the same percentage as their Shared Portfolio Investment Percentage bears to the Aggregate Shared Portfolio Investment Percentages of all of the Special Limited Partners in the class. (ii) If the Class A Limited Partner has an Unrealized Loss with respect to more than one Class A Limited Partner's Investment, payments of Unrealized Loss shall be allocated between or among such Class A Limited Partner's -25- 30 Investments pro rata in accordance with the respective dollar amounts of such Class A Limited Partner's Investments. (iii) Distribution to the Class A Limited Partner of Unrealized Loss shall be deemed to be a return of the Class A Limited Partner's Investment in the Portfolio Investment to which such distribution relates and accordingly, the amount of the Class A Limited Partner's Investment upon which the Hurdle Rate is paid will be correspondingly adjusted downward. (iv) If at the time of a distribution with respect to a Portfolio Investment pursuant to Section 6.01(a)(i), some or all of the amount that would otherwise have been distributed on account of the Carried Interest is not so distributed because of the distribution to the Class A Limited Partner of Unrealized Loss, the reduction in the amount of such distributions on account of Carried Interest by reason of distribution of Unrealized Loss (such reduction is referred to herein as the "Specified Amount") shall be maintained in the Partnership's records for each Class B Limited Partner, and shall be paid to such Class B Limited Partner, together with interest thereon at the Hurdle Rate, from the subsequent disposition by the Partnership of each Portfolio Investment with respect to which an Unrealized Loss was distributed to the Class A Limited Partner; provided, however, that no such payment shall be made until and unless the amount of the Class A Limited Partner's Investment and associated Hurdle Rate has been paid and provided, further, that payment of such Specified Amount and the Hurdle Rate thereon shall be made only from amounts representing the 15% distribution to be made pursuant to Section 6.01(a)(i)(E) above. The Specified Amount to be distributed shall be up to 15% of the amount, if any, by which the Unrealized Loss distributed to the Class A Limited Partner with respect to such Portfolio Investment exceeds the actual realized loss for such Portfolio Investment. (v) In the event of a partial liquidation or partial sale of a Portfolio Investment, the Portfolio Investment which is liquidated or sold, or in respect of which a distribution of liquidation or sale proceeds is made, shall be treated as having been comprised from inception as two portfolio Investments: one being the Portfolio Investment then being liquidated or sold and the other being a Portfolio Investment in respect of which no liquidation, sale or distribution is then being made. The Class A Limited Partner's Investment, and the Special Limited Partners' Investment if the Portfolio Investment -26- 31 is a Shared Portfolio Investment, and related Hurdle Rate will be appropriately allocated between the two Portfolio Investments. (vi) A leveraged recapitalization of a Portfolio Investment shall be deemed to be, to the extent of a distribution of the leverage proceeds, a dividend distribution from the applicable Portfolio Investment. (vii) All cash proceeds received by the Partnership in respect of a Portfolio Investment shall be distributed in accordance with this Section 6.01, unless retention thereof by the Partnership is determined by the Board of Directors, in the exercise of their reasonable discretion, to be necessary or reasonable to provide for expenses, whether or not accrued, obligations or contingencies in respect of such Portfolio Investment. (b) The Board of Directors may direct the General Partner to cause the Partnership to make distributions to the Partners (other than distributions required to be made pursuant to subsection (a) hereof), at such times and intervals as the Board of Directors may deem appropriate. (c) The amount of Investments returned to the Class A Limited Partner pursuant to Section 6.01(a), less the portion of such Investments attributable to Advances and Hurdle Rates, will, to such extent, restore the Class A Limited Partner's Commitment; provided, however, that the Class A Limited Partner's Commitment will become zero at the end of the Initial Term unless such Commitment is extended pursuant to the terms of the Agreement. (d) If Advanta requests the Partnership to undertake a Portfolio Investment which Partnership would not undertake at its own initiation and the Partnership determines in its discretion to do so, and on liquidation of such Portfolio Investment the Class A Limited Partner fails to recoup its Investment and receive the Hurdle Rate, such Shortfall shall not be treated as having occurred for purposes of calculating the Class A Limited Partner Unrealized Loss on the liquidation of subsequent Portfolio Investments. Additionally, the Class A Limited Partner's Contribution to such Portfolio Investment under such circumstances shall not be treated as part of the Class A Limited Partner's Commitment. (e) Notwithstanding the foregoing provisions of Section 6.01(a)(i)(E), with respect to distributions to be made -27- 32 to Partners of distributions from Advanta Partners 101 LP to the Partnership, each amount, if any, to be distributed to the Partners pursuant to Section 6.01(a)(i)(E) shall be calculated as follows: after calculating the amount distributable to each Partner pursuant to the terms of Section 6.01(a)(i)(E), an amount of the AP101 Distribution shall be reallocated from the Class A Limited Partner and Advanta GP to the Class B Limited Partners so that the share of the Class B Limited Partners in the AP101 Distribution shall be calculated as if no portion of the AP101 Distribution were allocable to Advanta 101 GP. (f) The Partners hereby agree that if, pursuant to a request of the Class A Limited Partner under this Section 6.01(f) (which request may be made by the Class A Limited Partner in its sole discretion), the capital stock and/or the assets of GEII is distributed to the Class A Limited Partner (and/or its Affiliates), there will be distributed to Hollin and Neems, if they are then Class B Limited Partners on account of their Carried Interest in GEII, in full satisfaction and discharge thereof, $1,471,800 to Hollin and $480,000 to Neems in such form and kind as is determined by the Class A Limited Partner as would be tax effective from the standpoint of the Class A Limited Partner (and its Affiliates), without jeopardizing the tax results to the Class B Limited Partners. In the event of any inconsistency between this paragraph and any other provision of the Agreement, the provisions of this paragraph shall control and take precedence. 6.02. Taxes Withheld. (a) Unless treated as a "Tax Payment Loan" (as hereinafter defined), any amount paid by the Partnership for or with respect to any Partner on account of any withholding tax or other tax payable with respect to the income, profits or distributions of the Partnership pursuant to the Code, Treasury regulations, or any state or local statute, regulation or ordinance requiring such payment (a "Withholding Tax Act") shall be treated as a distribution to such Partner for all purposes of this Agreement, consistent with the character or source of the income, profits or cash which gave rise to the payment or withholding obligation. To the extent that the amount required to be remitted by the Partnership under the Withholding Tax Act exceeds the amount then otherwise distributable to such Partner, the excess shall constitute a loan from the Partnership to such Partner (a "Tax Payment Loan") which shall be payable upon demand and shall bear interest, from the date that the Partnership makes the payment to the relevant taxing authority, at the highest -28- 33 "Prime Rate" as published as such from time to time in The Wall Street Journal, or its successor as a nationally recognized daily financial newspaper, plus 2 percentage points, compounded monthly. So long as any Tax Payment Loan or the interest thereon remains unpaid, the Partnership shall offset future distributions due to such Partner under this Agreement by applying the amount of any such distribution first to the payment of any unpaid interest on all Tax Payment Loans of such Partner and then to the repayment of the principal of all Tax Payment Loans of such Partner. (b) The General Partner shall have the authority to take all actions necessary to enable the Partnership to comply with the provisions of any Withholding Tax Act applicable to the Partnership and to carry out the provisions of this Section. Nothing in this Section shall create any obligation of the General Partner to advance funds to the Partnership or to borrow funds from third parties in order to make any payments on account of any liability of the Partnership under a Withholding Tax Act. ARTICLE VII ADDITIONAL CAPITAL CONTRIBUTIONS BY SPECIAL LIMITED PARTNERS 7.01 Opportunity to Participate. With respect to the Partnership's investment in each of RMH Teleservices, Inc., Sky Alland Research, Inc. and Harmonic Systems Incorporated, each Special Limited Partner has made additional capital contributions in the amount set forth opposite such Partner's name on Exhibit A hereto. With respect to the first seven Portfolio Investments made by the Partnership after the date hereof, each Special Limited Partner who is, at the time of such investment, an Outside Director, shall make additional capital contributions to the Partnership and shall acquire a share of the Partnership's distributions, profits and losses arising from such Portfolio Investment, subject to the terms set forth in this Agreement. The Special Limited Partners shall also have the right to make follow-on investments in Portfolio Investments as set forth in Section 7.02(b). 7.02 Procedures Relating to Additional Capital Contributions by Special Limited Partners (a) Prior to making a proposed Portfolio Investment after the execution of this Agreement, the Partnership -29- 34 will notify each of the Special Limited Partners who are, as of such time, Outside Directors, of such Portfolio Investment and provide information with respect thereto as the Partnership deems appropriate. Each of the Special Limited Partners will, within ten days after such notice (the "Investment Notice") is sent to them by the Partnership, make additional capital contributions to the Partnership with respect to the first seven of such Portfolio Investments actually made by the Partnership after the date hereof and shall do so by sending to the Partnership the Special Limited Partner's check to the Partnership's order in the amount (the "Investment Amount") set forth opposite such Special Limited Partner's name on Exhibit A hereto. In the event a Special Limited Partner fails to timely make any such additional capital contribution then, at the General Partner's option, such Special Limited Partner shall lose his opportunity to participate in any future Portfolio Investments of the Partnership with respect to which any Investment Notice is sent by the Partnership within twelve months after the date on which the Partnership sent the Investment Notice to the Special Limited Partners relating to the investment for which the Special Limited Partner did not timely make the additional capital contribution, and this shall be the Partnership's sole remedy against the Special Limited Partner with respect to any such failure. (b) Each special Limited Partner will have the opportunity to participate in investments made by the Partnership which are determined by the General Partner to be follow-on investments with respect to Portfolio Investments for which such Special Limited Partner has made additional capital contributions if, and only if, the per-unit price at which the Partnership is making such follow-on investment is less than the per-unit price at which it made its initial investment in the securities of the issuer of the Portfolio Investment; and in such event such Special Limited Partner will have the opportunity to make additional capital conditions to the Partnership in order to prevent dilution of his interest in such Portfolio Investment, provided that such additional capital contributions are made within ten days after a notice requesting such additional capital contribution is sent by the General Partner to such Special Limited Partner. -30- 35 ARTICLE VIII MANAGEMENT ---------- 8.01. AUTHORITY OF THE BOARD OF DIRECTORS. (a) The Partnership shall be governed by the board of directors of the General Partner, acting in their capacity as the Partnership's Board of Directors. Such board of directors is referred to in this Agreement as the Partnership's "Board of Directors." The members of the Board of Directors shall be free to consult with Advanta GP and with Advanta, and may act in accordance with directions received from Advanta GP and/or Advanta. The day to day management and operation of the Partnership will be directed by the General Partner. (b) A majority of the members of the Board of Directors then in office shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the members of the Board of Directors in office shall be the acts of the Board of Directors. The Board of Directors may also act by unanimous consent in writing. (c) The Board of Directors may elect a Chairman of the Board to preside at meetings of the Board (initially to be Dennis Alter). (d) Meetings of the Board of Directors shall be held whenever ordered by the Chairman of the Board, if any, or by a majority of the directors in office. Written notice stating the place and time of any meeting of the Board shall be sufficient if given at least one day in advance of the time fixed for the meeting, and notice may be given to the recipient either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received), or next day courier service, charges prepaid, or by telecopier, to such recipient's address (or to such recipient's telex, TWX, telecopier or telephone number) appearing on the books of the Partnership or supplied by such recipient to the Partnership for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person, or in the case of telex or TWX, when dispatched; provided, that in any case where only one day's notice is being given, notice must be given at least 24 hours in advance by -31- 36 delivery in person, telephone, telex, TWX, telecopier or similar means of communication. (e) Any member of the Board of Directors may participate in any meeting of the Board of Directors or of any committee (provided such director is otherwise entitled to participate), be counted for the purpose of determining a quorum thereof and exercise all rights and privileges to which such member of the Board of Directors might be entitled were he or she personally in attendance, including the right to vote, or any other rights attendant to presence in person at such meeting, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. (f) The Partnership policy with respect to compensation and expense reimbursement for directors shall be determined by the General Partner. (g) Except as otherwise expressly provided in this Agreement, all policy matters and material decisions with respect to any matter set forth herein or otherwise affecting or arising out of the conduct of the business of the Partnership shall be made by the Board of Directors. Specifically, but not by way of limitation, the Board of Directors: (1) shall determine the Portfolio Investment acquisitions and dispositions to be made by the Partnership, after receiving recommendations by the General Partner. A Portfolio Investment will not be made without the affirmative recommendation of the General Partner. The Class A Limited Partner shall not be called upon to contribute more than $20 million to any single Portfolio Investment, or to contribute more than $50 million to Portfolio Investments in any 12-month period; (2) has authority to direct the General Partner to execute and deliver, in the name and on behalf of the Partnership, such documents and instruments and to take such other action as the Board of Directors may deem appropriate for the conduct of the Partnership's business; (3) has authority to direct the General Partner to cause the Partnership to lend money to one or more Portfolio Investment companies for any purpose related to the Partnership's Portfolio Investments in such portfolio companies; -32- 37 (4) has authority to direct the General Partner to cause the Partnership to acquire property, real or personal, as the Board of Directors may in its sole discretion deem necessary or appropriate for the conduct of the Partnership's business and to sell, exchange, or otherwise dispose of all or any part of the Partnership's property; (5) has authority to direct the General Partner to cause the Partnership to employ such agents, employees, managers, accountants, attorneys, investment advisors, consultants and other Persons necessary or appropriate to carry out the business and affairs of the Partnership and to cause the Partnership to pay such reasonable fees, expenses, salaries, wages and other compensation to such Persons as the Board of Directors shall in its sole discretion determine; (6) has authority to direct the General Partner to cause the Partnership to make elections under the Code, as amended, (including, without limitation, elections under Section 754 or any similar provisions enacted in lieu thereof, or any corresponding provisions of state tax laws), and in connection therewith, each of the Partners agrees, upon request of the Board of Directors or a General Partner, to supply the information necessary to properly give effect to such elections, and the Partners hereby designate Advanta GP as the Partnership's "Tax Matters Partner", as such term is used in the Code; and (7) has authority to delegate particular authority to the General Partner. 8.02. Certain Compensation Matters. In the event any director's fees or other fees or remuneration are paid to any of the Class B Limited Partners, or any of their Affiliates (excluding the Partnership), by any Person in which the Partnership has a Portfolio Investment, the amount of compensation payable to the Class B Limited Partners by the Partnership shall be reduced by an amount equal to the amount of such fees or compensation. In the event the aggregate credits under this Section 8.02 against compensation payable by the Partnership to any Class B Limited Partner exceed the aggregate projected amount of compensation payable by the Partnership to such Class B Limited Partner for the twelve month period after such credits are determined, such excess shall be promptly paid to the Partnership by such Class B Limited Partner. Non-cash remuneration consisting of goods or services paid to a Class B Limited Partner by any Person in which the Partnership has a -33- 38 Portfolio Investment shall be taken into account when received, at fair value as determined by the Board of Directors. 8.03. Services of the General Partner and Board of Directors. Subject to any express exceptions set forth in any employment agreement with the Partnership, during the existence of the Partnership, the General Partner shall devote its full time and effort to the Partnership business to promote the interests of the Partnership consistent with the General Partner's fiduciary duty to the Partnership. Nothing in this Agreement shall be deemed to preclude any of the General Partner's officers (other than the Class B Limited Partners to the extent provided by any employment agreement between such parties and the Partnership), directors or equity owners or any member of the Board of Directors from engaging in other businesses, and in no event shall any of the Partners be entitled to any interest in or profits from any such other business by reason of their being a Partner in the Partnership. 8.04. Compensation and Dealings with Partnership. Except for the interests granted to the Partners under this Agreement in the Profits or Losses of and distributions from the Partnership, neither the General Partner nor the Class A Limited Partner shall receive any compensation for services rendered in connection with the management or operation of the Partnership or its business. The Class A Limited Partner may deal with the Partnership in connection with the management and operation of the Partnership as an independent contractor or as an agent for others, and may receive from such others or the Partnership normal profits, compensation, commissions, or other income incident to such dealings, but only with the prior written consent of the Board of Directors to such dealings and to the terms and conditions of, and the profits, compensation, commissions or income to be derived from such dealings. The Class B Limited Partners may receive compensation for services from the Partnership in their capacities as employees of the Partnership. 8.05. No Loans to Partners, Etc. The Partnership shall be permitted to lend funds, securities or other property of the Partnership only with the prior approval of the Board of Directors. Except for any Tax Payment Loan authorized under Section 6.02, any Loan to any Partner, any Affiliate of a Partner, or any director, officer, partner or equity owner of a Partner or Affiliate of a Partner, other than to a Person in which the Partnership has a Portfolio Investment must be approved by the Board of Directors and the Class A Limited Partner. -34- 39 8.06 LIABILITY OF THE GENERAL PARTNER, BOARD OF DIRECTORS MEMBERS AND OTHERS. (a) The General Partner, the officers, directors and shareholders of the General Partner, the members of the Board of Directors, the employees of the Partnership and any person serving at the request of the Board of Directors or the General Partner on the board of directors of a Person in which the Partnership has a Portfolio Investment (individually, an "Acting Member") shall not be liable, responsible or accountable in damages or otherwise to the Partnership or to any of the Partners for any act or omission performed or omitted in good faith on behalf of the Partnership and in a manner reasonably believed to be within the scope of the authority granted to such Person by this Agreement or by the Board of Directors or the General Partner and to be in the best interests of the Partnership, except for such person's own bad faith, gross negligence, recklessness, willful misconduct, fraud or a material and intentional breach of this Agreement in bad faith. (b) No Acting Member shall be liable to the Partnership or to any of the Partners for any tax, or penalty or interest related thereto, imposed upon the Partnership or any Partner. (c)(i) The Partnership shall indemnify, hold harmless and defend each past and present Acting Member and their requisite successors, heirs and personal representatives, (individually, a "Defended Person"), from and against any and all loss, claims, damages, liabilities joint and several, expenses, judgments, fines, settlements and other amounts, including, without limitation, reasonable attorney's and accountant's fees and disbursements, arising from any and all claims, demands, actions, suits or proceedings (civil, criminal, administrative or investigative) in which such Defended Person shall be involved as a party or otherwise, or be threatened to be made a party, by reason of any action taken or alleged to have been taken or omitted to have been taken in connection with or in any way related to the activities or affairs of the Partnership, if such action or omission: (A) Was taken or omitted in a manner reasonably believed by such Defended Person to be within the scope of authority conferred by law or this Agreement; and -35- 40 (B) Was authorized or consented to by the Board of Directors or the General Partner or was an action taken on behalf of the General Partner; and (C) Was taken or omitted in good faith either on behalf of the Partnership or in furtherance of the interests of the Partnership, provided that the action or omission of such Defended Person did not constitute bad faith, gross negligence, recklessness, willful misconduct, fraud or a material and intentional breach of this Agreement in bad faith. (ii) To the extent that such Defended Person has been successful on the merits or otherwise in defense of any proceedings referred to herein, or in defense of any claim, issue or matter therein, or even if the Defended Person has been unsuccessful in such, but would otherwise be entitled to indemnity pursuant to the standards set forth in clauses A, B and C above, the Partnership shall assume liability for all expenses actually and reasonably incurred by such Defended Person in connection therewith. The Partnership may, at its option, choose to assume the defense of a Defended Person by counsel selected by the Partnership with the consent of such Person, which consent shall not be unreasonably withheld. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that such Defended Person did not act in accordance with the standards set forth above. No settlement of any matter referred to herein shall be entered into by a Defended Person without the consent of the Partnership, which consent shall not be unreasonably withheld. If the Partnership shall reject a settlement proposed by a Defended Person, then, in addition to any other indemnification for which the Partnership may be liable hereunder, the Partnership shall be liable, without limitation or restriction hereunder, to indemnify such Defended Person for the excess of any of the amount for which such Defended Person is ultimately liable, by judgment, settlement or otherwise, over the amount of the settlement rejected by the Partnership. The Partnership shall indemnify a Defended Person from liability with respect to a claim, issue or matter for which such Defended Person shall have been adjudged to be liable for misconduct in the performance of such Defended Person's duty to the Partnership only to the extent that the court in which such action was brought, or another court of appropriate jurisdiction, determines upon application that, despite the liability, but in view of all the circumstances of the case, such Defended Person is fairly and reasonably entitled to be spared from liability for such expenses which such court shall deem proper. (iii) It is the intent of this Section that the Partnership will indemnify the Defended Persons from and -36- 41 against liability to the maximum extent permitted by law, subject to the provisions hereof. The General Partner, however, shall at no time or for any reason attempt to require the Limited Partners to directly satisfy all or any portion of the indemnification obligations of the Partnership to the Defended Persons pursuant to this Section. Accordingly, the Class A Limited Partner shall have no obligation to provide indemnification under this Agreement to the extent of its remaining Commitment or otherwise. (iv) Costs and expenses incurred in defending or responding to any pending or threatened action, proceeding or investigation shall be advanced by the Partnership (to a maximum of $250,000 unless a greater amount is approved by the Board of Directors) on behalf of the Defended Person who is the subject thereof in advance of the final disposition of such action, proceeding or investigation. However, any such Defended Person must agree in writing to repay such advance if it shall ultimately be determined that the Partnership shall not indemnify such Defended Person from liability pursuant to this Section. (v) The indemnification obligation of the Partnership set forth in this Section shall terminate as of the date the Partnership's Certificate of Limited Partnership shall have been cancelled and the assets of the Partnership shall have been distributed as provided herein. (d) The provisions of this Section shall not be deemed to be exclusive of any other rights to which the Defended Person may be entitled under any agreement, or as a matter of law, or otherwise. (e) The Board of Directors shall have the power to purchase and maintain insurance, at the expense of the Partnership, on behalf of the Acting Members against any liability asserted against or incurred by them in any capacity covered by the indemnification provisions of this Section, whether or not the Partnership would have the power to indemnify and defend the Defended Persons against such liability under the provisions of this Agreement. No such insurance, however, shall apply to suits by any Limited Partner directly or derivatively. (f) The Board of Directors or the General Partner may cause the execution of any of its power hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Board of Directors or General Partner, as the case may be, shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. -37- 42 8.07. Limitations on the Limited Partners. Nothing contained herein shall be deemed to confer on a Limited Partner a right, in its capacity as a Limited Partner, to (a) take part in the control of the business or affairs of the Partnership; (b) have any voice in the management or operation of any Partnership property; (c) have the authority or power to act as agent for or on behalf of the Partnership or any other Partner; (d) do any act which would be binding on the Partnership or any other Partner; or (e) incur any expenditures on behalf of or with respect to the Partnership. ARTICLE IX BOOKS, RECORDS AND BANK ACCOUNTS 9.01. Books and Records. The General Partner shall keep accurate books of account and records with respect to the operation of the Partnership and this Agreement. Such books and records shall be maintained at the principal place of business of the Partnership, or at such other place as the General Partner, with notice to the Class A Limited Partner, shall determine. The General Partner hereby agrees to preserve all financial and accounting records pertaining to the operation of the Partnership and this Agreement during the term of the Agreement and for six years thereafter, and during such period the Class A Limited Partner, shall, at its own cost and expense, have the right to audit such books and records for the purpose of verifying all records in regard thereto to the fullest extent authorized and permitted by law, but not more than one audit may be conducted in any twelve month period. The General Partner shall have the right to preserve all records and accounts in original form or on microfilm, magnetic tape, or any similar process. 9.02. Accounting Basis and Fiscal Year. The Partnership shall prepare its financial statements in accordance with generally accepted accounting principles as from time to time are in effect on a calendar year basis, taking account of the allocations in Article IV, and shall prepare its income tax information returns using the accrual method of accounting on a calendar year basis. 9.03. Financial Reports. Within 60 days after the end of each quarter, the General Partner shall cause to be prepared and sent to the Class A Limited Partner an unaudited balance sheet and statement of profit and loss of the Partnership. Within 90 days after the end of each fiscal year, or as promptly thereafter as practicable, the General Partner shall cause to be prepared and sent to (i) each Limited Partner (other than the -38- 43 Special Limited Partners) an audited financial report of the Partnership and (ii) to each Special Limited Partner a copy of any financial statements of any person in which a Shared Portfolio Investment has been made (and if such person files reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 a copy of any reports so filed), in each case which have been received by the Partnership within the prior twelve months, a report of the distributions, profits and losses of the Partnership attributable to the Portfolio Investments in which such Special Limited Partner elected to make a capital contribution pursuant to the provisions of this Agreement, and such other information relating to such Portfolio Investments as the General Partner shall determine. Such audited financial report shall be audited by the Accounting Firm. The cost of all such reporting shall be paid by the Partnership as a Partnership expense. The Special Limited Partners hereby agree that it would not be reasonable for the Partnership to be required to send to them, or permit them to have access to, financial statements, reports or other information relating to any matters other than the Portfolio Investments with respect to which they made capital contributions. 9.04 BANK ACCOUNTS. The assets of the Partnership shall be held by one or more custodian banks appointed by the Board of Directors. All funds of the Partnership shall be deposited in one or more accounts maintained at the custodian bank(s). All such funds and assets shall be and remain the property of the Partnership and shall be received, held and disbursed by the General Partner or its designee for the purposes specified in this Agreement. There shall not be deposited in any of said accounts any funds other than funds belonging to the Partnership, and no other funds shall in any way be commingled with such funds. The General Partner may, subject to any policies adopted by the Board of Directors, invest such funds in such temporary investments as they may deem appropriate, including but not limited to banking and savings accounts, U.S. government obligations, prime grade commercial paper, certificates of deposit, money market instruments, or similar low risk, high quality income securities. The General Partner shall not be liable or responsible for any loss resulting from the failure of any custodian bank so designated. -39- 44 ARTICLE X ASSIGNABILITY AND PURCHASE OF INTERESTS 10.01. Substitution and Assignment of a Partner's Interest. (a) A Partner may not sell, transfer, assign, pledge or otherwise dispose of (collectively, "disposition") all or any part of its Partnership Interest (except by operation of law) except pursuant to an amendment to the Agreement, signed by the General Partner and the Class A Limited Partner, setting forth the terms and conditions of any such disposition; no transferee of a Partnership Interest pursuant to this provision or any other provision of this Agreement shall become a General Partner or a substituted Limited Partner under the Act unless approved by the General Partner and the Board of Directors, which approval may be withheld arbitrarily. Notwithstanding the foregoing, no transfer of a Limited Partner's interest will be permitted if it affects the continuity of the Partnership under Section 708 of the Code. (b) If any transfer of all or any portion of a Partnership Interest is made pursuant to any provision of this Agreement, the assignor and assignee shall be jointly and severally liable to the Partnership to pay any fees and expenses incurred by the Partnership as a result of such transfer, promptly after demand therefor is made. 10.02. Admission of Additional Partners. Additional Partners may be admitted to the Partnership only pursuant to, and upon the terms set forth in, an amendment to the Agreement executed by the General Partner and the Class A Limited Partner upon authorization to do so by the respective boards of directors of such Partners. 10.03. Withdrawal of Partners. A Limited Partner (other than a Special Limited Partner) may withdraw from the Partnership at any time. A General Partner may withdraw from the Partnership at any time; provided, that such withdrawal will not be permitted if it affects the continuity of the Partnership under Section 708 of the Code. -40- 45 ARTICLE XI DISSOLUTION AND TERMINATION 11.01. Event of Dissolution. The Partnership shall be dissolved upon the earliest of: (a) a date designated by written agreement of the General Partner and the Class A Limited Partner or in a notice to dissolve, provided pursuant to Section 2.01, from the Class A Limited Partner to the General Partner; (b) the withdrawal, Bankruptcy or dissolution of a General Partner unless (i) the remaining General Partner, if any, agrees to continue the Partnership or (ii) if there is no remaining General Partner, within thirty (30) days a majority in interest of the remaining Partners agree in writing to continue the Partnership and admit a new General Partner; (c) at 12:00 midnight, on the date provided for in Section 2.01, unless extended by agreement of the Partners; and (d) a date designated in a notice to dissolve by the Board of Directors provided pursuant to the terms of Section 3.02. 11.02. Liquidation. (a) Dissolution of the Partnership shall be effective on the day on which the event occurs giving rise to the dissolution, but the Partnership shall not terminate until the Partnership's Certificate of Limited Partnership shall have been canceled and the assets of the Partnership shall have been distributed as provided herein. Notwithstanding any possible implication to the contrary, which implication is not intended, and in accordance with applicable law, dissolution of the Partnership shall not require the liquidation of any Portfolio Investment to occur at any faster rate than ordinary prudent business judgment would have required absent the dissolution, within the limit of the Initial Term. (b) Upon the dissolution of the Partnership, a full account of the assets and liabilities of the Partnership shall be taken and the assets and liabilities of the Partnership shall be liquidated by the General Partner, subject to Section 11.02(e), in the manner determined by the Board of Directors, and the proceeds thereof, as and when available, shall be applied as follows and in the following order of priority: -41- 46 (i) to the payment of all debts, taxes, obligations and liabilities of the Partnership, and the necessary expenses of liquidation (including, without limitation, any liabilities to Partners); and where a contingent debt, obligation or liability exists, a reserve shall be set up to meet it, and, if and when said contingency shall cease to exist, the assets, if any, remaining in said reserve shall be distributed as provided in this Article XI; and (ii) then to the Partners in accordance with Section 6.01(a)(i). (c) Upon any termination of the Partnership, the name of the Partnership and its good will shall not be appraised, sold or otherwise liquidated but shall be and remain the exclusive property of the Advanta GP. (d) Within 60 days after the termination of the Partnership, and at such time as the liquidation of the Partnership shall have been completed, the General Partner shall cause to be prepared and forwarded to each Partner financial statements of the Partnership, prepared in accordance with Section 9.02 hereof. (e) The liquidation of the Partnership shall be administered by the General Partner, unless the event causing the dissolution of the Partnership is an event set forth in Section 11.01(b), and has occurred with respect to the General Partner, in which case the liquidation of the Partnership shall be managed by a liquidator appointed by the Class A Limited Partner. (f) Except as otherwise provided herein, during the period of liquidation of the Partnership following its dissolution, the Partners shall continue to be entitled to their respective interests in the Profits or Losses of the Partnership as set forth in Article IV. (g) During the period of its liquidation, the Partnership will continue to pay and bear those expenses chargeable to the Partnership during its term. (h) Notwithstanding any other provision of this Agreement, on liquidation the General Partner shall contribute to the capital of the Partnership an amount equal to the lesser of the aggregate deficit balance in their Capital Accounts, if any, or 1.01% of the capital contributed by the Limited Partners to the Partnership in excess of the capital contributed previously by the General Partner. -42- 47 (i) Upon and after the dissolution of the Partnership, Advanta GP and the Class A Limited Partner and any of their affiliates shall be entitled to form another partnership, which may have the same purposes and the same name as the Partnership, without any other General Partner or any Limited Partner having any right in or restriction against such new partnership of any kind, unless Advanta GP, the Class A Limited Partner and any such affiliates shall agree to admit such parties as partners in such new partnership. No later than the completion of the liquidation of the Partnership as contemplated herein, the General Partner or the liquidator appointed by the Limited Partners shall cause the cancellation of the Partnership's Certificate of Limited Partnership. ARTICLE XII PURCHASE RIGHT OF ADVANTA 12.01. Advanta's Purchase Right. (a) At any time, with respect to any Portfolio Investment other than GEII held by the Partnership for not less than thirty-six (36) months, Advanta shall have the right to require the Board of Directors to engage, within thirty days after notice from Advanta, two appraisers, each to provide an opinion of the fair market value of such Portfolio Investment (defined as an amount in U.S. Dollars that a ready, willing and able buyer would pay to a ready, willing and able seller, both assumed to be of equal competence and experience and acting without coercion or duress in a fair market). The expense of engaging such appraisers shall be borne by Advanta and shall not be Advances under this Agreement. The average of such determinations of fair market value shall be the "Appraised Value" under this Agreement. Upon written notice within thirty (30) days after receipt of the Appraised Value, Advanta shall have the right to buy any Portfolio Investment of the Partnership at such Portfolio Investment's Appraised Value, subject to the following restrictions: (1) Advanta must purchase not less than 100% of the Partnership's interest in the Portfolio Investment; and (2) where the Partnership's Portfolio Investment represents less than a majority of the voting control and value of the investee entity, Advanta must (coincident with the purchase of the Partnership's Portfolio Investment) purchase from other sources a sufficient additional interest in the -43- 48 investee entity so that, when combined with the Portfolio Interest, Advanta will have acquired a majority of the voting control and value of the investee entity. (b) The closing of a purchase made pursuant to Section 12.01(a) shall occur within thirty (30) days after the Partnership's receipt of such notice that Advanta desires to make such purchase, pursuant to such other precise details as may be determined by the Board of Directors. ARTICLE XIII GENERAL PROVISIONS 13.01. Power of Attorney. Each Limited Partner, by the execution of this Agreement, does hereby irrevocably constitute and appoint the General Partner its true and lawful agent and attorney in fact, with full power and authority in its name, to make, execute, acknowledge, deliver, file and record such documents and instruments as may be necessary or appropriate to establish, maintain or terminate the legal existence of the Partnership, including, but not limited to, (a) the Partnership's Certificate of Limited Partnership, (b) such amendments to the Partnership's Certificate of Limited Partnership, as amended from time to time, as are required under the Act, (c) all certificates and other instruments which may be required to effect the dissolution and termination of the Partnership pursuant to the provisions hereof, (d) such documents and instruments as are necessary to cancel the Partnership's Certificate of Limited Partnership and any amendment thereto pursuant to Article VIII hereof, and (e) all other instruments, documents, certificates and amendments that may from time to time be required by any federal, state or local law to effectuate, implement, continue and defend the valid and subsisting existence of the Partnership or which may otherwise be required by law. 13.02. Indulgences, Etc. Neither the failure nor any delay on the part of any party to exercise any right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or further exercise of the same or of any other right nor shall any waiver of any right with respect to any occurrence be construed as a waiver of such right with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 13.03. Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and -44- 49 enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the State of Pennsylvania (notwithstanding any conflict-of-law doctrines of any state or other jurisdiction to the contrary), and without the aid of any canon, custom or rule of law requiring construction against the draftsman. 13.04. Notices. (a) All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when personally delivered, or on the day specified for delivery when deposited with a courier service such as Federal Express for delivery to the intended addressee, or two days following the day when deposited in the United States mails, by registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Advanta GP: Advanta GP Corp. Welsh and McKean Rds. P.O. Box 844 Spring House, Pennsylvania 19477-0844 Attention: Chief Executive Officer; with a copy, given in the manner prescribed above, to: Gene S. Schneyer, Esquire, Vice President and General Counsel c/o Advanta Corp. Welsh and McKean Rds. P.O. Box 844 Spring House, Pennsylvania 19477-0844 (ii) If to Class A Limited Partner: Advanta Investment Corp. c/o Advanta Corp. Welsh and McKean Rds. P.O. Box 844 Spring House, Pennsylvania 19477-0844 Attention: Chief Executive Officer; -45- 50 with a copy, given in the manner prescribed above, to: Gene S. Schneyer, Esquire, Vice President and General Counsel c/o Advanta Corp. Welsh and McKean Rds. P.O. Box 844 Spring House, Pennsylvania 19477-0844 (iii) If to any Limited Partner: To the address shown for such Partner on the Partnership's books and records (b) In addition, notice by mail shall be by air mail if posted outside of the continental United States. (c) Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this paragraph for the giving of notice. 13.05. Schedules. Schedules attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. 13.06. Binding Nature of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal successors and permitted assigns, except that none of the parties hereto may assign or transfer their rights or obligations under this Agreement without the prior written consent of the General Partner, and any such purported assignment shall be void. 13.07. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 13.08 Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other -46- 51 or others of them may be invalid or unenforceable in whole or in part. 13.09. Entire Agreement; Amendment. This Agreement, together with the Allocation and Vesting Agreement and the several employment agreements of the various Class B Limited Partners, contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing, which agreement in writing shall be binding on all parties hereto (even if such parties have not consented to such modification or amendment) if such agreement is executed by the General Partner and the Class A Limited Partner; provided, however, that if such amendment or modification would have a material adverse effect on Hollin and/or Neems, then such agreement shall not be binding on such party who shall be so materially adversely affected without such party's execution of such agreement. In the event of any inconsistency among this Agreement, the Allocation and Vesting Agreement and the aforementioned several employment agreements, the provisions of this Agreement shall prevail over the provisions of the other agreements and the provisions of the several employment agreements shall prevail over the Allocation and Vesting Agreement. 13.10. Section Headings. The article, section and subsection headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. 13.11. Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. 13.12. Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. 13.13. Interpretation. As used herein, (i) "include", "includes" and "including" are deemed to be followed by "without -47- 52 limitation" whether or not they are in fact followed by such words or words of like import, (ii) references to any agreement or other document are to it as amended and supplemented from time to time, (iii) references to any act, statute or law are to it as amended and supplemented from time to time, include any successor provision or any comparable act, statute or law that may be enacted as its replacement, and include all rules and regulations promulgated under such act, statute or law, (iv) references to Article, Section or another subdivision or to an attachment, Exhibit or Schedule are to an Article, Section or subdivision hereof or an attachment, Exhibit or Schedule hereto, and (v) "hereof", "herein", "hereunder" and comparable terms refer to the entirety hereof and not to any particular Article, Section or other subdivision hereof or attachment hereto. IN WITNESS WHEREOF, the parties have executed the Agreement of Limited Partnership as of the date first above written. ADVANTA GP CORP. Attest: /s/ By: /s/ ---------------------------- ------------------------------- Secretary or Assistant Authorized Officer Secretary ADVANTA INVESTMENT CORP. Attest: /s/ By: /s/ ---------------------------- ------------------------------- Secretary or Assistant Authorized Officer Secretary /s/ MITCHELL L. HOLLIN -------------------------------(SEAL) Mitchell L. Hollin /s/ MICHAEL NAJJAR -------------------------------(SEAL) Michael Najjar /s/ GARY H. NEEMS -------------------------------(SEAL) Gary H. Neems Special Limited Partners: /s/ ROBERT HALL ------------------------------- Robert Hall -48- 53 /s/ ROBERT ROCK ------------------------------- Robert Rock /s/ JAMES STERN ------------------------------- James Stern -49- 54 SCHEDULE A Initial Capital ------- Advanta GP $100.00 Class A Limited Partner $100.00 Mitchell L. Hollin $100.00 Michael Najjar $100.00 Gary H. Neems $100.00 55 EXHIBIT A Special Limited Partner Investment Amount - ----------------------- ----------------- Robert Hall $10,000 Robert Rock $25,000 James Stern $25,000 EX-10.T 12 AGREE DATED SEPT. 5, 1996/ WILLIAM J. RAZZOUK 1 EXHIBIT 10-T Mr. William J. Razzouk Page 1 September 5, 1996 Mr. William J. Razzouk c/o Rossie, Luckett, Parker & Laughlin 675 Oakleaf Office Lane Memphis, TN 38117-4863 Dear Bill: This letter, when signed by you and us, shall confirm and constitute the agreement between you and Advanta Information, Inc. (the "Company") relating to your employment with the Company as follows: 1. Title and Duties. Your title will be Chief Executive Officer and Director of the Company. In that capacity you will perform such senior executive duties on a full-time basis consistent with your position as the Board of Directors of the Company reasonably determines, including oversight of the business and operations of the Company. Advanta Corp. ("Advanta") hereby agrees to vote or cause to be voted all shares of common stock of the Company beneficially owned by Advanta and/or its affiliates in favor of your election to the Board of Directors of Advanta Information, Inc., during the term of your employment with the Company. 2. Start Date. Your employment will commence on or about October 1, 1996. 3. Base Salary. Your base salary in this position will be not less than $475,000 annually, payable in periodic installments in accordance with the Company's regular payroll practices in effect from time to time (but no less frequently than monthly). The Board shall have the discretion to review your Base Salary periodically. 4. Annual Bonus. You shall be eligible to participate in Advanta's Management Incentive Plan (AMIP). Your target bonus will be 75% of your Base Salary each year. Your AMIP bonus for the portion of the year in 1996 during which you are employed shall be prorated based on the number of days you are employed, provided that your bonus for this period shall be calculated on the basis of an annual minimum of $525,000, also prorated based on the number of days you are employed in 1996. Your minimum AMIP bonus for 1997 attributable to the number of days worked by you in 1997 up to the completion of your first year of employment shall be calculated on the basis of an annual minimum of 2 Mr. William J. Razzouk Page 2 $525,000, prorated based on the number of days you are employed in 1997 prior to the completion of your first year of employment. 5. Advanta Restricted Stock Award. (a) Upon commencement of your employment with the Company, Advanta will grant and convey to you one hundred thousand (100,000) shares of Class B restricted stock (the "Bonus Shares"). The Bonus Shares shall vest (i.e., become free of restrictions) at the rate of twenty-five thousand (25,000) shares on each of the first four anniversaries of the date of your employment, provided you are still employed by the Company on the anniversary date. You will receive non-preferential cash dividends (so long as Advanta is paying dividends on Class B Shares) on all of the Bonus Shares both before and after they vest. While any Bonus Shares remain restricted, the restricted Bonus Shares (and any securities received as a dividend or distribution with respect to such restricted Bonus Shares) may not be sold, transferred, pledged or hypothecated by you (other than to a family member or family trust to facilitate your estate planning goals, in which case such restrictions will apply to the Bonus Shares held by such family member or family trust). While Bonus Shares remain restricted, the stock certificates for such shares shall be held by Advanta, and copies thereof shall be delivered to you (as is our practice with respect to all restricted shares under the AMIP bonus plan). Such restricted shares shall bear a restrictive legend indicating that they are subject to the restrictions described above and, in certain circumstances (as more fully set forth below) to forfeiture and return to Advanta without the payment to you of any consideration therefor. As Bonus Shares vest, certificates for the vested shares (and for any securities received as a dividend or distribution with respect thereto), free of the restrictive legend described in the preceding sentences shall be delivered to you. Upon the Company's termination of your employment for any reason other than "Cause" as defined below prior to your having become vested in the first 50,000 cumulative shares, there will be accelerated vesting of your Bonus Shares to the extent necessary to provide you with a cumulative total of 50,000 class B vested shares. In the event you terminate your employment, or we terminate your employment for "Cause", any Bonus Shares which have not at that time already vested shall be forfeited by you and returned to Advanta without payment of any consideration. In the event of your death or the termination of your employment due to Disability occurring at any time while you are employed by the Company, a percentage equal to the product of 25% and the number of complete years of service with the Company prior to such termination of all unvested restricted stock conveyed to you pursuant to this paragraph 5 will immediately vest, except that in the event of your death or Disability in the first year of your employment you shall be deemed to have completed one year of service 3 Mr. William J. Razzouk Page 3 for purposes of this computation. For purposes of this agreement, a Disability shall mean any physical or mental condition which in the Company's judgment makes you unable to perform your essential duties hereunder, with or without reasonable accommodation. Except in the event of a termination for Cause, it is specifically understood that the Bonus Shares shall vest without regard to your personal performance or the performance of the Company during the term of your services. (b) In the event of a change of control of Advanta, all of your Bonus Shares shall immediately vest. For purposes of this agreement, a change in control of Advanta shall be deemed to have occurred upon the earliest to occur of the following events: (i) the date the stockholders of Advanta (or the Board of Directors, if stockholder action is not required) approve a plan or other arrangement pursuant to which Advanta will be dissolved or liquidated, or (ii) the date the stockholders of Advanta (or the Board of Directors, if stockholder action is not required) approve a definitive agreement to sell or otherwise dispose of substantially all of the assets of Advanta (other than to an affiliate of Advanta), or (iii) the date the stockholders of Advanta (or the Board of Directors, if stockholder action is not required) and the stockholders of the other constituent corporation (or its board of directors if stockholder action is not required) have approved a definitive agreement to merge or consolidate Advanta with or into such other corporation, other than, in either case, a merger or consolidation of Advanta in which holders of shares of Advanta's Class A Common Stock immediately prior to the merger or consolidation will have, directly or indirectly, at least a majority of the voting power of the surviving corporation's voting securities immediately after the merger or consolidation, which voting securities are to be held in the same proportion as such holders' ownership of Class A Common Stock of Advanta immediately before the merger or consolidation, or (iv) the date any entity, person or group, within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended, (other than (A) Advanta or any of its subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by Advanta or any of its subsidiaries or (B) any person who, on the date of this agreement, shall have been the beneficial owner of or have voting control over shares of Common Stock of Advanta possessing more than twenty-five percent (25%) of the aggregate voting power of Advanta's Common Stock) shall have become the beneficial owner of, or shall have obtained voting control over, more than twenty five percent (25%) of the outstanding shares of Advanta's Class A Common Stock or (v) the first day after the date of this agreement when directors are elected such that a majority of the Board of Directors shall have been members of the Board of Directors for less than two (2) 4 Mr. William J. Razzouk Page 4 years, unless the nomination for election of each new director who was not a director at the beginning of such two (2) year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 6. Advanta Information, Inc. Stock Award. (a) Simultaneously with the commencement of your employment, the Company will sell to you, for a purchase price of $0.01 per share, a number of shares of common stock of the Company which currently represents 6% of the outstanding shares of common stock on an after-issued, fully diluted basis. If the Company issues any shares of its common stock or options or other securities exercisable for or convertible into shares of its common stock after the date of this agreement and prior to the date that a registration statement on Form S-1 (or a successor form) with respect to shares of common stock of the Company has been declared effective ("IPO") under the Securities Act of 1933, as amended ("Securities Act"), such issuance will not dilute your fully diluted equity interest in the Company at that time in respect of the shares issued to you hereunder, and the avoidance of dilution will be effected without the issuance of additional shares to you. You shall have the right to vote the shares and to receive dividends, if any, declared with respect to the shares. However, shares which have not vested in accordance with the vesting schedule set forth below may not be transferred, encumbered or sold by you. (b) On the day before each yearly anniversary of the commencement of your employment with the Company, twenty five percent (25%) of the shares of common stock of the Company issued to you pursuant to paragraph (a) above shall vest, provided that you are employed by the Company on such date. In the event of (i) an IPO, (ii) a sale by the Company of all or substantially all of the assets of the Company or by Advanta of all or substantially all of its equity ownership of the Company to an entity not affiliated with Advanta, (iii) a change in control of Advanta or the Company (as defined in paragraph 5(b) as to Advanta and, as to the Company, applying the same definition, with "the Company" substituted for "Advanta" wherever it appears), or (iv) a termination of your employment by the Company other than for Cause (as defined in paragraph 9), all of your shares shall immediately vest. In addition, upon termination of your employment with the Company due to your death or Disability (as defined in paragraph 5(a)) occurring at any time while you are employed by the Company after the first anniversary of the commencement of your employment with the Company, a percentage equal to the product of 25% and the number of complete years of service with the Company prior to such termination of all unvested stock 5 Mr. William J. Razzouk Page 5 purchased by you pursuant to this paragraph 6 will immediately vest. Except as set forth in the immediately preceding sentence, any shares which have not vested prior to the termination of your employment with the Company for any reason shall no longer be eligible for vesting and shall be repurchased by the Company for $0.01 per share. Upon tender of the purchase price by the Company, the purchase of such shares shall be deemed to have been consummated. You agree to take all actions as may be reasonably necessary to effect the transfer of such shares to the Company upon the tender of the purchase price therefor. (c) The parties acknowledge and agree that Advanta will receive $1.00 nominal value of a preferred stock of the Company for each dollar invested in the Company (although the preferred stock shall be issued with a nominal value of $1,000 per share). It is further agreed that if Great Expectations International, Inc. (or its successor in interest) ("G/E") is acquired from Advanta Partners LP by Advanta or any of its subsidiaries, G/E will be included in the Company at its cost. The preferred stock shall be non-participating, non-voting and non-convertible and shall have a cumulative 8% cash dividend. Advanta will not seek to amend the certificate of designations of the preferred stock in respect of the conversion feature other than in connection with an IPO in which event Advanta could elect to convert the preferred stock into common stock of the Company at the IPO price. The parties acknowledge and agree that Advanta's interpersonal relationship services businesses (other than G/E which is dealt with above) will be conducted by the Company and its subsidiaries, including future development of "Connections Calendar" which will be performed by the Company or a subsidiary of the Company, whether or not G/E is acquired from Advanta Partners LP. (d) At any time after an IPO and prior to the date that all of the shares of common stock of the Company which are owned by you may be sold at one time without registration under the Securities Act (whether pursuant to Rule 144 thereunder or otherwise), you shall have the right, subject to standard restrictions, to participate in any registered offering by the Company or selling stockholders (other than an offering registered on Form S-8 or a successor form) of shares of the Company's common stock. In addition, before any sale by Advanta and/or its affiliates in one or a series of related transactions of 10% or more of the Company's common stock to an unaffiliated party, you shall be given an opportunity to participate in such a sale on a proportionate basis with Advanta and/or its affiliates. 6 Mr. William J. Razzouk Page 6 (e) The parties acknowledge and agree that you intend to make a Section 83(b) election under the Internal Revenue Code of 1986, as amended, with respect to the shares of Company common stock issued to you pursuant to the terms of this agreement and the Company hereby agrees to assist you in making such election to the extent reasonably requested by you. 7. Stock Options. After you have become vested in 50,000 of your Bonus Shares you shall become eligible to participate in the Advanta Corp. Stock Option Plan and to receive such grants as are made by the applicable committee of Advanta's Board on an annual basis. 8. Expense Reimbursement. The Company will pay for all of your reasonable and necessary business expenses in accordance with Advanta's expense reimbursement policies. 9. Term; Termination for Cause. Although you and we are entering into this agreement with the hope and expectation that this will be a multi-year partnership, either you or we may terminate your services at any time upon thirty (30) days prior written notice to the other, provided however that you may not voluntarily terminate your employment for any reason for one (1) year after your start date. We may, by notice to you, terminate your employment for "Cause" or without cause. As used herein, "Cause" shall mean: (a) your willful refusal or failure to perform a material and substantial part of your duties hereunder, it being understood that "Cause" shall not exist unless and until you have received written notice from us detailing the alleged willful refusal or failure, and you have been accorded at least thirty (30) days to cure; or (b) your commission of a felony, or of any act of fraud, inappropriation or criminal conduct involving or relating in any material way to the Company, or of personal dishonesty materially injurious to the Company. If we terminate your employment for "Cause," you shall be entitled to receive your Base Salary until the date of termination and your AMIP Bonus, pro-rated through the date of termination, which AMIP Bonus shall be subject to the discretion of the Board. This agreement shall terminate immediately in the event of your death, whereupon your estate shall be entitled to receive an amount equal to your salary and accrued benefits for any days which you spent in the employ of the Company prior to your death, together with the proceeds of all life insurance and any vested shares pursuant to this agreement. 10. Confidentiality Agreement. You agree to execute a Confidentiality and Non-competition Agreement in the form attached hereto as Exhibit A, the execution of which is in consideration of your employment by the Company. 11. Benefits; Relocation. The Company will provide you with such group life, health and disability plans and programs, if any, as are available generally to employees of Advanta, provided that the Company will at its expense and provided you are insurable, purchase a term life insurance policy providing a death benefit of 7 Mr. William J. Razzouk Page 7 $1,000,000 for a beneficiary of your designation for as long as you are employed. You shall not be required to relocate to Pennsylvania until the second anniversary of your employment. If you do relocate sooner, you shall be entitled to a relocation bonus of $350,000 for each year earlier than the two-year period, prorated for each full month after you have completed your move. Prior to your relocation, your reasonable expenses in traveling to Horsham and staying here shall be reimbursed in accordance with Advanta's reimbursement policies. 12. Indemnification. During and after the term of your employment with the Company, you shall be entitled to the full indemnification benefits provided under the Company's by-laws which shall be substantially similar to those set forth in Article VII of Advanta's by-laws, a copy of which has been provided to you. Any permissive provision therein relating to rights of indemnification shall be deemed mandatory to the maximum extent permitted by law. If the Company fails to make any payments due to you under the terms of such indemnification, Advanta hereby agrees to promptly make payment thereof on behalf of the Company. 13. Miscellaneous. (a) The Company may deduct and withhold from your compensation, and from any option or stock awards hereunder, any taxes required to be deducted or withheld under any applicable law. (b) The Company has the right to obtain key-man insurance on your life, at the Company's sole cost and expense. You agree to cooperate with the Company in obtaining any such insurance and to submit to the usual and customary medical and other examinations and to sign all requisite applications therefor. (c) You represent and warrant to the Company that there are no restrictions, agreements or understandings whatsoever to which you are a party that would prevent or make unlawful your execution or performance of this agreement. (d) You understand that the services to be rendered and the duties to be performed by you hereunder are of a special, unique and personal nature and that you may not assign your rights or delegate your obligations under this agreement. (e) You shall be considered an employee of the Company within the meaning of all federal, state, and local laws and regulations governing unemployment, insurance, workers' compensation, industrial accident, labor and taxes. (f) This agreement and the Confidentiality and Non-competition Agreement to be executed represent the entire understanding between the parties with 8 Mr. William J. Razzouk Page 8 respect to this relationship and supersede all prior oral and written agreements and negotiations relating to the subject matter of this agreement. (g) All clauses and covenants contained in this agreement are severable, and in the event any of them shall be held to be invalid by any court, such clauses or covenants shall be limited as permitted under applicable law or, if they are not susceptible to such limitation, this agreement shall be interpreted as if such invalid clauses or covenants were not contained herein. (h) This agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania, without regard to principles of conflicts of law. (i) All notice of any kind which either party may be required or may desire to serve upon the other party hereunder shall be in writing and sent by hand delivery or nationally recognized overnight courier service providing receipt of delivery, or by certified or registered mail, return receipt requested, postage prepaid. Notice to the Company shall be sent to the above address or any address, as may be provided hereafter. (j) Nothing in this agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to another entity that assumes this agreement and all obligations of the Company hereunder, subject to your rights hereunder if such a transaction is consummated. Thereafter, the term "Company" shall mean such other entity and this agreement shall continue in full force and effect. 9 Mr. William J. Razzouk Page 9 Bill, assuming the foregoing accurately reflects our understanding, please indicate your acceptance of its terms below. We both agree that we intend to be legally bound by this agreement. Very truly yours, ADVANTA INFORMATION, INC. By: /s/ ----------------------------- Accepted and agreed this 5th day of September 1996 ADVANTA CORP. By: /s/ ----------------------------------------- Accepted and agreed this 6th day of September 1996 /s/ WILLIAM J. RAZZOUK - ------------------------------------------- William J. Razzouk EX-21 13 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 CURRENT LIST OF SUBSIDIARIES OF REGISTRANT Advanta Corp. (DE) Advanta Residual Holding Corp. (DE) Colonial National Corp. (DE) Advanta National Bank USA Colonial Mortgage Management Corp. (CA) Advanta Financial Corp. (UT)* Advanta Capital L.L.C. (DE) Advanta National Bank Advanta GP Corp. (DE) Advanta 101 GP Corp. (DE) Advanta Investment Corp. (DE) Advanta Investment Corp. II (DE) Advanta Information Services, Inc. (DE) Advanta International Corporation I (DE) Advanta International Corporation II (DE) Advanta UK (Scotland)** Advanta Leasing Holding Corp. (DE) Advanta Business Services Corp. (DE)*** Advanta Leasing Receivables Corp. (DE) Advanta Leasing Receivables Corp. II (DE) Advanta Leasing Receivables Corp. III (NV) Advanta Business Receivables Corp. (NV) Advanta Commercial Credit Corp. (NV) Mt. Vernon Leasing, Inc. (NJ) Service Partners I Corp. (NV) Service Partners II Corp. (NV) Colorado Credit Card Service, LLC (CO)**** Advanta Service Corp. (DE) Advanta Life Insurance Company (AZ) Advanta Insurance Company (AZ) Advanta Insurance Agency Inc. (DE) TSO National Life Insurance Company (AZ) Direct National Life Insurance Company (AZ) AICM, Inc. (AZ) Advanta Name Corp. (DE) Advanta Advertising, Inc. (DE) ADVANTENNIS Corp. (DE) Colonial National Automotive Financial Corp. (DE) Advanta Mortgage Holding Company (DE) Advanta Auto Finance Corporation (NV) Advanta Mortgage Corp. USA (DE) Advanta Finance Corp. (NV) Advanta Mortgage Corp. Midatlantic (PA) Advanta Mortgage Corp. Midatlantic II (PA) Advanta Mortgage Corp. New Jersey (NJ) Advanta Mortgage Corp. Northeast (NY) Advanta Mortgage Corp. Midwest (PA) Advanta Financial Investments, Inc. (PA) Advanta Nominee Services, Inc. (DE) Advanta Mortgage Conduit Services, Inc. (DE) Advanta Mortgage Receivables, Inc. (DE) Advanta Mortgage Receivables Inc. (DE) * Formerly Colonial National Financial Corp. ** Advanta International Corp. I and Advanta International Corp. II each owns 50% of Advanta UK. *** Formerly Advanta Leasing Corp. **** The Managing Member of Colorado Credit Card Service, LLC is Service Partners I Corp. and Service Partners II Corp. is also a Member. EX-23 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements; File No.33-12510, No. 33-19290, No. 33-31456, No. 33-32969, No. 33-33350, No. 33-39331, No. 33-47308, No. 33-47305, No. 33-50256, No. 33-50254, No. 33-50258, No. 33-55492, No. 33-57516, No. 33-53205, No. 33-53475, No. 33-54991, No. 33-58029, No. 33-59219, No. 33-61555, No. 33-62601, No. 33-60419, No. 333-01681, No. 333-01833, No. 333-04471, No. 333-04465, No. 333-04468, No. 333-04469, No. 333-05701, and No. 333-18993. Arthur Andersen LLP Philadelphia, PA March 24, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
9 1000 12-MOS DEC-31-1996 DEC-31-1996 165,875 546,783 338,926 0 785,600 0 0 2,702,187 89,184 5,583,959 1,860,058 1,068,989 309,781 1,393,095 0 1,010 435 850,591 5,583,959 267,823 80,142 0 347,965 110,879 269,700 78,265 96,862 2,382 523,174 264,761 175,657 0 0 175,657 3.89 3.89 1.84 29,822 40,597 0 0 53,494 80,396 9,820 89,184 89,110 0 74
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