SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 001-12351
December 31, 1998 Commission file number
--------------------
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification No.)
600 South Highway 169, Suite 1800, St. Louis Park, Minnesota 55426
(Address of principal executive offices)
(612) 525-5020
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 Par Value
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 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.
As of February 26, 1999, 19,261,195 shares of the Registrant's Common Stock were
outstanding and the aggregate market value of Common Stock held by
non-affiliates of the Registrant on that date was approximately $729,500,000,
based upon the closing price on The Nasdaq Stock Market(R) on February 26,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Annual Report to Shareholders for the year ended
December 31, 1998, are incorporated by reference in Parts II and IV.
Certain portions of the Proxy Statement for the Annual Meeting of Shareholders
of Metris Companies Inc. to be held on May 11, 1999, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1998,
are incorporated by reference in Part III.
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Business......................................................3
Item 2. Properties...................................................26
Item 3. Legal Proceedings............................................26
Item 4. Submission of Matters to a Vote of Security Holders..........27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................27
Item 6. Selected Financial Data......................................27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....27
Item 8. Financial Statements and Supplementary Data..................28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................61
PART III
Item 10. Directors and Executive Officers of the Registrant...........61
Item 11. Executive Compensation.......................................61
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................61
Item 13. Certain Relationships and Related Transactions...............61
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................61
Signatures..............................................................63
Exhibit Index...........................................................65
<PAGE>
PART I
Item 1. Business
Metris Companies Inc. ("MCI" and collectively with its subsidiaries,
the "Company") is an information-based direct marketer of consumer credit
products and fee-based services primarily to moderate income consumers. The
Company's consumer credit products are primarily unsecured credit cards issued
by its subsidiary, Direct Merchants Credit Card Bank, National Association
("Direct Merchants Bank"). The Company's customers and prospects include
individuals for whom credit bureau information is available ("External
Prospects") and existing customers of a former affiliate, Fingerhut Corporation
("Fingerhut" or "Fingerhut Customers") from the Fingerhut database. The Company
markets its fee-based services, including debt waiver programs, membership
clubs, extended service plans, and third party insurance, to its credit card
customers and customers of third parties.
MCI was incorporated in Delaware on August 20, 1996. The Company became
a publicly held company in October 1996 after completing an initial public
offering. The Company's principal subsidiaries are Direct Merchants Bank, and
Metris Direct, Inc. Prior to its name change in August 1996, Metris Direct, Inc.
was known as Fingerhut Financial Services Corporation. During the third quarter
of 1998, Fingerhut Companies, Inc. ("FCI") received written approval from the
Internal Revenue Service to distribute its interest in the Company to FCI's
shareholders in a tax free spin off (the "Spin Off").
Business Segments
In June 1997, the Financial Accounting Standards Board ("FASB") issued
the Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes standards for the way public enterprises report information about
operating segments. SFAS 131, which was adopted by the Company for the year
ended December 31, 1998, requires management to describe the factors used to
identify the segments.
Management has concluded that the Company measures performance and
operates in two business segments.
o Consumer Credit Products, which are primarily unsecured credit cards
issued by Direct Merchants Bank; and
o Fee-Based Services, which include debt waiver programs, membership
clubs and third party insurance offered to its credit card
customers and customers of third parties. In addition, the Company
includes within this operating segment the Company's extended
service plans.
The Company receives income from its consumer credit products through:
interest charges and other finance charges assessed on outstanding credit card
loans; credit card fees (including annual membership, cash advances, overlimit
fees, and past due fees); and interchange fees. The primary expenses of this
business are the costs of funding the loans, provisions for loan losses and
operating expenses including employee compensation, account solicitation and
marketing expenses and data processing and servicing expenses. Profitability is
affected by response rates to solicitation efforts, loan growth, interest
spreads on loans, credit card usage, credit quality (delinquencies and charge
offs), card cancellations and fraud losses.
The fee-based services business derives benefits from the Company's
consumer credit products business because the Company cross sells fee-based
products to its credit card holders. Nonetheless, the two business segments are
different with respect to the factors that affect profitability, including how
income is generated and how expenses are incurred. These differences require
management to manage their operations separately.
The Company receives revenue from its fee-based services through fees
and commissions for such services. Expenses include costs of solicitation,
underwriting and claims servicing expenses, fees paid to third parties and other
operating expenses. Profitability for this business is affected by response
rates to solicitation efforts, returns or cancel rates, claims rates, and other
factors.
The Company primarily targets moderate income consumers whom the
Company believes are underserved by traditional providers of many of the
Company's products and services. The Company intends to serve this target market
using its proprietary scoring techniques together with information from credit
bureaus and Fingerhut's database to determine a potential customer's
creditworthiness. The Company uses sophisticated modeling techniques to evaluate
the expected risk, responsiveness, and profitability of each prospective
customer and to offer and price the products and services it believes to be
appropriate for each customer. (See more detailed discussion following under
"Business Lines.")
Strategy
The principal components of the Company's strategy are the following:
Identify and solicit additional External Prospects for credit cards.
The Company intends to continue adding moderate income consumers who are
currently not Fingerhut Customers through the use of its own internally
developed risk models. The Company has developed its own proprietary credit risk
modeling system (the "Proprietary Modeling System"). By incorporating individual
credit information from the major credit bureaus into this Proprietary Modeling
System and eliminating those individuals contained in the Fingerhut suppression
and bad debt file (the "Suppress File"), the Company expects to generate
additional customer relationships from External Prospects.
Use risk-based pricing. The specific pricing for an individual's credit
card offer is determined by the prospective customer's risk profile and expected
responsiveness prior to solicitation, a practice known as "risk-based pricing."
Management believes the use of risk-based pricing allows it to maximize the
profitability of a customer relationship.
Pursue acquisitions of credit card portfolios or other businesses. The
Company expects to continue to pursue acquisitions of credit card portfolios
and/or other businesses whose customers fit the Company's product and target
market profile or which otherwise strategically fit with the Company's business.
Increase the number of Fingerhut Customers using the Company's products
and services. The Company's strategy is to continue to use its proprietary risk,
response and profitability models to solicit Fingerhut Customers for credit
cards, and to focus its cross-selling activities in order to increase the volume
of fee-based services and extended service plans purchased by these customers.
Cross-sell multiple products and services to each customer. The Company
intends to maximize the profitability of each customer relationship by
cross-selling additional products, thereby leveraging its account acquisition
costs and infrastructure. Currently the Company focuses its cross-selling
efforts on selling fee-based services to its credit card customers and customers
of third parties.
Access additional customers by establishing relationships with third
parties. The Company will seek to access additional customers for the Company's
products and services by establishing relationships with third parties.
Diversify product offerings to our customers. The Company intends to
segment markets to expand the success of our existing credit and fee-based
products. To do so, the Company plans to maximize our information advantage and
analyze data to determine the needs of our customers, then develop, test and
effectively introduce the right products to the right people.
Spin Off
During the third quarter of 1998, FCI received formal written approval
from the Internal Revenue Service to complete the tax-free "Spin Off" of FCI's
remaining 83% interest in the Company. The FCI Board of Directors approved the
Spin Off and completed the distribution of Metris shares on September 25, 1998
to FCI shareholders.
The Company believes that it will be able to pursue expansion of its
business and operations without certain limitations that existed as a result of
FCI's ownership of the Company, including limitations on the Company's ability
to issue additional common equity. As a result of the Spin Off, the Company
believes that it will be able to more effectively develop relationships with
retailers other than Fingerhut with respect to its extended service plans
because the Company will no longer be viewed as affiliated with a competitor of
such retailers. In addition, on March 12, 1999, the Company's shareholders
approved an amendment to the Company's Amended and Restated Certificate of
Incorporation ("The Certificate of Incorporation") to eliminate the detailed
restrictions concerning the business activities in which the Company is
permitted to engage. These restrictions were originally adopted to address
certain potential conflicts of interest between FCI and the Company.
Each of the agreements between the Company and Fingerhut or FCI, other
than the tax sharing agreement, remain in effect after the Spin Off. Although
the administrative services agreement remains in effect, it is expected that the
only continuing administrative services to be provided by FCI to the Company
will be information systems, and that these services will continue to be
provided for no longer than 18 months following the Spin Off.
Each of the agreements between the Company and Fingerhut or FCI may
terminate early due to a Change of Control of the Company. The Spin Off itself
did not constitute a Change of Control. However, now that FCI does not own the
stock of the Company, it is possible for a Change of Control to occur, thus
causing early terminations of these agreements.
Specifically, the Company has a contract with Fingerhut to use the
information in the Fingerhut database for marketing its financial services
products, including general purpose credit cards. This contract expires October
2003 and is renewable thereafter upon mutual agreement between Fingerhut and the
Company unless there has been a change in control of the Company. A change of
control (the "Change of Control") shall be deemed to have occurred if (a) any
person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act
of 1934, as in effect), other than FCI, shall own beneficially or of record,
shares representing more than 25% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Company, (b) a
majority of the seats (other than vacant seats) on the Board of Directors of the
Company shall at anytime be occupied by persons who were neither (i) nominated
by FCI, or by the Board of Directors of the Company nor (ii) appointed by
directors so nominated, or (c) any person or group other than FCI shall
otherwise directly or indirectly have the power to exercise a controlling
influence over management or policies of the Company. However, after the Spin
Off, the Company cannot make any predictions as to whether a change in control
might occur.
On November 13, 1998, the Company entered into agreements with
affiliates of the Thomas H. Lee Company (the "Lee Company") to invest $300
million in the Company. The terms of the transaction provided that the Lee
Company investment would convert into 0.8 million shares of Series C Perpetual
Convertible Preferred Stock (the "Series C Preferred") upon shareholder approval
and receipt of notice that there was no regulatory objection to the transaction.
The Company determined that this conversion might result in a "Change of
Control" as defined in certain agreements between the Company and Fingerhut,
which would permit Fingerhut to terminate any or all of the agreements.
Therefore, on December 8, 1998, the Company obtained an agreement (the "Waiver
Agreement") from Fingerhut to waive its right to terminate the agreements if a
Change of Control occurred as a result of the conversion.
Pursuant to the Waiver Agreement, the Company and Fingerhut amended
certain of their other agreements. The most significant change occurred in the
database access agreement. The Company's exclusive license to use Fingerhut's
customer database to market financial service products will become non-exclusive
after October 31, 2001.
On March 12, 1999, the Company's shareholders approved the conversion
of the Lee Company investment into the Series C Preferred. If the Company
receives notice that there is no regulatory objection to the transaction, the
conversion will occur and the Lee Company will own approximately 30% of the
Company on a diluted basis.
Following the Spin Off, no individual holds titles of officer or
director at both FCI and the Company, except for Theodore Deikel, who is
Chairman of the Board and Chief Executive Officer of FCI and Non-Executive
Chairman of the Board of the Company.
Business Lines
The Company operates primarily through two businesses: consumer credit
products and fee-based services.
Consumer credit products
Products. The Company's consumer credit products are primarily
unsecured credit cards, including the Direct Merchants Bank MasterCard(R) and
Visa(R). In the future, the Company may offer co-branded credit cards and may
also offer other consumer credit products either directly or through alliances
with other companies. At December 31, 1998, the Company had approximately 3.0
million credit card accounts with over $5.3 billion in managed credit card
loans. Fingerhut Customers represented approximately 35% of the accounts and
managed loans. According to the Nilson Report, at December 31, 1998, the Company
was the 10th largest MasterCard issuer in the United States based on the number
of cards issued, and the 14th largest credit card issuer in the United States
based on managed credit card loan balances.
The Fingerhut Database. One of the Company's primary sources of names
to solicit for credit card offers is a database maintained by Fingerhut, a
wholly owned subsidiary of FCI. Fingerhut is a database marketing firm that
sells a broad range of products and services via catalogs, telemarketing,
television, and other media. Substantially all of Fingerhut's sales are made
using closed-end and revolving credit card loans. As customers make payments and
order new products, Fingerhut enters a variety of payment, behavioral, and other
data into its database (the "Fingerhut Database"). Fingerhut uses this database,
along with sophisticated and highly automated proprietary modeling techniques,
to evaluate each customer's creditworthiness. The Fingerhut Database contains
information on more than 31 million individuals. This database contains up to
3,500 potential data items in a customer record, including names, addresses,
behavioral characteristics, general demographic information and other
information provided by the customer. Fingerhut uses information in the
Fingerhut Database, along with sophisticated proprietary credit scoring models,
to produce its proprietary credit scores (the "Fingerhut Scores") for Fingerhut
Customers. The Fingerhut Database also includes Fingerhut's Suppress File, which
contains information on individuals about whom it has information relating to
indicators of unacceptably high risk. Fingerhut periodically updates the
information in the Fingerhut Database. Fingerhut does not report its credit
information to the credit bureaus, which means this information is not publicly
available.
Credit Scoring. The Company uses the Fingerhut Database to identify
potential customers. Fingerhut uses the information in the Fingerhut Database,
along with its proprietary credit scoring models to create the Fingerhut Score.
The Company also acquires credit bureau information, including risk scores
provided by Fair, Isaac & Company ("FICO scores"), for all Fingerhut Customers.
For those Fingerhut Customers who have FICO scores, the Company uses the
Fingerhut Score to further segment Fingerhut Customers into narrower ranges
within each FICO score subsegment, allowing the Company to better evaluate
credit risk and to tailor its risk-based pricing accordingly. Additionally, the
Fingerhut Score is used to target individuals who have no credit bureau
information, and consequently no FICO scores, allowing the Company to target
Fingerhut Customers who would not typically be solicited by other credit card
issuers. The Fingerhut Score has been effective in enhancing the Company's
ability to select which Fingerhut customers to solicit and in rank ordering
Fingerhut customers according to their likelihood of delinquency.
The Company uses internally and externally developed proprietary models
in enhancing its evaluation of External Prospects. These models help segment
External Prospects into narrower ranges within each FICO Score subsegment,
allowing the Company to better evaluate individual credit risk and to tailor its
risk-based pricing accordingly. The Company also uses this segmentation along
with the Suppress File to exclude certain individuals from its marketing
solicitations.
The Company generates External Prospects from lists obtained from the
major credit bureaus based on criteria established by the Company. The Company
uses proprietary models and additional analysis in conjunction with files
obtained from the credit bureaus to further segment External Prospects based
upon their likelihood of delinquency. The Company also eliminates any names
which are included in the Fingerhut Suppress File. The Company currently does
not solicit External Prospects who do not have FICO Scores.
The Company believes that the proprietary models in conjunction with
additional analysis is effective in further segmenting and evaluating risk
within FICO score bands. However, for certain campaigns the models and
additional analysis were less effective in doing so than in other campaigns. The
Company has and continues to use the results of its analysis of External
Prospects to adjust the proprietary models to determine the pricing for various
segments and to exclude certain segments from subsequent direct marketing
efforts. While the Company believes that the proprietary models and additional
analysis are valuable tools in analyzing relative risks, it is not possible to
accurately predict which consumers will default or the overall level of
defaults, and the Company cannot assure you as to the levels of actual
delinquencies or losses.
The Company believes that both the Fingerhut Score and the proprietary
models, in conjunction with the Fingerhut Suppress File, give it a competitive
advantage in evaluating the credit risk of moderate income consumers. Management
believes that due to the amount and type of credit information available in the
Fingerhut Database, the Fingerhut Score is currently more effective than the
proprietary models in allowing the Company to evaluate the credit risk of
prospects having lower FICO Scores. Therefore, the Company has been willing to
solicit consumers who have lower FICO Scores if they also have an appropriate
Fingerhut Score. As a result, the Company's Fingerhut-sourced credit card
customers generally have lower initial FICO Scores than do External Prospects.
After every marketing campaign, the Company monitors the performance of the
proprietary models and continually re-evaluates the effectiveness of these
models in segmenting credit risk, resulting in further refinements to its
selection criteria for External Prospects. Over time, the Company believes that
it will capture additional credit information on the behavioral characteristics
of External Prospects which will allow it to further increase the effectiveness
of the proprietary models.
Solicitation. Prospects for solicitation include both Fingerhut
Customers and External Prospects. Prospects are contacted on a nationwide basis
primarily through pre-screened direct mail and telephone solicitations. The
Company receives responses to its prescreened solicitations, performs fraud
screening, verifies name and address changes, and obtains any information which
may be missing from the application. Applications are sent to third party data
entry providers, which key the application information and process the
applications based on the criteria provided by the Company. The Company then
makes the credit decisions and approves, denies or begins exception processing.
The Company processes exceptions for, among other things, derogatory credit
bureau information and fraud warnings. Exception applications are processed
manually by credit analysts based on policies approved by the Company's Credit
Committee.
Pricing. Through risk-based pricing, the Company prices credit card
offers based upon a prospect's risk profile prior to solicitation. The Company
evaluates a prospect to determine credit needs, credit risk, and existing credit
availability and then develops a customized offer that includes the most
appropriate product, brand, pricing and credit line. The Company currently
offers over 100 different pricing structures on its credit card products, with
annual fees ranging from $0 to $75 and annual interest rates up to 26.9%. After
credit card accounts are opened, the Company periodically monitors customers'
internal and external credit performance and periodically recalculates behavior,
revenue, attrition and bankruptcy predictors. As customers evolve through the
credit life cycle and are regularly rescored, the lending relationship can
evolve to include more competitive (or more restrictive) pricing and product
configurations.
<PAGE>
Age of Portfolio. The following table sets forth, as of December 31,
1998, the number of total accounts and amount of outstanding loans based upon
the age of the managed accounts.
<TABLE>
Percentage of
Number Percentage Loans Loans
of Accounts of Accounts Outstanding Outstanding
Age Since Origination (Dollars in thousands)
<S> <C> <C> <C> <C>
0-6 Months ................... 411,051 13.8% $ 477,384 9.0%
7-12 Months .................. 372,549 12.5% 650,758 12.2%
13-18 Months ................. 389,385 13.1% 719,050 13.5%
19-24 Months ................. 350,258 11.8% 650,379 12.2%
25-36 Months ................. 668,870 22.5% 1,323,253 24.9%
37+ Months ................... 779,756 26.3% 1,494,218 28.2%
------- ---- --------- ----
Total ................... 2,971,869 100.0% $5,315,042 100.0%
========= ===== ========== =====
</TABLE>
Geographic Distribution. The Company solicits credit card customers on
a national basis and, therefore, maintains a geographically diversified
portfolio. The following table shows the distribution of total accounts and
amount of outstanding loans by state, as of December 31, 1998.
<TABLE>
Percentage of
Number Percentage Loans Loans
of Accounts of Accounts Outstanding Outstanding
State (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
California ................... 341,314 11.5% $ 663,726 12.5%
Texas ........................ 296,171 10.0% 537,479 10.1%
Florida ...................... 214,436 7.2% 401,222 7.5%
New York ..................... 208,643 7.0% 387,829 7.3%
Ohio ......................... 128,214 4.3% 224,256 4.2%
Illinois ..................... 104,422 3.5% 189,552 3.6%
Pennsylvania ................. 92,214 3.1% 160,069 3.0%
Michigan ..................... 79,947 2.7% 144,486 2.7%
Missouri ..................... 78,150 2.6% 135,589 2.6%
Georgia ...................... 76,770 2.6% 139,817 2.6%
Virginia ..................... 75,635 2.5% 135,860 2.6%
All others (1) 1,275,953 43.0% 2,195,157 41.3%
--------- ---- --------- ----
Total ................... 2,971,869 100.0% $5,315,042 100.0%
========= ===== ========== =====
</TABLE>
(1) No other state accounts for more than 2.5% of loans outstanding.
Credit Lines. Once an account is approved, an initial credit line is
established based on the individual's risk profile using automated screening and
credit scoring techniques. This process results in a portfolio (excluding
portfolio acquisitions) with average credit lines that are below the industry
average due to the higher average risk inherent in the Company's target market.
The Company may elect, at any time and without prior notice to the cardholder,
to preclude or restrict further credit card use by the cardholders, usually as a
result of poor payment performance or the Company's concern over the
creditworthiness of the cardholders. Credit lines are managed based on the
results of the behavioral scoring analysis in accordance with criteria
established by the Company. The
<PAGE>
following table sets forth information with respect to account balance and
credit limit ranges of the Company's managed portfolio, as of December 31, 1998.
<TABLE>
Credit Limit Range Number Percentage Loans Percentage of
of Accounts of Accounts Outstanding Loans Outstanding
(Dollars in thousands)
<S> <C> <C> <C> <C>
$1,000 or Less......... 279,095 9.4% $ 164,167 3.1%
$1,001-$2,000 ......... 647,278 21.8% 817,808 15.4%
$2,001-$3,500 ......... 719,134 24.2% 1,308,876 24.6%
$3,501-$5,000 ......... 577,659 19.4% 1,295,052 24.4%
Over $5,000 ........... 748,703 25.2% 1,729,139 32.5%
------- ---- --------- ----
Total ........... 2,971,869 100.0% $5,315,042 100.0%
========= ===== ========== =====
</TABLE>
<TABLE>
Account Balance Range Number Percentage Loans Percentage of
of Accounts of Accounts Outstanding Loans Outstanding
(Dollars in thousands)
<S> <C> <C> <C> <C>
Credit Balance ....... 44,720 1.5% $ (4,743) (.1%)
No Balance ........... 471,135 15.9%
$1,000 or Less ....... 707,600 23.8% 321,546 6.0%
$1,001-$2,000 ........ 647,906 21.8% 976,959 18.4%
$2,001-$3,500 ........ 627,816 21.1% 1,656,469 31.2%
Over $3,500 .......... 472,692 15.9% 2,364,811 44.5%
------- ---- --------- ----
Total ........... 2,971,869 100.0% $ 5,315,042 100.0%
========= ===== =========== =====
</TABLE>
The Adaptive Control System. The Company uses First Data Resources
Inc.'s ("FDR") adaptive control system (the "Adaptive Control System"), which
uses statistical models and basic account financial information to automatically
and regularly assign credit line increases and decreases to individual
customers, as well as to determine the systematic collection steps to be taken
at the various stages of delinquency. The Adaptive Control System manages the
authorization of each transaction; in addition, it implements the collections
strategies determined by the Company to be used for non-delinquent accounts that
have balances above their assigned credit line (referred to as "overlimit"
accounts).
Delinquency, Collections and Charge-offs. The Company considers an
account delinquent if a payment due is not received by the Company within 25
days from the closing date of the statement. Collection activities are
determined by the Adaptive Control System, which continually monitors all
delinquent accounts. The collections function is handled internally. Accounts
that become 60 days contractually delinquent are closed, but not necessarily
charged off. Accounts are charged off and taken as a loss either within 60 days
after formal notification of bankruptcy or at the end of the month during which
they become contractually 180 days past due. Accounts identified as fraud losses
are immediately reserved for and charged off no later than 90 days after the
last activity. Charged-off accounts are referred to the Company's recovery unit
for coordination of collection efforts to recover the amounts owed. When
appropriate, accounts are placed with external collection agencies or attorneys.
Servicing, Billing and Payment. The Company has established a
relationship with FDR for cardholder processing services. FDR is a subsidiary of
First Data Corporation, a provider of information processing and related
services including cardholder processing (services for financial institutions
which issue credit cards to cardholders), and merchant processing (services for
financial institutions which make arrangements with merchants for the acceptance
of credit cards as methods of payment). FDR provides data processing, credit
card reissuance, monthly statements, some inbound customer service telephone
calls and interbank settlement for the Company. Effective February 1998, the
Company extended its processing services agreement with FDR for an additional
six years, expiring 2006. Applications processing and back office support for
mail inquiries and fraud management are handled internally by the Company. In
addition the Company handles in-bound customer service telephone calls for a
part of its customer base.
The Company generally assesses periodic finance charges on an account
if the cardholder has not paid the balance in full from the previous billing
cycle. These finance charges are based upon the average daily balance
outstanding on the account during the monthly billing cycle. Payments by
cardholders to the Company on the accounts are processed by a third party
servicer and applied first to any billed and unpaid fees, next to billed and
unpaid finance charges and then to billed and unpaid transactions in the order
determined by the Company. If a payment in full is not received prior to 25 days
after the statement cycle date (the "Pay by Date"), finance charges are imposed
on all purchases from the date of the transaction to the statement cycle date.
Finance charges are also imposed on each cash advance from the day such advance
is made until the advance is paid in full. The finance charge is applied to the
average daily balance. For most cardholders, if the entire balance on the
account is paid by the due date a finance charge on purchases is not imposed.
The Company assesses an annual fee on some credit card accounts. The
Company may waive the annual membership fees, or a portion thereof, in
connection with the solicitation of new accounts depending on the credit terms
offered, which are determined by the prospect's risk profile prior to
solicitation or when the Company determines a waiver to be appropriate
considering the account's overall profitability. In addition to the annual fee,
the Company charges accounts certain other fees including: (i) a late fee with
respect to any unpaid monthly payment if the Company does not receive the
required minimum monthly payment by the Pay by Date, (ii) a cash advance fee for
each cash advance, (iii) a fee with respect to each check submitted by a
cardholder in payment of an account which is not honored by the cardholder's
bank, and (iv) an overlimit charge if, at any time during the billing cycle, the
total amount owed exceeds the cardholder's credit line by at least $30.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, the Company reserves
the right to change or terminate certain terms, conditions, services and
features of the account (including periodic finance charges, late fees, returned
check charges and any other charges or the minimum payment), subject to the
conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on behalf of
the Company. When an account is established, it is assigned a billing cycle.
Currently, there are 20 billing cycles and each such cycle has a separate
monthly billing date based on the respective business day the cycle represents
in each calendar month. Each month, a statement is sent to all accounts with an
outstanding balance greater than $1. All cardholders with open accounts must
make a minimum monthly payment generally of the greater of $15, 2.5% of the
outstanding balance, the finance charge or the balance of the account if the
balance is less than $15. If the minimum payment is not collected by the Pay by
Date, the account is considered delinquent.
Most merchant transactions by cardholders are authorized online. The
remaining transactions generally are low dollar amounts, typically below $50.
All authorizations are handled through the Adaptive Control System.
Fee-Based Services
The Company sells or offers fee-based services, including (i) debt
waiver protection for unemployment, disability, and death, (ii) membership
programs such as card registration, purchase protection and other club
memberships, and (iii) third-party insurance, directly to its credit card
customers and customers of third parties. The Company currently administers its
extended service plans sold through a third-party retailer, and the customer
pays the retailer directly. In addition, the Company develops customized
targeted mailing lists from information contained in both the Company's and
Fingerhut's databases for use by unaffiliated companies in their own financial
services product solicitation efforts that do not directly compete with those of
the Company. In 1998, the Company consolidated the fee-based services and
extended service plan businesses.
The Company currently markets the following programs:
Debt Waiver. Account Protection Plus(TM) , is a program the Company has
developed that protects customers from interest charges on the Company's credit
cards in the event that they become disabled or unemployed. The customer's
account is "frozen" for six months, with no payments due or interest accruing
during this time. In the event of death, the amount due, up to the credit limit,
is waived and the account is closed. Because this is an internally administered
program, the Company is responsible for all of the program's associated costs.
The Company also offers Account Benefit Plan which forgives the customer's
balance due in the event of death but offers no protection in the event of
disability or unemployment.
Extended Service Plans. The Company administers extended service plans
sold by retailers. Extended service plans provide warranty coverage beyond the
manufacturer's warranty. In general, the extended service plans administered by
the Company provide customers with the right to have their covered purchases
repaired, replaced, or in certain circumstances, the purchase price of the
product refunded, within certain parameters determined by the Company. Within
the warranty industry, extended service plans are available for a wide variety
of products including consumer electronics and appliances, furniture, jewelry,
automotives, and household mechanical systems such as heating, plumbing and
electrical systems. The Company currently administers extended service plans for
consumer electronics, appliances, furniture and jewelry purchased from
third-party retailers.
ServiceEdgeSM is the Company's extended service plan administered by
the Company for consumer electronics and all other electro-mechanical items.
ServiceEdge customers have the right to have their purchases repaired or
replaced in the event of electrical or mechanical failure or defects in
materials and workmanship for coverable events after the manufacturer's warranty
expires.
Quality Furniture Care is the Company's extended service plan program
for furniture. The services provided to Quality Furniture Care customers include
stain cleaning, structural defect or damage repair, or replacement if the
merchandise cannot be repaired.
Quality Jewelry Care(R) is the extended service plan administered by
the Company for jewelry. The services provided to Quality Jewelry Care customers
include repair, soldering, ring sizing, prong re-tipping, and cleaning. The
Company has third-party jewelers perform such services for the Company.
Most of the extended service plans administered by the Company continue
for two years from the date of the product purchase (three to five years in
limited cases). The customer pays the retail company a one-time fee for this
coverage based on the price of the product, the term of coverage and the loss
risk of the product. Customers may also be offered the opportunity to renew
their coverage in one-year extensions, presently up to six years from the date
of purchase, upon payment of an additional fee for each renewal.
Through the end of 1996, claims risk and claims processing for
electro-mechanical items were the responsibility of a third party. At the
beginning of 1997, the Company internalized the claims processing operations
related to extended service plans for electro-mechanical items and has incurred
the resulting claims risk for extended service plans sold on or after January 1,
1997. The Company is responsible for claims risk and claims processing for
furniture and jewelry.
Purchase Protection. During 1997, the Company developed a new
membership program, PurchaseShieldSM, which offers various levels of purchase
protection to its members. Eligible purchases made on members' credit cards are
protected with the following benefits: warranty extension, sale price protection
and product return guarantee. In addition, PurchaseShield offers its members a
household repair rebate that can be used on certain existing in-home
electro-mechanical item repairs. Because this is an internally administered
program, the Company receives all revenues and is responsible for all of the
program's associated costs. The Company currently offers purchase protection to
its credit card customers and credit card customers of third parties.
Card Registration. Card registration protects members from fraudulent
charges if their credit cards are lost or stolen and provides emergency cash and
airline tickets, change of address notification and lost or stolen card
notification, valuable property and document registration, a messaging service
and car rental discounts. The Company currently offers card registration service
under the name Fraud Alert Services(TM) to its credit card customers and
customers of third parties. The Company internalized this program in September
1996 and is responsible for all of its associated costs and revenues. Prior to
September 1996, the Company had an agreement with a third party vendor to offer
card registration services to its credit card customers.
Accidental Death Insurance. The Company earns a fee from a third-party
insurance administrator for the marketing and billing of the third-party's
accidental death insurance program. The Company markets the insurance program to
its credit card customers. Although the Company markets the program, the
third-party insurance company fulfills and underwrites the policies.
Other Membership Clubs. The Company has cooperative marketing
arrangements with several third parties to market the third party's memberships
in clubs that do not compete with the Company's services or clubs. Additionally,
the Company has other arrangements with third parties, which it assumed from
acquired credit card portfolios, that provide it with revenue from ongoing
membership fees billed to the Company's acquired credit card holders.
Tailored List Development. The Company currently works with several
companies to develop targeted mailing lists and earns revenue for each name that
is solicited by these companies from the Company's customer databases. The
Company also earns revenue from the sale of advertising space included in its
monthly billing statements.
Liquidity, Funding and Capital Resources
One of the Company's primary financial goals is to maintain an adequate
level of liquidity through active management of assets and liabilities. Because
the pricing and maturity characteristics of the Company's assets and liabilities
change, liquidity management is a dynamic process, affected by changes in short-
and long-term interest rates. The Company uses a variety of financing sources to
manage liquidity, refunding, rollover and interest rate risks.
The Company finances the growth of its credit card loan portfolio
through cash flow from operations, asset securitization, bank financing,
long-term debt issuance, and equity issuance.
Asset Securitization
A significant source of funding for the Company is the securitization
of credit card loans. Securitization involves packaging and selling both current
and future receivable balances of pools of credit card card accounts while
retaining the servicing of such receivables. The Company's securitizations are
treated as sales under generally accepted accounting principles. As a result,
the securitized receivables are removed from the Company's balance sheet and
treated as managed loans.
The Company primarily securitizes receivables by selling such
receivables either to its proprietary trust, the Metris Master Trust, or to
bank-sponsored multi-seller conduits which purchase such assets from a variety
of issuers.
The Metris Master Trust. The Metris Master Trust (the "Trust") was
formed in May 1995 pursuant to a pooling and servicing agreement, which was
amended on July 30, 1998. Metris Receivables, Inc., a subsidiary of the Company,
transfers receivables in designated accounts to the Trust in exchange for
proceeds and an interest in the Trust. Metris Receivables, Inc. may then
exchange portions of this interest for one or more series of securities which it
may then sell publicly or privately to third-party investors. The securities
each represent undivided interests in all of the receivables in the Trust, and
may be split into separate classes which have different terms. The different
classes of an individual series are structured to obtain specific credit
ratings. As of December 31, 1998, seven series of securities have been issued by
the Trust. The Company currently retains the most subordinated class of
securities in each series and sells all the other classes.
Generally, each series involves an initial reinvestment period (a
"revolving period") in which principal payments on receivables allocated to such
series are returned to Metris Receivables, Inc. and reinvested in new
receivables arising in the accounts. After the revolving period ends, principal
payments allocated to the series are then used to repay the investors. This
period is referred to as the amortization period. Currently, the Trust has one
series which is in a controlled amortization period. The scheduled amortization
period is set in the agreements governing each series. However, all the series
set forth certain events by which amortization can be accelerated (early
amortization). Usually, this would occur if the portfolio collections less
charge-offs for bad debt, financing costs and operational costs drop below a
minimum amount. As new receivables in designated accounts cannot be funded while
a series is in amortization, early amortization would accelerate the Company's
funding requirements for new receivables in the accounts. The Company does not
have any series that are in early amortization.
Each month, each series is allocated its share of finance charge
collections which is used to pay investors interest on their securities, to
reimburse them for their share of losses due to charge-offs and to pay their
share of servicing fees. Amounts remaining may be deposited in cash accounts of
the Trust as additional protection for future losses. Once each of these
obligations is fully met, any remaining finance charge collections, if any, are
returned to the Company.
Bank-Sponsored Conduit Programs. The Company also maintains
flexibility in its current securitization program by negotiating with
bank-sponsored conduits (the "Conduits"). These Conduits purchase an interest in
receivables arising in designated accounts. These transactions also feature a
revolving period in which principal payments on receivables allocated to the
Conduits are returned to the Company and reinvested in new receivables. These
agreements also have early amortization triggers. Finance charge collections are
used to pay certain obligations, including servicing fees, interest on the
principal amount of the Conduit's investment in the applicable receivables, and
recouping charge-offs. After such allocation, remaining finance charge
collections, if any, are returned to the Company.
At December 31, 1998 and 1997, the Company had received cumulative net
proceeds of approximately $4.6 billion and $3.1 billion, respectively from sales
of credit card loans to the Trust and Conduits. Cash generated from these
transactions was used to reduce short-term borrowings and to fund credit card
loan portfolio growth. The Company relies upon the securitization of its credit
card loans to fund portfolio growth and, to date, has completed securitization
transactions on terms that it believes are satisfactory. The Company's ability
to securitize its assets depends on favorable investor demand, legal, regulatory
and tax conditions for securitization transactions, as well as continued
favorable performance of the Company's securitized portfolio of receivables. Any
adverse change could force the Company to rely on other potentially more
expensive funding sources and, in the worst case scenario, could create
liquidity risks if other funding is unavailable.
During 1998, as part of a scheduled amortization of previously
securitized loans, the Company's owned loan portfolio, increased by $34.6
million. The following table presents the amounts, at December 31, 1998 of
investor principal in securitized receivables scheduled to amortize in future
years. The amortization amounts are based upon estimated amortization periods
which are subject to change based on Trust and Conduit performance.
(Dollars in thousands)
1999..................................... $1,847,538
2000..................................... 608,333
2001..................................... 2,102,272
Thereafter............................... 0
----------
Total Securitized Loans at December 31, 1998 $4,558,143
===========
The Company's lower independent credit ratings, due to the Spin Off,
reduced the advance rate on a portion of the sale of receivables to the Trust.
This required approximately $40 million in additional funding by the Company to
finance the unsold loans.
Bank Financing
On June 30, 1998, the Company executed a new $200 million, three-year
revolving credit facility and a $100 million five-year term loan (the "New
Credit Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit Facility, which is not guaranteed by FCI, replaced the Company's $300
million, five-year revolving credit facility (the "Old Credit Facility"). The
New Credit Facility is secured by receivables and subsidiary stock and
guaranteed by a Company subsidiary. Financial covenants in the New Credit
Facility include, but are not limited to, requirements concerning minimum net
worth, minimum tangible net worth to net managed receivables and tangible net
worth plus reserves to delinquent receivables. The minimum tangible net worth to
net managed receivables ratio requirement increased to 5.0% from 4.0% on
December 24, 1998. At December 31, 1998, the Company was in compliance with all
financial covenants under this agreement. At December 31, 1998, the Company had
outstanding borrowings of $110 million under the New Credit Facility. At
December 31, 1997, the Company had outstanding borrowings of $144 million under
the Old Credit Facility. As a result of the Spin Off and the removal of the FCI
guarantee, the Company is no longer able to borrow at an investment grade rate.
The interest rate under the New Credit Facility is higher than the interest rate
under the Old Credit Facility due to the Company's lower independent credit
rating.
Long-Term Debt and Equity Issuance
In addition to asset securitizations and bank funding, the Company uses
long term debt and equity to fund continued credit card growth. While the
Company planned to issue common equity shares in a public offering after the
Spin Off during the fourth quarter of 1998, volatility in the stock market and
in the Company's stock price caused the Company to seek alternatives to public
issuance through either private issuance of equity or public or private issuance
of equity-like securities. On November 13, 1998, after a review of several
alternatives and discussions with several advisors and investors, the Company
entered into agreements with affiliates of the Thomas H. Lee Company, (the "Lee
Company") to purchase $200 million in Series B Perpetual Preferred Stock (the
"Series B Preferred") and $100 million in 12% Senior Notes due 2006 (the "Lee
Senior Notes"). The Company also issued the Lee Company 3.75 million ten-year
warrants to purchase shares of the Company's common stock for $30, subject to
adjustment in certain circumstances. The Series B Preferred had a 12.5% dividend
payable in additional shares of Series B Preferred for ten years, then
converting to payable in cash. The proceeds from the issuance of the Series B
Preferred and the Lee Senior Notes were used to fund the PNC portfolio
acquisition and general corporate purposes.
On March 12, 1999, shareholders' approved conversion of the Series B
Preferred and Lee Senior Notes into Series C Perpetual Convertible Preferred
stock (the "Series C Preferred"). If notice is received that there is no
regulatory objection to the conversion to the Series C Preferred, the Series B
Preferred and the Lee Senior Notes will be converted into 0.8 million shares of
Series C Preferred at a conversion price of $37.25 and the warrants will be
canceled. The Series C Preferred has a 9% dividend payable in additional shares
of Series C Preferred and will also receive any dividends paid on the Company's
Common Stock on an as converted basis. The cumulative payment-in-kind dividends
are effectively guaranteed for a seven-year period. Assuming conversion of the
Series C Preferred into common stock in the first quarter of 1999, the Lee
Company would own approximately 30% of the Company on a diluted basis.
Converting to the Series C Preferred will cause a one-time, non-cash
accounting adjustment for retiring the Series B Preferred and the Lee Senior
Notes. The excess of the fair value of the Series C Preferred over the carrying
value of the Series B Preferred and the Lee Senior Notes at the time of the
conversion must be allocated to the Lee Senior Notes and the Series B Preferred
based upon their initial fair values. To arrive at net income available to
common stockholders in the calculation of earnings per share, the amount
allocated to the Lee Senior Notes would be recognized as an extraordinary loss
from the early extinguishment of debt and the amount allocated to the Series B
Preferred would be recognized as a reduction of net income available to common
stockholders. The extraordinary loss attributable to the Lee Senior Notes will
not be recorded net of taxes. These adjustments will not have an impact on total
stockholders' equity. At the time of the printing of this annual report on Form
10-K, the fair value of the Series C Preferred was not determined.
In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 pursuant to an exemption under the Securities Act of
1933, as amended. The net proceeds were used to reduce borrowings under the Old
Credit Facility. In January 1998, the Company commenced an exchange offer for
the Senior Notes pursuant to a registration statement. The terms of the new
Senior Notes are identical in all material respects to the original private
issue. The Senior Notes are unconditionally guaranteed on a senior basis,
jointly and severally, by Metris Direct, Inc., a subsidiary of Metris Companies
Inc., and all future subsidiaries of the Company that guarantee any of the
Company's indebtedness, including the New Credit Facility. The guarantee is an
unsecured obligation of Metris Direct, Inc. and ranks pari passu with all
existing and future unsubordinated indebtedness.
<PAGE>
General
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, Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
the Company or its subsidiaries. Additionally, Direct Merchants Bank is limited
in its ability to declare dividends to the Company. Therefore, Direct Merchants
Bank's investments in federal funds sold are generally not available for the
general liquidity needs of the Company or its subsidiaries. These restrictions
were not material to the operations of the Company at December 31, 1998 and
1997.
As the portfolio of credit card loans grows, or as the Trust and
Conduit certificates amortize or are otherwise paid, the Company's funding needs
will increase accordingly. The Company believes that its cash flow from
operations, asset securitization programs, together with the New Credit
Facility, long term debt issuance and equity issuance, will provide adequate
liquidity to the Company for meeting anticipated cash needs, although no
assurance can be given to that effect.
Competition
As a marketer of consumer credit products, the Company competes with
numerous providers of financial services, many of which have greater resources
than the Company. In particular, the Company's credit card business competes
with national, regional and local bank card issuers as well as other general
purpose credit and debit card issuers. In general, customers are attracted to
credit card issuers largely on the basis of price, credit limit and other
product features; as a result, customer loyalty is often limited. However, the
Company believes that its strategy of focusing on an underserved market and its
exclusive access to information from the Fingerhut Database will allow it to
compete effectively in the market for moderate income cardholders to market
financial services products.
There are numerous competitors in the fee-based services market,
including insurance companies, financial services institutions and other
membership-based or enhancement consumer services providers, many of which are
larger, better capitalized and more experienced than the Company. However, the
Company believes that its agreements with FCI, including its exclusive right to
use the Fingerhut Database to market financial services products and its right
to be the exclusive provider of extended service plans to Fingerhut customers,
will allow it to compete effectively in this market. As the Company continues to
expand its business to market extended service plans to the customers of
third-party retailers, it will also compete with manufacturers, financial
institutions, insurance companies and a number of independent administrators,
many of which have greater operating experience and financial resources than the
Company.
Regulation
The Company and Direct Merchants Bank
Direct Merchants Bank is a limited purpose credit card bank chartered
as a national banking association. It is a member of the Federal Reserve System.
Its deposits are insured by the Bank Insurance Fund which is administered by the
Federal Deposit Insurance Corporation ("FDIC") and it is subject to
comprehensive regulation and periodic examination by the Office of the
Comptroller of the Currency ("OCC"), its primary regulator. It is also subject
to regulation by the Board of Governors of the Federal Reserve System and the
FDIC, as back-up regulators. Direct Merchants Bank is not a "bank" as defined
under the Bank Holding Company Act of 1956, as amended (the "BHCA") because it
(i) engages only in credit card operations, (ii) does not accept demand deposits
or deposits that the depositor may withdraw by check or similar means for
payment to third parties or others, (iii) does not accept any savings or time
deposit of less than $100,000, except for deposits pledged as collateral for
extensions of credit, (iv) maintains only one office that accepts deposits and
(v) does not engage in the business of making commercial loans. As a result, the
Company is not a bank holding company under the BHCA. If Direct Merchants Bank
failed to meet the credit card bank criteria described above, Direct Merchants
Bank's status as an insured bank would make the Company subject to the
provisions of the BHCA. The Company believes that becoming a bank holding
company would limit the Company's ability to pursue future opportunities.
Exportation of Interest Rates and Fees
Under current judicial interpretations of federal law, national banks
such as Direct Merchants Bank may charge interest at the rate allowed by the
laws of the state where the bank is located and may "export" those interest
rates on loans to borrowers in other states, without regard to the laws of such
other states.
In 1996, the Supreme Court of the United States held that national
banks may also impose late payment fees allowed by the laws of the state where
the national bank is located on borrowers in other states, without regard to the
laws of such other states. The Supreme Court based its opinion largely on its
deference to a regulation adopted by the OCC that includes certain fees,
including late fees, overlimit fees, annual fees, cash advance fees and
membership fees, within the term "interest" under the provision of the National
Bank Act that has been interpreted to permit national banks to export interest
rates. As a result, national banks such as Direct Merchants Bank may export such
fees.
Dividends and Transfers of Funds
There are various federal law limitations on the extent to which Direct
Merchants Bank can finance or otherwise supply funds to the Company and its
affiliates through dividends, loans or otherwise. These limitations include:
minimum regulatory capital requirements; restrictions concerning the payment of
dividends out of net profits or surplus; and Sections 23A and 23B of the Federal
Reserve Act governing transactions between a bank and its affiliates. In
general, Federal law prohibits a national bank such as Direct Merchants Bank
from making dividend distributions on common stock if the dividend would exceed
currently available undistributed profits. In addition, Direct Merchants Bank
must get OCC prior approval for a dividend, if such distribution would exceed
current year net income combined with retained earnings from the prior two
years. Direct Merchants Bank cannot make a dividend if the distribution would
cause the bank to fail to meet applicable capital adequacy standards. Finally,
although not a regulatory restriction, the terms of certain debt agreements
prohibit the payment of dividends in certain circumstances.
Comptroller of the Currency
Capital Adequacy. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires the banking agencies to prescribe certain
non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation. FDICIA also provides
that regulatory action may be taken against a bank that does not meet such
standards.
The OCC has adopted regulations that define the five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leveraged capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6 percent, a total capital ratio of at
least 10 percent and a leverage ratio of at least 5 percent and not be subject
to a capital directive order. An "adequately capitalized" institution must have
a Tier 1 capital ratio of at least 4 percent, a total capital ratio of at least
8 percent and a leverage ratio of at least 4 percent (3 percent in some cases).
Under these guidelines, Direct Merchants Bank is considered well capitalized.
The OCC's risk-based capital standards explicitly consider a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates when evaluating a bank's capital adequacy. Interest rate risk is
the exposure of a bank's current and future earnings and equity capital arising
from adverse movements in interest rates. The evaluation will be made as a part
of the institution's regular safety and soundness examination.
FDICIA. FDICIA requires the FDIC to implement a system of risk-based
premiums for deposit insurance pursuant to which the premiums paid by a
depository institution will be based on the probability that the FDIC will incur
a loss in respect of such institution. The FDIC has adopted a system that
imposes insurance premiums based upon a matrix that takes into account a bank's
capital level and supervisory rating. Given Direct Merchants Bank's capital
level and supervisory rating, Direct Merchants Bank pays the lowest rate on
deposit insurance premiums.
Under FDICIA, only "well capitalized" and "adequately capitalized"
banks may accept brokered deposits. "Adequately capitalized" banks, however,
must first obtain a waiver from the FDIC before accepting brokered deposits and
such deposits may not pay rates that significantly exceed the rates paid on
deposits of similar size and maturity accepted from the bank's normal market
area or the national rate on deposits of comparable maturity, as determined by
the FDIC, for deposits from outside the bank's normal market area. Direct
Merchants Bank may accept brokered deposits as part of its funding; however, it
does not presently rely on brokered deposits to fund its operations.
Lending Activities
Direct Merchants Bank's activities as a credit card lender are also
subject to regulation under various federal consumer protection laws including
the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Community Reinvestment Act (the "CRA") and the Soldiers' and
Sailors' Civil Relief Act. Regulators are authorized to impose penalties for
violations of these statutes and, in certain cases, to order Direct Merchants
Bank to pay restitution to injured cardholders. Cardholders may also bring
actions for certain alleged violations of such regulations. Federal and state
bankruptcy and debtor relief laws also affect Direct Merchants Bank's ability to
collect outstanding balances owed by cardholders who seek relief under these
statutes.
The OCC's CRA regulations subject limited purpose banks, including
Direct Merchants Bank, to a "community development" test for evaluating required
CRA compliance. The community development performance of a limited purpose bank
is evaluated pursuant to various criteria involving community development
lending, qualified investments and community development services.
Legislation
From time to time legislation has been proposed in Congress to limit
interest rates and fees that could be charged on credit card accounts or
otherwise restrict practices of credit card issuers.
If this or similar legislation is proposed and adopted, the Company's
ability to collect on account balances or maintain previous levels of finance
charges and other fees could be adversely affected. Additionally, changes have
been proposed to the federal bankruptcy laws. Changes in federal bankruptcy laws
and any changes to state debtor relief and collection laws could adversely
affect the Company if such changes result in, among other things, accounts being
charged off as uncollectible and additional administrative expenses. It is
unclear at this time whether and in what form any legislation will be adopted
or, if adopted, what its impact on the Company would be. Congress may in the
future consider other legislation that would materially affect the credit card
and related fee-based services industries.
Consumer and Debtor Protection Laws
Various federal and state consumer protection laws limit the Company's
ability to offer and extend credit. In addition, the U.S. Congress and the
states may decide to regulate further the credit card industry by enacting laws
or amendments to existing laws to reduce finance charges or other fees or
charges applicable to credit card and other consumer revolving loan accounts.
These laws may adversely affect the Company's ability to collect on account
balances or maintain established levels of periodic rate finance charges and
other fees and charges with respect to the accounts. Similarly, Congress and the
states may decide to regulate further the Company's fee-based services.
Certain existing laws and regulations permit class action lawsuits on
behalf of customers in the event of violations, and such class lawsuits can be
very expensive to defend, even without any violation. The Company is a party to
various legal proceedings resulting from its ordinary business activities. One
proceeding, filed in Alabama in April 1998, seeks certification as a class. The
Company intends to defend this action vigorously, but if this action, or any
other class action, is determined adversely, such decision could have a
significant adverse economic impact on the Company.
Investment in the Company and Direct Merchants Bank
Certain acquisitions of capital stock may be subject to regulatory
approval or notice under federal law. Investors are responsible for insuring
that they do not directly or indirectly acquire shares of capital stock of the
Company in excess of the amount which can be acquired without regulatory
approval.
Interstate Taxation
Several states have passed legislation which attempts to tax the income
from interstate financial activities, including credit cards, derived from
accounts held by local state residents. The Company believes that this
legislation will not materially affect it. The Company's belief is based upon
the following: current interpretations of the enforceability of legislation;
prior court decisions; and the volume of business in states that have passed
legislation.
Fair Credit Reporting Act
The Fair Credit Reporting Act ("FCRA") regulates "consumer reporting
agencies." Under the FCRA, an entity risks becoming a consumer reporting agency
if it furnishes "consumer reports" to third parties. A "consumer report" is a
communication of information which bears on a consumer's creditworthiness,
credit capacity, credit standing or certain other characteristics and which is
collected or used or expected to be used to determine the consumer's eligibility
for credit, insurance, employment or certain other purposes. The FCRA explicitly
excludes from the definition of "consumer report" a report containing
information solely as to transactions or experiences between the consumer and
the entity making the report. An entity may share consumer reports with any of
its affiliates so long as that entity provides consumers with an appropriate
disclosure and an opportunity to opt out of such "affiliate sharing".
It is the objective of the Company to conduct its operations in a
manner which would fall outside the definition of "consumer reporting agency"
under the FCRA. If the Company were to become a consumer reporting agency,
however, it would be subject to a number of complex and burdensome regulatory
requirements and restrictions. Such restrictions could have a significant
adverse economic impact on the Company. The Company's agreements with Fingerhut
provide that neither will provide information that causes either to become a
consumer reporting agency. Failure to comply with this limitation could result
in termination of the agreements and have an adverse impact on the Company.
Employees
As of December 31, 1998, the Company had over 1,900 employees located
in Arizona, Illinois, Maryland, Minnesota, and Oklahoma. None of the Company's
employees are represented by a collective bargaining agreement. The Company
considers its relations with its employees to be good.
Trademarks and Tradenames
MCI and its subsidiaries have registered and continue to register, when
appropriate, various trademarks, tradenames and service marks used in connection
with its business and for private label marketing of certain of its products.
The Company considers these trademarks and service marks to be readily
identifiable with, and valuable to, its business.
Executive Officers of the Registrant
The following table sets forth certain information concerning the
persons who currently serve as executive officers of the Company. Each executive
officer serves at the discretion of the Board of Directors of the Company.
Name Age Position
Ronald N. Zebeck 44 President, Chief Executive Officer and Director
Z. Jill Barclift 41 Executive Vice President, General Counsel and
Secretary
Douglas B. McCoy 51 Executive Vice President, Operations
Douglas L. Scaliti 41 Executive Vice President, Fee-Based Products
David D. Wesselink 56 Executive Vice President, Chief Financial
Officer
Patrick J. Fox 43 Senior Vice President, Business Development
Joseph A. Hoffman 41 Senior Vice President, Consumer Credit Marketing
David R. Reak 40 Senior Vice President, Credit Risk
Paul T. Runice 39 Senior Vice President, Treasurer
Jean C. Benson 31 Vice President, Finance, Corporate Controller
Ronald N. Zebeck has been the President and Chief Executive Officer and
a director of the Company since its incorporation in August 1996. Mr. Zebeck has
been President of Metris Direct, Inc. since March 1994 and has served as
Chairman of the Board of Direct Merchants Bank since August 1995. Prior to
joining the Company, Mr. Zebeck was Managing Director, GM Card Operations of
General Motors Corporation from 1991 to 1993, Vice President, Marketing and
Strategic Planning of Advanta Corporation (Colonial National Bank USA) from 1987
to 1991, Director of Strategic Planning of TSO Financial (later Advanta
Corporation) from 1986 to 1987 and held various credit card and credit-related
positions at Citibank affiliates from 1976 to 1986.
Z. Jill Barclift has been Executive Vice President, General Counsel and
Secretary of the Company since November 1998. Ms. Barclift was appointed Vice
President, General Counsel in December 1996 and served as Assistant General
Counsel from April 1996 to December 1996. Prior to joining the Company, Ms.
Barclift held various positions at Household International, Inc. and Household
Credit Services, Inc. from October 1989 to April 1996, most recently as
Associate General Counsel. Prior to that, she was Senior Counsel at Dean Witter
Financial Services, Inc. from January 1984 to October 1989.
Douglas B. McCoy has been Executive Vice President, Operations of the
Company since November 1998. Mr. McCoy was appointed Senior Vice President,
Operations of the Company in December 1996 and served as Vice President,
Operations of Metris Direct, Inc. from January 1995 to November 1996. In
addition, Mr. McCoy has been President of Direct Merchants Bank since July 1995.
Prior to joining the Company, he was Vice President, Credit Administration of
USAA Federal Savings Bank from September 1984 to January 1995, Assistant Vice
President, Credit Administration of Bank of Oklahoma from July 1984 to September
1984, Assistant Vice President, Operations of First National Bank of Tulsa from
May 1982 to July 1984 and Assistant Vice President, Credit Card Marketing of The
Bank of New Orleans from April 1978 to April 1982.
Douglas L. Scaliti has been Executive Vice President, Fee-Based
Products of the Company since November 1998. Mr. Scaliti previously held the
position Senior Vice President, Fee-Based Services since March 1998. Mr. Scaliti
was appointed Senior Vice President, Marketing of the Company in December 1996
and served as Vice President, Marketing of the Company from August 1996 to
November 1996 and held that same position at Metris Direct, Inc. since September
1994. Prior to joining the Company, he held several positions at Advanta
Corporation in its marketing and operations area, including Senior Marketing
Manager, Credit Cards from 1987 to 1994, Operations Consultant, Profit
Improvement from 1985 to 1987 and Credit Operations Manager from 1982 to 1985.
Mr. Scaliti also serves on the First Data Resources Market Area Advisory Group.
David D. Wesselink has been Executive Vice President, Chief Financial
Officer of the Company since December 1998. Prior to joining the Company, Mr.
Wesselink was Senior Vice President and Chief Financial Officer of Advanta
Corporation since 1993. Prior to Advanta Corporation, he held several positions
at Household Finance Corp. and Household International, Inc. from 1971 to 1993,
including Senior Vice President from 1986 to 1993 and Chief Financial Officer
from 1982 to 1993.
Patrick J. Fox has been Senior Vice President, Business Development
since March 1998. Prior to joining the Company, Mr. Fox held executive positions
in the credit card group of Bank of America from September 1994 to March 1998.
Most recently he was the Director of Product Management and Business
Development. Previous to Bank of America, Mr. Fox held various marketing and
sales management positions with Bank One, which he joined in 1990, Comerica Bank
and Citibank.
Joseph A. Hoffman has been Senior Vice President, Consumer Credit
Marketing since April 1998. Prior to joining the Company, Mr. Hoffman was Vice
President of Marketing at Advanta Corporation from June 1994 to April 1998,
where he held a variety of positions including Directors of Brand Management and
Affinity and Co-Brand Marketing. Before that, Mr. Hoffman was Vice President,
Area Director, in Citibank's Card Product Group, which he joined in 1980. During
his fourteen-year tenure with Citibank, Mr. Hoffman held a variety of Marketing
and Operations positions with Citibank's Bankcard and Private Label businesses.
David R. Reak has been Senior Vice President, Credit Risk of the
Company since November 1998. Mr. Reak was appointed Vice President, Credit Risk
of the Company in October 1996 and previously served as Senior Director, Credit
Risk of Metris Direct, Inc. from December 1995 to October 1996. Prior to joining
the Company, he had several positions at American Express Travel Related
Services Company, including Senior Manager, Credit Risk Management Europe and
Middle East from 1994 to December 1995, Senior Manager, Credit Risk Management
U.S. Consulting Group from 1992 to 1994, and Project Manager, Credit Research
and Analysis from 1990 to 1992.
Paul T. Runice has been Senior Vice President, Treasurer of the Company
since November 1998. Mr. Runice previously was Vice President, Treasurer of the
Company from January 1998 to October 1998. Prior to joining the Company, Mr.
Runice was with the Bank of America for nine years, most recently as Vice
President in the U.S. Corporate Finance Group. Prior to Bank of America, he was
employed by Grand Metropolitan, Inc. and The Pillsbury Company as Manager of
Treasury Operations, as well as in corporate development and financial analysis
roles.
Jean C. Benson has been Vice President, Finance, Corporate Controller
of the Company since May 1998 and has been Corporate Controller since August
1996. In addition, Ms. Benson held various finance positions at the Company and
FCI since October 1994. Prior to that, she held various positions at Deloitte &
Touche LLP (public accounting), specializing in the financial services industry
from 1990 to 1994.
Officers of the Company are elected by, and hold office at the will of,
the Board of Directors and do not serve a "term of office" as such.
Risk Factors
This annual report on Form 10-K contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of management as well as assumptions made by, and information currently
available to, management. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from such
statements. You should not place undue reliance on these forward-looking
statements as they speak only of the Company's views as of the date the
statement was made and are not a guarantee of future performance.
Forward-looking statements include statements and information as to our
strategies and objectives, growth in earnings per share, return on equity,
growth in our managed loan portfolio, net interest margins, funding costs,
operating costs and marketing expenses, delinquencies and charge offs and
industry comparisons or projections. Forward-looking statements may be
identified by the use of terminology such as "may," "will," "believes," "does
not believe," "no reason to believe," "expects," "plans," "intends,"
"estimates," "anticipated," or "anticipates" and similar expressions, as they
relate to the Company or our management. These statements reflect management's
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions.
The factors discussed below, among others, could cause our actual
results to differ materially from those expressed in any forward-looking
statements. Though the Company has attempted to list comprehensively these
important factors, the Company cautions you that other factors may in the future
prove to be important in affecting the Company's results of operations. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statement.
Risks Related to Higher Default and Bankruptcy Rates of the Target
Market for Consumer Credit Products
The primary risk associated with unsecured lending to moderate income
consumers is higher default or bankruptcy rates than other income classes of
consumers, resulting in more accounts being charged-off as uncollectible. In
addition, general economic factors, such as the rate of inflation, unemployment
levels and interest rates may result in greater delinquencies and credit losses
among moderate income consumers than among other income classes of consumers.
The Company cannot assure you that it will be able to successfully identify and
evaluate the creditworthiness of its target customers to minimize the expected
higher delinquencies and losses. The Company also cannot assure you that its
risk-based pricing system can offset the negative impact on profitability that
the expected greater delinquencies and losses may have.
Lack of Seasoning of Credit Card Portfolio Creates a Risk of Increasing
Loss Levels
The Company's growth strategy is likely to produce a continued flow of
unseasoned accounts into the Company's portfolio. The average age of a credit
card issuer's portfolio of accounts generally affects the level and stability of
delinquency and loss rates of that portfolio. For example, a portfolio
containing mostly older accounts generally behaves more predictably than a newly
originated portfolio. At December 31, 1998, 74% of the Company's credit card
accounts were less than 36 months old and 14% of its credit card accounts were
less than six months old. At December 31, 1998, 7.4% of the Company's managed
credit card loans were 30 days or more delinquent, compared to 7.1% at December
31, 1997 and 5.5% at December 31, 1996. For the year ended December 31, 1998,
the Company had annualized net charge-offs of 10.8%, compared to 9.3% and 6.2%
for the years ended December 31, 1997 and 1996, respectively. As a result, until
the accounts become more seasoned, the Company expects the delinquency and loss
levels of the Company's portfolio to continue to increase. Any material
increases in delinquencies and losses beyond the Company's expectations could
have a material adverse impact on the Company and the value of its net retained
interests in loans securitized.
Limited Operating History as a Stand-Alone Entity Makes Predicting
Future Performance Difficult
In connection with the Spin Off in September 1998 described above, the
Company significantly changed its funding sources to stand-alone financing
without guarantees from FCI. See "Business - Liquidity and Funding." The Company
expects higher borrowing expense under its New Credit Facility because of the
Company's lower independent credit rating. Our relatively short existence as a
stand-alone company makes it difficult to apply historical operating results and
trends to assess our future performance.
No Assurance Can be Given of the Company's Ability to Sustain and
Manage Growth
In order to meet its strategic objectives, the Company plans to
continue to expand its credit card loan portfolio. Continued growth in this area
depends largely on:
o the Company's ability to attract new cardholders;
o growth in both existing and new account balances;
o the degree to which the Company loses accounts and account balances to
competing card issuers;
o levels of delinquencies and losses;
o the availability of funding, including securitizations, on favorable terms;
o general economic and other factors such as the rate of inflation,
unemployment levels and interest rates, which are beyond the Company's
control; and
o the Company's ability to acquire and integrate portfolios; and
o stability and growth in management.
The Company's continued growth also depends on its ability to manage
such growth effectively. Factors that affect the Company's ability to
successfully manage growth include: retaining and recruiting experienced
management personnel, finding and adequately training new employees,
cost-effectively expanding its facilities, growing and updating its management
systems and obtaining capital when needed. The Company cannot give assurances as
to the future growth in its loan portfolio or its ability to manage any such
growth.
Successful Integration of Portfolio Acquisitions Depends on Limited or
Unreliable Historical Information
As previously mentioned, the Company's growth depends in part on its
ability to acquire and successfully integrate new portfolios of credit card
customers. Since the Company's risk-based pricing system depends on information
regarding customers, limited or unreliable historical information on customers
within an acquired portfolio may impact the Company's ability to successfully
and profitably integrate that portfolio. The Company's success also depends on
whether the desirable customers of an acquired portfolio close their accounts
after transfer of the portfolio. A large attrition rate would result in a lower
borrowing base upon which to assess fees, higher costs for the Company relating
to closing accounts and less potential for marketing fee-based services. In
addition, if customers reduce their borrowings after the transfer of accounts,
the acquired portfolio may be less profitable than originally expected. To date,
the Company's portfolio acquisitions have experienced attrition rates consistent
with the rate estimated at the time of acquisition.
Risks Related to Fee-Based Services Include the Uncertainty of
Successful Marketing Efforts and Signing Additional Marketing Alliances
The Company targets its fee-based services to its credit card customers
and customers of third parties. Because of the variety of offers provided and
the diversity of the customers targeted, the Company is uncertain about how many
customers will respond to the Company's offers for these fee-based services. The
Company may experience higher than anticipated costs in connection with the
internal administration and underwriting of these fee-based services and lower
than anticipated response or retention rates.
Furthermore, the Company may not be able to expand the fee-based
services business or maintain historical growth and stability levels if:
o the Company cannot successfully market credit cards to new customers;
o existing credit card customers close accounts voluntarily or involuntarily;
o existing fee-based services customers cancel their services;
o the Company cannot form marketing alliances with other third parties; or
o new or restrictive state regulations limit the Company's ability to market or
sell fee-based services.
The Unavailability or Increased Cost of Funding Could Negatively
Affect the Company's Profitability and Ability to Grow
The Company depends on cash flow from operations, asset securitization,
and the issuance of long-term debt and equity to fund its operations. The loss
of any of these sources of funding could adversely affect the Company's ability
to operate. If the Company breaches any of its covenants in the long-term debt
indenture or under its credit facility, including various financial covenants,
the lenders may terminate the facility. In addition, because of the Company's
limited operating history and relatively unseasoned loan portfolio, FCI
historically guaranteed the Company's credit facility, as well as several
letters of credit and two interest rate swap transactions. Prior to the Spin
Off, however, the Company refinanced all funding and derivative transactions
without a guarantee from FCI. Absent FCI's guarantee, the Company's stand-alone
financing is significantly more expensive and subject to more restrictive terms
and conditions. Any material increase in the Company's costs of financing beyond
the Company's expectations could have a negative impact on the Company.
The Company also depends heavily upon the securitization of its credit
card loans to fund its operations and, to date, has completed securitization
transactions on terms that it believes are satisfactory. The Company cannot
assure you that the securitization market will continue to offer suitable
funding alternatives. Furthermore, the Company's ability to securitize its
assets depends on the continued availability of credit enhancement on acceptable
terms and the continued favorable legal, regulatory, accounting and tax
environment for securitization transactions. Any adverse change could force the
Company to rely on other potentially more expensive funding sources.
In addition, poor performance of the Company's securitized assets,
including increased delinquencies and credit losses, could result in a downgrade
or withdrawal of the ratings on the outstanding securities issued in the
Company's securitization transactions, cause early amortization of such
securities or result in higher required credit enhancement levels. This could
jeopardize the Company's ability to complete other securitization transactions
on acceptable terms, decrease the Company's liquidity and force the Company to
rely on other potentially more expensive funding sources to the extent
available.
The Company plans to continue to expand its credit card portfolio by
soliciting customers directly and by purchasing credit card portfolios from
third parties. The Company will depend on securitization and other funding
sources to finance the portfolio's acquisitions. At times it may be necessary
for the Company to issue debt or equity to fund the new loan growth. The
Company's ability to secure favorable financing depends on third parties
willingness to lend to the Company. There can be no assurance that the Company
will be able to secure funds to support its growth on terms as favorable as past
transactions. Any adverse change in the funding sources used by the Company
could force the Company to rely on other potentially more expensive funding
sources.
Interest Rate Fluctuations Impact the Yield on Company Assets and
Funding Expense
A reduction in market interest rates may reduce the yield on the
Company's assets while fixed rate funding expenses stay flat, compressing the
interest spread on which the Company profits. A rise in market interest rates
will directly increase floating rate funding expense and may indirectly impact
the payment performance of the Company's customers. Management tries to minimize
the impact of changes in market interest rates on the Company's cash flow, asset
value and net income primarily by funding variable rate assets with variable
rate funding sources and by using interest rate derivatives to match asset and
liability repricings. However, changes in market interest rates may have a
negative impact on the Company.
Current and Proposed Regulation and Legislation Limits the Company's
Business Activities, Product Offerings and Fees Charged
Various federal and state laws and regulations significantly limit the
activities in which the Company and Direct Merchants Bank are permitted to
engage. Such laws and regulations, among other things, limit the fees and other
charges that the Company is allowed to charge, limit or prescribe certain other
terms of the Company's products and services, require specified disclosures to
consumers, govern the sale and terms of products and services offered by the
Company and require that the Company maintain certain licenses, qualifications,
or capital requirements (see "Business - Regulations"). In some cases, the
precise application of these statutes and regulations is not clear. In addition,
the regulatory framework at the state and federal level regarding some of the
Company's fee-based products is evolving. The regulatory framework, as well as
changes in legal interpretation which may result from the Spin Off, could affect
the design or profitability of such products and the Company's ability to sell
certain products. In addition, numerous legislative and regulatory proposals are
advanced each year which, if adopted, could adversely affect the Company's
profitability or further restrict the manner in which the Company conducts its
activities. The failure to comply with, or adverse changes in the laws or
regulations to which the Company's business is subject, or adverse changes in
the interpretation thereof, could adversely affect the Company's ability to
collect its receivables and generate fees on the receivables which could have a
material adverse effect on the Company's business.
Other Industry Risks Related to Consumer Credit Products and Fee-Based
Services Could Negatively Impact the Company
The Company faces the risk of fraud by cardholders and third parties,
as well as the risk that increased criticism from consumer advocates and the
media could hurt consumer acceptance of its products. There is also a risk of
litigation, including class action litigation, challenging the Company's product
terms, rates, disclosures, collections or other practices, under state and
federal consumer protection statutes and other laws (see "Business -
Regulation").
As a Result of Intense Competition in the Company's Consumer Credit
Products and Fee-Based Services Businesses, There is no Assurance that the
Company Can Compete Successfully
The Company faces intense and increasing competition from numerous
financial services providers, many of which have greater resources than the
Company. In particular, the Company's credit card business competes with
national, regional and local bank card issuers, as well as other general purpose
and private label credit card issuers. There has been a recent increase in
solicitations to moderate income consumers, as competitors have increasingly
focused on this market. Customers are attracted to credit card issuers largely
on the basis of price, credit limit and other product features; as a result,
customer loyalty is often limited. According to published reports, as of
December 1998, the 20 largest issuers accounted for approximately 90% (based on
receivables outstanding) of the market for general purpose credit cards. Many of
these issuers are substantially larger, have more seasoned credit card
portfolios than the Company and often compete for customers by offering lower
interest rates and/or fee levels than the Company. The Company cannot assure you
that it will be able to compete successfully in this environment.
The Company also faces competition from numerous fee-based services
providers, including insurance companies, financial services institutions and
other membership-based or consumer services providers, many of which are larger,
better capitalized and more experienced than the Company. As the Company
continues to expand its extended service plan business to the customers of
third-party retailers, it competes with manufacturers, financial institutions,
insurance companies and a number of independent administrators, many of which
have greater operating experience and financial resources than the Company.
Changes in the Relationship With FCI Could Materially Impact the
Company's Business
Upon a Change of Control of the Company, Fingerhut can Terminate the
Company's Access to the Vital Database and Repurchase Credit Cards Bearing the
Fingerhut Name and Logo
The Company and FCI or Fingerhut have entered into a number of
agreements for the purpose of defining the ongoing relationship between them,
some of which are material to the Company's business. As previously discussed,
the Company relies on its access to the Fingerhut Database, including the
Fingerhut Suppress File, to market financial services products. As of December
31, 1998, Fingerhut customers in the Fingerhut Database represented 35% of the
Company's credit card accounts and all of the purchasers of the Company's
extended service plans. Until the Company develops its own significant database
and extended service plan marketing relationships with other companies, its
success will depend largely on its exclusive rights to the Fingerhut Database to
market such service plans and its right to be the exclusive provider of certain
financial services products to Fingerhut customers. Fingerhut can terminate the
Company's contractual rights to this access in the event a third party acquires
control of the Company and, upon termination of the agreement, Fingerhut has the
right to repurchase any then-outstanding general purpose credit cards bearing
the Fingerhut name and logo. Any denial or delay of this access or any such
repurchase could have a significant economic impact on the Company.
Recent Acquisition of Fingerhut Could Negatively Impact the Company
On February 11, 1999, FCI announced that it had agreed to be acquired
by Federated Department Stores, Inc. This transaction was completed on March 18,
1999, and the separate corporate existence of FCI ceased. Although the Company's
agreements with FCI and Fingerhut will not be terminated by this transaction,
the Company cannot predict how this change in status for FCI may impact the
relationship of the Company with FCI and Fingerhut.
No Assurance that Conflicts of Interest Between the Company and FCI
will be Resolved in Favor of the Company
Conflicts of interest may arise in the future between the Company and
FCI due to the continuing contractual relationship between the Company and FCI
and the overlap of the Company's Non-Executive Chairman of the Board, Theodore
Deikel, who is also the Chairman of the Board and Chief Executive Officer of
FCI. The Company has not instituted any formal plan or arrangement to address
such potential conflicts of interest. Although the directors intend to exercise
reasonable judgment and take such steps as they deem necessary under the
circumstances in resolving any conflict that may occur, the Company cannot
assure you that any conflicts will be resolved in favor of the Company.
Risks Relating to Year 2000 Compliance
The "Year 2000 Problem" is a result of computer systems using two
digits rather than four digits to define the applicable year. The Company, like
all database marketing companies and financial services institutions, depends
heavily upon computer systems for all phases of its operations. The Company
processes data through its own systems and obtains data and processing services
from various vendors. The Company, therefore, must concern itself not only with
its own systems, but also with the status of Year 2000 compliance with respect
to those vendors that provide data and processing services to the Company.
Most of the Company's existing information systems are less than three
years old and were originally designed for Year 2000 compliance, but as a
cautionary measure, the Company has begun testing such internal systems for Year
2000 compliance. The Company also depends on databases maintained by FCI and
card and statement generation, among other services, provided by FDR. The
Company has created a Year 2000 project team to identify, address and monitor
internal systems and vendor issues related to Year 2000 problems. The project
team meets monthly with systems experts at FCI and works closely with the
Company's identified material vendors, including FDR, to determine the impact on
the Company's and the vendors' plans for becoming Year 2000 compliant. The
project team is striving to obtain test results showing compliance by vendors by
the end of the first quarter of 1999 and has developed high-level contingency
plans to address non-compliance by its material vendors, which may include
replacing vendors. The Company may have difficulty identifying acceptable
alternative vendors, many of which may be overburdened with requests from
similarly situated companies. If the Company is unable to identify acceptable
and available alternative vendors, the transition of services to such vendors
may be time consuming and costly.
Although the Company cannot ensure compliance by all of its vendors on
a timely basis, the Company believes that it is taking appropriate steps to
identify exposure to Year 2000 problems and to address them on a timely basis.
In addition, the Company believes that it has adequate resources to achieve Year
2000 compliance for its systems which currently may not be compliant and that
the costs of Year 2000 compliance will not be material to the Company. If,
however, compliance with Year 2000 issues is not completed on a timely basis or
is not fully effective, the most reasonably likely worst case scenario that may
impact the Company's results of operations, financial condition and prospects is
the failure of FDR, Visa and MasterCard to provide services. The Company's
cardholders would be unable to use their credit cards or otherwise access their
accounts. Due to several unknown contributing factors, and the scope of the Year
2000 issue, the impact this worst case scenario would have on the Company's
results of operations, financial condition and prospects, is an uncertainty. The
scenarios will be analyzed and addressed in the Company's contingency plans.
The risks relating to the "Year 2000 Problem" are more fully discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 32 to 34 of the 1998 Annual Report.
Potential Volatility of Stock Price
The Company which began as a subsidiary of FCI, was incorporated in
1996 and prior to the Spin Off was 83% owned by FCI. Factors such as actual or
anticipated fluctuations in the Company's operating results, regulatory
developments, conditions and trends in the consumer credit industry, general
market conditions and other factors beyond the Company's control may
significantly affect the market price of the Common Stock. In addition, the
market has, from time to time, experienced significant price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These broad fluctuations may adversely affect the market
price of the Common Stock.
Item 2. Properties
The Company currently leases its principal executive office space in
St. Louis Park, Minnesota, consisting of leases for approximately 75,000 and
18,000 square feet. These leases expire on November 30, 2000 and April 30, 2001,
respectively. Direct Merchants Bank leases office space in Phoenix, Arizona,
consisting of approximately 26,000 square feet. This lease expires on June 30,
2004, and may be terminated by the Company after June 30, 2001. In addition, the
Company leases facilities in Tulsa, Oklahoma, White Marsh, Maryland, and
Champaign, Illinois, consisting of 62,000, 100,000, and 9,000 square feet,
respectively. These leases expire on December 31, 1999, September 30, 2007, and
November 30, 2002, respectively. The Company has extended the lease on its
current facility in Oklahoma through 1999 and entered into leases for its new
Oklahoma and Jacksonville operations centers. These leases commence January 1,
2000 and June 1, 1999 and consist of approximately 100,000 and 150,000 square
feet, respectively. The leased properties in Oklahoma, Maryland, and
Jacksonville support the Company's collections, customer service and back office
operations. The Company believes its facilities are suitable to its businesses
and that it will be able to lease or purchase additional facilities as needed.
Item 3. Legal Proceedings
The Company is a party to various legal proceedings resulting from the
ordinary business activities relating to its operations. On February 25, 1998,
the Company announced that the claims against it in the shareholders lawsuits
filed in October 1998 in the United States District Court, District of Minnesota
have been dismissed with prejudice. The Complaints had alleged securities fraud
and other claims related to a decline in the Company's stock price. The lawsuits
were dismissed through a Stipulation and Order entered into by counsel for the
plaintiffs and defendants, and ordered by the Federal District Court. This
dismissal was agreed to and ordered prior to the case having been certified as a
class action and without payment to the named plaintiffs or their counsel.
Certain existing laws and regulations permit class action lawsuits on
behalf of customers in the event of violations, and such class lawsuits can be
very expensive to defend, even without any violation. One of these actions, an
Alabama action in the Circuit Court of Greene County [(Preston Davis, Sr. et.
al. v. Direct Merchants Credit Card Bank, N.A., et. al. (Civil Action No.
CV98-012)], seeks damages in an unascertained amount and purports to be a
class action, although no class has been certified. During the past several
years, the press has widely reported certain industry-related concerns which
may impact the Company. Some of these involve the amount of litigation
instituted against financial services and insurance companies operating in the
state of Alabama and the large punitive awards obtained from juries in that
state. The Alabama case, instituted in April 1998, generally alleges a
fraudulent sale of credit protection insurance without consent. Compensatory
damages are sought. The judicial climate in Alabama is such that the outcome
of this case is unpredictable. The Company's subsidiary believes it has
substantive legal defenses to this claim and is prepared to defend this case
vigorously. Due to the uncertainties in litigation and other factors, there is
no assurance that the Company's subsidiary will ultimately prevail. Should the
Company's subsidiary's case settle or otherwise be resolved, it believes the
amount, in the aggregate, will not be material to the Company's consolidated
financial condition. However, if this action, or any class action, is
determined adversely, such decision can have a significant adverse economic
impact on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by Item 201 of Regulation S-K is set forth in
the "Summary of Consolidated Quarterly Financial Information and Stock Data" on
page 61 of the Company's Annual Report to Shareholders as of and for the year
ended December 31, 1998 (the "1998 Annual Report") and is incorporated herein by
reference.
During the period covered by this report, the Company sold securities
that were not registered under the Securities Act of 1933, as amended (the "1933
Act"), in reliance on Section 4(2) of the 1933 Act. The Company received
aggregate proceeds of $300 million and paid underwriting discounts, commissions
and related fees of $30 million. The additional information required by this
item is set forth in "Note 6 - Private Equity Placement" on page 48 of the 1998
Annual Report and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required by this item is set forth under the caption
"Selected Financial Data" on page 18 of the 1998 Annual Report and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Forward Looking Statements" on pages 19 to 35 of the 1998
Annual Report and is incorporated herein by reference.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
The information required by this item is set forth under the captions
"Management's Discussion and Analysis-Market Risk" on pages 29 and 30 of the
1998 Annual Report and is incorporated herein by reference.
<PAGE>
Item 8. Financial Statements and Supplementary Data
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
December 31,
1998 1997
---- ----
Assets:
<S> <C> <C>
Cash and due from banks .................................... $ 22,114 $ 21,006
Federal funds sold ......................................... 15,060 27,089
Short-term investments ..................................... 173 128
-------- --------
Cash and cash equivalents ............................... 37,347 48,223
-------- --------
Retained interests in loans securitized .................... 753,469 471,831
Less: Allowance for loan losses ......................... 393,283 244,084
-------- --------
Net retained interests in loans securitized ................ 360,186 227,747
-------- --------
Loans held for securitization .............................. 3,430 8,795
Property and equipment, net ................................ 21,982 15,464
Accrued interest and fees receivable ....................... 6,009 4,310
Prepaid expenses and deferred charges ...................... 59,104 18,473
Deferred income taxes ...................................... 153,021 80,787
Customer base intangible ................................... 81,892 36,752
Other receivables due from credit card securitizations, net 185,935 77,486
Other assets ............................................... 36,813 20,625
-------- --------
Total assets ......................................... $945,719 $538,662
======== ========
Liabilities:
Debt ....................................................... $310,896 $244,000
Accounts payable ........................................... 19,091 35,356
Current income taxes payable ............................... 31,783 9,701
Deferred income ............................................ 124,892 49,204
Accrued expenses and other liabilities ..................... 26,075 24,363
-------- --------
Total liabilities ....................................... $512,737 $362,624
-------- --------
Stockholders' Equity:
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized, 539,866 shares issued and outstanding ....... $201,100
Common stock, par value $.01 per share; 100,000,000 shares
authorized, 19,259,750 and 19,225,000 shares issued and
outstanding, respectively ............................... 193 $ 192
Paid-in capital ............................................ 107,615 107,059
Retained earnings .......................................... 124,074 68,787
-------- --------
Total stockholders' equity .............................. $432,982 $176,038
-------- --------
Total liabilities and stockholders' equity .............. $945,719 $538,662
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Interest Income:
<S> <C> <C> <C>
Credit card loans and retained interests in loans securitized.................. $ 111,118 $ 66,695 $ 29,028
Federal funds sold ............................................................ 1,065 1,636 867
Other ......................................................................... 1,028 863 299
-------- -------- --------
Total interest income ...................................................... 113,211 69,194 30,194
Interest expense .............................................................. 30,513 11,951 4,106
-------- -------- --------
Net Interest Income ........................................................... 82,698 57,243 26,088
Provision for loan losses ..................................................... 77,770 43,989 18,477
-------- -------- --------
Net interest income after provision for loan losses 4,928 13,254 7,611
-------- -------- --------
Other Operating Income:
Net securitization and credit card servicing income............................ 138,221 79,533 49,921
Credit card fees, interchange and other credit card income..................... 68,136 43,731 26,028
Fee-based services revenues ................................................... 106,601 63,413 50,273
-------- -------- --------
312,958 186,677 126,222
-------- -------- --------
Other Operating Expense:
Credit card account and other product solicitation and
marketing expenses ......................................................... 40,949 30,503 29,297
Employee compensation ......................................................... 62,627 35,200 23,068
Data processing services and communications ................................... 35,445 20,087 12,757
Third-party servicing expense ................................................. 11,074 12,711 9,207
Warranty and debt waiver underwriting and claims servicing
expense .................................................................... 12,279 6,053 10,024
Credit card fraud losses ...................................................... 4,436 3,240 2,276
Other ......................................................................... 57,828 30,254 14,658
-------- -------- --------
224,638 138,048 101,287
-------- -------- --------
Income Before Income Taxes .................................................... 93,248 61,883 32,546
Income taxes .................................................................. 35,900 23,825 12,530
-------- -------- --------
Net Income .................................................................... $ 57,348 $ 38,058 $ 20,016
Preferred stock dividends ..................................................... 1,100 -- --
-------- -------- --------
Net Income Available to Common Stockholders ................................... $ 56,248 $ 38,058 $ 20,016
======== ======== ========
Earnings Per Share:
Basic ......................................................................... $ 2.92 $ 1.98 $ 1.21
Diluted ....................................................................... $ 2.82 $ 1.88 $ 1.17
Shares used to compute earnings per share (000's)
Basic ......................................................................... 19,232 19,225 16,572
Diluted ....................................................................... 19,968 20,238 17,129
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Total
Preferred Common Paid-In Retained Stockholders'
Stock Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ............... $ $ $ 60,028 $ 11,290 $ 71,318
Net income ............................ 20,016 20,016
Company reorganization ................ 160 (160)
Issuance of common stock .............. 32 47,352 47,384
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ............... $ $ 192 $ 107,220 $ 31,306 $ 138,718
Net income ............................ 38,058 38,058
Common stock dividends and other - cash (161) (577) (738)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ............... $ $ 192 $ 107,059 $ 68,787 $ 176,038
Net income ............................ 57,348 57,348
Issuance of preferred stock ........... 200,000 200,000
Common stock dividends and
other - cash .................... (961) (961)
Preferred stock dividends -
in kind ......................... 1,100 (1,100)
Exercised stock options ............... 1 556 557
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 ............... $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
========== ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Operating Activities:
<S> <C> <C> <C>
Net income .................................................. $ 57,348 $ 38,058 $ 20,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................ 48,678 15,942 7,329
Change in allowance for loan losses ...................... 149,199 148,415 73,450
Changes in operating assets and liabilities:
Accrued interest and fees receivable .................. (1,699) (1,368) (719)
Prepaid expenses and deferred charges ................. (61,163) (23,150) (6,045)
Deferred income taxes ................................. (72,234) (49,259) 0
Accounts payable and accrued expenses ................. (14,553) 28,246 8,110
Other receivables due from credit card securitizations, (112,170) (31,911) 3,436
net
Current income taxes payable .......................... 22,082 8,241 (3,718)
Deferred income ....................................... 75,688 26,021 13,096
Other ................................................. (26,264) (16,022) (31,302)
----------- ----------- -----------
Net cash provided by operating activities ................... 64,912 143,213 83,653
----------- ----------- -----------
Investing Activities:
Proceeds from sales of loans ................................ 1,491,832 1,665,700 952,055
Net loans originated or collected ........................... (901,740) (1,231,223) (1,072,321)
Credit card portfolio acquisitions .......................... (921,558) (738,104)
Additions to property and equipment ......................... (10,814) (11,705) (4,113)
----------- ----------- -----------
Net cash used in investing activities ....................... (342,280) (315,332) (124,379)
----------- ----------- -----------
Financing Activities:
Net increase (decrease) in debt ............................ 66,896 188,837 (9,319)
Net proceeds from issuance of common stock .................. 557 47,384
Cash dividends paid ......................................... (961) (577)
Net proceeds from issuance of preferred stock ............... 200,000
----------- ----------- -----------
Net cash provided by financing activities ................... 266,492 188,260 38,065
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents ........ (10,876) 16,141 (2,661)
Cash and cash equivalents at beginning of year .............. 48,223 32,082 34,743
----------- ----------- -----------
Cash and cash equivalents at end of year .................... $ 37,347 $ 48,223 $ 32,082
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries (collectively, the "Company")
including Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank"). The
Company is an information-based direct marketer of consumer credit products and
fee-based services primarily to moderate-income consumers.
Prior to September 1996, Metris Direct, Inc. (previously known as
Fingerhut Financial Services Corporation), a direct subsidiary of MCI, operated
as a division of Fingerhut Companies, Inc. ("FCI"). During September 1996, FCI
reorganized the business through the formation of MCI. The stock of some
subsidiaries, in addition to the assets, liabilities and equity of certain
portions of the extended service plan business, was contributed to the Company
from FCI and its subsidiaries. In October 1996, the Company completed an initial
public offering of its common stock (see Note 7). On September 25, 1998, FCI
distributed the remaining shares of the Company to shareholders of FCI in a tax
free distribution (the "Spin Off").
The consolidated financial statements also include an allocation of
expenses for certain data processing and information systems, audit, accounting,
treasury, legal, human resources, customer service and other administrative
support historically provided by FCI and its subsidiaries to the Company. Such
expenses were based on the actual use of such services or were based on other
allocation methods that, in the opinion of management, are reasonable. During
1996, FCI and the Company entered into an administrative services agreement that
covers such expense allocations and the provision of future services using
similar rates and allocation methods for various terms, the latest of which
expired at the end of 1998. The consolidated financial statements also reflect
the retroactive effects of agreements entered into during 1996, including
co-brand credit card, database access, data sharing and extended service plan
agreements with Fingerhut Corporation, and a tax sharing agreement with FCI.
These agreements have original terms ranging up to seven years, expiring no
later than October 2003.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with the current year's presentation.
Pervasiveness of Estimates
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements as well as the reported amount of revenues
and expenses during the reporting periods. Actual results could differ from
these estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
Federal Funds Sold
Federal funds sold are short-term loans made to banks through the
Federal Reserve System. It is the Company's policy to make such loans only to
banks that are considered to be in compliance with their regulatory capital
requirements.
Loans Held for Securitization
Loans held for securitization are credit card loans the Company intends
to securitize, generally no later than three months from origination and are
recorded at the lower of aggregate cost or market value.
Securitization, Retained Interests in Loans Securitized and Securitization
Income
The Company securitizes and sells a significant portion of its credit
card loans to both public and private investors through the Metris Master Trust
(the "Trust") and third party bank sponsored, multi-seller receivables conduits
(the "Conduits"). The Company retains participating interests in the credit card
loans under "Retained interests in loans securitized" on the consolidated
balance sheets. The Company's retained interests in loans securitized are
subordinate to the interests of investors in the Trust and Conduit portfolios.
Although the Company continues to service the securitized credit card accounts
and maintains the customer relationships, these transactions are treated as
sales for financial reporting purposes and the associated loans are not
reflected on the consolidated balance sheets.
Beginning in 1997, the sales of these loans have been recorded in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The adoption of SFAS 125 did not have a material effect on the
Company's consolidated financial statements. Upon sale, the sold credit card
loans are removed from the balance sheet and the related financial and servicing
assets controlled and liabilities incurred are initially measured at fair value,
if practicable. SFAS 125 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.
Prior to January 1, 1997, the sales of these loans were recorded in
accordance with SFAS No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse." Upon sale, the loans were removed from the balance
sheet, and a gain on sale was recognized for the difference between the carrying
value of the loans and the adjusted sales proceeds. The adjusted sales proceeds
are based on a present value estimate of future cash flows to be received over
the life of the loans, net of certain funding and servicing costs. The resulting
gain was further reduced for estimated loan losses over the life of the related
loans under the limited recourse provisions.
The securitization and sale of credit card loans changes the Company's
interest in such loans from lender to servicer, with a corresponding change in
how revenue is reported in the statements of income. For securitized and sold
credit card loans, amounts that otherwise would have been recorded as interest
income, interest expense, fee income and provision for loan losses are instead
reported in other operating income as "Net securitization and credit card
servicing income." The Company has various receivables from the Trust or
Conduits and other assets as a result of securitizations, which primarily
consists of amounts deposited in investor reserve accounts held by the Trust or
Conduits for the benefit of the Trust's and Conduit's security holders. Other
components include amounts due from interest rate caps, swaps and floors;
accrued interest and fees on the securitized receivables; and various other
receivables. These amounts are reported as "other receivables due from credit
card securitizations, net" on the consolidated balance sheets. The provision for
loan losses reflected on the statements of income in "Net securitization and
credit card servicing income" was $456 million, $275 million, and $118 million
for the years ended December 31, 1998, 1997, and 1996, respectively.
Provisions for loan losses are made in amounts necessary to maintain
the allowance at a level estimated to be sufficient to absorb probable future
losses of principal and earned interest, net of recoveries, inherent in the
existing loan portfolio, effectively reducing the Company's retained interests
in loans securitized to fair value.
The Company securitized approximately $1.5 billion and $1.7 billion of
credit card loans in 1998 and 1997, respectively. At December 31, 1998, the
Company had approximately $4.6 billion of investors' interests in securitized
loans, with expected maturities from 1999 to 2001.
Allowance for Loan Losses
Provisions for loan losses are made in amounts necessary to maintain
the allowance at a level estimated to be sufficient to absorb probable future
losses of principal and earned interest, net of recoveries, inherent in the
existing managed loan portfolio. In evaluating the adequacy of the allowance for
loan losses, management considers several factors, including: historical
charge-off and recovery activity by age (vintage) of each loan portfolio (noting
any particular trends over recent periods); recent delinquency and collection
trends by vintage; current economic conditions and the impact such conditions
might have on borrowers' ability to repay; the risk characteristics of the
portfolios; and other factors. Significant changes in these factors could affect
the adequacy of the allowance for loan losses in the near term. Credit card
accounts are generally charged off at the end of the month during which the loan
becomes contractually 180 days past due, with the exception of bankrupt
accounts, which are charged off immediately upon formal notification of
bankruptcy, and accounts of deceased cardholders without a surviving,
contractually liable individual, or an estate large enough to pay the debt in
full, which are also charged off immediately upon notification.
Property and Equipment
Property and equipment, and computer hardware and software are stated
at cost and depreciated on a straight-line basis over their estimated economic
useful lives (three to ten years for furniture and equipment, three to five
years for computer hardware, up to five years for software; and over the shorter
of the estimated useful life or the term of the lease for leasehold
improvements). The Company capitalizes software developed for internal use that
represents major enhancements or replacements of operating and management
information systems. Amortization of such capitalized software begins when the
systems are fully developed and ready for implementation. Repairs and
maintenance are charged to expense as incurred.
Customer Base Intangible
The customer base intangible represents the excess of amounts paid for
portfolio acquisitions over the related credit card loan balances net of
reserves and discounts. The intangible assets are amortized over the estimated
periods of benefit, generally 5 to 7 years, in proportion to the expected
benefits to be recognized. The amount amortized for 1998, 1997 and 1996 were
$10.1 million, $2.5 million, and $0.3 million, respectively.
Interest Income on Credit Card Loans
Interest income on credit card loans is accrued and earned based on the
principal amount of the loans outstanding using the effective-yield method.
Accrued interest which has been billed to the customer but not yet received is
classified on the balance sheet with the related credit card loans. Accrued
interest which has not yet been billed to the customer is estimated and
classified on the balance sheet separate from the loan balance. Interest income
is generally recognized until a loan is charged off. At that time, the accrued
interest portion of the charged off balance is deducted from current period
interest income.
Fee-Based Services
Debt Waiver Products
Direct Merchants Bank offers various debt waiver products to its credit
card customers for which it retains the claims risk. Revenue for such products
is recognized ratably over the coverage period, generally one month, and
reserves are provided for pending claims based on Direct Merchants Bank's
historical experience with settlement of such claims. Revenues recorded for debt
waiver products are included in the consolidated statements of income under
"Fee-based services revenues" and were $73.8 million, $47.6 million and $25.5
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Unearned revenues and reserves for pending claims are recorded in the
consolidated balance sheets in "Deferred revenues" and "Accrued expenses and
other liabilities" and amounted to $4.8 million and $4.0 million as of December
31, 1998 and 1997, respectively.
Membership Programs
During the quarter ended September 30, 1998, the Company changed its
method of recognizing revenue for certain fee-based services for which a
cancellation period with a full refund exists. This change was made to be
consistent with recent revenue recognition policy changes made by others in the
Company's industry. Previously, the Company had recognized a portion of the
revenue, net of estimated cancellations, associated with such services during
the refund period. The Company now defers the recognition of revenue until the
expiration of the cancellation period, at which time revenue relating to the
full refund period is recognized. The remaining revenue is recognized over the
remaining term of the membership. The Company continues to defer qualifying
direct-response advertising costs and amortizes these expenses in proportion to
revenue recognized. This change resulted in a cumulative one-time reduction in
revenues of approximately $3.0 million and a corresponding reduction in expenses
of approximately $3.1 million, or a $68,000 increase in net income. This
cumulative impact is reflected in the consolidated statement of income for the
year ended December 31, 1998.
Membership fees are generally billed through financial institutions,
including Direct Merchants Bank, and other cardholder based institutions and are
recorded as deferred membership income upon acceptance of membership and
pro-rated over the membership period beginning after the contractual
cancellation period is complete.
In accordance with the provisions of Statement of Position 93-7,
"Reporting on Advertising Costs," qualifying membership acquisition costs are
deferred and charged to expense as membership fees are recognized. These costs,
which relate directly to membership solicitations (direct response advertising
costs), principally include: postage, printing, mailings, and telemarketing
costs. Such costs are amortized on a straight-line basis as revenues are
realized over the membership period. Amortization of membership acquisition
costs amounted to $8.9 million, $2.3 million, and $0.1 million for the years
ended December 31, 1998, 1997, and 1996, respectively. If deferred membership
acquisition costs were to exceed the membership fee, an appropriate adjustment
would be made for impairment. Deferred membership acquisition costs amounted to
$22.4 million and $11.1 million as of December 31, 1998 and 1997, respectively.
Extended Service Plans
The Company coordinates the marketing activities for Fingerhut's sales
of extended service plans. The Company began performing administrative services
and retained the claims risk for all extended service plans sold on or after
January 1, 1997. As a result, extended service plan revenues and the incremental
direct acquisition costs are deferred and recognized on a straight-line basis
over the life of the related extended service plan contracts beginning after the
expiration of any manufacturers' warranty coverage. The provision for service
contract returns charged against revenues for the years ended December 31, 1998,
1997 and 1996 amounted to $4.8 million, $4.6 million and $4.5 million,
respectively. Additionally, the Company reimburses Fingerhut for the cost of its
marketing media and other services utilized in the sales of extended service
plans, based on contracts sold and on media utilization costs as agreed to by
the Company and Fingerhut.
Prior to January 1, 1997, the Company contracted with a third-party
underwriter and claims administrator to service and absorb the risk of loss for
most claims. These claims servicing contract costs were expensed as the service
contracts were sold, net of the related cost of anticipated service contract
returns. In addition, the revenues related to these contract sales were
recognized immediately.
Credit Card Fees and Origination Costs
Credit card fees include annual membership, late payment, overlimit,
returned check, and cash advance transaction fees. These fees are assessed
according to the terms of the related cardholder agreements.
The Company defers direct credit card origination costs associated with
successful credit card solicitations that it incurs in transactions with
independent third parties, and certain other costs that it incurs in connection
with loan underwriting and the preparation and processing of loan documents.
These deferred credit card origination costs are netted against the related
credit card annual fee, if any, and amortized on a straight-line basis over the
cardholder's privilege period, generally 12 months. Net deferred fees were $9.6
million and $9.2 million as of December 31, 1998 and 1997, respectively.
Solicitation Expenses
Credit card account costs, including printing, credit bureaus, list
processing costs, telemarketing and postage, are generally expensed as incurred
over the two to three month period during which the related responses to such
solicitation are received.
Credit Card Fraud Losses
The Company experiences credit card fraud losses from the unauthorized
use of credit cards. These fraudulent transactions are expensed when identified,
through the establishment of a reserve for the full amount of the transactions.
These amounts are charged off after 90 days, after all attempts to recover the
amounts from such transactions, including chargebacks to merchants and claims
against cardholders, are exhausted.
Interest Rate Risk Management Contracts
The nature and composition of the Company's assets and liabilities and
securitized loans expose the Company to interest rate risk. The Company enters
into a variety of interest rate risk management contracts such as interest rate
swap, floor, and cap agreements with highly rated counterparties in order to
hedge its interest rate exposure. The monthly interest rate differential to be
paid or received on these contracts is accrued and included in "Net
securitization and credit card servicing income" on the consolidated statements
of income. Premiums paid for such contracts and the related interest payable or
receivable under such contracts are classified under "Other receivables due from
credit card securitization, net," on the consolidated balance sheets. Premiums
paid for interest rate contracts are recorded at cost and amortized on a
straight-line basis over the life of the contract. During 1998, the Company
terminated swaps and used the proceeds to purchase new interest rate floors.
After purchasing these floors, the Company terminated one of the floors
resulting in $43.4 million of proceeds. The resulting $34.1 million gain is
being amortized into income over the shorter of the contract life or the
remaining life of the securities it was hedging (see Note 16).
Debt Issuance Costs
Debt issuance costs are the costs related to issuing new debt
securities and establishing new securitizations under the Trust or Conduits. The
costs are capitalized as incurred and amortized to expense over the term of the
new debt security.
Income Taxes
The Company determines deferred taxes based on the temporary
differences between the financial statement and the tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred taxes are based on the enacted rate that is expected to apply when the
temporary differences reverse. For periods prior to the Spin Off, the Company
was included in the consolidated federal and certain state income tax returns of
FCI. Based on a tax sharing agreement between the Company and FCI, the provision
and deferred income taxes are computed based only on the Company's financial
results as if the Company filed its own federal and state tax returns.
Statements of Cash Flows
The Company prepares its consolidated statements of cash flows using
the indirect method, which requires a reconciliation of net income to net cash
from operating activities. In addition, the Company nets certain cash receipts
and cash payments from credit card loans made to customers, including principal
collections on those loans. For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and due from banks, federal funds
sold, short-term investments, (mainly money market funds) and all other highly
liquid investments with original maturities of three months or less.
Cash paid for interest during the years ended December 31, 1998, 1997
and 1996 was $28.4 million, $9.4 million and $4.1 million, respectively. Cash
paid for income taxes for the same periods was $86.1 million, $64.8 million and
$41.6 million, respectively.
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The following table
presents the computation of basic and diluted weighted average shares used in
the per share calculations:
Year Ended
December 31,
1998 1997 1996
---- ---- ----
(In thousands, except EPS)
Net income .................................. $57,348 $38,058 $20,016
Preferred dividends ......................... 1,100
------- ------- -------
Net income available to common stockholders . $56,248 $38,058 $20,016
======= ======= =======
Weighted average common shares outstanding .. 19,232 19,225 16,572
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options 736 1,013 557
------- ------- -------
Diluted common shares ....................... 19,968 20,238 17,129
Basic EPS ................................... $ 2.92 $ 1.98 $ 1.21
Diluted EPS ................................. 2.82 1.88 1.17
Comprehensive Income
During 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income." This statement does not apply to the Company's current financial
results and therefore, net income equals comprehensive income.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Balance at beginning of year ............ $244,084 $ 95,669 $ 22,219
Allowance related to assets acquired, net 20,152 20,246
Provision for loan losses ............... 77,770 43,989 18,477
Provision for loan losses (1) ........... 456,354 275,310 117,827
Loans charged off ....................... 420,875 195,535 64,083
Recoveries .............................. 15,798 4,405 1,229
-------- -------- --------
Net loan charge-offs .................... 405,077 191,130 62,854
-------- -------- --------
Balance at end of year .................. $393,283 $244,084 $ 95,669
======== ======== ========
(1) Amounts are included in "Net securitizations and credit servicing income."
NOTE 4 - PROPERTY AND EQUIPMENT
The carrying value of property and equipment is as follows:
December 31,
1998 1997
---- ----
Furniture and equipment ....................... $10,974 $ 6,346
Computer software and equipment ............... 9,077 3,733
Construction in progress ...................... 2,013 4,937
Leasehold improvements ........................ 6,204 2,439
------- -------
Total ......................................... $28,268 $17,455
Less: Accumulated depreciation and amortization 6,286 1,991
------- -------
Balance at end of year ........................ $21,982 $15,464
======= =======
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was $4.4 million, $1.4 million, and $0.4 million,
respectively.
NOTE 5 - PORTFOLIO ACQUISITIONS
In December 1998, the Company acquired a $800 million credit card
portfolio from PNC Bank Corp. representing loans from customers outside of PNC's
normal banking relationship. A portion of these credit card receivables were
securitized and sold to investors through a conduit. The Company retains an
interest in the receivables which is financed by borrowings under a credit
facility and proceeds from the Thomas H. Lee Company investments discussed in
Note 6.
In September 1997, the Company acquired a $317 million credit card
portfolio from Key Bank USA, National Association. These credit card receivables
were securitized and sold to investors through a conduit. The Company retains an
interest in the receivables which is financed by borrowings under a credit
facility.
In October 1997, the Company acquired a $405 million credit card
portfolio from Mercantile Bank National Association. This portfolio was also
securitized and sold through a conduit. The Company retains an interest in the
receivables which is financed by borrowings under a credit facility.
NOTE 6 - PRIVATE EQUITY PLACEMENT
On November 13, 1998, the Company entered into agreements with
affiliates of the Thomas H. Lee Company, a private equity firm, (together with
its affiliates, the "Lee Company") to make a total private equity investment of
$300 million in the Company. The Lee Company has agreed to purchase 0.8 million
shares of Series C Perpetual Convertible Preferred Stock (the "Series C
Preferred") which will be convertible into common shares at a conversion price
of $37.25 per common share subject to adjustment in certain circumstances. The
Series C Preferred has a 9% dividend payable in additional shares of Series C
Preferred and will also receive any dividends paid on the Company's common stock
on an as converted basis. The cumulative payment-in-kind dividends are
effectively guaranteed for a seven year period. Assuming conversion of the
Series C Preferred into common stock, the Lee Company would initially own
approximately 30% of the Company on a diluted basis. The Company's Board of
Directors will be expanded to a total of 11 members and the Series C Preferred
will entitle the holders to elect four members subject to approval of the Office
of the Comptroller of the Currency ("OCC"). The Company determined that the
conversion to the Series C Preferred will result in a "change in control" in
certain of the Company's agreements with FCI and the New Credit Facility.
Therefore, the Company was required to either increase the change in control
ownership percentage from 30 to 35 or otherwise exempt the Lee Company from the
change in control provision.
In order to provide the Company funding for the PNC portfolio
acquisition (see Note 5) as well as for general corporate purposes prior to
shareholders' approval and the receipt of notice that there was no regulatory
objection to the transaction, the Lee Company agreed to purchase $200 million in
Series B Perpetual Preferred Stock (the "Series B Preferred") and $100 million
in 12% Senior Notes due 2006 (the "Lee Senior Notes"). The Company also issued
the Lee Company 3.75 million ten-year warrants to purchase shares of the
Company's common stock for $30 subject to adjustment in certain circumstances.
The Series B Preferred has a 12.5% dividend payable in additional shares of
Series B Preferred for ten years, then converting to a dividend payable in cash.
On March 12, 1999, shareholders' approved the conversion of the Series
B Preferred and Lee Senior Notes into Series C Preferred. If notice is received
that there is no regulatory objection to the conversion to the Series C
Preferred, the Series B Preferred and the Lee Senior Notes will be retired, and
the warrants will be canceled causing a one-time, non-cash accounting
adjustment. The excess of the fair value of the Series C Preferred over the
carrying value of the Series B Preferred and the Lee Senior Notes at the time of
the conversion must be allocated to the Lee Senior Notes and the Series B
Preferred based upon their initial fair values. To arrive at net income
available to common stockholders in the calculation of earnings per share, the
amount allocated to the Lee Senior Notes would be recognized as an extraordinary
loss from the early extinguishment of debt and the amount allocated to the
Series B Preferred would be recognized as a reduction of net income available to
common stockholders. The extraordinary loss attributable to the Lee Senior Notes
will not be recorded net of taxes. These adjustments will not have an impact on
total stockholders' equity. At the time of the printing of this annual report,
the fair value of the Series C Preferred was not determined.
NOTE 7 - INITIAL PUBLIC OFFERING
In October, 1996, the Company completed an initial public offering of
3,258,333 shares of its common stock at $16 a share. At that time, the
transaction reduced FCI's ownership interest in the Company to approximately
83%. The Company realized net cash proceeds of approximately $47.2 million from
the sale of such shares after underwriting discounts, commissions and expenses
of the offering.
NOTE 8 - STOCK OPTIONS
In connection with the initial public offering of the Company, the
Company adopted the Metris Companies Inc. Long-Term Incentive and Stock Option
Plan (the "Stock Option Plan"), which permits a variety of stock-based grants
and awards and gives the Company flexibility in tailoring its long-term
compensation programs. In 1998, the Company's Board of Directors adopted a
proposal to increase the number of shares from 1,860,000 shares of common stock
to 4,000,000 shares of common stock, subject to adjustment in certain
circumstances, to be available for awards of stock options or other stock-based
awards. This increase was approved by the Company's Stockholders at the 1998
annual meeting. As of December 31, 1998 and 1997, 1,495,675 and 303,925 shares,
respectively, were available for grant.
The Compensation Committee has the authority to determine the exercise
prices, vesting dates or conditions, expiration dates and other material
conditions upon which options or awards may be exercised, except that the option
price for Incentive Stock Options ("ISOs") may not be less than 100% of the fair
market value of the common stock on the date of grant (and not less than 110% of
the fair market value in the case of an ISO granted to any employee owning more
than 10% of the common stock) and the terms of nonqualified stock options may
not exceed 15 years from the date of grant (not more than 10 years for ISOs and
five years for ISOs granted to any employee owning more than 10% of the common
stock). Full or part-time employees, consultants or independent contractors to
the Company are eligible to receive nonqualified options and awards. Only full
or part-time employees are eligible to receive ISOs.
Effective March 1994, FCI granted the Company's Chief Executive Officer
("CEO") a tandem option (the "Tandem Option") for either (a) 55,000 shares of
FCI's common stock at an exercise price of $15 per share or (b) a 3.3% equity
interest in the portion of the Company that exceeds two times the estimated fair
value of the Company in March 1994. In connection with the initial public
offering, the 3.3% equity interest was converted into options for 656,075 shares
of the Company's common stock with an exercise price of $2.76 per share, which
vests over five years from the effective date. This option was granted pursuant
to the Company's Stock Option Plan. Compensation expense of $0.7 million and
$7.8 million related to these options was recorded for the years ended December
31, 1997 and 1996, respectively.
During 1998 and 1997, the Company granted 1,055,500 and 318,500
options, respectively, to officers and employees of the Company. At the time of
the initial public offering, the Company granted officers and employees of the
Company, Fingerhut, and others options to purchase an aggregate of 742,625
shares of common stock. Of these, 646,500 options were granted at an exercise
price of $16 and the balance were granted at a below-market exercise price per
share, for which expense of $1.2 million was recorded for the year ended
December 31, 1996. All options granted to current officers and employees of the
Company and Fingerhut were at the initial offering price.
The Company also adopted the Metris Companies Inc. Non-Employee
Director Stock Option Plan (the "Director Plan"). Originally, such plan
permitted up to 20,000 shares of common stock for awards of options, subject to
certain adjustments in certain circumstances. In 1997, the Board of Directors
amended the plan to provide up to 100,000 shares of common stock for awards of
options, subject to adjustments in certain circumstances. This Director Plan was
approved by the Company's stockholders at the 1998 annual meeting. During 1998
and 1997, the Company granted 25,000 and 20,000 options, respectively, and at
the time of the initial public offering the Company granted 10,000 options. At
December 31, 1998 and 1997, 45,000 and 70,000 shares, respectively, were
available for grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, the Company continues to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the guidelines of Opinion 25, compensation cost for stock-based employee
compensation plans is recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to acquire the stock. Had compensation cost for these plans been
determined based on the fair value methodology prescribed by
SFAS 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Net income as reported ............... $ 57,348 $ 38,058 $ 20,016
Net income pro forma ................. $ 47,264 $ 36,819 $ 17,395
Diluted earnings per share as reported $ 2.82 $ 1.88 $ 1.17
Diluted earnings per share pro forma . $ 2.37 $ 1.82 $ 1.02
The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for grants in 1998, 1997 and
1996, respectively: dividend yield of 0.10%, 0.11% and 0.17%; expected
volatility of 71.3%, 68.2% and 25.1%; risk-free interest rate of 4.72%, 6.34%
and 6.48%; and expected lives of 7 years, 7 years, and 6.5 years, respectively.
Information regarding the Company's stock option plans for 1998, 1997
and 1996 is as follows:
<TABLE>
Year Ended December 31,
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year ....... 1,682,200 $15.03 1,408,700 $ 8.93 656,075 $ 2.76
Options exercised .......... 34,750 16.00
Options granted ............ 1,080,500 43.55 338,500 40.58 752,625 14.31
Options canceled/forfeited . 107,250 41.75 65,000 16.00
--------- ----- --------- ----- --------- ----
Options outstanding, end of
year .................... 2,620,700 25.68 1,682,200 15.03 1,408,700 8.93
Weighted-average fair value
of options granted during
the year ................ 32.32 28.29 11.54
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
Number Weighted-Average
Outstanding at Remaining Weighted-Average Number Exercisable Weighted Average
Exercise Price 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C>
$ 2.76 752,200 5.6 $ 2.76 730,864 $ 2.76
$16.00-$36.50 1,046,000 8.8 22.58 423,000 16.19
$36.51-$55.50 352,500 8.8 41.12 15,000 44.50
$55.51-$69.38 470,000 9.4 57.67 30,000 56.33
</TABLE>
NOTE 9 - EMPLOYEE BENEFIT PLANS
In January 1997, the Company adopted a defined contribution plan that
is intended to qualify under section 401(k) of the Internal Revenue Code (the
401(k) Plan"). The 401(k) Plan provides retirement benefits for eligible
employees. During 1997 and 1998, the Company's employees participated in the
401(k) Plan, which provides savings and investment opportunities. The 401(k)
Plan stipulates that eligible employees may elect to contribute to the 401(k)
Plan. The Company matches a portion of employee contributions and makes
discretionary contributions based upon the Company's financial performance. For
the years ended December 31, 1998 and 1997, the Company contributed $0.9 million
to the 401(k) for both periods.
Prior to 1997, employees of Direct Merchants Bank participated in a
defined contribution plan maintained by Direct Merchants Bank that covered
substantially all of its employees. This plan was merged with and into the
401(k) Plan and the funds transferred to the 401(k) Plan respective accounts.
Direct Merchants Bank employees were eligible to participate in the 401(k) Plan
as of January 1, 1997.
In 1998, the Company adopted a Non-Qualified Deferred Compensation Plan
to a select group of management or highly compensated employees. These employees
were excluded from participating in the 401(k) plan. This plan provided saving
and investment opportunities to those individuals who elected to defer a portion
of their salary. The Company matches a portion of the employee contribution and
makes discretionary contributions based on the Company's financial performance.
For the year ended December 31, 1998, the Company contributed $0.2 million to
the Plan.
NOTE 10 - INCOME TAXES
The components of the provision for income taxes consisted of the
following:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Current:
Federal $ 98,428 $ 66,496 $ 38,914
State . 8,355 4,663 4,035
Deferred . (70,883) (47,334) (30,419)
-------- -------- --------
$ 35,900 $ 23,825 $ 12,530
======== ======== ========
A reconciliation of the Company's effective income tax rate compared
to the statutory federal income tax rate is as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Statutory federal income tax rate ............. 35.0 35.0 35.0%
State income taxes, net of federal benefit .... 3.2 3.2 3.2%
Other, net .................................... 0.3 0.3 0.3%
--- --- ---
Effective income tax rate ..................... 38.5 38.5 38.5%
==== ==== ====
The Company's deferred tax assets and liabilities are as follows:
<TABLE>
December 31,
1998 1997
Deferred income tax assets resulting deductible temporary differences:
<S> <C> <C>
Allowance for loan losses ............................................................. $119,518 $ 71,240
Deferred revenues ..................................................................... 32,334 16,140
Other ................................................................................. 18,199 9,344
-------- --------
Total deferred tax assets ................................................................ $170,051 $ 96,724
Deferred income tax liabilities resulting from future taxable temporary differences:
Deferred costs ........................................................................ $ 10,672 $ 6,360
Accrued interest on credit card loans ................................................. 5,048 8,577
Accelerated depreciation .............................................................. 1,310 31
Other ................................................................................. 969
-------- --------
Total deferred tax liabilities ........................................................... $ 17,030 $ 15,937
-------- --------
Net deferred tax assets .................................................................. $153,021 $ 80,787
======== ========
</TABLE>
Management believes, based on the Company's history of operating
earnings, expectations for operating earnings in the future, and the expected
reversal of taxable temporary differences, earnings will be sufficient to fully
utilize the deferred tax assets.
NOTE 11 - RELATED PARTY TRANSACTIONS
Prior to September 1998, FCI owned approximately 83% of the outstanding
common shares of the Company. In September 1998, FCI distributed the remaining
shares of the Company to shareholders of FCI in a tax free distribution.
FCI and its various subsidiaries have historically provided financial
and operational support to the Company. Direct expenses incurred by FCI and/or
its subsidiaries for the Company, and other expenses, have been allocated to the
Company using various methods (headcount, actual or estimated usage, etc.).
Since the Company has not historically operated as a separate stand-alone entity
for all periods presented, these allocations do not necessarily represent the
expenses and costs that would have been incurred directly by the Company had it
operated on a stand-alone basis. However, management believes such allocations
reasonably approximate market rates for the services performed. The direct and
allocated expenses represent charges for services such as data processing and
information systems, audit, certain accounting and other similar functions,
treasury, legal, human resources, certain customer service and marketing
analysis functions, certain executive time, and space and property usage
allocations. In addition, the Company has historically managed the sales of
credit insurance products for Fingerhut. In accordance therewith, the Company
has allocated back to Fingerhut certain direct and other expenses using methods
similar to those mentioned above. The historical expenses and cost allocations
have been agreed to by the management of both FCI and the Company, the terms of
which are summarized in an ongoing administrative services agreement between FCI
and the Company. This agreement provides for similar future services using
similar rates and cost allocation methods for various terms.
The financial statements also include an allocation of FCI interest
expense for the net borrowings of the Company from FCI, or a net interest credit
for the net cash flows of the Company loaned to FCI in 1996. These allocations
of interest expense or income for 1996 were based on the net loans made or
borrowings received between the Company and FCI, plus or minus the effects of
intercompany balances outstanding during 1996. The interest rate used to
calculate such expense or credit during 1996 was based on the average short-term
borrowing rates of FCI during 1996.
The Company and Fingerhut have also entered into several other
agreements that detail further business arrangements between the companies. The
retroactive effects of these additional business arrangements have been
reflected in the consolidated financial statements of the Company. The
agreements entered into include a co-brand credit card agreement and a data
sharing agreement, which provides for payment for every Fingerhut co-branded
credit card account booked, as defined, and a payment based on card usage from
such accounts. The parties have also entered into a database access agreement,
which provides the Company with the exclusive right to access and market
financial services products, as defined, to Fingerhut customers, in exchange for
a license fee. The agreement also calls for a solicitation fee per product
mailed to a Fingerhut customer, and a suppress file fee for each consumer name
obtained from a third party and matched to the Fingerhut suppress file before
its solicitation.
The Company and Fingerhut have also entered into an extended service
plan agreement, which provides the company with the exclusive right to provide
and coordinate the marketing of extended service plans to the customers of
Fingerhut. Revenues are received from Fingerhut from such sales, and the Company
reimburses Fingerhut and/or its subsidiaries for certain marketing costs.
Additionally, the Company and FCI have entered into a tax sharing agreement (see
Note 2) and a card registration agreement.
The following table summarizes the amounts of these direct expense
charges and cost allocations (including net interest income or expense), and the
costs to the Company of the agreements mentioned above, for each of the years
reflected in the financial statements of the Company:
<TABLE>
Year Ended December 31,
1998 1997 1996
---- ---- ----
Revenues:
<S> <C> <C> <C>
Fee-based services ............................................. $12,937 $ 7,911 $20,420
Expenses:
Interest expense ............................................... 3,178
Credit card account and other product solicitation and marketing
expenses .................................................... 8,274 8,432 9,335
Data processing services and communications .................... 2,344 1,837 1,324
Other .......................................................... 659 1,336 950
</TABLE>
In the ordinary course of business, executive officers of the Company
or FCI may have credit card loans issued by the Company. Pursuant to the
Company's policy, such loans are issued on the same terms as those prevailing at
the time for comparable loans with unrelated persons and do not involve more
than the normal risk of collectibility.
On November 13, 1998, the Company entered into agreements with the Lee
Company to invest $300 million in the Company (see Note 6). The terms of the
transaction provided that the Lee Company investment would convert into 0.8
million shares of Series C Preferred upon shareholder approval and receipt of
notice that there was no regulatory objection to the transaction. The Company
determined that this conversion might result in a "Change of Control" as defined
in certain agreements between the Company and Fingerhut, which would permit
Fingerhut to terminate any or all of the agreements. Therefore, on December 8,
1998, the Company obtained an agreement (the "Waiver Agreement") from Fingerhut
to waive its right to terminate the agreements if a Change of Control occurred
as a result of the conversion.
Pursuant to the Waiver Agreement, the Company and Fingerhut amended
certain of their other agreements. The most significant change was made in the
database access agreement. The Company's exclusive license to use Fingerhut's
customer database to market financial service products will now become
non-exclusive after October 31, 2001.
On March 12, 1999, shareholders approved the conversion into the Series
C Preferred. If notice is received that there is no regulatory objection to the
conversion to the Series C Preferred, the Lee Company will own approximately 30%
of the Company on a diluted basis, assuming conversion of the Series C Preferred
into common stock.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments to extend credit to consumers represents the unused credit
limits on open credit card accounts. These commitments amounted to $5.9 billion
and $4.1 billion as of December 31, 1998 and 1997, respectively. While these
amounts represent the total lines of credit available to the Company's
customers, the Company has not experienced and does not anticipate all of its
customers will exercise their entire available line at any given point in time.
The Company also has the right to increase, reduce, cancel, alter or amend the
terms of these available lines of credit at any time.
The Company leases certain office facilities and equipment under
various cancelable and non-cancelable operating lease agreements that provide
for the payment of a proportionate share of property taxes, insurance and other
maintenance expenses. These leases also may include scheduled rent increases and
renewal options. Rental expense for such operating leases for the years ended
December 31, 1998, 1997 and 1996 was $6.4 million, $3.9 million and $1.1
million, respectively.
Future minimum lease commitments at December 31, 1998 under cancelable
and non-cancelable operating leases are as follows:
1999 $ 7,884
2000 6,146
2001 3,371
2002 1,421
2003 1,127
Thereafter 4,485
-----
Total minimum lease payments $24,434
=======
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTED PAYMENTS
In the normal course of business, the Company enters into agreements,
or is subject to regulatory requirements, that result in cash, debt and dividend
or other capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent
to which banks can finance or otherwise supply funds to certain of their
affiliates. In particular, Direct Merchants Bank is subject to certain
restrictions on any extensions of credit to or other covered transactions, such
as certain purchases of assets, with the Company or its affiliates. Such
restrictions limit Direct Merchants Bank's ability to lend to the Company and
its affiliates. Additionally, Direct Merchants Bank is limited in its ability to
declare dividends to the Company in accordance with the national bank dividend
provisions.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At December 31, 1998 and 1997, Direct Merchants Bank's Tier
1 risk-based capital ratio, risk-based total capital ratio and Tier 1 leverage
ratio exceeded the minimum required capital levels, and Direct Merchants Bank
was considered a "well capitalized" depository institution under regulations of
the OCC.
The Company is also bound by restrictions set forth in an indenture
related to the Senior Notes dated November 7, 1997 and the Lee Senior Notes (see
Note 6). Pursuant to those indentures, the Company may not make dividend
payments in the event of a default or if all such restricted payments would
exceed 25% of the aggregate cumulative net income of the Company.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as significant credit
exposure with an individual or group engaged in similar activities or affected
similarly by economic conditions. The Company is active in originating credit
card loans throughout the United States, and no individual or group had a
significant concentration of credit risk at December 31, 1998 or 1997. The
following table details the geographic distribution of the Company's retained,
sold and managed credit card loans:
Retained Sold Managed
December 31, 1998
California ..................... $ 94,521 $ 569,205 $ 663,726
Texas .......................... 76,542 460,937 537,479
Florida ........................ 57,138 344,084 401,222
New York ....................... 55,231 332,598 387,829
Ohio ........................... 31,936 192,320 224,256
Illinois ....................... 26,994 162,558 189,552
Pennsylvania ................... 22,795 137,274 160,069
All others ..................... 391,742 2,359,167 2,750,909
------- --------- ---------
Total .................... $ 756,899 $4,558,143 $5,315,042
========== ========== ==========
Retained Sold Managed
December 31, 1997
Texas .......................... $ 61,844 $ 394,571 $ 456,415
California ..................... 58,098 370,652 428,750
Florida ........................ 35,654 227,477 263,131
New York ....................... 29,246 186,589 215,835
Ohio ........................... 17,961 114,589 132,550
Illinois ....................... 15,914 101,533 117,447
Pennsylvania ................... 15,681 100,048 115,729
All others ..................... 246,228 1,570,851 1,817,079
------- --------- ---------
Total ....................... $ 480,626 $3,066,310 $3,546,936
========== ========== ==========
The Company targets its consumer credit products primarily to moderate
income consumers. Primary risks associated with lending to this market are that
they may be more sensitive to future economic downturn, which may make them more
likely to default on their obligations.
At December 31, 1998 and 1997, the majority of federal funds sold were
made to one bank, which represents a concentration of credit risk to the
Company. The Company is able to monitor and mitigate this risk since all federal
funds are sold on a daily origination and repayment basis and therefore may be
recalled quickly should the credit risk of the counterparty bank increase above
certain limits set by the Company.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of its financial instruments
in accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." Financial instruments include both assets and liabilities, whether
or not recognized in the Company's consolidated balance sheets, for which it is
practicable to estimate fair value. Additionally, certain intangible assets
recorded on the consolidated balance sheets, such as purchased credit card
relationships, and other intangible assets not recorded on the consolidated
balance sheets (such as the value of the credit card relationships for
originated loans and the franchise values of the Company's various lines of
business) are not considered financial instruments and, accordingly, are not
valued for purposes of this disclosure. The Company believes that there is
substantial value associated with these assets based on current market
conditions, including the purchase and sale of such assets. Accordingly, the
aggregate estimated fair value amounts presented do not represent the entire
underlying value of the Company.
Quoted market prices generally are not available for all of the
Company's financial instruments. Accordingly, in cases where quoted market
prices are not available, fair values were estimated using present value and
other valuation techniques that are significantly affected by the assumptions
used, including the discount rate and estimated future cash flows. Such
assumptions are based on historical experience and assessments regarding the
ultimate collectibility of assets and related interest, and estimates of product
lives and repricing characteristics used in the Company's asset/liability
management process. These assumptions involve uncertainties and matters of
judgment, and therefore, cannot be determined with precision. Thus, changes in
these assumptions could significantly affect the fair-value estimates.
A description of the methods and assumptions used to estimate the fair
value of each class of the Company's financial instruments is as follows:
Cash and cash equivalents and accrued interest and fees receivable
The carrying amounts approximate fair value due to the short-term
nature of these instruments.
Net retained interests in loans securitized and loans held for securitizations
Currently, credit card loans are originated with variable rates of
interest that adjust with changing market interest rates. Thus, carrying value,
which is net of the allowance for loan losses, approximates fair value. However,
this valuation does not include the value that relates to estimated cash flows
generated from new loans from existing customers over the life of the cardholder
relationship. Accordingly, the aggregate fair value of the credit card loans
does not represent the underlying value of the established cardholder
relationships.
Other receivables due from credit card securitizations, net
The following components of this net asset are as follows:
Interest-only strip
The fair value of the interest-only strip is estimated by discounting
the expected future cash flows from the Trust and each of the Conduits at rates
which management believes to be consistent with those that would be used by an
independent third party. However, because there is no active market for this,
the fair values presented may not be indicative of the value negotiated in an
actual sale. The future cash flows used to estimate fair value is limited to the
securitized receivables that exist at year end and does not reflect the value
associated with future receivables generated by cardholder activity. The
significant assumptions used to estimate fair value include: (i) discount rates;
(ii) customer payment rates; and (iii) anticipated charge-offs over the life of
the loans are summarized as follows:
December 31,
1998 1997
Discount rate 10% 10%
Payment rate 6% 5%
Default rate 16% 14%
Interest rate cap, swap, and floor agreements
The fair values of interest rate cap, swap, and floor agreements were
obtained from dealer quoted prices. These values generally represent the
estimated amounts the Company would receive or pay to terminate the agreements
at the reporting dates, taking into consideration current interest rates and the
current creditworthiness of the counterparties.
Other amounts
For the other components of other receivables due from credit card
securitizations, net, the carrying amount is a reasonable estimate of the fair
value.
Debt
Short-term borrowings are made with variable rates of interest that
adjust with changing market interest rates. Thus, carrying value approximates
fair value.
The fair value of long-term debt was obtained from quoted market
prices, when available.
The estimated fair values of the Company's financial instruments are
summarized as follows:
<TABLE>
December 31,
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 37,347 $ 37,347 $ 48,223 $ 48,223
Retained interest in loans securitized, 360,186 360,186 227,747 227,747
net
Loans held for securitization ......... 3,430 3,430 8,795 8,795
Other receivables due from credit card
securitizations, net:
Interest-only strip ................ 2,449 2,449
Interest rate swap agreements ...... 21,667
Interest rate cap agreements ....... 2,912 2,925 3,497 170
Interest rate floor agreements ..... 187 3,233
Other amounts ...................... 182,836 182,836 71,540 71,540
Debt .................................. 310,896 317,666 244,000 245,750
</TABLE>
NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS
Prior to the Spin Off, the Company had entered into interest rate cap
and swap agreements to hedge the cash flow and earnings impact of fluctuating
market interest rates on the spread between the floating rate loans owned by the
Trust and the floating and fixed rate securities issued by the Trust to fund the
loans. In connection with the issuance of term asset-backed securities by the
Trust in 1998, the Company entered into term interest rate cap agreements with
highly-rated bank counterparties in a total notional amount of $1.8 billion
effectively capping the potentially negative impact to the Trust of increases in
the floating interest rate of the securities at approximately 9.2%. These
interest rate cap agreements are for terms ranging from six to eight years and
will terminate between October 2004 and April 2006. The Company also entered
into a term interest rate cap agreement in connection with the PNC portfolio
acquisition with highly-rated bank counterparties in a total notional amount of
$640 million, effectively capping the potentially negative impact of increases
in market interest rate of the securities at 7.35% through May 2002. Due to the
Spin Off, the Company terminated interest rate swap agreements guaranteed by FCI
related to two trust series fixed rate asset-backed securities issuances.
Proceeds were utilized to purchase interest rate floor contracts from
highly-rated counterparties which did not require a FCI guaranty. The floors
were in the same notional amounts, fixed interest rate strike rates, and
maturities as the previous swaps in order to hedge the potential impact on the
Company's cash flow and earnings of a low market interest rate environment in
which the yield on the Trust's floating rate loans might decline causing the
margin over the fixed rate funding to compress. During October 1998, the Company
terminated the interest rate floors related to one of the trust series. The gain
of approximately $34.1 million on this termination is being amortized into
income over the remaining life of the securities. The cash proceeds of
approximately $43.4 million were used to reduce borrowings under the New Credit
Facility.
Interest rate risk management contracts are generally expressed in
notional principal or contract amounts that are much larger than the amounts
potentially at risk for nonpayment by counterparties. Therefore, in the event of
nonperformance by the counterparties, the Company's credit exposure is limited
to the uncollected interest and contract market value related to the contracts
that have become favorable to the Company. Although the Company does not require
collateral from counterparties on its existing agreements, the Company does
control the credit risk of such contracts through established credit approvals,
risk control limits, and the ongoing monitoring of the credit ratings of
counterparties. The Company currently has no reason to anticipate nonperformance
by the counterparties.
NOTE 17 - SEGMENTS
The Company is organized based on the products and services that it
offers. Under this organizational structure, the Company operates in two
principal areas: consumer credit products and fee-based services. The Company's
primary consumer credit products are unsecured credit cards, including the
Direct Merchants Bank MasterCard and Visa. The Company's credit card accounts
include customers obtained from the Fingerhut Database and other customers for
whom general credit bureau information is available.
The Company markets its fee-based services, including (i) debt waiver
protection for unemployment, disability, and death, (ii) membership programs
such as card registration, purchase protection and other club memberships, and
(iii) third-party insurance, directly to its credit card customers and customers
of third parties. The Company currently administers its extended service plans
sold through a third-party retailer, and the customer pays the retailer
directly. In addition, the Company develops customized targeted mailing lists
from information contained in the Company's databases for use by unaffiliated
companies in their own financial services product solicitation efforts that do
not directly compete with those of the Company.
The information in the following tables is derived directly from
internal segment reporting used for management purposes. The expenses, assets
and liabilities attributable to corporate functions are not allocated to the
operating segments. There were no operating assets located outside of the United
States for the years presented.
The segment information reported below is presented on a managed basis.
Management uses this basis to review segment performance and to make operating
decisions. To do so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with generally accepted accounting principles. The reconciliation
column in the segment tables includes adjustments to present the information on
an owned basis in the consolidated column as reported in the financial
statements of this annual report.
Employee compensation, data processing services and communications,
third party servicing expenses, and other expenses including: occupancy,
depreciation and amortization, professional fees, other general and
administrative expenses, and income taxes have not been allocated to the
operating segments and are included in the reconciliation of the income before
income taxes for the reported segments to the consolidated total. The Company
does not allocate capital expenditures for leasehold improvements, capitalized
software and property and equipment to operating segments.
The fee-based services operating segment pays a commission to the
consumer credit products segment for successful marketing efforts to the
consumer credit products segment's cardholders at a rate similar to those paid
to the Company's other third parties. The fee-based services segment reports
interest income and the consumer credit products segment reports interest
expense at the Company's weighted average borrowing rate for the excess cash
flow generated by the fee-based services segment and used by the consumer credit
products segment to fund the growth of cardholder balances.
<TABLE>
1998
Consumer Credit Fee-Based
Products Services Reconciliation (a) Consolidated
<S> <C> <C> <C> <C>
Interest income ...... $ 740,768 $ 2,754 $ (630,311) (b) $ 113,211
Interest expense ..... 237,710 (207,197) (c) 30,513
------- ------- -------- -------
Net interest income 503,058 2,754 (423,114) 82,698
Other operating income 239,597 106,601 (33,240) 312,958
Total revenue ........ 980,365 109,355 (663,551) 426,169
Income before income
taxes ............. 188,148 (d) 73,279 (d) (168,179) (e) 93,248
Income taxes ......... 35,900 35,900
Total assets ......... $5,375,925 $ 58,052 $ (4,488,258) (f) $ 945,719
1997
Consumer Credit Fee-Based
Products Services Reconciliation (a) Consolidated
Interest income ...... $ 435,833 $ 2,484 $ (369,123) (b) $ 69,194
Interest expense ..... 131,956 (120,005) (c) 11,951
---------- ------------ ----------- -------------
Net interest income 303,877 2,484 (249,118) 57,243
Other operating income 148,869 64,000 (26,192) 186,677
Total revenue ........ 584,702 66,484 (395,315) 255,871
Income before income
taxes .............. 110,973 (d) 49,162 (d) (98,252) (e) 61,883
Income taxes ......... 23,825 23,825
Total assets ......... $3,505,165 $ 30,488 $(2,996,991) (f) $ 538,662
1996
Consumer Credit Fee-Based
Products Services Reconciliation (a) Consolidated
Interest income ...... $ 198,633 $ 1,213 $ (169,652) (b) $ 30,194
Interest expense ..... 56,355 (52,249) (c) 4,106
---------- ------------- ----------- --------------
Net interest income 142,278 1,213 (117,403) 26,088
Other operating income 77,952 48,695 (425) 126,222
Total revenue ........ 276,585 49,908 (170,077) 156,416
Income before income
taxes .............. 61,503 30,733 (59,690) (e) 32,546
Income taxes ......... 12,530 12,530
Total assets ......... $1,612,234 $ 1,057 $(1,363,293) (f) $ 249,998
</TABLE>
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest income includes the
elimination of $2.8 million, $2.5 million, and $1.2 million of intercompany
interest received by the fee based services segment from the consumer credit
products segment for 1998, 1997, and 1996, respectively.
(c) The reconciliation to consolidated owned interest expense includes the
elimination of $2.8 million, $2.5 million, and $1.2 million of intercompany
interest paid by the consumer credit products segment to the fee-based services
segment for 1998, 1997, and 1996, respectively.
(d) Income before income taxes includes intercompany commissions paid by the
fee-based services segment to the consumer credit products segment for
successful marketing efforts to consumer credit products cardholders of $3.3
million, and $4.4 million for 1998, and 1997, respectively.
(e) The reconciliation to the owned income before income taxes includes:
unallocated costs related to employee compensation; data processing and
communications; third party servicing expenses; and other expenses. The majority
of these expenses, although not allocated for the internal segment reporting
used by management, relate to the consumer credit product segment.
(f) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors' interest in
securitized loans to present total assets on an owned basis.
NOTE 18 - DEBT
On June 30, 1998, the Company executed a new $200 million, three-year
revolving credit facility and a $100 million five-year term loan (the "New
Credit Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit Facility which is not guaranteed by FCI replaced the Company's $300
million, five-year revolving credit facility (the "Old Credit Facility"). The
New Credit Facility is secured by receivables and subsidiary stock and
guaranteed by a Company subsidiary. Financial covenants in the New Credit
Facility include, but are not limited to, requirements concerning minimum net
worth, minimum tangible net worth to net managed receivables and tangible net
worth plus reserves to delinquent receivables. At December 31, 1998, the Company
was in compliance with all financial covenants under this agreement. At December
31, 1998, the Company had outstanding borrowings of $110 million under the New
Credit Facility. At December 31, 1997, the Company had outstanding borrowings of
$144 million under the Old Credit Facility. The weighted average interest rates
on the borrowings at December 31, 1998 and 1997, were 7.9% and 6.5%,
respectively.
In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 (the "Senior Notes") pursuant to an exemption under
the Securities Act of 1933, as amended. In January 1998, the Company commenced
an exchange offer for the Senior Notes pursuant to a registration statement. The
terms of the new Senior Notes are identical in all material respects to the
original private issue. The net proceeds of $97 million were used to pay down
borrowings under the Old Credit Facility. The Senior Notes are unconditionally
guaranteed on a senior basis, jointly and severally, by Metris Direct, Inc. (the
"Guarantor"), and all future subsidiaries of the Company that guarantee any of
the Company's indebtedness, including the New Credit Facility. The guarantee is
an unsecured obligation of the Guarantor and ranks pari passu with all existing
and future unsubordinated indebtedness. As part of the Lee Company investment,
the Company issued the Lee Senior Notes (see Note 6) which are similar in all
material respects to the Senior Notes. The Company also has approximately $0.9
million of debt with local governments to support growth in those areas.
Metris Direct, Inc. has various subsidiaries which have not guaranteed the
Senior Notes. The following condensed consolidating financial statements of the
Company, the Guarantor subsidiary and the non-guarantor subsidiaries are
presented for purposes of complying with SEC reporting requirements. Separate
financial statements of Metris Direct, Inc. and the non-guaranteeing
subsidiaries are not presented because management has determined that the
subsidiaries financial statements would not be material to investors.
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1998
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Assets:
<S> <C> <C> <C> <C> <C>
Cash and due from banks ............. $ (5,010) $ (156) $ 27,280 $ $ 22,114
Federal funds sold .................. 15,060 15,060
Short-term investments .............. 3 170 173
------- ------- ------- -------
Cash and cash equivalents ........... (5,007) (156) 42,510 37,347
------- ------- ------- -------
Retained interests in loans securitized 753,469 753,469
Less: Allowance for loan losses ..... 97 393,186 393,283
------- ------- ------- -------
Net retained interests in loans securitized (97) 360,283 360,186
------- ------- ------- -------
Loans held for securitization ....... 1,876 1,554 3,430
Property and equipment, net ......... 18,243 3,739 21,982
Accrued interest and fees receivable (11) 6,020 6,009
Prepaid expenses and deferred charges 30,487 17,833 10,784 59,104
Deferred income taxes ............... 1,049 19,427 132,545 153,021
Customer base intangible ............ 81,892 81,892
Other receivables due from credit
card securitizations, net ........ 185,935 185,935
Other assets ........................ 6,000 6,989 23,824 36,813
Investment in subsidiaries .......... 756,455 774,986 (1,531,441)
------- ------- ------- ---------- -------
Total assets ........................ $ 790,752 $ 837,322 $ 849,086 $(1,531,441) $ 945,719
=========== =========== =========== =========== ===========
Liabilities:
Interest-bearing deposit from ....... $ (1,000) $ $ 1,000 $ $
affiliate
Debt ................................ 318,298 15,021 (22,423) 310,896
Accounts payable .................... 3,140 3,786 12,165 19,091
Current income taxes payable to
(receivable from) FCI .......... 3,722 (5,692) 33,753 31,783
Deferred income ..................... 31,753 47,515 45,624 124,892
Accrued expenses and other liabilities 1,857 20,237 3,981 26,075
------- ------- ------- -------
Total liabilities ................... 357,770 80,867 74,100 512,737
------- ------- ------- -------
Stockholders' Equity:
Preferred stock ..................... 201,100 201,100
Common Stock ........................ 193 1,002 1,052 (2,054) 193
Paid-in capital ..................... 107,615 651,863 628,339 (1,280,202) 107,615
Retained earnings ................... 124,074 103,590 145,595 (249,185) 124,074
------- ------- ------- ---------- -------
Total stockholders' equity .......... 432,982 756,455 774,986 (1,531,441) 432,982
------- ------- ------- ---------- -------
Total liabilities and stockholders'
equity $ 790,752 $ 837,322 $ 849,086 $(1,531,441) $ 945,719
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1997
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Assets:
<S> <C> <C> <C> <C> <C>
Cash and due from banks ............ $ 320 $ 390 $ 20,296 $ $ 21,006
Federal funds sold ................. 27,089 27,089
Short-term investments 16 112 128
------- ------- ------- -------
Cash and cash equivalents........... 336 390 47,497 48,223
------- ------- ------- -------
Credit card loans:
Retained interests in loans
securitized...................... 471,831 471,831
Less: Allowance for loan losses..... 611 243,473 244,084
------- ------- ------- -------
Net credit card loans............... (611) 228,358 227,747
------- ------- ------- -------
Loans held for securitization ...... 8,140 655 8,795
Premises and equipment, net ........ 13,899 1,565 15,464
Accrued interest and fees receivable 9 4,301 4,310
Prepaid expenses and deferred ...... 138 15,075 3,260 18,473
charges
Deferred income taxes .............. 682 12,638 67,467 80,787
Customer base intangible ........... 1,567 35,185 36,752
Other assets ....................... 3,489 6,983 10,153 20,625
Other receivables due from credit
card securitizations, net ....... 66 77,420 77,486
Investment in subsidiaries ......... 349,731 366,977 (716,708)
------- ------- ------- -------- -------
Total assets ....................... $ 363,547 $ 415,962 $ 475,861 $(716,708) $ 538,662
========= ========= ========= ========= =========
Liabilities:
Debt ............................... $ 276,598 $ 7,975 $ (40,573) $ $ 244,000
Accounts payable ................... (1,086) 7,975 28,467 35,356
Current income taxes payable to
(receivable from) FCI ........... (90,003) (486) 100,190 9,701
Deferred income .................... 33 35,044 14,127 49,204
Accrued expenses and other
liabilities...................... 1,967 15,723 6,673 24,363
------- ------- ------- -------
Total liabilities .................. 187,509 66,231 108,884 362,624
------- ------- ------- -------
Stockholders' Equity:
Common stock ....................... 192 1,002 1,002 (2,004) 192
Paid-in capital .................... 107,059 279,842 279,815 (559,657) 107,059
Retained earnings .................. 68,787 68,887 86,160 (155,047) 68,787
------- ------- ------- -------- -------
Total stockholders' equity ......... 176,038 349,731 366,977 (716,708) 176,038
------- ------- ------- -------- -------
Total liabilities and stockholders'
equity .......................... $ 363,547 $ 415,962 $ 475,861 $(716,708) $ 538,662
========= ========= ========= ========= =========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Year Ended December 31, 1998
(Dollars in thousands)
Non-
Metris Guarantor Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Interest Income:
<S> <C> <C> <C> <C> <C>
Credit card loans and retained
interests in loans securitized ...... $ 1,957 $ $ 109,161 $ $ 111,118
Federal funds sold ...................... 1,065 1,065
Other ................................... 215 813 1,028
--- ------ ------ ------
Total interest income .............. 2,172 111,039 113,211
Interest expense ........................ 8,725 24,444 (2,656) 30,513
----- ------ ------ ------
Net Interest Income/(Expense) ........... (6,553) (24,444) 113,695 82,698
Provision for loan losses ............... 532 77,238 77,770
----- ------ ------ ------
Net interest income/(expense) after
provision for loan losses ............ (7,085) (24,444) 36,457 4,928
Other Operating Income:
Net securitization and credit card
servicing income ..................... 9,668 (20) 128,573 138,221
Credit card fees, interchange and
other credit card income ............. 636 67,500 68,136
Fee-based services revenues 28,425 78,176 106,601
--- ------ ------ ------
10,304 28,405 274,249 312,958
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ................... 14,992 25,957 40,949
Employee compensation ................... 55,980 6,647 62,627
Data processing services and
communications ....................... 5,276 30,169 35,445
Third-party servicing expense ........... (51,565) 62,639 11,074
Warranty and debt waiver
underwriting and claims
servicing expense .................... 1,875 10,404 12,279
Credit card fraud losses ................ 18 4,418 4,436
Other ................................... 529 18,899 38,400 57,828
----- ------ ------ ------
547 45,457 178,634 224,638
----- ------ ------ ------
Income/(Loss) Before Income Taxes
and Equity in Income of
Subsidiaries ......................... 2,672 (41,496) 132,072 93,248
Income taxes ............................ 1,028 (16,768) 51,640 35,900
Equity in income of subsidiaries ........ 55,704 80,432 (136,136)
----- ------ ------ -------- ------
Net Income/(Loss) ....................... $ 57,348 $ 55,704 $ 80,432 $ (136,136) $ 57,348
========= ========= =========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Year Ended December 31, 1997
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Interest Income:
<S> <C> <C> <C> <C> <C>
Credit card loans ................................ $ 1,063 $ $65,632 $ $ 66,695
Federal funds sold ............................... 1,636 1,636
Other ............................................ 184 679 863
------ ----- ------ ------
Total interest income ........................ 1,247 67,947 69,194
Interest expense ................................. 13,937 432 (2,418) 11,951
------ ----- ------ ------
Net interest income/(expense) .................... (12,690) (432) 70,365 57,243
Provision for loan losses ........................ 682 43,307 43,989
------ ----- ------ ------
Net interest income/(expense)
after provision for loan losses ............... (13,372) (432) 27,058 13,254
Other Operating Income:
Net securitization and credit card
servicing income .............................. 10,653 68,880 79,533
Credit card fees, interchange and
other credit card income ...................... 478 (21) 43,274 43,731
Fee-based services revenues ...................... 8,536 54,877 63,413
------ ----- ------ ------
11,131 8,515 167,031 186,677
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ............................ 1,783 28,720 30,503
Employee compensation ............................ 32,735 2,465 35,200
Data processing services and
communications ................................ 2,883 17,204 20,087
Third-party servicing expense .................... 51 (20,396) 33,056 12,711
Warranty and debt waiver
underwriting and claims
servicing expense ............................. 549 5,504 6,053
Credit card fraud losses ......................... 27 3,213 3,240
Other ............................................ 382 12,644 17,228 30,254
------ ------ ------ ------
460 30,198 107,390 138,048
------ ------ ------ ------
Income/(Loss) Before Income Taxes
and Equity in Income of
Subsidiaries .................................. (2,701) (22,115) 86,699 61,883
Income taxes ..................................... (1,040) (8,475) 33,340 23,825
Equity in income of subsidiaries ................. 39,719 53,359 (93,078)
------ ------ ------- -------- ---------
Net Income/(Loss) ................................ $ 38,058 $ 39,719 $ 53,359 $ (93,078) $ 38,058
========= ========= ========= ========= =========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Year Ended December 31, 1996
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Interest Income:
<S> <C> <C> <C> <C> <C>
Credit card loans ..................... $ 199 $ $ 28,829 $ $ 29,028
Federal funds sold .................... 867 867
Other ................................. 105 194 299
----- ------ ------- -------
Total interest income ........... 304 29,890 30,194
Interest expense ...................... 7,272 (2,575) (591) 4,106
----- ------ ------- -------
Net Interest Income/(Expense) ......... (6,968) 2,575 30,481 26,088
Provision for loan losses ............. 83 18,394 18,477
----- ------ ------- -------
Net interest income/(expense) after
provision for loan losses .......... (7,051) 2,575 12,087 7,611
Other Operating Income:
Net securitization and credit card
servicing income ................... 3,859 46,062 49,921
Credit card fees, interchange and other
credit card income ................. 49 107 25,872 26,028
Fee-based services revenues ........... 22,000 28,273 50,273
----- ------ ------- -------
3,908 22,107 100,207 126,222
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses 5,805 9,563 13,929 29,297
Employee compensation ................. 22,076 992 23,068
Data processing services and
communications ..................... 1,600 11,157 12,757
Third-party servicing expense ......... 3 (6,757) 15,961 9,207
Warranty and debt waiver underwriting
and claims servicing expense ....... 6,463 3,561 10,024
Credit card fraud losses .............. 10 2,266 2,276
Other ................................. 1 9,900 4,757 14,658
----- ------ ------- -------
5,819 42,845 52,623 101,287
----- ------ ------- -------
Income/(Loss) Before Income Taxes
and Equity in Income of Subsidiaries (8,962) (18,163) 59,671 32,546
Income taxes .......................... (3,450) (6,993) 22,973 12,530
Equity in income of subsidiaries ...... 25,528 36,698 (62,226)
----- ------ ------- -------- -------
Net Income/(Loss) ..................... $ 20,016 $ 25,528 $ 36,698 $ (62,226) $ 20,016
========= ========= ========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended December 31
(Dollars in thousands)
1998
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities .... $ 97,274 $ (22,625) $ (9,737) $ 64,912
----------- ------------- ------------- -----------
Investing Activities:
Proceeds from sales of loans ........................... 1,491,832 1,491,832
Net loans originated or collected ...................... 8,106 (909,846) (901,740)
Credit card portfolio acquisition ...................... (921,558) (921,558)
Additions to premises and equipment .................... (8,414) (2,400) (10,814)
----------- ------------- ------------- -----------
Net cash provided by (used in) investing activities .... 8,106 (8,414) (341,972) (342,280)
Financing Activities:
Net increase (decrease) in debt ........................ 40,700 7,046 19,150 66,896
Net proceeds from issuance of common stock ............. (371,464) 23,447 348,574 557
Cash dividends paid .................................... 20,039 (21,000) (961)
Net proceeds from issuance of preferred stock 200,000 200,000
----------- ------------- ------------- -----------
Net cash provided by (used in) financing activities .... (110,725) 30,493 346,724 266,492
----------- ------------- ------------- -----------
Net increase in cash and cash equivalents .............. (5,345) (546) (4,985) (10,876)
Cash and cash equivalents at beginning of year ......... 336 390 47,497 48,223
----------- ------------- ------------- -----------
Cash and cash equivalents at end of year ............... $ (5,009) $ (156) $ 42,512 $ 37,347
=========== ============= =============== ===========
</TABLE>
<TABLE>
1997
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ (51,357) $ (526) $ 195,096 $ 143,213
----------- ----------- ----------- -----------
Investing Activities:
Proceeds from sales of loans ....................... 1,665,700 1,665,700
Net loans originated or collected .................. 3,357 (1,234,580) (1,231,223)
Credit card portfolio acquisition .................. (738,104) (738,104)
Additions to premises and equipment (10,515) (1,190) (11,705)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 3,357 (10,515) (308,174) (315,332)
----------- ----------- ----------- -----------
Financing Activities:
Decrease in interest bearing deposit ............... (1,000) (1,000)
Net (decrease) increase in short-term borrowings ... 127,425 11,348 (48,936) 89,837
Issuance of senior notes ........................... 100,000 100,000
Cash dividends paid ................................ 15,350 (15,927) (577)
Capital contributions .............................. (197,814) 197,814
----------- ----------- ----------- -----------
Net cash provided by financing activities 43,961 11,348 132,951 188,260
----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (4,039) 307 19,873 16,141
Cash and cash equivalents at beginning of year 4,375 83 27,624 32,082
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year ........... $ 336 $ 390 $ 47,497 $ 48,223
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 1996
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities . $ (40,549) $ (4,991) $ 129,193 $ 83,653
----------- ----------- ------------ ---------------
Investing Activities:
Proceeds from sales of loans ........................ 952,055 952,055
Net loans originated or collected ................... (14,105) (1,058,216) (1,072,321)
Additions to premises and equipment (3,782) (331) (4,113)
----------- ----------- ------------ ---------------
Net cash (used in) investing activities ............. (14,105) (3,782) (106,492) (124,379)
----------- ----------- ------------ ---------------
Financing Activities:
Net (decrease) increase in short-term borrowings .... 50,172 8,856 (68,347) (9,319)
Net proceeds from issuance of common stock .......... 47,384 47,384
Capital contributions (38,527) 38,527
----------- ----------- ------------ ---------------
Net cash provided by (used in) financing activities . 59,029 8,856 (29,820) 38,065
----------- ----------- ------------ ---------------
Net increase (decrease) in cash and cash equivalents 4,375 83 (7,119) (2,661)
Cash and cash equivalents at beginning of year 34,743 34,743
----------- ----------- ------------ ---------------
Cash and cash equivalents at end of year ............ $ 4,375 $ 83 $ 27,624 $ 32,082
=========== ============ =========== ===========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Metris
Companies Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 Metris
Companies Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 20, 1999, except for the last paragraph of Note 6 and the last paragraph
of Note 11 which are as of March 12, 1999
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is set
forth under "Proposal One: Election of Directors," in the Company's proxy
statement for the annual meeting of shareholders to be held on May 11, 1999,
which will be filed within 120 days of December 31, 1998 (the "Proxy Statement")
and is incorporated herein by reference. The information required by this item
with respect to executive officers is, pursuant to instruction 3 of Item 401(b)
of Regulation S-K, set forth in Part I of this Form 10-K under "Executive
Officers of the Registrant." The information required by this item with respect
to reports required to be filed under Section 16(a) of the Securities Exchange
Act of 1934 is set forth under "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under "Compensation
Tables and Compensation Matters" in the Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under "Company Stock
Owned by Officers and Directors" and "Persons Owning More Than Five Percent of
Company Common Stock " in the Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under "Corporate
Governance" in the Proxy Statement and is incorporated herein by reference.
With the exception of the information incorporated by reference in
Items 10-13 above, the Proxy Statement is not to be deemed filed as part of this
Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are made part of this report:
1. Consolidated Financial Statements - See Item 8 above.
2. Financial Statement Schedules
All schedules to the consolidated financial statements
normally required by Form 10-K are omitted since they are
either not applicable or the required information is shown
in the financial statements or the notes thereto.
(b) Reports on Form 8-K:
On December 22, 1998, the Company filed a Current Report
on Form 8-K to report the purchase of approximately
500,000 credit card accounts form PNC National Bank.
The Company also reported the issue and sale to the
Thomas H. Lee Company of $200 million of 12.5%
Series B Preferred Stock, $100 million aggregate
principal amount of 12% Senior Notes due 2006 and
warrants to purchase 3,750,000 shares of the
Company's Common Stock at an exercise price of $30
per share.
(c) Exhibits: See Exhibit Index on page 65 of this Report.
<PAGE>
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 on the 26th day of March,
1999.
METRIS COMPANIES INC.
(Registrant)
By /s/ Ronald N. Zebeck
-------------------------------
Ronald N. Zebeck
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Metris Companies
Inc., the Registrant, and in the capacities and on the dates indicated.
Signature Title Date
Principal executive President, March 26, 1999
officer and director: Chief Executive Officer
and Director
/s/ Ronald N. Zebeck
- -------------------------------
Ronald N. Zebeck
Principal financial officer: Executive Vice President, March 26, 1999
Chief Financial Officer
/s/ David D. Wesselink
- -------------------------------
David D. Wesselink
Principal accounting officer: Vice President, Finance, March 26, 1999
Corporate Controller
/s/ Jean C. Benson
- -------------------------------
Jean C. Benson
<PAGE>
Directors:
/s/ Theodore Deikel Director March 26, 1999
- -------------------------------
Theodore Deikel
/s/ Dudley C. Mecum Director March 26, 1999
- -------------------------------
Dudley C. Mecum
/s/ Frank D. Trestman Director March 26, 1999
- -------------------------------
Frank D. Trestman
/s/ Lee R. Anderson, Sr. Director March 26, 1999
- -------------------------------
Lee R. Anderson, Sr.
/s/ Derek V. Smith Director March 26, 1999
- --------------------------------
Derek V. Smith
/s/ John A. Cleary Director March 26, 1999
- --------------------------------
John A. Cleary
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
Charter Documents:
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No. 333-10831)).
3.2 Amended and Restated Bylaws of the Company.
Instruments Defining Rights:
4.1 Indenture, dated as of November 7, 1997, among the Company, Metris
Direct, Inc. as the Guarantor, and the First National Bank of Chicago,
as Trustee, including form of 10% Senior Note due 2004 and form of
Guarantee by Metris Direct, Inc. (incorporated by reference to Exhibit
4.a to the Company's Registration Statement on Form S-4 (File No.
333-43771)).
4.2 Certificate of Designation of Series B Perpetual Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated December 22, 1998 (File No. 1-12351)).
4.3 Certificate of Designation of Series C Perpetual Preferred Stock
(incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K dated December 22, 1998
(File No. 1-12351)).
4.4 Certificate of Designation of Series D Junior Participating
Convertible Preferred Stock (incorporated by reference to
Exhibit 4.3 of the Company's Current Report on Form 8-K dated
December 22, 1998 (File No. 1-12351)).
4.5 Securities Purchase Agreement, dated as of November 13, 1998, among the
Company, the Thomas H. Lee Equity Fund IV, L.P. (the "Lee Fund") and
certain affiliates of the Lee Fund (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K dated December 22, 1998
(File No. 1-12351)).
4.6 Indenture, dated as of December 9, 1998, among the Company, the
Guarantors named therein and The Bank of New York,
as Trustee (incorporated by reference to Exhibit 4.4 to the Company's
Current Report on Form 8-K dated December 22, 1998 (File No. 1-12351)).
4.7 Registration Rights Agreement, dated as of December 9, 1998, between the
Company and the Investors named therein (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K dated December
22, 1998 (File No. 1-12351)).
4.8 Warrant Agreement, dated as of December 9, 1998, between the
Company and the Purchasers named therein (incorporated by
reference to Exhibit 4.5 to the Company's Current Report on
Form 8-K dated December 22, 1998 (File No. 1-12351)).
Material Contracts
10.1 Amended and Restated Pooling and Servicing Agreement, dated as
of July 30, 1998, among Metris Receivables, Inc. ("MRI"), as
Transferor, Direct Merchants Credit Card Bank, National
Association ("DMCCB"), as Servicer, and The Bank of New York
(Delaware), as Trustee (incorporated by reference to Exhibit
4(a) to MRI's Registration Statement on Form S-3 (File No.
333-61343)).
10.2 Amended and Restated Bank Receivables Purchase Agreement,
dated as of July 30, 1998, between DMCCB and the Company
(incorporated by reference to Exhibit 4(c) to MRI's
Registration Statement on Form S-3 (File No. 333-61343)).
10.3 Amended and Restated Bank Receivables Purchase Agreement,
dated as of July 30, 1998, between the Company and MRI
(incorporated by reference to Exhibit 4(d) to MRI's
Registration Statement on Form S-3 (File No. 333-61343)).
10.4 Owner Trust Agreement, dated as of July 30, 1998, among MRI
and Wilmington Trust Company (incorporated by reference to
Exhibit 10.1(ii) to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 (File No.
1-12351)).
10.5 Liquidity Agreements, each dated July 30, 1998, among Metris Owner
Trust, the Lenders thereto and the Administrative
Agent (pursuant to Instruction 2 to Item 601, only one such agreement
has been filed) (incorporated by reference to Exhibit 10.1(iii) to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998 (File No.1-12351)).
10.6* Stock Option and Valuation Rights Agreement, dated as of March 21,
1994, between Fingerhut Companies, Inc. and Ronald N. Zebeck
(incorporated by reference to Exhibit 10.l to Fingerhut Companies,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 29, 1995 (File No. 1-8668)).
(i)* Amendment, dated October 25, 1996 (incorporated by
reference to Exhibit 10.4(i) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997 (File No. 1-12351)).
(ii)* Non-Qualified Stock Option Agreement pursuant to
Metris Companies Long-Term Incentive and Stock Option
Plan, dated as of October 25, 1996, by and between
the Company and Ronald N. Zebeck (incorporated by
reference to Exhibit 10.4(ii) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997 (File No. 1-12351)).
10.7 Change of Control Agreement, dated as of May 15, 1998, by and
between the Company and Ronald Zebeck and a schedule of
executive officers of the Company also having such an
agreement with the Company, indicating the differences from
the form of agreement filed (as permitted by Instruction 2 to
Item 601 of regulation S-K) (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998 (File No.
1-12351)).
(i) Amendment to Change in Control Severance Agreement, dated
as of December 9, 1998.
(ii) Amended Schedule of Officers with Change of Control.
10.8* Metris Companies Inc. Long-Term Incentive and Stock Option
Plan, as amended (incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-8 filed May 14,
1998 (File No. 333-52627)).
(i)* Form of Non-Qualified Stock Option Agreement.
10.9* Metris Companies Inc. Non-Employee Director Stock Option Plan,
including form of option agreement (incorporated by reference
to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No.
1-12351)).
10.10* Metris Companies Inc. Annual Incentive Plan for Designated
Corporate Officers.
10.11 Co-Brand Credit Card Agreement, dated as of October 31, 1996,
between the Company, Fingerhut Corporation, and Direct
Merchants Credit Card Bank, N.A. (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (File No. 1-12351)).
10.12 Extended Service Plan Agreement, dated as of October 31, 1996,
between the Company, Fingerhut Corporation, and InfoChoice USA, Inc.
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
(File No. 1-12351)).
10.13 Database Access Agreement, dated as of October 31, 1996, between the
Company and Fingerhut Corporation (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12351)).
10.14 Tax Sharing Agreement, dated as of October 31, 1996, between the
Company and Fingerhut Companies, Inc. (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12351)).
(i) Amendment to Tax Sharing Agreement, dated January 1, 1998,
between the Company and Fingerhut Companies, Inc.
10.15 Waiver Agreement, dated as of December 8, 1998, between Fingerhut
Corporation, Infochoice USA, Inc., Metris Direct, Inc., DMCCB and
Metris Direct Services, Inc. (incorporated by reference to Exhibit
10.4 to the Company's Current Report on Form 8-K dated December 22,
1998 (File No. 1-12351)).
10.16 Data Sharing Agreement, dated as of October 31, 1996, between
Fingerhut Corporation and DMCCB (incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
10.17 Amended and Restated Credit Agreement, dated as of June 30, 1998
among the Company and the lenders named therein
(incorporated by reference to Exhibit 10.18(a) to the Company's
Quarterly Report on Form 10-Q for the period ended
June 30, 1998 (File No. 1-12351)).
(i) Amendment, dated as of December 3, 1998, to the
Amended and Restated Credit Agreement, dated as of
June 30, 1998, among the Company, the lenders named
therein, NationsBank, N.A., as syndication agent,
Deutsche Bank, as documentation agent, U.S. Bank
National Association, as documentation agent,
Barclays Bank PLC, as co-agent, Bank of America
National Trust and Savings Association, as co-agent,
and The Chase Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated December
22, 1998 (File No. 1-12351)).
(ii) Amendment, dated as of December 7, 1998, to the
Amended and Restated Credit Agreement, dated as of
June 30, 1998, among the Company, the lenders named
therein, NationsBank, N.A., as syndication agent,
Deutsche Bank, as documentation agent, U.S. Bank
National Association, as documentation agent,
Barclays Bank PLC, as co-agent, Bank of America
National Trust and Savings Association, as co-agent,
and The Chase Manhattan Bank, as administrative
agent.
10.18 Transfer and Administration Agreement, dated as of October 23,
1997, among Kitty Hawk Funding Corporation, Metris Funding
Co., as Transferor, Direct Merchants Credit Card Bank,
National Association as Collection Agent, and NationsBank,
N.A., as Agent and Bank Investor (incorporated by reference to
Exhibit 10.18(a) to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 (File No.
1-12351)).
10.19 Transfer and Administration Agreement, dated as of October 23,
1997, among Kitty Hawk Funding Corporation, Metris Funding
Co., as Transferor, DMCCB, as Collection Agent, and
NationsBank, N.A. as Agent and Bank Investor (incorporated by
reference to Exhibit 10.c to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 (File No.
1-12351)).
(i) Amendment No. 4, dated October 22, 1998, to the
Transfer and Administration Agreement, dated as of
October 23, 1997, among Kitty Hawk Funding
Corporation, Metris Funding Co., as Transferor,
Direct Merchants Credit Card Bank, National
Association as Collection Agent, and NationsBank,
N.A., as Agent and Bank Investor.
10.20 Lease Agreement, dated as of March 28, 1997, between Nottingham
Village, Inc. and Metris Direct, Inc. (incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 1-12351)).
(i) Guaranty of Lease, dated as of March 31, 1997, between
Nottingham Village, Inc. and Metris Direct, Inc.
(incorporated by reference to Exhibit 10.21(i) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-12351)).
(ii) First Amendment and Lease Agreement, dated as of
October 15, 1997, among Nottingham Village, Metris
Direct, Inc., and the Company (incorporated by
reference to Exhibit 10.21(ii) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
(iii) Subordination, Non-Disturbance and Attornment
Agreement, dated as of March 17, 1998 (incorporated
by reference to Exhibit 10.21(iii) to the Company's
Quarterly Report on Form 10-Q for the period ended
March 31, 1998 (File No. 1-12351)).
(iv) Tenant Estoppel Certificate, dated as of March 3,
1998, to State Farm Life Insurance Company
(incorporated by reference to Exhibit 10.21(iv) to
the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998 (File No. 1-12351)).
10.21 Lease Agreement, dated August 11, 1995, between The Equitable Life
Assurance Society of the United States and Fingerhut Financial
Services Corporation (incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12351)).
(i) Amendment Number One to Lease Agreement, dated August
1, 1996, between The Equitable Life Assurance Society
of the United States and Fingerhut Financial Services
Corporation (incorporated by reference to Exhibit
10.22(i) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No.
1-12351)).
(ii) Amendment Number Two to Lease Agreement, dated
January 16, 1997, between WHIOP Real Estate Limited
Partnership and Metris Direct, Inc. (incorporated by
reference to Exhibit 10.22(ii) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
(iii) Amendment Number Three to Lease Agreement, dated
December 4, 1997, between WHIOP Real Estate Limited
Partnership and Metris Direct, Inc. (incorporated by
reference to Exhibit 10.22(iii) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
(iv) Amendment Number Four to Lease Agreement, dated
January 29, 1997, between WHIOP Real Estate Limited
Partnership and Metris Direct, Inc. (incorporated by
reference to Exhibit 10.22(iv) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
(v) Tenant Estoppel Certificate to WCB Properties Limited
Partnership (incorporated by reference to Exhibit
10.22(v) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No.
1-12351)).
10.22 Lease Agreement, dated October 31, 1995, between Exchange
Limited Partnership and Fingerhut Financial Services
Corporation (incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
(i) Addendum to Lease Agreement, dated October 31, 1995,
between 1991 Exchange Limited Partnership and
Fingerhut Financial Services Corporation
(incorporated by reference to Exhibit 10.23(i) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-12351)).
(ii) Corporate Guaranty of Lease, dated October 31, 1995,
between 1991 Exchange Limited Partnership and
Fingerhut Financial Services Corporation
(incorporated by reference to Exhibit 10.23(ii) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-12351)).
(iii) First Amendment to Lease, dated February 14, 1996,
between 1991 Exchange Limited Partnership and
Fingerhut Financial Services Corporation
(incorporated by reference to Exhibit 10.23(iii) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-12351)).
(iv) Tenant Estoppel Certificate to Eagle Investments
Limited Liability Company, Bank One, Oklahoma City
and 1991 Exchange Limited Partnership, dated January,
1996, from Fingerhut Financial Services Corporation
(incorporated by reference to Exhibit 10.23(iv) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-12351)).
(v) Third Amendment to Lease, dated December 22, 1998, between
Exchange Center, L.L.C. and Fingerhut Financial
Services Corporation.
10.23 Lease Agreement, dated December 11, 1996, between Koger Equity, Inc.
and Metris Direct, Inc. (incorporated by reference to Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12351)).
(i) Lease Amendment, dated June 27, 1997, between Koger Equity,
Inc. and Metris Direct, Inc. (incorporated by
reference to Exhibit 10.24(i) to the Company's Annual Report
on Form 10-K for the year ended December 31,
1997 (File No. 1-12351)).
(ii) Lease Amendment, dated October 15,1997, between Koger
Equity, Inc. and Metris Direct, Inc. (incorporated
by reference to Exhibit 10.24(ii) to the Company's Annual
Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12351)).
(iii) Lease Amendment, dated July 10, 1998, between Koger Equity,
Inc. and Metris Direct, Inc.
10.24 Transfer and Administration Agreement, dated December 9, 1998,
among Enterprise Funding Corporation, Park Avenue Receivables
Corporation, Sheffield Receivables Corporation, Metris Asset
Funding Co., Direct Merchants Credit Card Bank, National
Association, N.A.
10.25 Receivables Purchase Agreement, dated December 9, 1998, between the
Company and Metris Asset Funding Co.
Other Exhibits
11 Computation of Earnings Per Share.
12(a) Computation of Ratio of Earnings to Fixed Charges.
12(b) Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends.
13 Pages 18 to 62 of the 1998 Annual Report to Shareholders. The
1998 Annual Report shall not be deemed to be filed
with the Commission except to the extent that information is
specifically incorporated herein by reference.
21 Subsidiaries of the Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
AMENDED AND RESTATED BYLAWS
OF
METRIS COMPANIES INC.
ARTICLE I
OFFICES
The corporation may have such offices and places of business, within or
without the State of Delaware, at such locations as the Board of Directors may
from time to time designate, or the business of the corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meeting. (a) The corporation shall hold regular
annual meetings of the corporation's stockholders for the election of directors.
The time and place of any such meetings shall be determined by the Board of
Directors and communicated to the stockholders according to the requirements set
forth herein. Subject to paragraph (b) of this Section 1, which paragraph (b)
shall be deemed valid on and after June 1, 1998 and before such date deemed null
and void, any other proper business may be conducted at an annual meeting.
(b) Only such business shall be conducted at an annual meeting of
stockholders as shall have been properly brought before the meeting. For
business to be properly brought before the meeting, it must be: (i) authorized
by the Board of Directors and specified in the notice, or a supplemental notice,
of the meeting, (ii) otherwise brought before the meeting by or at the direction
of the Board of Directors or the chairman of the meeting or (iii) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given written notice thereof to the Secretary, delivered or mailed to and
received at the principal executive offices of the corporation (x) not less than
50 days nor more than 75 days prior to the meeting or (y) if less than 60 days'
notice of the meeting or prior public disclosure of the date of the meeting is
given or made to stockholders, not later than the close of business on the tenth
day following the day on which the notice of the meeting was mailed or, if
earlier, the day on which such public disclosure was made. A stockholder's
notice to the Secretary shall set forth as to each item of business the
stockholder proposes to bring before the meeting (1) a brief description of such
item and the reasons for conducting such business at the meeting, (2) the name
and address, as they appear on the corporation's records, of the stockholder
proposing such business, (3) the class and number of shares of stock of the
corporation which are beneficially owned by the stockholder (for purposes of the
regulations under Sections 13 and 14 of the Securities Exchange Act of 1934, as
amended) and (4) any material interest of the stockholder in such business. No
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the meeting at which
any business is proposed by a stockholder shall, if the facts warrant, determine
and declare to the meeting that such business was not properly brought before
the meeting in accordance with the provisions of this paragraph (b), and, in
such event, the business not properly before the meeting shall not be
transacted.
Section 2. Place of Meeting. All meetings of the stockholders
shall be held at the offices of the corporation or such other place as may be
designated by the Board of Directors.
Section 3. Special Meetings. Special meetings of the stockholders may
be called for any purpose or purposes at any time by the President, a majority
of the entire Board of Directors or by a committee of the Board of Directors
specifically authorized to call such meetings. The business transacted at a
special meeting of stockholders shall be limited to the purpose or purposes for
which such meeting is called, except as otherwise determined by the Board of
Directors or the chairman of the meeting.
Section 4. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by law or by the Certificate of Incorporation, any action
required to be taken, or which may be taken, at any meeting of stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of at least 80% of the shares of outstanding stock entitled to vote
thereon, provided that prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 5. Voting by Ballot. Unless otherwise provided by law, voting
on any question or in any election may be by voice unless the presiding officer
shall order, or any stockholder shall demand, that voting be by secret ballot.
Section 6. Notice of Meeting. Written or printed notice stating the
place, date, hour and purpose or purposes of any meeting of the stockholders
shall be sent or given to each stockholder entitled to vote at such meeting.
Notice of each meeting of stockholders shall be in such form as is approved by
the Board of Directors and shall state the purpose or purposes for which the
meeting is called, the date and time when and the place where it is to be held,
and shall be delivered personally or mailed not more than sixty (60) days and
not less than ten (10) days before the day of the meeting. Notice may be waived
before, during or after any meeting by any stockholder. The waiver may be oral,
written or by attendance at the meeting; provided, however, that attendance at a
meeting will not constitute a waiver of notice if the stockholder attends the
meeting for the purpose of objecting to the meeting itself or, at the meeting,
objects to the consideration of a particular item prior to the voting thereon.
Section 7. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation, (a) prior to June 1, 1998 the holders of not less
than a majority of the outstanding shares entitled to vote, represented in
person or by proxy, shall constitute a quorum for the transaction of business;
and (b) on or after June 1, 1998 the holders of not less than one-third of the
outstanding shares entitled to vote, represented in person or by proxy, shall
constitute a quorum for the transaction of business; provided, however, that in
the event of an election contest subject to Rule 14a-11 under the Securities
Exchange Act of 1934, the holders of a majority of the outstanding shares
entitled to vote shall constitute a quorum unless otherwise provided by law or
the Certificate of Incorporation. In the absence of a quorum, the holders of a
majority of the shares represented at the meeting may adjourn the meeting from
time to time without further notice except as provided in Section 11 of this
Article.
Section 8. Record Date. For the purpose of determining stockholders
entitled to notice of, or to vote at, any meeting of the stockholders, or any
adjournment thereof, the Board of Directors may fix in advance a date, such date
being not less than 10 days nor more than 60 days immediately preceding the date
on which the particular action requiring such determination of stockholders is
to be taken. For the purpose of determining stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which date shall not precede the
date upon which the resolution fixing such date is adopted and which record date
shall not be more than sixty days preceding the action to be taken.
Notwithstanding the foregoing, the Board of Directors shall set record dates in
such manner as to ensure that the Company shall make such notices to the market
of such record dates as may be required by applicable law. Only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to notice of, and to vote at, such meeting, or to receive payment of
such dividend, or to receive such allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any stock on the
books of the corporation after any such record is fixed as aforesaid.
Section 9. Voting of Shares. Except as otherwise provided by the
Certificates of Designation of the Series B Perpetual Preferred Stock and the
Series C Perpetual Convertible Preferred Stock, each stockholder of record or
the stockholder's legal proxy shall be entitled to one vote for each voting
share standing in the stockholder's name as reflected on the stock transfer
books of the corporation as of the record date. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting may
decide any question properly before the meeting, and shall be the act of the
stockholders unless the vote of a greater number of shares is required by law,
the Certificate of Incorporation or these Bylaws.
Section 10. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by the stockholder's
duly authorized attorney-in-fact. Such proxy shall be filed with an officer of
the corporation or with the duly authorized transfer agent of the corporation at
or before the time of the meeting. A proxy shall be valid for the period
specified in the proxy or, if no expiration date is provided in the proxy, for a
period not to exceed three years from the date of its execution. A proxy's
authority shall not be revoked by the death or incapacity of the maker unless,
before the vote is cast and the authority exercised, written notice of such
death or incapacity is given to the corporation.
Section 11. Adjournment. If any meeting of the stockholders be
adjourned to another time or place, no notice as to such adjourned meeting need
be given other than by announcement at the meeting, at the time of its
adjournment.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Board of Directors. The business and affairs of the
corporation shall be managed by, or under the direction of, its Board of
Directors. The members of the Board of Directors need not be stockholders.
Directors shall possess all qualifications required of them pursuant to the
Certificate of Incorporation.
Section 2. Number and Tenure. (a) The number of directors of the
corporation shall be as determined from time to time by resolution of the Board
of Directors, subject to the provisions of the Certificate of Incorporation.
Each director elected by the stockholders, and each director elected to fill a
vacancy or newly created directorship, shall serve until the next regular
stockholder meeting and until his or her successor is elected and qualified.
Upon the occurrence of the Threshold Time (as defined in Article VII, Section 1
of the Certificate of Incorporation), the directors of the Corporation, other
than those who may be elected pursuant to the terms of any series of Preferred
Stock, shall be classified, with respect to the time for which they severally
hold office, into three classes, designated Classes I, II and III, which shall
be nearly as equal as possible. Class I shall consist of two directors,Class II
shall consist of two directors and Class III shall consist of three directors.
The membership of each class shall be determined by the Board of
Directors. Directors of Class I shall serve for a term which expires at the
first annual meeting of stockholders to be held after the Threshold Time.
Directors of Class II shall serve for a term which expires at the second
annual meeting of stockholders to be held after the Threshold Time.
Directors of Class III shall serve for a term which expires at the third annual
meeting of stockholders to be held after the Threshold Time. At each succeeding
annual meeting of stockholders following such initial classification, the
respective successors of each class shall be elected for three year terms.
Notwithstanding the foregoing, a director's term shall expire on his or
her death, resignation, removal or disqualification.
(b) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (b) shall be eligible for election as directors of
the corporation. Nominations of persons for election to the Board of Directors
may be made at a meeting of stockholders by the Board of Directors or by any
stockholder of the corporation entitled to vote in the election of directors at
the meeting who complies with the notice procedures set forth in this paragraph
(b). Any nomination by a stockholder must be made by written notice to the
Secretary delivered or mailed to and received at the principal executive offices
of the corporation (i) not less than 50 days nor more than 75 days prior to the
meeting or (ii) if less than 60 days' notice of the meeting or prior public
disclosure of the date of the meeting is given or made to stockholders, not
later than the close of business on the tenth day following the day on which the
notice of the meeting was mailed, or if earlier, the day on which such public
disclosure was made. A stockholder's notice to the Secretary shall set forth (x)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director: (1) the name, age, business address and residence
address of such person, (2) the principal occupation or employment of such
person, (3) the class and number of shares of stock of the corporation which are
beneficially owned by such person (for the purposes of the regulations under
Sections 13 and 14 of the Securities Exchange Act of 1934, as amended) and (4)
any other information relating to such person that would be required to be
disclosed in solicitations of proxies for the election of such person as a
director of the corporation pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, and such person's written consent to being
named in any proxy statement as a nominee and to serving as a director if
elected; and (y) as to the stockholder giving notice (1) the name and address,
as they appear on the corporation's records, of such stockholder and (2) the
class and number of shares of stock of the corporation which are beneficially
owned by such stockholder (determined as provided in clause (x) (3) above). At
the request of the Board of Directors any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. The chairman of the meeting at which a
stockholder nomination is presented shall, if the facts warrant, determine and
declare to the meeting that such nomination was not made in accordance with the
procedures prescribed by this paragraph (b), and, in such event, the defective
nomination shall be disregarded.
Section 3. Vacancies. (a) Except as provided in paragraph (b) below,
any vacancy occurring on the Board of Directors by reason of death, resignation,
removal or disqualification may be filled by the unanimous vote of the remaining
directors, even though less than a quorum, at any regular or special meeting.
Except as provided in paragraph (b) below, vacancies on the Board resulting from
newly created directorships may be filled only by the unanimous vote of the
directors serving at the time of the increase.
(b) In the event a vacancy occurs on the Board of Directors by reason
of death, resignation, removal or disqualification of a director elected by the
holders of the Series C Perpetual Convertible Preferred Stock (a "Series C
director"), the remaining Series C directors, if any, shall elect a new director
to fill such vacancy. If a new directorship is created in connection with the
issuance of the Series C Perpetual Convertible Preferred Stock or if no other
Series C directors are serving at the time of the death, resignation, removal or
disqualification of a Series C director, the holders of the Series C Perpetual
Convertible Stock shall elect a new director to fill such new directorship or
vacancy.
Section 4. Resignations. Any director may resign at any time by giving
written notice to the chairman of the Board, if any, or to the president or
secretary, if any, of the corporation. Unless a later date is specified in the
notice as the effective date of resignation, resignation shall take effect on
the date of receipt of the written notice by the corporation. Unless otherwise
specified in such notice, acceptance of the resignation shall not be necessary
to make it effective.
Section 5. Regular and Annual Meetings. The Board of Directors may hold
regular meetings on an annual or other periodic basis. Except as may otherwise
be provided in a resolution of the Board of Directors, or in any notice of such
meeting if the Board of Directors has failed to act on the issue, the annual
meeting of the Board shall be held immediately following the annual meeting of
the stockholders, and regularly scheduled meetings may be held without notice at
such time and place as may be provided by resolution of the Board of Directors.
Notwithstanding the foregoing, the failure of the corporation to hold an annual
or other regularly scheduled meeting shall not affect the status of the
directors or officers, or the status of the corporation to continue as an
operating entity, unless the Board of Directors provides otherwise by
resolution.
Section 6. Special Meetings. Special meetings of the Board of
Directors may be called by the president of the corporation, the chairman of the
Board of Directors, if the Board has elected one of its members to act as its
chairman, or by resolution of the Board of Directors.
Section 7. Notice of Special Meetings. The secretary, or in his or her
absence any other officer of the corporation, shall give each director notice of
the time and place of holding of special meetings of the Board of Directors by
mail at least five days before the meeting, or by telephone, electronic or
facsimile transmission or personal service given at least 24 hours before the
meeting. A director may waive notice of any meeting before, during or after the
meeting, and the waiver may be written, oral or by attendance. The attendance of
a director at any meeting and participation therein shall constitute a waiver of
notice of such meeting unless a director attends such meeting for the express
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened, and such director does not thereafter
participate in the meeting. Neither the business to be transacted at, nor the
purpose of, any special meeting of the Board of Directors need be specified in
the notice or waiver of notice for such meeting. No notice need be provided of
any meeting which is adjourned and later reconvened other than by announcement
at the meeting at which adjournment is taken.
Section 8. Place of Meetings; Meetings by Telephone. Meetings of the
Board shall be at the principal office of the corporation or at such other place
as the directors may from time to time determine. A meeting of the Board may be
held by any means of communication through which all person participating in the
meeting may simultaneously hear and converse with each other during the meeting,
including by means of conference telephone or similar communications equipment.
Participation in a meeting by any such means constitutes presence in person at
the meeting.
Section 9. Quorum. At all meetings of the Board, a majority of the
directors shall constitute a quorum for the transaction of business; provided,
however, that if less than all of the directors are present at said meeting, a
majority of the directors present may adjourn the meeting from time to time
without notice other than an announcement at the meeting at which the
adjournment is taken.
Section 10. Act of Board. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless otherwise provided by the Bylaws, by the Certificate of
Incorporation or by law.
Section 11. Absent Director. A director may give advance written
consent or opposition to a proposal to be acted on at a Board meeting. If a
director is not present at the meeting, consent or opposition to a proposal does
not constitute presence for purposes of determining the existence of a quorum,
but consent or opposition shall be counted as a vote in favor of or against the
proposal and shall be entered in the minutes or other record of action at the
meeting, if the proposal acted on at the meeting is substantially the same or
has substantially the same effect as the proposal to which the director has
consented or objected.
Section 12. Action without Meeting. Except as otherwise provided by law
or by the Certificate of Incorporation, any action which is required or may be
taken at a meeting of the Board of Directors or any committee of the Board may
be taken without a meeting if a consent in writing (including a telecopied
transmission), setting forth the action so taken, is signed by a majority of all
the directors or members of the committee entitled to vote with respect to the
subject matter thereof, except as to matters that require stockholder approval,
in which case a consent in writing shall be signed by all of the directors. Such
written action shall be effective on the date when signed by the required number
of directors or committee members, or such other effective date as set forth
therein. When written action is taken by less than all of the directors, all
directors shall be notified immediately of its text and effective date. Failure
to provide the notice, however, shall not invalidate the written action. A
director who does not sign or consent to the written action shall have no
liability for the action or actions taken thereby.
Section 13. Committees. The Board of Directors may, by the affirmative
vote of a majority of the number of directors, designate two or more of their
number to constitute an executive committee, which, to the extent determined by
the Board and allowed by law, shall have and exercise the authority of the Board
in the management of the business of the corporation, subject to the provisions
of the Certificate of Incorporation. Such executive committee shall act only in
the interval between meetings of the Board and shall be subject at all times to
the control and direction of the Board.
The Board of Directors may, by the affirmative vote of a majority of
the number of directors, also appoint one or more natural persons who need not
be Board members to serve on such other committees as the Board may determine.
Such other committees shall have such powers and duties as shall from time to
time be prescribed by the Board. Such other committees shall be subject at all
times to the control and direction of the Board.
A majority of the members of any committee constitutes a quorum for the
transaction of business. All committees shall keep accurate minutes of their
meetings, which minutes shall be made available upon request to members of that
committee and to any director.
Section 14. Chairman of the Board. The directors may elect one of their
members to serve as the chairman of the Board of Directors. The chairman shall
be subject to the control of, and may be removed by, the Board of Directors. He
or she shall perform such duties as may from time to time be assigned by the
Board.
Section 15. Reliance upon Records. Every director, and every member of
any committee of the Board of Directors, shall, in the performance of his or her
duties, be fully protected in relying in good faith upon the records of the
corporation and upon such information, opinions, reports or statements presented
to the corporation by any of its officers or employees, or committees of the
Board of Directors, or by any other person as to matters the director or member
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
corporation, including, but not limited to, such records, information, opinions,
reports or statements as to the value and amount of the assets, liabilities
and/or net profits of the corporation, or any other facts pertinent to the
existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the corporation's capital stock
might properly be purchased or redeemed.
Section 16. Interested Directors. A director who is directly or
indirectly a party to a contract or transaction with the corporation, or is a
director or officer of or has a financial interest in any other corporation,
partnership, association or other organization which is a party to a contract or
transaction with the corporation, may be counted in determining whether a quorum
is present at any meeting of the Board of Directors or a committee thereof at
which such contract or transaction is considered or authorized, and such
director may participate in such meeting and vote on such authorization to the
extent permitted by applicable law, including Sections 141(h) and 144 of the
General Corporation Law of the State of Delaware.
Section 17. Compensation. Unless otherwise restricted by the
Certificate of Incorporation, the Board of Directors shall have the authority to
fix the compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for attendance at each such
meeting and an annual retainer or salary for services as a director or committee
member. No such payment shall preclude any director from serving the corporation
in any other capacity and receiving compensation therefor.
Section 18. Presumption of Assent. For purposes of any liability as a
director, a director of the corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless (a) he or she objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not thereafter participate in the
meeting; or (b) he or she votes against the action at the meeting.
ARTICLE IV
OFFICERS
Section 1. Election of Officers. The Board of Directors shall, from
time to time, elect one or more persons to exercise the functions of the offices
of president, secretary and chief financial officer. The Board of Directors may,
but shall not be required to, elect a treasurer, controller, secretary and one
or more vice presidents, as it deems necessary or advisable. In addition, the
Board of Directors may elect such other officers and agents as it deems
necessary or advisable, including assistant secretaries and assistant
treasurers. Such officers shall exercise such powers and perform such duties as
are prescribed by these Bylaws or as may be otherwise determined from time to
time by the Board of Directors. Any number of offices or functions of those
offices may be held or exercised by the same person.
Section 2. President. The President shall be the chief executive
officer of the corporation. He shall direct, coordinate and control the
corporation's business and activities and its operating expenses and capital
expenditures and shall have general authority to exercise all the powers
necessary for the chief executive officer of the corporation, all in accordance
with basic policies established by and subject to the control of the Board of
Directors. The President shall also be the chief operating officer of the
corporation. The president shall (a) have general active management of the
business of the corporation; (b) when present, preside at all meetings of the
Board and of the stockholders, unless such duties shall have been assigned to a
Chairman of the Board of Directors; (c) see that all orders and resolutions of
the Board are carried into effect; (d) sign and deliver, in the name of the
corporation, any deeds, mortgages, bonds, contracts or other instruments
pertaining to the business of the corporation, except in cases in which the
authority to sign and deliver is required by law to be exercised by another
person or is expressly delegated by the Certificate of Incorporation, these
Bylaws or by the Board to some other officer or agent of the corporation; (e)
maintain records of and, whenever necessary, certify all proceedings of the
Board and the stockholders; and (f) perform other duties prescribed by the
Board.
Section 3. Chief Financial Officer. The chief financial officer shall
(a) keep accurate financial records for the corporation; (b) deposit all money,
drafts and checks in the name and to the credit of the corporation in the banks
and depositories designated by the Board; (c) endorse for deposit all notes,
checks and drafts received by the corporation as ordered by the Board, making
proper vouchers therefor; (d) disburse corporate funds and issue checks and
drafts in the name of the corporation, as ordered by the Board; (e) render to
the president and the Board, whenever requested, an account of all transactions
by the chief financial officer and of the financial condition of the
corporation; and (f) perform other duties prescribed by the Board or by the
president.
Section 4. Secretary. The secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders, and record all votes
and minutes of all proceedings in a book kept for that purpose, and shall
perform like duties for the standing committees when required. The secretary
shall give or cause to be given notice of all meetings of the stockholders and
of the Board of Directors when notice is required, and shall perform such other
duties as may be prescribed by the Board of Directors or the chief executive
officer. The secretary shall keep in safe custody the seal, if any, of the
corporation, and shall affix the same to any instrument requiring it.
Section 5. Terms of Office. The officers of the corporation shall hold
office for such terms as shall be determined from time to time by the Board of
Directors or until their successors are chosen and qualify in their stead.
Section 6. Compensation. The compensation of all executive
officers of the corporation shall be determined by the Board of Directors.
Section 7. Resignations. An officer may resign at any time by
giving written notice to the corporation. The resignation is effective without
acceptance when the notice is given to the corporation, unless a later effective
date is specified in the notice.
Section 8. Removals. An officer may be removed at any time,
with or without cause, by a resolution approved by the affirmative vote of a
majority of the directors present. Such removal is without prejudice to any
contractual rights of the officer.
Section 9. Vacancies. If the office of any officer or agent becomes
vacant by reason of death, resignation, retirement, disqualification, removal
from office or otherwise, the Board of Directors, may, and in the case of a
vacancy in the office of chief executive officer or chief financial officer
shall, choose a successor or successors who shall hold office for the unexpired
term in respect of which such vacancy occurred.
Section 10. Contract Rights. The election or appointment of a person
as an officer or agent of the corporation does not, of itself, create contract
rights.
ARTICLE V
INDEMNIFICATION
Section 1. Definitions. For purposes of this Article V: (a)
"corporation" shall be deemed to mean the corporation and shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees and agents so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another legal entity shall stand in
the same position under the provisions of this Article V with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued; (b) a "legal
entity" is a corporation, partnership, joint venture, trust or other enterprise;
(c) a "proceeding" is any action, suit, or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, including an action or suit by or
in the right of the corporation to procure a judgment in its favor, and any
appeal in such an action, suit, or proceeding, and any inquiry or investigation
that could lead to such action, suit or proceeding; and (d) a "qualified
position" with respect to any legal entity is a position as a director or an
officer of such legal entity or a position held by a director, officer or
employee of such legal entity which does or might constitute him a fiduciary
with respect to any employee benefit plan for the employees of such legal entity
under any federal or state law regulating employee benefit plans.
Section 2. Mandatory Indemnification. The corporation shall indemnify
each person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is serving in a qualified position with
respect to the corporation or is serving in a similar capacity with respect to
any other legal entity at the request of the corporation, against all expenses
(including attorneys' fees and costs of investigation and litigation),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any such proceeding to the maximum extent permitted
under the General Corporation Law of the State of Delaware (the "Delaware Law",
which term shall be deemed to include the General Corporation Law of the State
of Delaware or any successor statute or section thereof, as now written or
hereafter amended). The termination of any 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 person acted in such a manner
as to make him ineligible for indemnification. The right of a person to be
indemnified hereunder shall be a contract right and shall include the right to
be paid by the corporation all expenses incurred in defending any such
proceeding in advance of its final disposition upon compliance with the
provisions of Delaware Law then in effect concerning advancement of expenses.
Section 3. Permissive Indemnification. In addition to the
indemnification provided for in Section 2, the corporation shall have the power
to indemnify or contract in advance to indemnify, to a lesser or the same extent
that indemnification is required under Section 2, any person who was or is a
party or is threatened to be made a party to any proceeding by reason of the
fact that he is serving in any capacity with respect to the corporation or with
respect to any other legal entity at the request of the corporation.
Section 4. Determination that Indemnification is Proper. Any
indemnification under this Article V (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that such indemnification is permitted under Delaware Law, or, in the case of
indemnification under Section 3, is proper because the requirements specified by
the corporation with respect to such indemnification have been met. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who neither are nor were parties to the
proceeding, (b) if such a quorum is not obtainable or, even though obtainable, a
majority of disinterested directors so directs, by independent legal counsel in
a written opinion or (c) by the stockholders. In making a determination the
directors may rely, as to all questions of law, on the advice of independent
legal counsel.
Section 5. Claims for Indemnification or Advances. If a claim for
indemnification or advancement of expenses hereunder is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim, and if successful in
whole or in part, the claimant shall be entitled to be paid the expenses of
prosecuting such claim. It shall be a defense to any such action that such
indemnification or advancement of costs of defense are not permitted under
Delaware Law, but the burden of proving such defense shall be on the
corporation.
Section 6. Miscellaneous. Every reference in this Article V to persons
who are entitled to indemnification and advancement of expenses shall include
all persons who formerly occupied any of the positions hereinabove set forth in
this Article V, to the extent they would have been entitled to indemnification
and advancement of expenses under the provisions of this Article V if they still
held such positions and their respective heirs, executors and administrators.
Indemnification or advancement of expenses provided pursuant to the foregoing
provisions of this Article V shall not be exclusive of any other rights of
indemnification or advancement of expenses to which any person may be entitled.
Such rights include, but are not limited to, any and all rights under insurance
policies that may be purchased and maintained by the corporation or others,
whether or not the corporation would have the power to indemnify such person in
the particular instance under the provisions of this Article V, but no person
shall be entitled to indemnification by the corporation to the extent he is
indemnified by any other party, including an insurer.
Section 7. Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer or employee
of the corporation, or is or was serving at the request of the corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise 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 corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article V.
ARTICLE VI
SHARES
Section 1. Certificates. The interest of each stockholder of the
corporation shall be evidenced by certificates for shares of capital stock in
such form or forms as the appropriate officers of the corporation may from time
to time prescribe, unless it shall be determined by, or pursuant to, a
resolution adopted by the Board of Directors that the shares representing such
interest be uncertificated. If certificated, each stockholder shall be entitled
to a certificate representing his shares of capital stock, signed by the
president or a vice president, and by the secretary or an assistant secretary,
if one has been elected or appointed, and otherwise by the chief financial
officer; provided, however, that where a certificate is countersigned by a
transfer agent or an assistant transfer agent or by a transfer clerk acting on
behalf of the corporation and registered by a registrar, the signatures of said
officers on such certificates for shares may be facsimile. If a person signs or
has a facsimile signature placed upon a certificate while an officer, transfer
agent or registrar of the corporation, the certificate may be issued by the
corporation, even if the person has ceased to have that capacity before the
certificate is issued, with the same effect as if the person had that capacity
at the date of its issue. All certificates for shares shall be consecutively
numbered or otherwise identified, and shall state the name of the corporation,
that it is organized under the laws of the State of Delaware, the name of the
person to whom the shares are issued, the number and class of shares, and the
designation of the series, if any, that the certificate represents. The name of
the person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the books of the corporation.
Section 2. Transfer of Shares. The shares of stock of the corporation
shall be transferable upon its books only by the persons named in the
certificates or by their attorneys-in-fact or legal representatives duly
authorized in writing, and upon surrender to the corporation of the old stock
certificates, properly endorsed, to the person in charge of the stock and
transfer books and ledgers, or to such other persons as the Board of Directors
may designate, by whom they shall be canceled. New certificates for the shares
shall thereupon be issued to the person entitled to such new certificates. A
record shall be made of each transfer, and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
Section 3. Lost Certificate. Any stockholder claiming that a
certificate for shares has been lost, destroyed or wrongfully taken shall make
an affidavit or affirmation of that fact and, if the Board of Directors so
requires, shall: (a) advertise such fact in such manner as the Board of
Directors may require; (b) give to the corporation and its transfer agent and
registrar, if any, a bond of indemnity in open penalty as to amount or in such
other sum as the Board of Directors may direct, in form satisfactory to the
Board of Directors and to the transfer agent and registrar of the corporation,
if any, and with or without such sureties as the Board of Directors with the
approval of the transfer agent and registrar, if any, may prescribe; and (c)
satisfy such other requirements as may be imposed by the Board.
If notice by the stockholder of the loss, destruction or wrongful
taking of a certificate is received by the corporation before the corporation
has received notice that the shares represented by such certificate have been
acquired by a bona fide purchaser, and if the foregoing requirements imposed by
the Board are satisfied, then the Board of Directors shall authorize the
issuance of a new certificate for shares of the same class and series and for
the same number of shares as the one alleged to have been lost or destroyed.
Section 4. Dividends. The Board of Directors may declare and
pay dividends to the extent permitted by statute and the Certificate of
Incorporation.
ARTICLE VII
MISCELLANEOUS
Section 1. Books of Account. The corporation shall keep such
books of account as are required by statute or the Certificate of Incorporation.
Section 2. Corporate Seal. If so directed by the Board of Directors,
the corporation may use a corporate seal. The failure to use such seal, however,
shall not affect the validity of any documents executed on behalf of the
corporation. The seal need only include the word "seal", but it may also
include, at the discretion of the Board of Directors, such additional wording as
is permitted by law.
Section 3. Fiscal Year. The fiscal year of the corporation
shall be as determined by resolution of the Board of Directors.
Section 4. Amendment of Bylaws. The power to adopt, amend or repeal the
Bylaws is vested in the Board. The power of the Board is subject, however, to
the power of the stockholders to amend or repeal Bylaws adopted, amended or
repealed by the Board.
Section 5. Stock of other Corporations or other Interests. Unless
otherwise ordered by the Board of Directors, the chief executive officer, the
secretary, if any, and such other attorneys or agents of the corporation as may
from time to time be authorized by the Board of Directors or the president,
shall have full power and authority on behalf of the corporation to attend, and
to act and vote in person or by proxy at, any meeting of the holders of
securities of any corporation or other entity in which the corporation may own
or hold shares or other securities, and at such meetings shall possess and may
exercise all the rights and powers incident to the ownership of such shares or
other securities which the corporation, as the owner or holder thereof, might
have possessed and exercised if present. The president, the secretary, if any,
or such attorneys or agents, may also execute and deliver, on behalf of the
corporation, powers of attorney, proxies, consents, waivers and other
instruments relating to the shares or securities owned or held by the
corporation.
AMENDMENT TO
CHANGE IN CONTROL SEVERANCE AGREEMENT
WHEREAS, Ronald N. Zebeck (the "Executive") and Metris
Companies, Inc. (the "Company") (collectively, the "Parties") have entered into
a Change of Control Severance Agreement dated May 15, 1998 (the "Agreement");
and
WHEREAS, Section 10.6 of the Agreement provides that such
Agreement may be amended by written instrument executed by the Company and the
Executive; and
WHEREAS, the Parties desire to amend the Agreement in certain
respects;
NOW THEREFORE, the Agreement is hereby amended, effective
December 9, 1998, as follows:
1. Section 2.6 of the Agreement is hereby amended to provide
that the transaction effected by the document entitled "Securities Purchase
Agreement between Metris Companies Inc. and Thomas H. Lee Equity Fund IV, L.P.,"
dated November 13, 1998 (the "Securities Purchase Agreement") shall not
constitute a "Change in Control" for purposes of paragraph a. of such section.
2. Section 2.6 of the Agreement is hereby further amended to
provide that any director elected pursuant to Section 5.04 of the Securities
Purchase Agreement shall not be treated as an "Incumbent Director" for purposes
of paragraph b. of Section 2.6 of the Agreement.
3. Paragraph b. of Section 2.6 of the Agreement is hereby
further amended to provide that the term "Effective Date" shall, for purposes of
the transaction effected by the Securities Purchase Agreement, mean the date on
which securities are first acquired by Thomas H. Lee Equity Fund IV, L.P.
("Lee") pursuant to such agreement.
Notwithstanding the foregoing, nothing herein shall in any
manner adversely affect any of the Executive's other rights under the Agreement,
including but not limited to rights triggered in connection with a "Change in
Control" as defined in Section 2.6.b. of the Agreement in the event that
incumbent directors cease for any reason to constitute a majority of the board,
as provided for therein.
IN WITNESS WHEREOF, the Executive and the Company have
executed this Agreement as of December 9, 1998.
/s/Ronald N. Zebeck
METRIS COMPANIES INC.
By: Ronald N. Zebeck
Title: President and Chief Executive Officer
Amended Schedule of Officers with Change of Control Agreements
The following executive officers as determined by Item 402(a)(3) have
executed a Change of Control Severance Agreement substantially identical to Mr.
Zebeck's except that initial of the times the compensation set forth in Section
5.1(d) the multiplies is as set forth below and that the number of years for
which Section 9.3 applies is as set forth below:
Number for Section
Officers Date of Agreement 5.1(d)and 9.3(b)
Douglas McCoy 4/30/98 Two
Douglas Scaliti 4/30/98 Two
Z. Jill Barclift 4/30/98 Two
Joseph Hoffman 4/30/98 Two
METRIS COMPANIES, INC.
LONG-TERM INCENTIVE AND STOCK OPTION PLAN
Non-Qualified Stock Option Agreement
This Non-Qualified Stock Option Agreement is made and entered into as
of ___________________, by and between__________________________________ (the
"Optionee") and Metris Companies Inc., a Delaware corporation, with its
principal business office located in St. Louis Park, Minnesota
(the "Company").
WHEREAS, the Compensation Committee (the "Committee") of the Board of
Directors of the Company (the "Board") desires to provide Optionee with an
option to purchase shares of common stock of the Company (the "Common Stock")
pursuant to the provisions of the Metris Companies Inc. Long-Term Incentive and
Stock Option Plan, as amended (the "Plan") and this Non-Qualified Stock Option
Agreement (the "Agreement"), and Optionee desires to acquire such option.
NOW, THEREFORE, for and in consideration of the mutual covenants and
promises contained herein, and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant of Option. The Company hereby grants to Optionee effective as
of , (the "Date of Grant"), the option (the "Option") to purchase an aggregate
of , ( ) shares (the "Shares") of Common Stock, subject to the terms and
conditions set forth herein and in the Plan.
2. Option Price. The purchase price of the Shares subject
to the Option (the "Option Price") shall be $_________ per share,
subject to adjustment as provided herein.
3. Term of Option; Time of Exercise.
3.1 The term of the Option shall be for a period of ten (10) years from
the Date of Grant. The Option shall be exercisable with respect to twenty-five
percent (25%) of the Shares on (date), twenty-five percent (25%) of the Shares
on (date), twenty-five (25%) percent of the Shares on (date) and the final
twenty-five (25%) of the shares on (date).
3.2 This Option shall not under any circumstances be exercisable after,
and this Agreement and Option shall terminate as to all unexercised Shares at,
5:00 p.m. (Minnesota time) on the date that is ten (10) years from the Date of
Grant (the "Expiration Date"), unless terminated prior thereto pursuant to the
provisions of Section 5 hereof.
3.3 Notwithstanding the vesting provisions contained in Section 3.1
hereof, but subject to the other terms and conditions set forth herein, the
Option may be exercised in full immediately following the date of a "Change in
Control" (as hereinafter defined). For purposes of this Agreement, the following
terms shall have the definitions set forth below:
(a) "Change in Control" shall mean:
(i) a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
whether or not the Company is then subject to such reporting requirement;
(ii) the public announcement (which, for purposes of this definition,
shall include without limitation a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act) directly or
indirectly of securities of the Company representing fifty percent (50%) or more
of the combined voting power of the Company's then outstanding securities;
provided, however, that notwithstanding the foregoing, no Change of Control
shall be deemed to have occurred for purposes of this Agreement by reason of
ownership of fifty percent (50%) or more of the total voting capital stock of
the Company then issued and outstanding by any subsidiary of the Company or any
employee benefit plan of the Company or of any subsidiary of the Company or any
entity holding shares of the Common Stock organized, appointed or established
for, or pursuant to the terms of, any such plan (any such person or entity
described in this proviso is referred to herein as a "Company Entity");
(iii) the announcement of a tender offer by any person or entity (other
than a Company Entity) for thirty percent (30%) or more of the Company's voting
capital stock then issued and outstanding, which tender offer has been approved
by the Board, a majority of the members of which are Continuing Directors (as
hereinafter defined), and recommended to the shareholders of the Company;
(iv) the Continuing Directors (as hereinafter defined) cease to
constitute a majority of the Board; or
(v) the shareholders of the Company approve (A) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Company stock would be converted into
cash, securities or other property, other than a merger of the Company in which
shareholders immediately prior to the merger have the same proportionate
ownership of stock of the surviving corporation immediately after the merger;
(B) any sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all or substantially all of the assets of the
Company; or (C) any plan of liquidation or dissolution of the Company.
<PAGE>
(b) "Continuing Director" shall mean any person who is a member of the
Board, while such person is a member of the Board, who is not an Acquiring
Person (as defined below) or an Affiliate or Associate (as defined below) of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, and who (i) was a member of the Board on the date of
this Agreement as first written above or (ii) subsequently becomes a member of
the Board, if such person's initial nomination for election or initial election
to the Board is recommended or approved by a majority of the Continuing
Directors. For purposes of this subparagraph (b), "Acquiring Person" shall mean
any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) who or which, together with all Affiliates and Associates of such person,
is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly of securities of the Company representing
thirty percent (30%) or more of the combined voting power of the Company's then
outstanding securities, but shall not include any Company Entity; and
"Affiliate" and "Associate" shall have the respective meanings ascribed to such
terms in Rule 12b-2 promulgated under the Exchange Act.
4. Exercise of Option.
4.1 Subject to the terms and conditions of the Plan and this Section 4,
this Option may be exercised by Optionee in whole or in part by written notice
to the Company at its principal executive office addressed to the attention of
its General Counsel. Such notice shall specify Optionee's election to exercise
this Option and the number of Shares in respect of which it is being exercised,
and shall be signed by Optionee. The Company shall not, however, be required to
sell or issue any Shares pursuant to this Option if the issuance of such Shares
would constitute a violation by Optionee or the Company of any applicable law or
regulation of any governmental authority.
4.2 Notice of exercise of the Option by Optionee shall be accompanied
by payment of the full Option Price of the Shares as to which the Option is to
be exercised, together with payment of the amount determined by the Company to
be necessary to satisfy any applicable federal, state and local tax withholding
requirements arising from the exercise of the Option. The Company shall issue
and deliver a certificate or certificates representing such Shares as soon as
practicable after such notice and payments are received. Payment of such Option
Price shall be made in cash or check payable to the order of the Company or, in
lieu thereof, if the Committee in its sole discretion at the time of exercise so
permits, by tendering to the Company shares of Common Stock having a fair market
value equal to the Option Price. Payment by Optionee of any required amount of
withholding for tax purposes shall be made in cash or check payable to the order
of the Company. The certificate or certificates for the Shares as to which the
Option shall have been so exercised shall be registered in the name of Optionee
(or Optionee's Representative, (as defined in Section 5)) or at the direction of
Optionee or such Representative and shall be delivered as aforesaid to or upon
the written order of such person or persons. In the event that the Option shall
be exercised by any person or persons other than Optionee, such notice shall be
accompanied by appropriate proof of the authority and right of such person or
persons to exercise the Option. All Shares purchased upon the exercise of the
Option as provided herein shall be fully paid and nonassessable.
5. Termination of Option.
(a) This Option shall terminate and may no longer be exercised if
Optionee ceases to be employed by the Company or one of its subsidiaries (a
defined in the Plan) except:
(i) if Optionee's employment shall be terminated for any reason other
than gross and willful misconduct, death, disability or retirement, Optionee
may, at any time before (A) the expiration of ninety (90) days after such
termination or (B) the Expiration Date, whichever shall first occur, exercise
this Option (x) to the extent that the Option was exercisable on the date of the
termination of employment in the case of voluntary termination or (y) to the
extent that the Option was or would become exercisable on or before the
expiration of such ninety (90) day period in the case of involuntary
termination; provided, however, that if, immediately prior to such termination
of employment, Optionee was an "officer" as defined in Rule 16a.1(f) promulgated
under the Exchange Act, the periods of exercisability referred to in clauses (x)
and (y) above (but not the acceleration of vesting referred to in clause (y))
shall be extended from ninety (90) days to seven (7) months after the date of
such termination;
(ii) if Optionee's employment shall be terminated by reason of
Optionee's gross and willful misconduct during the course of employment (as may
be determined by the Committee in its sole and absolute discretion), including
but not limited to wrongful appropriation of funds of the employer or the
commission of a gross misdemeanor or felony, this Option shall be terminated as
of the date of the misconduct and Optionee shall have no further rights
hereunder;
(iii) if Optionee's employment shall be terminated by reason of
Optionee's death, this Option will become fully exercisable and may be exercised
by Optionee's Representative (as defined below) at any time before (A) the
expiration of three (3) years after the date of death or (B) the Expiration
Date, whichever shall first occur;
(iv) (A) if Optionee's employment shall be terminated by reason of
Optionee's disability (other than Total Disability), as may be determined by the
Committee in its sole and absolute discretion, this Option may be exercised, to
the extent that the Option was exercisable on the date of disability, by
Optionee or Optionee's guardian or legal representative, at any time before (x)
the expiration of one (1) year after the date Optionee's employment was
terminated by reason of such disability or (y) the Expiration Date, whichever
shall first occur or (B) if Optionee's employment shall be terminated by reason
of Optionee's Total Disability, this Option will become fully exercisable and
may be exercised by Optionee or Optionee's guardian or legal representative at
any time before (x) the expiration of three (3) years after the date Optionee's
employment was terminated by reason of such disability or (y) the Expiration
Date, whichever shall first occur;
(v) if Optionee's employment shall be terminated by Optionee's
Retirement (as defined below), this Option will become fully exercisable and may
be exercised by Optionee before (A) the expiration of three (3) years after such
date or (B) the Expiration Date, whichever shall first occur; or
(vi) if Optionee dies or becomes disabled (as may be determined by the
Committee in its sole and absolute discretion) during the time of exercisability
after termination of employment provided in clause (i) of this Section 5(a),
this Option may be exercised, to the extent that the Option was exercisable on
the date of death or disability: (A) in the case of death, by Optionee's
Representative or (B) in the case of disability, by Optionee or Optionee's
guardian or legal representative before (x) the expiration of one (1) year after
the date of death or the onset of such disability or (y) the Expiration Date,
whichever shall first occur.
(b) Notwithstanding the provisions contained in Section 5(a) above, but
subject to the other terms and conditions set forth herein, in the event that,
within one (1) year following a Change in Control, Optionee's employment is
terminated for any reason other than for gross and wilful misconduct (including
Optionee's voluntary termination), Optionee shall have the right to exercise the
Option in whole or in part at any time before (i) the expiration of one (1) year
after the date of such termination of employment or (ii) the Expiration Date,
whichever shall first occur.
(c) For purposes of this Agreement, the following terms shall be
defined as follows:
(i) "Retirement" shall mean any termination other than by death or
gross and willful misconduct after (A) Optionee has attained at least age
fifty-five (55) and (B) Optionee's age plus completed continuous years of
service equals sixty (60) or more; provided, however, that if Optionee is less
than age sixty-five (65) on the date of termination of employment Optionee must
have completed at least five (5) years of service.
(ii) "Representative" shall mean the person or persons to whom
Optionee's rights under this Agreement shall pass upon death, whether by will or
by the applicable laws of descent and distribution.
(iii) "Total Disability" shall have the meaning given to "permanent and
total disability" in Section 22(e)(3) of the Code (as defined in the Plan) and
shall be determined by the Committee in its sole and absolute discretion.
(d) Notwithstanding the foregoing provisions of Section 5(a), the
Committee shall have the authority, on a case by case basis, in its sole and
absolute discretion to extend for up to a period of two (2) years following the
termination of employment of Optionee the period of vesting referred to in
Section 3.1 and the period of exercisability, provided such extension does not
exceed the Expiration Date.
6. Leave of Absence; Related Employment. A leave of absence granted in
accordance with the Company's usual procedure which does not operate to
interrupt continuous employment for other benefits granted by the Company shall
not be considered a termination of employment under this Agreement. A period of
related employment during which Optionee is not employed by the Company nor a
subsidiary (as defined in the Plan) shall not be considered a termination of
employment under this Agreement if (i) such employment is undertaken by Optionee
at the request of the Company or a subsidiary, (ii) immediately prior to the
undertaking of such employment Optionee was an officer or employee of the
Company or a subsidiary or was engaged in related employment and (iii) such
employment is recognized by the Committee, in its sole discretion, as related
employment. The death or disability of Optionee during a period of related
employment shall be treated, for purposes of this agreement, as if such death or
the onset of such disability had occurred while Optionee was an officer or
employee of the Company.
7. Adjustments for Changes in Common Stock.
7.1 In the event that the outstanding shares of Common Stock (other
than shares held by dissenting shareholders) shall be changed into, or exchanged
for, a different number or kind of shares of Common Stock or other securities of
the Company, or if further changes or exchanges of any Common Stock or other
securities into which the Common Stock shall have been changed, or for which it
shall have been exchanged, shall be made (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividend,
reclassification, split-up, combination of shares or otherwise), then for each
Share subject to the Option, there shall be substituted and exchanged therefor
the number and kind of shares of Common Stock or other securities into or for
which each outstanding share of Common Stock (other than shares held by
dissenting shareholders) shall be so changed or exchanged. If in the event of
any such changes or exchanges in order to prevent dilution or enlargement of
rights under this Agreement, it is necessary to make an adjustment in the
number, kind or option exercise price of the Shares then subject to the Option,
such adjustment shall be made by the Committee and shall be effective and
binding for all purposes of this Agreement.
7.2 All adjustments made pursuant to the provision of this Section 7
shall be made by the Committee, whose determination as to which adjustments
shall be made, and the extent thereof, shall be final, binding and conclusive.
8. Non-transferability of Option.
(a) Except as provided in subsection 8(b) below, the Option granted
under this Agreement shall not be transferable by Optionee, either voluntarily
or involuntarily, except by will or the laws of descent and distribution. This
Option may not be transferred, assigned, pledged or hypothecated, whether by
operation of law or otherwise, or be subject to attachment, execution or similar
process. Any attempt to do so shall void this Option. During the lifetime of
Optionee, this Option may be exercised only by Optionee (or by Optionee's
guardian or legal representative in the case of disability) or by a permitted
transferee pursuant to a transfer as described below.
(b) To the extent such transfers are permitted under the Plan and are
not restricted by Rule l6b-3 promulgated under the Exchange Act, the Committee,
in its sole discretion, may establish, as permitted by applicable law, rules and
conditions under which an Optionee may transfer this Option to any member of
Optionee's "immediate family" (as such term is defined in Rule 16a- 1(e)
promulgated under the Exchange Act).
9. Rights as a Shareholder. No rights of a shareholder of the Company
shall attach to Optionee with respect to any of the Shares until this Option
shall be duly exercised as to such Shares and Optionee shall have become the
holder of record of such Shares. No adjustments shall be made for cash dividends
or other distributions or rights as to which there is a record date preceding
the date that Optionee becomes the holder of record of such Shares.
10. Securities Law Compliance. The exercise of all or any portion of
this Option shall only be effective at such time that the sale of Common Stock
issued pursuant to such exercise will not violate any state or federal
securities or other laws. The Company is under no obligation to effect any
registration of the stock subject to the Option under the Securities Act of
1933, as amended, or to effect any state registration or qualification of such
Common Stock. The Company may, in its sole discretion, defer the effectiveness
of any full or partial exercise of the Option in order to ensure that the
issuance of stock upon exercise will be in compliance with federal or state
securities laws and the rules of the Nasdaq National Market or any other
exchange upon which the Common Stock is traded.
11. Limitation of Liability. Nothing in this Agreement shall be
construed to:
(a) limit in any way the right of the Company or a subsidiary to
terminate the employment of Optionee; or
(b) be evidence of any agreement or understanding, express or implied,
that the Company or a subsidiary shall employ Optionee in any particular
position at any particular rate of compensation or for any particular period of
time.
12. Severability. It is intended that each provision of this Agreement
shall be viewed as separate and divisible. In the event that any provision
hereof shall be held to be invalid or unenforceable, the remaining provisions of
this Agreement shall continue to be in full force and effect.
13. Governing Law. The place of administration of the Plan and this
Agreement shall be in the State of Minnesota. The corporate law of the State of
Delaware shall govern issues relating to the validity and issuances of Shares.
Otherwise, this Agreement shall be construed and administered in accordance with
the laws of the State of Minnesota, without giving effect to principles relating
to conflict of laws.
14. Further Assurances. Upon the exercise of the Option by Optionee or
at such subsequent date as either the Company or Optionee may reasonably
request, each party hereto agrees to execute and deliver such further
instruments and to take such other action as shall be reasonably required to
carry out the intent and purposes of this Agreement.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document
16. Notices. All notices that are required or may be given pursuant to
the terms of this Agreement shall be in writing and delivered personally or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows and shall be deemed to have been given upon delivery to the
addressee:
To the Company:
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park, MN 55426
Attention: General Counsel
To Optionee;
At Optionee's residence address
listed in the Company's personnel records.
Notice of a change in address of one of the parties hereto shall be given in
writing to the other party as provided above, but shall be effective only upon
actual receipt.
17. Amendment. This Agreement may not be amended or modified by the
parties hereto in any manner, except by a written instrument signed by both
parties hereto.
18. Binding Effect; Assignment. This Agreement shall be binding upon
the heirs, successors and assigns of the parties hereto, subject to shareholder
approval of the Plan. This Agreement shall not be assigned by either party
hereto without the express written consent of the other party.
19. Entire Agreement. The Plan, the rules adopted by the Committee from
time to time and this Agreement constitute, except as to any written agreement
between the parties hereto which specifically references this Section 19, the
entire understanding between the parties hereto with respect to the matters
covered herein and supersede all previous written, oral or implied
understandings between the parties hereto with respect to the subject matter
hereof.
<PAGE>
IN WITNESS WHEREOF, the Company and Optionee have executed this
Agreement as of the day and year first above written.
METRIS COMPANIES INC.
By:
Title:
OPTIONEE
Social Security #:
Date:
METRIS COMPANIES INC.
ANNUAL INCENTIVE BONUS PLAN
DESIGNATED CORPORATE OFFICERS
1. Definitions. When the following terms are used herein with initial
capital letters, they shall have the following meanings:
1.1 Base Pay - a specific dollar amount identified in Schedule X.
1.2 Compensation Committee - a committee comprised solely of two or
more "outside directors" of Metris Companies Inc. which satisfies
the requirements of Section 162(m) of the Code.
1.2. Code - The Internal Revenue Code of 1986, as it may be amended
from time to time, and any proposed, temporary of final Treasury
Regulations promulgated thereunder.
1.3 Company - Metris Companies Inc., a Delaware corporation, and any of its
affiliates that adopt this Plan.
1.4 Participant - the President and Chief Executive Officer, and any
of the Executive Vice Presidents or Senior Vice Presidents of the
Company who are designated by the Compensation Committee at any
time ending on or before the 90th day of each Performance Period
as Participants in this Plan.
1.5 Performance Period - the twelve consecutive month period which
coincides with the Company's fiscal year.
1.6 Targeted Bonus Percentage - the percentage identified in Schedule Y.
1.7 Company Performance Factor - percentage identified in Schedule Z.
The Company Performance Factor shall be directly and specifically
tied to one or more of the following business criteria, determined
with respect to the Company: consolidated pre-tax earnings, net
revenues, net earnings, operating income, earnings before interest
and taxes, cash flow, return on equity, return on net assets
employed or earnings per share for the applicable Performance
Period, all as computed in accordance with generally accepted
accounting principles as in effect from time to time and as
applied by the Company in the preparation of its financial
statements and subject to such other special rules and conditions
as the Compensation Committee may establish at any time ending on
or before the 90th day of the applicable Performance Period. Such
Performance Factors shall constitute the sole business criteria
upon which the performance goals under this Plan shall be based.
2. Administration
2.1 Compensation Committee. The Plan shall be administered by the Compensation
Committee.
2.2 Determinations made prior to each performance Period. At any time
ending on or before the 90th day of each Performance Period, they
shall:
(a) designate Participants for that Performance Period;
(b) determine each Participant's Base Pay for the Performance Period by amending
(in writing) Schedule X; (c) establish Targeted Bonus Percentages for the
Performance Period by amending (in writing) Schedule Y; (d) establish Company
Performance Factors for the Performance Period by amending (in writing) Schedule
Z.
2.3 Certification. Following the close of each Performance Period and
prior to payment of any bonus under the Plan, the Compensation
Committee must certify in writing that the Company Performance
Factor and all other factors upon which a bonus is being based
have been attained.
2.4 Shareholder Approval. The material terms of this Plan shall be
disclosed to and approved by shareholders of the Company in
accordance with Section 162(m) of the Code No. Bonus shall be paid
under this plan unless such shareholder approval has been
obtained.
3. Bonus Payment.
3.1 Formula. Each participant shall receive a bonus payment for each
Performance Period in an amount not greater than:
(a) the Participant's Base Pay for the Performance Period, multiplied by.
(b) the Participant's Target Bonus Percentage for the Performance Period
multiplied by.
(c) the Participant's Company Performance Factor for the Performance Period.
3.2 Limitations.
(a) No payment if Performance Factor not Achieved. In no event
shall any Participant receive a bonus payment hereunder if
the Performance Factor and all other factors on which the
bonus payment is based is not achieved during the
Performance Period.
(b) No payment in excess of pre-established amount. No
Participant shall receive a payment under this Plan for
any Performance Period in excess of $4 million.
(c) Compensation Committee may reduce bonus payment. The
Compensation Committee retains sole discretion to reduce
the amount of or eliminate any bonus otherwise payable
under this Plan.
4. Benefit Payments.
4.1 Time and Form of Payments. Subject to any deferred compensation
election pursuant to any such plans of the Company, benefits shall
be paid to the Participant in one or more cash payments as soon as
determined by the Compensation Committee after it has certified
that the Company Performance Factor and all other factors upon
which the bonus payment for the Participant is based have been
attained.
4.2 Nontransferability. Participants and beneficiaries shall not have
the right to assign, encumber or otherwise anticipate the payments
to be made under this Plan, and the benefits provided hereunder
shall not be subject to seizure for payment of any debts or
judgments against any Participant or any beneficiary.
4.3 Tax Withholding. In order to comply with all applicable federal or
state income tax laws or regulation, the Company may take such
action as it deems appropriate to ensure that all applicable
federal or state payroll, withholding, income or other taxes,
which a re the sole and absolute responsibility of a Participant,
are withheld or collected from such Participant.
5. Amendment and Termination. The Compensation Committee may amend this Plan
prospectively at any time and for any reason deemed sufficient by it
without notice to any person affected by this Plan and may likewise
terminate or curtail the benefits of this Plan both with regard to persons
expecting to receive benefits hereunder in the future and persons already
receiving benefits at the time of such action.
6. Miscellaneous.
6.1 Effective Date. January 1, 1998
6.2 Term of the Plan. Unless the Plan shall have been discontinued or
terminated, the Plan shall terminate on December 31, 2002. No
bonus shall be granted after the termination of the Plan;
provided, however, that a payment with respect to a Performance
Period which begins before such termination may be made
thereafter. In addition, the authority of the Compensation
Committee to amend the Plan, shall extend beyond the termination
of the Plan.
6.3 Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any ways material or relevant to
the construction or interpretation of the Plan or any provision
thereof.
6.4 Applicability to Successors. This Plan shall be binding upon and
inure to the benefit of the Company and each Participant, the
successors and assigns of the Company, and the beneficiaries,
personal representatives and heirs of each Participant. If the
Company becomes a party to any merger, consolidation or
reorganization, this Plan shall remain in full force and effect as
an obligation of the Company or its successors in interest.
6.5 Employment Rights and Other Benefit Programs. The provisions of
this Plan shall not give any Participant any right to be retained
in the employment of the Company. In the absence of any specific
agreement to the contrary, this Plan shall not affect any right of
the Company, or of any affiliate of the Company, to terminate,
with or without cause, the participant's employment at any time.
This Plan shall not replace any contract of employment, whether
oral or written, between the Company and any Participant, but
shall be considered a supplement thereto. This Plan is in addition
to, and not in lieu of, any other employee benefit plan or program
in which any Participant may be or become eligible to participate
by reason of employment with the Company. Receipt of benefits
hereunder shall have such effect on contributions to and benefits
under such other plans or programs as the provisions of each such
other plan or program may specify.
6.6 No Trust Fund Created. This Plan shall not create or be construed
to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any affiliate and a
Participant or any other person. To the extent that any person
acquires a right to receive payments from the Company or any
affiliate pursuant to this Plan, such right shall be no greater
than the right of an unsecured general creditor of the Company or
of any affiliate.
6.7 Governing Law. The validity, construction and effect of the Plan
or any bonus payable under the Plan shall be determined in
accordance with the laws of the State of Minnesota.
6.8 Severability. If any provision of the Plan is or becomes or is
deemed to be invalid, illegal or unenforceable in any jurisdiction
such provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be so construed or deemed amended
without, in the Plan, such provision shall be stricken as to such
jurisdiction, and the remainder of the Plan shall remain in full
force and effect.
6.9 Qualified Performance-Based Compensation. All of the terms and
conditions of the Plan shall be interpreted in such a fashion as
to qualify all compensation paid hereunder as qualified
performance-based compensation within the meaning of Section
162(m) if the Code.
AMENDMENT TO TAX SHARING AGREEMENT
This agreement made as of January 1, 1998, amends the Tax Sharing
Agreement (the "Original Agreement") dated as of October 31, 1996, entered into
by Fingerhut Companies, Inc. ("FCI"), Metris Companies Inc. ("Metris"), and the
Metris Affiliates (as defined therein). All terms used herein have the same
meaning as in the Original Agreement.
WHEREAS FCI has submitted a request for a private letter ruling from
the Internal Revenue Service in connection with the spin-off of the Metris Group
to FCI's public shareholders; and
WHEREAS FCI intends to consummate the spin-off upon receiving such
ruling; and
WHEREAS FCI has caused the restructuring of the Metris Group; and
WHEREAS the members of the Consolidated Group desire to update and
expand the scope of the Original Agreement and to allocate the Tax liabilities,
if any, resulting form the spin-off;
NOW, THEREFORE, the Original Agreement is hereby amended as follows,
and the following amendments shall be effective as if included in the Original
Agreement:
(1) Section 1.12 is amended to read as follows:
1.12 . "METRIS AFFILIATE" means any corporation or other entity directly
or indirectly owned or controlled by Metris and which is includible in the
Metris Group.
(2) Section 1.27 is amended to read as follows:
1.27. "TAXES" means Federal Income Taxes and Non-Federal Domestic Taxes.
(3) The following definitions are added to Section 1, and all definitions
in Section 1 are renumbered in alphabetical order:
1.6 "CONTRIBUTION" has the meaning provided in the IRS Ruling Request.
1.9 "DISTRIBUTIONS" means the transaction pursuant to which the FCI
Group will distribute its entire interest in Metris, representing
83% of the common stock of Metris, to the shareholders of FCI on a
pro-rata basis.
1.10 "DISTRIBUTION TAXES" means Taxes of any member of the Consolidated
Group (as in existence on or prior to the date of the
Distributions) resulting from, or arising in connection with, the
failure of the Distributions to be tax-free to such member under
Code Section 355 (including without limitation by reason of the
application of Code Sections 355 (d) or(e)).
1.15 "IDEMNIFIYING PARTY" means a party from which indemnification is
sought under Sections 2.4 or 2.5 of this Agreement.
1.16 "IRS RULING REQUEST" means the request for a private letter
ruling, dated October 23, 1997 (including supplemental
filings with respect thereto), that was submitted to the Internal
Revenue Service in connection with the Distributions.
(4) The following new Section 2.4 is added to the Original Agreement:
2.4 ADDITIONAL STATE, LOCAL AND FOREIGN TAXES.
(a) FCI GROUP LIABILITY FOR ADDITIONAL STATE, LOCAL AND
FOREIGN TAXES. If one or more members of the FCI Group
engages (or is deemed to engage) in any activities in a
state, local or foreign taxing jurisdiction without the
consent of the Metris Group, the members of the FCI Group
shall be liable for and shall indemnify, defend, hold
harmless and make whole on an after-tax basis the members
of the Metris Group from and against any Non-Federal
Domestic Taxes or foreign taxes imposed on, or required to
be withheld by, any member of the Metris Group by
state, local or foreign taxing jurisdiction for any
taxable period (or portion thereof) beginning on or prior
to the date of the Distributions, if the relevant member
of the Metris Group would not have been liable for any
taxes of such type in such jurisdiction for the relevant
taxable period (or portion thereof) but for such
activities of member of the FCI Group in such
jurisdiction. The preceding sentence shall also apply to
sales, use and value added taxes imposed on, or required
to be collected by, members of the Metris Group on sales
to third parties, but only for sales prior to 30 days
after the date that a taxing jurisdiction first claims in
writing that the Metris Group is liable for such taxes,
and thereafter the Metris Group shall be responsible
for charging such taxes to the third parties (but in no
event shall the preceding sentence apply to sales, use
and value added taxes with respect to sales after the date
of the Distributions).
(b) METRIS GROUP LIABILITY FOR ADDITIONAL STATE, LOCAL AND
FOREIGN TAXES. If one or more members of the Metris
Group engages (or is deemed to engage) in any activities
in a state, local or foreign taxing jurisdiction
without the consent of the FCI Group, the members of the
Metris Group shall be liable for and shall indemnify,
defend, hold harmless and make whole on an after-tax basis
the members of the FCI Group from and against any
Non-Federal Domestic Taxes or foreign taxes imposed on,
or required to be withheld by, any member of the FCI
Group by such state, local or foreign taxing jurisdiction
for any taxable period (or portion thereof) beginning
on or prior to the date of the Distributions, if the
relevant member of the FCI Group would not have been
liable for any taxes of such type in such jurisdiction for
the relevant taxable period (or portion thereof) but
for such activities of members of the Metris Group in such
jurisdiction. The preceding sentence shall also
apply to sales, use and value added taxes imposed on, or
required to be collected by, members of the FCI Group
on sales to third parties, but only for sales prior to 30
days after the date that a taxing jurisdiction first
claims in writing that the FCI Group is liable for such
taxes and thereafter the FCI Group shall be responsible
for charging such taxes to the third parties (but in no
event shall the preceding sentence apply to sales, use
and value added taxes with respect to sales after the date
of the Distributions).
(c) COOPERATION AND CONTESTS. The FCI Group and the Metris
Group agree to keep each other fully informed and fully
cooperate with respect to any Audit or contest with a Tax
Authority relating to taxes indemnified under this
Section 2.4. The indemnifying party or indemnified party
shall each notify the other within 15 business days
of receiving inquiries or information requests from an
applicable Tax Authority. Both parties shall have the
right to participate in all activities and strategic
decisions relating to any such inquiry, request, Audit or
contest. No such Audit or contest shall be settled
without the consent of the Indemnifying Party, which
consent shall not be unreasonably withheld. Any
disagreements arising under this Section 2.4 shall be
settled pursuant to the procedures in Section 6.
(5) The following new Section 2.5 is added to the Original Agreement:
2.5 DISTRIBUTION TAXES.
(a) FCI GROUP LIABILITY FOR CERTAIN DISTRIBUTION TAXES. The
members of the FCI Group shall be liable for and shall
indemnify, defend, hold harmless and make whole on any
after-tax basis the members of the Metris Group from and
against any Distribution Taxes that are primarily
attributable to one or more of the following:
(1) any inaccurate statement or representation of fact or
intent (or omission to state a material fact) in the IRS
Ruling Request that relates to the FCI Group;
(2) any action or omission by the FCI Group after the date of
filing of the IRS Ruling Request, including, but not
limited to, an issuance of stock or stock buyback by the
FCI Group following the Distributions;
(3) any acquisition of any stock or assets of the FCI Group by
one or more other persons prior to or following the
Distributions, except such an acquisition described in
Section 2.5 (b) (4) or in the IRS Ruling Request;
(4) any acquisition of any stock or assets of the Metris Group
by one or more persons following the Distributions if,
prior to the Distributions, any formal or informal
negotiations regarding any acquisition of any stock or
assets of the Metris Group (other than by an acquirer
contemplating the acquisition of substantially all the
stock or assets of the FCI Group) had occurred between any
such persons and any member of the FCI Group without the
knowledge of the Chief Executive Officer of the Metris
Group; or
(5) any issuance of stock by FCI, or change in ownership of
stock in FCI, that causes Code Section 355 (d) or
Section 355 (e) to apply to the Distributions.
(b) METRIS GROUP LIABILITY FOR CERTAIN DISTRIBUTION TAXES. The
members of the Metris Group shall be liable for and shall
indemnify, defend, hold harmless and make whole on an
after-tax basis the members of the FCI Group from and
against any Distribution Taxes that are primarily
attributable to one or more of the following:
(1) any inaccurate statement or representation of fact or
intent (or omission to state a material fact) in the IRS
Ruling Request that relates to the Metris Group;
(2) any action or omission by the Metris Group after the date
of filing of the IRS Ruling Request, including, but
not limited to, an issuance of stock or stock buyback by
the Metris Group following the Distributions;
(3) any acquisition of any stock or assets of the Metris Group
by one or more other persons prior to or following
the Distributions, except such an acquisition described in
Section 2.5 (a) (4) or in the IRS Ruling Request;
(4) any acquisition of any stock or assets of the FCI Group by
one or more persons following the Distributions if, prior
to the Distributions, any formal or informal negotiations
regarding any acquisition of any stock or assets of the
FCI Group had occurred between any such persons and any
member of the Metris Group without the knowledge of the
Chief Executive Officer of the FCI Group; or
(5) any issuance of stock by Metris, or change in ownership of
stock in Metris, that causes Code Section 355 (d) or
Section 355(e) to apply to the Distributions.
(c) JOINT LIABILITY FOR REMAINING DISTRIBUTION TAXES. The
liability for any Distribution Taxes not allocated by
Section 2.5 (a) or (b) shall be borne equally by the FCI
Group and the Metris Group.
(d) COOPERATION AND CONTESTS. The FCI Group and the Metris
Group agree to keep each other fully informed and fully
cooperate with respect to any Audit or contest with a Tax
Authority relating to Distribution Taxes. Each party
shall notify the other within 15 business days of
receiving inquiries or information requests concerning
Distribution Taxes from an applicable Tax Authority.
Both parties shall have the right to participate in all
activities and strategic decisions relating to any such
inquiry, request, Audit or contest. No such Audit or
contest shall be settled without the consent of the
Indemnifying Party, which consent shall not be
unreasonably withheld. Any disagreements arising under
this Section 2.5 shall be settled pursuant to the
procedures in Section 6.
(e) TREATMENT OF PAYMENTS. The parties agree that for all tax
and financial accounting purposes any payments made
pursuant to this Section 2.5 shall be treated as
nontaxable payment (dividends or capital contributions, as
the case may be) made immediately prior to the
Distributions.
(f) APPLICABILITY. The provisions of this Section 2.5 shall
apply notwithstanding any other provisions of this
Agreement.
(6) Section 4.1 is amended by (1) in the first sentence thereof,
deleting "Until Deconsolidation," and (2) amending the second
sentence thereof to read as follows: "FCI shall have the sole and
exclusive responsibility for the preparation and filing of any
Consolidated Return or Combined Return for all Pre-Deconsolidation
Periods and Straddle Periods, except that separate Federal legal
entity returns and schedules and separate state legal entity
returns and schedules shall be prepared by the Metris Group for
members of the Metris Group."
IN WITNESS WHEROF, each of the parties hereto has caused this agreement
to be executed by a duly authorized officer as of the date first above written.
FINGERHUT COMPANIES, INC.
By:/s/ Gerald T. Knight
Title: Executive Vice President and CFO
METRIS COMPANIES INC.
By:/s/ Robert W. Oberrender
Title: Chief Financial Officer
AMENDMENT, dated as of December 7, 1998 (this "Amendment"), to
the AMENDED AND RESTATED CREDIT AGREEMENT (the "Credit Agreement"), dated as of
June 30, 1998, among METRIS COMPANIES INC., a Delaware corporation (the
"Borrower"), the lenders listed in Schedule 2.01 thereto (the "Lenders"),
NATIONSBANK, N.A., as Syndication Agent (in such capacity, the "Syndication
Agent"), DEUTSCHE BANK, as documentation agent, U.S. BANK NATIONAL ASSOCIATION,
as documentation agent (collectively in such capacity, the "Documentation
Agents"), BARCLAYS BANK PLC as co-agent, BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as co-agent (collectively in such capacity, the
"Co-Agents"), and THE CHASE MANHATTAN BANK, as administrative agent for the
Lenders.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have
agreed to make, and have made, certain loans and other extensions of credit to
the Borrower; and
WHEREAS, in connection with the $300 million investment in the
Borrower by the Thomas H. Lee Company (in substantially the form attached hereto
as Annex A), the Borrower has requested that the Lenders agree to amend the
Credit Agreement as provided herein:
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the
premises contained herein, the parties hereto hereby agree as follows:
SECTION I. AMENDMENT
1.1 Defined Terms. Unless otherwise defined herein,
capitalized terms which are defined in the Credit Agreement are used herein as
defined therein.
1.2 Amendment. The Lenders and the Borrower hereby agree that
upon the effectiveness of this Amendment the definitions of "Capital Stock" and
"Consolidated Net Worth" set forth in Section 1.1 of the Credit Agreement shall
be deleted and the following definitions shall be added in alphabetical order:
"Amendment Effective Date" shall have the meaning given to
such term in the Amendment to this Agreement dated as of December 7, 1998.
"Capital Stock" shall mean any and all shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, any and all equivalent ownership interests in a Person (other than
a corporation) and any and all warrants, rights or options to purchase any of
the foregoing; provided that Capital Stock shall not include any certificates or
other interests in or issued by a trust or other conduit in connection with a
Receivables Transfer Program and shall include the Lee Preferred Stock.
"Consolidated Net Worth" shall mean, at any date of
determination, the sum of (a) the consolidated stockholders' equity of the
Borrower and its Subsidiaries and (b) the amount of the Lee Preferred Stock (not
to exceed $300,000,000), in the case of clauses (a) and (b) as determined on a
consolidated basis in conformity with GAAP consistently applied.
"Lee Preferred Stock" shall mean, at any date of
determination, the amount of the obligation of the Borrower in respect of the
Series B Perpetual Preferred Stock and the Series C Perpetual Convertible
Preferred Stock of the Borrower in substantially the form provided to the
Administrative Agent on the Amendment Effective Date on a consolidated balance
sheet of the Borrower in conformity with GAAP consistently applied.
SECTION II. MISCELLANEOUS
2.1 Conditions to Effectiveness of Amendment. This Amendment
shall become effective (the "Amendment Effective Date") as of the date first set
forth above upon (a) the Administrative Agent having received counterparts of
this Amendment duly executed and delivered by the Borrower and the Required
Lenders and (b) payment to the Administrative Agent and the Lenders by the
Borrower of such fees in respect of this Amendment as have been previously
agreed upon by the Borrower and the Administrative Agent.
2.2 Representations and Warranties. The Borrower represents
and warrants to each Lender that as of the effective date of this Amendment: (a)
the representations and warranties made by the Loan Parties in the Loan
Documents are true and correct in all material respects on and as of the date
hereof (except to the extent that such representations and warranties are
expressly stated to relate to an earlier date, in which case such
representations and warranties shall have been true and correct in all material
respects on and as of such earlier date); and (b) no Default or Event of Default
shall have occurred and be continuing as of the date hereof
2.3 Counterparts. This Amendment may be executed by one or
more of the parties to this Amendment on any number of separate counterparts
(including by facsimile transmission), and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. A set of the
copies of this Amendment signed by all the parties shall be lodged with the
Borrower and the Administrative Agent.
2.4 Continuing Effect; No Other Amendments. Except to the
extent expressly stated herein, all of the terms and provisions of the Credit
Agreement and the other Loan Documents are and shall remain in full force and
effect and are not waived in any respect. This Amendment shall constitute a Loan
Document.
2.5 Payment of Expenses. The Borrower agrees to pay and
reimburse the Administrative Agent for all of its reasonable out-of-pocket costs
and reasonable expenses incurred to date in connection with this Amendment and
the other Loan Documents, including, without limitation, the reasonable fees and
disbursements of legal counsel to the Administrative Agent.
2.6 GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
METRIS COMPANIES INC., as Borrower
By:/s/Paul Runice
Name: Paul Runice
Title: Sr. Vice President, Treasurer
By
Name:
Title:
THE CHASE MANHATTAN BANK, as
Administrative Agent, Lender and Issuing Bank
By:/s/Gail Weiss
Name: Gail Weiss
Title: Vice President
NATIONSBANK, N.A.
By:/s/Mary Pat Riggins
Name: Mary Pat Riggins
Title: Vice President
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLAND BRANCHES
By:/s/Gayma Z. Shivnarain
Name: Gayma Z. Shivnarain
Title: Vice President
By:/s/Elizabeth Ziegimeir
Name: Elizabeth Ziegimeier
Title: Director
U.S. BANK NATIONAL ASSOCIATION
By:/s/Elliot Jaffee
Name: Elliot Jaffee
Title: Vice President
<PAGE>
BARCLAYS BANK PLC,
NEW YORK BRANCH
By:/s/Karen M. Wagner
Name: Karen M. Wagner
Title: Associate Director
THE SUMITOMO BANK, LTD.
By:/s/John H. Kemper
Name: John H. Kemper
Title: Sr. Vice President
THE BANK OF NEW YORK
By:/s/Michael Flanery
Name: Michael Flanery
Title: Vice President
THE BANK OF NOVA SCOTIA
By:/s/F.C.H. Ashby
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
BANQUE NATIONALE DE PARIS
By:/s/Arnaud Collin du Bocage
Name: Arnaud Collin du Bocage
Title: Executive Vice President and
Branch Manager
THE LONG TERM CREDIT BANK OF JAPAN, LTD.
By:/s/ Shuichi Tajima
Name: Shuichi Tajima
Title: General Manager & Regional Head
THE FUJI BANK, LIMITED
By:/s/Peter L. Chinnici
Name: Peter L. Chinnici
Title: Joint General Manager
KZH IV LLC
By:/s/Virginia Conway
Name: Virginia Conway
Title: Authorized Agent
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
By:
Name:
Title:
KZH III LLC
By:/s/ Virginia Conway
Name: Virginia Conway
Title: Authorized Agent
KZH SHOSHONE LLC
By:/s/ Virginia Conway
Name: Virginia Conway
Title: Authorized Agent
AMARA-1 FINANCE LTD
By:/s/Ian David Moore
Name: Ian David Moore
Title: Director
AMARA-2 FINANCE LTD
By:/s/ Ian David Moore
Name: Ian David Moore
Title: Director
CERES FINANCE LTD
By:/s/ John W. Cullimane
Name: John W. Cullimane
Title: Director
BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION
By:/s/ Mary Pat Riggins
Name: Mary Pat Riggins
Title: Vice President
AMENDMENT NO. 4 TO THE
TRANSFER AND ADMINISTRATION AGREEMENT
This AMENDMENT NO. 4, dated October 22, 1998 to the TRANSFER AND
ADMINISTRATION AGREEMENT, dated October 23, 1997, (as amended, modified,
supplemented, restated, or replaced from time to time, the "Agreement"), by and
among METRIS FUNDING CO., a Delaware corporation, as transferor (in such
capacity, the "Transferor"), DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL
ASSOCIATION, a national banking association ("DMCCB"), as collection agent (in
such capacity, the "Collection Agent"), KITTY HAWK FUNDING CORPORATION, a
Delaware corporation (the "Company"), and NATIONSBANK, N.A., a national banking
association ("NationsBank"), as agent for the Company and the Bank Investors (in
such capacity, the "Agent") and as a Bank Investor.
PRELIMINARY STATEMENTS
WHEREAS, the parties hereto have entered into the Agreement whereby
the Transferor may convey, transfer, and assign from time to time undivided
interests in certain accounts receivable, and the Company may, and the Bank
Investors, if requested, shall accept such conveyance, transfer and assignment
of such undivided percentage interests, subject to the terms and conditions of
the Agreement and
WHEREAS, the parties to the Agreement desire to make certain amendments
to the Agreement.
NOW, THEREFORE, the parties hereby agree as follows::
ARTICLE I
DEFINITIONS
SECTION 1.1 Defined Terms
As used in this Amendment, all capitalized terms not otherwise defined
herein shall have the meanings assigned such terms in the Agreement.
<PAGE>
ARTICLE II
THE AMENDMENTS
SECTION 2.1 Amendment to Certain Defined Terms.
The definition of "Commitment Termination Date" is to be amended as
follows and the effective date of such amendment shall be October 22, 1998:
The date October 22, 1998 in the definition "Commitment Termination
Date" shall be replaced by October 21, 1999.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 Representations and Warranties.
The Transferor hereby makes to the Company, on and as of the date
hereof, all of the representations and warranties set forth in Section 3.1 of
the Agreement.
The Collection Agent hereby makes to the Company, on and as of the date
hereof, all of the representations and warranties set for in Section 3.3 of the
Agreement
SECTION 3.2 Severability; Counterparts.
This amendment to the Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute one and the same Agreement. Any provisions of
this amendment to the Agreement which are prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
<PAGE>
SECTION 3.3 Ratification.
Except as expressly affected by the provisions hereof, the Agreement as
amended by this Amendment shall remain in full force and effect in accordance
with its terms and ratified and confirmed by the parties hereto. On and after
the date hereof, each reference in the Agreement to "this Agreement",
"hereunder", "herein" or words of like import shall mean and be a reference to
the Agreement as amended by this Amendment.
SECTION 3.4 Captions.
The captions in the Amendment are for convenience of reference only and
shall not define or limit any of the terms or provisions hereof.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment No. 4 to the Transfer and Administration Agreement as of the date
first written above.
KITTY HAWK FUNDING CORPORATION,
as Company
By:/s/ Richard L. Taiano
Name: Richard L. Taiano
Title:Vice President
METRIS FUNDING CO.,
as Transferor
By: /s/ Paul Runice
Name: Paul Runice
Title:Vice President & Treasurer
DIRECT MERCHANTS CREDIT CARD BANK,
NATIONAL ASSOCIATION
as Collection Agent
By:/s/ Paul Runice
Name: Paul Runice
Title: Treasurer & Cashier
NATIONSBANK, N.A.
as a Bank Investor
By: /s/ Robert R. Wood
Name: Robert R. Wood
Title: Vice President
NATIONSBANK, N.A.
as Agent
By:/s/ Robert R. Wood
Name: Robert R. Wood
Title: Vice President
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE (hereinafter "Third Amendment"), entered
into this 22nd day of December, 1998 by and between Exchange Center, L.L.C.
(hereinafter called "Landlord"), and Fingerhut Financial Services Corporation, a
Minnesota Corporation, (hereinafter called "Tenant").
RECITALS
WHEREAS, Landlord is the successor to the interest of 4500 Exchange
Tower under said Lease; and shall be known thereafter as Landlord.
WHEREAS, Metris Direct, Inc. is the successor to the interest of Tenant
under said Lease, and shall be known thereafter as Tenant.
WHEREAS, Landlord's predecessor, 1991 Exchange Limited Partnership, and
Tenant entered into a Lease Agreement dated October 31, 1995 (herein called the
"Base Lease"), covering office space on the 3rd floor of the building commonly
known as 4500 Exchange Tower, located at 4500 South Garnett, Tulsa, Oklahoma,
known as Suite 300 (the "Premises") consisting of approximately 17,590 net
rentable square feet of space; and
WHEREAS, the Base Lease was subsequently modified and amended by a
written instrument dated February 14, 1996, entitled, "First Amendment To Lease"
by and between Tenant and Landlord's predecessor, 1991 Exchange Limited
Partnership, which among other things, permitted tenant to expand the Premises
by approximately 17,120 net rentable square fee; and
WHEREAS, the Base Lease, as amended, was subsequently modified and
amended by a written instrument dated April 20, 1998, entitled "Second Amendment
to Lease" by and between Tenant and Landlord, which among other things permitted
Tenant to expand the Premises by approximately 1,004 net rentable square fee
(the Base Lease, First Amendment to Lease, and Second Amendment to Lease are
hereafter collectively referred to as the "Lease"); and
WHEREAS, Landlord and Tenant desire to amend and modify the Lease in
order to extend the Lease Term and set forth certain other understandings and
agreements as between Landlord and Tenant in accordance with the specific terms
and conditions hereafter provided; and
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and in said Lease the parties hereto agree as follows:
1. The provisions of this Third Amendment shall supersede any
inconsistent provisions contained in the Lease, regardless of
whether such inconsistent provisions are contained in the
printed portion of the Lease or any rider or addendum annexed
hereto and made a part thereof. All capitalized items are not
otherwise defined herein shall have the same meanings
ascribed to them in the Lease.
2. The Lease Term is hereby extended to expire at midnight on the 31st
day of December, 1999.
3. Effective from and after January 1, 1999, Base Rental shall be as
follows:
01/01/99 - 12/31/99 $31,249.75/monthly
4. Tenant represents and warrants to Landlord that it has not
engaged a broker in connection with the negotiation of and
entry into this Third Amendment. Tenant agrees hereby to
indemnify, defend and save Landlord harmless from all
liabilities arising form any losses arising from or relating
to Tenant's breach of this warranty.
5. This Third Amendment shall not constitute an agreement by
Landlord or Tenant and shall not be binding upon Landlord or
Tenant unless and until this Third Amendment shall be executed
by Landlord and Tenant and shall be delivered by Landlord to
Tenant.
6. This Third Amendment may not be changed orally, and shall be
binding upon and shall inure to the benefit of the parties to
it, their respective heirs, successors and, as permitted,
their assigns.
7. Tenant accepts the Demised Premises in their present "as-is"
condition as suitable for Tenant's occupancy thereof, provided
that Landlord, at Landlord's sole cost and expense, shall
provide the following Tenant Improvements:
(1.) Install new carpet and rubber cove base in the third (3rd)
and fifth (5th) floor elevator lobbies per Tenant's
specifications, not to exceed $22.00 per yard.
(2.) Install new carpet and rubber cove base in the third 93rd)
floor reception area per Tenant's specifications, not to
exceed $22.00 per yard.
(3.) Install new wallpaper in the third (3rd) floor conference room per Tenant's
specifications.
(4.) Install two (2) door units with side light window units in the third
(3rd) floor reception areal
Landlord shall complete these Tenant Improvements on or before
April 30, 1999.
It is further understood that the unused portion of the Tenant
Improvement Allowance that is discussed in the "Option to
Renew" provision of the Addendum to Lease dated October 31,
1995 shall be forfeited and no longer available to Tenant in
the future.
Any additional alterations shall be at Tenant's sole cost and
expense with prior approval by Landlord.
8. It is agreed and confirmed that Tenant's Premises contain
approximately 35,714 net rentable square fee.
9. Effective from and after January 1, 1999, Landlord hereby
releases Fingerhut Financial Services Corporation from any and
all financial obligations relating to the Lease, however, such
release shall not release or discharge Fingerhut Financial
Services Corporation from any obligation that has accrued
hereunder prior to January 1, 1999.
EXCEPT as amended herein, the Lease shall remain in full force and
effect.
IN WITNESS HEREOF, Landlord and Tenant have duly executed this Third
Amendment to Lease as of the day and year first above written.
LANDLORD
Exchange Center, L.L.C.,
by and through its agent
P & H Properties, L.L.C.
/s/Robert E. Phillips
By: Robert E. Phillips
Title: Member
TENANT
Metris Direct, Inc.,
a Minnesota Corporation
/s/Ronald N. Zebeck
By: Ronald N. Zebeck
LEASE AMENDMENT
THIS LEASE AMENDMENT, dated 7/10/98 by and between Koger Equity, Inc., a Florida
Corporatoin (Landlord with its principal office at 3986 Boulevard Center Drive,
Jacksonville, Florida, 32207, and METRIS DIRECT, INC., a Delaware Corporation,
(Tenant) with its principal office at 4400 Baker Road, Minnetonka, MN 55343. The
Landlord and Tenant executed a Lease Agreement dated 12/11/96, and amended
6/27/97 and 10/15/97, for space designated as Suite 200, comprising
approximately 25,787 square feet (as shown on Exhibit A attached, located at
4135 South 100th East Aveneu, Tulsa, Oklahoma. The parties hereto desire to
alter and modify said Lease Agreement, effective January 1, 1999, as follows:
1. By changing Lease Expirate Date from December 31, 1998 to read December 31,
1999.
2. By changing monthly rent from $24,712.54 to read $27,935.92, net of
electricity.
Except as specifically amended and modified by this Lease Amendment, all other
terms of the Lease and the Exhibits attached thereto remain in full force and
effect.
IN WITNESS WHEREOF, the Landlord and the Tenant have executed or caused to be
executed this Amendment on the dates shown below their signatures to be
effective as of the date set forth above.
Tenant: METRIS DIRECT, INC. Landlord: KOGER EQUITY, INC.
BY:/s/ Douglas B. McCoy BY:/s/J. Velma Keen, II
Print Name: Douglas B. McCoy J. VELMA KEEN, II
Title: Sr. Vice President, Operations Vice President
ATTEST: _______________________________ ATTEST: _____________________________
TRANSFER AND ADMINISTRATION AGREEMENT
TRANSFER AND ADMINISTRATION AGREEMENT (as amended,
supplemented or otherwise modified and in effect from time to time, this
"Agreement"), dated as of December 9, 1998, by and among METRIS ASSET FUNDING
CO., a Delaware corporation, as transferor (in such capacity, the "Transferor"),
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION, a national banking
association with its principal offices located in Arizona (together with its
successors and assigns, "DMCCB"), as Collection Agent, ENTERPRISE FUNDING
CORPORATION, a Delaware corporation (together with its successors and assigns,
"Enterprise"), as a Purchaser, PARK AVENUE RECEIVABLES CORPORATION, a Delaware
corporation (together with its successors and assigns, "PARCO"), as a Purchaser,
SHEFFIELD RECEIVABLES CORPORATION, a Delaware corporation (together with its
successors and assigns, "Sheffield"), as a Purchaser, BARCLAYS BANK PLC, an
English banking corporation (together with its successors and assigns,
"Barclays"), as a Bank Investor and the Sheffield Agent, THE CHASE MANHATTAN
BANK, a New York banking corporation (together with its successors and assigns,
"Chase"), as a Bank Investor and the PARCO Agent, NATIONSBANK, N.A., a national
banking association (together with its successors and assigns, "NationsBank"),
as a Bank Investor and the Enterprise Agent, and NationsBank, as the agent for
the Enterprise Agent, the PARCO Agent and the Sheffield Agent (in such capacity,
the "Administrative Agent").
PRELIMINARY STATEMENTS
WHEREAS, the Transferor may desire to convey, transfer and
assign, from time to time, undivided percentage interests in certain accounts
receivable, and the Purchasers may desire to, and the Bank Investors, if
requested, shall, accept such conveyance, transfer and assignment of such
undivided percentage interests, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Certain Defined Terms.
As used in this Agreement, the following terms shall have the
following meanings:
"Account" shall mean each VISA or MasterCard account in
existence as of the Cut-Off Date pursuant to an Account Agreement, which
accounts were sold by PNC to the Seller pursuant to the PNC Agreement, which is
identified by account number and by the outstanding balance as of the Cut-Off
Date and referred to in the Account Schedule delivered to the Purchaser Agents
on the Closing Date pursuant to Section 2.8, including any Related Account, and
any Related Account established after the Cut-Off Date and any Account converted
to the Seller's systems, shall be identified on the Account Schedule, as such
schedule is delivered from time to time pursuant to Section 2.8 hereof.
"Account Agreement" shall mean the cardholder agreements and
Federal Truth in Lending Statement for Accounts, between an Obligor and,
originally, PNC, or to which the Seller has become a party, as such agreements
or statement may be amended, modified or otherwise changed from time to time.
"Account Schedule" shall mean the schedule of Accounts (which
schedule may be in the form of a computer file or microfiche) of the Transferor
delivered to the Purchaser Agents on the Closing Date, as delivered from time to
time pursuant to the terms of this Agreement.
"Accrued Interest Component" means, for any Collection Period,
that portion of the Interest Component of all Related Commercial Paper
outstanding at any time during such Collection Period which has accrued from the
first day through the last day of such Collection Period whether or not such
Related Commercial Paper matures during such Collection Period, based on the
actual number of days in such Collection Period that such Related Commercial
Paper was outstanding.
"Additional Investment Certificate" means a certificate, in
substantially the form attached hereto as Exhibit A or in such other form as is
mutually agreed to by the Transferor and the Purchaser Agents, furnished by the
Collection Agent pursuant to Section 2.11 hereof.
"Adjusted LIBOR Rate" means, with respect to any funding
period during which the return to any Bank Investor or any Liquidity Provider is
to be calculated by reference to the London interbank offered rate, a rate which
is 0.875% in excess of a rate per annum equal to the sum (rounded upwards, if
necessary, to the next higher 1/100 of 1%) of (A) the rate obtained by dividing
(i) the applicable LIBOR Rate by (ii) a percentage equal to 100% minus the
reserve percentage, if any, used for determining the maximum reserve requirement
as specified in Regulation D (including, without limitation, any marginal,
emergency, supplemental, special or other reserves) that is applicable to the
applicable Purchaser Agent during such period in respect of eurocurrency or
eurodollar funding, lending or liabilities (or, if more than one percentage
shall be so applicable, the daily average of such percentage for those days in
such period during which any such percentage shall be applicable) plus (B) the
then daily net annual assessment rate (rounded upwards, if necessary, to the
nearest 1/100 of 1%) as estimated by the applicable Purchaser Agent for
determining the current annual assessment payable by the applicable Purchaser
Agent to the Federal Deposit Insurance Corporation in respect of eurocurrency or
eurodollar funding, lending or liabilities.
"Adjustment Payment" has the meaning assigned to that term in
Section 2.9(a).
"Administrative Agent" means NationsBank, N.A., in its
capacity as agent for the Purchaser Agents, together with its successors,
including any successor thereto appointed pursuant to Article IX.
"Administrative Fee" means the fee payable by the Transferor
to Enterprise pursuant to Section 2.7 hereof, the terms of which are set forth
in the Fee Letter.
"Adverse Claim" means a lien, security interest, charge or
encumbrance, or other right or claim in, of or on any Person's assets or
properties in favor of any other Person (including any UCC financing statement
or any similar instrument filed against such Person's assets or properties),
excluding any liens created under this Agreement or the Receivables Purchase
Agreements or liens against the Initial Purchaser or the Seller that secure the
payment of taxes, assessments and governmental charges or levies, if such taxes
are either (a) not delinquent or (b) being contested in good faith by
appropriate legal or administrative proceedings and as to which adequate
reserves in accordance with generally accepted accounting principles shall have
been established.
"Affected Assets" means, collectively, the Receivables,
the Related Security, the Collections and Proceeds relating thereto.
"Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies of the
controlled Person, whether through ownership of voting stock, by contract or
otherwise.
"Agency Fee" means the fee payable by the Transferor to the
Administrative Agent pursuant to Section 2.7 hereof, the terms of which are set
forth in the Fee Letter.
"Aggregate Interest Component" means aggregate sum of the
Interest Components of all issued and outstanding Related Commercial Paper.
"Aggregate Unpaids" means, at any time, an amount equal to the
sum of (i) the aggregate accrued and unpaid Carrying Costs at such time, (ii)
all amounts of the type included in the definition of Carrying Costs which will
accrue after such time, (iii) the Net Investments at such time, and (iv) all
other amounts owed (whether due or accrued) hereunder by the Transferor or the
Collection Agent to the Purchasers, the Administrative Agent, the Purchaser
Agents or the Bank Investors at such time.
"Applicable Purchaser Percentage" means (i) with respect to
Enterprise, 37.50%, (ii) with respect to PARCO, 31.25%, and (iii) with respect
to Sheffield, 31.25%.
"Asset Purchase Agreement" means that certain Asset Purchase
Agreement, dated as of December 9, 1998, by and among the PARCO Agent, the PARCO
Bank Investors and PARCO, as the same may from time to time be amended,
supplemented or otherwise modified and in effect.
"Assigned Rights" means all right, title and interest of DMCCB
in and to any payment from PNC arising from any (i) breach of any representation
or warranty, (ii) repurchase obligation or (iii) indemnity in each case under
the PNC Agreement.
"Assignment" has the meaning specified in Section 4.1(dd)
hereof.
"Assignment Amount" with respect to a Bank Investor shall mean
at any time an amount equal to the lesser of (i) such Bank Investor's Special
Pro Rata Share of the applicable Net Investment at such time, (ii) such Bank
Investor's Special Pro Rata Share of the aggregate outstanding principal balance
of Receivables (other than Defaulted Receivables as shown on the most recently
delivered Investor Report hereunder) at such time, and (iii) such Bank
Investor's unused Commitment.
"Assignment and Assumption Agreement" means (i) with respect
to any Enterprise Bank Investor, an Assignment and Assumption Agreement
substantially in the form of Exhibit B attached hereto, (ii) with respect to any
PARCO Bank Investor, the Asset Purchase Agreement and (iii) with respect to any
Sheffield Bank Investor, the Sheffield Agreement.
"Bank Investors" shall mean, collectively, the Enterprise Bank
Investors, the PARCO Bank Investors and the Sheffield Bank Investors.
"Bankruptcy Code" has the meaning assigned to that term in
Section 3.1(k) hereof.
"Barclays" shall have the meaning set forth in the preamble
to this Agreement.
"Base Rate" or "BR" means (x) with respect to Enterprise and
the Enterprise Bank Investors, a rate per annum equal to the greater of (i) the
prime rate of interest announced by the Liquidity Provider (or, if more than one
Liquidity Provider, then by NationsBank) from time to time, changing when and as
said prime rate changes (such rate not necessarily being the lowest or best rate
charged by the Liquidity Provider (or NationsBank, as applicable) and (ii) the
sum of (a) 1.50% and (b) the rate equal to the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published for such day (or, if such day is
not a Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day for such transactions
received by the Liquidity Provider (or, if more than one Liquidity Provider,
then by NationsBank) from three (3) Federal funds brokers of recognized standing
selected by it; (y) with respect to PARCO and the PARCO Bank Investors, a rate
per annum equal to the greater of (i) the prime rate of interest announced by
the PARCO Agent from time to time, changing when and as said prime rate changes
(such rate not necessarily being the lowest or best rate charged by the PARCO
Agent) and (ii) the sum of (a) 1.50% and (b) the rate equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day that is a Business Day, the average of the quotations for such day
for such transactions received by the PARCO Agent from three (3) Federal funds
brokers of recognized standing selected by it; and (z) with respect to Sheffield
and the Sheffield Bank Investors, a rate per annum equal to the greater of (i)
the prime rate of interest announced by the Sheffield Agent from time to time,
changing when and as said prime rate changes (such rate not necessarily being
the lowest or best rate charged by the Sheffield Agent) and (ii) the sum of (a)
1.50% and (b) the rate equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a Business
Day, the average of the quotations for such day for such transactions received
by the Sheffield Agent from three (3) Federal funds brokers of recognized
standing selected by it.
"Benefit Plan" means any employee benefit plan as defined in
Section 3(3) of ERISA in respect of which the Transferor, the Initial Purchaser,
the Seller or any ERISA Affiliate of the Transferor, the Initial Purchaser, or
the Seller is, or at any time during the immediately preceding six years was, an
"employer" as defined in Section 3(5) of ERISA.
"Business Day" means any day excluding Saturday, Sunday and
any day on which banks in New York, New York, Charlotte, North Carolina or in
the States of Minnesota or Arizona are authorized or required by law to close,
and, when used with respect to the determination of any Adjusted LIBOR Rate or
any notice with respect thereto, any such day which is also a day for trading by
and between banks in United States dollar deposits in the London interbank
market.
"Buyer's Percentage Factor" shall mean, with respect to any
Collection Period, the fraction (expressed as a percentage) computed at any time
of determination as follows:
NI
---
PRB
Where:
NI = the Net Investments at the time of such computation.
PRB = the amount of Principal Receivables minus all Defaulted
Receivables for such Collection Period (which were not excluded from the
calculation of "Principal Receivables" used herein) plus the amount on deposit
in the Excess Funding Account at the time of such computation.
Notwithstanding the foregoing computation, (i) the Buyer's
Percentage Factor shall not exceed 100%, and (ii) the Buyer's Percentage Factor
with respect to Principal Collections at any time on and after the earlier of
the Termination Date and a Special Termination Date shall be the percentage
equivalent of a fraction the numerator of which is the Net Investments as of
such earlier date and the denominator of which is the lesser of (x) the
Principal Receivables plus the amount on deposit in the Excess Funding Account
on the last day of the Collection Period immediately prior to such earlier date
or (y) the Principal Receivables plus the amount on deposit in the Excess
Funding Account on the last day of the immediately preceding Collection Period.
"Carrying Costs" means, for a Collection Period, the sum of
(i) the sum of the dollar amount of the Purchasers' obligations for such
Collection Period determined on an accrual basis in accordance with GAAP
consistently applied (a) as to Enterprise, to pay interest with respect to
Purchased Interests pursuant to the provisions of each Liquidity Provider
Agreement (such interest to be calculated based on the Adjusted LIBOR Rate,
provided that if a Termination Event shall have occurred, such interest shall be
calculated at the Base Rate with respect to Enterprise plus 2.00%) outstanding
at any time during such Collection Period accrued from the first day through the
last day of such Collection Period whether or not such interest is payable
during such Collection Period and to pay interest with respect to amounts
disbursed by each Credit Support Provider pursuant to the applicable Credit
Support Agreement outstanding at any time during such Collection Period accrued
from the first day through the last day of such Collection Period whether or not
such interest is payable during such Collection Period, (b) as to the PARCO Bank
Investors, to pay interest on such Bank Investors' Net Investment funded at the
Base Rate and the Adjusted LIBOR Rate which were outstanding at any time during
such Collection Period which accrued from the first day through the last day of
such Collection Period, whether or not such interest is payable during such
Collection Period, (c) as to the Sheffield Bank Investors, to pay interest on
funding periods during which the applicable interest rate is the Base Rate with
respect to Sheffield and the Adjusted LIBOR Rate with respect to Sheffield
outstanding at any time during such Collection Period, accrued from the first
day through the last day of such Collection Period, whether or not such interest
is payable during such Collection Period, (d) to pay the Accrued Interest
Component of Related Commercial Paper with respect to any Collection Period
(and, for purposes of this clause (d), Related Commercial Paper shall include
Commercial Paper issued to fund the Net Investments even if such Commercial
Paper is issued in an amount in excess of the Net Investments), (e) as to
Enterprise, to pay the Dealer Fee with respect to Related Commercial Paper
issued during such Collection Period and (f) to pay the costs of the Purchasers
with respect to the operation of Sections 8.1, 8.2, 8.3 and 8.4; (ii) as to
Enterprise, the Program Fee, the Administrative Fee and the Facility Fee accrued
from the first day through the last day of such Collection Period whether or not
such amount is payable during such Collection Period; (iii) all amounts due the
Bank Investors in accordance with Section 2.3(c), (d), (e) and (f) hereof which
accrued during such Collection Period, whether or not payable during such
Collection Period; (iv) as to PARCO, the fees specified in the PARCO Fee Letter
which accrued during such Collection Period, whether or not payable during such
Collection Period; (v) as to Sheffield, the fees specified in the Sheffield Fee
Letter and (vi) any of the foregoing amounts which have not been paid in any
prior Collection Period.
"Certificates" means the certificates issued to the Purchaser
Agents for the benefit of their related Purchasers and their related Bank
Investors pursuant to Section 2.2(g) hereof.
"Chase" shall have the meaning set forth in the preamble to
this Agreement.
"Closing Date" means December 9, 1998.
"Code" means the Internal Revenue Code of 1986, as amended and
in effect from time to time.
"Collateral Agent" means NationsBank, N.A., as collateral
agent for each Liquidity Provider, each Credit Support Provider, the holders of
Commercial Paper and certain other parties.
"Collection Account" shall have the meaning assigned to that
term in Section 2.12(a).
"Collection Agent" means at any time the Person then
authorized pursuant to Section 6.1 hereof to service, administer and collect
Receivables, and its successors and permitted assigns.
"Collection Agent Default" has the meaning specified in
Section 6.4 hereof.
"Collection Period" means the calendar month preceding the
Remittance Date, or in the case of the first Collection Period, the period
commencing on the Cut-Off Date to the end of the calendar month preceding the
first Remittance Date.
"Collections" means, with respect to any Receivable, all cash
collections and other cash proceeds of such Receivable, including, without
limitation, all Recoveries and collections on Finance Charge Receivables, if
any, and cash proceeds of Related Security with respect to such Receivable.
"Commercial Paper" means the promissory notes, having a
maturity date of 270 days or less, issued by the Purchasers in the commercial
paper market.
"Commitment" (i) means with respect to each Enterprise Bank
Investor party hereto, (A) the Commitment of such Enterprise Bank Investor to
make acquisitions from the Transferor or Enterprise in accordance herewith in an
amount not to exceed the dollar amount set forth opposite such Enterprise Bank
Investor's signature on the signature page hereto under the heading "Commitment"
minus the dollar amount of any Commitment or portion thereof assigned pursuant
to an Assignment and Assumption Agreement plus the dollar amount of any increase
to such Enterprise Bank Investor's Commitment consented to by such Enterprise
Bank Investor prior to the time of determination, (B) with respect to any
assignee of such Enterprise Bank Investor party hereto taking pursuant to an
Assignment and Assumption Agreement, the Commitment of such assignee to make
acquisitions from the Transferor or Enterprise not to exceed the amount set
forth in such Assignment and Assumption Agreement minus the dollar amount of any
Commitment or portion thereof assigned pursuant to an Assignment and Assumption
Agreement prior to such time of determination and (C) with respect to any
assignee of an assignee referred to in clause (B), the Commitment of such
assignee to make acquisitions from the Transferor or Enterprise not to exceed
the amount set forth in an Assignment and Assumption Agreement between such
assignee and its assign; (ii) with respect to each PARCO Bank Investor party
hereto, has the meaning specified in the Asset Purchase Agreement; and (iii)
with respect to each Sheffield Bank Investor party hereto, means an amount not
to exceed the dollar amount set forth opposite such Sheffield Bank Investor's
signature on the signature page of the Sheffield Agreement.
"Commitment Termination Date" means December 8, 1999, or such
later date to which the Commitment Termination Date may be extended by the
Transferor, the Administrative Agent, the Purchaser Agents, the Purchasers and
the Bank Investors not later than 60 days prior to the then current Commitment
Termination Date.
"Conduit Assignee" shall mean, as to Enterprise, PARCO or
Sheffield, any commercial paper conduit administered by (a) NationsBank or Bank
of America N.T. & S.A. ("BofA"), (b) Chase or (c) Barclays, respectively, and
designated by NationsBank or BofA, Chase or Barclays, respectively, from time to
time to accept an assignment from a related Purchaser of all or a portion of the
applicable Net Investment.
"Conversion/Continuation Notice" shall have the meaning
specified in Section 2.3(e) hereof.
"Credit and Collection Policy" means the written policies and
procedures of the Seller relating to the operation of its consumer revolving
credit card business, including, without limitation, the written policies and
procedures for determining the creditworthiness of credit card customers, the
extension of credit to credit card customers and relating to the maintenance of
credit card accounts and collection of receivables with respect thereto, as such
policies and procedures are amended, modified or otherwise changed from time to
time.
"Credit Support Agreement" means any agreement between a
Purchaser and a Credit Support Provider evidencing the obligation of such Credit
Support Provider to provide credit support to such Purchaser in connection with
the issuance by such Purchaser of Commercial Paper.
"Credit Support Provider" means the Person or Persons who
provides credit support to a Purchaser in connection with the issuance by such
Purchaser of Commercial Paper.
"Cut-Off Date" means December 8, 1998.
"Date of Processing" means, with respect to any transaction
giving rise to a Receivable, the date on which such transaction is settled
according to the Collection Agent's computer master file of Accounts.
"Dealer Fee" means the fee payable by the Transferor to
Enterprise, pursuant to Section 2.5 hereof, the terms of
----------
which are set forth in the Fee Letter.
"Default Rate" means the ratio (expressed as a percentage)
computed as of the last day of each Collection Period by dividing (i) the
aggregate outstanding balance of all Defaulted Receivables as of such date by
(ii) the aggregate outstanding balance of all Receivables as of such date.
"Defaulted Receivable" means a Receivable in an Account with
respect to which, in accordance with the Credit and Collection Policy or the
Collection Agent's customary and usual servicing procedures, the Collection
Agent has charged off such Receivable as uncollectible, and in any event shall
include, by the last day of the month in which it became 180 days past due, any
Receivable that is more than 180 days past due; a Receivable shall become a
Defaulted Receivable on the day on which it is recorded as charged off as
uncollectible on the Collection Agent's computer master file of consumer credit
card revolving accounts. Notwithstanding any other provision hereof, any
Defaulted Receivables that were not Eligible Receivables on the date on which an
ownership interest hereunder was initially purchased by the Purchasers or the
Bank Investors hereunder shall be treated as Receivables which are not Eligible
Receivables rather than as Defaulted Receivables.
"Defaulting Bank Investor" has the meaning specified in
Section 2.2(d)(iii) hereof.
"Determination Date" shall mean with respect to any Collection
Period, the date which is two Business Days before the related Remittance Date.
"Discount Percentage" means the Percentage designated by the
Transferor pursuant to Section 2.5(e).
"Discount Receivables" shall have the meaning specified in
Section 2.5(e) hereof.
"Discount Receivables Collections" means, for any day, the
product of (a) the Discount Percentage and (b) Principal Collections on such
day.
"DMCCB" means Direct Merchants Credit Card Bank, National
Association, a national banking association, and its successors and permitted
assigns.
"Document Agent Fee" means the fee payable by the Transferor
to the Enterprise Agent pursuant to Section 4.1 hereof, the terms of which are
set forth in the Fee Letter.
"Early Collection Fee" means, for any funding period during
which the portion of any Net Investment that was allocated to such funding
period is reduced for any reason whatsoever, the excess, if any, of (i) the
additional interest that would have accrued during such funding period if such
reductions had not occurred, minus (ii) the income, if any, received by the
recipient of such reductions from investing the proceeds of such reductions.
"Eligible Account" means, as of the Cut-Off Date (or, with
respect to Accounts arising after the Cut-Off Date, as of the date of creation),
each Account in existence and owned by the Seller:
(i) the credit card or cards related thereto have not been reported lost or
stolen or designated fraudulent;
(ii) the Obligor on which has provided, as its most recent billing address,
an address located in the United States or its territories or
possessions, or Canada, or which is a United States military address;
(iii) which is not an Account as to which any of the Receivables existing
thereunder are Defaulted Receivables;
(iv) which was purchased by the Seller from PNC (or is a Related Account)
and to which the Seller has good title, free and clear of all Adverse
Claims; and
(v) as to which no Event of Bankruptcy shall have occurred with respect to the
Obligor of any Receivable with respect thereto.
"Eligible Investments" means any of the following (a)
negotiable instruments or securities represented by instruments in bearer or
registered or in book-entry form which evidence (i) obligations fully guaranteed
by the United States of America; (ii) time deposits in, or bankers acceptances
issued by, any depositary institution or trust company incorporated under the
laws of the United States of America or any state thereof and subject to
supervision and examination by Federal or state banking or depositary
institution authorities; provided, however, that at the time of investment or
contractual commitment to invest therein, the certificates of deposit or
short-term deposits, if any, or long-term unsecured debt obligations (other than
such obligation whose rating is based on collateral or on the credit of a Person
other than such institution or trust company) of such depository institution or
trust company shall have a credit rating from Moody's and S&P of at least "P-1"
and "A-1", respectively, in the case of the certificates of deposit or
short-term deposits, or a rating not lower than one of the two highest
investment categories granted by Moody's and by S&P; (iii) certificates of
deposit having, at the time of investment or contractual commitment to invest
therein, a rating from Moody's and S&P of at least "P-1" and "A-1",
respectively; or (iv) investments in money market funds rated in the highest
investment category or otherwise approved in writing by the applicable rating
agencies; (b) demand deposits in any depositary institution or trust company
referred to in (a)(ii) above; (c) commercial paper (having original or remaining
maturities of no more than 30 days) having, at the time of investment or
contractual commitment to invest therein, a credit rating from Moody's and S&P
of at least "P-1" and "A-1", respectively; (d) Eurodollar time deposits having a
credit rating from Moody's and S&P of at least "P-1" and "A-1", respectively;
and (e) repurchase agreements involving any of the Eligible Investments
described in clauses (a)(i), (a)(iii) and (d) hereof so long as the other party
to the repurchase agreement has at the time of investment therein, a rating from
Moody's and S&P of at least "P-1" and "A-1", respectively.
"Eligible Receivable" means, at any time, any Receivable:
(i) with respect to which the related Account is
an Eligible Account;
(ii) to which, immediately prior to the transfer to a
Purchaser, the Transferor has good title thereto,
free and clear of all Adverse Claims;
(iii) which (together with the Related Security,
Collections and proceeds related thereto) has been the
subject of either a valid transfer and sale from the Transferor to each of the
Purchaser Agents, on behalf of the applicable Purchaser and its related Bank
Investors, of all of the Transferor's right, title and interest therein or the
grant of a first priority perfected security interest therein (and in the
Related Security, Collections and proceeds related thereto), effective until the
termination of this Agreement;
(iv) the Obligor of which is not a government or
a government subdivision or agency;
(v) which is not a Defaulted Receivable at
the time of the initial creation of an interest therein
hereunder;
(vi) which is an "eligible asset" as defined in Rule
3a-7 under the Investment Company Act of 1940, as
amended;
(vii) a purchase of which with the proceeds of
Commercial Paper would constitute a "current transaction"
within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended;
(viii) which is an "account" or "general
intangible" within the meaning of Article 9 of the UCC of the
applicable jurisdiction;
(ix) which is denominated and payable only in
United States dollars;
(x) which arises under an Account that, together with
the Receivable related thereto, is in full force
and effect and constitutes the legal, valid and binding obligation of the
related Obligor enforceable against such Obligor in accordance with its terms
and is not, at the time of transfer hereunder, subject to any litigation, right
of recission, dispute, offset, counterclaim or other defense;
(xi) which, together with the Account related
thereto, complies in all material respects with all laws,
rules or regulations applicable thereto (including, without limitation, laws,
rules and regulations relating to truth in lending, fair credit billing, fair
credit reporting, equal credit opportunity, fair debt collection practices and
privacy) and with respect to which the Account Agreement related thereto is not
in violation of any such law, rule or regulation in any material respect;
(xii) which is assignable without the consent of, or
notice to, the Obligor thereunder;
(xiii) the transfer of which under the Receivables
Purchase Agreements by the Seller and the Initial
Purchaser and hereunder by the Transferor does not violate, breach or contravene
any applicable laws, rules, regulations, orders or writs or any contractual or
other restriction, limitation or encumbrance;
(xiv) which, at the time of transfer hereunder, has
not been compromised, adjusted or modified
(including the granting of any discounts, allowances or credits); provided,
however, that only such portion of such Receivable that is the subject of such
compromise, adjustment or modification shall be deemed to be ineligible pursuant
to the terms of this clause (xiv);
(xv) as to which no effective financing statement or
other instrument similar in effect covering such
Receivable, any interest therein, Account or Collections with respect thereto is
on file in any recording office except such as may be filed in favor of the
Initial Purchaser or the Transferor, pursuant to the Receivables Purchase
Agreements, or a Purchaser hereunder;
(xvi) with respect to which all material consents,
licenses, approvals or authorizations of, or
registrations or declarations with, any governmental authority required to be
obtained, effected or given by the Initial Purchaser, Transferor or the Seller
in connection with the creation of such Receivable or the execution, delivery,
creation and performance by the Initial Purchaser, Transferor or the Seller of
the Account Agreement pursuant to which such Receivable was created, have been
duly obtained, effected or given and are in full force and effect; and
(xvii) which was originated by PNC or (as to Related
Accounts) the Seller in the ordinary course of its
business and was validly assigned to the Transferor under the Receivables
Purchase Agreements.
"Enterprise" shall have the meaning set forth in the preamble
to this Agreement.
"Enterprise Agent" means NationsBank or any other entity which
has been appointed as the administrator of Enterprise and agent for the
Enterprise Bank Investors.
"Enterprise Bank Investors" shall mean NationsBank and each
other financial institution that becomes a Bank Investor with respect to any
Transferred Interest held by Enterprise, pursuant to an Assignment and
Assumption Agreement, together with its successors and permitted assigns.
"Enterprise Majority Investors" shall have the meaning
specified in Section 9.7(h) hereof.
"Enterprise Wind-Down Event" means the occurrence of any of
the following events:
(a) any Liquidity Provider with respect to Enterprise
or any Credit Support Provider with respect to Enterprise shall have
given notice that an event of default has occurred and is continuing
under any of its respective agreements with Enterprise, or the
Commitment of such Liquidity Provider under its Liquidity Provider
Agreement or such Credit Support Provider under its Credit Support
Agreement shall have terminated;
(b) the short-term unsecured debt of Enterprise shall
not be rated at least "A-2" by Standard & Poor's and at least "P-2" by
Moody's, respectively;
(c) a Termination Event or Potential Termination
Event shall have occurred and be continuing;
(d) Enterprise has notified the Transferor that, in
its sole discretion, it (i) no longer wishes to, or is unable to, issue
Commercial Paper with respect to this Agreement, (ii) elects to
commence a Reinvestment Termination Date or (iii) elects to amortize
its Net Investment or elects not to make an additional Incremental
Transfer; and
(e) the date which is five Business Days prior to the
Commitment Termination Date shall have occurred.
"ERISA" means the U.S. Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"ERISA Affiliate" means, with respect to any Person, (i) any
corporation which is a member of the same controlled group of corporations
(within the meaning of Section 414(b) of the Code) as such Person; (ii) a trade
or business (whether or not incorporated) under common control (within the
meaning of Section 414(c) of the Code) with such Person; or (iii) a member of
the same affiliated service group (within the meaning of Section 414(n) of the
Code) as such Person, any corporation described in clause (i) above or any trade
or business described in clause (ii) above; provided, however, that none of FCI
and its Affiliates (other than the Initial Purchaser and its Subsidiaries) shall
be an ERISA Affiliate.
"Event of Bankruptcy" means, with respect to any Person, (i)
that such Person (a) shall generally not pay its debts as such debts become due,
(b) shall admit in writing its inability to pay its debts generally or (c) shall
make a general assignment for the benefit of creditors; (ii) any proceeding
shall be instituted by or against such Person seeking to adjudicate it as
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee or other similar official for it or any substantial part of
its property, and in the case of any such proceeding instituted against such
Person (other than the Transferor), such proceeding shall continue undismissed
for a period of 30 days; or (iii) if such Person is a corporation, such Person
or any Subsidiary shall take any corporate action to authorize any of the
actions set forth in the preceding clauses (i) or (ii).
"Excess Funding Account" shall have the meaning assigned to
that term in Section 2.12(c).
"Excess Spread" means, with respect to any Collection Period,
the annualized percentage equivalent of a fraction the numerator of which is
equal to the Buyer's Percentage Factor of Finance Charge Collections for such
Collection Period minus the Carrying Costs for such Collection Period minus the
Buyer's Percentage Factor of the aggregate amount of Principal Receivables which
became Defaulted Receivables during such Collection Period minus the Buyer's
Percentage Factor of the Servicing Fee with respect to such Collection Period,
and the denominator of which is equal to the average amount of the Net
Investments during such Collection Period.
"Excluded Taxes" shall have the meaning specified in Section
8.3 hereof.
"Facility Fee" means the fee payable by the Transferor to the
Enterprise Agent for distribution to the Bank Investors pursuant to Section 2.7
hereof, the terms of which are set forth in the Fee Letter.
"Facility Limit" means $640,000,000, as reduced (unless the
Purchaser Agents notify the Transferor in writing that such reduction shall not
occur, which notice must be given by each Purchaser Agent), by the cumulative
percentage set forth below on the dates set forth below. Following the earlier
of the Termination Date and Special Termination Date the Facility Limit shall at
all times equal the Net Investments outstanding as of such date.
Cumulative Percent of Initial
Date Facility Limit Reduced on such Date
18-month anniversary of the Closing Date 10%
21-month anniversary of the Closing Date 20%
24-month anniversary of the Closing Date 30%
27-month anniversary of the Closing Date 40%
30-month anniversary of the Closing Date 100% (Facility Limit
is reduced to zero)
"FCI" means Fingerhut Companies, Inc., a Minnesota corporation.
"Fee Letter" means the letter agreement dated the date hereof
between the Transferor and Enterprise with respect to the fees to be paid by the
Transferor hereunder, as amended, modified or supplemented from time to time.
"Finance Charge Collections" shall mean, with respect to any
Business Day, Collections received by the Collection Agent with respect to
Finance Charge Receivables and unless otherwise specified herein, Discount
Receivables Collections on such Business Day.
"Finance Charge Receivables" shall mean the sum of all amounts
billed from time to time to the Obligors on any Account in respect of (i)
Periodic Finance Charges, (ii) over limit fees, (iii) late charges, (iv)
returned check fees, (v) annual membership fees and annual service charges, if
any, (vi) transaction charges, (vii) cash advance fees and (viii) similar fees
and charges, excluding fees and charges for insurance and insurance type
products, plus (x) Recoveries and (y) Discount Receivables, if any.
"Fitch" means Fitch Investors Service, L.P., and its successors and assigns.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such accounting profession, which are in effect from time to time.
"Incremental Transfer" means a Transfer which is made pursuant
to Section 2.2(a) hereof.
"Indemnified Amounts" has the meaning specified in Section 8.1 hereof.
"Indemnified Parties" has the meaning specified in Section 8.1 hereof.
"Initial Purchaser" means MCI.
"Interest Component" means (i) with respect to Enterprise, (a)
with respect to any Commercial Paper issued on an interest-bearing basis, the
interest payable on such Commercial Paper at its maturity (including any Dealer
Fee) and (b) with respect to any Commercial Paper issued on a discount basis,
the portion of the face amount of such Commercial Paper representing the
discount incurred in respect thereof (including any Dealer Fee to the extent
included as part of such discount), (ii) with respect to PARCO, with respect to
any funding period with respect to PARCO during which all or a portion of its
Net Investment is funded by Commercial Paper of PARCO, the rate equivalent to
the rate (or, if more than one rate, the weighted average of the rates) at which
such Commercial Paper outstanding during such funding period with respect to
PARCO's Net Investment may be sold by any placement agent or commercial paper
dealer selected by PARCO, which rates shall reflect and give effect to the
commissions of placement agents and dealers in respect of such Commercial Paper,
to the extent such commissions are allocated, in whole or in part, to such
Commercial Paper by the PARCO Agent (on behalf of PARCO); provided, however,
that if the rate (or rates) as agreed between any such agent or dealer and PARCO
is a discount rate, then the rate (or if more than one rate, the weighted
average of the rates) resulting from PARCO's converting such discount rate (or
rates) to an interest-bearing equivalent rate per annum and (iii) with respect
to Sheffield, with respect to any funding period with respect to Sheffield
during which all or a portion of its Net Investment is funded by Commercial
Paper of Sheffield, the rate equivalent to the rate (or, if more than one rate,
the weighted average of the rates) at which such Commercial Paper outstanding
during such funding period with respect to its Net Investment may be sold by any
placement agent or commercial paper dealer selected by Sheffield, which rates
shall reflect and give effect to the commissions of placement agents and dealers
in respect of such Commercial Paper, to the extent such commissions are
allocated, in whole or in part, to such Commercial Paper by the Sheffield Agent
(on behalf of Sheffield); provided, however, that if the rate (or rates) as
agreed between any such agent or dealer and Sheffield is a discount rate, then
the rate (or if more than one rate, the weighted average of the rates) resulting
from Sheffield's converting such discount rate (or rates) to an interest-bearing
equivalent rate per annum.
"Interest Rate Caps" shall have the meaning specified in
Section 5.1(n)(i).
"Interest Rate Cap Agreement" means each agreement providing
for an Interest Rate Cap between the Transferor and an Interest Rate Cap
Provider, which is satisfactory in form and substance to the Purchaser Agents,
together with any amendment, modification or supplement thereto.
"Interest Rate Cap Provider" means a provider of an Interest
Rate Cap, which has a short-term rating from Standard & Poor's of at least
"A-1+" or a long-term rating from Standard & Poor's of at least "A" and a
short-term rating of at least "P-1" from Moody's or a long-term rating of at
least "A2" from Moody's.
"Investor Report" means a report, in substantially the form
attached hereto as Exhibit D or in such other form as is mutually agreed to by
the Transferor and the Purchaser Agents, furnished by the Collection Agent
pursuant to Section 2.11 hereof.
"Law" means any law (including common law), constitution,
statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or
award of any Official Body.
"LIBOR Cap Rate" means for any Collection Period, the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Telerate Page 3750 (or any successor page) as the London interbank offered rate
for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two
London Business Days prior to the first day of such Collection Period for a term
of one month.
"LIBOR Rate" means: (a) with respect to any funding period,
for the Net Investment of Enterprise and the Enterprise Bank Investors, and the
Net Investment of Sheffield and the Sheffield Bank Investors, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Telerate Page 3750 (or any successor page) as the London interbank offered rate
for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two
London Business Days prior to the first day of each such funding period for a
term of one month. If for any reason such rate is not available, the term "LIBOR
Rate" shall mean, for any funding period, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page
as the London interbank offered rate for deposits in dollars at approximately
11:00 a.m. (London time) two London Business Days prior to the first day of such
funding period for a term of one month; provided, however, if more than one rate
is specified on the Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates and (b) with respect to the PARCO Bank
Investors and any portion of the related Net Investment funded at the Adjusted
LIBOR Rate, the rate at which deposits in dollars are offered to the PARCO Agent
in the London interbank market at approximately 11:00 A.M. (London time) two (2)
Business Days before the first day of the applicable funding period in an amount
approximately equal to the amount of such portion of such Net Investment and for
a period of time approximately equal to the number of days in such funding
period; provided that if such funding period would expire on (i) a day which is
not a Business Day, such funding period shall expire on the next succeeding
Business Day, (ii) a day which is not a Business Day but is a day of the month
after which no further Business Day occurs in such month, such funding period
shall expire on the next preceding Business Day or (iii) a Business Day for
which there is no numerically corresponding day in the applicable subsequent
calendar month, such funding period shall expire on the last Business Day of
such month.
"Liquidity Provider" means the Person or Persons who will
provide liquidity support to a Purchaser in connection with the issuance by such
Purchaser of Commercial Paper.
"Liquidity Provider Agreement" means (i) with respect to
Enterprise, the agreement between Enterprise and a Liquidity Provider evidencing
the obligation of such Liquidity Provider to provide liquidity support to
Enterprise in connection with the issuance by Enterprise of Commercial Paper,
(ii) with respect to PARCO, the Asset Purchase Agreement and (iii) with respect
to Sheffield, the Sheffield Agreement.
"Material Adverse Effect" means any event or condition which
could reasonably be expected to have a material adverse effect on (i) the
collectibility of the Receivables, taken as a whole, (ii) the condition
(financial or otherwise), businesses or properties of the Transferor, the
Collection Agent, the Initial Purchaser or the Seller, (iii) the ability of the
Transferor, the Collection Agent, the Initial Purchaser or the Seller to perform
its respective obligations under the Transaction Documents to which it is a
party and (iv) the legality, binding effect or enforceability of any material
provision of the Transaction Documents or on the rights and remedies of the
Administrative Agent, the Purchaser Agents, the Purchasers or the Bank Investors
under the Transaction Documents.
"Maximum Buyer's Percentage Factor" means 82.75%.
"MCI" means Metris Companies Inc., a Delaware corporation, and
its successors and permitted assigns.
"Metris Direct" means Metris Direct, Inc., a Minnesota
corporation and its successors and permitted assigns.
"Moody's" means Moody's Investors Service, Inc., and its successors
and assigns.
"Multiemployer Plan" means a "multi-employer plan" as defined
in Section 4001(a)(3) of ERISA which is or was at any time during the current
year or the immediately preceding five years contributed to by the Transferor,
the Initial Purchaser the Seller or any ERISA Affiliate of the Transferor or the
Seller on behalf of its employees.
"NationsBank" shall have the meaning set forth in the preamble
to this Agreement.
"Net Investments" means the sum of the cash amounts paid to
the Transferor for each Incremental Transfer by each of the Purchaser Agents, on
behalf of its related Purchaser or its related Bank Investors, less the
aggregate amount of Collections received and applied by the applicable Purchaser
Agent to reduce the applicable Net Investment pursuant to Section 2.5, 2.6 or
2.9 hereof; provided, however, that each Net Investment shall be restored and
reinstated in the amount of any Collections so received and applied if at any
time the distribution of such Collections is rescinded or must otherwise be
returned for any reason; and, provided, further, that, in the case of the
Enterprise Bank Investors, the related Net Investment may be increased by the
amount described in Section 9.7(d) hereof as described therein.
"Non-Defaulting Bank Investor" has the meaning specified in
Section 2.2(d)(iii) hereof.
"Obligor" means a Person obligated to make payments pursuant
to an Account, including any guarantor thereunder.
"Official Body" means any government or political subdivision
or any agency, authority, bureau, central bank, commission, department or
instrumentality of any such government or political subdivision, or any court,
tribunal, grand jury or arbitrator, in each case whether foreign or domestic.
"Other Transferor" means any Person other than the Transferor
that has entered into a receivables purchase agreement or transfer and
administration agreement with a Purchaser.
"PARCO" shall have the meaning set forth in the preamble to
this Agreement.
"PARCO Agent" means Chase or any other entity which has been
appointed as the administrator of PARCO and agent for the PARCO Bank Investors.
"PARCO Bank Investors" means Chase and each other financial
institution that becomes a Bank Investor with respect to any Transferred
Interest held by PARCO, pursuant to an Assignment and Assumption Agreement,
together with its successors and permitted assigns.
"PARCO Fee Letter" means that certain Fee Letter, dated as of
December 9, 1998, between the Transferor and the PARCO Agent, as the same may
from time to time be amended, supplemented or otherwise modified and in effect.
"PARCO Wind-Down Event" means the occurrence of any of the
following events:
(a) the fifth (5th) Business Day prior to the
Commitment Termination Date;
(b) any provider of PARCO's program liquidity and/or
letter of credit facilities shall have given notice that an event of
default has occurred and is continuing under its agreement with PARCO;
(c) PARCO has notified the Transferor that it no
longer wishes to, or is unable to, issue Commercial Paper with respect
to this Agreement;
(d) PARCO's Commercial Paper shall not be rated at
least A-1/P-1 by Standard & Poor's and Moody's, respectively; and
(e) a Termination Event or Potential Termination
Event shall have occurred and be continuing.
"Payment Rate" means, for any Collection Period, the
percentage equivalent of a fraction, the numerator of which is equal to the
amount of all cash Collections during such Collection Period and the denominator
of which is equal to the average amount of Receivables outstanding during the
prior Collection Period.
"Periodic Finance Charges" shall have, with respect to any
Account, the meaning specified in the Account Agreement applicable to such
Account for finance charges (due to periodic rate) or any similar term.
"Person" means any corporation, limited liability company,
natural person, firm, joint venture, partnership, trust, unincorporated
organization, enterprise, government or any department or agency of any
government.
"PNC" means PNC National Bank, a national banking association,
and shall include, with respect to the origination or creation of any Account
sold pursuant to the PNC Agreement, any predecessor in interest to PNC which
actually originated such Account.
"PNC Agreement" means the Purchase Agreement, dated as of
September 4, 1998, by and between PNC and DMCCB, and all schedules and exhibits
thereto, together with all agreements, instruments and documents executed in
connection therewith, including, without limitation, the Interim Servicing
Agreement with respect thereto, as they may be modified, amended and
supplemented from time to time.
"PNC Consent" shall have the meaning set forth in Section
4.1(ff).
"Potential Termination Event" means an event which but for the
lapse of time or the giving of notice, or both, would constitute a Termination
Event.
"Principal Collections" means, with respect to any Collection
Period, all Collections received during such period other than Finance Charge
Collections.
"Principal Receivables" means amounts shown on the Collection
Agent's records as amounts payable by Obligors with respect to Eligible
Receivables on any Account other than such amounts that are Finance Charge
Receivables or Defaulted Receivables and shall include, without limitation,
amounts payable for purchases of goods or services or cash advances. A
Receivable shall be deemed to have been created at the end of the day on the
Date of Processing of such Receivable. In calculating the aggregate amount of
Principal Receivables on any day, the amount of Principal Receivables shall be
reduced by the aggregate amount of credit balances in the Accounts on such day.
"Pro Rata Share" means, with respect to each Purchaser and its
related Bank Investors, the percentage obtained by dividing such Purchaser's and
its related Bank Investors' Net Investment by the aggregate Net Investments of
the Purchasers and the Bank Investors.
"Proceeds" means "proceeds" as defined in Section 9-306(1) of
the UCC.
"Program Fee" means the fee payable by the Transferor to
Enterprise pursuant to Section 2.7 hereof, the terms of
------------
which are set forth in the Fee Letter.
"Purchase Termination Date" means the date upon which the
Transferor or the Initial Purchaser shall cease, for any reason whatsoever, to
make purchases of Receivables under the applicable Receivables Purchase
Agreement or either Receivables Purchase Agreement shall terminate for any
reason whatsoever.
"Purchased Interest" means the interest in the Receivables
acquired by a Liquidity Provider through purchase pursuant to the terms of the
Liquidity Provider Agreement to which it is a party.
"Purchaser" means any of Enterprise, PARCO or Sheffield, as
the context requires, and "Purchasers" means all of Enterprise, PARCO and
Sheffield. "Applicable Purchaser" means (a) Enterprise, with respect to the
Enterprise Bank Investors and the Enterprise Agent, (b) PARCO, with respect to
the PARCO Bank Investors and the PARCO Agent and (c) Sheffield, with respect to
the Sheffield Bank Investors and the Sheffield Agent.
"Purchaser Agent" means any of the Enterprise Agent, the PARCO
Agent or the Sheffield Agent, as the context requires. "Purchaser Agents" means
all of the Enterprise Agent, the PARCO Agent and the Sheffield Agent.
"Rating Agencies" means, collectively, Standard & Poor's,
Moody's and Fitch.
"Receivable" means all of the indebtedness of any Obligor to
the Transferor under an Account, including the right to receive payment of any
interest or finance charges and other obligations of such Obligor with respect
thereto, which Indebtedness was sold by the Seller to the Initial Purchaser and
by the Initial Purchaser to the Transferor pursuant, respectively, to the
Receivables Purchase Agreements. Each Receivable includes, without limitation,
all rights of the Transferor under the applicable Account Agreement.
"Receivable Systems" shall have the meaning set forth in
Section 3.1(v)(ii) hereof.
"Receivables Purchase Agreements" means, collectively, the (a)
Amended and Restated Bank Receivables Purchase Agreement, dated as of July 30,
1998, between the Seller, as seller, and the Initial Purchaser, as buyer, and
(b) the Receivables Purchase Agreement, dated as of the date hereof, by and
between the Initial Purchaser, as seller, and the Transferor, as purchaser, as
such agreements may be amended, modified or supplemented and in effect from time
to time.
"Records" means all right, title and interest of the Seller,
the Initial Purchaser and the Transferor in and to all Account Agreements and
other documents, books, records and other information (including, without
limitation, computer programs, tapes, discs, punch cards, data processing
software and related property and rights) maintained with respect to Receivables
and the related Obligors.
"Recoveries" means all amounts received or collected by the
Collection Agent with respect to Defaulted Receivables.
"Reinvestment Termination Date" means the second Business Day
after the delivery by a Purchaser to the Transferor of written notice that such
Purchaser elects to assign its Net Investment to the Bank Investors pursuant to
(i) Section 9.7, in the case of Enterprise, (ii) the Asset Purchase Agreement,
in the case of PARCO, or (iii) the Sheffield Agreement, in the case of
Sheffield.
"Related Account" shall mean an Account having each of the
following characteristics: (i) such Related Account is being established in
accordance with the Credit and Collection Policy; (ii) the Obligor or Obligors
with respect to such Related Account are the same Person or Persons as the
Obligor or Obligors of an Account; (iii) such Related Account is originated as a
result of (x) the credit card with respect thereto being lost or stolen or (y)
the Obligor's requesting a VISA account rather than a MasterCard account and
(iv) such Related Account can be traced or identified as a successor account to
an Account by reference to or by way of the computer or other records of the
Collection Agent or the Transferor.
"Related Commercial Paper" shall mean Commercial Paper issued
by a Purchaser the proceeds of which were used to acquire, or refinance the
acquisition of, its interest in Receivables with respect to the Transferor.
"Related Security" means all of the Transferor's right, title
and interest in, to and under:
(i) all guarantees, indemnities, warranties,
insurance (and proceeds and premium refunds thereof) or other
agreements or arrangements of any kind from time to time supporting or
securing payment of a Receivable, whether pursuant to the Account
related to such Receivable or otherwise;
(ii) all Records related to the Receivables (which,
if necessary to comply with applicable law applicable to the Collection
Agent or Transferor, the Transferor or Collection Agent may remove
therefrom the names, addresses, Social Security numbers or other
personal identifiers of Obligors);
(iii) all rights and remedies of the Transferor under
or in connection with the Receivables Purchase Agreements, including
all financing statements filed in connection therewith on which the
Purchaser Agents are listed as assignees;
(iv) all right, title and interest of the Transferor
under each Interest Rate Cap Agreement; and
(v) all Proceeds of any of the foregoing.
"Remittance Date" means the twentieth day of each calendar
month, or if such day is not a Business Day, the next succeeding Business Day;
provided, however, that the first Remittance Date shall be January 20, 1999.
"Required Purchaser Agents" means, for so long as (i) only
three Purchaser Agents are parties to this Agreement, at least two of such
Purchaser Agents, (ii) fewer than three Purchaser Agents are parties to this
Agreement, at least one of such Purchaser Agents and (iii) greater than three
Purchaser Agents become parties to this Agreement, the number of Purchaser
Agents or percentage of holders of the Net Investment which shall constitute
"Required Purchaser Agents" shall be as agreed to by all Purchaser Agents then
party to this Agreement, but shall be at least fifty percent of the holders of
the Net Investment at the time of any determination thereof.
"Section 8.2 Costs" has the meaning specified in Section
8.2(d) hereof.
"Seller" means DMCCB and its successors and permitted assigns.
"Servicing Fee" means the fee payable to the Collection Agent
in an amount equal to 2% per annum on the average daily amount of the Principal
Receivables. Such fee shall accrue from the date of the initial purchase of an
interest in the Receivables to the date on which the Buyer's Percentage Factor
is reduced to zero. Such fee shall be payable only from Collections pursuant to,
and subject to the priority of payments set forth in, Section 2.5 hereof.
"Sheffield" shall have the meaning set forth in the preamble
to this Agreement.
"Sheffield Agent" means Barclays or any other entity which has
been appointed as administrator of Sheffield and agent for the Sheffield Bank
Investors.
"Sheffield Agreement" means that certain Revolving Asset
Purchase Agreement, dated as of December 9, 1998, by and among the Sheffield
Agent, the Sheffield Bank Investors and Sheffield, as the same may from time to
time be amended, supplemented or otherwise modified and in effect.
"Sheffield Bank Investors" shall mean Barclays and each other
financial institution that becomes a Bank Investor with respect to any
Transferred Interest held by Sheffield, pursuant to an Assignment and Assumption
Agreement, together with its successors and permitted assigns.
"Sheffield Fee Letter" means that certain Fee Letter, dated as
of December 9, 1998, between the Transferor and the Sheffield Agent, as the same
may from time to time be amended, supplemented or otherwise modified and in
effect.
"Sheffield Wind-Down Event" means the occurrence of any of the
following events:
(a) the fifth (5th) Business Day prior to the Commitment
Termination Date;
(b) any provider of Sheffield's liquidity and/or program
enhancement shall have given notice that an event of default has occurred and is
continuing under its agreement with Sheffield;
(c) Sheffield has notified the Transferor that it no longer
wishes to, or is unable to, issue Commercial Paper with respect to this
Agreement;
(d) Sheffield's Commercial Paper shall not be rated at least
A-1+/P-1 by Standard & Poor's and Moody's, respectively; and
(e) a Termination Event or Potential Termination Event shall
have occurred and be continuing.
"Special Pro Rata Share" means, for a Bank Investor, the
Commitment of such Bank Investor divided by the sum of the Commitments of all
Bank Investors related to the same Purchaser.
"Special Termination Date" means (a) with respect to
Enterprise or the related Bank Investors, (i) the date of termination of the
Commitment of the Liquidity Provider under the Liquidity Provider Agreement with
respect to Enterprise's commercial paper program or (ii) the date of termination
of the Commitment of the Credit Support Provider under the Credit Support
Agreement with respect to Enterprise's commercial paper program, and (b) with
respect to any Purchaser and related Bank Investors, five Business Days prior to
the Commitment Termination Date if such Purchaser or Bank Investor does not
agree to extend the Commitment Termination Date.
"Spread Account" shall have the meaning assigned to that term
in Section 2.12(b).
"Spread Account Cap Percentage Amount", as of any
Determination Date, means the product of the Net Investments on such
Determination Date and the applicable "Spread Account Cap Percentage" determined
as set forth in the chart immediately below, subject to the following: (a) any
decrease in the Spread Account Cap Percentage will take effect only after three
consecutive Determination Dates during which such decrease (or any greater
decrease) shall have prevailed; (b) any calculation of the "Spread Account
Percentage" based on the Collection Periods ending in October 1998 and November
1998 shall assume that, for each such Collection Period, (x) Excess Spread was
5.10% and 6.18%, respectively, (y) the Payment Rate was 11.29% and 11.49%,
respectively, and (z) the Default Rate was 9.47% and 9.57%, respectively, and
(c) in the event that, as of any Determination Date, the average Default Rate
for any of the three Collection Periods immediately preceding such Determination
Date exceeds 14%, the applicable Spread Account Percentage shall be the amount
determined below, plus 2%.
The Spread Account Cap Percentage Amount applicable on the
Closing Date shall be $0.
<PAGE>
Average Excess Spread for the three
consecutive Collection Periods immediately Spread Account Spread Account
immediately preceding the Cap Percentage (1) Cap Percentage (2)
Determination Date
Greater than 4.50% 0% 1%
Greater than 4.00% and less than or equal 1% 2%
to 4.50%
Greater than 3.00% and less than or equal 2% 3%
to 4.00%
Greater than 2.00% and less than or equal 3% 4%
to 3.00%
2.00% and less 4% 5%
(1) Spread Account Cap Percentage in effect if average Payment
Rate for the three consecutive Collection Periods immediately preceding the
Determination Date is greater than 10%.
(2) Spread Account Cap Percentage in effect if average Payment
Rate for the three consecutive Collection Periods immediately preceding the
Determination Date is less than or equal to 10%.
"Standard & Poor's" or "S&P" means Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc., and its successors and
assigns.
"Structuring Fee" means the fee payable by the Transferor to
the Enterprise Agent pursuant to Section 4.1 hereof, the terms of which are set
forth in the Fee Letter.
"Subsidiary" of a Person means any Person more than 50% of the
outstanding voting interests of which shall at any time be owned or controlled,
directly or indirectly, by such Person or by one or more Subsidiaries of such
Person or any similar business organization which is so owned or controlled.
"Taxes" shall have the meaning specified in Section 8.3 hereof.
"Termination Date" means the earliest of (i) the Business Day
designated by the Transferor to the Purchaser Agents as the Termination Date at
any time following 60 days' written notice to the Purchaser Agents, (ii) the day
upon which the Termination Date is declared or automatically occurs pursuant to
Section 7.2(a) hereof or (iii) the Purchase Termination Date.
"Termination Event" means an event described in Section 7.1
hereof.
"Transaction Costs" has the meaning specified in Section
8.4(a) hereof.
"Transaction Documents" means, collectively, this Agreement,
the Receivables Purchase Agreements, the Fee Letter, the PARCO Fee Letter, the
Sheffield Fee Letter, the Certificates, the Transfer Certificate, each Interest
Rate Cap Agreement, the Assignment, the PNC Consent and all of the other
instruments, documents and other agreements executed and delivered by the Seller
or the Transferor in connection with any of the foregoing, in each case, as the
same may be amended, restated, supplemented or otherwise modified from time to
time.
"Transfer" means a conveyance, transfer and assignment by the
Transferor to a Purchaser or the Bank Investors of an undivided percentage
ownership interest in Receivables hereunder (including, without limitation, as a
result of any reinvestment of Collections in Transferred Interests pursuant to
Sections 2.2(e) and 2.5 hereof).
"Transfer Certificate" has the meaning specified in Section
2.2(c) hereof.
"Transfer Date" means, with respect to each Transfer, the
Business Day on which such Transfer is made.
"Transfer Price" means with respect to any Incremental
Transfer, the amount paid to the Transferor by a Purchaser or the Bank Investors
as described in the applicable Transfer Certificate.
"Transfer Price Deficit" has the meaning specified in Section
2.2(d)(iii) hereof.
"Transferor" means Metris Asset Funding Co., a Delaware
corporation, and its successors and permitted assigns.
"Transferor's Percentage Interest" means (i) 100% (1) minus
(ii) the Buyer's Percentage Factor, provided, that, after the occurrence of the
Termination Date, the Transferor's Percentage Interest shall not fall below an
amount equal to 3% of the Facility Limit on the Termination Date.
"Transferred Interest" means, at any time of determination, an
undivided percentage ownership interest in (i) each and every then outstanding
Receivable, (ii) all Related Security, (iii) all Collections with respect
thereto, and (iv) other Proceeds of the foregoing, which undivided ownership
interest shall be equal to the Buyer's Percentage Factor at such time, and only
at such time (without regard to prior calculations). The Transferred Interest in
each Receivable, together with Collections and Proceeds with respect thereto,
shall at all times be equal to the Transferred Interest in each other
Receivable, together with Collections and Proceeds with respect thereto. To the
extent that the Transferred Interest shall decrease as a result of a
recalculation of the Buyer's Percentage Factor, each of the Purchaser Agents, on
behalf of each of their respective Purchasers or Bank Investors shall be
considered to have reconveyed to the Transferor its undivided percentage
ownership interest in each Receivable, together with Collections and Proceeds
with respect thereto, in an amount equal to its Pro Rata Share of such decrease
such that in each case the Transferred Interest in each Receivable shall be
equal to the Transferred Interest in each other Receivable.
"UCC" means, with respect to any state, the Uniform Commercial
Code as from time to time in effect in such state.
"U.S." or "United States" means the United States of America.
"Year 2000 Compliant" shall have the meaning set forth in
Section 3.1(v)(i) hereof.
"Year 2000 Problem" shall have the meaning set forth in
Section 3.1(v)(i) hereof.
SECTION 1.2. Other Terms.
All accounting terms not specifically defined herein shall be
construed in accordance with GAAP. All terms used in Article 9 of the UCC in the
State of New York, and not specifically defined herein, are used herein as
defined in such Article 9.
SECTION 1.3. Computation of Time Periods.
Unless otherwise stated in this Agreement, in the computation
of a period of time from a specified date to a later specified date, the word
"from" means "from and including", the words "to" and "until" each means "to but
excluding", and the word "within" means "from and excluding a specified date and
to and including a later specified date".
ARTICLE II
PURCHASES AND SETTLEMENTS
Facility.
Upon the terms and subject to the conditions herein set forth,
(x) the Transferor may, at its option, convey, transfer and assign to the
Purchaser Agents, on behalf of their related Purchasers or Bank Investors, as
applicable, and (y) (i) each of the Enterprise Agent, on behalf of and at the
option of Enterprise (prior to an Enterprise Wind-Down Event), the PARCO Agent,
on behalf of and at the option of PARCO (prior to a PARCO Wind-Down Event), and
the Sheffield Agent, on behalf of and at the option of Sheffield (prior to a
Sheffield Wind-Down Event), may or (ii) the Purchaser Agents, on behalf of their
respective Bank Investors shall, unless a Termination Date or Special
Termination Date with respect to such Bank Investors shall have occurred,
severally but not jointly, accept such conveyance, transfer and assignment from
the Transferor, without recourse except as provided herein, of an undivided
percentage ownership interest in the Receivables, together with Collections,
Proceeds and Related Security with respect thereto, from time to time. By
accepting any conveyance, transfer and assignment hereunder, none of the
Purchasers, any Bank Investor, the Administrative Agent or any of the Purchaser
Agents assumes or shall have any obligations or liability under any of the
Accounts, all of which shall remain the obligations and liabilities of the
Transferor, the Initial Purchaser and the Seller.
SECTION 2.2. Transfers; Certificates; Eligible Receivables.
(a) Upon the terms and subject to the conditions herein set forth, (x) the
Transferor may, at its option, convey, transfer and assign to the Purchaser
Agents, on behalf of their related Purchasers or Bank Investors, as applicable,
and (y) the Enterprise Agent, on behalf of Enterprise (prior to an Enterprise
Wind-Down Event), the PARCO Agent, on behalf of PARCO (prior to a PARCO
Wind-Down Event), and the Sheffield Agent, on behalf of Sheffield (prior to a
Sheffield Wind-Down Event), may, at each such Purchaser's option, or (z) the
Purchaser Agents, on behalf of their related Bank Investors, provided that the
Termination Date or a Special Termination Date with respect to such Bank
Investors shall not have occurred and that the Bank Investors shall have
previously accepted the assignment by the applicable Purchaser of all of its
interest in the Affected Assets, shall, if so requested by the Transferor,
accept such conveyance, transfer and assignment from the Transferor, without
recourse except as provided herein, of undivided percentage ownership interests
in the Receivables, together with Collections, Proceeds and Related Security
with respect thereto (each, an "Incremental Transfer"); provided, however, that
after giving effect to the payment to the Transferor of the Transfer Price by
each Purchaser Agent, (i) the sum of the Net Investments plus, in the case where
the Transferred Interest is held on behalf of the Purchasers, the Interest
Component of all outstanding Related Commercial Paper, would not exceed the
Facility Limit; (ii) a Purchaser's applicable Net Investment, plus, in the case
where the Transferred Interest is held on behalf of the Purchasers, the Interest
Component of all outstanding Related Commercial Paper issued by such Purchaser,
would not exceed its Applicable Purchaser Percentage of the Facility Limit, and
the share of any Bank Investor therein would not exceed its Special Pro Rata
Share of such amount, and (iii) the Buyer's Percentage Factor shall not exceed
the Maximum Buyer's Percentage Factor; and, provided further, that the
representations and warranties set forth in Article III hereof shall be true and
correct both immediately before and immediately after giving effect to any such
Incremental Transfer and the payment to the Transferor of the Transfer Price
related thereto and an Additional Investment Certificate shall have been
delivered with respect to such Incremental Transfer as required by Section
2.11(b) hereof.
(b) The Transferor shall, by notice to the Purchaser Agents given by no later
than 11:00 a.m. (New York City time) at least one (1) Business Day (and, in the
case of any Incremental Transfer for which the initial funding period will be
based on the Adjusted LIBOR Rate, three (3) Business Days) prior to the proposed
date of any Incremental Transfer by telecopy, offer to convey, transfer and
assign to the Purchaser Agents, on behalf of their related Purchasers or the
Bank Investors, as applicable, undivided percentage ownership interests in the
Receivables and the other Affected Assets relating thereto. Each such notice
shall specify (w) the Purchaser Agents to which such request is being made,
which shall make a Transfer, at the sole discretion of such Purchaser Agents, on
behalf of the applicable Purchaser or on behalf of the applicable Bank Investors
(it being understood and agreed that once any Transferred Interest hereunder is
acquired on behalf of any group of Bank Investors, each Purchaser Agent, on
behalf of the applicable group of Bank Investors, shall be required to purchase
all Transferred Interests held by the Purchaser Agents on behalf of the
applicable Purchaser in accordance with Section 9.7 hereof, the Asset Purchase
Agreement or the Sheffield Agreement, as applicable, and thereafter that no
additional Incremental Transfers shall be acquired on behalf of the Purchasers
hereunder), (x) the desired Transfer Price (which shall be, for each Purchaser,
at least $1,000,000 or integral multiples of $250,000 in excess thereof) or, to
the extent that the then available unused portion of the Facility Limit is less
than such amount, such lesser amount equal to such available portion of the
Facility Limit), (y) the desired date of such Incremental Transfer and (z) with
respect to PARCO and Sheffield, the desired funding periods and allocations of
its Net Investment of such Incremental Transfer thereto as required by Section
2.3. The Purchaser Agents will promptly notify the applicable Purchaser or each
of the applicable Bank Investors, as the case may be, of any of the Purchaser
Agents' receipt of any request for an Incremental Transfer to be made to any of
the Purchaser Agents on behalf of such Person. To the extent that any such
Incremental Transfer is requested of any of the Purchaser Agents, on behalf of
the Purchasers, the Purchasers shall instruct the applicable Purchaser Agent to
accept or reject such offer by notice given to the Transferor and the applicable
Purchaser Agents by telephone or telecopy by no later than the close of its
business on the Business Day following its receipt of any such request. Each
notice of proposed Transfer shall be irrevocable and binding on the Transferor
and the Transferor shall indemnify the Purchasers and each Bank Investor against
any loss or expense incurred by the Purchasers or any Bank Investor, either
directly or indirectly (including, in the case of the Purchasers, through the
Liquidity Provider Agreement) as a result of any failure by the Transferor to
complete such Incremental Transfer including, without limitation, any loss
(including loss of anticipated profits) or expense incurred by the Purchasers or
any Bank Investor, either directly or indirectly (including, in the case of the
Purchasers, pursuant to the Liquidity Provider Agreement) by reason of the
liquidation or reemployment of funds acquired by the Purchasers (or the
Liquidity Providers) or any Bank Investor (including, without limitation, funds
obtained by issuing commercial paper or promissory notes or obtaining deposits
as loans from third parties) for the Purchasers or any Bank Investor to fund
such Incremental Transfer.
(c) On the date of the initial Incremental Transfer, each Purchaser Agent, on
behalf of its applicable Purchaser or Bank Investors, as applicable, shall
deliver written confirmation to the Transferor of its Transfer Price and the
Transferor shall deliver to each of the Purchaser Agents a Transfer Certificate
in the form of Exhibit F hereto (each, a "Transfer Certificate"). Each Purchaser
Agent shall indicate the Pro Rata Share of the related Purchaser or Bank
Investor, as applicable, of the amount of the initial Incremental Transfer
together with the date thereof on the grid attached to its Transfer Certificate.
On the date of each subsequent Incremental Transfer, the Purchaser Agents shall
(i) with respect to Enterprise, send written confirmation to the Transferor of
its Transfer Price applicable to such Incremental Transfer, (ii) with respect to
PARCO, send written confirmation to the Transferor of its Transfer Price, the
Transfer Date and the funding period(s) applicable to such Incremental Transfer
and (iii) with respect to Sheffield, send written confirmation to the Transferor
of its Transfer Price, the Transfer Date and the funding period(s) applicable to
such Incremental Transfer. Each Purchaser Agent shall indicate the applicable
Pro Rata Share of the amount of the Incremental Transfer together with the date
thereof as well as the Pro Rata Share of any decrease in the applicable Net
Investment on the grid attached to its Transfer Certificate. The Transfer
Certificates shall evidence the Incremental Transfers. Following each
Incremental Transfer, each Purchaser Agent shall deposit to the Transferor's
account at the location indicated in Section 10.3 hereof, on behalf of the
applicable Purchaser or Bank Investor, in immediately available funds, its
Transfer Price for such Incremental Transfer.
(d) (i) By no later than 11:00 a.m. (New York time) on any Transfer Date, each
Purchaser shall remit an amount equal to its Transfer Price for such Transfer
(and, in the case of a Bank Investor, such Bank Investor shall remit its Special
Pro Rata Share of such amount) to the account of the applicable Purchaser
Agents, specified therefor from time to time by the Purchaser Agent by notice to
the applicable Persons; provided, that, the face amount of Commercial Paper
issued by any Purchaser (minus the Interest Component thereon with respect to
such Purchaser) to fund its Transfer Price shall not exceed $1,000,000 more or
less than its Applicable Purchaser Percentage of the aggregate amount of all
Commercial Paper issued on such Transfer Date (minus the Interest Component
thereon with respect to such Purchaser) to fund such Transfer. The obligation of
each Purchaser and Bank Investor to remit its Transfer Price shall be several
from that of each other Purchaser and Bank Investor, and the failure of any
Purchaser or Bank Investor to so make such amount available to the applicable
Purchaser Agent shall not relieve any other Purchaser or Bank Investor of its
obligation hereunder. Following each Incremental Transfer and each Purchaser
Agent's receipt of funds from the applicable Purchaser or Bank Investors as
aforesaid, each Purchaser Agent shall remit the Transfer Price to the
Transferor's account at the location indicated in Section 10.3 hereof, in
immediately available funds, an amount equal to its Transfer Price for such
Incremental Transfer. Unless a Purchaser Agent shall have received notice from a
related Purchaser or Bank Investor, that such Person will not make its Transfer
Price relating to any Incremental Transfer available on the applicable Transfer
Date therefor, such Purchaser Agent may (but shall have no obligation to) make
such Purchaser's or any such Bank Investor's Transfer Price available to the
Transferor in anticipation of the receipt by such Purchaser Agent of such amount
from such Purchaser or such Bank Investor. To the extent such Purchaser or any
such Bank Investor fails to remit any such amount to the applicable Purchaser
Agent after any such advance by such Purchaser Agent on such Transfer Date, such
Purchaser or such Bank Investor, on the one hand, and the Transferor, on the
other hand, shall be required to pay such amount, together with interest thereon
at a per annum rate equal to the Federal funds rate (as determined in accordance
with clause (ii) of clause (x), (y) or (z), as applicable, of the definition of
"Base Rate"), in the case of such Purchaser, any such Bank Investor, or the
Transferor, to the applicable Purchaser Agent upon its demand therefor (provided
that such Purchaser shall have no obligation to pay such interest amounts except
to the extent that it shall have sufficient funds to pay the face amount of its
Commercial Paper in full). Until such amount shall be repaid, such amount shall
be deemed to be Net Investment paid by the applicable Purchaser Agent, and the
applicable Purchaser Agent shall be deemed to be the owner of a Transferred
Interest hereunder. Upon the payment of such amount to the applicable Purchaser
Agent (x) by the Transferor, the amount of the aggregate Net Investment shall be
reduced by such amount or (y) by such Purchaser or such Bank Investor, such
payment shall constitute such Person's payment of its share of the applicable
Transfer Price for such Transfer.
(ii) Notwithstanding anything contained in this Section 2.2(d)
or elsewhere in this Agreement to the contrary, no Bank Investor shall be
obligated to provide its related Purchaser Agent or the Transferor with
aggregate funds in connection with an Incremental Transfer in an amount that
would exceed such Bank Investor's unused Commitment then in effect. The failure
of any Bank Investor to make its Special Pro Rata Share of the Transfer Price
available to the applicable Purchaser Agent shall not relieve any other Bank
Investor of its obligations hereunder.
(iii) If, by 2:00 p.m. (New York time) on any Transfer Date,
one or more Enterprise Bank Investors (each, a "Defaulting Bank Investor", and
each Enterprise Bank Investor other than the Defaulting Bank Investor being
referred to as a "Non-Defaulting Bank Investor") fails to make its Special Pro
Rata Share of the Transfer Price available to the Enterprise Agent pursuant to
Section 2.2(d) or the Assignment Amount payable by it pursuant to Section 9.7
(the aggregate amount not so made available to the Enterprise Agent being herein
called in either case the "Transfer Price Deficit"), then the Enterprise Agent
shall, by no later than 2:30 p.m. (New York time), instruct each Non-Defaulting
Bank Investor to pay, by no later than 3:00 p.m. (New York time), in immediately
available funds, to the account designated by the Enterprise Agent, an amount
equal to the lesser of (x) such Non-Defaulting Bank Investor's proportionate
share (based upon the relative Commitments of the Non-Defaulting Bank Investors)
of the Transfer Price Deficit and (y) its unused Commitment. A Defaulting Bank
Investor shall forthwith, upon demand, pay to the Enterprise Agent for the
ratable benefit of the Non-Defaulting Bank Investors all amounts paid by each
Non-Defaulting Bank Investor on behalf of such Defaulting Bank Investor,
together with interest thereon, for each day from the date a payment was made by
a Non-Defaulting Bank Investor until the date such Non-Defaulting Bank Investor
has been paid such amounts in full, at a rate per annum equal to the sum of the
Federal funds rate (as determined in accordance with clause (x)(ii) of the
definition of "Base Rate").
(e) On each Business Day occurring after the initial Incremental Transfer
hereunder, the Transferor hereby agrees to convey, transfer and assign to the
Purchaser Agents, on behalf of their related Purchasers or Bank Investors, and
the Purchaser Agents, on behalf of their related Purchasers, may, provided there
is no Enterprise Wind-Down Event, PARCO Wind-Down Event or Sheffield Wind-Down
Event, as applicable, and the Purchaser Agents, on behalf of their related Bank
Investors, shall, provided there is no Termination Date or applicable Special
Termination Date, agree to purchase from the Transferor an undivided percentage
ownership interests in each and every Receivable, together with Collections,
Proceeds and Related Security with respect thereto, to the extent that
Collections are available for such Transfer in accordance with Section 2.5
hereof, such that after giving effect to such Transfer, (i) the amount of the
Net Investments at the close of business on such Business Day shall be equal to
the amount of the Net Investments at the close of the business on the Business
Day immediately preceding such Business Day plus the aggregate Transfer Price
paid by the Purchaser Agents (on behalf of their Purchasers or related Bank
Investors) of any Incremental Transfer made on such day, if any, and (ii) the
Transferred Interest in each Receivable, together with Collections, Proceeds and
Related Security with respect thereto, shall be equal to the Transferred
Interest in each other Receivable, together with Collections, Proceeds and
Related Security with respect thereto.
(f) Each Transfer shall constitute a transfer to the Purchaser Agents, on behalf
of their related Purchasers or Bank Investors, of undivided percentage ownership
interests in each and every Receivable, together with Collections, Proceeds and
Related Security with respect thereto, then existing, as well as in each and
every Receivable, together with Collections, Proceeds and Related Security with
respect thereto, which arises at any time after the date of such Transfer. The
Purchaser Agents' aggregate undivided percentage ownership interest in the
Receivables, together with Collections, Proceeds and Related Security with
respect thereto, held on behalf of the Purchasers or the Bank Investors, as
applicable, shall equal the Buyer's Percentage Factor in effect from time to
time. The Purchaser Agents shall hold the Transferred Interests on behalf of
each applicable Purchaser and each applicable Bank Investor in accordance with
each of the Purchaser's and each Bank Investor's percentage interest in the
Transferred Interest (determined on the basis of the relationship that the
portion of the applicable Net Investment funded by such Person bears to the
aggregate Net Investments of the Purchasers and all of the Bank Investors at
such time).
(g) The Transferor shall issue to each Purchaser Agent a Certificate, in the
form of Exhibit E, on or prior to the date hereof.
(h) The Buyer's Percentage Factor shall be initially computed as of the opening
of business of the Collection Agent on the date of the initial Incremental
Transfer hereunder. Thereafter until the later of the Termination Date or
Special Termination Date, the Buyer's Percentage Factor shall be automatically
recomputed as of the close of business of the Collection Agent on each day
(other than a day after the later of the Termination Date or Special Termination
Date). The Buyer's Percentage Factor shall remain constant from the time as of
which any such computation or recomputation is made until the time as of which
the next such recomputation, if any, shall be made.
SECTION 2.3. Selection of Interest Rates and Interest Periods; LIBOR
Protection; Illegality.
(a) Prior to a Wind-Down Event; Transferred Interest held on behalf of the
Purchasers. At all times hereafter, but prior to the occurrence of an Enterprise
Wind-Down Event, PARCO Wind-Down Event or Sheffield Wind-Down Event, as
applicable, and not with respect to any portion of the Transferred Interest held
on behalf of the Bank Investors (or any of them), the Transferor may, subject to
the approval of each Purchaser and the limitations described below, request that
the applicable Net Investment of such Purchaser be allocated among one or more
funding periods, so that the aggregate amounts so allocated at all times shall
equal the Net Investments held on behalf of the Purchasers. The Transferor shall
give the Purchaser Agents irrevocable notice by telephone of the new requested
funding period(s) by 11:00 a.m. at least one (1) Business Day prior to the
expiration of any then existing funding period; provided, however, that each of
the Purchaser Agents may select, in its sole discretion, any such new funding
period with respect to its respective Purchaser's Net Investment if (i) the
Transferor fails to provide such notice on a timely basis or (ii) the applicable
Purchaser Agent determines, in its sole discretion, that the funding period
requested by the Transferor is unavailable or for any reason commercially
undesirable. Each Purchaser confirms that it is its intention to fund all or
substantially all of its Net Investment by issuing Related Commercial Paper (in
the case of (A) Enterprise, prior to an Enterprise Wind-Down Event, (B) PARCO,
prior to a PARCO Wind-Down Event and (C) Sheffield, prior to a Sheffield
Wind-Down Event); provided that a Purchaser may determine, from time to time, in
its sole discretion, that funding its Net Investment by means of Related
Commercial Paper is not possible or is not desirable for any reason. If a
Liquidity Provider acquires from a Purchaser a Purchased Interest with respect
to the Receivables pursuant to the terms of a Liquidity Provider Agreement,
NationsBank, Chase or Barclays, as applicable, on behalf of the Liquidity
Provider, may exercise the right of selection granted to such Purchaser hereby.
The initial funding period applicable to any such Purchased Interest shall be a
period of not greater than 14 days and shall accrue Carrying Costs on the basis
of the Base Rate. Thereafter, provided that the Termination Date or a Special
Termination Date shall not have occurred, Carrying Costs shall accrue on the
basis of either the Base Rate or the Adjusted LIBOR Rate, as determined by
NationsBank, Chase or Barclays, as applicable. In the case of any funding period
outstanding upon the Termination Date or a Special Termination Date, such
funding period shall end on such date. Any funding made by PARCO or Sheffield
hereunder by issuing its Commercial Paper shall accrue Carrying Costs on the
basis of the Interest Component with respect thereto.
(b) After a Wind-Down Event; Transferred Interest Held on behalf of the
Purchasers. At all times on and after an Enterprise Wind-Down Event, a PARCO
Wind-Down Event or a Sheffield Wind-Down Event, with respect to any portion of
the Transferred Interest which shall be held by the Purchaser Agents on behalf
of the Purchasers, the affected Purchaser Agent, shall select all funding
periods and rates applicable thereto.
(c) Prior to the Termination Date or Special Termination Date; Transferred
Interest Held on Behalf of Bank Investors. At all times with respect to any
portion of the Transferred Interest held on behalf of the Bank Investors, but
prior to the earlier of a Termination Date or Special Termination Date, the
initial funding period applicable to such portion of the applicable Net
Investment allocable thereto shall be a period of not greater than (i) 14 days,
with respect to the Enterprise Bank Investors, (ii) 3 days, with respect to the
PARCO Bank Investors, or (iii) 3 days with respect to the Sheffield Bank
Investors, and shall accrue Carrying Costs on the basis of the Base Rate.
Thereafter, with respect to such portion, and with respect to any other portion
of the Transferred Interest held on behalf of the Bank Investors (or any of
them), provided that the Termination Date or Special Termination Date shall not
have occurred, Carrying Costs shall accrue with respect thereto at either the
Base Rate or the Adjusted LIBOR Rate, at the Transferor's option. The Transferor
shall give the Purchaser Agents irrevocable notice by telephone of the new
requested funding period at least three (3) Business Days prior to the
expiration of any then existing funding period. In the case of any funding
period outstanding upon the occurrence of the Termination Date or Special
Termination Date, such funding period shall end on the date of such occurrence.
(d) After the Termination Date or Special Termination Date; Transferred Interest
Held on behalf of Bank Investor. At all times on and after the Termination Date
or Special Termination Date, with respect to any portion of the Transferred
Interest held by any of the Purchaser Agents on behalf of the Bank Investors,
the affected Purchaser Agent shall select all funding periods and rates
applicable thereto.
(e) Conversion and Continuation of Outstanding Funding Periods Funded by the
Bank Investors. Subject to paragraph (c) of this Section 2.3, the Transferor may
(a) convert each funding period during which the applicable interest rate is the
Base Rate hereunder to a funding period during which the applicable interest
rate is the Adjusted LIBOR Rate and (b)(i) continue each funding period during
which the applicable interest rate is the Adjusted LIBOR Rate as a funding
period during which the applicable interest rate is the Adjusted LIBOR Rate or
(ii) convert each funding period during which the applicable interest rate is
calculated at the Adjusted LIBOR Rate to a funding period during which the
applicable interest rate is the Base Rate. If a Termination Event or a Potential
Termination Event has occurred and is continuing, then (x) no outstanding
funding period funded by the Bank Investors may be converted to, or continued
as, a funding period during which the applicable interest rate is the Adjusted
LIBOR Rate and (y) unless repaid, each funding period during which the
applicable interest rate is the Adjusted LIBOR Rate shall be converted to a
funding period during which the applicable interest rate is the Base Rate on the
last day of the funding period related thereto. The Transferor shall give any of
the Purchaser Agents, as applicable, irrevocable notice (each, a
"Conversion/Continuation Notice") of such request not later than 12:30 p.m. (New
York time) (i) in the case of a conversion described in clause (a) above, or a
continuation described in clause (b)(i) above, three (3) Business Days before
the date of such conversion or continuation, as applicable, and (ii) following
the occurrence and continuation of a Termination Event or Potential Termination
Event, in the case of a conversion as described in clause (b)(ii) above or a
continuation of a funding period during which the applicable interest rate is
the Base Rate as a funding period during which the applicable interest rate is
the Base Rate, on the Business Day of such conversion. If a
Conversion/Continuation Notice has not been timely delivered with respect to any
funding period during which the applicable interest rate is the Base Rate or
funding period during which the applicable interest rate is the Adjusted LIBOR
Rate, such funding shall be automatically continued as, or converted to, a
funding period during which the applicable interest rate is the Base Rate. Each
Conversion/Continuation Notice shall specify (a) the requested date (which shall
be a Business Day) of such conversion or continuation, (b) the aggregate amount
and rate option applicable to the funding period which is to be converted or
continued and (c) the amount and rate option(s) of funding period(s) into which
such funding period is to be converted or continued.
(f) LIBOR Rate Protection; Illegality.
(i) Notwithstanding any other provision of this
Section 2.3, if any of the Purchaser Agents is unable to obtain on a timely
basis the information necessary to determine the applicable LIBOR Rate for
any proposed funding period, then
(A) such Purchaser Agent shall forthwith notify the
applicable Purchaser or Bank Investors, as applicable, and the
Transferor that the Adjusted LIBOR Rate cannot be determined
for such funding period, and
(B) while such circumstances exist, none of the
affected Purchasers, the Bank Investors or any of the
Purchaser Agents shall allocate its Net Investment of any
additional Transferred Interests purchased during such period
or reallocate its Net Investment allocated to any then
existing funding period ending during such period, to a
funding period which accrues Carrying Costs on the basis of
the Adjusted LIBOR Rate.
(ii) If, with respect to any outstanding funding
period which accrues Carrying Costs on the basis of
the Adjusted LIBOR Rate, a Purchaser or any of the Bank Investors on behalf of
which any of the Purchaser Agents holds any Transferred Interest therein
notifies the applicable Purchaser Agent that it is unable to obtain matching
deposits in the London inter-bank market to fund its purchase or maintenance of
such Transferred Interest or that the Adjusted LIBOR Rate applicable to such
Transferred Interest will not adequately reflect the cost to the Person of
funding or maintaining its respective Transferred Interest for such funding
period then the applicable Purchaser Agent shall forthwith so notify the
Transferor, whereupon none of the affected Purchaser Agents, the affected
Purchasers or the affected Bank Investors, as applicable, shall, while such
circumstances exist, allocate its Net Investment of any additional Transferred
Interest purchased during such period or reallocate the applicable Net
Investment allocated to any funding period ending during such period, to a
funding period which accrues Carrying Costs on the basis of the Adjusted LIBOR
Rate.
(iii) Notwithstanding any other provision of this Agreement,
if a Purchaser or any of the Bank Investors shall notify any of the Purchaser
Agents that such Person has determined (or has been notified by any Liquidity
Provider) that the introduction of or any change in or in the interpretation of
any law or regulation after the Closing Date makes it unlawful (either for such
Purchaser, such Bank Investor, or such Liquidity Provider, as applicable), or
any central bank or other governmental authority asserts that it is unlawful,
for such Purchaser, such Bank Investor or such Liquidity Provider, as
applicable, to fund the purchases or maintenance of Transferred Interests at the
Adjusted LIBOR Rate, then (x) as of the effective date of such notice from such
Person to the applicable Purchaser Agent, the obligation or ability of such
Purchaser or such Bank Investor to fund its purchase or maintenance of
Transferred Interests at the Adjusted LIBOR Rate shall be suspended until such
Person notifies the applicable Purchaser Agent that the circumstances causing
such suspension no longer exist and (y) the applicable Net Investment allocated
to each funding period which accrues Carrying Costs on the basis of the Adjusted
LIBOR Rate in which such Person owns an interest shall either (1) if such Person
may lawfully continue to maintain such Transferred Interest at the Adjusted
LIBOR Rate until the last day of the applicable funding period, be reallocated
on the last day of such funding period to another funding period in respect of
which the applicable Net Investment allocated thereto which accrues Carrying
Costs on a basis other than the Adjusted LIBOR Rate or (2) if such Person shall
determine that it may not lawfully continue to maintain such Transferred
Interest at the Adjusted LIBOR Rate until the end of the applicable funding
period, such Person's Net Investment allocated to such funding period shall be
deemed to accrue Carrying Costs on the basis of the Base Rate from the effective
date of such notice until the end of such funding period.
SECTION 2.4. Carrying Costs, Fees and Other Costs and Expenses.
The Transferor agrees to pay, as and when due in accordance
with this Agreement, each Early Collection Fee and all Carrying Costs and
Servicing Fees. On each Remittance Date, the Transferor shall pay to the
Purchaser Agents, on behalf of their related Purchasers or Bank Investors, as
applicable, an amount equal to the accrued and unpaid Carrying Costs of such
Purchasers or Bank Investors for the related Collection Period; provided that
(i) in the event of any repayment or prepayment of a funding period during which
the applicable interest rate is the Base Rate or a funding period during which
the applicable interest rate is the Adjusted LIBOR Rate, interest on the
principal amount repaid or prepaid shall be payable on the date of such
repayment or prepayment, (ii) in the event of any conversion of a funding period
during which the applicable interest rate is the Base Rate or a funding period
during which the applicable interest rate is the Adjusted LIBOR Rate, accrued
interest on such funding periods shall be payable by the Transferor to each
Purchaser Agent on the effective date of such conversion and (iii) on the last
day of each funding period, the Transferor shall pay to each Purchaser Agent an
amount equal to accrued and unpaid interest for such funding period (together
with the Interest Component accrued on any Commercial Paper issued to fund any
transfer hereunder, including the Interest Component in excess of any Transfer
Price of an Incremental Transfer). Interest shall accrue with respect to each
funding period on each day occurring during such funding period. The Transferor
shall pay to the Enterprise Agent, on behalf of Enterprise, on each day on which
Related Commercial Paper is issued by Enterprise, the Dealer Fee with respect to
such Related Commercial Paper. All payments referred to in this Section shall be
made solely out of Collections, and amounts paid to the Transferor pursuant to
each Interest Rate Cap Agreement, except for the amounts described in clause
(i)(f) of the definition of "Carrying Costs," which shall be paid directly by
the Transferor to the extent Collections are not available therefor. Payment of
the amounts described herein may be made from amounts on deposit in the
Collection Account at the time payment of such amounts is due.
SECTION 2.5. Allocations of Collections; Non-Liquidation Settlement and
Reinvestment Procedures.
(a) On each Determination Date, the Collection Agent shall allocate all
Collections received during the preceding Collection Period as Principal
Collections or Finance Charge Collections. Principal Collections shall be
applied by the Collection Agent as described in subsection (d) below. On each
Remittance Date, (A) the product of (i) the daily average of the Buyer's
Percentage Factor over the preceding Collection Period and (ii) the aggregate
Finance Charge Collections for such preceding Collection Period (plus any
investment earnings on the Excess Funding Account) plus (B) any amounts
deposited in the Collection Account with respect to proceeds received by the
Transferor under an Interest Rate Cap Agreement, shall be applied by the
Collection Agent, without duplication, in the following order of priority,
provided, that, if there shall be insufficient funds on deposit to pay in full
the amounts specified in any clause below, then payments shall be made pursuant
to each such clause as between each group of Purchasers, and their related Bank
Investors, on a pro rata basis:
(i) first, an amount equal to any accrued and unpaid Carrying Costs
(except for the costs described in clause (f) of the
definition thereof) for such Collection Period, shall be paid, as
applicable, to each Purchaser Agent for the account of the applicable
Purchasers and the Bank Investors;
(ii) second, to the payment to the Collection Agent of the Buyer's
Percentage Factor of any Servicing Fee due and owing;
(iii) third, an amount equal to each Purchaser's Pro
Rata Share of the Buyer's Percentage Factor of
Defaulted Receivables for the related Collection
Period plus an amount equal to such Purchaser's
Pro Rata Share of the Buyer's Percentage Factor of
any unpaid amount of Principal Receivables which
are Defaulted Receivables from prior Collection
Periods shall be applied as Principal Collections
in accordance with Section 2.5(d) hereof;
(iv) fourth, to the payment of any Adjustment Payments
which the Transferor was required, but failed, to
make under Section 2.9(a) or any payment which the
Transferor was required, but failed, to make under
Section 2.9(b), in each case during the related
Collection Period or any prior Collection Period,
which payment shall be applied as Principal
Collections in accordance with Section 2.5(d)
below;
(v) fifth, an amount equal to any accrued and unpaid Carrying Costs
pursuant to clause (f) of the definition thereof; and
(vi) sixth, to the extent any Finance Charge
Collections remain after application in accordance
with clauses (i) through (v) above, (A) if prior
to the earlier of the Termination Date and Special
Termination Date, such excess amounts shall be (i)
deposited in the Spread Account, up to the Spread
Account Cap Percentage Amount and (ii) thereafter,
paid to the Transferor and (B) if on or after the
earlier of the Termination Date and Special
Termination Date, such excess amounts shall be
paid to each Purchaser Agent, in accordance with
such Purchaser's Pro Rata Share thereof, in
reduction of the applicable Net Investment, until
the applicable Net Investment has been reduced to
zero and thereafter to the Transferor.
(b) On each Remittance Date, subject to Section 2.5(c), the product of (A) the
daily average of the Transferor's Percentage Interest during the preceding
Collection Period and (B) the aggregate Finance Charge Collections for the
preceding Collection Period shall be applied as follows:
(i) first, to the payment to the Collection Agent of the Transferor's
Percentage Interest of any Servicing Fee due and owing;
(ii) second, an amount equal to the Transferor's Percentage Interest of any
Defaulted Receivables for the related Collection Period and any such
amount unpaid for prior Collection Periods shall be applied as
Principal Collections in accordance with Section 2.5(d) below; and
(iii) third, any remaining amounts shall be remitted to the Transferor.
(c) In the event that, on any Remittance Date, the Buyer's Percentage Factor of
Finance Charge Collections is insufficient to pay the sum of the amounts due and
payable pursuant to Section (a)(i) above, then, in such event, on such
Remittance Date the entire amount of Finance Charge Collections distributable or
allocable to the Transferor, up to the amount of any such insufficiency, shall
be reduced by the amount of such insufficiency, and to the extent any such
insufficiency continues to remain, the amounts then on deposit in the Spread
Account, then the amounts on deposit in the Excess Funding Account, and then the
amounts distributable to the Transferor pursuant to Section 2.5(d), shall be
reduced by the amount of such insufficiency. In the event that, on any
Remittance Date, the Buyer's Percentage Factor of Finance Charge Collections is
insufficient to pay the sum of the amounts due and payable pursuant to clauses
(a)(ii) through (a)(vi) of Section 2.5 above, then, in such event, on such
Remittance Date the amount of Finance Charge Collections distributable or
allocable to the Transferor pursuant to clauses (b)(ii) and (b)(iii) of Section
2.5 above, up to the amount of any such insufficiency, and to the extent any
such insufficiency continues to remain, the amounts then on deposit in the
Spread Account, then the amounts on deposit in the Excess Funding Account, and
then the amounts distributable to the Transferor pursuant to Section 2.5(d),
shall be reduced by the amount of such insufficiency, in each case after giving
effect to the application of funds in the preceding sentence. All amount(s)
against which any insufficiency described in this paragraph is to be applied
shall be applied as Finance Charge Collections and distributed in accordance
with the priority set forth in clauses (i) through (vi) of Section 2.5(a).
(d) On each Remittance Date prior to the Termination Date or a Special
Termination Date (i) the Collection Agent shall allocate to the applicable
Purchasers and/or the Bank Investors their Pro Rata Share of the Buyer's
Percentage Factor of Principal Collections received during the related
Collection Period and not previously accounted for or applied toward
reinvestment in new Receivables or reduction of the applicable Net Investment,
and, at the Transferor's option, (A) pay such amount to the Transferor, for the
benefit of the applicable Purchasers and/or the Bank Investors, and the
Transferor shall apply such amount toward the purchase of additional undivided
percentage interests in each Receivable pursuant to Section 2.2(b), or (B) pay
such amount plus, at the Transferor's option, subject to Section 2.5(f) below,
all or a portion of the amount on deposit in the Excess Funding Account, to each
of the Purchaser Agents in reduction of the related Purchaser's applicable Net
Investment and (ii) the Collection Agent shall pay to the Transferor the portion
of such Principal Collections not allocated to the Transferred Interest and
remaining after any reallocations pursuant to Section 2.5(c) above.
On each Remittance Date on or subsequent to the Termination
Date or a Special Termination Date, the Collection Agent shall allocate to the
applicable Purchasers or the Bank Investors, as applicable, their respective Pro
Rata Shares of the Buyer's Percentage Factor of all Principal Collections
received during the related Collection Period and not previously applied or
accounted for, plus all amounts on deposit in the Excess Funding Account, and
pay such amount to each of the Purchaser Agents in reduction of the related
Purchaser's applicable Net Investment. In the event the Termination Date
occurred as a result of a Termination Event, the portion of such Principal
Collections not allocated to the Transferred Interest and remaining after any
reallocations pursuant to Section 2.5(c) above shall be distributed to each of
the Purchaser Agents in reduction of the related Purchaser's applicable Net
Investment and, in the case of any other Termination Date or a Special
Termination Date, the portion of such Principal Collections not allocated to the
Transferred Interest and remaining after any allocations pursuant to Section
2.5(c) above shall be distributed to the Transferor.
(e) The Transferor shall have the option to designate a fixed or variable
percentage (the "Discount Percentage") of all Principal Receivables to be
treated as Finance Charge Receivables ("Discount Receivables") in accordance
with the provisions of this Section 2.5(e), and shall be applied in accordance
with Section 2.5(a), which percentage shall remain fixed and in effect until
such time as the Transferor has provided a subsequent designation to the
Purchaser Agents and all shall consent thereto. The initial Discount Percentage
shall equal 4.75%, and such percentage shall not be increased or decreased by
more than 2% unless the Transferor shall have obtained written confirmation from
each Rating Agency then rating the Commercial Paper of any Purchaser that such
change will not result in a reduction or withdrawal of any such rating.
(f) On any Business Day prior to the Termination Date on which the Buyer's
Percentage Factor of the aggregate Principal Receivables is equal to or greater
than the Net Investments, the Transferor or Collection Agent may request that
any or all amounts in the Excess Funding Account be distributed to the
Transferor.
SECTION 2.6. Liquidation Settlement Procedures.
On each Remittance Date occurring on and following the earlier
of a Termination Date or a Special Termination Date, Principal Collections shall
be applied in accordance with Section 2.5(d). Each Purchaser Agent, as
applicable, upon its receipt of such amounts in its account, shall distribute
such amounts to the applicable Purchasers and/or Bank Investors entitled thereto
as set forth above; provided that if the Collection Agent shall have
insufficient funds to pay all of the above amounts in full on any such date, the
Collection Agent shall pay such amounts in the order of priority set forth above
and, with respect to any such category above for which the Collection Agent
shall have insufficient funds to pay all amounts owing on such date, ratably
(based on the amounts in such categories owing to such Persons) among all such
Persons entitled to payment thereof.
Following the date on which the Net Investments have been
reduced to zero and all other Aggregate Unpaids have been paid in full, (i) the
Collection Agent shall recompute the Buyer's Percentage Factor as zero, (ii) the
Purchaser Agents, on behalf of their related Purchasers and Bank Investors shall
be deemed to have reconveyed to the Transferor all of the Purchaser Agents'
right, title and interest in and to the Affected Assets (including the
Transferred Interest), (iii) the Collection Agent shall pay to the Transferor
any remaining Collections held by any of the Purchaser Agents or the Collection
Agent pursuant to Section 2.5 or 2.12 and (iv) the Purchaser Agents, on behalf
of their related Purchasers and Bank Investors shall execute and deliver to the
Transferor, at the Transferor's expense, such documents or instruments as are
necessary to terminate the applicable Purchase Agent's interests in the Affected
Assets. Any such documents shall be prepared by or on behalf of the Transferor.
SECTION 2.7. Fees.
On each Remittance Date the Transferor shall pay (which
payments shall be made from Collections in the order of priority set forth in
Section 2.5), with respect to the preceding Collection Period, (i) to Enterprise
solely for its own account, the Program Fee and the Administrative Fee, and to
the Enterprise Agent, for distribution to the Enterprise Bank Investors, the
Facility Fee, (ii) to PARCO, the fees specified in the PARCO Fee Letter, and
(iii) to Sheffield, the fees specified in the Sheffield Fee Letter. On each
anniversary of the Closing Date, the Transferor shall pay to the Administrative
Agent, solely for its own account, the Agency Fee set forth in the Fee Letter.
SECTION 2.8. Protection of Ownership Interest of the Purchasers and the
Bank Investors.
(a) The Transferor agrees that it will, and will cause the Initial Purchaser and
the Seller to, from time to time, at Transferor's expense, promptly execute and
deliver all instruments and documents and take all actions as may be necessary
or as the Administrative Agent or any of the Purchaser Agents may reasonably
request in order to perfect or protect the Transferred Interest or to enable the
Administrative Agent, each of the Purchaser Agents, the Purchasers or the Bank
Investors to exercise or enforce any of their respective rights hereunder.
Without limiting the foregoing, the Transferor will, and will cause the Seller
and Initial Purchaser to, upon the request of the Administrative Agent, any of
the Purchaser Agents, a Purchaser or any of the Bank Investors, in order to
accurately reflect this purchase and sale transaction, execute and file such
financing or continuation statements or amendments thereto or assignments
thereof (as permitted, as applicable, pursuant to Section 9.7 hereof, the Asset
Purchase Agreement or the Sheffield Agreement) as may be requested by the
Administrative Agent, any of the Purchaser Agents, a Purchaser or any of the
Bank Investors. The Transferor shall, and shall cause the Initial Purchaser and
the Seller to, upon request of the Administrative Agent or any of the Purchaser
Agents (on behalf of the related Purchaser or Bank Investors) obtain such
additional search reports as the Administrative Agent or such Purchaser Agents
shall reasonably request. To the fullest extent permitted by applicable law, the
Administrative Agent and the Purchaser Agents shall be permitted to sign and
file continuation statements and assignments thereof without the Transferor's or
the Seller's signature. Carbon, photographic or other reproduction of this
Agreement or any financing statement shall be sufficient as a financing
statement. The Transferor shall not, and shall not permit the Initial Purchaser
or Seller to, change its respective name, identity or corporate structure
(within the meaning of Section 9-402(7) of the UCC as in effect in the States of
New York, Arizona and Minnesota, as applicable) or relocate its respective chief
executive office unless it shall have: (i) given the Administrative Agent and
the Purchaser Agents at least ten (10) days prior notice thereof and (ii)
prepared at Transferor's expense and delivered to the Administrative Agent and
the Purchaser Agents all financing statements, instruments and other documents
necessary to preserve and protect the Transferred Interest or as otherwise
requested by the Administrative Agent and the Purchaser Agents in connection
with such change or relocation. Any filings under the UCC or otherwise that are
occasioned by such change in name or location shall be made at the expense of
Transferor. The Transferor shall notify the Administrative Agent promptly after
it, the Initial Purchaser or the Seller relocates any office where Records are
kept of any such new location.
(b) The Transferor agrees that it will, and will cause the Seller and each other
Person having possession of any Records to, at Transferor's expense, on or prior
to the Closing Date indicate clearly and unambiguously in its master data
processing records and on any storage containers containing Records that the
Receivables created in connection with the Accounts have been conveyed to the
Transferor and transferred to the Purchaser Agents, for the benefit of the
Purchasers and the Bank Investors. The Transferor further agrees to deliver or
to cause the Collection Agent to deliver to the Administrative Agent a computer
file or microfiche list containing a true and complete list of all such
Accounts, identified by account number and by Receivable balance as of the
Cut-Off Date. Such file or list shall be marked as the Account Schedule
delivered to the Administrative Agent as confidential and proprietary, and is
hereby incorporated into and made a part of this Agreement. The Transferor
agrees to deliver or to cause the Collection Agent to deliver to the
Administrative Agent within five (5) Business Days of the request therefor by
any of the Purchaser Agents and in any event promptly after any conversion of
record-keeping and servicing functions related to the ongoing activity of the
Accounts from PNC to the Collection Agent, a computer file or microfiche list
containing a true and complete list of all Accounts, including all Related
Accounts created on or after the Cut-Off Date, in existence as of the last day
of the prior Collection Period, identified by account number and by Receivable
balance as of the last day of the prior Collection Period. Such file or list
shall be marked as the Account Schedule delivered to the Administrative Agent as
confidential and proprietary, shall replace the previously delivered Account
Schedule and shall be incorporated into and made a part of this Agreement. The
Collection Agent agrees, on behalf of the Transferor, at its own expense, by the
end of each Collection Period in which any Accounts or Related Accounts have
been originated to indicate clearly and unambiguously in its master data
processing records and any storage containers containing Records that the
Receivables created in connection with such Accounts have been conveyed to the
Transferor and transferred to the Purchaser Agents, for the benefit of the
Purchasers and the Bank Investors, pursuant to this Agreement.
SECTION 2.9. Application of Payments.
(a) If on any day any Receivable is either (x) reduced or canceled as a result
of any defective, rejected or returned merchandise or services, any discount,
credit, rebate, dispute, warranty claim, chargeback, allowance or any billing or
other adjustment, or (y) reduced or canceled as a result of a setoff or offset
in respect of any claim by any Person (whether such claim arises out of the same
or a related transaction or an unrelated transaction and whether such reduction
or cancellation is effected through the granting of credits against the
applicable Receivables or by the issuance of a check or other payment in respect
of, and as payment for, such reduction) or (z) any other downward adjustments to
the balance of such Receivable without receiving Collections therefor and prior
to such Receivable becoming a Defaulted Receivable, then such amount shall
thereafter be deducted from the aggregate balance of the Receivables and the
Principal Receivables. If such reduction would result in a Buyer's Percentage
Factor greater than the Maximum Buyer's Percentage Factor, the Transferor shall
pay (or direct the Collection Agent to pay from Collections otherwise
distributable to the Transferor) to each of the Purchaser Agents its respective
Purchaser's or Bank Investor's Pro Rata Share of an amount (the payment of such
amount is herein referred to as an "Adjustment Payment") equal to the amount
that, when (A) deposited into the Excess Funding Account or (B) applied in
reduction of the related Purchaser's applicable Net Investment, will result in a
Buyer's Percentage Factor less than or equal to the Maximum Buyer's Percentage
Factor. At the Transferor's election, such amount shall be (A) deposited into
the Excess Funding Account or (B) applied by the applicable Purchaser Agent to
the reduction of the related Purchaser's applicable Net Investment.
(b) If on any day any of the representations or warranties set forth in (x)
Section 3.1 (d), (j), (l) or (s) or Section 3.3(f) was or becomes untrue with
respect to a Receivable or (y) Section 3.1(e) or Section 3.3(d) was or becomes
untrue with respect to the existence or amount of any Receivable (whether, in
any case, on or after the date of any transfer of an interest therein to any of
the Purchaser Agents, the Purchasers or the Bank Investors as contemplated
hereunder), then such Receivable shall thereafter not be included in any
calculation of the outstanding Receivables or the Principal Receivables;
provided, however, that if such representations and warranties shall on any day
thereafter be true and correct in all material respects as if such Receivable
had then been created, such Receivable shall be eligible for purchase hereunder.
If such reduction would result in a Buyer's Percentage Factor greater than the
Maximum Buyer's Percentage Factor, the Transferor shall pay (or direct the
Collection Agent to pay from Collections otherwise distributable to the
Transferor) to each of the Purchaser Agents its respective Purchaser's or Bank
Investor's Pro Rata Share of an amount equal to the amount that, when (A)
deposited into the Excess Funding Account or (B) applied in reduction of the
applicable Net Investment, will result in a Buyer's Percentage Factor less than
or equal to the Maximum Buyer's Percentage Factor. At the Transferor's election,
such amount shall be (A) deposited into the Excess Funding Account or (B)
applied by the applicable Purchaser Agent to the reduction of the applicable Net
Investment.
SECTION 2.10. Payments and Computations, Etc.
All amounts to be paid or deposited by the Transferor or the
Collection Agent hereunder shall be paid or deposited in accordance with the
terms hereof no later than 11:00 a.m. (New York City time) on the day when due
in immediately available funds; if such amounts are payable to the Purchaser
Agents (whether on behalf of a Purchaser or any Bank Investor or otherwise) they
shall be paid or deposited in the account indicated in Section 10.3 hereof,
until otherwise notified by the Purchaser Agents. The Transferor shall, to the
extent permitted by law, pay to the Purchaser Agents, for the benefit of the
Purchasers and the Bank Investors upon demand, interest on all amounts not paid
or deposited when due hereunder at a rate equal to 2% per annum plus the Base
Rate. All computations of interest and all per annum fees hereunder shall be
made on the basis of a year of 360 days for the actual number of days (including
the first but excluding the last day) elapsed, provided, that any interest which
accrues at the Base Rate shall be computed on the basis of a year of 365 or 366
days, as applicable, for such actual number of days elapsed. Any computations by
the Administrative Agent or any of the Purchaser Agents of amounts payable by
the Transferor hereunder shall create a rebuttable presumption of correctness.
SECTION 2.11. Reports.
(a) Prior to each Determination Date after the Closing Date, beginning with the
January 1999 Determination Date, the Collection Agent shall prepare and forward
to the Purchaser Agents (i) an Investor Report as of the end of the last day of
the immediately preceding month, (ii) if requested by any of the Purchaser
Agents, a listing by Obligor Account Number of all Receivables together with an
aging of such Receivables for any month and (iii) such other information as any
of the Purchaser Agents may reasonably request.
(b) On or before the date of an Incremental Transfer, the Transferor shall
prepare and forward to the Purchaser Agents an Additional Investment
Certificate, reporting the Principal Receivables, the Buyer's Percentage Factor,
the most recent Spread Account Cap Percentage Amount, the amount on deposit in
the Spread Account and such other information as any of the Purchaser Agents may
request as of the close of business on the Business Day preceding the date of
the requested Incremental Transfer.
SECTION 2.12. Collection Account, Spread Account and Excess Funding
Account.
(a) There shall be established on the day of the initial Incremental Transfer
hereunder and maintained with the Administrative Agent, a segregated account
(the "Collection Account"), bearing a designation clearly indicating that the
funds deposited therein are held for the benefit of the Administrative Agent and
the Purchaser Agents. The Collection Agent shall remit daily but in any event
within forty-eight hours of receipt to the Collection Account, (a) if prior to
the occurrence of a Termination Event, the Buyer's Percentage Factor of all
Finance Charge Collections, and (b) if on or after the occurrence of a
Termination Event, all Collections received with respect to any Receivables. In
addition, the Transferor shall remit or cause to be remitted to the Collection
Account all proceeds received by it under each Interest Rate Cap Agreement, on
the same Business Day received by it pursuant to such agreement. For purposes of
this Section 2.12(a), the Buyer's Percentage Factor during any Collection Period
shall be the Buyer's Percentage Factor at the opening of business on the first
day of such Collection Period. Funds on deposit in the Collection Account (other
than investment earnings) shall be invested by the Administrative Agent in
Eligible Investments that will mature so that such funds will be available prior
to the Remittance Date following such investment (or any earlier date on which
such funds are needed pursuant to Section 2.4 hereof). On each Remittance Date,
all interest and earnings (net of losses and investment expenses) on funds on
deposit in the Collection Account shall be applied as if such amounts were the
Buyer's Percentage Factor of Finance Charge Collections. In addition, amounts on
deposit in the Collection Account may be applied toward payments to be made
pursuant to Section 2.4. On the date on which the Net Investments and all
Aggregate Unpaids have been paid in full, any funds remaining on deposit in the
Collection Account shall be paid to the Transferor.
(b) (i) There shall be established on the Closing Date hereunder and maintained
with the Administrative Agent a segregated account (the "Spread Account"),
bearing a designation clearly indicating that the funds deposited therein are
held for the benefit of the Administrative Agent and the Purchaser Agents. On
each Determination Date, the Spread Account Cap Percentage Amount for such
Determination Date shall be calculated by the Purchaser Agents. If the funds on
deposit in the Spread Account on such Determination Date are less than the
Spread Account Cap Percentage Amount, Collections shall be deposited into the
Spread Account on the next succeeding Remittance Date in accordance with Section
2.5 up to the Spread Account Cap Percentage Amount.
(ii) Funds on deposit in the Spread Account (other than
investment earnings) shall be invested by the Administrative Agent in Eligible
Investments that will mature so that funds will be available prior to the
Remittance Date following such investment. On each Remittance Date, all interest
and earnings (net of losses and investment expenses) on funds on deposit in the
Spread Account shall be applied as if such amounts were the Buyer's Percentage
Factor of Finance Charge Collections. On the date on which the Net Investments
and all Aggregate Unpaids have been paid in full, any funds remaining on deposit
in the Spread Account shall be paid to the Transferor.
(c) (i) There shall be established on the Closing Date hereunder and maintained
with the Administrative Agent either a separate, segregated account or a
subaccount of the Collection Account (the "Excess Funding Account"), bearing a
designation clearly indicating that the funds deposited therein are held for the
benefit of the Administrative Agent and the Purchaser Agents. In the event that
on any day the Buyer's Percentage Factor exceeds the Maximum Buyer's Percentage
Factor, the Collection Agent shall remit to the Excess Funding Account an amount
of Principal Collections which would cause the Buyer's Percentage Factor not to
exceed the Maximum Buyer's Percentage Factor.
(ii) Funds on deposit in the Excess Funding Account (other
than investment earnings) shall be invested by the Administrative Agent at the
direction of the Collection Agent in Eligible Investments that will mature so
that funds will be available prior to the Remittance Date following such
investment. On each Remittance Date, all funds on deposit in the Excess Funding
Account shall be available to make any payments required to be made from the
Excess Funding Account in accordance with Section 2.5. On the date on which the
Net Investments and all Aggregate Unpaids have been paid in full, any funds
remaining on deposit in the Excess Funding Account shall be paid to the
Transferor.
(d) All payments to be made out of funds on deposit in the Collection Account,
Spread Account and Excess Funding Account pursuant to Sections 2.4, 2.5 and 2.6
shall be remitted by the Administrative Agent pursuant to instructions and
computations provided by the Collection Agent, including pursuant to the
Investor Reports. The Administrative Agent shall have no responsibility
whatsoever for the accuracy of any such computations or information provided
pursuant to the Investor Reports.
SECTION 2.13. Sharing of Payments, Etc.
If a Purchaser or any Bank Investor (for purposes of this
Section only, being a "Recipient") shall obtain any payment (whether voluntary,
involuntary, through the exercise of any right of setoff, or otherwise) on
account of Transferred Interest owned by it (other than pursuant to Section 2.7,
or Article VIII and other than as a result of the differences in the timing of
the applications of Collections pursuant to Section 2.5 or 2.6) in excess of its
ratable share of payments on account of Transferred Interest obtained by the
Purchasers and/or the Bank Investors entitled thereto, such Recipient shall
forthwith purchase from the Purchasers and/or the Bank Investors entitled to a
share of such amount participations in the Percentage Interests owned by such
Persons as shall be necessary to cause such Recipient to share the excess
payment ratably with each such other Person entitled thereto; provided, however,
that if all or any portion of such excess payment is thereafter recovered from
such Recipient, such purchase from each such other Person shall be rescinded and
each such other Person shall repay to the Recipient the purchase price paid by
such Recipient for such participation to the extent of such recovery, together
with an amount equal to such other Person's ratable share (according to the
proportion of (a) the amount of such other Person's required payment to (b) the
total amount so recovered from the Recipient) of any interest or other amount
paid or payable by the Recipient in respect of the total amount so recovered.
SECTION 2.14. Right of Setoff.
(a) Without in any way limiting the provisions of Section 2.13, each of the
Purchasers and the Bank Investors is hereby authorized (in addition to any other
rights it may have) at any time after the occurrence of the earlier of a Special
Termination Date or Termination Date or during the continuance of a Potential
Termination Event to setoff, appropriate and apply (without presentment, demand
or protest, which are hereby expressly waived, but with notice (which may be
given after such setoff, provided that failure to give such notice shall not
impair any right of setoff, appropriation or application hereunder)) any
deposits held by such Purchaser or such Bank Investor in the Collection Account,
the Excess Funding Account or the Spread Account to, or for the account of, the
Transferor against the amount of the Aggregate Unpaids owing by the Transferor
to such Person or to any Purchaser Agent, on behalf of such Person.
(b) Each of the Transferor and the Collection Agent hereby waives any right of
setoff it may have or to which it may be entitled under this Agreement or the
other Transaction Documents from time to time against any of the other parties
to this Agreement or any of their assets.
SECTION 2.15. Special Termination Date with Respect to a Particular
Purchaser.
Notwithstanding anything to the contrary contained in this
Agreement, if there shall occur a Special Termination Date with respect to a
Purchaser or related Bank Investors, then, from and after such Termination Date,
(a) no further Transfers shall be made to such Purchaser or Bank Investor, (b)
the Pro Rata Share of such Purchaser or Bank Investor of the Buyer's Percentage
Factor shall remain constant until the Net Investment owing to such Purchaser or
Bank Investor has been reduced to zero and the Aggregate Unpaids owing to such
Purchaser or Bank Investor have been paid in full, (c) the Collection Agent
shall distribute Collections to such Purchaser or Bank Investor in accordance
with the provisions of Sections 2.5 and 2.6 applicable to a Termination Date,
(d) in all respects, the provisions of this Agreement with respect to a
Termination Date shall be deemed to apply only to such Purchaser or Bank
Investor, and (e) all provisions of this Agreement shall continue to apply to
the other Purchasers and Bank Investors as if no Termination Date has occurred
with respect thereto unless and until a Termination Date shall occur separately
with respect thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Representations and Warranties of the Transferor.
The Transferor represents and warrants to the Administrative
Agent, Purchaser Agents, each Purchaser and the Bank Investors that:
(a) Corporate Existence and Power.
The Transferor is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
corporate power and all material governmental licenses, authorizations,
consents and approvals required to carry on its business in each jurisdiction in
which its business is now conducted. The Transferor is duly qualified to do
business in, and is in good standing in, every other jurisdiction in which
the nature of its business requires it to be so qualified, except where the
failure to be so qualified or in good standing would not have a Material
Adverse Effect.
(b) Corporate and Governmental Authorization; Contravention.
The execution, delivery and performance by the
Transferor of this Agreement, the Receivables Purchase
Agreement to which it is a party, the Fee Letter, the PARCO Fee Letter, the
Sheffield Fee Letter, the Certificate, the Transfer Certificate and the other
Transaction Documents to which the Transferor is a party are within the
Transferor's corporate powers, have been duly authorized by all necessary
corporate action, require no action by or in respect of, or filing with, any
Official Body or official thereof (except as contemplated by Section 2.8
hereof), and do not contravene, or constitute a default under, any provision of
applicable law, rule or regulation or of the Certificate of Incorporation or
Bylaws of the Transferor or of any agreement, judgment, injunction, order, writ,
decree or other instrument binding upon the Transferor or result in the creation
or imposition of any Adverse Claim on the assets of the Transferor or any of its
Subsidiaries (except as contemplated by Section 2.8 hereof).
(c) Binding Effect.
Each of this Agreement, the Receivables Purchase
Agreements to which it is a party, the Fee Letter, the PARCO Fee Letter,
the Sheffield Fee Letter, the Certificates and the other Transaction
Documents to which the Transferor is a party constitutes, and the
Transfer Certificates upon payment of the Transfer Price set forth therein by
each Purchaser Agent will constitute, the legal, valid and binding obligation of
the Transferor, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally and as such enforceability may be limited by
general principles of equity (whether considered in a proceeding at law or in
equity).
(d) Perfection.
Immediately preceding each Transfer hereunder,
the Transferor shall be the lawful owner of all of the
Receivables, free and clear of all Adverse Claims. On or prior to each Transfer
and each recomputation of the Transferred Interest, all financing statements and
other documents required to be recorded or filed in order to perfect and protect
the Transferred Interest against all creditors of and purchasers from the
Transferor, the Initial Purchaser and the Seller will have been duly filed in
each filing office necessary for such purpose and all filing fees and taxes, if
any, payable in connection with such filings shall have been paid in full.
(e) Accuracy of Information.
All information heretofore furnished by or on
behalf of the Seller, the Collection Agent or the Transferor
(including without limitation, the Account Schedule, the Investor Reports, any
reports delivered pursuant to Section 2.11 hereof and the Transferor's financial
statements) to a Purchaser, any Bank Investors, the Administrative Agent or any
of the Purchaser Agents for purposes of or in connection with this Agreement or
any transaction contemplated hereby is, and all such information hereafter
furnished by the Transferor to a Purchaser, any Bank Investors, the
Administrative Agent or any of the Purchaser Agents will be, true, accurate and
complete in every material respect, on the date such information is stated or
certified.
(f) Tax Status.
The Transferor has filed all tax returns (federal,
state and local) required to be filed and has paid or
made adequate provision for the payment of all taxes, assessments and other
governmental charges, except to the extent it is contesting any such payment in
good faith, through appropriate proceedings and after having set aside adequate
reserves therefor.
(g) No Actions, Suits.
There are no actions, suits or proceedings pending
or, to the knowledge of the Transferor, threatened
against or affecting the Transferor, the Seller or the Initial Purchaser or
their respective properties, in or before any court, arbitrator or other body,
which question the validity of the transactions contemplated hereby or which,
individually or in the aggregate, have or could reasonably be expected to have a
Material Adverse Effect.
(h) Use of Proceeds.
No proceeds of any Transfer will be used by the
Transferor to acquire any security in any transaction which
is subject to Section 13 or 14 of the Securities Exchange Act of 1934,
as amended.
(i) Place of Business.
The principal place of business and chief executive
office of the Transferor are located at the address of
the Transferor indicated in Section 10.3 hereof and the offices where the
Transferor keeps all its Records, are located in Arizona, Nebraska, Oklahoma and
Minnesota and such other addresses as are described on Exhibit G or such other
locations notified to the Purchasers in accordance with Section 2.8 hereof in
jurisdictions where all action required by Section 2.8 hereof has been taken and
completed. (j) Good Title.
Upon each Transfer and each recomputation of the
Transferred Interest, the Purchaser Agents shall acquire a
valid and perfected first priority undivided percentage ownership interest to
the extent of the Transferred Interest or a first priority perfected security
interest in each Receivable that exists on the date of such Transfer and
recomputation and in the Collections with respect thereto free and clear of any
Adverse Claim.
(k) Tradenames, Etc.
Except as set forth on Exhibit H, as amended from
time to time, (i) the Transferor's chief executive office
is located at the address for notices set forth in Section 10.3 hereof; (ii) the
Transferor has no subsidiaries; and (iii) the Transferor has, within the last
five (5) years, operated only under its legal name, and, within the last five
(5) years, has not changed its name, merged with or into or consolidated with
any other corporation or been the subject of any proceeding under Title 11,
United States Code (as amended, supplemented or otherwise modified and in
effect, the "Bankruptcy Code").
(l) Nature of Receivables.
Each Receivable (x) represented by the Transferor
or the Collection Agent to be an Eligible Receivable
(including in any Investor Report or other report delivered pursuant to Section
2.11 hereof) or (y) included in the calculation of Principal Receivables in fact
satisfies at such time the definition thereof.
(m) Coverage Requirement; Amount of Receivables.
The Buyer's Percentage Factor does not exceed
the Maximum Buyer's Percentage Factor. As of the day
preceding the Cut-Off Date, the aggregate outstanding balance of the Principal
Receivables in existence was $803,461,210.
(n) Collections and Servicing.
Since September 8, 1998, there has been no
material adverse change in the ability of the Collection Agent
(to the extent it is the Seller, the Transferor or any Subsidiary or
Affiliate of any of the foregoing) to service and collect the
Receivables.
(o) No Termination Event.
No event has occurred and is continuing and no
condition exists which constitutes a Termination Event or a
Potential Termination Event.
(p) Not an Investment Company.
The Transferor is not, and is not controlled by,
an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or is exempt from all provisions of
such Act.
(q) ERISA.
Each of the Transferor and its ERISA Affiliates is in
compliance in all material respects with ERISA and no
lien exists in favor of the Pension Benefit Guaranty Corporation on any of the
Receivables.
(r) Bulk Sales.
No transaction contemplated hereby or by the
Receivables Purchase Agreements requires compliance with any
bulk sales act or similar law.
(s) Transfers under Receivables Purchase Agreements.
Each Receivable which has been transferred to the
Transferor by the Initial Purchaser and to the Initial
Purchaser by the Seller has been purchased, respectively, by the Transferor from
the Initial Purchaser and by the Initial Purchaser from the Seller pursuant to,
and in accordance with, the terms of the respective Receivables Purchase
Agreements. The Affected Assets have been conveyed by DMCCB to the Initial
Purchaser pursuant to the Receivables Purchase Agreement between DMCCB and the
Initial Purchaser.
(t) Preference; Voidability.
The Transferor and the Initial Purchaser shall
have given reasonably equivalent value to the Initial
Purchaser and the Seller, respectively, in consideration for the transfer to the
Transferor and the Initial Purchaser of the Receivables from the Initial
Purchaser and the Seller, respectively, and each such transfer shall not have
been made for or on account of an antecedent debt owed by the Initial Purchaser
to the Transferor or Seller to the Initial Purchaser, respectively, and no such
transfer is or may be voidable under any Section of the Bankruptcy Code.
(u) Representations and Warranties of the Seller.
Each of the representations and warranties of the
Seller and Initial Purchaser set forth in the Receivables
Purchase Agreements and of the Seller, Initial Purchaser and the Transferor in
each other Transaction Document are true and correct in all material respects
and the Transferor hereby remakes all such representations and warranties for
the benefit of the Purchasers, the Bank Investors and the Purchaser Agents. Any
document, instrument, certificate or notice delivered to the Purchasers
hereunder shall be deemed a representation and warranty by the Transferor.
(v) Year 2000 Compliance.
(i) The Transferor has (x) initiated a review
and assessment of all areas within its and each of its
Subsidiaries' business and operations (including those affected by suppliers,
vendors and customers) that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by the Transferor or
any of its Subsidiaries (or suppliers, vendors and customers) may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date after December 31, 1999), (y) developed a plan and
timeline for addressing the Year 2000 Problem on a timely basis, and (z) to
date, implemented that plan in accordance with that timetable. Based on the
foregoing, the Transferor believes that all computer applications (including
those of its suppliers, vendors and customers) that are material to its or any
of its Subsidiaries' business and operations are reasonably expected on a timely
basis to be able to perform properly date-sensitive functions for all dates
before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to
that extent that a failure to do so could not reasonably be expected (A) to have
a Material Adverse Effect or (B) to result in a Termination Event.
(ii) The Transferor (x) has completed a review and
assessment of all computer applications (including,
but not limited to those of its suppliers, vendors, customers and any third
party servicers), which are related to or involved in the origination,
collection, management or servicing of the Receivables (the "Receivable
Systems") and (y) has determined in its reasonable judgment based on current
information that such Receivable Systems are Year 2000 Compliant or will be Year
2000 Compliant on or before June 1, 1999 and thereafter, except to the extent
that a failure to be Year 2000 Compliant could not reasonably be expected (A) to
have a Material Adverse Effect or (B) to result in a Termination Event.
(iii) The costs of all assessment, remediation,
testing and integration related to the Transferor's plan
for becoming Year 2000 Compliant will not have a Material Adverse Effect.
SECTION 3.2. Reaffirmation of Representations and Warranties by the
Transferor.
On each day that a Transfer is made hereunder, the Transferor,
by accepting the proceeds of such Transfer, whether delivered to the Transferor
pursuant to Section 2.2(a) or Section 2.5 hereof, shall be deemed to have
certified that all representations and warranties described in Section 3.1
hereof are correct on and as of such day as though made on and as of such day.
Each Incremental Transfer shall be subject to the further conditions precedent
that (a) prior to the date of such Incremental Transfer, the Collection Agent
shall have delivered to each of the Purchaser Agents, in form and substance
satisfactory to the Purchaser Agents, a completed Additional Investment
Certificate, together with such additional information as may be reasonably
requested by any of the Purchaser Agents; and the Transferor shall be deemed to
have represented and warranted that such conditions precedent have been
satisfied and (b) all representations and warranties of the Collection Agent
shall be true and correct on and as of the date of such Incremental Transfer.
SECTION 3.3. Representations and Warranties of the Collection Agent.
The Collection Agent represents and warrants to the
Administrative Agent, Purchaser Agents, each Purchaser and the Bank Investors
that:
(a) Corporate Existence and Power.
The Collection Agent is a national banking
association duly organized, validly existing and in good
standing under the laws of the United States and has all corporate power and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business in each jurisdiction in which its business is now
conducted. The Collection Agent is duly qualified to do business in, and is in
good standing (or is exempt from such requirements) in, every other jurisdiction
in which the nature of its business requires it to be so qualified, except where
the failure to be so qualified or in good standing would not have a Material
Adverse Effect.
(b) Corporate and Governmental Authorization; Contravention.
The execution, delivery and performance by the
Collection Agent of this Agreement are within the Collection
Agent's corporate powers, have been duly authorized by all necessary corporate
action, require no action by or in respect of, or filing with, any Official Body
or official thereof, and do not contravene, or constitute a default under, any
provision of applicable law, rule or regulation or of the Articles of
Association or Bylaws of the Collection Agent or of any agreement, judgment,
injunction, order, writ, decree or other instrument binding upon the Collection
Agent or result in the creation or imposition of any Adverse Claim on the assets
of the Collection Agent or any of its Subsidiaries (except as contemplated by
Section 2.8).
(c) Binding Effect.
This Agreement and each other Transaction Document
to which the Collection Agent is a party constitutes the
legal, valid and binding obligation of the Collection Agent, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors and as such
enforceability may be limited by general principles of equity (whether
considered in a proceeding at law or in equity).
(d) Accuracy of Information.
All information heretofore furnished by the
Collection Agent to a Purchaser, any Bank Investor, the
Administrative Agent or any of the Purchaser Agents for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all such information hereafter furnished by the Collection Agent to a Purchaser,
any Bank Investor, the Administrative Agent and the Purchaser Agents will be,
true and accurate in every material respect, on the date such information is
stated or certified.
(e) Actions, Suits.
There are no actions, suits or proceedings pending,
or to the knowledge of the Collection Agent threatened,
against or affecting the Collection Agent or its respective properties, in or
before any court, arbitrator or other body, which have or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
(f) Nature of Receivables.
Each Receivable included in the calculation of the
Principal Receivables in fact satisfies at such time the
definition of "Eligible Receivable". Each Account is either a VISA or
MasterCard account.
(g) Amount of Receivables.
As of the day preceding the Cut-Off Date, the
aggregate outstanding balance of the Principal Receivables in
existence was $803,461,210.
(h) Collections and Servicing.
Since September 8, 1998, there has been no
material adverse change in the ability of the Collection Agent
to service and collect the Receivables.
(i) Not an Investment Company.
The Collection Agent is not, and is not controlled
by, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or is exempt from all provisions of
such Act.
(j) Tax Status.
The Collection Agent has filed all tax returns
(federal, state and local) required to be filed and has paid
or made adequate provision for the payment of all taxes, assessments and other
governmental charges, except to the extent it is contesting any such payment in
good faith, through appropriate proceedings and after having set aside adequate
reserves therefor.
(k) ERISA.
The Collection Agent is in compliance in all material
respects with ERISA.
(l) Chief Executive Office.
Its chief executive office for purposes of Article
9 of the UCC is located as specified below its name in
Section 10.3.
(m) Year 2000 Compliance.
(i) The Collection Agent has (x) initiated a
review and assessment of all areas within its and each of
its Subsidiaries' business and operations (including those affected by
suppliers, vendors and customers) that could be adversely affected by the Year
2000 Problem, (y) developed a plan and timeline for addressing the Year 2000
Problem on a timely basis, and (z) to date, implemented that plan in accordance
with that timetable. Based on the foregoing, the Collection Agent believes that
all computer applications (including those of its suppliers, vendors and
customers) that are material to its or any of its Subsidiaries' business and
operations are reasonably expected on a timely basis to be Year 2000 Compliant,
except to the extent that a failure to do so could not reasonably be expected
(A) to have a Material Adverse Effect or (B) to result in a Termination Event.
(ii) The Collection Agent (x) has completed a review
and assessment of all its Receivable Systems and
(y) has determined in its reasonable judgment based on current information that
such Receivable Systems are Year 2000 Compliant or will be Year 2000 Compliant
on or before June 1, 1999 and thereafter, except to the extent that a failure to
be Year 2000 Compliant could not be reasonably expected (A) to have a Material
Adverse Effect or (B) to result in a Termination Event.
(iii) The costs of all assessment, remediation,
testing and integration related to the Collection
Agent's plan for becoming Year 2000 Compliant will not have a Material Adverse
Effect.
ARTICLE IV
CONDITIONS PRECEDENT
Conditions to Closing.
On or prior to the date of execution hereof, the Transferor
shall deliver to the Administrative Agent and the Purchaser Agents the following
documents, instruments and fees, all of which shall be in a form and substance
acceptable to the Administrative Agent and the Purchaser Agents:
(a) A copy of the resolutions of the Board of Directors of the Transferor
certified by its Secretary approving the execution, delivery and performance by
the Transferor of this Agreement, the Receivables Purchase Agreement to which it
is a party and the other Transaction Documents to be delivered by the Transferor
hereunder or thereunder.
(b) A copy of the resolutions of the Board of Directors of each of the Seller
and the Initial Purchaser, certified by its Secretary, approving the execution,
delivery and performance by the Seller and the Initial Purchaser of this
Agreement, the Receivables Purchase Agreements and the other Transactions
Documents to be delivered by the Seller and the Initial Purchaser hereunder or
thereunder.
(c) The Certificate of Incorporation of the Transferor certified by the
Secretary of State or other similar official of the Transferor's jurisdiction of
incorporation.
(d) The Articles of Association of the Seller, certified by the Seller's
corporate secretary, and the Certificate of Incorporation of the Initial
Purchaser, certified by the Secretary of State or other similar official of the
Initial Purchaser's jurisdiction of incorporation.
(e) A Good Standing Certificate for the Transferor issued by the Secretary of
State or a similar official of the Transferor's jurisdiction of incorporation,
dated a date reasonably prior to the Closing Date.
(f) A Good Standing Certificate for the Initial Purchaser issued by the
Secretary of State or a similar official of its jurisdiction of incorporation,
dated a date reasonably prior to the Closing Date.
(g) A Certificate of an officer of the Transferor, Seller and Initial Purchaser
as to the truth of representations and warranties on the Closing Date, and a
certificate of the Secretary of each of the Transferor, Seller and the Initial
Purchaser as to the incumbency of all officers signing Transaction Documents on
their behalf, with such attachments, and including such other matters, as are
requested by the Administrative Agent or any of the Purchaser Agents.
(h) Copies of proper financing statements (Form UCC-1), dated a date reasonably
near to the date of the initial Incremental Transfer naming the Transferor as
the debtor in favor of the Purchaser Agents, for the benefit of the Purchasers
and the Bank Investors, as secured party or other similar instruments or
documents as may be necessary or in the reasonable opinion of the Purchaser
Agents desirable under the UCC of all appropriate jurisdictions or any
comparable law to perfect the Purchaser Agents' undivided percentage interest in
all Receivables, Related Security, Collections and Proceeds relating thereto.
(i) Copies of proper financing statements (Form UCC-1), (x) naming the Seller as
the debtor in favor of the Initial Purchaser as secured party, which were filed
in respect of the Receivables Purchase Agreement between such parties, and (y)
dated a date reasonably near to the date of the initial Incremental Transfer,
naming the Initial Purchaser as the debtor in favor of the Transferor as secured
party, or other similar instruments or documents as may be necessary or in the
reasonable opinion of the Administrative Agent and the Purchaser Agents
desirable under the UCC of all appropriate jurisdictions or any comparable law
to perfect the Transferor's and the Initial Purchaser's ownership interest in
all Receivables, Related Security, Collections and Proceeds.
(j) Copies of proper financing statements (Form UCC-3), if any, necessary to
terminate all security interests and other rights of any person in Receivables
previously granted by Transferor.
(k) Copies of proper financing statements (Form UCC-3), if any, necessary to
terminate all security interests and other rights of any person in Receivables
previously granted by PNC, the Seller or the Initial Purchaser.
(l) Certified copies of request for information (Form UCC-11) (or a similar
search report certified by parties acceptable to the Administrative Agent and
the Purchaser Agents) dated a date reasonably near the date of the initial
Incremental Transfer listing all effective financing statements which name the
Transferor, the Seller or the Initial Purchaser (under their respective present
names and any previous names) as debtor and which are filed in jurisdictions in
which the filings were made pursuant to items (h) or (i) above together with
copies of such financing statements (none of which shall cover any Receivables
or Accounts except for those referred to in clause (i)(x) above).
(m) An opinion of in-house counsel to the Transferor, the Collection Agent, the
Seller and the Initial Purchaser, covering the matters requested by the
Administrative Agent and the Purchaser Agents.
(n) A copy of an executed notice to Bank of New York excluding the Receivables
from being conveyed pursuant to a certain receivables purchase agreement between
the Initial Purchaser and Metris Receivables, Inc.
(o) An opinion of Dorsey & Whitney LLP, counsel to the Transferor and the
Initial Purchaser, covering certain bankruptcy and insolvency matters (i.e.
"true sale" and "non-consolidation").
(p) An opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears,
special Arizona counsel to the Seller, as to the perfection and priority of the
ownership or security interests created under the Receivables Purchase Agreement
between the Seller and the Initial Purchaser and the Assignment.
(q) (i) An opinion of Dorsey & Whitney LLP, counsel to the Seller, as to the
enforceability of any security interest referred to in clause (p) above
notwithstanding any insolvency of the Seller and (ii) an officer's certificate
delivered by an officer of PNC as to certain facts relevant to the
enforceability of the security interest created under the PNC Agreement
notwithstanding any insolvency of PNC.
(r) Opinions of Dorsey & Whitney LLP, counsel to the Initial Purchaser and the
Transferor, covering the (i) perfection and priority of the ownership or
security interests under this Agreement, the PNC Agreement and the Receivables
Purchase Agreement between the Initial Purchaser and the Transferor, (ii)
creation of the ownership or security interests under the Receivables Purchase
Agreement between DMCCB and the Initial Purchaser and (iii) the characterization
of the Receivables as accounts or general intangibles.
(s) Opinions of counsel to PNC and the Seller regarding the enforceability of
the PNC Agreement against PNC and the Seller, respectively.
(t) A computer tape (to the Administrative Agent only) setting forth as of the
Cut-Off Date all Receivables and the Receivables balances thereon and such other
information as the Administrative Agent or any Purchaser Agent may reasonably
request.
(u) An executed copy of this Agreement, the Receivables Purchase Agreements, the
Fee Letter, the PARCO Fee Letter, the Sheffield Fee Letter, the Assignment, the
Asset Purchase Agreement, the Sheffield Agreement and each of the other
Transaction Documents to be executed by the Seller, the Initial Purchaser or the
Transferor.
(v) The Transfer Certificates, duly executed by the Transferor.
(w) The Certificates, duly executed by the Transferor and appropriately
completed.
(x) The Additional Investment Certificate, duly executed by the Transferor.
(y) Evidence that the fees due and owing on the Closing Date under the Fee
Letter, the PARCO Fee Letter and the Sheffield Fee Letter have been paid.
(z) Evidence that the Spread Account, the Excess Funding Account and the
Collection Account have been established in accordance with Section 2.12(b)
hereof.
(aa) All documents pursuant to which the Receivables have been sold by PNC
to the Seller.
(bb) PARCO shall have received letters from each of the Rating Agencies (other
than Fitch) confirming the rating of PARCO's Commercial Paper after taking into
effect PARCO's execution and performance of this Agreement.
(cc) Sheffield shall have received a letter from Moody's confirming the rating
of Sheffield's Commercial Paper after taking into effect Sheffield's execution
and performance of this Agreement.
(dd) Assignment by DMCCB to MCI, by MCI to the Transferor and by the
Transferor to NationsBank, as Administrative Agent, of the
Assigned Rights.
(ee) Substantially simultaneously with the execution hereof, evidence that the
proceeds of a cash capital contribution in the amount of at least $200,000,000
made to the Initial Purchaser by Thomas H. Lee Equity Fund IV, L.P. and certain
of its affiliates have been transferred by wire transfer to PNC in partial
payment of the purchase price payable by DMCCB under the PNC Agreement.
(ff) A letter agreement (the "PNC Consent") pursuant to which PNC consents to
the assignment by DMCCB of the Assigned Rights.
(gg) A draft confirmation with respect to the Interest Rate Cap in effect
on the Closing Date.
(hh) Such other documents, instruments, certificates and opinions as the
Administrative Agent and the Purchaser Agents shall reasonably request.
ARTICLE V
COVENANTS
Affirmative Covenants of Transferor.
At all times from the date hereof to the later to occur of (i)
the Termination Date (ii) a Special Termination Date or (iii) the date on which
the Net Investments have been reduced to zero and all other Aggregate Unpaids
shall have been paid in full, in cash, unless the Purchaser Agents shall
otherwise consent in writing:
(a) Financial Reporting.
The Transferor will maintain, for itself and each of
its Subsidiaries, a system of accounting established
and administered in accordance with GAAP, and furnish or cause to be furnished
to the Purchaser Agents:
(i) Annual Reporting.
Within one hundred (100) days after the close of the Initial
Purchaser's fiscal years, audited financial statements,
prepared in accordance with GAAP on a
consolidated basis for the Initial Purchaser and its Subsidiaries, in
each case, including balance sheets as of the end of such period,
related statements of income and cash flows, accompanied by an opinion
(which shall not be qualified in any material respect) of a "Big Five"
independent certified public accounting firm, prepared in accordance
with generally accepted auditing standards and by a certificate of said
accountants that, in the course of the foregoing, they have obtained no
knowledge of any Termination Event or Potential Termination Event, or
if, in the opinion of such accountants, any Termination Event or
Potential Termination Event shall exist, stating the nature and status
thereof.
(ii) Quarterly Reporting.
Within fifty (50) days after the close
of the first three quarterly periods of the Initial
Purchaser's fiscal years, for the Initial Purchaser and its
Subsidiaries, in each case, consolidated unaudited balance sheets as at
the close of each such period and consolidated related statements of
income and cash flows for the period from the beginning of such fiscal
year to the end of such quarter, all as contained in the Initial
Purchaser's filing with the Securities and Exchange Commission on Form
10-Q.
(iii) Compliance Certificate.
Together with the financial statements required hereunder, a
compliance certificate signed by the
Initial Purchaser's chief financial officer stating that (x) the
attached financial statements have been prepared in accordance with
GAAP and accurately reflect the financial condition of the Initial
Purchaser and its Subsidiaries and (y) to the best of such Person's
knowledge, no Termination Event or Potential Termination Event exists,
or if any Termination Event or Potential Termination Event exists,
stating the nature and status thereof.
(iv) Notice of Termination Events or Potential Termination Events.
As soon as possible and in any event
within two (2) Business Days after the occurrence of each
Termination Event or each Potential Termination Event, a statement of
the chief financial officer or chief accounting officer of the
Transferor setting forth details of such Termination Event or Potential
Termination Event and the action which the Transferor proposes to take
with respect thereto.
(v) Debt Ratings.
Within five (5) days after the date of any
change in the Transferor's, the Seller's or the Initial
Purchaser's public or private debt ratings, if any, a written
certification of the Transferor's, the Seller's or the Initial
Purchaser's public and private debt ratings after giving effect to any
such change.
(vi) ERISA.
Promptly after the filing or receiving
thereof, copies of all reports and notices with respect to
any Reportable Event (as defined in Article IV of ERISA) which the
Transferor, the Initial Purchaser, the Seller or any ERISA Affiliate of
the Transferor, the Initial Purchaser or the Seller files under ERISA
with the Internal Revenue Service, the Pension Benefit Guaranty
Corporation or the U.S. Department of Labor or which the Transferor,
the Initial Purchaser, the Seller or any ERISA Affiliates of the
Transferor, the Initial Purchaser, or the Seller receives from the
Internal Revenue Service, the Pension Benefit Guaranty Corporation or
the U.S. Department of Labor.
(vii) Year 2000 Reporting.
The certificate referred to in Section
5.1(m)(ii) as and when required to be delivered and shall
cause the Collection Agent to deliver the certificate referred to in
Section 5.3(e) as and when required to be delivered.
(viii) Litigation.
Promptly upon the commencement thereof, notice of all legal or arbitral
proceedings and of all proceedings by or before any governmental or
regulatory authority or agency, and (promptly upon the occurrence
thereof) of any material development in respect of such legal or other
proceedings, affecting the Transferor.
(ix) Other Information.
Such other information (including non-financial information) as
the Administrative Agent and the Purchaser Agents may from time to time
reasonably request with respect to the Seller, the Initial Purchaser,
the Transferor or any Subsidiary of any of the foregoing.
(b) Conduct of Business.
The Transferor will carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted, and will do, and cause the Initial Purchaser and the Seller to do,
all things necessary to remain duly incorporated, validly existing and in
good standing as a domestic corporation in its jurisdiction of
incorporation and maintain all requisite authority to conduct its business in
each jurisdiction in which its business is conducted.
(c) Compliance with Laws.
The Transferor will, and will cause each of the Seller and the Initial
Purchaser to, comply in all material respects with all laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to
which it or its respective properties may be subject, where the failure to
comply with the foregoing could be reasonably expected to have a Material
Adverse Effect.
(d) Furnishing of Information and Inspection of Records.
The Transferor will, and will cause each of the Seller and the Initial
Purchaser, furnish to the Administrative Agent and the Purchaser Agents from
time to time such information with respect to the Receivables as the
Administrative Agent or any of the Purchaser Agents may reasonably request,
including, without limitation, listings identifying the Obligor and the
outstanding balance for each Receivable. The Transferor will, and will cause
each of the Seller and the Initial Purchaser to, at any time and from time to
time during regular business hours and after reasonable notice permit the
Administrative Agent and the Purchaser Agents, or their respective agents or
representatives, (i) to examine and make copies of and take abstracts from all
Records and (ii) to visit the offices and properties
of the Transferor, the Initial Purchaser or the Seller, as applicable, for the
purpose of examining such Records, and to discuss matters relating to
Receivables or the Transferor's, the Initial Purchaser's or the Seller's
performance hereunder and under the other Transaction Documents to which such
Person is a party with any of the officers, directors, employees or independent
public accountants of the Transferor, the Initial Purchaser or the Seller, as
applicable, having knowledge of such matters.
(e) Keeping of Records and Books of Account.
The Transferor will, and will cause the Initial Purchaser and the Seller
to, maintain and implement administrative and operating procedures
(including, without limitation, an ability to recreate records evidencing
Receivables in the event of the
destruction of the originals thereof), and keep and maintain, all documents,
books, records and other information reasonably necessary or advisable for the
collection of all Receivables (including, without limitation, records adequate
to permit the daily identification of each new Receivable and all Collections of
and adjustments to each existing Receivable).
(f) Performance and Compliance with Receivables and Accounts.
The Transferor, at its expense, will, and will cause the Seller and
Initial Purchaser to, timely and fully
perform and comply with all material provisions, covenants and other promises
required to be observed by the Transferor, Initial Purchaser or the Seller under
the Accounts related to the Receivables.
(g) Credit and Collection Policies.
The Transferor will, and will cause the Seller,
Initial Purchaser and the Collection Agent to, comply with
the Credit and Collection Policy in regard to the Receivables and the related
Accounts, except insofar as any failure to so comply could not be reasonably
expected to impair the collectibility of the Receivables, on the whole, or a
substantial amount thereof, or otherwise have a Material Adverse Effect.
(h) Collections Received.
The Transferor shall, and shall cause the Seller
and the Collection Agent to, hold in trust, and deposit,
immediately, but in any event not later than forty-eight (48) hours of its
receipt thereof, to the Collection Account all Collections received from time to
time by the Transferor, Initial Purchaser or the Seller, as the case may be, in
accordance with Section 2.12(a).
(i) Sale Treatment.
The Transferor will not (i) and will not permit the
Seller or the Initial Purchaser to, account for, or
otherwise treat, the transactions contemplated by the Receivables Purchase
Agreements in any manner other than as a sale of Receivables by the Seller to
the Initial Purchaser or by the Initial Purchaser to the Transferor, or (ii)
account for (other than for tax purposes) or otherwise treat the transactions
contemplated hereby in any manner other than as a sale of Receivables by the
Transferor to the Purchaser Agents, on behalf of the Purchasers or the Bank
Investors, as applicable. In addition, the Transferor shall, and shall cause the
Seller and the Initial Purchaser to, disclose (in a footnote or otherwise) in
all of their respective financial statements (including any such financial
statements consolidated with any other Persons' financial statements) the
existence and nature of the transaction contemplated hereby and by the
Receivables Purchase Agreements and the interest of the Transferor (in the case
of the Initial Purchaser's financial statements) and the Purchaser Agents, on
behalf of the Purchasers and the Bank Investors, in the Affected Assets.
(j) Separate Existence
The Transferor shall at all times (a) to the extent
the Transferor's office is located in the offices of
the Seller, Metris Direct, or any Affiliate of Metris Direct, pay fair market
rent for its executive office space located in the offices of the Seller, Metris
Direct, or any Affiliate of Metris Direct, (b) have at all times at least two
members of its board of directors which are not and have never been employees,
officers or directors of the Seller, Metris Direct, or any Affiliate of Metris
Direct, or of any creditor of the Seller, Metris Direct, or any Affiliate of
Metris Direct (other than any special purpose corporations which have been
established by the Initial Purchaser or any of its Affiliates in conjunction
with the securitization by the Initial Purchaser or any of its Affiliates of
credit card receivables) and are persons who are familiar and have experience
with asset securitization, (c) maintain the Transferor's books, financial
statements, accounting records and other corporate documents and records
separate from those of the Seller, Metris Direct, or any other entity and
maintain separate accounts, (d) not commingle the Transferor's assets with those
of the Seller or any other entity, (e) act solely in its corporate name and
through its own authorized officers and agents, (f) make investments directly or
by brokers engaged and paid by the Transferor or its agents (provided that if
any such agent is an Affiliate of the Transferor it shall be compensated at a
fair market rate for its services), (g) separately manage the Transferor's
liabilities from those of the Seller, Metris Direct, or any Affiliates of Metris
Direct, and pay its own liabilities, including all administrative expenses, from
its own separate assets, except that the Seller may pay the organizational
expenses of the Transferor, (h) pay from the Transferor's assets all obligations
and indebtedness of any kind incurred by the Transferor, and (i) take no actions
which may mislead third parties as to the separate corporate identities and
separate assets and liabilities of the Seller, Metris Direct, the Initial
Purchaser, and the Transferor. The Transferor shall abide by all corporate
formalities, including the maintenance of current minute books, and the
Transferor shall cause its financial statements to be prepared in accordance
with generally accepted accounting principles in a manner that indicates the
separate existence of the Transferor and its assets and liabilities. The
Transferor shall (i) pay all its liabilities, (ii) not assume the liabilities of
the Seller, Metris Direct, or any Affiliate of Metris Direct, (iii) not lend
funds or extend credit to the Seller and (iv) not guarantee the liabilities of
the Seller, Metris Direct, or any Affiliates of Metris Direct. The officers and
directors of the Transferor (as appropriate) shall make decisions with respect
to the business and daily operations of the Transferor independent of and not
dictated by any controlling entity. The Transferor shall not engage in any
business not permitted by its Certificate of Incorporation.
(k) Corporate Documents.
The Transferor shall not amend, alter or change (i)
Article III, VI, X, XI, XII or XIV of its Certificate
of Incorporation, (ii) any provision of the agreement mentioned in clause (b) of
the definition of "Receivables Purchase Agreements" or (iii) the agreement
mentioned in clause (a) of the definition of "Receivables Purchase Agreements"
if such amendment, alteration, or change to such agreement referred to in such
clause (a) could have an adverse effect on the collectibility of the
Receivables, the interests of the Administrative Agent, any of the Purchaser
Agents, the Purchasers or the Bank Investors, without, in each case, the prior
written consent of the Administrative Agent and the Purchaser Agents, which
consent shall not be unreasonably withheld.
(l) Payment to the Initial Purchaser.
With respect to any Receivable sold by the Initial
Purchaser to the Transferor, the Transferor shall, and
shall cause the Initial Purchaser to, effect such sale under, and pursuant to
the terms of, the applicable Receivables Purchase Agreement, including, without
limitation, the payment by the Transferor to the Initial Purchaser and by the
Initial Purchaser to the Seller of the purchase price for such Receivable as
required by the terms of the applicable Receivables Purchase Agreement.
(m) Year 2000 Compliance.
(i) The Transferor will promptly notify the
Administrative Agent and the Purchaser Agents in the event
the Transferor discovers or determines that any computer application (including
those of its suppliers, vendors and customers) (x) that is necessary for the
origination, collection, management, or servicing of the Receivables will not be
Year 2000 Compliant on or before June 1, 1999 and thereafter, or (y) that is
otherwise material to its or any of its Subsidiaries' business and operations
will not be Year 2000 Compliant on a timely basis, except to the extent that, in
the case of (y) above, such failure could not reasonably be expected (A) to have
a Material Adverse Effect or (B) to result in a Termination Event.
(ii) Further, the Transferor will deliver
simultaneously with any quarterly or annual financial
statements or reports to be delivered under this Agreement, a certificate signed
by its chief financial officer that no material event, problems or conditions
have occurred which in the opinion of management would (x) prevent or materially
delay the Transferor's plan to become Year 2000 Compliant or (y) cause or be
likely to cause the Transferor's representations and warranties with respect to
being or becoming Year 2000 Compliant no longer to be true.
(n) Interest Rate Caps.
(i) The Transferor will obtain and at all times
prior to a date (the "Cap Termination Date") which is
twenty-seven months after the later of a Special Termination Date and
Termination Date, as each may be extended, maintain one or more interest rate
caps (collectively, "Interest Rate Caps"), the notional amounts of which,
individually or in the aggregate, shall equal or exceed the outstanding balance
of the Net Investments. Pursuant to the Interest Rate Caps, on each Remittance
Date on which the LIBOR Cap Rate for a related Collection Period exceeds 7.35%,
the Interest Rate Cap Provider will make a payment to the Transferor in an
amount equal to the product of (i) such excess, (ii) the notional amount as of
such Remittance Date and (iii) the actual number of days in the related
Collection Period divided by 360. The Interest Rate Caps will terminate on the
Cap Termination Date; provided, however, that the Interest Rate Caps may be
terminated at an earlier date if the Transferor has obtained a substitute
interest rate cap or entered into an alternative arrangement satisfactory to the
Purchaser Agents and each Rating Agency then rating the Commercial Paper of any
Purchaser, which in each case will not result in the reduction or withdrawal of
the rating of any such Commercial Paper (such substitute interest rate cap, a
"Replacement Interest Rate Cap"; such alternative arrangement, a "Qualified
Substitute Arrangement").
(ii) In the event that the rating of the Interest
Rate Cap Provider is reduced or withdrawn, as
specified in the Interest Rate Caps, the Transferor will obtain for each such
Interest Rate Cap a Replacement Interest Rate Cap, or enter into a Qualified
Substitute Arrangement. It shall be a condition to any such Replacement Interest
Rate Cap or Qualified Substitute Arrangement that there be delivered to the
Purchaser Agents an Officer's Certificate by the Transferor stating that the
conditions to such substitution set forth in this Section 5.1(n) have been
satisfied.
(iii) Each Interest Rate Cap Agreement will provide
that payments due to the Transferor shall be
deposited into the Collection Account.
(iv) The Transferor agrees to notify the Rating
Agencies rating the Commercial Paper of any Purchaser
of any assignment by an Interest Rate Cap Provider and shall, prior to amending
any Interest Rate Cap Agreement, obtain confirmation from each such Rating
Agency that such amendment will not result in the reduction or withdrawal of the
rating of any such Commercial Paper.
(v) Within five Business Days after the Closing Date,
the Transferor shall deliver to the Purchaser
Agents and the Rating Agencies a fully executed Interest Rate Cap Agreement
satisfactory to the Rating Agencies and all fees payable by the Transferor
thereunder to the Interest Rate Cap Provider shall have been contributed to the
capital of the Transferor by MCI and paid by the Transferor to the Interest Rate
Cap Provider.
SECTION 5.2. Negative Covenants of the Transferor.
At all times from the date hereof to the later to occur of (i)
the Termination Date, (ii) a Special Termination Date or (iii) the date on which
the Net Investments have been reduced to zero and all other Aggregate Unpaids
shall have been paid in full, in cash, unless the Purchaser Agents shall
otherwise consent in writing:
(a) No Sales, Liens, Etc.
Except as otherwise provided herein and in the
Receivables Purchase Agreements, the Transferor will not,
and will not permit the Initial Purchaser or the Seller to, sell, assign (by
operation of law or otherwise) or otherwise dispose of, or create or suffer to
exist any Adverse Claim upon (or the filing of any financing statement) or with
respect to any of the Affected Assets, or assign any right to receive income in
respect thereof.
(b) No Extension or Amendment of Receivables.
The Transferor will not, and will not permit the
Seller or Initial Purchaser to, extend, amend or otherwise
modify the terms of any Receivable, or amend, modify or waive any term or
condition of any Account related thereto if such action could have a Material
Adverse Effect. The Transferor further covenants that, except as otherwise
required by law (or as is deemed by the Seller or Initial Purchaser to be
necessary in order to maintain its credit card business on a competitive basis),
it shall not, and shall not cause or otherwise permit the Collection Agent or
Initial Purchaser at any time to reduce the periodic finance charges assessed on
any Receivable or other fees on any Account if, as a result of such reduction,
the reasonable expectation of the Excess Spread as of such date would be less
than 2.00% and unless (i) such reduction is made applicable to the comparable
segment of the consumer revolving credit accounts owned and serviced by the
Collection Agent that have characteristics the same as, or substantially similar
to, the Accounts that are the subject of such change or (ii) if it does not own
such a comparable segment, it will not make any such change with the intent to
materially benefit itself over the Purchasers and the Bank Investors.
(c) No Change in Business or Credit and Collection Policy.
The Transferor will not make any change in the
character of its business or in the Credit and Collection
Policy, which change would, in either case, impair the collectibility of the
Receivables or otherwise have a Material Adverse Effect.
(d) No Mergers, Etc.
The Transferor will not, and except as
otherwise permitted pursuant to the Receivables Purchase
Agreements, will not permit the Seller to, (i) consolidate or merge with or into
any other Person, or (ii) sell, lease or transfer all or substantially all of
its assets to any other Person, except that the Seller may consolidate or merge
with or into any other Person if (a) the Seller is the surviving corporation, or
the entity or Person formed by or surviving any such consolidation or merger (if
other than the Seller) or to which such sale, lease or transfer shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (b) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Seller) or
the entity or Person to which such sale, lease, or transfer shall have been made
assumes all the obligations of the Seller, respectively, under this Agreement
and the other Transaction Documents pursuant to an agreement in form and
substance satisfactory to the Purchaser Agents; and (c) immediately after such
transaction, no Potential Termination Event or Termination Event will result
therefrom.
(e) Change of Name, Etc.
The Transferor will not, and will not permit the
Seller to, change its name, identity or structure or the
location of its chief executive office, unless at least 10 days prior to the
effective date of any such change the Transferor or the Seller, as applicable,
delivers to the Administrative Agent and the Purchaser Agents such documents,
instruments or agreements, executed by the Transferor or the Seller, as
applicable, as are necessary to reflect such change and to continue the
perfection of the Purchaser Agents' ownership interests or security interests in
the Affected Assets.
(f) Amendment to Transaction Documents.
The Transferor will not, and will not permit the
Seller to, amend, modify, or supplement the Transaction
Documents or waive any provision thereof, in each case except with the prior
written consent of the Administrative Agent and the Purchaser Agents (which
shall not be unreasonably withheld); nor shall the Transferor take, or permit
the Seller to take, any other action under the Transaction Documents that shall
have a material adverse affect on the Administrative Agent, any of the Purchaser
Agents, a Purchaser or any Bank Investor or which is inconsistent with the terms
of this Agreement.
(g) Other Debt.
Except as provided for herein, the Transferor
will not create, incur, assume or suffer to exist any
indebtedness, whether current or funded, or any other liability other than (i)
indebtedness of the Transferor representing fees, expenses and indemnities
arising hereunder or under the Receivables Purchase Agreement to which it is a
party for the purchase price of such Receivables under the Receivables Purchase
Agreements, and (ii) other indebtedness incurred in the ordinary course of its
business in an amount not to exceed $9,750 at any time outstanding.
(h) ERISA Matters.
The Transferor will not, and will not permit the
Seller or the Initial Purchaser to, (i) engage or permit
any of its respective ERISA Affiliates to engage in any prohibited transaction
(as defined in Section 4975 of the Code and Section 406 of ERISA) for which an
exemption is not available or has not previously been obtained from the U.S.
Department of Labor; (ii) permit to exist any accumulated funding deficiency (as
defined in Section 302(a) of ERISA and Section 412(a) of the Code) or funding
deficiency with respect to any Benefit Plan other than a Multiemployer Plan;
(iii) fail to make any payments to any Multiemployer Plan that the Transferor,
the Seller, the Initial Purchaser or any ERISA Affiliate of the Transferor, the
Initial Purchaser or the Seller is required to make under the agreement relating
to such Multiemployer Plan or any law pertaining thereto; (iv) terminate any
Benefit Plan so as to result in any liability; or (v) permit to exist any
occurrence of any reportable event described in Title IV of ERISA which
represents a material risk of a liability to the Transferor, the Seller, the
Initial Purchaser or any ERISA Affiliate of the Transferor, the Initial
Purchaser or the Seller under ERISA or the Code.
(i) Performance of Account Agreements.
The Transferor shall not, and shall not permit the
Seller or Initial Purchaser to fail to comply with and
perform its obligations under the applicable Account Agreements relating to the
Accounts and the Credit and Collection Policy except insofar as any such failure
to comply or perform would not materially and adversely affect the rights of a
Purchaser, the Administrative Agent, any of the Purchaser Agents or any Bank
Investor in the Receivables or the collectibility of the Receivables. The
Transferor shall not, and shall not permit the Seller or Initial Purchaser to,
change the terms and provisions of the Account Agreement or the Credit and
Collection Policy in any respect (including, without limitation, the calculation
of the amount, and the timing, of uncollectible Receivables) with the intent to
materially benefit itself over a Purchaser, the Administrative Agent, any of the
Purchaser Agents or any Bank Investor, unless such change does not materially
and adversely affect the rights of a Purchaser, the Administrative Agent, any of
the Purchase Agents or any Bank Investor in the Receivables or the
collectibility of the Receivables.
SECTION 5.3. Affirmative Covenants of the Collection Agent.
At all times from the date hereof to the later to occur of (i)
the Termination Date, (ii) a Special Termination Date or (iii) the date on which
the Net Investments have been reduced to zero and all other Aggregate Unpaids
shall have been paid in full, in cash, unless the Purchaser Agents shall
otherwise consent in writing:
(a) Conduct of Business.
The Collection Agent shall carry on and conduct
its business in substantially the same manner and in
substantially the same fields of enterprise as it is presently conducted and do
all things necessary to remain duly chartered, validly existing and in good
standing as a national banking association and maintain all requisite authority
to conduct its business in each jurisdiction in which its business is conducted.
(b) Compliance with Laws.
The Collection Agent shall comply in all material
respects with all laws, rules, regulations, orders,
writs, judgments, injunctions, decrees or awards to which it or its properties
may be subject which pertain to its duties hereunder and shall maintain in
effect all material qualifications required by law to service the Receivables
and Accounts properly.
(c) Furnishing of Information and Inspection of Records.
The Collection Agent shall furnish to the
Administrative Agent and the Purchaser Agents from time to time
such information with respect to the Receivables as the Administrative Agent and
the Purchaser Agents may reasonably request, including, without limitation,
listings identifying the Obligor by Account number and the outstanding balance
for each Receivable. The Collection Agent shall, at any time and from time to
time during regular business hours and upon reasonable notice permit the
Administrative Agent, any of the Purchaser Agents, or its agents or
representatives, (i) to examine and make copies of and take abstracts from all
Records and (ii) to visit the offices and properties of the Collection Agent for
the purpose of examining such Records, and to discuss matters relating to
Receivables or the Transferor's, the Seller's, the Initial Purchaser's or the
Collection Agent's performance hereunder and under the other Transaction
Documents to which such Person is a party with any of the officers, directors,
employees or independent public accountants of the Collection Agent having
knowledge of such matters.
(d) Keeping of Records and Books of Account.
The Collection Agent shall maintain and implement
operating procedures (including, without limitation, an
ability to recreate records evidencing Receivables in the event of the
destruction of the originals thereof), and keep and maintain, all documents,
books, records and other information reasonably necessary or advisable for the
collection of all Receivables (including, without limitation, records adequate
to permit the daily identification of each new Receivable and all Collections of
and adjustments to each existing Receivable).
(e) Year 2000 Compliance.
(i) The Collection Agent will promptly notify
the Administrative Agent and the Purchaser Agents in the
event the Collection Agent discovers or determines that any computer application
(including those of its suppliers, vendors and customers) (x) that is necessary
for the origination, collection, management, or servicing of the Receivables
will not be Year 2000 Compliant on or before June 1, 1999 and thereafter, or (y)
that is otherwise material to its or any of its Subsidiaries' business and
operations will not be Year 2000 Compliant on a timely basis, except to the
extent that, in the case of (y) above, such failure could not reasonably be
expected (A) to have a Material Adverse Effect or (B) to result in a Termination
Event.
(ii) Further, the Collection Agent will deliver
simultaneously with any quarterly or annual financial
statements or reports to be delivered under this Agreement, a certificate signed
by its chief financial officer that no material event, problems or conditions
have occurred which in the opinion of management would (x) prevent or materially
delay the Transferor's plan to become Year 2000 Compliant or (y) cause or be
likely to cause the Transferor's representations and warranties with respect to
being or becoming Year 2000 Compliant no longer to be true.
(f) Credit and Collection Policies.
The Collection Agent shall comply with the Credit
and Collection Policy in regard to the Receivables and
each related Account, except insofar as any failure to so comply could not be
reasonably expected to impair the collectibility of the Receivables, on the
whole, or a substantial amount thereof, or otherwise have a Material Adverse
Effect.
(g) No Rescission or Cancellation.
The Collection Agent shall not permit any rescission
or cancellation of a Receivable except as ordered by a
court of competent jurisdiction or other governmental authority or in the
ordinary course of its business and in accordance with the Credit and Collection
Policy.
(h) Protection of Purchasers' Rights.
The Collection Agent shall take no action, nor omit
to take any action, which would impair the rights of
the Purchasers in the Receivables or the related Accounts.
(i) Litigation.
Promptly upon the commencement thereof, the
Collection Agent shall give to the Purchaser Agents notice of
all legal or arbitral proceedings and of all proceedings by or before any
governmental or regulatory authority or agency, affecting the Collection Agent,
Seller, Initial Purchaser or any of their respective Subsidiaries (i) involving
amounts in excess of $10,000,000, (ii) which could reasonably be expected to
have a Material Adverse Effect, or (iii) which could otherwise result in a
Termination Event or Potential Termination Event, and (promptly upon the
occurrence thereof) notice of any material development in respect of any such
legal or other proceedings.
(j) Notice of Termination Events, Potential Termination Events or
Collection Agent Default.
As soon as possible and in any event within two (2)
Business Days after the occurrence of each Termination
Event, Potential Termination Event or Collection Agent Default, the Collection
Agent shall deliver to the Administrative Agent and the Purchaser Agents a
statement of the chief financial officer or chief accounting officer of the
Collection Agent setting forth details of such Termination Event, Potential
Termination Event or Collection Agent Default and the action which the
Collection Agent proposes to take with respect thereto.
(k) [Reserved].
(l) Notices under the PNC Agreement.
The Collection Agent shall deliver to the Purchaser
Agents copies of all notices and other communications
delivered by or to the Collection Agent under the PNC Agreement after the
Closing Date, promptly upon such delivery or receipt thereof, as the case may
be, (i) in connection with the Assigned Rights and (ii) involving any claim
against PNC in excess of $1,000,000. The Collection Agent shall notify the
Purchaser Agents of any breach by PNC of any term of the PNC Agreement which
involves an amount in excess of $1,000,000, upon its knowledge thereof.
(m) PNC Agreement.
(i) The Collection Agent shall take all commercially
reasonable actions necessary to collect payments due to it under the
PNC Agreement and shall exercise diligently and promptly all its rights
and remedies thereunder unless and until the Administrative Agent
provides the notice to PNC under the PNC Consent and pursuant to clause
(ii) below.
(ii) The Administrative Agent may, in its discretion,
provide to PNC a notice as described in the PNC Consent upon the
occurrence of any one or more of the following: (A) the occurrence of a
Potential Termination Event which involves an amount in excess of
$5,000,000 or a Termination Event which involves an amount in excess of
$1,000,000 that, in each case, is caused by or related to a breach by
PNC under the PNC Agreement or would be cured by a payment made by PNC
under the PNC Agreement, or (B) a Collection Agent Default or
Termination Event with respect to the Collection Agent which involves
an amount in excess of $1,000,000
(iii) In the event that the Administrative Agent
delivers to PNC a notice as described in the PNC Consent and agrees to
settle any claim against PNC for an amount that is less than the
original amount of the claim (the difference between such original
amount and the amount of such settlement being the "Claim Amount"), the
Administrative Agent and the Purchaser Agents agree that DMCCB shall
not be liable for the Claim Amount with respect to such claims, but the
Transferor and MCI, to the extent they were liable therefor, shall
remain liable for the payment thereof.
(n) Remittance to Collection Account.
The Collection Agent shall, within one Business Day
after the Collection Agent's receipt thereof, remit to
the Collection Account any payment received by the Collection Agent pursuant to
the PNC Agreement which relates to an amount due and owing under this Agreement,
unless otherwise previously paid by the Collection Agent or Transferor hereunder
or by PNC directly to the Administrative Agent.
SECTION 5.4. Negative Covenants of the Collection Agent.
At all times from the date hereof to the later to occur of (i)
the Termination Date, (ii) a Special Termination Date or (iii) the date on which
the Net Investments have been reduced to zero and all other Aggregate Unpaids
shall have been paid in full, in cash, unless the Purchaser Agents shall
otherwise consent in writing.
(a) No Sales, Liens, Etc.
Except as otherwise provided herein, the Collection
Agent shall not sell, assign (by operation of law or
otherwise) or otherwise dispose of, or create or suffer to exist any Adverse
Claim upon (or the filing of any financing statement) or with respect to (x) any
of the Affected Assets or (y) any account to which any Collections of any
Receivable are sent, or assign any right to receive income in respect thereof.
(b) No Change in Business or Credit Collection Policy.
The Collection Agent shall not make any change in
the character of its business or in the Credit and
Collection Policy, which change would, in either case, impair the collectibility
of the Receivables, on the whole, or otherwise have a Material Adverse Effect.
(c) No Extension or Amendment of Receivables.
Except as otherwise permitted in Section 6.2
hereof, the Collection Agent shall not extend, amend or
otherwise modify the terms of any Receivable, or amend, modify or waive any term
or condition of any Account related thereto if such action could have a Material
Adverse Effect.
(d) No Mergers, Etc.
The Collection Agent shall not (i) consolidate or
merge with or into any other Person, or (ii) sell, lease
or transfer all or substantially all of its assets to any other Person, unless
(a) the Collection Agent is the surviving corporation, or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Collection Agent) or to which such sale, lease or transfer shall have been made
is a corporation or a national bank organized or existing under the laws of the
United States, any state thereof or the District of Columbia; (b) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Collection Agent) or the entity or Person to which such sale, lease or
transfer shall have been made assumes all the obligations of the Collection
Agent under this Agreement and the other Transaction Documents pursuant to an
agreement in form and substance satisfactory to the Administrative Agent and
each Purchaser Agent; and (c) immediately after such transaction, no Potential
Termination Event or Termination Event will result therefrom.
(e) Amendment to PNC Agreement.
The Collection Agent will not amend, modify or
supplement the PNC Agreement or waive any provision thereof
regarding or relating to the Assigned Rights, in each case except with the prior
written consent of the Administrative Agent and the Purchaser Agents; nor shall
the Collection Agent take any other action under the PNC Agreement that could
reasonably be expected to have a Material Adverse Effect or which is
inconsistent with the terms of this Agreement.
ARTICLE VI
ADMINISTRATION AND COLLECTIONS
Appointment of Collection Agent.
The servicing, administering and collection of the Receivables
shall be conducted by such Person (the "Collection Agent") so designated from
time to time in accordance with this Section 6.1. Until the Administrative Agent
gives notice to the Seller of the designation of a new Collection Agent, under
the circumstances set forth below, the Seller is hereby designated as, and
hereby agrees to perform the duties and obligations of, the Collection Agent
pursuant to the terms hereof. The Collection Agent may not delegate any of its
material rights, duties or obligations hereunder without prior notice to the
Administrative Agent and the Purchaser Agents or designate a substitute
Collection Agent, without the prior written consent of the Administrative Agent
and the Purchaser Agents, and provided that in all events the Collection Agent
shall continue to remain solely liable for the performance of the duties as
Collection Agent hereunder notwithstanding any such delegation hereunder. The
Administrative Agent shall, after the occurrence of a Collection Agent Default
or any other Termination Event, and at the direction of the Required Purchasers,
designate as Collection Agent any Person (including itself) approved by such
Required Purchaser Agents to succeed the Seller or any successor Collection
Agent, on the condition in each case that any such Person so designated shall
agree to perform the duties and obligations of the Collection Agent pursuant to
the terms hereof. The Collection Agent may notify any Obligor of the Transferred
Interest.
SECTION 6.2. Duties of Collection Agent.
(a) The Collection Agent shall take or cause to be taken all such action as may
be necessary or advisable to collect each Receivable from time to time, all in
accordance with applicable laws, rules and regulations, with reasonable care and
diligence, and in accordance with the Credit and Collection Policy. Each of the
Transferor, the Purchasers, the Purchaser Agents and the Bank Investors hereby
appoints as its agent the Collection Agent, from time to time designated
pursuant to Section 6.1 hereof, to enforce its respective rights and interests
in and under the Affected Assets. To the extent permitted by applicable law,
each of the Transferor and the Seller (to the extent not then acting as
Collection Agent hereunder) hereby grants to any Collection Agent appointed
hereunder an irrevocable power of attorney to take any and all steps in the
Transferor's and/or the Seller's name and on behalf of the Transferor or the
Seller necessary or desirable, in the reasonable determination of the Collection
Agent, to collect all amounts due under any and all Receivables, including,
without limitation, endorsing the Transferor's and/or the Seller's name on
checks and other instruments representing Collections and enforcing such
Receivables and the related Account Agreements. The Collection Agent shall set
aside for the account of the Transferor and the Purchaser Agents their
respective allocable shares of the Collections of Receivables in accordance with
Sections 2.5 and 2.6 hereof. The Collection Agent shall segregate and deposit to
each of the Purchase Agent's account its allocable share of Collections of
Receivables when required pursuant to Article II hereof. The Transferor shall
deliver to the Collection Agent or its designee(s) and the Collection Agent or
its designees shall hold in trust for the Transferor and the Purchaser Agents,
on behalf of their related Purchasers and Bank Investors, in accordance with
their respective interests, all Records which evidence or relate to Receivables.
The Collection Agent shall not make the Administrative Agent, any of the
Purchaser Agents, a Purchaser or any of the Bank Investors a party to any
litigation with respect to the Receivables without the prior written consent of
such Person, unless such joinder is required by law and such Person would not
become subject to any liability for which it is not indemnified hereunder.
(b) The Collection Agent shall, as soon as practicable following receipt
thereof, turn over to the Transferor any collections of any indebtedness of any
Person which is not on account of a Receivable. If the Collection Agent is not
the Transferor or the Seller or an Affiliate of the Transferor or the Seller,
the Collection Agent, by giving three Business Days' prior written notice to the
Purchaser Agents, may revise the percentage used to calculate the Servicing Fee
so long as the revised percentage will not result in a Servicing Fee that
exceeds 110% of the reasonable and appropriate out-of-pocket costs and expenses
of such Collection Agent incurred in connection with the performance of its
obligations hereunder as documented to the reasonable satisfaction of the
Purchaser Agents; provided, however, that at any time after the Buyer's
Percentage Factor equals or exceeds 100%, any compensation to the Collection
Agent in excess of the Servicing Fee initially provided for herein shall be an
obligation of the Transferor and shall not be payable, in whole or in part, from
Collections allocated to the Purchasers or the Bank Investors, as applicable.
The Collection Agent, if other than the Transferor or the Seller or an Affiliate
of the Transferor or the Seller, shall as soon as practicable upon demand,
deliver to the Seller all Records in its possession which evidence or relate to
indebtedness of an Obligor which is not a Receivable.
(c) On or before 100 days after the end of each fiscal year of the Collection
Agent, beginning with the fiscal year ending December 31, 1998, the Collection
Agent shall cause a firm of nationally recognized independent public accountants
(who may also render other services to the Collection Agent, the Transferor, the
Seller or any Affiliates of any of the foregoing) to furnish a report to the
Purchaser Agents to the effect that they have (i) applied certain procedures,
agreed upon with the Collection Agent and the Purchaser Agents and substantially
as set forth in Exhibit C hereto, which would re-perform certain accounting
procedures performed by the Collection Agent pursuant to certain documents and
records relating to the servicing of the Accounts under this Agreement; in
addition, each report shall set forth the agreed upon procedures performed and
the results of such procedures; and (ii) compared the amounts and percentages
set forth in the Investor Reports forwarded by the Collection Agent pursuant to
Section 2.11 during the period covered by such report with the computer reports
(which may include personal computer generated reports that summarize data from
the computer reports generated by either the Transferor or Collection Agent
which are used to prepare the Investor Reports) which were the source of such
amounts and percentages and that on the basis of such comparison, such amounts
and percentages are in agreement except as shall be set forth in such report.
(d) Notwithstanding anything to the contrary contained in this Article VI, the
Collection Agent, if not the Transferor, the Seller or any Affiliate of the
Transferor or the Seller, shall have no obligation to collect, enforce or take
any other action described in this Article VI with respect to any indebtedness
that is not included in the Transferred Interest other than to deliver to the
Transferor the collections and documents with respect to any such indebtedness
as described in Section 6.2(b) hereof.
SECTION 6.3. Rights After Designation of New Collection Agent.
At any time following the designation of a Collection Agent
(other than the Transferor, the Seller or any Affiliate of the Transferor or the
Seller) pursuant to Section 6.1 hereof:
(i) The Administrative Agent may or shall, at the direction of the
Purchaser Agents, direct that payment of all amounts payable under any
Receivable be made directly to the Administrative Agent or its
designee, to be applied in accordance with Sections 2.5, 2.6 and
2.12(d), as applicable.
(ii) In the event that a Termination Event has occurred, the Transferor
shall, at the Administrative Agent's request and at the Transferor's
expense, direct that payments be made directly by each Obligor to the
Administrative Agent or its designee, and, if necessary, give notice of
any of the Purchaser Agents', the Transferor's and/or the Bank
Investors' ownership of Receivables to each Obligor.
(iii) The Transferor shall, at the Administrative Agent's request, (A)
assemble all of the Records, and shall make the same available to the
Administrative Agent or its designee at a place selected by the
Administrative Agent or its designee, and (B) segregate all cash,
checks and other instruments received by it from time to time
constituting Collections of Receivables in a manner acceptable to the
Administrative Agent and shall, promptly upon receipt, remit all such
cash, checks and instruments, duly endorsed or with duly executed
instruments of transfer, to the Administrative Agent or its designee.
(iv) The Transferor and the Seller hereby authorize the Administrative Agent
to take any and all lawful steps in the Transferor's or Seller's name
and on behalf of the Transferor and the Seller necessary or desirable
and reasonable, in the determination of the Administrative Agent, to
collect all amounts due under any and all Receivables, including,
without limitation, endorsing the Transferor's or Seller's name on
checks and other instruments representing Collections and enforcing
such Receivables and the related Account Agreements, and the Transferor
and the Seller shall request any third party holding any Records to
provide the Administrative Agent with access to such Records to same
extent as the Transferor and Seller have such access.
SECTION 6.4. Collection Agent Default.
The occurrence of any one or more of the following events
shall constitute a Collection Agent Default:
(a) the Collection Agent or, to the extent that the Transferor, the Seller or
any Affiliate of the Transferor, the Seller, the Initial Purchaser is then
acting as Collection Agent, the Transferor, the Seller, the Initial Purchaser or
such Affiliate, as applicable, shall fail to (i) observe or perform any term,
covenant or agreement to be observed or performed under Section 5.3(a), (f), (g)
or (h) or Section 5.4(b), (c) or (d), and any such failure to observe Section
5.3(a), (g) or (h) or Section 5.4(c) shall have a Material Adverse Effect, or
(ii) observe or perform any term, covenant or agreement hereunder (other than as
referred to in clause (i) or (iii) of this Section 6.4(a)) or under any of the
other Transaction Documents to which such Person is a party or by which such
Person is bound, which failure shall have a Material Adverse Effect and shall
remain unremedied for ten (10) days, or (iii) make any payment or deposit
required to be made by it hereunder when due or the Collection Agent shall fail
to observe or perform any term, covenant or agreement on the Collection Agent's
part to be performed under Section 2.8(b) hereof; or
(b) any representation, warranty, certification or statement made by the
Collection Agent (in the event that the Transferor, the Seller or such Affiliate
is then acting as the Collection Agent) in this Agreement, the Receivables
Purchase Agreements or in any of the other Transaction Documents or in any
certificate or report delivered by it pursuant to any of the foregoing shall
prove to have been incorrect in any material adverse respect when made or deemed
made; or
(c) any event of default by the Collection Agent or any of its Subsidiaries in
the performance of any term, provision or condition contained in any agreement
under which any Indebtedness greater than $10,000,000 was created or is
governed, if the effect of such event of default is to cause that Indebtedness
to become or be declared due and payable prior to its stated maturity or the
stated maturity of any underlying obligation, as the case may be; or
(d) any Event of Bankruptcy shall occur with respect to the Collection Agent or
any of its Subsidiaries; or
(e) there shall have occurred any material adverse change in the operations of
the Collection Agent since the end of the last fiscal year ending prior to the
date of its appointment as Collection Agent hereunder which, in the commercially
reasonable judgment of the Required Purchaser Agents, materially and adversely
affects the Collection Agent's ability to either collect the Receivables or to
perform under this Agreement; or
(f) a final judgment or judgments for the payment of money in excess of
$10,000,000 individually or in the aggregate shall be rendered by one or more
courts, administrative tribunals or other bodies having jurisdiction against the
Collection Agent and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be procured,
within 30 days from the date of entry thereof.
SECTION 6.5. Responsibilities of the Transferor and the Seller.
Anything herein to the contrary notwithstanding, the
Transferor shall, and/or shall cause the Seller to, (i) perform all of the
Seller's obligations under the Accounts related to the Receivables to the same
extent as if interests in such Receivables had not been sold hereunder and under
the Receivables Purchase Agreements and the exercise by the Administrative
Agent, the Purchaser Agents, the Purchasers and the Bank Investors of their
rights hereunder and under the Receivables Purchase Agreements shall not relieve
the Transferor or the Seller from such obligations and (ii) pay when due any
taxes, including without limitation, any sales taxes payable in connection with
the Receivables and their creation and satisfaction. Neither the Administrative
Agent, any of the Purchaser Agents, the Purchasers nor any of the Bank Investors
shall have any obligation or liability with respect to any Receivable or related
Accounts, nor shall it be obligated to perform any of the obligations of the
Seller thereunder.
ARTICLE VII
TERMINATION EVENTS
Termination Events.
The occurrence of any one or more of the following events
shall constitute a Termination Event:
(a) the Transferor, the Seller, the Initial Purchaser or the Collection Agent
shall fail to make any payment or deposit to be made by it hereunder or under
the Receivables Purchase Agreements when due hereunder or thereunder, and such
failure shall continue for 2 Business Days; or
(b) any representation, warranty, certification or statement made by the
Transferor in this Agreement, any other Transaction Document to which it is a
party or in any other document delivered pursuant hereto or thereto shall prove
to have been incorrect in any material adverse respect when made or deemed made
and, if susceptible of being remedied, has not been remedied within 30 days
thereafter; or
(c) the Transferor or the Collection Agent, shall default in the performance of
any payment, covenant or undertaking (other than those covered by clause (a)
above): (i) to be performed or observed under Sections 5.1(a)(iv), 5.1(b),
5.1(f), 5.1(g), 5.1(i), 5.1(k), 5.1(l), 5.2(a), 5.2(c), 5.2(d) or 5.2(g); (ii)
to be performed or observed under Section 5.1(a)(vi) or Section 5.3, and such
default in the case of this clause (ii) shall continue for two (2) Business
Days; and (iii) to be performed or observed under any other provision hereof or
any other Transaction Document and such default in the case of this clause (iii)
shall continue for ten (10) days; or
(d) any event of default by the Transferor, the Seller, the Initial Purchaser or
any Subsidiary of the Transferor, the Seller, or the Initial Purchaser in the
performance of any term, provision or condition contained in any agreement to
which any such Person is a party or under which any Indebtedness owing by the
Transferor, the Seller, the Initial Purchaser or any Subsidiary of the
Transferor, the Initial Purchaser or the Seller greater than $10,000,000 was
created or is governed if the effect of such event of default is to cause that
Indebtedness to become or be declared due and payable prior to its stated
maturity or the stated maturity of any underlying obligation, as the case may
be; or
(e) an Event of Bankruptcy shall occur with respect to the Transferor, the
Collection Agent, the Initial Purchaser or the Seller, Metris Direct or any
Subsidiary of any of the foregoing (which, in the case of such Subsidiary, could
reasonably be expected to have a Material Adverse Effect); or
(f) the Transferor shall, for any reason, fail to have a valid ownership
interest in the Affected Assets or any of the Purchaser Agents, on behalf of
their related Purchasers and Bank Investors shall, for any reason, fail or cease
to have a valid and perfected first priority ownership or security interest in
the Affected Assets free and clear of any Adverse Claims; or
(g) a Collection Agent Default shall have occurred; or
(h) (x) either of the Receivables Purchase Agreements shall have terminated or
(y) a default shall occur under either of the Receivables Purchase Agreements
which has a Material Adverse Effect; or
(i) the Transferor, the Collection Agent (except as permitted under Section
5.4(d), the Initial Purchaser, or the Seller shall enter into any transaction or
merger whereby it is not the surviving entity; or
(j) there shall have occurred any material adverse change in the operations of
the Transferor or the Seller since September 8, 1998 or any other Material
Adverse Effect shall have occurred; or
(k) on any date (i) the Buyer's Percentage Factor shall exceed the Maximum
Buyer's Percentage Factor and shall not be cured within one Business Day
thereafter or (ii) the Buyer's Percentage Factor shall equal or exceed 100% at
any time; or
(l) on any Remittance Date, the Spread Account balance shall be less than the
Spread Account Cap Percentage Amount and such deficiency shall continue to exist
unremedied at the close of business on the fifth Remittance Date thereafter; or
(m) the average Excess Spread for any three rolling consecutive
Collection Periods shall be less than or equal to 2% but greater
than 0%; or
(n) the Initial Purchaser shall at any time cease to own, directly or
indirectly, all of the outstanding capital stock of the Seller; or
(o) any failure by the Initial Purchaser or any of its ERISA Affiliates to
maintain its Benefit Plans in accordance with ERISA or the occurrence of any
event of the type set forth in clauses (i) through (v) of Section 5.2(h) with
respect to any such entity which, in any case, results in a lien on the
Receivables or otherwise has a Material Adverse Effect; or
(p) (i) the Net Investments plus, in the case where the Transferred Interest is
held by a Purchaser, the Interest Component of all outstanding Related
Commercial Paper, shall exceed the Facility Limit or (ii) any Purchaser's
applicable Net Investment (together with the Interest Component of all its
outstanding Related Commercial Paper) shall exceed its Applicable Purchaser
Percentage of the Facility Limit; provided, that, in the event that the Facility
Limit is reduced by the Purchasers pursuant to the definition thereof, a
Termination Event shall occur hereunder if the Net Investments (plus the
Interest Component of outstanding Related Commercial Paper to the extent that
the Transferred Interest is held by a Purchaser) exceeds such Facility Limit, as
reduced, for a period of up to two months after the date of any such reduction;
or
(q) a final judgment or judgments for the payment of money in excess of
$10,000,000 individually (in the case of the Collection Agent, Seller, Initial
Purchaser or any of their respective Subsidiaries other than the Transferor) or
in the aggregate shall be rendered by one or more courts, administrative
tribunals or other bodies having jurisdiction against the Collection Agent,
Seller, Initial Purchaser or any of their respective Subsidiaries and the same
shall not be discharged (or provision shall not be made for such discharge), or
a stay of execution thereof shall not be procured, within 30 days from the date
of entry thereof; or
(r) the Interest Rate Cap Agreement shall not be in full force and effect and no
substitute shall have been obtained therefor within 10 days thereafter, or an
Event of Bankruptcy shall have occurred with respect to the Interest Rate Cap
Provider or the Interest Rate Cap Provider shall repudiate the Interest Rate Cap
Agreement or refuse to make a payment thereunder; or
(s) the Interest Rate Cap Provider is downgraded below the ratings specified in
the definition thereof by either Standard & Poor's or Moody's, respectively, and
is not replaced with a substitute Interest Rate Cap Provider within 10 days; or
(t) the average Excess Spread for any three rolling consecutive Collection
Periods shall be 0% or less.
SECTION 7.2. Termination.
(a) Upon the occurrence of any Termination Event, the Required Purchaser Agents
may, by notice to the other Purchaser Agent and to the Transferor and the
Collection Agent, declare the Termination Date to have occurred; provided,
however, that in the case of any event described in Section 7.1(e), 7.1(f),
7.1(k)(ii), 7.1(p), 7.1(r), 7.1(s) or 7.1(t) above, the Termination Date shall
be deemed to have occurred automatically upon the occurrence of such event. Upon
any such declaration or automatic occurrence, the Purchaser Agents shall have,
in addition to all other rights and remedies under this Agreement or otherwise,
all other rights and remedies provided under the UCC of the applicable
jurisdiction and other applicable laws, all of which rights shall be cumulative.
(b) At all times after the declaration or automatic occurrence of the
Termination Date pursuant to Section 7.2(a), interest shall thereafter be
calculated on the basis of the Base Rate plus 2.00% and all other Carrying Costs
shall accrue interest on the basis of the Base Rate plus 2.00% until, in each
case, such interest and Carrying Costs are paid in full.
ARTICLE VIII
INDEMNIFICATION; EXPENSES; RELATED MATTERS
Indemnities by the Transferor.
Without limiting any other rights which the Administrative
Agent, any of the Purchaser Agents, the Purchasers or the Bank Investors may
have hereunder or under applicable law, each of the Transferor and the
Collection Agent hereby severally agrees to indemnify the Purchasers, the Bank
Investors, the Administrative Agent, the Purchaser Agents, the Collateral Agent,
each Liquidity Provider and each Credit Support Provider and any successors and
permitted assigns and their respective officers, directors and employees
(collectively, "Indemnified Parties") from and against any and all damages,
losses, claims, liabilities, costs and expenses, including, without limitation,
reasonable attorneys' fees (which such attorneys may be employees of a Liquidity
Provider, a Credit Support Provider, the Administrative Agent, any of the
Purchaser Agents or the Collateral Agent, as applicable) and disbursements (all
of the foregoing being collectively referred to as "Indemnified Amounts")
awarded against or incurred by any of them in any action or proceeding between
the Transferor, the Initial Purchaser or the Seller (including, in its capacity
as the Collection Agent, except for indemnification which is being sought
against the Collection Agent) and any of the Indemnified Parties or between any
of the Indemnified Parties and any third party or otherwise arising out of or as
a result of this Agreement, the other Transaction Documents, the ownership or
maintenance, either directly or indirectly, by the Administrative Agent, any of
the Purchaser Agents, a Purchaser or any Bank Investor of the Transferred
Interest or any of the other transactions contemplated hereby or thereby,
excluding, however, (i) Indemnified Amounts to the extent resulting from gross
negligence or willful misconduct on the part of an Indemnified Party or (ii)
recourse (except as otherwise specifically provided in this Agreement) for
uncollectible Receivables. Notwithstanding the foregoing, the indemnity of the
Collection Agent pursuant to this Section shall be limited to Indemnified
Amounts relating to or resulting from any of the following which relate to the
failure, breach or other action of the Collection Agent or the Seller, whether
in its individual capacity or as Collection Agent. Without limiting the
generality of the foregoing, the Transferor shall indemnify each Indemnified
Party for Indemnified Amounts relating to or resulting from all matters set
forth below (other than those described in the preceding sentence):
(i) any representation or warranty made by the Transferor, Initial
Purchaser or the Seller (including, in its capacity as the Collection
Agent) or any officers of the Transferor, the Initial Purchaser or the
Seller (including, in its capacity as the Collection Agent) under or in
connection with this Agreement, the Receivable Purchase Agreements, any
of the other Transaction Documents, any Investor Report or any other
information or report delivered by the Transferor, Seller or the
Collection Agent pursuant hereto, which shall have been false or
incorrect in any material respect when made or deemed made;
(ii) the failure by the Transferor, the Initial Purchaser or the Seller
(including, in its capacity as the Collection Agent) to comply with any
applicable law, rule or regulation with respect to any Receivable or
the related Account, or the nonconformity of any Receivable or the
related Account with any such applicable law, rule or regulation;
(iii) the failure (x) to vest and maintain vested in the Purchaser
Agents, on behalf of their related Purchasers and Bank
Investors, an undivided first priority, perfected percentage
ownership interest (to the extent of the Transferred Interest)
in the Affected Assets free and clear of any Adverse Claim or (y) to
create or maintain a valid and perfected first priority
security interest in favor of the Purchaser Agents, for the benefit
of their related Purchasers and Bank Investors, in the
Affected Assets as contemplated pursuant to Section 10.11 hereof,
free and clear of any Adverse Claim, except that any
ownership interest or security interest created hereunder with
respect to Related Security shall be a first priority
perfected interest only to the extent possible by filing the financing
statements contemplated to be filed hereunder on the
Closing Date (and any amendments thereto or continuations thereof);
(iv) the failure to file, or any delay in filing, financing statements,
continuation statements, or other similar instruments or documents
under the UCC of any applicable jurisdiction or other applicable laws
with respect to any of the Affected Assets;
(v) any dispute, claim, offset or defense (other than discharge in
bankruptcy) of the Obligor to the payment of any Receivable (including,
without limitation, a defense based on such Receivable or the related
Account not being the legal, valid and binding obligation of such
Obligor enforceable against it in accordance with its terms);
(vi) any failure of the Collection Agent to perform its duties or obligations in
accordance with the provisions hereof;
(vii) any products liability claim or personal injury or property damage suit
or other similar or related claim or action of whatever sort arising
out of or in connection with merchandise or services which are the
subject of any Receivable;
(viii) the transfer of an ownership interest in any Receivable other than an
Eligible Receivable;
(ix) the failure by the Transferor or the Seller (individually or as
Collection Agent) to comply with any term, provision or covenant
contained in this Agreement or any of the other Transaction Documents
to which it is a party or to perform any of its respective duties under
the Account Agreements;
(x) [Reserved]
(xi) the failure of PNC, the Seller or Initial Purchaser to pay when due any
taxes, including without limitation, sales, excise or personal property
taxes payable in connection with any of the Receivables;
(xii) any repayment by any Indemnified Party of any amount previously
distributed in reduction of Net Investments which such Indemnified
Party believes in good faith is required to be made;
(xiii) the commingling by the Transferor, the Seller, the Collection Agent, or
Initial Purchaser of Collections of Receivables at any time with other
funds;
(xiv) any investigation, litigation or proceeding related to this Agreement,
any of the other Transaction Documents, the use of proceeds of
Transfers by the Transferor or the Seller, the ownership of Transferred
Interests, or any Receivable or Account;
(xv) any inability to obtain any judgment in or utilize the court or other
adjudication system of, any state in which an Obligor may be located as
a result of the failure of the Transferor or the Seller to qualify to
do business or file any notice of business activity report or any
similar report;
(xvi) any failure of the Transferor or Initial Purchaser to give reasonably
equivalent value to the Initial Purchaser or Seller, respectively, in
consideration of the transfer by the Transferor and the Initial
Purchaser from the Initial Purchaser and the Seller, respectively, of
any Receivable, or any attempt by any Person to void, rescind or set
aside any such transfer under statutory provisions or common law or
equitable action, including, without limitation, any provision of the
Bankruptcy Code; or
(xvii) any action taken by the Transferor, the Seller, the Initial Purchaser
or the Collection Agent (if the Transferor, the Seller or any Affiliate
or designee of the Transferor or the Seller) in the enforcement or
collection of any Receivable;
provided, however, that if a Purchaser enters into agreements for the purchase
of interests in receivables from one or more Other Transferors, such Purchaser
shall allocate such Indemnified Amounts which are in connection with the
Liquidity Provider Agreement, the Credit Support Agreement or the credit support
furnished by the Credit Support Provider to the Transferor and each Other
Transferor; and, provided, further, that if such Indemnified Amounts are
attributable to the Transferor, the Seller, the Initial Purchaser or the
Collection Agent and not attributable to any Other Transferor, the Transferor
shall be solely liable for such Indemnified Amounts or if such Indemnified
Amounts are attributable to Other Transferors and not attributable to the
Transferor, the Seller, the Initial Purchaser or the Collection Agent, such
Other Transferors shall be solely liable for such Indemnified Amounts.
SECTION 8.2. Indemnity for Taxes, Reserves and Expenses.
(a) If after the date hereof, the adoption of any Law or bank regulatory
guideline or any amendment or change in the interpretation of any existing or
future Law or bank regulatory guideline by any Official Body charged with the
administration, interpretation or application thereof, or the compliance with
any directive of any Official Body (in the case of any bank regulatory
guideline, whether or not having the force of Law): (i) shall subject any
Indemnified Party to any tax, duty or other charge (other than Excluded Taxes)
with respect to this Agreement, the other Transaction Documents, the ownership,
maintenance or financing of the Transferred Interest, the Receivables or
payments of amounts due hereunder, or shall change the basis of taxation of
payments to any Indemnified Party of amounts payable in respect of this
Agreement, the other Transaction Documents, the ownership, maintenance
or financing of the Transferred Interest, the Receivables or payments
of amounts due hereunder or its obligation to advance funds hereunder,
under a Liquidity Provider Agreement or the credit support furnished by
a Credit Support Provider or otherwise in respect of this Agreement,
the other Transaction Documents, the ownership, maintenance or
financing of the Transferred Interest or the Receivables (except for
changes in the rate of general corporate, franchise, net income or
other income tax imposed on such Indemnified Party by the jurisdiction
in which such Indemnified Party's principal executive office is
located);
(ii) shall impose, modify or deem applicable any reserve, special deposit or
similar requirement (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System) against
assets of, deposits with or for the account of, or credit extended by, any
Indemnified Party or shall impose on any Indemnified Party or on the United
States market for certificates of deposit or the London interbank
market any other condition affecting this Agreement, the
other Transaction Documents, the ownership, maintenance or financing
of the Transferred Interest, the Receivables or
payments of amounts due hereunder or its obligation to advance funds
hereunder under the Liquidity Provider Agreement or the
credit support provided by a Credit Support Provider or otherwise
in respect of this Agreement, the other Transaction
Documents, the ownership, maintenance or financing of the Transferred
Interest or the Receivables; or
(iii) imposes upon any Indemnified Party any other expense (including,
without limitation, reasonable attorneys' fees and expenses, and
expenses of litigation or preparation therefor in contesting any of the
foregoing) with respect to this Agreement, the other Transaction
Documents, the ownership, maintenance or financing of the Transferred
Interest, the Receivables or payments of amounts due hereunder or its
obligation to advance funds hereunder under a Liquidity Provider
Agreement or the credit support furnished by a Credit Support Provider
or otherwise in respect of this Agreement, the other Transaction
Documents, the ownership, maintenance or financing of the Transferred
Interests or the Receivables,
and the result of any of the foregoing is to increase the cost to such
Indemnified Party with respect to this Agreement, the other Transaction
Documents, the ownership, maintenance or financing of the Transferred Interest,
the Receivables, the obligations hereunder, the funding of any purchases
hereunder, the Liquidity Provider Agreement or the Credit Support Agreement, by
an amount deemed by such Indemnified Party to be material, then, within ten (10)
days after demand by such Indemnified Party, the Transferor shall pay to such
Indemnified Party, such additional amount or amounts as will compensate such
Indemnified Party for such increased cost or reduction.
(b) If any Indemnified Party shall have determined that after the date hereof,
the adoption of any applicable Law or bank regulatory guideline regarding
capital adequacy, or any change therein, or any change in the interpretation
thereof by any Official Body, or any directive regarding capital adequacy (in
the case of any bank regulatory guideline, whether or not having the force of
law) of any such Official Body, has or would have the effect of reducing the
rate of return on capital of such Indemnified Party (or its parent) as a
consequence of such Indemnified Party's obligations hereunder or with respect
hereto to a level below that which such Indemnified Party (or its parent) could
have achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by such Indemnified Party to be material, then from time to time, within ten
(10) days after demand by such Indemnified Party through any of the Purchaser
Agents, the Transferor shall pay to the applicable Purchaser Agent, for the
benefit of such Indemnified Party, such additional amount or amounts as will
compensate such Indemnified Party (or its parent) for such reduction.
(c) The applicable Purchaser Agent will promptly notify the Transferor of any
event of which it has knowledge, occurring after the date hereof, which will
entitle an Indemnified Party to compensation pursuant to this Section 8.2. A
notice by any of the Purchaser Agents or the applicable Indemnified Party
claiming compensation under this Section and setting forth the additional amount
or amounts to be paid to it hereunder shall be conclusive in the absence of
manifest error. In determining such amount, any of the Purchaser Agents or any
applicable Indemnified Party may use any reasonable averaging and attributing
methods.
(d) Anything in this Section 8.2 to the contrary notwithstanding, if a Purchaser
enters into agreements for the acquisition of interests in receivables from one
or more Other Transferors, such Purchaser shall allocate the liability for any
amounts under this Section 8.2 which are in connection with the Liquidity
Provider Agreement, the Credit Support Agreement or the credit support provided
by the Credit Support Provider ("Section 8.2 Costs") to the Transferor and each
Other Transferor; provided, however, that if such Section 8.2 Costs are
attributable to the Transferor, the Seller or the Collection Agent and not
attributable to any Other Transferor, the Transferor shall be solely liable for
such Section 8.2 Costs or if such Section 8.2 Costs are attributable to Other
Transferors and not attributable to the Transferor, the Seller or the Collection
Agent, such Other Transferors shall be solely liable for such Section 8.2 Costs.
SECTION 8.3. Taxes.
All payments made hereunder by the Transferor or the
Collection Agent (each, a "payor") to a Purchaser, any Bank Investor, the
Administrative Agent or any of the Purchaser Agents (each, a "recipient") shall
be made free and clear of and without deduction for any present or future
income, excise, stamp or franchise taxes and any other taxes, fees, duties,
withholdings or other charges of any nature whatsoever imposed by any taxing
authority on any recipient (or any assignee of such parties) (such nonexcluded
items being called "Taxes"), but excluding franchise taxes and taxes imposed on
or measured by the recipient's net income or gross receipts ("Excluded Taxes").
In the event that any withholding or deduction from any payment made by the
payor hereunder is required in respect of any Taxes, then such payor shall:
(a) pay directly to the relevant authority the full amount required to be
so withheld or deducted;
(b) promptly forward to the Purchaser Agents an official receipt or other
documentation satisfactory to the Purchaser Agents evidencing such payment to
such authority; and
(c) pay to the recipient such additional amount or amounts as is necessary to
ensure that the net amount actually received by the recipient will equal the
full amount such recipient would have received had no such withholding or
deduction been required.
Moreover, if any Taxes are directly asserted against any recipient with respect
to any payment received by such recipient hereunder, the recipient may pay such
Taxes and the payor will promptly pay such additional amounts (including any
penalties, interest or expenses) as shall be necessary in order that the net
amount received by the recipient after the payment of such Taxes (including any
Taxes on such additional amount) shall equal the amount such recipient would
have received had such Taxes not been asserted.
If the payor fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to the recipient the required
receipts or other required documentary evidence, the payor shall indemnify the
recipient for any incremental Taxes, interest, or penalties that may become
payable by any recipient as a result of any such failure.
SECTION 8.4. Other Costs, Expenses and Related Matters.
(a) The Transferor agrees, upon receipt of a written invoice, to pay or cause to
be paid, and to save the Purchasers, the Bank Investors, the Administrative
Agent and the Purchaser Agents harmless against liability for the payment of,
all reasonable out-of-pocket expenses (including, without limitation,
attorneys', accountants', rating agencies' and other third parties' fees and
expenses, any filing fees and expenses incurred by officers or employees of the
Purchasers, the Bank Investors, the Administrative Agent and/or any of the
Purchaser Agents) or intangible, documentary or recording taxes incurred by or
on behalf of a Purchaser, any Bank Investor, the Administrative Agent and the
Purchaser Agents (i) in connection with the negotiation, execution, delivery and
preparation of this Agreement, the other Transaction Documents and any documents
or instruments delivered pursuant hereto and thereto and the transactions
contemplated hereby or thereby (including, without limitation, the perfection or
protection of the Transferred Interest) whether or not the transactions
contemplated hereby are consummated and (ii) from time to time (a) relating to
any amendments, waivers or consents under this Agreement and the other
Transaction Documents, (b) arising in connection with a Purchaser's, any Bank
Investor's, the Administrative Agent's, any of the Purchaser Agents' or the
Collateral Agent's enforcement or preservation of rights (including, without
limitation, the perfection and protection of the Transferred Interest under this
Agreement), or (c) arising in connection with any audit, dispute, disagreement,
litigation or preparation for litigation involving this Agreement or any of the
other Transaction Documents (all of such amounts, collectively, "Transaction
Costs").
(b) The Transferor shall pay the Purchaser Agents, for the account of the
Purchasers and the Bank Investors, as applicable, on demand any Early Collection
Fee, including interest thereon, due on account of the receipt by a Purchaser or
any Bank Investor of any amounts applied in reduction of the applicable Net
Investment on any day other than the next Remittance Date or the last day of any
applicable funding period (in the case of any LIBOR-based funding).
SECTION 8.5. Reconveyance Under Certain Circumstances.
The Transferor agrees to accept the reconveyance from the
Purchaser Agents, on behalf of the applicable Purchaser and/or applicable Bank
Investors, of the Transferred Interest if any of the Purchaser Agents notifies
Transferor of a breach of any representation or warranty made or deemed made
pursuant to Sections 3.1(a), (b), (c), (d) or (j) hereof and Transferor shall
fail to cure such breach (including, without limitation, pursuant to Section
2.9(b)) within 15 days (or, in the case of the representations and warranties in
Sections 3.1(d) and 3.1(j) hereof 3 days) of such notice. The reconveyance price
shall be paid by the Transferor to the applicable Purchaser Agent for the
account of the related Purchasers and the Bank Investors, as applicable, in
immediately available funds on such 15th day (or 3rd day, if applicable) in an
amount equal to the Aggregate Unpaids.
ARTICLE IX
THE ADMINISTRATIVE AGENT; BANK COMMITMENT;
PURCHASER AGENTS
Authorization and Action of Administrative Agent.
(a) Each of the Purchaser Agents hereby appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Transaction Documents as are
expressly delegated to the Administrative Agent by the terms hereof and thereof,
together with such powers as are reasonably incidental thereto. In furtherance,
and without limiting the generality, of the foregoing, each of the Purchaser
Agents hereby appoints the Administrative Agent as its agent to execute and
deliver all further instruments and documents, and take all further action that
the Administrative Agent may deem necessary or appropriate or that the Purchaser
Agents may reasonably request in order to perfect, protect or more fully
evidence the interests transferred or to be transferred from time to time by the
Transferor hereunder, or to enable any of them to exercise or enforce any of
their respective rights hereunder, including, without limitation, the execution
by the Administrative Agent as secured party/assignee of such financing or
continuation statements, or amendments thereto or assignments thereof, relative
to all or any of the Receivables now existing or hereafter arising, and such
other instruments or notices, as may be necessary or appropriate for the
purposes stated herein above. With respect to any actions which are incidental
to the actions specifically delegated to the Administrative Agent hereunder, and
in any event with respect to any action taken or to be taken by the
Administrative Agent with respect to the Assigned Rights, the Administrative
Agent shall not be required to take any such incidental action hereunder, but
shall be required to act or to refrain from acting (and shall be fully protected
in acting or refraining from acting) upon the direction of the Purchaser Agents;
provided, however, that the Administrative Agent shall not be required to take
any action hereunder if the taking of such action, in the reasonable
determination of the Administrative Agent, shall be in violation of any
applicable law, rule or regulation or contrary to any provision of this
Agreement or shall expose the Administrative Agent to liability hereunder or
otherwise.
(b) The Administrative Agent shall exercise such rights and powers vested in it
by this Agreement and the other Transaction Documents, 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 such person's own affairs.
SECTION 9.2. Administrative Agent's Reliance, Etc.
Neither the Administrative Agent nor any of its directors,
officers, agents or employees shall be liable for any action taken or omitted to
be taken by it or them as Administrative Agent under or in connection with this
Agreement or any of the other Transaction Documents, except for its or their own
gross negligence or willful misconduct. Without limiting the foregoing, the
Administrative Agent: (i) may consult with legal counsel (including counsel for
the Transferor or the Seller), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (ii) makes no warranty or representation, and shall not
be responsible for, any statements, warranties or representations made in or in
connection with this Agreement; (iii) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement or any of the other Transaction Documents on the
part of the Transferor, the Collection Agent or the Seller or to inspect the
property (including the books and records) of the Transferor, the Collection
Agent or the Seller; (iv) shall not be responsible for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement, any of the other Transaction Documents or any other instrument or
document furnished pursuant hereto or thereto; and (v) shall incur no liability
under or in respect of this Agreement or any of the other Transaction Documents
by acting upon any notice (including notice by telephone), consent, certificate
or other instrument or writing (which may be by telex) believed by it to be
genuine and signed or sent by the proper party or parties.
SECTION 9.3. Credit Decision With Respect to Administrative Agent.
Each of the Purchaser Agents, and each of their related
Purchasers and Bank Investors, acknowledges that it has, independently and
without reliance upon the Administrative Agent, or any of the Administrative
Agent's Affiliates, and based upon such documents and information as it has
deemed appropriate, made its own evaluation and decision to enter into this
Agreement and the other Transaction Documents to which it is a party and, if it
so determines, to accept the transfer of any undivided ownership interest in the
Affected Assets hereunder. Each of the Purchaser Agents, and each of their
related Purchasers and Bank Investors, also acknowledges that it will,
independently and without reliance upon the Administrative Agent or any of the
Administrative Agent's Affiliates, and based on such documents and information
as it shall deem appropriate at the time, continue to make its own decisions in
taking or not taking action under this Agreement and the other Transaction
Documents to which it is a party.
SECTION 9.4. Indemnification of the Administrative Agent.
Each of the Purchaser Agents and Bank Investors agrees to
indemnify the Administrative Agent (to the extent not reimbursed by or on behalf
of the Transferor or the Collection Agent under the Transaction Documents, and
without limiting the obligation of such Persons to do so in accordance with the
Transaction Documents), ratably in accordance with its Pro Rata Share, from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against the
Administrative Agent in any way relating to or arising out of this Agreement or
any action taken or omitted by the Administrative Agent, any of the other
Transaction Documents hereunder or thereunder; provided, however, that none of
the Purchaser Agents shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the Administrative Agent's gross
negligence or willful misconduct. Without limitation of the foregoing, each of
the Purchaser Agents agrees to reimburse the Administrative Agent, ratably as
above described, promptly upon demand for any out-of-pocket expenses (including
counsel fees) incurred by the Administrative Agent in connection with the
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement and the other Transaction
Documents, to the extent that such expenses are incurred in the interests of or
otherwise in respect of the Purchaser Agents hereunder and/or thereunder and to
the extent that the Administrative Agent is not reimbursed for such expenses by
the Transferor.
SECTION 9.5. Successor Administrative Agent.
The Administrative Agent may resign at any time by giving five
(5) days' prior written notice thereof to each of the Purchaser Agents and the
Transferor, such resignation to be effective when the Administrative Agent is
discharged from its duties and obligations as set forth below, and may be
removed at any time with cause by the Purchaser Agents. Upon any such
resignation or removal, the Purchaser Agents shall appoint a successor
Administrative Agent. Each of the Purchaser Agents agrees that it shall not
unreasonably withhold or delay its approval of the appointment of a successor
Administrative Agent. If no such successor Administrative Agent shall have been
so appointed, and shall have accepted such appointment, within 30 days after the
retiring Administrative Agent's giving of notice of resignation or the removal
of the retiring Administrative Agent, then the retiring Administrative Agent
may, on behalf of the Purchaser Agents, appoint a successor Administrative Agent
which successor Administrative Agent shall be either (i) a commercial bank
organized under the laws of the United States or of any state thereof and have a
combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of
such a bank. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Administrative Agent's resignation or removal
hereunder as Administrative Agent, the provisions of this Article IX shall
continue to inure to its benefit as to any actions taken or omitted to be taken
by it while it was Administrative Agent under this Agreement.
SECTION 9.6. Payments by the Administrative Agent.
Unless specifically allocated to the Purchaser Agents pursuant
to the terms of this Agreement, all amounts (if any) received by the
Administrative Agent on behalf of the Purchaser Agents shall be paid by the
Administrative Agent to the Purchaser Agents (at their respective accounts
specified in their respective Assignment and Assumption Agreements) in
accordance with their respective related pro rata interests in the applicable
Net Investment on the Business Day received by the Administrative Agent, unless
such amounts are received after 12:00 noon on such Business Day, in which case
the Administrative Agent shall use its reasonable efforts to pay such amounts to
the Purchaser Agents on such Business Day, but, in any event, shall pay such
amounts to the Purchaser Agents in accordance with their respective related pro
rata interests in the applicable Net Investment not later than the following
Business Day.
SECTION 9.7. Bank Commitment; Assignment to Bank Investors.
(a) Bank Commitment.
At any time on or prior to the Commitment
Termination Date, in the event that Enterprise does not effect an
Incremental Transfer as requested under Section 2.2(a), then at any time, the
Transferor shall have the right to require Enterprise to assign its Net
Investment in whole to the Enterprise Bank Investors pursuant to this Section
9.7. In addition, at any time on or prior to the Commitment Termination Date (i)
upon the occurrence of an Enterprise Wind-Down Event or (ii) upon the occurrence
of a Termination Event that results in the Termination Date or Special
Termination Date with respect to Enterprise or (iii) Enterprise elects to give
notice to the Transferor of a Reinvestment Termination Date or (iv) after
Enterprise elects to amortize its Net Investment or elects not to make an
additional Incremental Transfer, the Transferor hereby requests and directs that
Enterprise assign its Net Investment in whole to the Enterprise Bank Investors
pursuant to this Section 9.7 and the Transferor hereby agrees to pay the amounts
described in Section 9.7(d) below. Upon any such election by Enterprise or any
such request by the Transferor, Enterprise shall be deemed to have made such
assignment to the Enterprise Bank Investors and the Enterprise Bank Investors
shall be deemed to have accepted such assignment from Enterprise and to have
assumed all of Enterprise's obligations hereunder, in each case without any
further action on the part of either Enterprise or the Enterprise Bank
Investors. In connection with any assignment from Enterprise to the Enterprise
Bank Investors pursuant to this Section 9.7, each Enterprise Bank Investor
shall, on the date of such assignment, pay to Enterprise an amount equal to its
Assignment Amount. If such Assignment Amount is not paid on such date, such
Enterprise Bank Investor shall pay interest thereon to Enterprise at the per
annum rate of 2% in excess of clause (x) of the definition of the Base Rate from
such date until such amount is paid in full. Upon any assignment by Enterprise
to the Enterprise Bank Investors contemplated hereunder, Enterprise shall cease
to make any additional Incremental Transfers hereunder.
(b) Assignment.
No Enterprise Bank Investor may assign all or a
portion of its interests in the applicable Net Investment,
the Receivables, and Collections, Proceeds and Related Security with respect
thereto and its rights and obligations hereunder to any Person unless approved
in writing by the Transferor, the Administrative Agent, and the Enterprise
Agent. In connection with any such assignment by an Enterprise Bank Investor to
another Person, the assignor shall deliver to the assignee(s) an Assignment and
Assumption Agreement, duly executed, assigning to the assignee a pro rata
interest in its Net Investment, the Receivables, and Collections, Proceeds and
Related Security with respect thereto and the assignor's rights and obligations
hereunder and the assignor shall promptly execute and deliver all further
instruments and documents, and take all further action, that the assignee may
reasonably request, in order to protect, or more fully evidence the assignee's
right, title and interest in and to such interest and to enable the Enterprise
Agent, on behalf of such assignee, to exercise or enforce any rights hereunder
and under the other Transaction Documents to which such assignor is or,
immediately prior to such assignment, was a party. Upon any such assignment, (i)
the assignee shall have all of the rights and obligations of the assignor
hereunder and under the other Transaction Documents to which such assignor is
or, immediately prior to such assignment, was a party with respect to such
interest for all purposes of this Agreement and under the other Transaction
Documents to which such assignor is or, immediately prior to such assignment,
was a party (it being understood that the Bank Investors, as assignees, shall
(x) be obligated to fund Incremental Transfers under Section 2.2(a) hereof in
accordance with the terms thereof, notwithstanding that Enterprise was not so
obligated and (y) not have the right to elect the commencement of the
amortization of its Net Investment pursuant to the definition of "Reinvestment
Termination Date", notwithstanding that Enterprise had such right) and (ii) the
assignor shall relinquish its rights with respect to such interest for all
purposes of this Agreement and under the other Transaction Documents to which
such assignor is or, immediately prior to such assignment, was a party. No such
assignment shall be effective unless a fully executed copy of the related
Assignment and Assumption Agreement shall be delivered to the Administrative
Agent, the Enterprise Agent and the Transferor. All costs and expenses of the
Administrative Agent, the Enterprise Agent and the assignor and assignee
incurred in connection with any assignment hereunder shall be borne by the
Transferor and not by the assignor or any such assignee. No Enterprise Bank
Investor shall assign any portion of its Commitment hereunder without also
simultaneously assigning an equal portion of its interest in the related
Liquidity Provider Agreement.
(c) Effects of Assignment.
By executing and delivering an Assignment and
Assumption Agreement, the assignor and assignee thereunder
confirm to and agree with each other and the other parties hereto as follows:
(i) other than as provided in such Assignment and Assumption Agreement, the
assignor makes no representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in or in
connection with this Agreement, the other Transaction Documents or any other
instrument or document furnished pursuant hereto or thereto or the execution,
legality, validity, enforceability, genuineness, sufficiency or value or this
Agreement, the other Transaction Documents or any such other instrument or
document; (ii) the assignor makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Transferor, the
Seller or the Collection Agent or the performance or observance by the
Transferor, the Seller or the Collection Agent of any of their respective
obligations under this Agreement, the Receivables Purchase Agreement, the other
Transaction Documents or any other instrument or document furnished pursuant
hereto; (iii) such assignee confirms that it has received a copy of this
Agreement, the Receivables Purchase Agreement and such other instruments,
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Assumption Agreement and
to purchase such interest; (iv) such assignee will, independently and without
reliance upon the Administrative Agent, the Enterprise Agent or any of their
Affiliates, or the assignor and based on such agreements, documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement and the
other Transaction Documents; (v) such assignee appoints and authorizes the
Enterprise Agent to take such action as agent on its behalf and to exercise such
powers under this Agreement, the other Transaction Documents and any other
instrument or document furnished pursuant hereto or thereto as are delegated to
such agent by the terms hereof or thereof, together with such powers as are
reasonably incidental thereto and to enforce its respective rights and interests
in and under this Agreement, the other Transaction Documents, the Receivables
and the Account Agreements; (vi) such assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of this
Agreement and the other Transaction Documents are required to be performed by it
as the assignee of the assignor; and (vii) such assignee agrees that it will not
institute against Enterprise any proceeding of the type referred to in Section
10.9 hereof prior to the date which is one year and one day after the payment in
full of all Commercial Paper issued by Enterprise.
(d) Transferor's Obligation to Pay Certain Amounts; Additional Assignment
Amount.
The Transferor shall pay to the Enterprise Agent
for the account of Enterprise, in connection with any
assignment by Enterprise to the Enterprise Bank Investors pursuant to this
Section 9.7, an aggregate amount equal to all Carrying Costs to accrue through
the end of each outstanding funding period plus all other Aggregate Unpaids
(other than the applicable Net Investment). To the extent that such Carrying
Costs relate to interest or discount on Related Commercial Paper, if the
Transferor fails to make payment of such amounts at or prior to the time of
assignment by Enterprise to the Enterprise Bank Investors, such amount shall be
paid by the Enterprise Bank Investors (in accordance with their respective
Special Pro Rata Shares) to Enterprise as additional consideration for the
interests assigned to the Enterprise Bank Investors and the amount of the "Net
Investments" hereunder held by the Enterprise Bank Investors shall be increased
by an amount equal to the additional amount so paid by the Enterprise Bank
Investors.
(e) Administration of Agreement After Assignment.
After any assignment by Enterprise to the Enterprise
Bank Investors pursuant to this Section 9.7 (and the
payment of all amounts owing to such Purchaser in connection therewith), all
rights of the Enterprise Agent and the Collateral Agent set forth herein shall
be deemed to be afforded to the Enterprise Agent on behalf of the Enterprise
Bank Investors instead of either such party.
(f) Payments.
After any assignment by Enterprise to the
Enterprise Bank Investors pursuant to this Section 9.7, all
payments to be made hereunder by the Transferor or the Collection Agent to
Enterprise shall be made to the account of the Enterprise Agent, as such account
shall have been notified to the Transferor and the Collection Agent. In the
event that the Assignment Amount paid by the Enterprise Bank Investors pursuant
to Section 9.7(a) is less than the sum of the applicable Net Investment plus the
Interest Component of all outstanding Related Commercial Paper, then to the
extent payments made hereunder in respect of the applicable Net Investment
(excluding interest) exceed the Assignment Amount, such excess amounts shall be
remitted by the Enterprise Agent to Enterprise.
(g) Downgrade of Bank Investor.
If at any time prior to any assignment by
Enterprise to the Enterprise Bank Investors as contemplated
pursuant to this Section 9.7, the short term debt rating of any Enterprise Bank
Investor shall be "A-2" or "P-2" from Standard & Poor's or Moody's,
respectively, with negative credit implications, such Enterprise Bank Investor,
upon request of the Enterprise Agent, shall, within 30 days of such request,
assign its rights and obligations hereunder to another financial institution
(which institution's short term debt shall be rated at least "A-2" and "P-2"
from Standard & Poor's and Moody's, respectively, and which shall not be so
rated with negative credit implications). If the short term debt rating of an
Enterprise Bank Investor shall be "A-3" or "P-3", or lower, from Standard &
Poor's or Moody's, respectively (or such rating shall have been withdrawn by
Standard & Poor's or Moody's), such Bank Investor, upon request of the
Enterprise Agent, shall, within five (5) Business Days of such request, assign
its rights and obligations hereunder to another financial institution (which
institution's short term debt shall be rated at least "A-2" and "P-2" from
Standard & Poor's and Moody's, respectively, and which shall not be so rated
with negative credit implications). In either such case, if any such Enterprise
Bank Investor shall not have assigned its rights and obligations under this
Agreement within the applicable time period described above, Enterprise shall
have the right to require such Enterprise Bank Investor to pay to the Enterprise
Agent an amount equal to such Enterprise Bank Investor's Commitment for deposit
by the Enterprise Agent into an account, in the name of the Enterprise Agent,
which shall be in satisfaction of such Enterprise Bank Investor's obligation to
make Incremental Purchases and to accept an assignment from Enterprise in
accordance with Section 9.7 hereof. The amount on deposit in such account shall
be invested by the Enterprise Agent in Eligible Investments and such Eligible
Investments shall have a term of no more than 30 days, at the Enterprise Agent's
sole discretion. The Enterprise Agent shall remit to such Enterprise Bank
Investor, monthly, the income thereon. Nothing in the three preceding sentences
shall affect or diminish in any way any such downgraded Enterprise Bank
Investor's Commitment to the Transferor or such downgraded Enterprise Bank
Investor's other obligations and liabilities hereunder and under the other
Transaction Documents.
(h) Bank Investor Consent.
Upon the occurrence and during the continuance of any
Termination Event or Potential Termination Event, the
Enterprise Agent shall take no action hereunder (other than ministerial actions
or such actions as are specifically provided for herein) without the prior
consent of the Enterprise Majority Investors (which consent shall not be
unreasonably withheld or delayed). The Enterprise Agent shall not, without the
prior written consent of all Enterprise Bank Investors, agree to (i) amend,
modify or waive any provision of this Agreement in any way which would (A)
reduce or impair Collections or the payment of interest or fees payable
hereunder to such Bank Investors or delay the scheduled dates for payment of
such amounts, (B) increase the Servicing Fee (other than as permitted pursuant
to Section 6.2(b)), (C) modify any provisions of this Agreement or the
Receivables Purchase Agreement relating to the timing of payments required to be
made by the Transferor or the Seller or the application of the proceeds of such
payments, (D) permit the appointment of any Person (other than the
Administrative Agent) as successor Collection Agent, (E) release any property
from the lien provided by this Agreement (other than as expressly contemplated
herein) or (F) extend or permit the extension of the Commitment Termination Date
without the consent of each such Enterprise Bank Investor. The Enterprise Agent
shall not agree to any amendment of this Agreement which increases the dollar
amount of an Enterprise Bank Investor's Commitment without the prior consent of
such Enterprise Bank Investor. In addition, the Enterprise Agent shall not agree
to any amendment of this Agreement not specifically described in the two
preceding sentences without the consent of the Enterprise Majority Investors
(which consent shall not be unreasonably withheld or delayed). "Enterprise
Majority Investors" shall mean at any time, the Enterprise Agent and those
Enterprise Bank Investors which hold Commitments aggregating in excess of 66 and
2/3% of Enterprise's Pro Rata Share of the Facility Limit as of such date. In
the event the Enterprise Agent requests an Enterprise Bank Investor's consent
pursuant to the foregoing provisions and the Enterprise Agent does not receive a
consent (either positive or negative) from such Enterprise Bank Investor within
10 Business Days of such Enterprise Bank Investor's receipt of such request,
then such Enterprise Bank Investor (and its percentage interest hereunder) shall
be disregarded in determining whether the Enterprise Agent shall have obtained
sufficient consent hereunder.
SECTION 9.8. Authorization and Action of Enterprise Agent.
(a) Enterprise and each Enterprise Bank Investor hereby appoints and authorizes
the Enterprise Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Transaction Documents as are
delegated to the Enterprise Agent by the terms hereof and thereof, together with
such powers as are reasonably incidental thereto. In furtherance, and without
limiting the generality, of the foregoing, Enterprise and each Enterprise Bank
Investor hereby appoints the Enterprise Agent as its agent to execute and
deliver all further instruments and documents, and take all further action that
the Enterprise Agent may deem necessary or appropriate or that Enterprise or an
Enterprise Bank Investor may reasonably request in order to perfect, protect or
more fully evidence the interests transferred or to be transferred from time to
time by the Transferor hereunder, or to enable any of them to exercise or
enforce any of their respective rights hereunder, including, without limitation,
the execution by the Enterprise Agent as secured party/assignee of such
financing or continuation statements, or amendments thereto or assignments
thereof, relative to all or any of the Receivables now existing or hereafter
arising, and such other instruments or notices, as may be necessary or
appropriate for the purposes stated herein above. Enterprise and the Enterprise
Majority Investors may direct the Enterprise Agent to take any such incidental
action hereunder. With respect to other actions which are incidental to the
actions specifically delegated to the Enterprise Agent hereunder, the Enterprise
Agent shall not be required to take any such incidental action hereunder, but
shall be required to act or to refrain from acting (and shall be fully protected
in acting or refraining from acting) upon the direction of Enterprise and the
Enterprise Majority Investors; provided, however, that the Enterprise Agent
shall not be required to take any action hereunder if the taking of such action,
in the reasonable determination of the Enterprise Agent, shall be in violation
of any applicable law, rule or regulation or contrary to any provision of this
Agreement or shall expose the Enterprise Agent to liability hereunder or
otherwise.
(b) The Enterprise Agent shall exercise such rights and powers vested in it by
this Agreement and the other Transaction Documents, 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 such person's own affairs. SECTION
9.9. Reliance, Etc. of Enterprise Agent.
Neither the Enterprise Agent nor any of its directors,
officers, agents or employees shall be liable for any action taken or omitted to
be taken by it or them as Enterprise Agent under or in connection with this
Agreement or any of the other Transaction Documents, except for its or their own
gross negligence or willful misconduct. Without limiting the foregoing, the
Enterprise Agent: (i) may consult with legal counsel (including counsel for the
Transferor or the Seller), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (ii) makes no warranty or representation to Enterprise
or any Enterprise Bank Investor and shall not be responsible to Enterprise or
any Enterprise Bank Investor for any statements, warranties or representations
made in or in connection with this Agreement; (iii) shall not have any duty to
ascertain or to inquire as to the performance or observance of any of the terms,
covenants or conditions of this Agreement or any of the other Transaction
Documents on the part of the Transferor, the Collection Agent or the Seller or
to inspect the property (including the books and records) of the Transferor, the
Collection Agent or the Seller; (iv) shall not be responsible to a Purchaser or
any Bank Investor for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, any of the other
Transaction Documents or any other instrument or document furnished pursuant
hereto or thereto; and (v) shall incur no liability under or in respect of this
Agreement or any of the other Transaction Documents by acting upon any notice
(including notice by telephone), consent, certificate or other instrument or
writing (which may be by telex) believed by it to be genuine and signed or sent
by the proper party or parties.
SECTION 9.10. Credit Decision with respect to Enterprise.
Enterprise and each Enterprise Bank Investor acknowledges that
it has, independently and without reliance upon the Enterprise Agent, any of the
Enterprise Agent's Affiliates, any other Enterprise Bank Investor or Enterprise
(in the case of any Enterprise Bank Investor) and based upon such documents and
information as it has deemed appropriate, made its own evaluation and decision
to enter into this Agreement and the other Transaction Documents to which it is
a party and, if it so determines, to accept the transfer to the Enterprise Agent
on its behalf of any undivided ownership interest in the Affected Assets
hereunder. Enterprise and each Enterprise Bank Investor also acknowledges that
it will, independently and without reliance upon the Enterprise Agent, any of
the Enterprise Agent's Affiliates, any other Enterprise Bank Investor or
Enterprise (in the case of any Enterprise Bank Investor) and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own decisions in taking or not taking action under this Agreement and
the other Transaction Documents to which it is a party.
SECTION 9.11. Indemnification of Enterprise Agent.
The Enterprise Bank Investors agree to indemnify the
Enterprise Agent (to the extent not reimbursed by the Transferor), ratably in
accordance with their Special Pro Rata Shares, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against the Enterprise Agent in any way
relating to or arising out of this Agreement or any action taken or omitted by
the Enterprise Agent, any of the other Transaction Documents hereunder or
thereunder; provided, however, that the Enterprise Bank Investors shall not be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Enterprise Agent's gross negligence or willful misconduct. Without
limitation of the foregoing, the Enterprise Bank Investors agree to reimburse
the Enterprise Agent, ratably in accordance with their Special Pro Rata Shares,
promptly upon demand for any out-of-pocket expenses (including counsel fees)
incurred by the Enterprise Agent in connection with the administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement and the other Transaction Documents, to
the extent that such expenses are incurred in the interests of or otherwise in
respect of the Enterprise Bank Investors hereunder and/or thereunder and to the
extent that the Enterprise Agent is not reimbursed for such expenses by the
Transferor.
SECTION 9.12. Successor Agent to Enterprise Agent.
The Enterprise Agent may resign at any time by giving written
notice thereof to each Enterprise Bank Investor, Enterprise, the Administrative
Agent and the Transferor and may be removed at any time with cause by the
Enterprise Majority Investors. Upon any such resignation or removal, Enterprise
and the Enterprise Majority Investors shall appoint a successor Enterprise
Agent. Enterprise and each Enterprise Bank Investor agrees that it shall not
unreasonably withhold or delay its approval of the appointment of a successor
Enterprise Agent. If no such successor Enterprise Agent shall have been so
appointed, and shall have accepted such appointment, within 30 days after the
retiring Enterprise Agent's giving of notice of resignation or the Enterprise
Majority Investors' removal of the retiring Enterprise Agent, then the retiring
Enterprise Agent may, on behalf of Enterprise and the Enterprise Bank Investors,
appoint a successor Enterprise Agent which successor Enterprise Agent shall be
either (i) a commercial bank organized under the laws of the United States or of
any state thereof and have a combined capital and surplus of at least
$50,000,000 or (ii) an Affiliate of such a bank. Upon the acceptance of any
appointment as Enterprise Agent hereunder by a successor Enterprise Agent, such
successor Enterprise Agent shall thereupon succeed to and become vested with all
the rights, powers, privileges and duties of the retiring Enterprise Agent, and
the retiring Enterprise Agent shall be discharged from its duties and
obligations under this Agreement. After any retiring Enterprise Agent's
resignation or removal hereunder as Enterprise Agent, the provisions of this
Article IX shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was Enterprise Agent under this Agreement.
SECTION 9.13. Payments by the Purchaser Agents.
Unless specifically allocated to a Bank Investor pursuant to
the terms of this Agreement, all amounts received by the applicable Purchaser
Agent on behalf of the Bank Investors shall be paid by such Purchaser Agent to
the Bank Investors (at their respective accounts specified in their respective
Assignment and Assumption Agreements) in accordance with their respective
related pro rata interests in the applicable Net Investment on the Business Day
received by such Purchaser Agent, unless such amounts are received after 12:00
noon on such Business Day, in which case such Purchaser Agent shall use its
reasonable efforts to pay such amounts to the Bank Investors on such Business
Day, but, in any event, shall pay such amounts to the Bank Investors in
accordance with their respective related pro rata interests in the applicable
Net Investment not later than the following Business Day.
ARTICLE X
MISCELLANEOUS
Term of Agreement.
This Agreement shall terminate on the date following the later
of a Termination Date and a Special Termination Date upon which the Net
Investments have been reduced to zero and all other Aggregate Unpaids have been
paid in full, in each case, in cash; provided, however, that (i) the rights and
remedies of the Administrative Agent, the Purchaser Agents, the Purchasers and
the Bank Investors with respect to any representation and warranty made or
deemed to be made by the Transferor pursuant to this Agreement, (ii) the
indemnification and payment provisions of Article VIII, and (iii) the agreement
set forth in Section 10.9 hereof, shall be continuing and shall survive any
termination of this Agreement.
SECTION 10.2. Waivers; Amendments.
No failure or delay on the part of the Administrative Agent,
any of the Purchaser Agents, a Purchaser or any Bank Investor in exercising any
power, right or remedy under this Agreement shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power, right or remedy
preclude any other further exercise thereof or the exercise of any other power,
right or remedy. The rights and remedies herein provided shall be cumulative and
nonexclusive of any rights or remedies provided by law. Any provision of this
Agreement may be amended or waived if, but only if, in the case of any
amendment, such amendment is in writing and is signed by the Transferor, the
Purchasers, the Administrative Agent, the Purchaser Agents and the Bank
Investors holding Commitments aggregating 66 and 2/3 % of the Pro Rata Share of
its related Purchaser's Facility Limit and in the case of any waiver, such
waiver is granted in writing by the Administrative Agent, Purchaser Agents and
such Bank Investors. The Transferor shall notify each Rating Agency then rating
the Commercial Paper of any Purchaser of any waiver or amendment with respect to
this Agreement, and, as to each material waiver or amendment (other than any
extension of the Commitment Termination Date or decrease in the Facility Limit),
shall obtain confirmation by such Rating Agency that such material waiver or
amendment shall not result in a reduction or withdrawal of any such rating.
SECTION 10.3. Notices.
Except as provided below, all communications and notices
provided for hereunder shall be in writing (including telecopy or electronic
facsimile transmission or similar writing) and shall be given to the other party
at its address or telecopy number set forth below or at such other address or
telecopy number as such party may hereafter specify for the purposes of notice
to such party. Each such notice or other communication shall be effective (i) if
given by telecopy, when such telecopy is transmitted to the telecopy number
specified in this Section 10.3 and confirmation is received, (ii) if given by
mail 3 Business Days following such posting, postage prepaid, U.S. certified or
registered, (iii) if given by overnight courier, one (1) Business Day after
deposit thereof with a national overnight courier service, or (iv) if given by
any other means, when received at the address specified in this Section 10.3.
However, anything in this Section to the contrary notwithstanding, the
Transferor hereby authorizes the Purchasers to effect Transfers and funding
period selections based on telephonic notices made by any Person which the
Purchasers in good faith believe to be acting on behalf of the Transferor. The
Transferor agrees to deliver promptly to the Purchasers a written confirmation
of each telephonic notice signed by an authorized officer of Transferor.
However, the absence of such confirmation shall not affect the validity of such
notice. If the written confirmation differs in any material respect from the
action taken by the Purchasers, the records of the Purchasers shall govern
absent manifest error.
If to Enterprise:
Enterprise Funding Corporation
c/o Merrill Lynch Money Markets, Inc.
World Financial Center
South Tower, 8th Floor
225 Liberty Street
New York, NY 10080
Attention: Gerard Haugh
Telephone: (212) 236-7200
Telecopy: (212) 236-7584
(with a copy to the Enterprise Agent)
Payment Information:
Bankers Trust Company
New York, New York
ABA: 021 001 033
BNF: BTCo as Depository for EFC
Account #: 000 362 917
Ref: Metris - PNC
Attention: Stacy Coulon
If to PARCO:
Park Avenue Receivables Corporation
c/o Global Securitization Services, LLC
25 West 43rd Street, Suite 704
New York, New York 10036
Attention: President
Telephone: (212) 302-5151
Telecopy: (212) 302-8767
(with a copy to the PARCO Agent)
Payment Information:
Chase Manhattan Bank
New York, New York
ABA: 021-000-021
Account: 507839463
Account #: 507839463
For account of:Park Avenue Receivables Corp.
Ref: Metris/PNC
If to Sheffield:
Sheffield Receivables Corporation
c/o Barclays Bank plc
222 Broadway, 7th Floor
New York, New York 10030
Attention: Mike Wade
Telephone: (212) 412-7554
Telecopy: (212) 412-6846
(with a copy to the Sheffield Agent)
Payment Information:
Barclays Bank plc
New York, New York 10038
ABA: 026 0025-74
Account #: 050 791 516
Ref: Sheffield Funding Account/Metris
If to the Transferor:
Metris Asset Funding Co.
600 South Highway 169, Suite 300
St. Louis Park, MN 55426
Telephone: (612) 525-5024
Telecopy: (612) 525-5070
Payment Information:
Bank: Norwest Bank, N.A. Minnesota
ABA 091 000 019
Account #: 6355055112
Reference: EFC/PNC National Bank
If to the Collection Agent:
Direct Merchants Credit Card Bank, N.A.
6909 East Greenway Parkway
Scottsdale, AZ 85254
Telephone: (602) 718-4600
Telecopy: (602) 718-4830
If to the Collateral Agent:
NationsBank, N.A.
NationsBank Corporate Center -- 10th Floor
Charlotte, North Carolina 28255
Attention: Michelle M. Heath,
Structured Finance
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
If to the PARCO Agent:
The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001
Attention: Structured Finance Services
Telephone: (212) 946-7861
Telecopy: (212) 946-7776
If to the Sheffield Agent:
Barclays Bank plc,
222 Broadway, 7th Floor
New York, New York 10035
Attention: Mary Logan
Telephone: (212) 412-3266
Telecopy: (212) 412-6846
If to the Enterprise Agent or the Administrative
Agent:
NationsBank, N.A.
NationsBank Corporate Center, -- 10th Floor
Charlotte, North Carolina 28255
Attention: Michelle M. Heath, Structured
Finance
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
Payment Information:
NationsBank, N.A.
ABA: 053000196
for the account of IBG Operations/Admin.
Account #: 1093601650000
Ref: Metris PNC
Attention: Jennifer Luhia
If to the Bank Investors, at their respective addresses set
forth on the signature pages hereto or of the Assignment and Assumption
Agreement pursuant to which it became a party hereto.
SECTION 10.4. Governing Law; Submission to Jurisdiction; Integration.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. Each of the parties hereto agrees that a final
judgment in any such court shall be conclusive and may be enforced in such and
other jurisdictions by suit on the judgment or in any other manner provided by
law. Each of the Collection Agent and the Transferor hereby irrevocably waives,
to the fullest extent it may effectively do so, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum in connection with any objection based on
lack of personal jurisdiction. Nothing in this Section 10.4 shall affect the
right of the Purchasers to bring any action or proceeding against the
Transferor, the Collection Agent or their property in the courts of other
jurisdictions.
(b) EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE AMONG ANY OF THEM ARISING OUT OF, CONNECTED WITH, RELATING TO OR
INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR
THE OTHER TRANSACTION DOCUMENTS.
(c) This Agreement contains the final and complete integration of all prior
expressions by the parties hereto with respect to the subject matter hereof and
shall constitute the entire Agreement among the parties hereto with respect to
the subject matter hereof superseding all prior oral or written understandings.
(d) Each of the parties hereto irrevocably consents to service of process in the
manner provided for notices in Section 10.3. Nothing in this Agreement will
affect the right of any party hereto to serve process in any other manner
permitted by law.
SECTION 10.5. Severability; Counterparts.
This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which when taken together
shall constitute one and the same Agreement. Any provisions of this Agreement
which are prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 10.6. Successors and Assigns.
(a) This Agreement shall be binding on the parties hereto and their respective
successors and assigns; provided, however, that neither the Transferor nor the
Seller may assign any of its rights or delegate any of its duties hereunder or
under the Receivables Purchase Agreement or under any of the other Transaction
Documents to which it is a party without the prior written consent of the
Administrative Agent and the Purchaser Agents. No provision of this Agreement
shall in any manner restrict the ability of a Purchaser or any Bank Investor to
assign, participate, grant security interests in, or otherwise transfer any
portion of the Transferred Interest.
(b) Without limiting the foregoing, a Purchaser may, from time to time, with
prior or concurrent notice to Transferor and Collection Agent, in one
transaction or a series of transactions, assign all or a portion of its Net
Investment and its rights and obligations under this Agreement and any other
Transaction Documents to which it is a party to a Conduit Assignee. Upon and to
the extent of such assignment by such Purchaser to a Conduit Assignee, (i) such
Conduit Assignee shall be the owner of the assigned portion of the applicable
Net Investment, (ii) the related administrative or managing agent for such
Purchaser will act as the agent hereunder for such Conduit Assignee, with all
corresponding rights and powers, express or implied, granted to the Purchaser
Agent hereunder or under the other Transaction Documents, (iii) such Conduit
Assignee and its liquidity support provider(s) and credit support provider(s)
and other related parties shall have the benefit of all the rights and
protections provided to such Purchaser and its Liquidity Support Provider(s) and
Credit Support Provider(s), respectively, herein and in the other Transaction
Documents (including, without limitation, any limitation on recourse against
such Purchaser or related parties, any agreement not to file or join in the
filing of a petition to commence an insolvency proceeding against such
Purchaser, and the right to assign to another Conduit Assignee as provided in
this paragraph), (iv) such Conduit Assignee shall assume all (or the assigned or
assumed portion) of such Purchaser's obligations, if any, hereunder or any other
Transaction Document, and such Purchaser shall be released from such
obligations, in each case to the extent of such assignment, and the obligations
of such Purchaser and such Conduit Assignee shall be several and not joint, (v)
all distributions in respect of the Net Investments shall be made to the
applicable Purchaser Agent or administrative agent, as applicable, on behalf of
such Purchaser and such Conduit Assignee on a pro rata basis according to their
respective interests, (vi) the definition of the term "Interest Component" with
respect to the portion of the Net Investments funded with commercial paper
issued by such Purchaser from time to time shall be determined in the manner set
forth in the definition of " Interest Component" applicable to such Purchaser on
the basis of the interest rate or discount applicable to commercial paper issued
by such Conduit Assignee (rather than such Purchaser), (vii) the defined terms
and other terms and provisions of this Agreement and the other Transaction
Documents shall be interpreted in accordance with the foregoing, and (viii) if
requested by any of the Purchaser Agents or the administrative agent with
respect to the Conduit Assignee, the parties will execute and deliver such
further agreements and documents and take such other actions as the applicable
Purchaser Agent or such administrative agent may reasonably request to evidence
and give effect to the foregoing. No Assignment by such Purchaser to a Conduit
Assignee of all or any portion of the applicable Net Investment shall (A) in any
way diminish the related Bank Investors' obligation under Section 9.9 to fund
any Incremental Transfer not funded by such Purchaser or such Conduit Assignee
or to acquire from such Purchaser or such Conduit Assignee all or any portion of
the applicable Net Investment or (B) result in the liability of the Transferor
for any Section 8.2 Costs which are higher than those then applicable to such
Purchaser.
(c) Each of the Transferor and the Seller hereby agrees and consents to the
assignment by a Purchaser from time to time of all or any part of its rights
under, interest in and title to this Agreement and the Transferred Interest to
any Liquidity Provider or to any Conduit Assignee as set forth in section
10.6(b). In addition, each of the Transferor and the Seller hereby consents to
and acknowledges the assignment by such Purchaser of all of its rights under,
interest in and title to this Agreement and the Transferred Interest to the
Collateral Agent, in the case of Enterprise, and the collateral agent for each
of the other Purchasers in the case of such other Purchasers.
SECTION 10.7. Waiver of Confidentiality.
Each of the Transferor and the Seller hereby consents to the
disclosure of any nonpublic information with respect to it received by a
Purchaser, the Administrative Agent, any of the Purchaser Agents or any Bank
Investor to any of a Purchaser, the Administrative Agent, any of the Purchaser
Agents, any nationally recognized rating agency rating such Purchaser's
Commercial Paper, the Collateral Agent, any Bank Investor or potential Bank
Investor, the Liquidity Provider, the Credit Support Provider or any dealers of
Commercial Paper in relation to this Agreement; provided, that each Purchase
Agent will notify the Transferor in advance of its sending nonpublic information
to a potential related Bank Investor and will use its best efforts to obtain
executed confidentiality agreements covering the disclosure of any such
information to any Bank Investor, potential Bank Investor, Liquidity Provider or
Credit Support Provider other than the Purchaser Agents.
SECTION 10.8. Confidentiality Agreement.
Each of the Transferor and the Collection Agent hereby agrees
that it will not disclose the contents of this Agreement or any other
proprietary or confidential information of a Purchaser, the Administrative
Agent, any of the Purchaser Agents, the Collateral Agent, any Liquidity Provider
or any Bank Investor to any other Person except (i) its auditors and attorneys,
employees or financial advisors (other than any commercial bank) and any
nationally recognized rating agency, provided such auditors, attorneys,
employees, financial advisors or rating agencies are informed of the highly
confidential nature of such information or (ii) as otherwise required by
applicable law (including any disclosure required to be made under the rules of
the Securities and Exchange Commission) or order of a court of competent
jurisdiction.
SECTION 10.9. No Bankruptcy Petition Against the Purchasers.
(a) Each of the parties hereto (other than Enterprise) hereby covenants and
agrees that, prior to the date which is one year and one day after the payment
in full of all outstanding Commercial Paper or other indebtedness of Enterprise,
it will not institute against, or join any other Person in instituting against,
Enterprise any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings or other similar proceeding under the laws of the United
States or any state of the United States.
(b) Each of the parties hereto (other than PARCO) hereby covenants and agrees
that, prior to the date which is one year and one day after the payment in full
of all outstanding Commercial Paper or other Indebtedness of PARCO, it will not
institute against, or join any other Person in instituting against, PARCO any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings
or other similar proceedings under the laws of the United States or any state of
the United States.
(c) Each of the parties hereto (other than Sheffield) hereby covenants and
agrees that, prior to the date which is one year and one day after the payment
in full of all outstanding Commercial Paper or other indebtedness of Sheffield,
it will not institute against, or join any other Person in instituting against,
Sheffield any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other similar proceedings under the laws of the United States or
any state of the United States.
SECTION 10.10. No Recourse Against Stockholders, Officers or Directors.
(a) (i) No recourse under any obligation, covenant or agreement of Enterprise
contained in this Agreement shall be had against Merrill Lynch Money Markets
Inc. (or any affiliate thereof) or any stockholder, officer or director of
Enterprise, as such, by the enforcement of any assessment or by any legal or
equitable proceeding, by virtue of any statute or otherwise; it being expressly
agreed and understood that this Agreement is solely a corporate obligation of
Enterprise, and that no personal liability whatsoever shall attach to or be
incurred by Merrill Lynch Money Markets Inc. (or any affiliate thereof) or the
stockholders, officers or directors of such Purchaser, as such, or any of them,
under or by reason of any of the obligations, covenants or agreements of
Enterprise contained in this Agreement, or implied therefrom, and that any and
all personal liability for breaches by Enterprise of any of such obligations,
covenants or agreements, either at common law or at equity, or by statute or
constitution, of Merrill Lynch Money Markets Inc. (or any affiliate thereof),
and every such stockholder, officer or director of Enterprise is hereby
expressly waived as a condition of and consideration for the execution of this
Agreement; provided that the foregoing shall not relieve any such Person from
any liability it might otherwise have as a result of its fraudulent actions or
omissions. The provisions of this Section 10.10(a) shall survive the termination
of this Agreement.
(ii) No recourse under any obligation, covenant
or agreement of PARCO contained in this Agreement shall
be had against any incorporator, stockholder, officer, director, employee or
agent of PARCO, the PARCO Agent or any of their Affiliates (solely by virtue of
such capacity) by the enforcement of any assessment or by any legal or equitable
proceeding, by virtue of any statute or otherwise, it being expressly agreed and
understood that this Agreement is solely a corporate obligation of PARCO, and
that no personal liability whatever shall attach to or be incurred by any
incorporator, stockholder, officer, director, employee or agent of PARCO, the
PARCO Agent or any of their Affiliates (solely by virtue of such capacity) or
any of them under or by reason of any of the obligations, covenants or
agreements of PARCO contained in this Agreement, or implied therefrom, and that
any and all personal liability for breaches by PARCO of any of such obligations,
covenants or agreements, either at common law or at equity, or by statute, rule
or regulation, of every such incorporator, stockholder, officer, director,
employee or agent is hereby expressly waived as a condition of and in
consideration for the execution of this Agreement; provided that the foregoing
shall not relieve any such Person from any liability it might otherwise have as
a result of its fraudulent actions or fraudulent omissions.
The provisions of this Section 10.10(b) shall survive termination of this
Agreement.
(iii) No recourse under any obligation, covenant or
agreement of Sheffield contained in this Agreement
shall be had against any incorporator, stockholder, officer, director, employee
or agent of Sheffield, the Sheffield Agent or any of their Affiliates (solely by
virtue of such capacity) by the enforcement of any assessment or by any legal or
equitable proceeding, by virtue of any statute or otherwise, it being expressly
agreed and understood that this Agreement is solely a corporate obligation of
Sheffield, and that no personal liability whatever shall attach to or be
incurred by any incorporator, stockholder, officer, director, employee or agent
of Sheffield, the Sheffield Agent or any of their Affiliates (solely by virtue
of such capacity) or any of them under or by reason of any of the obligations,
covenants or agreements of Sheffield contained in this Agreement, or implied
therefrom, and that any and all personal liability for breaches by Sheffield of
any of such obligations, covenants or agreements, either at common law or at
equity, or by statute, rule or regulation, of every such incorporator,
stockholder, officer, director, employee or agent is hereby expressly waived as
a condition of and in consideration for the execution of this Agreement;
provided that the foregoing shall not relieve any such Person from any liability
it might otherwise have as a result of its fraudulent actions or fraudulent
omissions. The provisions of this Section 10.10(b)(iii) shall survive
termination of this Agreement.
(b) Notwithstanding anything to the contrary contained herein, the obligations
of each Purchaser under this Agreement and all other Transaction Documents are
solely the corporate obligations of such Purchaser and, in the case of
obligations of such Purchaser other than such Purchaser's Commercial Paper,
shall be payable at such time as funds are received by or are available to such
Purchaser in excess of funds necessary to pay in full all of such Purchaser's
outstanding Commercial Paper, as applicable, and, to the extent funds are not
available to pay such obligations, the claims relating thereto shall not
constitute a claim against such Purchaser but shall continue to accrue. Each
party hereto agrees that the payment of any claim (as defined in Section 101 of
Title 11 of the Bankruptcy Code) of any such party against any Purchaser shall
be subordinated to the payment in full of all of such Purchaser's Commercial
Paper.
SECTION 10.11. Characterization of the Transactions Contemplated by the
Agreement.
It is the intention of the parties that the transactions
contemplated hereby constitute the sale of the Transferred Interest, conveying
good title thereto free and clear of any Adverse Claims to the Purchaser Agents,
on behalf of their related Purchasers and Bank Investors, and that the
Transferred Interest not be part of the Transferor's estate in the event of an
insolvency. If, notwithstanding the foregoing, in the event that the
transactions contemplated hereby are deemed a financing, the Transferor hereby
grants to the Purchaser Agents, on behalf of their Related Purchasers and Bank
Investors, and the Transferor hereby grants to the Purchaser Agents, on behalf
of their related Purchasers and Bank Investors, a first priority perfected and
continuing security interest in all of the Transferor's right, title and
interest in, to and under the Receivables, together with Collections, Proceeds
and (to the extent that a security interest therein can be perfected and have
first priority by the filing of the financing statements contemplated to be
filed hereunder on the Closing Date, together with amendments thereto and
continuations thereof) Related Security with respect thereto, and together with
all of the Transferor's rights under the Receivables Purchase Agreement to which
it is a party with respect to the Receivables and with respect to any
obligations thereunder of the Seller with respect to the Receivables, and that
this Agreement shall constitute a security agreement under applicable law. The
Transferor hereby assigns to the Purchaser Agents, on behalf of their related
Purchasers and Bank Investors, all of its rights and remedies under the
Receivables Purchase Agreement to which it is a party with respect to the
Receivables and with respect to any obligations thereunder of the Sellers with
respect to the Receivables.
SECTION 10.12. Conflict Waiver.
(a) NationsBank acts as Enterprise's administrative agent, as provider of other
facilities for Enterprise, and may provide other services or facilities from
time to time (the "NationsBank Roles"). Each party hereto hereby acknowledges
and consents to any and all NationsBank Roles, waives any objections it may have
to any actual or potential conflict of interest caused by NationsBank's acting
as the Enterprise Agent or as a Bank Investor hereunder and acting as or
maintaining any of the NationsBank Roles, and agrees that in connection with any
NationsBank Role, NationsBank may take, or refrain from taking, any action which
it in its discretion deems appropriate.
(b) Chase acts as PARCO's administrative agent, as issuing and paying agent for
PARCO's Commercial Paper, as provider of other backup facilities for PARCO, and
may provide other services or facilities from time to time (the "Chase Roles").
Each party hereto hereby acknowledges and consents to any and all Chase Roles,
waives any objections it may have to any actual or potential conflict of
interest caused by Chase's acting as the PARCO Agent or as a Bank Investor
hereunder and acting as or maintaining any of the Chase Roles, and agrees that
in connection with any Chase Role, Chase may take, or refrain from taking, any
action which it in its discretion deems appropriate.
(c) Barclays acts as Sheffield's administrative agent, as issuing and paying
agent for Sheffield's Commercial Paper, as provider of other backup facilities
for Sheffield, and may provide other services or facilities from time to time
(the "Barclays Roles"). Each party hereto hereby acknowledges and consents to
any and all Barclays Roles, waives any objections it may have to any actual or
potential conflict of interest caused by Barclays' acting as the Sheffield Agent
or as a Bank Investor hereunder and acting as or maintaining any of the Barclays
Roles, and agrees that in connection with any Barclays Role, Barclays may take,
or refrain from taking, any action which it in its discretion deems appropriate.
SECTION 10.13. Limitation of Liability.
Notwithstanding any provision of this Agreement or any other
Transaction Document: (i) none of the Purchaser Agents shall have any
obligations under this Agreement or any other Transaction Document other than
those specifically set forth herein and therein, and no implied obligations of
any of the Purchaser Agents shall be read into this Agreement or any other
Transaction Document; and (ii) in no event shall any of the Purchaser Agents be
liable under or in connection with this Agreement or any other Transaction
Document for indirect, special, or consequential losses or damages of any kind,
including lost profits, even if advised of the possibility thereof and
regardless of the form of action by which such losses or damages may be claimed.
None of the Purchaser Agents nor any of its respective directors, officers,
agents or employees shall be liable for any action taken or omitted to be taken
in good faith by it or them under or in connection with this Agreement or any
other Transaction Document, except for its or their own gross negligence or
willful misconduct. Without limiting the foregoing, each Purchaser Agent (a) may
consult with legal counsel (including counsel for the Purchasers), independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken in good faith by it in accordance with
the advice of such counsel, accountants or experts, (b) shall not be responsible
to any party to this Agreement for any statements, warranties or representations
made in or in connection with this Agreement or the other Transaction Documents
(other than its own), (c) shall not be responsible to any party to this
Agreement for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or the other Transaction
Documents (except with respect to itself), (d) shall incur no liability under or
in respect of any of the Commercial Paper or other obligations of any Purchaser
under this Agreement or the other Transaction Documents and (e) shall incur no
liability under or in respect of this Agreement or the other Transaction
Documents by acting upon any notice (including notice by telephone), consent,
certificate or other instrument or writing (which may be by facsimile) believed
by it to be genuine and signed or sent by the proper party or parties.
Notwithstanding anything else herein or in the other Transaction Documents, it
is agreed that where any of the Purchaser Agents may be required under this
Agreement or the other Transaction Documents to give notice of any event or
condition or to take any action as a result of the occurrence of any event or
the existence of any condition, the applicable Purchaser Agent agrees to give
such notice or take such action only to the extent that it has actual knowledge
of the occurrence of such event or the existence of such condition, and shall
incur no liability for any failure to give such notice or take such action in
the absence of such knowledge.
SECTION 10.14. Pari Passu Interests.
It is the intention of the parties hereto that the interests
being acquired hereunder by the Purchaser Agents, on behalf of their related
Purchasers and Bank Investors, shall rank equally in priority.
SECTION 10.15. Further Assurances.
Each of the Transferor and Collection Agent agrees to do and
perform from time to time any and all acts and to execute any and all further
instruments required or reasonably requested by the Administrative Agent or the
Purchaser Agents more fully to effect the purposes of this Agreement and the
other Transaction Documents in a manner consistent with this Agreement and such
other Transaction Documents.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered the Transfer and Administration Agreement as of the date first written
above.
ENTERPRISE FUNDING CORPORATION,
as Purchaser
By:/s/
Name:
Title:
PARK AVENUE RECEIVABLES
CORPORATION,
as Purchaser
By: /s/ Andrea L. Stidd
Name: Andrea L. Stidd
Title:
SHEFFIELD RECEIVABLES CORPORATION,
as Purchaser
By: /s/ Michael Wade
Name: Michael Wade
Title:Associate Director
METRIS ASSET FUNDING CO.,
as Transferor
By: /s/ Paul Runice
Name:Paul Runice
Title: President & Treasurer
DIRECT MERCHANTS CREDIT CARD BANK,
NATIONAL ASSOCIATION,
as Collection Agent
By: /s/ Jean Benson
Name:Jean Benson
Title:Controller
<PAGE>
Commitment NATIONSBANK, N.A.,
$__________ as a Bank Investor, Enterprise Agent and
Administrative Agent
By: /s/ Robert R. Wood
Name:Robert R. Wood
Title:Vice President
THE CHASE MANHATTAN BANK,
as a Bank Investor
By: ______________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as PARCO Agent
By: /s/ Andrew Taylor
Name:Andrew Taylor
Title:Vice President
BARCLAYS BANK PLC,
as a Bank Investor and Sheffield Agent
By: /s/ Mary Logan
Name:Mary Logan
Title:Director
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS........................................................1
SECTION 1.1. Certain Defined Terms...................................1
SECTION 1.2. Other Terms............................................24
SECTION 1.3. Computation of Time Periods............................24
ARTICLE II PURCHASES AND SETTLEMENTS........................................25
SECTION 2.1. Facility...............................................25
SECTION 2.2. Transfers; Certificates; Eligible Receivables..........25
SECTION 2.3. Selection of Interest Rates and Interest Periods;
LIBOR Protection; Illegality...........................29
SECTION 2.4. Carrying Costs, Fees and Other Costs and Expenses......32
SECTION 2.5. Allocations of Collections; Non-Liquidation
Settlement and Reinvestment Procedures.................33
SECTION 2.6. Liquidation Settlement Procedures......................35
SECTION 2.7. Fees...................................................36
SECTION 2.8. Protection of Ownership Interest of the Purchasers
and the Bank Investors.................................36
SECTION 2.9. Application of Payments................................37
SECTION 2.10. Payments and Computations, Etc........................38
SECTION 2.11. Reports...............................................39
SECTION 2.12. Collection Account, Spread Account
and Excess Funding Account............................39
SECTION 2.13. Sharing of Payments, Etc..............................40
SECTION 2.14. Right of Setoff.......................................41
SECTION 2.15. Special Termination Date with Respect to
a Particular Purchaser................................41
ARTICLE III REPRESENTATIONS AND WARRANTIES..................................42
SECTION 3.1. Representations and Warranties of the Transferor.......42
SECTION 3.2. Reaffirmation of Representations and
Warranties by the Transferor...........................46
SECTION 3.3. Representations and Warranties of the
Collection Agent.......................................46
ARTICLE IV CONDITIONS PRECEDENT.............................................49
SECTION 4.1. Conditions to Closing..................................49
ARTICLE V COVENANTS.........................................................52
SECTION 5.1. Affirmative Covenants of Transferor....................52
SECTION 5.2. Negative Covenants of the Transferor...................58
SECTION 5.3. Affirmative Covenants of the Collection Agent..........60
SECTION 5.4. Negative Covenants of the Collection Agent.............63
ARTICLE VI ADMINISTRATION AND COLLECTIONS...................................64
SECTION 6.1. Appointment of Collection Agent........................64
SECTION 6.2. Duties of Collection Agent.............................65
SECTION 6.3. Rights After Designation of New Collection Agent.......66
SECTION 6.4. Collection Agent Default...............................67
SECTION 6.5. Responsibilities of the Transferor and the Seller......75
ARTICLE VII TERMINATION EVENTS..............................................76
SECTION 7.1. Termination Events.....................................76
SECTION 7.2. Termination............................................78
ARTICLE VIII INDEMNIFICATION; EXPENSES; RELATED MATTERS.....................79
SECTION 8.1. Indemnities by the Transferor..........................79
SECTION 8.2. Indemnity for Taxes, Reserves and Expenses.............82
SECTION 8.3. Taxes..................................................84
SECTION 8.4. Other Costs, Expenses and Related Matters..............84
SECTION 8.5. Reconveyance Under Certain Circumstances...............85
ARTICLE IX THE ADMINISTRATIVE AGENT; BANK COMMITMENT; PURCHASER AGENTS......85
SECTION 9.1. Authorization and Action of Administrative Agent.......85
SECTION 9.2. Administrative Agent's Reliance, Etc...................86
SECTION 9.3. Credit Decision With Respect to Administrative Agent...87
SECTION 9.4. Indemnification of the Administrative Agent............87
SECTION 9.5. Successor Administrative Agent.........................88
SECTION 9.6. Payments by the Administrative Agent...................88
SECTION 9.7. Bank Commitment; Assignment to Bank Investors..........88
SECTION 9.8. Authorization and Action of Enterprise Agent...........93
SECTION 9.9. Reliance, Etc. of Enterprise Agent.....................94
SECTION 9.10. Credit Decision with respect to Enterprise............94
SECTION 9.11. Indemnification of Enterprise Agent...................94
SECTION 9.12. Successor Agent to Enterprise Agent...................95
SECTION 9.13. Payments by the Purchaser Agents......................95
ARTICLE X MISCELLANEOUS.....................................................96
SECTION 10.1. Term of Agreement.....................................96
SECTION 10.2. Waivers; Amendments...................................96
SECTION 10.3. Notices...............................................97
SECTION 10.4. Governing Law; Submission to Jurisdiction;
Integration..........................................100
SECTION 10.5. Severability; Counterparts...........................101
SECTION 10.6. Successors and Assigns...............................101
SECTION 10.7. Waiver of Confidentiality............................103
SECTION 10.8. Confidentiality Agreement............................103
SECTION 10.9. No Bankruptcy Petition Against the Purchasers........103
SECTION 10.10. No Recourse Against Stockholders,
Officers or Directors...............................104
SECTION 10.11. Characterization of the Transactions
Contemplated by the Agreement.......................105
SECTION 10.12. Conflict Waiver.....................................106
SECTION 10.13. Limitation of Liability.............................106
SECTION 10.14. Pari Passu Interests................................107
SECTION 10.15. Further Assurances..................................107
EXHIBIT A Form of Additional Investment Certificates
EXHIBIT B Form of Assignment and Assumption Agreement
EXHIBIT C Form of Agreed Upon Procedures
EXHIBIT D Form of Investor Report
EXHIBIT E Form of Certificates
EXHIBIT F Form of Transfer Certificates
EXHIBIT G Location of Records
EXHIBIT H List of Subsidiaries, Divisions and Tradenames
<PAGE>
EXECUTION COPY
TRANSFER AND ADMINISTRATION AGREEMENT
among
METRIS ASSET FUNDING CO.,
as the Transferor,
ENTERPRISE FUNDING CORPORATION,
PARK AVENUE RECEIVABLES CORPORATION
and
SHEFFIELD RECEIVABLES CORPORATION,
as Purchasers,
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION,
as the Collection Agent,
BARCLAYS BANK PLC,
as a Bank Investor and Sheffield Agent,
THE CHASE MANHATTAN BANK,
as a Bank Investor and PARCO Agent,
and
NATIONSBANK, N.A.,
as a Bank Investor and Enterprise Agent,
and
NATIONSBANK, N.A.,
as Administrative Agent
Dated as of December 9, 1998
PNC NATIONAL BANK PORTFOLIO
RECEIVABLES PURCHASE AGREEMENT
RECEIVABLES PURCHASE AGREEMENT, dated as of December 9, 1998
(the "Agreement"), by and between METRIS COMPANIES INC., a Delaware corporation
("Metris" or the "Seller"), and METRIS ASSET FUNDING CO., a Delaware corporation
(the "Buyer").
WITNESSETH:
WHEREAS, pursuant to that certain Amended and Restated Bank
Receivables Purchase Agreement dated as of July 30, 1998 (the "Bank Receivables
Purchase Agreement") between Metris and Direct Merchants Credit Card Bank,
National Association, a national banking association (the "Bank"), the Seller
purchases from time to time revolving credit card receivables (including,
without limitation, MasterCard and Visa credit card receivables); and
WHEREAS, the Buyer wishes to purchase from time to time
revolving credit card receivables acquired by the Seller on or after the Closing
Date in connection with the Accounts; and
WHEREAS, the Seller desires to sell and assign from time to
time such receivables to the Buyer upon the terms and conditions hereinafter set
forth; and
WHEREAS, the Buyer is an Affiliate of the Seller;
NOW, THEREFORE, it is hereby agreed by and between the Buyer
and the Seller as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. For all purposes of this Agreement,
except as otherwise expressly provided herein or unless the context otherwise
requires, capitalized terms used herein shall have the following meanings
assigned to them:
"Conveyed Property" shall have the meaning set forth in Section 2.1(a).
"Credit Adjustment" shall have the meaning set forth in Section 3.2(b).
"Involuntary Case" shall have the meaning set forth in Section 2.1(c).
"Purchase Price" shall have the meaning set forth in Section 3.1.
"Related Security" means all of the Seller's right, title and interest in,
to and under:
(i) all guarantees, indemnities, warranties, insurance (and
proceeds and premium refunds thereof) or other agreements or arrangements of any
kind from time to time supporting or securing payment of a Receivable, whether
pursuant to the Account related to such Receivable or otherwise;
(ii) all Records related to the Receivables;
(iii) all rights and remedies of the Seller under or in
connection with the Receivables Purchase Agreements, including all financing
statements filed in connection therewith, other than those financing statements
filed in connection therewith which name the Purchaser Agents as initial
assignee; and
(iv) all Proceeds of any of the foregoing.
"Relevant UCC State" shall mean each jurisdiction in which the
filing of a UCC financing statement is necessary to perfect the
ownership interest and security interest of the Buyer established under
this Agreement.
"Requirements of Law" for any Person shall mean the
certificate of incorporation or articles of association and by-laws or
other organizational or governing documents of such Person, and any
material law, treaty, rule or regulation, or determination of an
arbitrator or Official Body, in each case applicable to or binding upon
such Person or to which such Person is subject.
"Sale Papers" shall have the meaning set forth in Section
4.1(a).
"Secured Obligations" shall have the meaning set forth in
Section 2.1(f).
"Transfer Agreement" means the Transfer and Administration
Agreement dated as of December 9, 1998, as amended, modified or
supplemented from time to time, among the Buyer, the Bank, as
Collection Agent, Enterprise Funding Corporation, as a Purchaser, Park
Avenue Receivables Corporation, as a Purchaser, Sheffield Receivables
Corporation, as a Purchaser, The Chase Manhattan Bank, as a Bank
Investor and as PARCO Agent, Barclays Bank PLC, as a Bank Investor and
as Sheffield Agent, and NationsBank, N.A., as a Bank Investor,
Enterprise Agent, and NationsBank, N.A., as the Administrative Agent
for the Enterprise Agent and the PARCO Agent and the Sheffield Agent.
Section 1.2 Other Definitional Provisions. The words
"hereof,"' "herein" and "hereunder" and words of similar import when used in
this Agreement or any Sale Papers shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; and Section, Subsection,
Schedule and Exhibit references contained in this Agreement are references to
Sections, Subsections, Schedules and Exhibits in or to this Agreement unless
otherwise specified. All capitalized terms not otherwise defined herein are
defined in the Transfer Agreement. In the event that any term or provision
contained herein shall conflict with or be inconsistent with any provisions
contained in the Transfer Agreement, the terms and provisions contained herein
shall govern with respect to this Agreement.
Section 1.3 Computation of Time Periods. Unless otherwise
stated in this Agreement, in the computation of a period of time from a
specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each means "to but excluding."
ARTICLE II
PURCHASE CONVEYANCE AND SERVICING OF RECEIVABLES
Section 2.1 Sale.
(a) Assets Conveyed. In consideration for the Purchase Price
and upon the terms and subject to the conditions set forth herein, the Seller
does hereby sell, assign, transfer, set-over, and otherwise convey to the Buyer,
and the Buyer does hereby purchase from the Seller, all of the Seller's right,
title and interest in, to and under (i) the Receivables now existing and
hereafter created and arising in connection with the Accounts, including,
without limitation, all accounts, general intangibles, contract rights and other
obligations of any Obligor with respect to the Receivables, now or hereafter
existing; (ii) all Collections with respect thereto; (iii) all Proceeds of such
Receivables; and (iv) the Related Security (the "Conveyed Property") immediately
upon the Seller's acquisition of rights in such Conveyed Property. The foregoing
sale, transfer, assignment, set-over and conveyance does not constitute and is
not intended to result in a creation or an assumption by the Buyer of any
obligation of the Seller in connection with the Conveyed Property or any
agreement or instrument relating thereto, including, without limitation, any
obligation to any Obligors, merchant banks, merchant clearance systems, VISA
U.S.A., Inc., MasterCard International Inc. or insurers. Each Account in
existence on the Closing Date shall be listed by account number and by the
outstanding balance as of the Cut-Off Date in an Account Schedule delivered to
the Buyer on the Closing Date.
(b) Financing Statements. In connection with the foregoing
sale, the Seller agrees to record and file promptly following the Closing Date,
at its own expense, a financing statement or statements with respect to the
Conveyed Property meeting the requirements of applicable state law in such
manner and in such jurisdictions as are necessary to perfect and protect the
interests of the Buyer created hereby under the applicable UCC against all
creditors of and purchasers from the Seller, and to deliver a file-stamped copy
of such financing statements or other evidence of such filings to the Buyer
within 10 days after the Closing Date.
(c) Bankruptcy of Seller. The Buyer shall not purchase
Receivables hereunder if the Seller shall become an involuntary party to (or be
made the subject of) any bankruptcy proceeding or any other insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Seller or relating to all or substantially all
of its property (an "Involuntary Case") upon receipt by the Seller at its head
corporate office of notice of such Involuntary Case.
(d) Insolvency of Seller. The Buyer shall not purchase
Receivables hereunder if the Seller shall admit in writing its inability to pay
its debts as they are due, or the Seller shall commence a voluntary case under
the federal bankruptcy laws, as now or hereafter in effect, or any present or
future federal or state bankruptcy, insolvency or similar law, or the Seller
shall consent to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of the Seller or of any substantial part of its property or the Seller shall
make an assignment for the benefit of creditors or the Seller shall fail
generally to pay its debts as such debts become due or the Seller shall take
corporate action in furtherance of any of the foregoing.
(e) Marking Records. In connection with the sale and
conveyance hereunder, the Seller agrees, at its own expense, on or prior to the
Closing Date and on each Business Day thereafter, to indicate or cause to be
indicated clearly and unambiguously in its accounting records and with respect
to any Receivables purchased by the Seller from the Bank to cause the Bank to
indicate clearly and unambiguously in the Bank's accounting records that the
Conveyed Property has been sold to the Buyer pursuant to this Agreement as of
the Closing Date or such Business Day as applicable.
(f) Sale Intended; Security Interest. It is the express intent
of the Seller and the Buyer that the conveyance of the Conveyed Property by the
Seller to the Buyer pursuant to this Agreement be construed as a sale thereof by
the Seller to the Buyer. It is, further, not the intention of the Seller and the
Buyer that such conveyance be deemed a grant of a security interest in the
Conveyed Property by the Seller to the Buyer to secure a debt or other
obligation of the Seller. However, if notwithstanding the intent of the parties,
the Conveyed Property is held to continue to be property of the Seller, then (i)
this Agreement also shall be deemed to be and hereby is a security agreement
within the meaning of the UCC; (ii) this Agreement and the Seller's books and
records shall evidence the Buyer's obligation to pay the Purchase Price; and
(iii) the conveyance by the Seller provided for in this Agreement shall be
deemed to be, and the Seller hereby grants to the Buyer a security interest in
and to, all of the Seller's right, title and interest in the Conveyed Property
to secure all obligations now or hereafter arising of the Seller to the Buyer
including without limitation loans to the Seller in the amount of the Purchase
Price as set forth in this Agreement (the "Secured Obligations"). The Seller and
the Buyer shall, to the extent consistent with this Agreement, take such action
as may be necessary to ensure that if this Agreement were deemed to create a
security interest in the Conveyed Property, such security interest would be
deemed to be a perfected security interest of first priority in favor of the
Buyer under applicable law and will be maintained as such throughout the term of
this Agreement. The Seller and the Buyer may rely upon an opinion of counsel
addressed to them as to what is required to provide the Buyer with such security
interest; and any such opinion of counsel shall permit the Administrative Agent,
the Enterprise Agent, the PARCO Agent and the Sheffield Agent, on behalf of
Enterprise, PARCO and Sheffield, respectively, the Bank Investors, and any
rating agencies to rely on it.
ARTICLE III
CONSIDERATION AND PAYMENT
Section 3.1 Purchase Price. The purchase price for the
Conveyed Property (the "Purchase Price") shall be a dollar amount equal to the
aggregate amount of all Principal Receivables sold as of such date subject to
adjustment from time to time with respect to new Receivables to reflect such
factors as Buyer and Seller mutually agree will result in a Purchase Price
determined to approximate the fair market value of such new Receivables.
Section 3.2 Payment of Purchase Price.
(a) The Purchase Price for Receivables shall be paid or
provided for on the Closing Date with respect to the Receivables
existing on the Closing Date and on each Business Day thereafter on
which Receivables are transferred hereunder, as the case may be, by
payment in immediately available funds on the following Business Day.
(b) The Purchase Price shall be adjusted on a daily basis (the
"Credit Adjustment") with respect to any Receivable adjusted as
provided in Section 2.9 of the Transfer Agreement in an amount equal to
the amount of such Credit Adjustment specified in Section 2.9 of the
Transfer Agreement. If the Buyer is required to make payments pursuant
to Section 2.9 of the Transfer Agreement, the Seller shall pay the
amount so adjusted to the Buyer on the last day of the calendar month.
Section 3.3 Daily Reports. On each Business Day, the Seller
shall deliver to the Buyer a Daily Report (the "Daily Report") showing the
aggregate Purchase Price of Receivables generated, the aggregate amount, if any,
owing to the Buyer pursuant to Section 6.1 and the aggregate net amount of cash
owing for Receivables generated in each case for the period from and including
the preceding Business Day.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Seller's Representations and Warranties.
The Seller represents and warrants to the Buyer, that:
(a) Organization and Good Standing. The Seller is a
corporation duly organized and validly existing in good standing under
the laws of the State of Delaware and has the corporate power and
authority and legal right to own its property and conduct its business
as such properties are presently owned and as such business is
presently conducted and to execute, deliver and perform its obligations
under this Agreement and each other document or instrument to be
delivered by the Seller hereunder (collectively, the "Sale Papers").
(b) Due Qualification. The Seller is duly qualified to do
business and is in good standing (or is exempt from such requirements),
as a foreign corporation in any state required in order to conduct
business, and has obtained all necessary licenses and approvals with
respect to the Seller required under applicable law; provided that no
representation or warranty is made with respect to any qualifications,
licenses or approvals which the Buyer would have to obtain to do
business in any state in which the Buyer seeks to enforce any
Receivable.
(c) Due Authorization. The execution and delivery of the Sale
Papers, and the consummation of the transactions provided for herein
and therein have been duly authorized by the Seller by all necessary
corporate action on its part.
(d) Binding Obligation. Each of the Sale Papers, and the
consummation of the transactions provided for therein, constitutes a
legal, valid and binding obligation of the Seller, enforceable in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereinafter in effect, affecting the enforcement of
creditors' rights in general.
(e) No Conflicts. The execution and delivery of the Sale
Papers and the performance of the transactions contemplated thereby, do
not (i) contravene the Seller's certificate of incorporation or by-laws
or (ii) violate any material provision of law applicable to it or
require any filing (except for the filings under the UCC, registration,
consent or approval under, any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award presently in
effect having applicability to the Seller, except for such filings,
registrations, consents or approvals as have already been obtained and
are in full force and effect.
(f) Taxes. The Seller has filed all material tax returns
required to be filed and has paid or made adequate provision for the
payment of all material taxes, assessments and other governmental
charges due from the Seller or is contesting any such tax, assessment
or other governmental charge in good faith through appropriate
proceedings and having set up appropriate reserves.
(g) No Violation. The execution and delivery of the Sale
Papers, the performance of the transactions contemplated by the Sale
Papers and the fulfillment of the terms thereof, will not violate any
Requirements of Law applicable to the Seller, will not violate, result
in any breach of any of the material terms and provisions of or
constitute (with or without notice or lapse of time or both) a default
under any Requirement of Law applicable to the Seller, or any material
indenture, contract, agreement, mortgage, deed of trust or other
material instrument to which the Seller is a party or by which it or
its properties are bound.
(h) No Proceedings. There are no proceedings or investigations
pending or, to the best knowledge of the Seller, threatened against the
Seller, before any Official Body (i) asserting the invalidity of the
Sale Papers, (ii) seeking to prevent the consummation of any of the
transactions contemplated thereby, (iii) seeking any determination or
ruling that would materially and adversely affect the performance by
the Seller of its obligations thereunder or (iv) seeking any
determination or ruling that would materially and adversely affect the
validity or enforceability thereof.
(i) All Consents Required. All approvals, authorizations,
consents, orders or other actions of any Official Body required in
connection with the execution and delivery of the Sale Papers, the
performance of the transactions contemplated by the Sale Papers and the
fulfillment of the terms hereof and thereof, have been obtained.
(j) Bona Fide Receivables. The Seller has no knowledge of any
fact which should have led it to expect at the time of the
classification of any Receivable as an Eligible Receivable that such
Receivable would not be paid in full when due, and each Receivable
classified as an Eligible Receivable by the Seller in any document or
report delivered under this Agreement satisfies the requirements of
eligibility contained in the definition of "Eligible Receivable" set
forth in the Transfer Agreement. No adverse selection criteria have
been applied to the Receivables purchased hereunder.
(k) Place of Business. The principal executive offices of the
Seller are in St. Louis Park, Minnesota and the offices where the
Seller keeps its Records concerning the Receivables and related
Accounts are in Nebraska, Minnesota, Oklahoma, and Arizona.
(l) Use of Proceeds. No proceeds of the sale of any Receivable
hereunder received by the Seller will be used by the Seller to acquire
any security in any transaction which is subject to Section 13 or 14 of
the Securities Exchange Act of 1934, as amended.
(m) No Termination Event. No Termination Event, or Potential
Termination Event, has occurred and is continuing.
(n) Not an Investment Company. The Seller is not an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended, or is exempt from all provisions of such Act.
(o) Tradenames, Etc. As of the date hereof; (i) the Seller's
chief executive office is located at the address for notices set forth
in Section 8.3; and (ii) the Seller has, within the last five (5)
years, operated only under its legal name or the tradename "Metris
Companies" and, within the last five (5) years, has not changed its
name, identity or corporate structure, merged with or into or
consolidated with any other corporation or been the subject of any
proceeding under the Bankruptcy Code.
(p) Amount of Receivables. As of the Cut-Off Date, the
aggregate outstanding balance of the Principal Receivables in existence
was at least $[ ].
(q) ERISA. Each of the Seller and its ERISA Affiliates is in
compliance in all material respects with ERISA and no lien exists in
favor of the Pension Benefit Guaranty Corporation on any of the
Receivables.
(r) Bulk Sales. No transaction contemplated by this Agreement
requires compliance with any bulk sales act or similar law.
(s) Preference; Voidability. The Seller warrants that the
conveyance of the applicable Receivables and Collections to the Buyer,
and each such conveyance, shall not have been made for or on account of
an antecedent debt owed by the Seller to the Buyer and no such transfer
is or may bc voidable under any section of the Bankruptcy Code.
(t) No Restriction on Transfer. To the best of Seller's
knowledge, no Account requires the prior written consent of an Obligor
or contains any other restriction relating to the transfer or
assignment of rights of payment under such Account (other than a
consent or waiver of such restriction that has been obtained prior to
the related purchase date).
(u) Accuracy of Information. All information heretofore
furnished by the Seller to the Buyer for purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
such information hereafter furnished by the Seller to the Buyer will
be, true and accurate in every material respect, on the date such
information is stated or certified.
The representations and warranties set forth in this Section 4.1 shall survive
the sale of the Receivables to the Buyer. The Seller hereby represents and
warrants to the Buyer, that the representations and warranties of the Seller set
forth in this Section 4.1 are true and correct as of the Closing Date. Upon
discovery by the Seller or the Buyer of a material breach of any of the
foregoing representations and warranties, the party discovering such breach
shall give prompt written notice thereof to the other.
Section 4.2 Seller's Representations and Warranties
Regarding Receivables.
(a) Valid Sale, etc. The Seller (x) hereby represents and
warrants as of the Closing Date, with respect to the Receivables
outstanding on such date, and (y) shall be deemed to represent and
warrant as of the date of the creation or acquisition and sale to the
Buyer of any Receivables after the Closing Date with respect to such
Receivables, that:
(i) Each of this Agreement and the Bank Receivables
Purchase Agreement constitutes the legal, valid and binding
obligation of the Seller, enforceable against the Seller in
accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or
hereafter in effect, affecting the enforcement of creditors'
rights in general.
(ii) The transfer of Receivables by the Seller to the
Buyer under this Agreement constitutes a valid sale, transfer,
assignment, set-over and conveyance to the Buyer of all right,
title and interest of the Seller in and to the Receivables,
Collections and Proceeds, whether then existing or thereafter
created and arising in connection with the Accounts, and such
Receivables will be held by the Buyer free and clear of any
Adverse Claim of any Person claiming through or under the
Seller or any of its Affiliates. This Agreement constitutes a
valid sale, transfer, assignment, set-over and conveyance to
the Buyer of all right, title and interest of the Seller in
and to the Receivables purported to be sold hereunder, whether
existing on the Closing Date or thereafter created, and the
proceeds thereof.
(iii) The Seller is not insolvent and will not be
rendered insolvent upon sale of the Receivables to the Buyer.
(iv) Immediately preceding the sale of the
Receivables and related property pursuant to this Agreement,
the Seller is (or, with respect to Receivables arising after
the date hereof, will be) the legal and beneficial owner of
all right, title and interest in and to each Receivable and
each Receivable has been or will be transferred to the Buyer
free and clear of any Adverse Claim.
(v) All consents, licenses, approvals or
authorizations of or registrations or declarations with any
Official Body requested in connection with the transfer of
such Receivables to the Buyer have been obtained.
(vi) Each Account classified as an Eligible Account
by the Seller in any document or report delivered hereunder
will satisfy the requirements contained in the definition of
Eligible Account as of the date of such document or report and
each Receivable classified as an Eligible Receivable by the
Seller in any document or report delivered hereunder will
satisfy the requirements contained in the definition of
"Eligible Receivable" as of the time of such document or
report.
(vii) Each Receivable then existing has been conveyed
to the Buyer free and clear of any Adverse Claim of any Person
claiming through or under the Seller or any of its Affiliates
and in compliance, in all material respects, with all
Requirements of Law applicable to the Seller. (b) Daily
Representations and Warranties. On each day on which any new
Receivable is
created or acquired by the Seller, the Seller shall be deemed to
represent and warrant to the Buyer that all representations and
warranties contained in Section 4.1 and Section 4.2(a) are true and
correct on and as of such date (in addition to the Closing Date) as
though made on and as of such date (except for the representation
contained in Section 4.1(p)).
(c) Notice of Breach. The representations and warranties set
forth in this Section 4.2 shall survive the sale, transfer and
assignment of the respective Receivables to the Buyer. Upon discovery
by the Seller or the Buyer of a breach of any of the representations
and warranties set forth in this Section 4.2, the party discovering
such breach shall give prompt written notice thereof to the other. The
Seller agrees to cooperate with the Buyer in attempting to cure any
such breach.
Section 4.3 Representations and Warranties of the Buyer. The
Buyer hereby represents and warrants as of the Closing Date, and shall be deemed
to represent and warrant as of the date of the creation of any Receivable sold
to the Buyer hereunder, that:
(a) Organization and Good Standing. The Buyer is a corporation
duly organized and validly existing in good standing under the laws of
the State of Delaware and has the corporate power and authority and
legal right to own its property and conduct its business as such
properties are presently owned and such business is presently conducted
and to execute, deliver, and perform its obligation's under the Sale
Papers.
(b) Due Qualification. The Buyer is duly qualified to do
business and is in good standing (or is exempt from such requirements)
as a foreign corporation in any state required in order to conduct
business and has obtained all necessary licenses and approvals with
respect to the Buyer required under federal and Delaware law.
(c) Due Authorization. The execution and delivery of the Sale
Papers and the consummation of the transactions provided for in the
Sale Papers have been duly authorized by the Buyer by all necessary
corporate action on its part.
(d) No Conflicts. The execution and delivery of the Sale
Papers and the performance of the transactions contemplated thereby do
not (i) contravene the Buyer's certificate of incorporation or by-laws
or (ii) violate any material provision of law applicable to it, or
require any filing (except for the filings under the UCC),
registration, consent or approval under, any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to the Buyer, except for such
filings, registrations, consents or approvals as have already been
obtained and are in full force and effect.
(e) No Violation. The execution and delivery of the Sale
Papers, the performance of the transactions contemplated by the Sale
Papers, and the fulfillment of the terms of the Sale Papers will not
violate any Requirements of Law applicable to the Buyer, will not
violate, result in any breach of any of the material terms and
provisions of, or constitute (with or without notice or lapse of time
or both) a default under any Requirement of Law applicable to the
Buyer, or any material indenture, contract, agreement, mortgage, deed
of trust or other material instrument to which the Buyer is a party or
by which it or its properties are bound.
(f) No Proceedings. There are no proceedings or investigations
pending or, to the best knowledge of the Buyer, threatened against the
Buyer, before any Official Body (i) asserting the invalidity of the
Sale Papers, (ii) seeking to prevent the consummation of any of the
transactions contemplated by the Sale Papers, (iii) seeking any
determination or ruling that would materially and adversely affect the
performance by the Buyer of its obligations thereunder or (iv) seeking
any determination or ruling that would materially and adversely affect
the validity or enforceability or the Sale Papers.
(g) All Consents Required. All approvals, authorizations,
consents, orders, or other actions of any Official Body required in
connection with the execution and delivery of the Sale Papers, the
performance of the transactions contemplated by the Sale Papers, and
the fulfillment of the terms of the Sale Papers have been obtained.
(h) Solvency. The Buyer is not insolvent and will not be
rendered insolvent upon the purchase of the Receivables.
The representations and warranties set forth in this Section 4.3 shall survive
the sale of the Receivables to the Buyer. The Buyer hereby represents and
warrants to the Seller that the representations and warranties of the Buyer set
forth in Section 4.3 are true and correct as of the Closing Date. Upon discovery
by the Buyer or the Seller of a breach of any of the foregoing representations
and warranties, the party discovering such breach shall give prompt written
notice to the other.
ARTICLE V
COVENANTS OF SELLER AND BUYER
Section 5.1 Seller Covenants. The Seller hereby
covenants that:
(a) Receivables to be Accounts or General Intangibles. The
Seller will take no action to cause any Receivable to be evidenced by
any "instrument" or to constitute "chattel paper" (as defined in the
UCC as in effect in the Relevant UCC State), except in connection with
the enforcement or collection of a Receivable. Except in such
circumstances, the Seller will take no action to cause any Receivable
to be anything other than an "account" or a "general intangible" (as
defined in the UCC as in effect in the Relevant UCC State).
(b) Security Interests. Except for the conveyances hereunder,
the Seller will not sell, pledge, assign or transfer to any other
Person, or grant, create, incur, assume or suffer to exist any Adverse
Claim, on any Receivable, whether now existing or hereafter created, or
any interest therein; the Seller will immediately notify the Buyer of
the existence of any Adverse Claim on any Receivable; and the Seller
shall defend the right, title and interest of the Buyer in, to and
under the Receivables, whether now existing or hereafter created,
against all claims of third parties claiming through or under the
Seller.
(c) Periodic Finance Charges and Other Fees. Except as
otherwise required by any Requirement of Law, or as is deemed by the
Seller in its sole discretion to be necessary in order to maintain its
credit card business on a competitive basis, it shall not at any time
reduce the annual percentage rates of the periodic finance charges
assessed on the Receivables or other fees charged on any of the
Accounts if, as a result of any such reduction, either (i) the Seller's
reasonable expectation is that such reduction will cause a Termination
Event to occur or (ii) such reduction is not also applied to any
comparable segment of consumer revolving credit card accounts owned by
the Seller that have characteristics the same as, or substantially
similar to, such Accounts.
(d) Credit and Collection Policy and Account Agreements. The
Seller shall comply with the Credit and Collection Policy in regard to
the Receivables and the related Accounts, except insofar as any failure
to so comply could not be reasonably expected to impair the
collectibility of the Receivables, on the whole, or a substantial
amount thereof, or otherwise have a Material Adverse Effect and the
Receivables and related Accounts shall be serviced in all respects in a
manner consistent with and similar to the revolving credit consumer
credit card amounts and receivables conveyed to the Metris Master
Trust.
(e) Delivery of Collections. In the event that the Seller
receives Collections, the Seller agrees to deposit such Collections
into the Collection Account as soon as practicable after the receipt
thereof, but in no event later than the second Business Day following
the Date of Processing thereof.
(f) Conveyance of Receivables. Except as provided in Section
8.5, the Seller covenants and agrees that it will not convey, assign,
exchange or otherwise transfer any Receivable arising in an Account, to
any Person other than the Buyer.
(g) Notice of Adverse Claims. The Seller shall notify the
Buyer promptly after becoming aware of any Adverse Claim on any
Receivable.
(h) Separate Business. The Seller will not permit its assets
to be commingled with those of the Buyer and shall maintain separate
corporate records and books of account from those of the Buyer. The
Seller will not conduct its business in the name of the Buyer and will
cause the Buyer to conduct its business solely in its own name so as
not to mislead others as to the identity of the entity with which those
others are concerned. The Seller will provide for its own operating
expenses and liabilities from its own funds. The Seller will not hold
itself out, or permit itself to be held out, as having agreed to pay,
or as generally being liable for, the debts of the Buyer, except that
the organizational expenses of the Buyer may be paid by the Seller. The
Seller shall cause the Buyer not to hold itself out, or permit itself
to be held out, as having agreed to pay, or as being liable for, the
debts of the Seller. The Seller will maintain an arm's length
relationship with the Buyer with respect to any transactions between
the Seller, on the one hand, and the Buyer, on the other.
(i) Conduct of Business. The Seller will do, and will cause
each of its Subsidiaries to do, all things necessary to remain duty
incorporated, validly existing and in good standing as a domestic
corporation in its jurisdiction of incorporation and will maintain all
requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
(j) Compliance with Laws. The Seller shall comply with all
laws, rules, regulations, orders, writs, judgments, injunctions,
decrees or awards to which it or its respective properties may be
subject, except where such failure to comply could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect.
(k) Furnishing of Information and Inspection of Records. The
Seller shall furnish to the Buyer from time to time such information
with respect to the Receivables as the Buyer may reasonably request,
including, without limitation, listings identifying the Obligor and the
outstanding principal balance for each Receivable. The Seller shall, at
any time and from time to time during regular business hours and upon
reasonable notice permit the Buyer, or its agents or representatives,
(i) to examine and make copies of and take abstracts from all Records,
to visit the offices and properties of the Seller and to discuss
matters relating to Receivables or the Seller's performance hereunder
and under the other Transaction Documents to which it is a party with
any of the officers, directors, employees or independent public
accountants of the Seller having knowledge of such matters and (ii) to
conduct as many audits of the Receivables during the term of this
Agreement as the Buyer may reasonably request; provided, however, that
the Seller shall only be required to reimburse the Buyer for the cost
of one such audit per year.
(l) Keeping of Records and Books of Account. The Seller will
maintain a system of accounting established and administered in
accordance with generally accepted accounting principles, consistently
applied, and will maintain and implement administrative and operating
procedures (including, without limitation, an ability to recreate
records evidencing Receivables in the event of the destruction of the
originals thereof), and keep and maintain, all documents, books,
records and other information reasonably necessary or advisable for the
collection of all Receivables (including, without limitation, records
adequate to permit the daily identification of each new Receivable and
all Collections of and adjustments to each existing Receivable). The
Seller will give the Administrative Agent notice of any material change
in the administrative and operating procedures of the Seller referred
to in the previous sentence.
(m) Performance and Compliance with Receivables and Accounts.
The Seller at its expense will timely and fully perform and comply with
all material provisions, covenants and other promises required to be
observed by it under the Accounts related to the Receivables.
(n) ERISA. The Seller shall promptly give the Administrative
Agent written notice upon becoming aware that the Seller or any of its
Subsidiaries is not in compliance in all material respects with ERISA
or that any ERISA lien on any of the Receivables exists.
(o) Bank Receivables Purchase Agreement. The Seller will not
amend the Bank Receivables Purchase Agreement in any manner materially
adverse to the interests of the Buyer with respect to the Receivables
without obtaining the prior written consent of the Buyer.
(p) Year 2000 Compliance. The Seller will promptly notify the
Buyer in the event the Seller discovers or determines that any computer
application (including those of its suppliers and vendors) that is
material to its or any of its Subsidiaries' business and operations
will not be Year 2000 compliant on a timely basis, except to the extent
that such failure could not reasonably be expected to have a Material
Adverse Effect.
Section 5.2 Buyer Covenant Regarding Sale Treatment. The Buyer
will not (i) account for or otherwise treat, the transactions contemplated by
this Agreement in any manner other than as a sale of the Conveyed Property by
the Seller to the Buyer or account for (other than for tax purposes) or
otherwise treat the transactions contemplated hereby in any manner other than as
a sale of the Conveyed Property by the Seller to the Buyer and shall disclose
(in a footnote or otherwise) in all of its financial statements (including any
such financial statements consolidated with any other Person's financial
statements) the existence and nature of the transaction contemplated hereby and
the interest of the Buyer in the Affected Assets.
Section 5.3 Indemnification by the Seller. Without limiting
any other rights which the Buyer may have hereunder or under applicable law, the
Seller hereby agrees to indemnify the Buyer and any successors and permitted
assigns and their respective officers, directors and employees (collectively,
"Indemnified Parties") from and against any and all damages, losses, claims,
liabilities, costs and expenses, including, without limitation, reasonable
attorneys' fees and disbursements (all of the foregoing being collectively
referred to as "Indemnified Amounts") awarded against or incurred by any of them
in any action or proceeding between any of the Indemnified Parties and any third
party or otherwise arising out of or as a result of this Agreement or the other
Transaction Documents or any transaction contemplated hereby or thereby,
excluding, however, (i) Indemnified Amounts to the extent resulting from
negligence or willful misconduct on the part of an Indemnified Party or (ii)
recourse (except as otherwise specifically provided in this Agreement) for
uncollectible Receivables. Without limiting the generality of the foregoing, the
Seller shall indemnify each Indemnified Party for Indemnified Amounts relating
to or resulting from:
(a) any representation or warranty made by the Seller or any
officers of the Seller under or in connection with this Agreement, the
Receivable Purchase Agreements, any of the other Transaction Documents,
any Investor Report or any other information or report delivered by the
Seller pursuant hereto, which shall have been false or incorrect in any
material respect when made or deemed made;
(b) the failure by the Seller to comply with any applicable
law, rule or regulation with respect to any Receivable or the related
Account, or the nonconformity of any Receivable or the related Account
with any such applicable law, rule or regulation;
(c) the failure (i) to vest and maintain vested in the Buyer,
an undivided first priority, perfected percentage ownership interest in
the Affected Assets free and clear of any Adverse Claim or (ii) to
create or maintain a valid and perfected first priority security
interest in favor of the Buyer, in the Affected Assets, free and clear
of any Adverse Claim;
(d) the failure to file, or any delay in filing, financing
statements, continuation statements, or other similar instruments or
documents under the UCC of any applicable jurisdiction or other
applicable laws with respect to any of the Affected Assets;
(e) the transfer of an ownership interest in any
Receivable other than an Eligible Receivable;
(f) the failure of the Seller to pay when due any taxes,
including without limitation, sales, excise or personal property taxes
payable in connection with any of the Receivables;
(g) the commingling by the Seller of Collections of
Receivables at any time with other funds;
(h) any failure of the Seller to give reasonably equivalent
value to the Bank, in consideration of the transfer to the Seller from
the Bank, of any Receivable, or any attempt by any Person to void,
rescind or set aside any such transfer under statutory provisions or
common law or equitable action, including, without limitation, any
provision of the Bankruptcy Code; or
(i) any action taken by the Seller in the enforcement or
collection of any Receivable.
ARTICLE VI
REPURCHASE OBLIGATION
Section 6.1 Mandatory Repurchase.
(a) Breach of Warranty. In the event of a breach with respect
to a Receivable of any of the representations and warranties set forth
in Subsections (a), (b), (c), (d), (e) or (j) of Section 4.1 or
Subsections (a) or (b) of Section 4.2, or in the event that a
Receivable is not an Eligible Receivable on the date of its transfer to
the Buyer as a result of the failure to satisfy the conditions set
forth in the definition of "Eligible Receivable", such Receivable shall
be designated an "Ineligible Receivable" and the Seller shall pay to
the Buyer an amount in cash equal to the purchase price paid for any
such Ineligible Receivable by the Buyer to the Seller plus any costs
and expenses of the Buyer associated therewith less any amounts
collected by Buyer on such Receivable. Such payment must be made by the
close of business on the next succeeding Business Day following the day
such Receivable has been designated an Ineligible Receivable; provided,
however, that prior to the Termination Date (except in the case of a
breach of any of the representations listed in the first sentence
above) such amount may be offset against any amounts due from the Buyer
to the Seller with respect to the Purchase Price for Receivables sold
to the Buyer on such day. The obligation of the Seller set forth in
this Section 6.1 shall constitute the sole remedy respecting any breach
of the representations and warranties set forth in the above-referenced
Sections or failure to meet the conditions set forth in the definition
of "Eligible Receivable" with respect to such Receivable available to
the Buyer.
(b) Reassignment of the Sold Assets. In the event of a breach
of any of the representations and warranties set forth in Sections
4.1(a), (b) and (c) and 4.2(a)(i) and (ii), the Buyer by notice given
in writing to the Seller may direct the Seller to accept reassignment
of the Receivables at the amount specified below within 60 days of such
notice (or within such longer period as may be specified in such
notice), and the Seller shall be obligated to accept reassignment of
the Receivables within such applicable period on and conditions set
forth below; provided, however, that no such reassignment shall be
required to be made if, at any time during such applicable period, the
Seller delivers to the Buyer an officer's certificate stating that the
representations and warranties contained in Section 4.1(a), (b) and (c)
and 4.2(a)(i) and (ii) shall then be true and correct in all material
respects as if made on such day. The Seller shall pay to the Buyer on
the day of such reassignment an amount equal to the Aggregate Unpaids
plus the Transferor's Percentage Interest. On the day on which such
amount has been paid, each Receivable shall be sold and reassigned to
the Seller, and the Buyer shall execute and deliver such instruments of
sale and assignment, in each case without recourse, representation or
warranty, as shall be reasonably requested by the Seller to vest in the
Seller, or its designee or assignee, all right, title and interest of
the Buyer in and to each Receivable. The obligation of the Seller to
purchase each Receivable pursuant to this Section 6.1 shall constitute
the sole remedy available to the Buyer for a breach of the
representations and warranties contained in Section 4.1(a), (b) and (c)
and 4.2(a)(i) and (ii).
Section 6.2 Conveyance of Reassigned Receivable. Upon the
request of the Seller, the Buyer shall execute and deliver to the Seller a
reconveyance substantially in such form and upon such terms as shall be
acceptable to the Seller, pursuant to which the Buyer evidences the conveyance
to the Seller of all of the Buyer's right, title, and interest in any
Receivables reconveyed to the Seller pursuant to Section 6.1(b). The Buyer shall
(and shall cause the Administrative Agent and each Purchaser Agent to) execute
such other documents or instruments of conveyance or take such other actions as
the Seller may reasonably require to effect any repurchase of Receivables
pursuant to Section 6.1.
Section 6.3 Sales are Non-Recourse. Other than the obligations
to repurchase Receivables under the limited circumstances set forth in Section
6.1 and to make payments with respect to Credit Adjustments under Section 3.2(b)
and the indemnity provided in Section 5.3, the sales of Receivables under this
Agreement shall be without recourse to the Seller.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1 Conditions to the Buyer's Obligations Regarding
Receivables. The obligations of the Buyer to purchase the Receivables on any
Business Day shall be subject to the satisfaction of the following conditions:
(a) All representations and warranties of the Seller contained
in this Agreement shall be true and correct on the Closing Date and
(except for the representation in Section 4.1(p)) on the day of
creation of any Receivable created thereafter with the same effect as
though such representations and warranties had been made on such date;
(b) All information concerning the Receivables provided to the
Buyer shall be true and correct in all material respects as of the
Closing Date, in the case of Receivables sold to the Buyer on the
Closing Date, or the applicable Date of Processing, in the case of
Receivables created after the Closing Date;
(c) At the Closing Date, the Seller shall have substantially
performed all other obligations required to be performed by the
provisions of this Agreement;
(d) All corporate and legal proceedings and all instruments in
connection with the transactions contemplated by this Agreement shall
be satisfactory in form and substance to the Buyer, and the Buyer shall
have received from the Seller copies of all documents (including,
without limitation, records of corporate proceedings) relevant to the
transactions herein contemplated as the Buyer may reasonably have
requested.
Section 7.2 Conditions Precedent to the Seller's Obligations.
The obligations of the Seller to sell Receivables on any Business Day shall be
subject to the satisfaction of the following conditions:
(a) All representations and warranties of the Buyer contained
in this Agreement shall be true and correct with the same effect as
though such representations and warranties had been made on such date;
(b) Payment or provision for payment of the Purchase Price in
accordance with the provisions of Section 3.2 shall have been made; and
(c) All corporate and legal proceedings and all instruments in
connection with the transactions contemplated by this Agreement shall
be satisfactory in form and substance to the Seller, and the Seller
shall have received from the Buyer copies of all documents (including,
without limitation, records of corporate proceedings) relevant to the
transactions herein contemplated as the Seller may reasonably have
requested.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.1 Amendment. This Agreement and any other Sale
Papers and the rights and obligations of the parties hereunder may not be
changed orally, but only by an instrument in writing signed by the Buyer and the
Seller. The Seller shall provide prompt written notice of any such amendment to
the Agent.
Section 8.2 Governing Law. THIS AGREEMENT AND THE OTHER SALE
PAPERS SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA,
WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
Section 8.3 Notices. All demands, notices and communications
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered at or mailed by registered mail, return receipt requested,
to:
(a) in the case of the Buyer, to:
Metris Asset Funding Co.
600 South Highway 169, Suite 300
St. Louis Park, Minnesota 55426
Attention: Treasurer
Telephone: (612) 593-4845
Telecopy: (612) 525-5070
with a copy to:
NationsBank, N.A., Administrative Agent
Corporate Center-10th Floor
100 North Tryon Street
NCI-007-10-07
Charlotte, NC 28255
Attention: Michelle M. Heath (NC 1-007-10-07)
Structured Finance
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
(b) in the case of the Seller, to:
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
Attention: Chief Financial Officer
Telephone: (612) 525-5094
Telecopy: (612) 595-0510
or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party.
Section 8.4 Severability of Provisions. If any one or more of
the covenants, agreements, provisions or terms of the Sale Papers shall for any
reason whatsoever be held invalid, then such covenants, agreements, provisions,
or terms shall be deemed severable from the remaining covenants, agreements,
provisions, or terms of the Sale Papers and shall in no way affect the validity
or enforceability of the other provisions of the Sale Papers.
Section 8.5 Assignment. Notwithstanding anything to the
contrary contained herein, this Agreement may not be assigned by the Buyer or
the Seller except as contemplated by this Section 8.5 and the Transfer
Agreement; provided, however, that simultaneously with the execution and
delivery of this Agreement, the Buyer may assign its rights hereunder pursuant
to the Transfer Agreement to the (a) PARCO Agent, for the benefit of PARCO, (b)
to the Enterprise Agent for the benefit of Enterprise, (c) to the Sheffield
Agent for the benefit of Sheffield and (d) to the Bank Investors; and that
PARCO, Enterprise or Sheffield may assign any or all of its rights to any
Liquidity Provider. The Buyer hereby notifies (and the Seller hereby
acknowledges that) the Buyer, pursuant to the Transfer Agreement, has assigned
its rights hereunder to the PARCO Agent and the Enterprise Agent and the
Sheffield Agent. All rights of the Buyer hereunder may be exercised by the PARCO
Agent, the Enterprise Agent or the Sheffield Agent or their respective
assignees, to the extent of their respective rights pursuant to such
assignments.
Section 8.6 Further Assurances. The Buyer and the Seller agree
to do and perform, from time to time, any and all acts and to execute any and
all further instruments required or reasonably requested by the other party more
fully to effect the purposes of the Sale Papers, including, without limitation,
the execution of any financing statements or continuation statements or
equivalent documents relating to the Receivables for filing under the provisions
of the UCC or other laws of any applicable jurisdiction.
Section 8.7 No Waiver; Cumulative Remedies. No failure to
exercise and no delay in exercising, on the part of the Buyer or the Seller, any
right, remedy, power or privilege hereunder, shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exhaustive of any
rights, remedies, powers and privileges provided by law.
Section 8.8 Counterparts. The Sale Papers may each be executed
in two or more counterparts including telecopy transmission thereof (and by
different parties on separate counterparts), each of which shall be an original,
but all of which together shall constitute one and the same instrument.
Section 8.9 Binding Effect; Third-Party Beneficiaries. The
Sale Papers will inure to the benefit of and be binding upon the parties hereto
and their respective successors and permitted assigns.
Section 8.10 Merger and Integration. Except as specifically
stated otherwise herein, the Sale Papers set forth the entire understanding of
the parties relating to the subject matter hereof, and all prior understandings,
written or oral, are superseded by the Sale Papers.
Section 8.11 Headings. The headings herein are for
purposes of reference only and shall not otherwise affect the meaning or
interpretation of any provision hereof.
Section 8.12 Schedules and Exhibits. The schedules and
exhibits attached hereto and referred to herein shall constitute a part of this
Agreement and are incorporated into this Agreement for all purposes.
Section 8.13 No Bankruptcy Petition Against the Buyer. The
Seller hereby covenants and agrees that, prior to the date which is one year and
one day after the payment in full of all Aggregate Unpaids, it will not
institute against or join any other Person in instituting against the Buyer any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings
or other similar proceeding under die laws of the United States or any state of
the United States.
Section 8.14 Merger or Consolidation of, or Assumption of the
Obligations of the Seller. The Seller shall not consolidate with or merge into
any other corporation or convey or transfer its properties and assets
substantially as an entirety to any Person, unless:
(a) the corporation formed by such consolidation or into which
the Seller is merged or the Person which acquires by conveyance or
transfer the properties and assets of the Seller substantially as an
entirety shall be a corporation organized and existing under the laws
of the United States of America or any State or the District of
Columbia and, if the Seller is not the surviving entity, shall
expressly assume, by an agreement supplemental hereto, executed and
delivered to the Buyer in form satisfactory to the Buyer, the
performance of every covenant and obligation of the Seller hereunder
(to the extent that any right, covenant or obligation of the Seller, as
applicable hereunder, is inapplicable to the successor entity, such
successor entity shall be subject to such covenant or obligation, or
benefit from such right, as would apply, to the extent practicable, to
such successor entity); and
(b) the Seller shall have delivered to the Buyer (i) an
officer's certificate that such consolidation, merger, conveyance or
transfer and such supplemental agreement comply with this Section 8 .14
and that all conditions precedent herein provided for relating to such
transaction have been complied with and (ii) the Company and Bank
Investors shall have received an opinion of legal counsel reasonably
acceptable to them that the Transaction Documents to which Seller is a
party are legal, valid and binding obligations of such successor
corporation, enforceable against such successor corporation in
accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance,
fraudulent transfer and other similar laws affecting creditors' rights
generally, and to the application of general principles of equity; and
(c) there shall exist no Termination Event or Potential
Termination Event.
Section 8.15 Protection of Right, Title and Interest to
Receivables.
(a) The Seller shall cause this Agreement, all amendments
hereto and/or all financing statements and continuation statements and
any other necessary documents covering the Seller's and the Buyer's
right, title and interest to the Receivables to be promptly recorded,
registered and filed, and at all times to be kept recorded, registered
and filed, all in such manner and in such places as may be required by
law fully to preserve and protect the right, title and interest of the
Buyer hereunder to the Receivables and proceeds thereof. The Seller
shall deliver to the Buyer file-stamped copies of, or filing receipts
for, any document recorded, registered or filed as provided above, as
soon as available following such recording, registration or filing, the
Buyer shall cooperate fully with the Seller in connection with the
obligations set forth above and will execute any and all documents
reasonably required to fulfill the intent of this Subsection (a).
(b) Within 30 days after the Seller makes any change in its
name, identity or corporate structure which would make any financing
statement or continuation statement filed in accordance with Subsection
(a) materially misleading within the meaning of Section 9-402(7) of the
UCC as in effect in the Relevant UCC State, the Seller shall give the
Buyer written notice of any such change and shall file such financing
statements or amendments as may be necessary to continue the perfection
of the Buyer's security interest in the Receivables and the proceeds
thereof.
(c) The Seller will give the Buyer prompt written notice of
any relocation of any office from which it services Receivables or
keeps records concerning the Receivables or of its principal executive
office and whether, as a result of such relocation, the applicable
provisions of the UCC would require the filing of any amendment of any
previously filed financing or continuation statement or of any new
financing statement and shall file such financing statements or
amendments as may be necessary to continue the perfection of the
Buyer's security interest in the Receivables and the proceeds thereof.
The Seller will at all times maintain each office from which it
services Receivables and its principal executive office within the
United States of America.
The remainder of this page is intentionally left
blank.
<PAGE>
IN WITNESS WHEREOF, the Buyer and the Seller each have caused
this Receivables Purchase Agreement to be duly executed by their respective
officers as of the day and year first above written.
METRIS ASSET FUNDING CO., as Buyer
By: /s/ Paul Runice
Its: President and Treasuer
METRIS COMPANIES INC., as Seller,
By: /s/ Paul Runice
Its: Senior Vice President and Treasurer
Exhibit 11
METRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Earnings Per Share
In thousands, except per share amounts Year Ended December 31,
1998 1997 1996
BASIC:
Net income available to common
stockholders .................................. $56,248 $38,058 $20,016
======= ======= =======
Weighted average number of common
shares outstanding .......................... 19,232 19,225 16,572
Net income per share .......................... $ 2.92 $ 1.98 $ 1.21
DILUTED:
Net income available to common
stockholders .................................. $56,248 $38,058 $20,016
======= ======= =======
Weighted average number of common
shares outstanding ............................ 19,232 19,225 16,572
Net effect of assumed exercise of stock
options based on treasury stock
method using average market price ............. 736 1,013 557
------ ------ ------
19,968 20,238 17,129
------ ------ ------
Net income per share .......................... $ 2.82 $ 1.88 $ 1.17
EXHIBIT 12 (a)
METRIS COMPANIES INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Earnings before income taxes: (1) .............. $ 93,248 $ 61,883 $ 32,546 $ 7,449 $ 3,503
Fixed Charges: (1)
Interest on indebtedness, and
amortization of debt expense ............ 30,513 11,951 4,106 1,217
Interest factor of rental expense ......... 2,134 1,313 378 50 26
-------- -------- -------- -------- --------
Total fixed charges ....................... 32,647 13,264 4,484 1,267 26
-------- -------- -------- -------- --------
Total available earnings ....................... $125,895 $ 75,147 $ 37,030 $ 8,716 $ 3,529
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ............. 3.86 5.67 8.26 6.88 134.16
</TABLE>
(1) As defined in Item 503(d) of Regulation S-K
EXHIBIT 12 (b)
METRIS COMPANIES INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Earnings before income taxes: (1) ................ $ 93,248 $ 61,883 $ 32,546 $ 7,449 $ 3,503
Preferred dividend requirement ................... $ 1,100
Ratio of earnings before tax expense to net income 1.63
-------- -------- -------- -------- --------
Preferred dividends (2) .......................... $ 1,789
Fixed Charges: (1)
Interest on indebtedness, and
amortization of debt expense .............. 30,513 11,951 4,106 1,217
Interest factor of rental expense ........... 2,134 1,313 378 50 26
-------- -------- -------- -------- --------
32,647 13,264 4,484 1,267 26
Total fixed charges and preferred dividends . 34,436 13,264 4,484 1,267 26
-------- -------- -------- -------- --------
Total available earnings ......................... $125,895 $ 75,147 $ 37,030 $ 8,716 $ 3,529
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ............... 3.66 5.67 8.26 6.88 134.16
</TABLE>
(1) As defined in Item 503(d) of Regulation S-K.
(2) The preferred dividends were increased to amounts representing the pretax
earnings that would be required to cover such dividend requirements.
Exhibit 13
Metris Companies Inc.
1998 Annual Report, Pages 18 to 62
<TABLE>
Selected Financial Data
(In thousands, except EPS, dividends and stock prices)
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income Statement Data (Managed Basis):(1)
<S> <C> <C> <C> <C> <C>
Net Interest Income ..................... $ 505,812 $ 306,361 $ 143,491 $ 26,354 $ 487
Provision for Loan Losses ............... 534,124 319,299 136,305 26,234
Other Operating Income .................. 346,198 212,869 126,647 52,969 14,238
Other Operating Expense ................. 224,638 138,048 101,287 45,640 11,222
------- ------- ------- ------ ------
Income Before Income Taxes .............. 93,248 61,883 32,546 7,449 3,503
Tax Rate ................................ 38.5% 38.5% 38.5% 38.5% 37.3%
Net Income .............................. $ 57,348 $ 38,058 $ 20,016 $ 4,581 $ 2,198
------- ------- ------- ------ ------
Per Common Share Statistics:
EPS - diluted (2) ....................... $ 2.82 $ 1.88 $ 1.17 $ 0.28 $ 0.14
Stock Price (year end) .................. 50.31 34.25 24.00
Dividends Paid .......................... .04 .03
Shares Outstanding (year end) ........... 19,260 19,225 19,225 15,967 15,967
Shares Used to Compute EPS .............. 19,968 20,238 17,129 16,369 16,270
(diluted) ------- ------- ------- ------ ------
Other Data (Managed Basis): (1)
Total Accounts .......................... 2,972 2,293 1,418 703
Year-end Loans .......................... $5,315,042 $3,546,936 $1,615,940 $ 543,619
Year-end Assets ......................... 5,503,862 3,604,972 1,687,227 622,983 $ 9,856
Average Loans ........................... 4,000,467 2,294,893 1,018,856 183,274
Average Interest-Earning
Assets ................................ 4,040,220 2,341,451 1,040,924 193,086 6,615
Average Assets .......................... 4,159,171 2,355,978 1,078,346 214,363 7,076
Debt .................................... 310,896 244,000 55,163 63,487
Preferred Stock ......................... 201,100
Average Total Equity .................... 219,835 158,180 92,852 30,083 5,365
Net Interest Margin (3) ................. 12.5% 13.1% 13.8% 13.6% 7.4%
Return on Average Assets ................ 1.4% 1.6% 1.9% 2.1% 31.1%
Return on Average Total
Equity ................................ 26.1% 24.1% 21.6% 15.2% 41.0%
Loan Loss Reserves ...................... $ 393,283 $ 244,084 $ 95,669 $ 22,219
Delinquency Ratio (4) ................... 6.8% 6.6% 5.5% 4.0%
Loan Loss Reserve Ratio ................. 7.4% 6.9% 5.9% 4.1%
Net Charge-off Ratio (5) ................ 10.1% 8.3% 6.2% 2.2%
Fee-Based Services Revenues ............. $ 106,601 $ 63,413 $ 50,273 $ 24,441 $ 14,238
</TABLE>
<PAGE>
(1) The Company analyzes its financial performance on a managed loan portfolio
basis whereby the income statement and balance sheet are adjusted to
reverse the effects of securitization.
(2) Earnings per share is calculated assuming the Company was incorporated at
the beginning of the first year shown.
(3) Includes the Company's actual cost of funds plus all costs associated with
asset securitizations, including the interest expense paid to the
certificate holders and amortization of the discount and fees.
(4) Delinquency ratio represents credit card loans that were at least 30 days
contractually past due at year end as a percentage of year-end managed
loans.
(5) Net charge-off ratio reflects actual principal amounts charged-off, less
recoveries, as a percentage of average managed credit card loans.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of Metris Companies Inc. and its subsidiaries (collectively, the
"Company"), including Direct Merchants Credit Card Bank, National Association
("Direct Merchants Bank"). This discussion should be read in conjunction with
the consolidated financial statements and the related notes thereto.
General
We are an information-based direct marketer and provider of consumer
credit products and fee-based services primarily to moderate income consumers.
We underwrite and offer credit cards and such fee-based services to a sector of
consumers traditionally overlooked by other credit card companies and in doing
so provide opportunities for such individuals to establish credit. Our products
are available throughout the United States.
Our home page on the Internet is at www.metriscompanies.com. You can
learn more about the Company by visiting that site.
Business Segments
In June 1997, the Financial Accounting Standards Board ("FASB") issued
the Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes standards for the way public enterprises report information about
operating segments. SFAS 131, which was adopted by the Company for the year
ended December 31, 1998, requires management to describe the factors used to
identify the segments.
Management has concluded that the Company measures performance and
operates in two business segments.
o Consumer Credit Products, which are primarily unsecured credit cards issued by
Direct Merchants Bank; and
o Fee-Based Services, which include debt waiver programs, membership
clubs and third party insurance offered to its credit card
customers and customers of third parties. In addition, the Company
includes within this operating segment the Company's extended
service plans.
The Company receives income from its consumer credit products through:
interest charges and other finance charges assessed on outstanding credit card
loans; credit card fees (including annual membership, cash advances, overlimit
fees, and past due fees); and interchange fees. The primary expenses of this
business are the costs of funding the loans, provisions for loan losses and
operating expenses including employee compensation, account solicitation and
marketing expenses and data processing and servicing expenses. Profitability is
affected by response rates to solicitation efforts, loan growth, interest
spreads on loans, credit card usage, credit quality (delinquencies and charge
offs), card cancellations and fraud losses.
The fee-based services business derives benefits from the Company's
consumer credit products business because the Company cross sells products to
its credit card holders. Nonetheless, the two business segments are different
with respect to the factors that affect profitability, including how income is
generated and how expenses are incurred. These differences require management to
manage their operations separately.
The Company receives revenue from its fee-based services through fees
and commissions for such services. Expenses include costs of solicitation,
underwriting and claims servicing expenses, fees paid to third parties and other
operating expenses. Profitability for this business is affected by response
rates to solicitation efforts, returns or cancel rates, claims rates, and other
factors.
Spin Off
You will see references in the following discussion of our financial
performance to the "Spin Off." Prior to September 25, 1998, Fingerhut Companies,
Inc. ("FCI")owned 83% of the Company's common stock. During the third quarter of
1998, FCI received written approval from the Internal Revenue Service to
distribute its interest in the Company to FCI's shareholders in a tax free "spin
off." FCI executed this Spin Off on September 25, 1998, and at that time the
Company ceased to be a subsidiary of FCI.
Results of Operations
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Net income for the year ended December 31, 1998, was $57.3 million, or
$2.82 per share, an increase of $19.2 million over net income of $38.1 million,
or $1.88 per share, for 1997. The 51% increase in net income is the result of an
increase in net interest income and other operating income partially offset by
increases in the provision for loan losses and other operating expenses. These
increases are largely attributable to the growth in average managed loans to
$4.0 billion for 1998 from $2.3 billion for 1997, an increase of 74%, and growth
in total credit card accounts to 3.0 million at December 31, 1998, from 2.3
million at December 31, 1997.
The provision for loan losses on a managed basis was $534.1 million in
1998, compared to $319.3 million in 1997. The increase primarily reflects higher
credit card loan balances as well as an increase in net charge-offs. The managed
net charge-off rate was 10.1% for 1998, compared to 8.3% in 1997. The charge-off
ratio for the years ended December 31, 1998, and 1997, was favorably impacted by
70 and 90 basis points, respectively due to purchase accounting related to
portfolio acquisitions.
Other operating income on a managed basis increased $133.3 million to
$346.2 million, primarily due to credit card fees, interchange and other credit
card income, which increased to $251.2 million for 1998, up 64% over $153.6
million for 1997. In addition, fee-based services revenues increased 68% to
$106.6 million for 1998, up from $63.4 million for 1997. These increases were
primarily due to the growth in total accounts and outstanding receivables in the
managed credit card loan portfolio, the continued strong performance of debt
waiver and additional club membership sales.
Other operating expenses increased to $224.6 million in 1998, compared
to $138.0 million in 1997. The increase in operating costs was due to continued
investments in the infrastructure of the Company. Even while making these
investments, the operating efficiency ratio improved to 26.4% in 1998 from 26.6%
in 1997.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Net income for the year ended December 31, 1997, was $38.1 million, or
$1.88 per share, an increase of $18.1 million over net income of $20.0 million,
or $1.17 per share, for 1996. The 90% increase in net income is the result of an
increase in net interest income and other operating income partially offset by
increases in the provision for loan losses and other operating expenses. These
increases are largely attributable to the growth in average managed loans to
$2.3 billion for 1997 from $1.0 billion for 1996, an increase of 125%, and
growth in total credit card accounts to 2.3 million at December 31, 1997, from
1.4 million at December 31, 1996.
The provision for loan losses on a managed basis was $319.3 million in
1997, compared to $136.3 million in 1996. The increase primarily reflects higher
credit card loan balances as well as an increase in net charge-offs. The managed
net charge-off rate was 8.3% for 1997, compared to 6.2% in 1996. The charge-off
ratio for the year ended December 31, 1997 was favorably impacted by 90 basis
points due to purchase accounting related to portfolio acquisitions.
<PAGE>
Other operating income on a managed basis increased $86.2 million to
$212.9 million, primarily due to credit card fees, interchange and other credit
card income, which increased to $153.6 million for 1997, up 74% over $88.3
million for 1996. In addition, fee-based services revenues increased 26% to
$63.4 million for 1997, up from $50.3 million for 1996. These increases were
primarily due to the growth in total accounts and outstanding receivables in the
managed credit card loan portfolio.
Other operating expenses increased to $138.0 million in 1997, compared
to $101.3 million in 1996. The increase in operating costs was due to continued
investments in the infrastructure of the Company. However, the Company's
operating effectiveness as measured by the Company's managed operating
efficiency ratio improved to 26.6% in 1997 from 37.5% in 1996.
Managed Loan Portfolio and the Impact of Credit Card Securitizations
Securitization
A major source of funding for the Company is the securitization of
credit card loans. Securitization requires the Company to remove credit card
loans sold with limited recourse from the consolidated balance sheet. The
securitization and sale of credit card loans changes the Company's interest in
such loans from lender to servicer, with a corresponding change in how revenues
and expenses are reported in the income statement. For securitized credit card
loans, amounts that otherwise would have been recorded as net interest income,
fee income and provision for loan losses are instead reported in other operating
income as net securitization and credit card servicing income.
Managed Loan Portfolio
The Company analyzes its financial performance on a managed loan
portfolio basis. To do so, the income statement and balance sheet are adjusted
to reverse the effects of securitization. The Company's discussion of revenues,
where applicable, and provision for loan losses includes comparisons to amounts
reported in the Company's consolidated statements of income ("owned basis") as
well as on a managed basis.
The Company's managed loan portfolio is comprised of credit card loans
held for securitization, retained interests in loans securitized and the
investors' share of securitized credit card loans. The investors' share of
securitized credit card loans is not an asset of the Company, and therefore, is
not shown on the Company's consolidated balance sheets. The following tables
summarize the Company's managed loan portfolio:
<TABLE>
December 31,
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Year-end balances:
Credit card loans:
<S> <C> <C> <C>
Loans held for securitization ........... $ 3,430 $ 8,795 $ 14,164
Retained interests in loans securitized . 753,469 471,831 201,165
Investors' interests in securitized loans 4,558,143 3,066,310 1,400,611
--------- --------- ---------
Total managed loan portfolio .............. $5,315,042 $3,546,936 $1,615,940
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Average balances:
Credit card loans:
<S> <C> <C> <C>
Loans held for securitization ........... $ 52,016 $ 78,264 $ 28,632
Retained interests in loans securitized . 544,364 278,554 121,177
Investors' interests in securitized loans 3,404,087 1,938,075 869,047
--------- --------- -------
Total managed loan portfolio .............. $4,000,467 $2,294,893 $1,018,856
========== ========== ==========
</TABLE>
Impact of Credit Card Securitizations
The following table provides a summary of the effects of credit card
securitizations on selected line items of the Company's statements of income for
each of the periods presented, as well as selected financial information on both
an owned and managed loan portfolio basis:
Year Ended December 31,
--------------------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Statements of Income (owned basis):
Net interest income .............. $ 82,698 $ 57,243 $ 26,088
Provision for loan losses ........ 77,770 43,989 18,477
Other operating income ........... 312,958 186,677 126,222
Other operating expense .......... 224,638 138,048 101,287
---------- ---------- ----------
Income before income taxes ....... $ 93,248 $ 61,883 $ 32,546
========== ========== ==========
Adjustments for Securitizations:
Net interest income .............. $ 423,114 $ 249,118 $ 117,403
Provision for loan losses ........ 456,354 275,310 117,828
Other operating income ........... 33,240 26,192 425
Other operating expense
---------- ---------- ----------
Income before income taxes ....... $ $ $
========== ========== ==========
Statements of Income (managed basis):
Net interest income .............. $ 505,812 $ 306,361 $ 143,491
Provision for loan losses ........ 534,124 319,299 136,305
Other operating income ........... 346,198 212,869 126,647
Other operating expense .......... 224,638 138,048 101,287
---------- ---------- ----------
Income before income taxes ....... $ 93,248 $ 61,883 $ 32,546
========== ========== ==========
Other Data:
Owned Basis:
Average interest earning assets .. $ 636,133 $ 403,375 $ 171,877
Return on average assets ......... 7.4% 9.1% 9.6%
Return on average total equity ... 26.1% 24.1% 21.6%
Net interest margin (1) .......... 13.0% 14.2% 15.2%
Managed Basis:
Average interest earning assets .. $4,040,220 $2,341,451 $1,040,924
Return on average assets ......... 1.4% 1.6% 1.9%
Return on average total equity ... 26.1% 24.1% 21.6%
Net interest margin (1) .......... 12.5% 13.1% 13.8%
(1) Net interest margin is equal to net interest income divided by average
interest-earning assets.
Risk Based Pricing
The Company prices credit card offers based on a prospect's risk
profile prior to solicitation. The Company evaluates a prospect to determine
credit needs, credit risk, and existing credit availability and then develops a
customized offer that includes the most appropriate product, brand, pricing and
credit line. After credit card accounts are opened, the Company periodically
monitors customers' internal and external credit performance and periodically
recalculates behavior, revenue, attrition and bankruptcy predictors. As
customers evolve through the credit life cycle and are regularly rescored, the
lending relationship can evolve to include more competitive (or more
restrictive) pricing and product configurations. These analyses consider the
overall profitability of accounts using both credit information and the
profitability from selling fee-based services to the customers.
Net Interest Income
Net interest income consists primarily of interest earned on the
Company's credit card loans less interest expense on borrowings to fund the
loans. Managed net interest income for the year ended December 31, 1998, was
$505.8 million compared to $306.4 million for the same period in 1997, an
increase of $199.4 million. This increase was primarily due to a $1.7 billion
increase in average managed loans over the comparable period in 1997. The
managed net interest margin decreased to 12.5% for the year ended December 31,
1998, from 13.1% for the year ended December 31, 1997. The reduction in the
managed net interest margin was primarily due to increased charge-offs of
finance charges in 1998. The net interest margin on an owned basis decreased to
13.0% for the year ended December 31, 1998, from 14.2% for the same period in
1997 primarily due to higher financing costs as a percent of average
interest-earning assets.
Managed net interest income for the year ended December 31, 1997, was
$306.4 million compared to $143.5 million for the same period in 1996, an
increase of $162.9 million. This increase was primarily due to a $1.3 billion
increase in average managed loans over the comparable period in 1996. The
average yield on managed interest-earning assets decreased to 18.6% for the year
ended December 31, 1997, from 19.1% for the year ended December 31, 1996. The
acquisition of two credit card portfolios reduced the average yield for the year
ended December 31, 1997 by approximately 0.2%. The remaining reduction in the
average yield was due to increased finance charge charge-offs in 1997. The
average yield on interest-earning assets on an owned basis decreased to 17.2%
for the year ended December 31, 1997, from 17.6% for the same period in 1996.
<PAGE>
The following table provides an analysis of interest income and
expense, net interest spread, net interest margin and average balance sheet data
for the years ended December 31, 1998, 1997 and 1996:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997
---- ----
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Owned Basis
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold ........................ $ 20,190 $ 1,065 5.3% $ 30,049 $ 1,636 5.4%
Short-term investments .................... 19,563 1,028 5.3% 16,509 863 5.2%
Credit card loans and retained
interests in loans
securitized ............................ 596,380 111,118 18.6% 356,817 66,695 18.7%
------- ------- ---- ------- ------ ----
Total interest-earning assets ............. $ 636,133 $ 113,211 17.8% $ 403,375 $ 69,194 17.2%
------- ------- ---- ------- ------ ----
Other assets .............................. 423,278 172,739
Allowance for loan losses ................. (285,244) (158,211)
------- -------
Total assets .......................... $ 774,167 $ 417,903
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities .............. $ 284,038 $ 30,513 10.7% $ 149,726 $ 11,951 8.0%
Other liabilities ......................... 270,294 109,997
------- -------
Total liabilities ......................... 554,332 259,723
Stockholders' equity ...................... 219,835 158,180
------- -------
Total liabilities and equity .............. $ 774,167 $ 417,903
=========== ===========
Net interest income and interest margin (1) $ 82,698 13.0% $ 57,243 14.2%
Net interest rate spread (2) .............. 7.1% 9.2%
Managed Basis
Credit card loans ......................... $ 4,000,467 $ 738,675 18.5% $ 2,294,893 $ 433,334 18.9%
Total interest-earning assets ............. 4,040,220 740,768 18.3% 2,341,451 435,833 18.6%
Total interest-bearing liabilities......... 3,719,960 234,956 6.3% 2,087,801 129,472 6.2%
Net interest income and interest margin (1) 508,812 12.5% 306,361 13.1%
Net interest rate spread (2) .............. 12.0% 12.4%
</TABLE>
(1)Net interest margin is computed by dividing net interest income by average
total interest-earning assets.
(2)The interest rate spread is the yield on average interest-earning assets
minus the funding rate on average interest-bearing liabilities.
<PAGE>
Analysis of Average Balances, Interest and Average Yields and Rates (continued)
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Owned Basis
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold ........................ $ 30,049 $ 1,636 5.4% $ 16,299 $ 867 5.3%
Short-term investments .................... 16,509 863 5.2% 5,769 299 5.2%
Credit card loans and retained
interests in loans
securitized ............................. 356,817 66,695 18.7% 149,809 29,028 19.4%
------- ------ ---- ------- ------ ----
Total interest-earning assets ......... $ 403,375 $ 69,194 17.2% $ 171,877 $ 30,194 17.6%
------- ------ ---- ------- ------ ----
Other assets .............................. 172,739 91,030
Allowance for loan losses ................. (158,211) (53,608)
------- -------
Total assets .......................... $ 417,903 $ 209,299
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities .............. $ 149,726 $ 11,951 8.0% $ 57,708 $ 4,106 7.1%
Other liabilities ......................... 109,997 58,739
------- -------
Total liabilities .......................... 259,723 116,447
Stockholders' equity ...................... 158,180 92,852
------- -------
Total liabilities and equity .............. $ 417,903 $ 209,299
=========== ===========
Net interest income and interest margin (1) $ 57,243 14.2% $ 26,088 15.2%
Net interest rate spread (2) .............. 9.2% 10.5%
Managed Basis
Credit card loans ......................... $ 2,294,893 $ 433,334 18.9% $ 1,018,856 $ 197,467 19.4%
Total interest-earnings assets ............ 2,341,451 435,833 18.6% 1,040,924 198,633 19.1%
Total interest-bearing liabilities......... 2,087,801 129,472 6.2% 926,755 55,142 5.9%
Net interest income and interest margin (1) 306,361 13.1% 143,491 13.8%
Net interest rate spread (2) .............. 12.4% 13.2%
</TABLE>
(1) Net interest margin is computed by dividing net interest income by average
total interest-earning assets.
(2) The interest rate spread is the yield on average interest-earning assets
minus the funding rate on average interest-bearing liabilities.
<PAGE>
Interest Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, in addition to changes in the volume of
interest-earning assets and interest-bearing liabilities. The following table
presents the effects of changes in average volume and interest rates on
individual financial statement line items on an owned basis:
<TABLE>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 1997 vs. 1996
---------------------------------------------------------------------------------------
Change due to* Change due to*
(Dollars in thousands) Increase/
(Decrease) Volume Rate Increase Volume Rate
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold .............. $ (571) $ (521) $ (50) $ 769 $ 749 $ 20
Short-term investments .......... 165 160 5 564 562 2
Credit card loans and retained
interests in loans securitized 44,423 44,635 (212) 37,667 38,655 (988)
-------- -------- -------- -------- -------- --------
Total interest income ........ 44,017 43,061 956 39,000 39,694 (694)
Interest expense ................ 18,562 13,397 5,165 7,845 7,288 557
-------- -------- -------- -------- -------- --------
Net interest income ............. $ 25,455 $ 29,664 $ (4,209) $ 31,155 $ 32,406 $ (1,251)
======== ======== ======== ======== ======== ========
</TABLE>
* The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change in
each. The changes in income and expense are calculated independently for each
caption in the analysis. The totals for the volume and rate columns are not the
sum of the individual lines.
Other Operating Income
Other operating income contributes substantially to the Company's
results of operations, representing 73%, 73% and 81% of owned revenues for the
years ended December 31, 1998, 1997 and 1996, respectively. Fee-based services
revenues, particularly from debt waiver products, continue to provide an
increasing percentage of other operating income. Debt waiver products and other
fee-based services revenues are expected to increase with growth in credit card
accounts and as the Company continues to offer other fee-based services to its
customer base and to customers of third parties. The following table presents
other operating income on an owned basis:
<TABLE>
Year Ended December 31,
---------------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- -----
Other Operating Income:
<S> <C> <C> <C>
Net securitization and credit card servicing income ...... $138,221 $ 79,533 $ 49,921
Credit card fees, interchange and other credit card income 68,136 43,731 26,028
Fee-based services revenues .............................. 106,601 63,413 50,273
-------- -------- --------
Total .............................................. $312,958 $186,677 $126,222
======== ======== ========
</TABLE>
<PAGE>
Other operating income increased $126.3 million for the year ended
December 31, 1998, over 1997, primarily due to income generated from the growth
in average credit card loans. Additionally, fee-based services revenues
increased 68% to $106.6 million because of the Company's marketing efforts to
cross-sell other products and services to its customers and customers of third
parties. Specifically, debt waiver product revenue increased by $26.2 million to
$73.8 million for the year ended December 31, 1998, as the Company continued to
add new credit card customers with debt waiver protection. In addition,
interchange revenue increased over the prior year due to credit card charge
volume increasing to approximately $3.9 billion in 1998 from $2.7 billion in
1997.
On September 28, 1998, the SEC issued a press release and stated the
"SEC will formulate and augment new and existing accounting rules and
interpretations covering revenue recognition, restructuring reserves,
materiality, and disclosure;" for all publicly-traded companies. Until such time
as the SEC staff issues such interpretative guidelines, it is unclear what, if
any, impact such interpretative guidance will have on the Company's current
accounting practices. However, the potential changes in accounting practice
being considered by the SEC Staff could have a material impact on the manner in
which the Company recognizes revenue. Any such changes would have no effect on
reported cash flow or the economic value of the Company's business.
The fee-based services revenues reported for 1998 reflect the Company's
previously announced change in revenue recognition. This change was made to be
consistent with recent revenue recognition policy changes made by others in the
Company's industry. This change resulted in a cumulative one-time reduction in
revenues of approximately $3.0 million and a corresponding reduction in expenses
of approximately $3.1 million, or a $68,000 increase in net income.
Other operating income increased $60.5 million for the year ended
December 31, 1997, over 1996, primarily due to income generated from the growth
in average securitized credit card loans. Additionally, fee-based services
revenues increased 26% to $63.4 million because of the Company's marketing
efforts to cross-sell other products and services to its customers and customers
of third parties. Specifically, debt waiver product revenue increased by $22.1
million to $47.6 million for the year ended December 31, 1997, as the Company
continued to add new credit card customers with debt waiver protection. In
addition, interchange revenue increased over the prior year due to credit card
charge volume increasing to approximately $2.7 billion in 1997 from $1.7 billion
in 1996.
<PAGE>
<TABLE>
Other Operating Expense
Year Ended December 31,
-----------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Other Operating Expense:
<S> <C> <C> <C>
Credit card account and other product solicitation and
marketing expenses .................................... $ 40,949 $ 30,503 $ 29,297
Employee compensation .................................... 62,627 35,200 23,068
Data processing services and communications
35,445 20,087 12,757
Third-party servicing expense ............................ 11,074 12,711 9,207
Warranty and debt waiver underwriting and claims servicing
expense ............................................... 12,279 6,053 10,024
Credit card fraud losses ................................. 4,436 3,240 2,276
Other .................................................... 57,828 30,254 14,658
------ ------ ------
Total .............................................. $224,638 $138,048 $101,287
======== ======== ========
</TABLE>
Total other operating expenses for the year ended December 31, 1998
increased $86.6 million over 1997, largely due to costs associated with the
growth of the Company's business activities. Employee compensation and other
expenses increased $27.4 million and $27.6 million, respectively, for the year
ended December 31, 1998, due to increased staffing needs and use of outside
services to support the increase in credit card accounts, fee-based services
active member growth and other functions. Also, data processing services and
communications expenses increased $15.4 million, largely due to the growth in
credit card accounts, transaction volumes and loan balances.
Total other operating expenses for the year ended December 31, 1997,
increased $36.8 million over 1996, largely due to costs associated with the
growth of the Company's business activities. Also, data processing services and
communications expenses and third-party servicing expenses increased by $7.3
million and $3.5 million, respectively, largely due to the growth in credit card
accounts, transaction volumes and loan balances.
Total other operating expenses include direct and allocated expenses
from FCI for administrative services provided to the Company under an
administrative services agreement between the Company and FCI. Additionally,
total other operating expenses reflect the retroactive effects of additional
agreements and contracts between the Company and FCI or its subsidiaries (see
Note 1 to the Consolidated Financial Statements).
Income Taxes
The Company's provision for income taxes includes both federal and
state income taxes. Applicable income tax expense was $35.9 million, $23.8
million and $12.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively. This tax expense represents an effective tax rate of 38.5% for the
years ended December 31, 1998, 1997 and 1996.
Asset Quality
The Company's delinquency and net loan charge-off rates at any point in
time reflect, among other factors, the credit risk of loans, the average age of
the Company's various credit card account portfolios, the success of the
Company's collection and recovery efforts, and general economic conditions. The
average age of the Company's credit card portfolio affects the stability of
delinquency and loss rates of the portfolio. The Company continues to focus its
resources on refining its credit underwriting standards for new accounts, and on
collections and post charge-off recovery efforts to minimize net losses. At
December 31, 1998, 51% of managed accounts and 47% of managed loans were less
than 24 months old. Accordingly, the Company believes that its loan portfolio
will experience increasing or fluctuating levels of delinquency and loan losses
as the average age of the Company's accounts increases.
This trend is reflected in the change in the Company's net charge-off
ratio. For the year ended December 31, 1998, the Company's net charge-off ratio
was 10.1%, compared to 8.3% and 6.2% for the years ended December 31, 1997 and
1996, respectively. The charge-off ratio for the years ended December 31, 1998
and 1997 was favorably impacted by approximately 70 and 90 basis points,
respectively, due to purchase accounting related to the portfolio acquisitions.
The Company believes, consistent with its statistical models and other credit
analysis, that this rate will continue to fluctuate but generally rise over the
next year.
The Company's strategy for managing loan losses consists of credit line
management and customer purchase authorizations. Loan losses are further managed
through the offering of credit lines which are generally lower than is currently
standard in the industry. Individual accounts and their related credit lines are
also continually managed using various marketing, credit and other management
processes in order to continue to maximize the profitability of accounts.
Delinquencies
Delinquencies not only have the potential to affect earnings in the
form of net loan losses, but are also costly in terms of the personnel and other
resources dedicated to their resolution. Delinquency levels are monitored on a
managed basis, since delinquency on either an owned or managed basis subjects
the Company to credit loss exposure. A credit card account is contractually
delinquent if the minimum payment is not received by the specified date on the
cardholder's statement. It is the Company's policy to continue to accrue
interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged off. The following table presents the delinquency trends of the
Company's credit card loan portfolio on a managed portfolio basis:
Managed Loan Delinquency
<TABLE>
December 31, % of December 31, % of December 31, % of
1998 Total 1997 Total 1996 Total
---- ------- ---------- ---- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Managed loan portfolio ................... $5,315,042 100% $3,546,936 100% $1,615,940 100%
Loans contractually delinquent:
30 to 59 days ......................... 113,449 2.1% 72,114 2.0% 32,114 2.0%
60 to 89 days ......................... 75,049 1.4% 49,300 1.4% 20,398 1.2%
90 or more days ....................... 173,812 3.3% 111,166 3.2% 36,857 2.3%
------- --- ------- --- ------ ---
Total .............................. $ 362,310 6.8% $ 232,580 6.6% $ 89,369 5.5%
========== === ========== === ========== ===
</TABLE>
The above numbers reflect the continued seasoning of the Company's
managed loan portfolio. In 1998 and 1997, the ratios were favorably impacted by
purchase accounting for portfolio acquisitions by 60 basis points for both
periods. The Company intends to continue to focus its resources on its
collection efforts to minimize the negative impact to net loan losses that
results from increased delinquency levels.
<PAGE>
Net charge-offs
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged against the related income at the
time of charge-off. The following table presents the Company's net charge-offs
for the periods indicated as reported in the consolidated financial statements
and on a managed portfolio basis:
<TABLE>
Year Ended December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Owned Basis:
<S> <C> <C> <C>
Average loans outstanding .......................... $ 596,380 $ 356,817 $ 149,809
Net charge-offs .................................... 58,793 29,398 9,327
Net charge-offs as a percentage
of average loans outstanding ...................... 9.9% 8.2% 6.2%
=== === ===
Managed Basis:
Average loans outstanding .......................... $4,000,467 $2,294,893 $1,018,856
Net charge-offs .................................... 405,077 191,130 62,855
Net charge-offs as a percentage
of average loans outstanding ....................... 10.1% 8.3% 6.2%
==== === ===
</TABLE>
Provision and allowance for loan losses
The allowance for loan losses is maintained for the retained interest
in loans securitized. For securitized loans, anticipated losses and related
provisions for loan losses are reflected in the calculations of net
securitization and credit card servicing income. Provisions for loan losses are
made in amounts necessary to maintain the allowance at a level estimated to be
sufficient to absorb probable future losses of principal and earned interest,
net of recoveries, inherent in the existing loan portfolio.
The provision for loan losses on a managed basis for the year ended
December 31, 1998, totaled $534.1 million compared to a provision of $319.3
million in 1997. The increase in the provision for loan losses in 1998 compared
to 1997 is primarily reflective of the large increase in loans and the overall
seasoning of the portfolio. The following table presents the change in the
Company's allowance for loan losses and other ratios on a managed portfolio
basis for the periods presented:
Analysis of Allowance for Loan Losses
<PAGE>
<TABLE>
Year Ended December 31,
-----------------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Managed Basis:
<S> <C> <C> <C>
Balance at beginning of year ........................... $244,084 $ 95,669 $ 22,219
Allowance related to assets acquired, net .............. 20,152 20,246
Provision for loan losses .............................. 534,124 319,299 136,305
Loans charged off ...................................... 420,875 195,535 64,083
Recoveries ............................................. 15,798 4,405 1,228
------- ------- ------
Net loan charge-offs ................................... 405,077 191,130 62,855
------- ------- ------
Balance at end of year ................................. $393,283 $244,084 $ 95,669
======== ======== ========
Ending allowance as a percent of loans ................. 7.4% 6.9% 5.9%
======== ======== ========
</TABLE>
Management believes the allowance for loan losses is adequate to cover
probable losses in the loan portfolio under current conditions. However, there
can be no assurance as to the future credit losses that may be incurred in
connection with the Company's loan portfolio, nor can there be any assurance
that the loan loss allowance that has been established by the Company will be
sufficient to absorb such expected loan losses. Management continually monitors
the allowance for loan losses and makes additional provisions to the allowance
as it deems appropriate. Derivatives Activities
The Company uses derivative financial instruments for the purpose of
managing its exposure to interest rate risks and has a number of procedures in
place to monitor and control both market and credit risk from these derivatives
activities. All derivatives strategies and transactions are managed by a special
management committee which must make quarterly reports to the Board of
Directors.
Prior to the Spin Off, the Company had entered into interest rate cap
and swap agreements to hedge the cash flow and earnings impact of fluctuating
market interest rates on the spread between the floating rate loans owned by the
Metris Master Trust (the "Trust") and the floating and fixed rate securities
issued by the Trust to fund the loans. In connection with the issuance of term
asset-backed securities by the Trust in 1998, the Company entered into term
interest rate cap agreements with highly-rated bank counterparties in a total
notional amount of $1.8 billion effectively capping the potentially negative
impact to the Trust of increases in the floating interest rate of the securities
at approximately 9.2%. The Company also entered into a term interest rate cap
agreement in connection with the PNC Bank Corp portfolio acquisition with
highly-rated bank counterparties in a total notional amount of $640 million,
effectively capping the potentially negative impact of increases in market
interest rates of the securities at 7.35%. Due to the Spin Off, the Company
terminated interest rate swap agreements guaranteed by FCI related to two trust
series fixed rate asset-backed securities issuances. Proceeds were utilized to
purchase interest rate floor contracts from highly-rated counterparties which
did not require a FCI guaranty. The floors were in the same notional amounts,
fixed interest rate strike rates, and maturities as the previous swaps in order
to hedge the potential impact on the Company's cash flow and earnings of a low
market interest rate environment in which the yield on the Trust's floating rate
loans might decline causing the margin over the fixed rate funding to compress.
During October 1998, the Company terminated the interest rate floors related to
one of the Trust Series. The gain of approximately $34.1 million on this
termination is being amortized into income over the remaining life of the
securities. The cash proceeds of approximately $43.4 million were used to reduce
borrowings under a credit facility.
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's principal market risk is due to changes in interest
rates. This affects the Company directly in its lending and borrowing
activities, as well as indirectly as interest rates may impact the payment
performance of the Company's cardholders.
To manage the Company's direct risk to market interest rates,
management actively monitors the interest rates and the interest sensitive
components of the Company's owned and managed balance sheet to minimize the
impact changes in interest rates have on the fair value of assets, net income
and cash flow. Management seeks to minimize the impact of changes in interest
rates on the Company primarily by matching asset and liability repricings.
The Company's primary owned and managed assets are credit card loans,
which are virtually all priced at rates indexed to the variable Prime Rate.
Retained interests in loans securitized and loans held for securitization are
funded through a combination of cash flow from operations, the Company's $300
million bank credit facility, $200 million in senior notes, and equity issuance.
The $300 million bank credit facility has pricing that is indexed to the
variable London Interbank Offered Rate ("LIBOR") or a Prime Rate. The Company's
securitized loans are owned by the Trust and bank-sponsored multiseller
receivables conduits (the "Conduits"), which have committed current funding
indexed to variable commercial paper rates, as well as term funding which is
either directly indexed to LIBOR or at fixed rates. At December 31, 1998,
approximately 26.1% of the Trust and Conduit funding of securitized receivables
was funded with fixed rate certificates.
Combining the interest rate floor transaction referred to above with
the Trust and Conduit funding, in a low market interest rate environment, 84.1%
of the funding for the securitized loan portfolio is indexed to floating
commercial paper and LIBOR rates. In a high market interest rate environment,
the potentially negative impact on earnings of higher interest expense is
mitigated by the fixed rate funding and the interest rate cap contracts
described above.
The approach used by management to quantify interest rate risk is a
sensitivity analysis which management believes best reflects the risk inherent
in the Company's business. This approach calculates the impact on net income
from an instantaneous and sustained change in interest rates by 200 basis
points. Assuming no counteractive measures by management, a 200 basis point
increase in interest rates affecting the Company's floating rate financial
instruments, including both debt obligations and loans, will result in an
increase in net income of approximately $16.7 million relative to a base case
over the next 12 months; while a decrease of 200 basis points will result in a
reduction in net income of approximately $12.5 million. The Company's use of
this methodology to quantify the market risk of financial instruments should not
be construed as an endorsement of its accuracy or the accuracy of the related
assumptions. In addition, this methodology does not take into account the
indirect impact interest rates may have on the payment performance of the
Company's cardholders. The quantitative information about market risk is
necessarily limited because it does not take into account operating transactions
or other costs associated with managing immediate changes in interest rates.
Liquidity, Funding and Capital Resources
One of the Company's primary financial goals is to maintain an adequate
level of liquidity through active management of assets and liabilities. Because
the pricing and maturity characteristics of the Company's assets and liabilities
change, liquidity management is a dynamic process, affected by changes in short-
and long-term interest rates. The Company uses a variety of financing sources to
manage liquidity, refunding, rollover and interest rate risks.
The Company finances the growth of its credit card loan portfolio
through cash flow from operations, asset securitization, bank financing,
long-term debt issuance, and equity issuance.
At December 31, 1998 and 1997, the Company had received cumulative net
proceeds of approximately $4.6 billion and $3.1 billion, respectively from sales
of credit card loans to the Trust and Conduits. Cash generated from these
transactions was used to reduce short-term borrowings and to fund credit card
loan portfolio growth. The Company relies upon the securitization of its credit
card loans to fund portfolio growth and, to date, has completed securitization
transactions on terms that it believes are satisfactory. The Company's ability
to securitize its assets depends on the favorable investor demand and legal,
regulatory and tax conditions for securitization transactions, as well as
continued favorable performance of the Company's securitized portfolio of
receivables. Any adverse change could force the Company to rely on other
potentially more expensive funding sources and, in the worst case scenario,
could create liquidity risks if other funding is unavailable.
During 1998, as part of a scheduled amortization of previously
securitized loans, the Company's owned loan portfolio, increased by $34.6
million. The following table presents the amounts, at December 31, 1998 of
investor principal in securitized receivables scheduled to amortize in future
years. The amortization amounts are based upon estimated amortization periods
which are subject to change based on Trust and Conduit performance.
(Dollars in thousands)
1999 $ 1,847,538
2000 608,333
2001 2,102,272
Thereafter 0
-----------
Total Securitized Loans
at December 31, 1998 $ 4,558,143
===========
The Company's lower independent credit ratings, due to the Spin Off,
reduced the advance rate on a portion of the sale of receivables to the Trust.
This required approximately $40 million in additional funding by the Company to
finance the unsold loans.
On June 30, 1998, the Company executed a new $200 million, three-year
revolving credit facility and a $100 million five-year term loan (the "New
Credit Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit Facility, which is not guaranteed by FCI, replaced the Company's $300
million, five-year revolving credit facility (the "Old Credit Facility"). The
New Credit Facility is secured by receivables and subsidiary stock and
guaranteed by a Company subsidiary. Financial covenants in the New Credit
Facility include, but are not limited to, requirements concerning minimum net
worth, minimum tangible net worth to net managed receivables and tangible net
worth plus reserves to delinquent receivables. The minimum tangible net worth to
net managed receivables ratio requirement increased to 5.0% from 4.0% on
December 24, 1998. At December 31, 1998, the Company was in compliance with all
financial covenants under this agreement. At December 31, 1998, the Company had
outstanding borrowings of $110 million under the New Credit Facility. At
December 31, 1997, the Company had outstanding borrowings of $144 million under
the Old Credit Facility. As a result of the Spin Off and the removal of the FCI
guarantee, the Company is no longer able to borrow at an investment grade rate.
The interest rate under the New Credit Facility is higher than the interest rate
under the Old Credit Facility due to the Company's lower independent credit
rating.
In addition to asset securitizations and bank funding, the Company uses
long term debt and equity to fund continued credit card growth. While the
Company planned to issue common equity shares in a public offering after the
Spin Off during the fourth quarter of 1998, volatility in the stock market and
in the Company's stock price caused the Company to seek alternatives to public
issuance through either private issuance of equity or public or private issuance
of equity-like securities. On November 13, 1998, after a review of several
alternatives and discussions with several advisors and investors, the Company
entered into agreements with affiliates of the Thomas H. Lee Company, (the "Lee
Company") to purchase $200 million in Series B Perpetual Preferred Stock (the
"Series B Preferred") and $100 million in 12% Senior Notes due 2006 (the "Lee
Senior Notes"). The Company also issued the Lee Company 3.75 million ten-year
warrants to purchase shares of the Company's common stock for $30, subject to
adjustment in certain circumstances. The Series B Preferred had a 12.5% dividend
payable in additional shares of Series B Preferred for ten years, then
converting to payable in cash. The proceeds from the issuance of the Series B
Preferred and the Lee Senior Notes were used to fund the PNC portfolio
acquisition and general corporate purposes.
On March 12, 1999, shareholders' approved conversion of the Series B
Preferred and Lee Senior Notes into Series C Perpetual Convertible Preferred
stock (the "Series C Preferred"). If notice is received that there is no
regulatory objection to the conversion to the Series C Preferred, the Series B
Preferred and the Lee Senior Notes will be converted into 0.8 million shares of
Series C Preferred at a conversion price of $37.25 and the warrants will be
cancelled. The Series C Preferred has a 9% dividend payable in additional shares
of Series C Preferred and will also receive any dividends paid on the Company's
common stock on an as converted basis. The cumulative payment-in-kind dividends
are effectively guaranteed for a seven-year period. Assuming conversion of the
Series C Preferred into common stock in the first quarter of 1999, the Lee
Company would own approximately 30% of the Company on a diluted basis.
Converting to the Series C Preferred will cause a one-time, non-cash
accounting adjustment for retiring the Series B Preferred and Lee Senior Notes.
The excess of the fair value of the Series C Preferred over the carrying value
of the Series B Preferred and the Lee Senior Notes at the time of the conversion
must be allocated to the Lee Senior Notes and the Series B Preferred Stock based
upon their initial fair values. To arrive at net income available to common
stockholders in the calculation of earnings per share, the amount allocated to
the Lee Senior Notes would be recognized as an extraordinary loss from the early
extinguishment of debt and the amount allocated to the Series B Preferred would
be recognized as a reduction of net income available to common stockholders. The
extraordinary loss attributable to the Lee Senior Notes will not be recorded net
of taxes. These adjustments will not have an impact on total stockholders'
equity. At the time of the printing of this annual report, the fair value of the
Series C Preferred was not determined.
In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 pursuant to an exemption under the Securities Act of
1933, as amended. The net proceeds were used to reduce borrowings under the Old
Credit Facility. In January 1998, the Company commenced an exchange offer for
the Senior Notes pursuant to a registration statement. The terms of the new
Senior Notes are identical in all material respects to the original private
issue. The Senior Notes are unconditionally guaranteed on a senior basis,
jointly and severally, by Metris Direct, Inc., a subsidiary of Metris Companies
Inc., and all future subsidiaries of the Company that guarantee any of the
Company's indebtedness, including the New Credit Facility. The guarantee is an
unsecured obligation of Metris Direct, Inc. and ranks pari passu with all
existing and future unsubordinated indebtedness.
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, Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
the Company or its subsidiaries. Additionally, Direct Merchants Bank is limited
in its ability to declare dividends to the Company. Therefore, Direct Merchants
Bank's investments in federal funds sold are generally not available for the
general liquidity needs of the Company or its subsidiaries. These restrictions
were not material to the operations of the Company at December 31, 1998 and
1997.
As the portfolio of credit card loans grows, or as the Trust and
Conduit certificates amortize or are otherwise paid, the Company's funding needs
will increase accordingly. The Company believes that its cash flow from
operations, asset securitization programs, together with the New Credit
Facility, long term debt issuance and equity issuance, will provide adequate
liquidity to the Company for meeting anticipated cash needs, although no
assurance can be given to that effect.
Capital Adequacy
During 1998, the Company improved its financial position, as reflected
by an increase in stockholders' equity, through the completion of a private
placement with the Lee Company as described above, which raised net proceeds of
approximately $270 million.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the Office of the Comptroller of the Currency (the "OCC"), its
primary regulator. At December 31, 1998 and 1997, Direct Merchants Bank exceeded
the minimum required capital levels and was considered a "well-capitalized"
depository institution under regulations of the OCC.
Newly Issued Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. It requires enterprises to recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company is evaluating the financial impact the adoption of this statement
will have on in its financial statements.
Year 2000
The "Year 2000 Problem" is a result of software systems or hardware
systems utilizing two digits instead of four digits to define the year. Software
or hardware with only two digit capacity may interpret the year 00 as 1900 when
calculating age, length of a phone call, financing period for a loan, or
expiration for a credit card. The problem is not limited to computers and
computer software. Anything that contains a processor that utilizes date
information needs to be assessed to insure it will work correctly in the Year
2000 (i.e. heating/cooling systems, telephones, elevators, alarm systems, vaults
with time locks). Vendors must be evaluated to ensure their compliance;
otherwise materials essential to business operation may not be delivered on
time.
The Company, like all database marketing companies and financial
services institutions, depends heavily upon computer systems for all phases of
its operations. The Company processes data through its own systems and obtains
data and processing services from various vendors. The Company, therefore, must
concern itself not only with its own systems, but also with the status of Year
2000 compliance with respect to those vendors that provide data and processing
services to the Company.
Most of the Company's existing information systems are less than three
years old and were originally designed for Year 2000 compliance, but as a
cautionary measure, the Company has begun testing such internal systems for Year
2000 compliance. The Company has created a Year 2000 project team to identify,
address, and monitor internal computer systems; environmental systems such as
heating/cooling systems, telephones, and elevators; and vendor issues related to
Year 2000 issues. The Company believes that it has adequate resources to achieve
Year 2000 compliance for its systems, which currently may be compliant, and the
evaluation of vendors.
The following phases are used in managing the Year 2000 project for the
Company. These phases are consistent with the OCC and the Federal Financial
Institutions Examination Council (the "FFIEC") recommendations for project
organization.
The Awareness Phase was completed in October 1997. The goal was to
define the Year 2000 problem and gain executive level support.
The Assessment Phase was completed in March 1998. The goal was to
complete an inventory of possible Year 2000 exposure points to gain an
understanding of the size and complexity of the issue.
The Renovation Phase began March 1998 with a targeted completion of
July 1999 for mission critical applications. This phase of the project cannot be
considered successful and complete until the systems have experienced the
century and the leap year transitions and any problems have been addressed. The
goal of this phase is code enhancement, hardware and software upgrades, system
replacements, vendor certification and other associated changes.
The Validation and Implementation Phase began in April 1998 with a
targeted completion of mission critical applications by September 1999. Again,
this phase of the project cannot be considered successful and complete until the
systems have experienced the century and the leap year transitions and any
problems have been addressed. The goal of this phase is validation/testing of
items to ensure Year 2000 compliance, implementation of renovated systems, and
certification of Year 2000 compliance by business users.
The following milestones are a part of the Company's plan to achieve Year 2000
compliance.
<TABLE>
------------------------------- ----------------------------------------------------------------------------------------
<S> <C>
September 30, 1998 Completed development of a proactive customer awareness program
------------------------------- ----------------------------------------------------------------------------------------
------------------------------- ----------------------------------------------------------------------------------------
September 30, 1998 Completed organization planning guidelines and business impact analysis for Year 2000
Business Resumption Contingency Planning
------------------------------- ----------------------------------------------------------------------------------------
------------------------------- ----------------------------------------------------------------------------------------
December 31, 1998 Contingency planning and validation for Year 2000 Business Resumption Contingency
Planning is underway.
------------------------------- ----------------------------------------------------------------------------------------
------------------------------- ----------------------------------------------------------------------------------------
March 31, 1999 Testing with service providers for mission critical systems should be substantially
complete
------------------------------- ----------------------------------------------------------------------------------------
------------------------------- ----------------------------------------------------------------------------------------
September 30, 1999 Testing of mission-critical systems should be complete and implementation should be
substantially complete.
------------------------------- ----------------------------------------------------------------------------------------
------------------------------- ----------------------------------------------------------------------------------------
October 31, 1999 Contingency planning and validation for Year 2000 Business Resumption Contingency
Planning should be complete.
------------------------------- ----------------------------------------------------------------------------------------
</TABLE>
As of December 1998, the project is on schedule. A customer awareness
program has been implemented; a Contingency Planning framework has been
completed and contingency planning efforts are well underway; testing of mission
critical systems was underway by December 1998; and testing of Mission Critical
systems is targeted for completion by September 1999.
The Company is dependent on databases maintained by FCI, and card and
statement generation, among other services, provided by First Data Resources
("FDR"). In addition, the Company is dependent on MasterCard and Visa for
clearinghouse activities associated with credit card use. The project team has
been working with its identified material vendors, including FCI, FDR,
MasterCard, and Visa to determine the status of each vendor's plans for becoming
Year 2000 compliant. The project team is striving to obtain test results showing
Year 2000 compliance by vendors by the end of the first quarter 1999 and has
developed high level contingency plans to address non-compliance by its material
vendors, which may include replacing vendors.
Although the Company cannot ensure compliance by all of its vendors on
a timely basis, the Company believes that it is taking appropriate steps to
identify exposure to Year 2000 problems and to address them on a timely basis.
<PAGE>
The Company believes that the costs of Year 2000 compliance will not be
material to the Company's consolidated financial position, results of
operations, or cash flows.
The most reasonably likely worst case scenario that may impact the
Company's results of operations, financial condition and prospects is the
failure of FDR, VISA and MasterCard to provide services. The
Company's cardholders would be unable to use their credit cards or otherwise
access their accounts. Due to several unknown contributing factors, and the
scope of the Year 2000 issue, the impact this worst case scenario would have on
the Company's results of operations, financial condition and prospects, is an
uncertainty. The scenarios will be analyzed and addressed in the Company's
contingency plans.
The Company views contingency planning from a remediation and business
resumption perspective. Remediation Contingency Planning refers to mitigating
the risks associated with the failure to successfully complete renovation,
validation, and implementation of mission critical systems and vendor services.
Year 2000 Business Resumption Contingency Planning is the process of identifying
core business processes and critical information systems that support those
processes, and developing plans to enable those processes to be resumed, or
alternatives instituted, in the event of a disruption.
The Company has completed high level Year 2000 Remediation Contingency
plans for mission critical applications and vendors. The contingency plans
include identification of the product/service provided, the current vendor,
other vendors that could provide the product/service, estimated timeline and
cost to convert services to another vendor, and any business reasons why the
backup vendors could not provide the services. These plans are reviewed
periodically for accuracy.
The Company has completed a framework that is used in developing Year
2000 Business Resumption Contingency plans and has begun to document plans for
core business processes. Completion of these plans is targeted for October 1999.
Forward-Looking Statements
This annual report contains some forward-looking statements.
Forward-looking statements give our current expectations of future events. You
will recognize these statements because they do not strictly relate to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "think," "believe," and other words
or terms of similar meaning in connection with any discussion of future
performance of the Company. For example, these include statements relating to
future actions, future performance of current or anticipated products,
solicitation efforts, expenses, the outcome of contingencies such as litigation,
and the impact of the capital markets on liquidity. From time to time, we also
may provide oral or written forward-looking statements in other material
released to the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors, which can not be predicted with certainty, will be important in
determining future results. Among such factors are the Company's limited
operating history as a stand alone entity, its limited experience in originating
and servicing credit card accounts, the lack of seasoning of its credit card
accounts which renders predictability of delinquencies more difficult, interest
rate risks, dependence on the securitization markets, state and federal laws and
regulations, and general economic conditions that can have a major impact on the
performance of loans. In addition, like all companies, the Company must deal
with the uncertainty surrounding the effect of the Year 2000 problem. Each of
these factors and others are more fully discussed under the caption
"Business--Risk Factors" contained in the Company's Annual Report on Form 10-K.
As a result of these factors, no forward-looking statements can be guaranteed.
Actual future results may vary materially. Also, please note that the factors we
provide are those we think could cause our actual results to differ materially
from expected and historical results. Other factors besides those listed here or
in the Company's 10-K could also adversely affect the Company.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.
<PAGE>
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
AND INTERNAL CONTROL
The accompanying consolidated financial statements, related financial
data, and other information in this annual report were prepared by the
management of Metris Companies Inc. Management is responsible for the integrity
and objectivity of the data presented, including amounts that must necessarily
be based on judgments and estimates. The consolidated financial statements were
prepared in conformity with generally accepted accounting principles.
Management of Metris Companies Inc. depends on its accounting systems
and internal control structures in meeting its responsibilities for reliable
consolidated financial statements. In management's opinion, these systems and
structures provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorizations. As an integral part of these systems and structures, the Company
utilizes a professional staff of internal auditors who conduct operational and
special audits and coordinate audit coverage with Company management and the
independent auditors.
The consolidated financial statements have been audited by the
Company's independent auditors, KPMG Peat Marwick LLP, whose independent
professional opinion appears separately. Their opinion on the consolidated
financial statements is based on auditing procedures that include performing
selected tests of transactions and records as they deem appropriate. These
auditing procedures are designed to provide reasonable assurance that the
consolidated financial statements are free of material misstatement.
The Audit Committee of the Board of Directors, composed solely of
outside directors, meets periodically with the internal auditors, the
independent auditors and management to review the work of each and ensure that
each is properly discharging its responsibilities. The internal and independent
auditors have free access to the Committee to discuss the results of their audit
work and their findings.
/s/ Ronald N. Zebeck /s/ David D. Wesselink
Ronald N. Zebeck David D. Wesselink
President and Executive Vice President,
Chief Executive Officer Chief Financial Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Metris
Companies Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 Metris
Companies Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 20, 1999, except for the last paragraph of Note 6 and the last paragraph
of Note 11 which are as of March 12, 1999
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
December 31,
1998 1997
---- ----
Assets:
<S> <C> <C>
Cash and due from banks ........................................................ $ 22,114 $ 21,006
Federal funds sold ............................................................. 15,060 27,089
Short-term investments ......................................................... 173 128
------- -------
Cash and cash equivalents ................................................... 37,347 48,223
------- -------
Retained interests in loans securitized ........................................ 753,469 471,831
Less: Allowance for loan losses ............................................. 393,283 244,084
------- -------
Net retained interests in loans securitized .................................... 360,186 227,747
------- -------
Loans held for securitization .................................................. 3,430 8,795
Property and equipment, net .................................................... 21,982 15,464
Accrued interest and fees receivable ........................................... 6,009 4,310
Prepaid expenses and deferred charges .......................................... 59,104 18,473
Deferred income taxes .......................................................... 153,021 80,787
Customer base intangible ....................................................... 81,892 36,752
Other receivables due from credit card securitizations, net 185,935 77,486
Other assets ................................................................... 36,813 20,625
------- -------
Total assets ............................................................. $ 945,719 $ 538,662
=========== ===========
Liabilities:
Debt ........................................................................... $ 310,896 $ 244,000
Accounts payable ............................................................... 19,091 35,356
Current income taxes payable ................................................... 31,783 9,701
Deferred income ................................................................ 124,892 49,204
Accrued expenses and other liabilities ......................................... 26,075 24,363
------- -------
Total liabilities ........................................................... $ 512,737 $ 362,624
------- -------
Stockholders' Equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized,
539,866 shares issued and outstanding........................................ $ 201,100
Common stock, par value $.01 per share; 100,000,000 shares authorized,
19,259,750 and 19,225,000 shares issued and outstanding, respectively........ 193 $ 192
Paid-in capital ................................................................ 107,615 107,059
Retained earnings .............................................................. 124,074 68,787
------- -------
Total stockholders' equity .................................................. $ 432,982 $ 176,038
------- -------
Total liabilities and stockholders' equity .................................. $ 945,719 $ 538,662
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
Year Ended December 31,
1998 1997 1996
---- ---- ----
Interest Income:
<S> <C> <C> <C>
Credit card loans and retained interests in loans securitized......................... $ 111,118 $ 66,695 $ 29,028
Federal funds sold ................................................................... 1,065 1,636 867
Other ................................................................................ 1,028 863 299
-------- -------- --------
Total interest income ............................................................. 113,211 69,194 30,194
Interest expense ..................................................................... 30,513 11,951 4,106
-------- -------- --------
Net Interest Income .................................................................. 82,698 57,243 26,088
Provision for loan losses ............................................................ 77,770 43,989 18,477
-------- -------- --------
Net interest income after provision for loan losses................................... 4,928 13,254 7,611
-------- -------- --------
Other Operating Income:
Net securitization and credit card servicing income................................... 138,221 79,533 49,921
Credit card fees, interchange and other credit card income............................ 68,136 43,731 26,028
Fee-based services revenues .......................................................... 106,601 63,413 50,273
-------- -------- --------
312,958 186,677 126,222
-------- -------- --------
Other Operating Expense:
Credit card account and other product solicitation and marketing expenses............. 40,949 30,503 29,297
Employee compensation ................................................................ 62,627 35,200 23,068
Data processing services and communications .......................................... 35,445 20,087 12,757
Third-party servicing expense ........................................................ 11,074 12,711 9,207
Warranty and debt waiver underwriting and claims servicing expense.................... 12,279 6,053 10,024
Credit card fraud losses ............................................................. 4,436 3,240 2,276
Other ................................................................................ 57,828 30,254 14,658
-------- -------- --------
224,638 138,048 101,287
-------- -------- --------
Income Before Income Taxes ........................................................... 93,248 61,883 32,546
Income taxes ......................................................................... 35,900 23,825 12,530
-------- -------- --------
Net Income ........................................................................... $ 57,348 $ 38,058 $ 20,016
Preferred stock dividends ............................................................ 1,100
-------- -------- --------
Net Income Available to Common Stockholders .......................................... $ 56,248 $ 38,058 $ 20,016
======== ======== ========
Earnings Per Share:
Basic ................................................................................ $ 2.92 $ 1.98 $ 1.21
Diluted .............................................................................. $ 2.82 $ 1.88 $ 1.17
Shares used to compute earnings per share (000's)
Basic ................................................................................ 19,232 19,225 16,572
Diluted .............................................................................. 19,968 20,238 17,129
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
<TABLE>
Total
Preferred Common Paid-In Retained Stockholders'
Stock Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ............... $ $ $ 60,028 $ 11,290 $ 71,318
Net income ............................ 20,016 20,016
Company reorganization ................ 160 (160)
Issuance of common stock .............. 32 47,352 47,384
----------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ............... $ $ 192 $ 107,220 $ 31,306 $ 138,718
Net income ............................ 38,058 38,058
Common stock dividends and other - cash (161) (577) (738)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ............... $ $ 192 $ 107,059 $ 68,787 $ 176,038
Net income ............................ 57,348 57,348
Issuance of preferred stock ........... 200,000 200,000
Common stock dividends and
other - cash ......................... (961) (961)
Preferred stock dividends -
in kind ............................... 1,100 (1,100)
Exercised stock options ............... 1 556 557
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 ............... $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
Year Ended
December 31,
1998 1997 1996
---- ---- ----
Operating Activities:
<S> <C> <C> <C>
Net income ...................................................... $ 57,348 $ 38,058 $ 20,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 48,678 15,942 7,329
Change in allowance for loan losses .......................... 149,199 148,415 73,450
Changes in operating assets and liabilities:
Accrued interest and fees receivable ...................... (1,699) (1,368) (719)
Prepaid expenses and deferred charges ..................... (61,163) (23,150) (6,045)
Deferred income taxes ..................................... (72,234) (49,259) 0
Accounts payable and accrued expenses ..................... (14,553) 28,246 8,110
Other receivables due from credit card securitizations, net (112,170) (31,911) 3,436
Current income taxes payable .............................. 22,082 8,241 (3,718)
Deferred income ........................................... 75,688 26,021 13,096
Other ..................................................... (26,264) (16,022) (31,302)
-------- -------- --------
Net cash provided by operating activities ....................... 64,912 143,213 83,653
-------- -------- --------
Investing Activities:
Proceeds from sales of loans .................................... 1,491,832 1,665,700 952,055
Net loans originated or collected ............................... (901,740) (1,231,223) (1,072,321)
Credit card portfolio acquisitions .............................. (921,558) (738,104)
Additions to property and equipment ............................. (10,814) (11,705) (4,113)
-------- -------- --------
Net cash used in investing activities ........................... (342,280) (315,332) (124,379)
-------- -------- --------
Financing Activities:
Net(decrease)increase in debt ................................... 66,896 188,837 (9,319)
Net proceeds from issuance of common stock ...................... 557 47,384
Cash dividends paid ............................................. (961) (577)
Net proceeds from issuance of preferred stock ................... 200,000
-------- -------- --------
Net cash provided by financing activities ....................... 266,492 188,260 38,065
-------- -------- --------
Net (decrease) increase in cash and cash equivalents
(10,876) 16,141 (2,661)
Cash and cash equivalents at beginning of year .................. 48,223 32,082 34,743
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 37,347 $ 48,223 $ 32,082
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries (collectively, the
"Company")including Direct Merchants Credit Card Bank, N.A. ("Direct Merchants
Bank"). The Company is an information-based direct marketer of consumer credit
products and fee-based services primarily to moderate-income consumers.
Prior to September 1996, Metris Direct, Inc. (previously known as
Fingerhut Financial Services Corporation), a direct subsidiary of MCI, operated
as a division of Fingerhut Companies, Inc. ("FCI"). During September 1996, FCI
reorganized the business through the formation of MCI. The stock of some
subsidiaries, in addition to the assets, liabilities and equity of certain
portions of the extended service plan business, was contributed to the Company
from FCI and its subsidiaries. In October 1996, the Company completed an initial
public offering of its common stock (see Note 7). On September 25, 1998, FCI
distributed the remaining shares of the Company to shareholders of FCI in a tax
free distribution (the "Spin Off").
The consolidated financial statements also include an allocation of
expenses for certain data processing and information systems, audit, accounting,
treasury, legal, human resources, customer service and other administrative
support historically provided by FCI and its subsidiaries to the Company. Such
expenses were based on the actual use of such services or were based on other
allocation methods that, in the opinion of management, are reasonable. During
1996, FCI and the Company entered into an administrative services agreement that
covers such expense allocations and the provision of future services using
similar rates and allocation methods for various terms, the latest of which
expired at the end of 1998. The consolidated financial statements also reflect
the retroactive effects of agreements entered into during 1996, including
co-brand credit card, database access, data sharing and extended service plan
agreements with Fingerhut Corporation, and a tax sharing agreement with FCI.
These agreements have original terms ranging up to seven years, expiring no
later than October 2003.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with the current year's presentation.
Pervasiveness of Estimates
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements as well as the reported amount of revenues
and expenses during the reporting periods. Actual results could differ from
these estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
Federal Funds Sold
Federal funds sold are short-term loans made to banks through the
Federal Reserve System. It is the Company's policy to make such loans only to
banks that are considered to be in compliance with their regulatory capital
requirements.
Loans Held for Securitization
Loans held for securitization are credit card loans the Company intends
to securitize, generally no later than three months from origination and are
recorded at the lower of aggregate cost or market value.
Securitization, Retained Interests in Loans Securitized and Securitization
Income
The Company securitizes and sells a significant portion of its credit
card loans to both public and private investors through the Metris Master Trust
(the "Trust") and third party bank sponsored, multi-seller receivables conduits
(the "Conduits"). The Company retains participating interests in the credit card
loans under "Retained interests in loans securitized" on the consolidated
balance sheets. The Company's retained interests in loans securitized are
subordinate to the interests of investors in the Trust and Conduit portfolios.
Although the Company continues to service the securitized credit card accounts
and maintains the customer relationships, these transactions are treated as
sales for financial reporting purposes and the associated loans are not
reflected on the consolidated balance sheets.
Beginning in 1997, the sales of these loans have been recorded in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The adoption of SFAS 125 did not have a material effect on the
Company's consolidated financial statements. Upon sale, the sold credit card
loans are removed from the balance sheet and the related financial and servicing
assets controlled and liabilities incurred are initially measured at fair value,
if practicable. SFAS 125 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.
Prior to January 1, 1997, the sales of these loans were recorded in
accordance with SFAS No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse." Upon sale, the loans were removed from the balance
sheet, and a gain on sale was recognized for the difference between the carrying
value of the loans and the adjusted sales proceeds. The adjusted sales proceeds
are based on a present value estimate of future cash flows to be received over
the life of the loans, net of certain funding and servicing costs. The resulting
gain was further reduced for estimated loan losses over the life of the related
loans under the limited recourse provisions.
The securitization and sale of credit card loans changes the Company's
interest in such loans from lender to servicer, with a corresponding change in
how revenue is reported in the statements of income. For securitized and sold
credit card loans, amounts that otherwise would have been recorded as interest
income, interest expense, fee income and provision for loan losses are instead
reported in other operating income as "Net securitization and credit card
servicing income." The Company has various receivables from the Trust or
Conduits and other assets as a result of securitizations, which primarily
consists of amounts deposited in investor reserve accounts held by the Trust or
Conduits for the benefit of the Trust's and Conduit's security holders. Other
components include amounts due from interest rate caps, swaps and floors;
accrued interest and fees on the securitized receivables; and various other
receivables. These amounts are reported as "other receivables due from credit
card securitizations, net" on the consolidated balance sheets. The provision for
loan losses reflected on the statements of income in "Net securitization and
credit card servicing income" was $456 million, $275 million, and $118 million
for the years ended December 31, 1998, 1997, and 1996, respectively.
Provisions for loan losses are made in amounts necessary to maintain
the allowance at a level estimated to be sufficient to absorb probable future
losses of principal and earned interest, net of recoveries, inherent in the
existing loan portfolio, effectively reducing the Company's retained interests
in loans securitized to a fair value.
The Company securitized approximately $1.5 billion and $1.7 billion of
credit card loans in 1998 and 1997, respectively. At December 31, 1998, the
Company had approximately $4.6 billion of investors' interests in securitized
loans, with expected maturities from 1999 to 2001.
Allowance for Loan Losses
Provisions for loan losses are made in amounts necessary to maintain
the allowance at a level estimated to be sufficient to absorb probable future
losses of principal and earned interest, net of recoveries, inherent in the
existing managed loan portfolio. In evaluating the adequacy of the allowance for
loan losses, management considers several factors, including: historical
charge-off and recovery activity by age (vintage) of each loan portfolio (noting
any particular trends over recent periods); recent delinquency and collection
trends by vintage; current economic conditions and the impact such conditions
might have on borrowers' ability to repay; the risk characteristics of the
portfolios; and other factors. Significant changes in these factors could affect
the adequacy of the allowance for loan losses in the near term. Credit card
accounts are generally charged off at the end of the month during which the loan
becomes contractually 180 days past due, with the exception of bankrupt
accounts, which are charged off immediately upon formal notification of
bankruptcy, and accounts of deceased cardholders without a surviving,
contractually liable individual, or an estate large enough to pay the debt in
full, which are also charged off immediately upon notification.
<PAGE>
Property and Equipment
Property and equipment, and computer hardware and software are stated
at cost and depreciated on a straight-line basis over their estimated economic
useful lives (three to ten years for furniture and equipment, three to five
years for computer hardware, up to five years for software; and over the shorter
of the estimated useful life or the term of the lease for leasehold
improvements). The Company capitalizes software developed for internal use that
represents major enhancements or replacements of operating and management
information systems. Amortization of such capitalized software begins when the
systems are fully developed and ready for implementation. Repairs and
maintenance are charged to expense as incurred.
Customer Base Intangible
The customer base intangible represents the excess of amounts paid for
portfolio acquisitions over the related credit card loan balances net of
reserves and discounts. The intangible assets are amortized over the estimated
periods of benefit, generally 5 to 7 years, in proportion to the expected
benefits to be recognized. The amount amortized for 1998, 1997 and 1996 were
$10.1 million, $2.5 million, and $0.3 million, respectively.
Interest Income on Credit Card Loans
Interest income on credit card loans is accrued and earned based on the
principal amount of the loans outstanding using the effective-yield method.
Accrued interest which has been billed to the customer but not yet received is
classified on the balance sheet with the related credit card loans. Accrued
interest which has not yet been billed to the customer is estimated and
classified on the balance sheet separate from the loan balance. Interest income
is generally recognized until a loan is charged off. At that time, the accrued
interest portion of the charged off balance is deducted from current period
interest income.
Fee-Based Services
Debt Waiver Products
Direct Merchants Bank offers various debt waiver products to its credit
card customers for which it retains the claims risk. Revenue for such products
is recognized ratably over the coverage period, generally one month, and
reserves are provided for pending claims based on Direct Merchants Bank's
historical experience with settlement of such claims. Revenues recorded for debt
waiver products are included in the consolidated statements of income under
"Fee-based services revenues" and were $73.8 million, $47.6 million and $25.5
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Unearned revenues and reserves for pending claims are recorded in the
consolidated balance sheets in "Deferred revenues" and "Accrued expenses and
other liabilities" and amounted to $4.8 million and $4.0 million as of December
31, 1998 and 1997, respectively.
Membership Programs
During the quarter ended September 30, 1998, the Company changed its
method of recognizing revenue for certain fee-based services for which a
cancellation period with a full refund exists. This change was made to be
consistent with recent revenue recognition policy changes made by others in the
Company's industry. Previously, the Company had recognized a portion of the
revenue, net of estimated cancellations, associated with such services during
the refund period. The Company now defers the recognition of revenue until the
expiration of the cancellation period, at which time revenue relating to the
full refund period is recognized. The remaining revenue is recognized over the
remaining term of the membership. The Company continues to defer qualifying
direct-response advertising costs and amortizes these expenses in proportion to
revenue recognized. This change resulted in a cumulative one-time reduction in
revenues of approximately $3.0 million and a corresponding reduction in expenses
of approximately $3.1 million, or a $68,000 increase in net income. This
cumulative impact is reflected in the consolidated statement of income for the
year ended December 31, 1998.
Membership fees are generally billed through financial institutions,
including Direct Merchants Bank, and other cardholder based institutions and are
recorded as deferred membership income upon acceptance of membership and
pro-rated over the membership period beginning after the contractual
cancellation period is complete.
In accordance with the provisions of Statement of Position 93-7,
"Reporting on Advertising Costs," qualifying membership acquisition costs are
deferred and charged to expense as membership fees are recognized. These costs,
which relate directly to membership solicitations (direct response advertising
costs), principally include: postage, printing, mailings, and telemarketing
costs. Such costs are amortized on a straight-line basis as revenues are
realized over the membership period. Amortization of membership acquisition
costs amounted to $8.9 million, $2.3 million, and $0.1 million for the years
ended December 31, 1998, 1997, and 1996, respectively. If deferred membership
acquisition costs were to exceed the membership fee, an appropriate adjustment
would be made for impairment. Deferred membership acquisition costs amounted to
$22.4 million and $11.1 million as of December 31, 1998 and 1997, respectively.
Extended Service Plans
The Company coordinates the marketing activities for Fingerhut's sales
of extended service plans. The Company began performing administrative services
and retained the claims risk for all extended service plans sold on or after
January 1, 1997. As a result, extended service plan revenues and the incremental
direct acquisition costs are deferred and recognized on a straight-line basis
over the life of the related extended service plan contracts beginning after the
expiration of any manufacturers' warranty coverage. The provision for service
contract returns charged against revenues for the years ended December 31, 1998,
1997 and 1996 amounted to $4.8 million, $4.6 million and $4.5 million,
respectively. Additionally, the Company reimburses Fingerhut for the cost of its
marketing media and other services utilized in the sales of extended service
plans, based on contracts sold and on media utilization costs as agreed to by
the Company and Fingerhut.
Prior to January 1, 1997 the Company contracted with a third-party
underwriter and claims administrator to service and absorb the risk of loss for
most claims. These claims servicing contract costs were expensed as the service
contracts were sold, net of the related cost of anticipated service contract
returns. In addition, the revenues related to these contract sales were
recognized immediately.
Credit Card Fees and Origination Costs
Credit card fees include annual membership, late payment, overlimit,
returned check, and cash advance transaction fees. These fees are assessed
according to the terms of the related cardholder agreements.
The Company defers direct credit card origination costs associated with
successful credit card solicitations that it incurs in transactions with
independent third parties, and certain other costs that it incurs in connection
with loan underwriting and the preparation and processing of loan documents.
These deferred credit card origination costs are netted against the related
credit card annual fee, if any, and amortized on a straight-line basis over the
cardholder's privilege period, generally 12 months. Net deferred fees were $9.6
million and $9.2 million as of December 31, 1998 and 1997, respectively.
Solicitation Expenses
Credit card account costs, including printing, credit bureaus, list
processing costs, telemarketing and postage, are generally expensed as incurred
over the two to three month period during which the related responses to such
solicitation are received.
Credit Card Fraud Losses
The Company experiences credit card fraud losses from the unauthorized
use of credit cards. These fraudulent transactions are expensed when identified,
through the establishment of a reserve for the full amount of the transactions.
These amounts are charged off after 90 days, after all attempts to recover the
amounts from such transactions, including chargebacks to merchants and claims
against cardholders, are exhausted.
Interest Rate Risk Management Contracts
The nature and composition of the Company's assets and liabilities and
securitized loans expose the Company to interest rate risk. The Company enters
into a variety of interest rate risk management contracts such as interest rate
swap, floor, and cap agreements with highly rated counterparties in order to
hedge its interest rate exposure. The monthly interest rate differential to be
paid or received on these contracts is accrued and included in "Net
securitization and credit card servicing income" on the consolidated statements
of income. Premiums paid for such contracts and the related interest payable or
receivable under such contracts are classified under "Other receivables due from
credit card securitization, net," on the consolidated balance sheets. Premiums
paid for interest rate contracts are recorded at cost and amortized on a
straight-line basis over the life of the contract. During 1998, the Company
terminated swaps and used the proceeds to purchase new interest rate floors.
After purchasing these floors, the Company terminated one of the floors
resulting in $43.4 million of proceeds. The resulting $34.1 million gain is
being amortized into income over the shorter of the contract life or the
remaining life of the securities it was hedging (see Note 16).
Debt Issuance Costs
Debt issuance costs are the costs related to issuing new debt
securities and establishing new securitizations under the Trust or Conduits. The
costs are capitalized as incurred and amortized to expense over the term of the
new debt security.
Income Taxes
The Company determines deferred taxes based on the temporary
differences between the financial statement and the tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred taxes are based on the enacted rate that is expected to apply when the
temporary differences reverse. For periods prior to the Spin Off, the Company
was included in the consolidated federal and certain state income tax returns of
FCI. Based on a tax sharing agreement between the Company and FCI, the provision
and deferred income taxes are computed based only on the Company's financial
results as if the Company filed its own federal and state tax returns.
Statements of Cash Flows
The Company prepares its consolidated statements of cash flows using
the indirect method, which requires a reconciliation of net income to net cash
from operating activities. In addition, the Company nets certain cash receipts
and cash payments from credit card loans made to customers, including principal
collections on those loans. For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and due from banks, federal funds
sold, short-term investments, (mainly money market funds) and all other highly
liquid investments with original maturities of three months or less.
Cash paid for interest during the years ended December 31, 1998, 1997
and 1996 was $31.3 million, $9.4 million and $4.1 million, respectively. Cash
paid for income taxes for the same periods was $86.1 million, $64.8 million and
$41.6 million, respectively.
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The following table
presents the computation of basic and diluted weighted average shares used in
the per share calculations:
Year Ended
December 31,
1998 1997 1996
---- ---- ----
(In thousands, except EPS)
Net income .................................. $57,348 $38,058 $20,016
Preferred dividends ......................... 1,100
------- ------- -------
Net income available to common stockholders . $56,248 $38,058 $20,016
======= ======= =======
Weighted average common shares outstanding .. 19,232 19,225 16,572
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options 736 1,013 557
------- ------- -------
Diluted common shares ....................... 19,968 20,238 17,129
Basic EPS ................................... $ 2.92 $ 1.98 $ 1.21
Diluted EPS ................................. 2.82 1.88 1.17
Comprehensive Income
During 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income." This statement does not apply to the Company's current financial
results and therefore, net income equals comprehensive income.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Balance at beginning of year ............ $244,084 $ 95,669 $ 22,219
Allowance related to assets acquired, net 20,152 20,246
Provision for loan losses ............... 77,770 43,989 18,477
Provision for loan losses (1) ........... 456,354 275,310 117,827
Loans charged off ....................... 420,875 195,535 64,083
Recoveries .............................. 15,798 4,405 1,229
-------- -------- --------
Net loan charge-offs .................... 405,077 191,130 62,854
-------- -------- --------
Balance at end of year .................. $393,283 $244,084 $ 95,669
======== ======== ========
(1) Amounts are included in "Net securitizations and credit servicing income."
NOTE 4 - PROPERTY AND EQUIPMENT
The carrying value of property and equipment is as follows:
<TABLE>
December 31,
1998 1997
---- ----
<S> <C> <C>
Furniture and equipment $ 10,974 $ 6,346
Computer software and equipment 9,077 3,733
Construction in progress 2,013 4,937
Leasehold improvements 6,204 2,439
----------- ----------
Total $ 28,268 $ 17,455
Less: Accumulated depreciation and amortization
6,286 1,991
Balance at end of year $ 21,982 $ 15,464
============= ============
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was $4.4 million, $1.4 million, and $0.4 million,
respectively.
NOTE 5 - PORTFOLIO ACQUISITIONS
In December 1998, the Company acquired a $800 million credit card
portfolio from PNC Bank Corp. representing loans from customers outside of PNC's
normal banking relationship. A portion of these credit card receivables were
securitized and sold to investors through a conduit. The Company retains an
interest in the receivables which is financed by borrowings under the New Credit
Facility and proceeds from the Thomas H. Lee Company investments discussed in
Note 6.
In September 1997, the Company acquired a $317 million credit card
portfolio from Key Bank USA, National Association. These credit card receivables
were securitized and sold to investors through a conduit. The Company retains an
interest in the receivables which is financed by borrowings under a credit
facility.
In October 1997, the Company acquired a $405 million credit card
portfolio from Mercantile Bank National Association. This portfolio was also
securitized and sold through a conduit. The Company retains an interest in the
receivables which are financed by borrowings under a credit facility.
NOTE 6 - PRIVATE EQUITY PLACEMENT
On November 13, 1998, the Company entered into agreements with
affiliates of the Thomas H. Lee Company, a private equity firm, (together with
its affiliates, the "Lee Company") to make a total private equity investment of
$300 million in the Company. The Lee Company has agreed to purchase 0.8 million
shares of Series C Convertible Preferred Stock (the "Series C Preferred") which
will be convertible into common shares at a conversion price of $37.25 per
common share subject to adjustment in certain circumstances. The Series C
Preferred has a 9% dividend payable in additional shares of Series C Preferred
and will also receive any dividends paid on the Company's common stock on an as
converted basis. The cumulative payment-in-kind dividends are effectively
guaranteed for a seven year period. Assuming conversion of the Series C
Preferred into common stock, the Lee Company would initially own approximately
30% of the Company on a diluted basis. The Company's Board of Directors will be
expanded to a total of 11 members and the Series C Preferred will entitle the
holders to elect four members subject to approval of the Office of the
Comptroller of the Currency ("OCC"). The Company determined that the conversion
to the Series C Preferred will result in a "change in control" in certain of the
Company's agreements with FCI and the New Credit Facility. Therefore, the
Company was required to either increase the change in control ownership
percentage from 30 to 35 or otherwise exempt the Lee Company from the change in
control provision.
In order to provide the Company funding for the PNC portfolio
acquisition (see Note 5) as well as for general corporate purposes prior to
shareholders' approval and the receipt of notice that there was no regulatory
objection to the transaction, the Lee Company agreed to purchase $200 million in
Series B Perpetual Preferred Stock (the "Series B Preferred") and $100 million
in 12% Senior Notes due 2006 (the "Lee Senior Notes"). The Company also issued
the Lee Company 3.75 million ten-year warrants to purchase shares of the
Company's common stock for $30 subject to adjustment in certain circumstances.
The Series B Preferred has a 12.5% dividend payable in additional shares of
Series B Preferred for ten years, then converting to a dividend payable in cash.
On March 12, 1999, shareholders' approved the conversion of the Series
B Preferred and Lee Senior Notes into Series C Preferred. If notice is received
that there is no regulatory objections to the conversion to the Series C
Preferred, the Series B Preferred and the Lee Senior Notes will be retired, and
the warrants canceled causing a one-time, non-cash accounting adjustment. The
excess of the fair value of the Series C Preferred over the carrying value of
the Series B Preferred and the Lee Senior Notes at the time of the conversion
must be allocated to the Lee Senior Notes and the Series B Preferred based upon
their initial fair values. To arrive at net income available to common
stockholders in the calculation of earnings per share, the amount allocated to
the Lee Senior Notes would be recognized as an extraordinary loss from the early
extinguishment of debt and the amount allocated to the Series B Preferred would
be recognized as a reduction of net income available to common stockholders. The
extraordinary loss attributable to the Lee Senior Notes will not be recorded net
of taxes. These adjustments will not have an impact on total stockholders'
equity. At the time of the printing of this annual report, the fair value of the
Series C Preferred was not determined.
NOTE 7 - INITIAL PUBLIC OFFERING
In October, 1996, the Company completed an initial public offering of
3,258,333 shares of its common stock at $16 a share. At that time, the
transaction reduced FCI's ownership interest in the Company to approximately
83%. The Company realized net cash proceeds of approximately $47.2 million from
the sale of such shares after underwriting discounts, commissions and expenses
of the offering.
NOTE 8 - STOCK OPTIONS
In connection with the initial public offering of the Company, the
Company adopted the Metris Companies Inc. Long-Term Incentive and Stock Option
Plan (the "Stock Option Plan"), which permits a variety of stock-based grants
and awards and gives the Company flexibility in tailoring its long-term
compensation programs. In 1998, the Company's Board of Directors adopted a
proposal to increase the number of shares from 1,860,000 shares of common stock
to 4,000,000 shares of common stock, subject to adjustment in certain
circumstances, to be available for awards of stock options or other stock-based
awards. This increase was approved by the Company's Stockholders at the 1998
annual meeting. As of December 31, 1998 and 1997, 1,495,675 and 303,925 shares,
respectively, were available for grant.
The Compensation Committee has the authority to determine the exercise
prices, vesting dates or conditions, expiration dates and other material
conditions upon which options or awards may be exercised, except that the option
price for Incentive Stock Options ("ISOs") may not be less than 100% of the fair
market value of the common stock on the date of grant (and not less than 110% of
the fair market value in the case of an ISO granted to any employee owning more
than 10% of the common stock) and the terms of nonqualified stock options may
not exceed 15 years from the date of grant (not more than 10 years for ISOs and
five years for ISOs granted to any employee owning more than 10% of the common
stock). Full or part-time employees, consultants or independent contractors to
the Company are eligible to receive nonqualified options and awards. Only full
or part-time employees are eligible to receive ISOs.
Effective March 1994, FCI granted the Company's Chief Executive Officer
("CEO") a tandem option (the "Tandem Option") for either (a) 55,000 shares of
FCI's common stock at an exercise price of $15 per share or (b) a 3.3% equity
interest in the portion of the Company that exceeds two times the estimated fair
value of the Company in March 1994. In connection with the initial public
offering, the 3.3% equity interest was converted into options for 656,075 shares
of the Company's common stock with an exercise price of $2.76 per share, which
vests over five years from the effective date. This option was granted pursuant
to the Company's Stock Option Plan. Compensation expense of $0.7 million and
$7.8 million related to these options was recorded for the years ended December
31, 1997 and 1996, respectively.
During 1998 and 1997, the Company granted 1,055,500 and 318,500
options, respectively, to officers and employees of the Company. At the time of
the initial public offering, the Company granted officers and employees of the
Company, Fingerhut, and others options to purchase an aggregate of 742,625
shares of common stock. Of these, 646,500 options were granted at an exercise
price of $16 and the balance were granted at a below-market exercise price per
share, for which expense of $1.2 million was recorded for the year ended
December 31, 1996. All options granted to current officers and employees of the
Company and Fingerhut were at the initial offering price.
The Company also adopted the Metris Companies Inc. Non-Employee
Director Stock Option Plan (the "Director Plan"). Originally, such plan
permitted up to 20,000 shares of common stock for awards of options, subject to
certain adjustments in certain circumstances. In 1997, the Board of Directors
amended the plan to provide up to 100,000 shares of common stock for awards of
options, subject to adjustments in certain circumstances. This Director Plan was
approved by the Company's stockholders at the 1998 annual meeting. During 1998
and 1997, the Company granted 25,000 and 20,000 options, respectively, and at
the time of the initial public offering the Company granted 10,000 options. At
December 31, 1998 and 1997, 45,000 and 70,000 shares, respectively, were
available for grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, the Company continues to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the guidelines of Opinion 25, compensation cost for stock-based employee
compensation plans is recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to acquire the stock. Had compensation cost for these plans been
determined based on the fair value methodology prescribed by SFAS 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Net income as reported ............... $ 57,348 $ 38,058 $ 20,016
Net income pro forma ................. $ 47,264 $ 36,819 $ 17,395
Diluted earnings per share as reported $ 2.82 $ 1.88 $ 1.17
Diluted earnings per share pro forma . $ 2.37 $ 1.82 $ 1.02
The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for grants in 1998, 1997 and
1996, respectively: dividend yield of 0.10%, 0.11% and 0.17%; expected
volatility of 71.3%, 68.2% and 25.1%; risk-free interest rate of 4.72%, 6.34%
and 6.48%; and expected lives of 7 years, 7 years, and 6.5 years, respectively.
Information regarding the Company's stock option plans for 1998, 1997
and 1996 is as follows:
<TABLE>
Year Ended December 31,
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 1,682,200 $15.03 1,408,700 $ 8.93 656,075 $ 2.76
Options exercised ............................ 34,750 16.00
Options granted .............................. 1,080,500 43.55 338,500 40.58 752,625 14.31
Options canceled/forfeited ................... 107,250 41.75 65,000 16.00
--------- ----- --------- ----- --------- ----
Options outstanding, end of year ............. 2,620,700 25.68 1,682,200 15.03 1,408,700 8.93
Weighted-average fair value of options granted
during the year ........................... 32.32 28.29 11.54
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
Number Weighted-Average Number Weighted Average
Outstanding at Remaining Weighted-Average Exercisable at Exercise Price
Exercise Price 12/31/98 Contractual Life Exercise Price 12/31/98
<S> <C> <C> <C> <C> <C>
$ 2.76 752,200 5.6 $ 2.76 730,864 $ 2.76
$16.00-$36.50 1,046,000 8.8 22.58 423,000 16.19
$36.51-$55.50 352,500 8.8 41.12 15,000 44.50
$55.51-$69.38 470,000 9.4 57.67 30,000 56.33
</TABLE>
NOTE 9 - EMPLOYEE BENEFIT PLANS
In January 1997, the Company adopted a defined contribution plan that
is intended to qualify under section 401(k) of the Internal Revenue Code (the
401(k) Plan"). The 401(k) Plan provides retirement benefits for eligible
employees. During 1997 and 1998, the Company's employees participated in the
401(k) Plan, which provides savings and investment opportunities. The 401(k)
Plan stipulates that eligible employees may elect to contribute to the 401(k)
Plan. The Company matches a portion of employee contributions and makes
discretionary contributions based upon the Company's financial performance. For
the years ended December 31, 1998 and 1997, the Company contributed $0.9 million
to the 401(k) for both periods.
Prior to 1997, employees of Direct Merchants Bank participated in a
defined contribution plan maintained by Direct Merchants Bank that covered
substantially all of its employees. This plan was merged with and into the
401(k) Plan and the funds transferred to the 401(k) Plan respective accounts.
Direct Merchants Bank employees were eligible to participate in the 401(k) Plan
as of January 1, 1997.
In 1998, the Company adopted a Non-Qualified Deferred Compensation Plan
to a select group of management or highly compensated employees. These employees
were excluded from participating in the defined contribution plan. This plan
provided saving and investment opportunities to those individuals who elected to
defer a portion of their salary. The Company matches a portion of the employee
contribution and makes discretionary contributions based on the Company's
financial performance. For the year ended December 31, 1998, the Company
contributed $0.2 million to the Plan.
NOTE 10 - INCOME TAXES
The components of the provision for income taxes consisted of the
following:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Current:
Federal $ 98,428 $ 66,496 $ 38,914
State . 8,355 4,663 4,035
Deferred . (70,883) (47,334) (30,419)
-------- -------- --------
$ 35,901 $ 23,825 $ 12,530
-------- -------- --------
A reconciliation of the Company's effective income tax rate compared
to the statutory federal income tax rate is as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Statutory federal income tax rate ............ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ... 3.2% 3.2% 3.2%
Other, net ................................... 0.3% 0.3% 0.3%
---- ---- ----
Effective income tax rate .................... 38.5% 38.5% 38.5%
---- ---- ----
The Company's deferred tax assets and liabilities are as follows:
<TABLE>
December 31,
1998 1997
Deferred income tax assets resulting from future
deductible temporary differences:
<S> <C> <C>
Allowance for loan losses ................................... $119,518 $ 71,240
Deferred revenues ........................................... 32,334 16,140
Other ....................................................... 18,199 9,344
------ -----
Total deferred tax assets ...................................... $170,051 $ 96,724
Deferred income tax liabilities resulting from future taxable
temporary differences:
Deferred costs .............................................. $ 10,672 $ 6,360
Accrued interest on credit card loans ....................... 5,048 8,577
Accelerated depreciation .................................... 1,310 31
Other ....................................................... 969
------ -----
Total deferred tax liabilities ................................. $ 17,030 $ 15,937
------ -----
Net deferred tax assets ........................................ $153,021 $ 80,787
======== ========
</TABLE>
Management believes, based on the Company's history of operating
earnings, expectations for operating earnings in the future, and the expected
reversal of taxable temporary differences, earnings will be sufficient to fully
utilize the deferred tax assets.
NOTE 11 - RELATED PARTY TRANSACTIONS
Prior to September 1998, FCI owned approximately 83% of the outstanding
common shares of the Company. In September 1998, FCI distributed the remaining
shares of the Company to shareholders of FCI in a tax free distribution.
FCI and its various subsidiaries have historically provided financial
and operational support to the Company. Direct expenses incurred by FCI and/or
its subsidiaries for the Company, and other expenses, have been allocated to the
Company using various methods (headcount, actual or estimated usage, etc.).
Since the Company has not historically operated as a separate stand-alone entity
for all periods presented, these allocations do not necessarily represent the
expenses and costs that would have been incurred directly by the Company had it
operated on a stand-alone basis. However, management believes such allocations
reasonably approximate market rates for the services performed. The direct and
allocated expenses represent charges for services such as data processing and
information systems, audit, certain accounting and other similar functions,
treasury, legal, human resources, certain customer service and marketing
analysis functions, certain executive time, and space and property usage
allocations. In addition, the Company has historically managed the sales of
credit insurance products for Fingerhut. In accordance therewith, the Company
has allocated back to Fingerhut certain direct and other expenses using methods
similar to those mentioned above. The historical expenses and cost allocations
have been agreed to by the management of both FCI and the Company, the terms of
which are summarized in an ongoing administrative services agreement between FCI
and the Company. This agreement provides for similar future services using
similar rates and cost allocation methods for various terms.
The financial statements also include an allocation of FCI interest
expense for the net borrowings of the Company from FCI, or a net interest credit
for the net cash flows of the Company loaned to FCI in 1996. These allocations
of interest expense or income for 1996 were based on the net loans made or
borrowings received between the Company and FCI, plus or minus the effects of
intercompany balances outstanding during 1996. The interest rate used to
calculate such expense or credit during 1996 was based on the average short-term
borrowing rates of FCI during 1996.
The Company and Fingerhut have also entered into several other
agreements that detail further business arrangements between the companies. The
retroactive effects of these additional business arrangements have been
reflected in the consolidated financial statements of the Company. The
agreements entered into include a co-brand credit card agreement and a data
sharing agreement, which provide for payment for every Fingerhut co-branded
credit card account booked, as defined, and a payment based on card usage from
such accounts. The parties have also entered into a database access agreement,
which provides the Company with the exclusive right to access and market
financial services products, as defined, to Fingerhut customers, in exchange for
a license fee. The agreement also calls for a solicitation fee per product
mailed to a Fingerhut customer, and a suppress file fee for each consumer name
obtained from a third party and matched to the Fingerhut suppress file before
its solicitation.
The Company and Fingerhut have also entered into an extended service
plan agreement, which provides the company with the exclusive right to provide
and coordinate the marketing of extended service plans to the customers of
Fingerhut. Revenues are received from Fingerhut from such sales, and the Company
reimburses Fingerhut and/or its subsidiaries for certain marketing costs.
Additionally, the Company and FCI have entered into a tax sharing agreement (see
Note 2) and a card registration agreement.
The following table summarizes the amounts of these direct expense
charges and cost allocations (including net interest income or expense), and the
costs to the Company of the agreements mentioned above, for each of the years
reflected in the financial statements of the Company:
<TABLE>
Year Ended December 31,
1998 1997 1996
---- ---- ----
Revenues:
<S> <C> <C> <C>
Fee-based services ............................................. $12,937 $ 7,911 $20,420
Expenses: ......................................................
Interest expense ............................................... 3,178
Credit card account and other product solicitation and marketing
expenses .................................................... 8,274 8,432 9,335
Data processing services and communications .................... 2,344 1,837 1,324
Other .......................................................... 659 1,336 950
</TABLE>
In the ordinary course of business, executive officers of the Company
or FCI may have credit card loans issued by the Company. Pursuant to the
Company's policy, such loans are issued on the same terms as those prevailing at
the time for comparable loans with unrelated persons and do not involve more
than the normal risk of collectibility.
On November 13, 1998, the Company entered into agreements with the Lee
Company to invest $300 million in the Company (see Note 6). The terms of the
transaction provided that the Lee Company investment would convert into 0.8
million shares of Series C Preferred upon shareholder approval and receipt of
notice that there was no regulatory objection to the transaction. The Company
determined that this conversion might result in a "Change of Control" as defined
in certain agreements between the Company and Fingerhut, which would permit
Fingerhut to terminate any or all of the agreements. Therefore, on December 8,
1998, the Company obtained an agreement (the "Waiver Agreement") from Fingerhut
to waive its right to terminate the agreements if a Change of Control occurred
as a result of the conversion.
Pursuant to the Waiver Agreement, the Company and Fingerhut amended
certain of their other agreements. The most significant change was made in the
database access agreement. The Company's exclusive license to use Fingerhut's
customer database to market financial service products will now become
non-exclusive after October 31, 2001.
On March 12, 1999, shareholders approved the conversion into the Series
C Preferred. If notice is received that there is no regulatory objection to the
conversion to the Series C Preferred, the Lee Company will own approximately 30%
of the Company on a diluted basis, assuming conversion of the Series C Preferred
into common stock.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments to extend credit to consumers represents the unused credit
limits on open credit card accounts. These commitments amounted to $5.9 billion
and $4.1 billion as of December 31, 1998 and 1997, respectively. While these
amounts represent the total lines of credit available to the Company's
customers, the Company has not experienced and does not anticipate all of its
customers will exercise their entire available line at any given point in time.
The Company also has the right to increase, reduce, cancel, alter or amend the
terms of these available lines of credit at any time.
The Company leases certain office facilities and equipment under
various cancelable and non-cancelable operating lease agreements that provide
for the payment of a proportionate share of property taxes, insurance and other
maintenance expenses. These leases also may include scheduled rent increases and
renewal options. Rental expense for such operating leases for the years ended
December 31, 1998, 1997 and 1996 was $6.4 million, $3.9 million and $1.1
million, respectively.
Future minimum lease commitments at December 31, 1998 under cancelable
and non-cancelable operating leases are as follows:
1999 $ 7,884
2000 6,146
2001 3,371
2002 1,421
2003 1,127
Thereafter 4,485
-------
Total minimum lease payments $24,434
-------
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTED PAYMENTS
In the normal course of business, the Company enters into agreements,
or is subject to regulatory requirements, that result in cash, debt and dividend
or other capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent
to which banks can finance or otherwise supply funds to their affiliates. In
particular, Direct Merchants Bank is subject to certain restrictions on any
extensions of credit to or other covered transactions, such as certain purchases
of assets, with the Company or its affiliates. Such restrictions limit Direct
Merchants Bank's ability to lend to the Company and its affiliates.
Additionally, Direct Merchants Bank is limited in its ability to declare
dividends to the Company in accordance with the national bank dividend
provisions.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At December 31, 1998 and 1997, Direct Merchants Bank's Tier
1 risk-based capital ratio, risk-based total capital ratio and Tier 1 leverage
ratio exceeded the minimum required capital levels, and Direct Merchants Bank
was considered a "well capitalized" depository institution under regulations of
the OCC.
The Company is also bound by restrictions set forth in an indenture
related to the Senior Notes dated November 7, 1997 and the Lee Senior Notes (see
Note 6). Pursuant to those indentures, the Company may not make dividend
payments in the event of a default or if all such restricted payments would
exceed 25% of the aggregate cumulative net income of the Company.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as significant credit
exposure with an individual or group engaged in similar activities or affected
similarly by economic conditions. The Company is active in originating credit
card loans throughout the United States, and no individual or group had a
significant concentration of credit risk at December 31, 1998 or 1997. The
following table details the geographic distribution of the Company's retained,
sold and managed credit card loans:
<TABLE>
Retained Sold Managed
December 31, 1998
<S> <C> <C> <C>
California .............................................................. $ 94,521 $ 569,205 $ 663,726
Texas ................................................................... 76,542 460,937 537,479
Florida ................................................................. 57,138 344,084 401,222
New York ................................................................ 55,231 332,598 387,829
Ohio .................................................................... 31,936 192,320 224,256
Illinois ................................................................ 26,994 162,558 189,552
Pennsylvania ............................................................ 22,795 137,274 160,069
All others .............................................................. 391,742 2,359,167 2,750,909
---------- ---------- ----------
Total ............................................................. $ 756,899 $4,558,143 $5,315,042
---------- ---------- ----------
Retained Sold Managed
December 31, 1997
Texas ................................................................... $ 61,844 $ 394,571 $ 456,415
California .............................................................. 58,098 370,652 428,750
Florida ................................................................. 35,654 227,477 263,131
New York ................................................................ 29,246 186,589 215,835
Ohio .................................................................... 17,961 114,589 132,550
Illinois ................................................................ 15,914 101,533 117,447
Pennsylvania ............................................................ 15,681 100,048 115,729
All others .............................................................. 246,228 1,570,851 1,817,079
---------- ---------- ----------
Total ................................................................ $ 480,626 $3,066,310 $3,546,936
---------- ---------- ----------
</TABLE>
The Company targets its consumer credit products primarily to moderate
income consumers. Primary risks associated with lending to this market are that
they may be more sensitive to future economic downturn, which may make them more
likely to default on their obligations.
At December 31, 1998 and 1997, the majority of federal funds sold were
made to one bank, which represents a concentration of credit risk to the
Company. The Company is able to monitor and mitigate this risk since all federal
funds are sold on a daily origination and repayment basis and therefore may be
recalled quickly should the credit risk of the counterparty bank increase above
certain limits set by the Company.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of its financial instruments
in accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." Financial instruments include both assets and liabilities, whether
or not recognized in the Company's consolidated balance sheets, for which it is
practicable to estimate fair value. Additionally, certain intangible assets
recorded on the consolidated balance sheets, such as purchased credit card
relationships, and other intangible assets not recorded on the consolidated
balance sheets (such as the value of the credit card relationships for
originated loans and the franchise values of the Company's various lines of
business) are not considered financial instruments and, accordingly, are not
valued for purposes of this disclosure. The Company believes that there is
substantial value associated with these assets based on current market
conditions, including the purchase and sale of such assets. Accordingly, the
aggregate estimated fair value amounts presented do not represent the entire
underlying value of the Company.
Quoted market prices generally are not available for all of the
Company's financial instruments. Accordingly, in cases where quoted market
prices are not available, fair values were estimated using present value and
other valuation techniques that are significantly affected by the assumptions
used, including the discount rate and estimated future cash flows. Such
assumptions are based on historical experience and assessments regarding the
ultimate collectibility of assets and related interest, and estimates of product
lives and repricing characteristics used in the Company's asset/liability
management process. These assumptions involve uncertainties and matters of
judgment, and therefore, cannot be determined with precision. Thus, changes in
these assumptions could significantly affect the fair-value estimates.
A description of the methods and assumptions used to estimate the fair
value of each class of the Company's financial instruments is as follows:
Cash and cash equivalents and accrued interest and fees receivable
The carrying amounts approximate fair value due to the short-term
nature of these instruments.
Net retained interests in loans securitized and loans held for securitizations
Currently, credit card loans are originated with variable rates of
interest that adjust with changing market interest rates. Thus, carrying value
approximates fair value. However, this valuation does not include the value that
relates to estimated cash flows generated from new loans from existing customers
over the life of the cardholder relationship. Accordingly, the aggregate fair
value of the credit card loans does not represent the underlying value of the
established cardholder relationships.
Other receivables due from credit card securitizations, net
The following components of this net asset are as follows:
Interest-only strip
The fair value of the interest-only strip is estimated by discounting
the expected future cash flows from the Trust and each of the Conduits at rates
which management believes to be consistent with those that would be used by an
independent third party. However, because there is no active market for this,
the fair values presented may not be indicative of the value negotiated in an
actual sale. The future cash flows used to estimate fair value is limited to the
securitized receivables that exist at year end and does not reflect the value
associated with future receivables generated by cardholder activity. The
significant assumptions used to estimate fair value include: (i) discount rates
and are summarized as follows; (ii) customer payment rates; and (iii)
antici-pated charge-offs over the life of the loans:
December 31,
1998 1997
Discount rate 10% 10%
Payment rate 6% 5%
Default rate 16% 14%
Interest rate cap, swap, and floor agreements
The fair values of interest rate cap, swap, and floor agreements were
obtained from dealer quoted prices. These values generally represent the
estimated amounts the Company would receive or pay to terminate the agreements
at the reporting dates, taking into consideration current interest rates and the
current creditworthiness of the counterparties.
<PAGE>
Other amounts
For the other components of other receivables due from credit card
securitizations, net, the carrying amount is a reasonable estimate of the fair
value.
Debt
Short-term borrowings are made with variable rates of interest that
adjust with changing market interest rates. Thus, carrying value approximates
fair value.
The fair value of long-term debt was obtained from quoted market
prices, when available.
The estimated fair values of the Company's financial instruments are
summarized as follows:
<TABLE>
December 31,
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 37,347 $ 37,347 $ 48,223 $ 48,223
Retained interest in loans securitized,
net ................................ 360,186 360,186 227,747 227,747
Other receivables due from credit card
securitizations, net:
Interest-only strip ................ 2,449 2,449
Interest rate swap agreements
21,667
Interest rate cap agreements 2,912 2,925 3,497 170
Interest rate floor agreements 187 3,233
Other amounts ...................... 182,836 182,836 71,540 71,540
Debt ............................... 310,896 317,666 244,000 245,750
</TABLE>
NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS
Prior to the Spin Off, the Company had entered into interest rate cap
and swap agreements to hedge the cash flow and earnings impact of fluctuating
market interest rates on the spread between the floating rate loans owned by the
Trust and the floating and fixed rate securities issued by the Trust to fund the
loans. In connection with the issuance of term asset-backed securities by the
Trust in 1998, the Company entered into term interest rate cap agreements with
highly-rated bank counterparties in a total notional amount of $1.8 billion
effectively capping the potentially negative impact to the Trust of increases in
the floating interest rate of the securities at approximately 9.2%. These
interest rate cap agreements are for terms ranging from six to eight years and
will terminate between October 2004 and April 2006. The Company also entered
into a term interest rate cap agreement in connection with the PNC portfolio
acquisition with highly-rated bank counterparties in a total notional amount of
$640 million, effectively capping the potentially negative impact of increases
in market interest rate of the securities at 7.35% through May 2002. Due to the
Spin Off, the Company terminated interest rate swap agreements guaranteed by FCI
related to two trust series fixed rate asset-backed securities issuances.
Proceeds were utilized to purchase interest rate floor contracts from
highly-rated counterparties which did not require a FCI guaranty. The floors
were in the same notional amounts, fixed interest rate strike rates, and
maturities as the previous swaps in order to hedge the potential impact on the
Company's cash flow and earnings of a low market interest rate environment in
which the yield on the Trust's floating rate loans might decline causing the
margin over the fixed rate funding to compress. During October 1998, the Company
terminated the interest rate floors related to one of the trust series. The gain
of approximately $34.1 million on this termination is being amortized into
income over the remaining life of the securities. The cash proceeds of
approximately $43.4 million were used to reduce borrowings under the New Credit
Facility.
Interest rate risk management contracts are generally expressed in
notional principal or contract amounts that are much larger than the amounts
potentially at risk for nonpayment by counterparties. Therefore, in the event of
nonperformance by the counterparties, the Company's credit exposure is limited
to the uncollected interest and contract market value related to the contracts
that have become favorable to the Company. Although the Company does not require
collateral from counterparties on its existing agreements, the Company does
control the credit risk of such contracts through established credit approvals,
risk control limits, and the ongoing monitoring of the credit ratings of
counterparties. The Company currently has no reason to anticipate nonperformance
by the counterparties.
NOTE 17 - SEGMENTS
The Company is organized based on the products and services that it
offers. Under this organizational structure, the Company operates in two
principal areas: consumer credit products and fee-based services. The Company's
primary consumer credit products are unsecured credit cards, including the
Direct Merchants Bank MasterCard and Visa. The Company's credit card accounts
include customers obtained from the Fingerhut Database and other customers for
whom general credit bureau information is available.
The Company markets its fee-based services, including (i) debt waiver
protection for unemployment, disability, and death, (ii) membership programs
such as card registration, purchase protection and other club memberships, and
(iii) third-party insurance, directly to its credit card customers and customers
of third parties. The Company currently administers its extended service plans
sold through a third-party retailer, and the customer pays the retailer
directly. In addition, the Company develops customized targeted mailing lists
from information contained in the Company's databases for use by unaffiliated
companies in their own financial services product solicitation efforts that do
not directly compete with those of the Company.
The information in the following tables is derived directly from
internal segment reporting used for management purposes. The expenses, assets
and liabilities attributable to corporate functions are not allocated to the
operating segments. There were no operating assets located outside of the United
States for the years presented.
The segment information reported below is presented on a managed basis.
Management uses this basis to review segment performance and to make operating
decisions. To do so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with generally accepted accounting principles. The elimination
column in the segment table includes adjustments to present the information on
an owned basis in the consolidated column as reported in the financial
statements of this annual report.
Employee compensation, data processing services and communications,
third party servicing expenses, and other expenses including: occupancy,
depreciation and amortization, professional fees, other general and
administrative expenses, and income taxes have not been allocated to the
operating segments and are included in the reconciliation of the income before
income taxes for the reported segments to the consolidated total. The Company
does not allocate capital expenditures for leasehold improvements, capitalized
software and furniture and equipment to operating segments.
The fee-based services operating segment pays a commission to the consumer
credit products segment for successful marketing efforts to the consumer credit
products segment's cardholders at a rate similar to those paid to the Company's
other third parties. The fee-based services segment reports interest income and
the consumer credit products segment reports interest expense at the Company's
weighted average borrowing rate for the excess cash flow generated by the
fee-based services segment and used by the consumer credit products segment to
fund the growth of cardholder balances.
<TABLE>
1998
Consumer
Credit Fee Based
Products Services Reconciliation (a) Consolidated
<S> <C> <C> <C> <C>
Interest revenue $ 740,768 $ 2,754 $ (630,311) $ 113,211
Interest expense 237,710 (207,197) (b) 30,513
---------------- ------------- --------------------------- ------------------
Net interest 503,058 2,754 (423,114) (c) 82,698
income
Other revenue 239,597 106,601 (33,240) 312,958
Total revenue 980,365 109,355 (663,551) 426,169
Income before
income taxes 188,148(d) 73,279 (d) (168,179) (e) 93,248
Income taxes 35,900 35,900
Total assets $ 5,375,925 $ 58,052 $ (4,488,258) (f) $ 945,719
1997
Consumer
Credit Fee-Based
Products Services Reconciliation (a) Consolidated
Interest revenue $ 435,833 $ 2,484 $ (369,123) (b) $ 69,194
Interest expense 131,956 (120,005) (c) 11,951
---------------- --------------- --------------------------- ------------------
Net interest
income 303,877 2,484 (249,118) 57,243
Other revenue 148,869 64,000 (26,192) 186,677
Total revenue 584,702 66,484 (395,315) 255,871
Income taxes 23,825 23,825
Income before
income taxes 110,973 (d) 49,162(d) (98,252) (e) 61,883
Income taxes 23,825 23,825
Total assets $ 3,505,165 $ 30,488 $ (2,996,991) (f) $ 538,662
1996
Consumer
Credit Fee-Based
Products Services Reconciliation (a) Consolidated
Interest revenue $ 198,633 $ 1,213 $ (169,652) (b) $ 30,194
Interest expense 56,355 (52,249) (c) 4,106
------------------- ----------------- --------------------------- ------------------
Net interest income 142,278 1,213 (117,403) 26,088
Other revenue 77,952 48,695 (425) 126,222
Total revenue 276,585 49,908 (170,077) 156,416
Income before income taxes 61,503 30,733 (59,690) (e) 32,546
Income taxes 12,530 12,530
Total assets $ 1,612,234 $ 1,057 $ (1,363,293) (f) $ 249,998
</TABLE>
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue includes the
elimination of $2.8 million, $2.5 million, and $1.2 million of intercompany
interest received by the fee based services segment from the consumer credit
products segment for 1998, 1997, and 1996, respectively.
(c) The reconciliation to consolidated owned interest expense includes the
elimination of $2.8 million, $2.5 million, and $1.2 million of intercompany
interest paid by the consumer credit products segment to the fee based services
segment for 1998, 1997, and 1996, respectively.
(d) Income before income taxes includes intercompany commissions paid by the fee
based services segment to the consumer credit products segment for successful
marketing efforts to consumer credit products cardholders of $3.3 million, and
$4.4 million for 1998, and 1997, respectively.
(e) The reconciliation to the owned income before income taxes includes:
unallocated costs related to employee compensation; data processing and
communications; third party servicing expenses; and other expenses. The majority
of these expenses, although not allocated for the internal segment reporting
used by management, relate to the consumer credit product segment.
(f) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors interest in
securitized loans to present total assets on an owned basis.
NOTE 18 - DEBT
On June 30, 1998, the Company executed a new $200 million, three-year
revolving credit facility and a $100 million five-year term loan (the "New
Credit Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit Facility which is not guaranteed by FCI replaced the Company's $300
million, five-year revolving credit facility (the "Old Credit Facility"). The
New Credit Facility is secured by receivables and subsidiary stock and
guaranteed by a Company subsidiary. Financial covenants in the New Credit
Facility include, but are not limited to, requirements concerning minimum net
worth, minimum tangible net worth to net managed receivables and tangible net
worth plus reserves to delinquent receivables. At December 31, 1998, the Company
was in compliance with all financial covenants under this agreement. At December
31, 1998, the Company had outstanding borrowings of $110 million under the New
Credit Facility. At December 31, 1997, the Company had outstanding borrowings of
$144 million under the Old Credit Facility. The weighted average interest rates
on the borrowings at December 31, 1998 and 1997, were 7.9% and 6.5%,
respectively.
In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 (the "Senior Notes") pursuant to an exemption under
the Securities Act of 1933, as amended. In January 1998, the Company commenced
an exchange offer for the Senior Notes pursuant to a registration statement. The
terms of the new Senior Notes are identical in all material respects to the
original private issue. The net proceeds of $97 million were used to pay down
borrowings under the Old Credit Facility. The Senior Notes are unconditionally
guaranteed on a senior basis, jointly and severally, by Metris Direct, Inc. (the
"Guarantor"), and all future subsidiaries of the Company that guarantee any of
the Company's indebtedness, including the New Credit Facility. The guarantee is
an unsecured obligation of the Guarantor and ranks pari passu with all existing
and future unsubordinated indebtedness. As part of the Lee Company investment,
the Company issued the Lee Senior Notes (see Note 6) which are similar in all
material respects to the Senior Notes. The Company also has approximately $0.9
million of debt with local governments to support growth in those areas.
Metris Direct, Inc. has various subsidiaries which have not guaranteed
the Senior Notes. The Company has prepared condensed consolidating financial
statements of the Company, the Guarantor subsidiary and the non-guarantor
subsidiaries for purposes of complying with SEC reporting requirements. Such
financial statements are included in Note 18 of the Company's consolidated
financial statements included in its Annual Report on Form 10-K filed with the
SEC.
<PAGE>
Metris Companies Inc. and Subsidiaries
Summary of Consolidated Quarterly Financial Information and Stock Data
(Dollars in thousands, expect per share data) (unaudited)
<TABLE>
1998
Fourth Third Second First
Quarter Quarter Quarter Quarter
Summary of Operations
<S> <C> <C> <C> <C>
Interest Income ............................... $30,838 $28,564 $27,022 $26,787
Interest Expense .............................. 8,780 8,902 6,188 6,643
------ ------ ------ ------
Net Interest Income ........................... 22,058 19,662 20,834 20,144
Provision for Loan Losses ..................... 19,184 17,154 21,390 20,042
Other Operating Income ........................ 92,296 75,859 72,307 72,496
Other Operating Expense ....................... 67,972 50,730 51,588 54,348
Income before Income Taxes .................... 27,198 27,637 20,163 18,250
------ ------ ------ ------
Net Income .................................... 16,728 16,996 12,400 11,224
Preferred Dividends ........................... 1,100
------ ------ ------ ------
Net Income Available to
Common Stockholders .......................... $15,628 $16,996 $12,400 $11,224
======= ======= ======= =======
Per Common Share
Earnings per Common Share
- Diluted ................................ $ 0.79 $ 0.85 $ 0.62 $ 0.55
Shares used to Compute
Diluted EPS (000's) ...................... 19,897 20,063 19,982 20,296
Dividends ..................................... $ .01 $ .01 $ .01 $ .01
Market Prices:
High ..................................... $ 50.31 $ 80.13 $ 63.75 $ 46.50
Low ...................................... 17.75 46.25 44.88 32.00
Close .................................... 50.31 46.63 63.75 43.50
1997
Fourth Third Second First
Quarter Quarter Quarter Quarter
Summary of Operations
Interest Income ................................ $24,711 $17,215 $14,838 $12,430
Interest Expense ............................... 6,021 2,398 2,073 1,459
------ ------ ------ ------
Net Interest Income ............................ 18,690 14,817 12,765 10,971
Provision for Loan Losses ...................... 15,400 11,106 6,429 11,054
Other Operating Income ......................... 56,489 41,279 42,661 46,248
Other Operating Expense ........................ 43,415 27,856 33,194 33,583
Income before Income Taxes ..................... 16,364 17,134 15,803 12,582
------ ------ ------ ------
Net Income ..................................... $10,064 $10,537 $ 9,719 $ 7,738
======= ======= ======= =======
Per Common Share
Earnings per Common Share
- Diluted ................................. $ 0.50 $ 0.52 $ 0.48 $ 0.38
Shares used to Compute
Diluted EPS (000's) ....................... 20,269 20,299 20,142 20,174
Dividends ...................................... .01 .01 .01
Market Prices:
High ...................................... $ 44.06 $ 47.81 $ 32.81 $ 35.13
Low ....................................... 30.00 32.25 22.00 23.25
Close ..................................... 34.25 43.31 32.81 25.00
</TABLE>
<PAGE>
Stock Data
The Company's common stock, which is traded under the symbol "MTRS,"
has been listed on the Nasdaq Stock Market since October 25, 1996. As of March
2, 1999, there were 460 holders of record and 9000 beneficial holders of the
Company's common stock.
<PAGE>
CORPORATE INFORMATION
Corporate Offices
Executive Offices
600 South Highway 169
Interchange Tower, Suite 1800
St. Louis Park, Minnesota 55426
(612) 525-5020
Direct Merchants Credit
Card Bank, National Association
6909 East Greenway Parkway
Scottsdale, Arizona 85254
Annual Meeting
Tuesday, May 11, 1999
10:00 a.m., Hyatt Regency Minneapolis
1300 Nicollet Mall
Minneapolis, Minnesota 55403
Stock Listing
Nasdaq National Market
Stock Symbol: MTRS
Independent Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota
Transfer Agent and Registrar
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota
Form 10-K
A copy of the Company's Annual Report on Form 10-K may be obtained free of
charge from the Company's Investor Relations contact:
Alfred A. Galgano
Vice President, Investor Relations
Phone: (612) 593-4820
Fax: (612) 593-4733
<PAGE>
BOARD OF DIRECTORS
Theodore Deikel
Chairman, Metris Companies Inc.
Chairman and Chief Executive Officer
Fingerhut Companies, Inc.
Ronald N. Zebeck
President and Chief Executive Officer
Lee R. Anderson, Sr.
Chairman and CEO
API Group, Inc.
John A. Cleary
President
John Cleary Enterprises
Dudley C. Mecum
Managing Director
Capricorn Holdings, LLC
Derek V. Smith
President & CEO
ChoicePoint, Inc.
Frank D. Trestman
President
Trestman Enterprises
Audit Committee
Dudley C. Mecum, Chairman
Lee R. Anderson
Frank D. Trestman
Compensation Committee
Frank D. Trestman, Chairman
John A. Cleary
Dudley C. Mecum
Derek V. Smith
EXECUTIVE OFFICERS
Ronald N. Zebeck
President and Chief
Executive Officer
Z. Jill Barclift
Executive Vice President, Secretary and General Counsel
EXECUTIVE OFFICERS continued
Douglas B. McCoy
Executive Vice President, Operations
Douglas L. Scaliti
Executive Vice President, Fee-Based Products
David D. Wesselink
Executive Vice President,
Chief Financial Officer
Patrick J. Fox
Senior Vice President, Business Development
Joseph A. Hoffman
Senior Vice President, Consumer Credit Card Marketing
David R. Reak
Senior Vice President, Credit Risk
Paul T. Runice
Senior Vice President, Treasurer
Jean C. Benson
Vice President, Finance, and Corporate Controller
OTHER OFFICERS
William R. Anderson
Senior Vice President, Electronic Commerce
Adolph T. Barclift
Senior Vice President,
Information Services
Matthew S. Melius
Senior Vice President,
Portfolio Marketing
Jon Mendel
Senior Vice President, Human Resources
Jean P. Vernor
Senior Vice President, Product Management
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
COMPANY JURISDICTION OF REGISTRANT
Direct Merchants Credit National Banking Association
Card Bank, National Association
(d/b/a Direct Merchants Bank)
Metris Direct, Inc. Minnesota
(d/b/a Metris Direct)
Metris Receivables, Inc. Delaware
Metris Funding Co. Delaware
Metris Asset Funding Co. Delaware
Metris Direct Services, Inc. Delaware
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Metris Companies Inc.:
We consent to the incorporation by reference in Registration Statement Nos.
333-42529, 333-42961, 333-52627 and 333-52629 on Form S-8 of Metris Companies
Inc. of our report dated January 20, 1999 (except for the last paragraph of Note
6 and the last paragraph of Note 11 which are as of March 12, 1999) relating to
the consolidated balance sheets of Metris Companies Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report on Form 10-K of Metris Companies Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 22,114
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,060
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 756,899
<ALLOWANCE> 393,283
<TOTAL-ASSETS> 945,719
<DEPOSITS> 0
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 201,841
<LONG-TERM> 300,896
0
201,000
<COMMON> 193
<OTHER-SE> 231,689
<TOTAL-LIABILITIES-AND-EQUITY> 945,719
<INTEREST-LOAN> 111,118
<INTEREST-INVEST> 1,065
<INTEREST-OTHER> 1,028
<INTEREST-TOTAL> 113,211
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 30,513
<INTEREST-INCOME-NET> 82,698
<LOAN-LOSSES> 77,770
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 224,638
<INCOME-PRETAX> 93,248
<INCOME-PRE-EXTRAORDINARY> 57,348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,348
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.82
<YIELD-ACTUAL> 17.8
<LOANS-NON> 0
<LOANS-PAST> 173,812
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 244,084
<CHARGE-OFFS> 420,875
<RECOVERIES> 15,798
<ALLOWANCE-CLOSE> 393,283
<ALLOWANCE-DOMESTIC> 393,283
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 21,006
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,089
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 480,626
<ALLOWANCE> 244,084
<TOTAL-ASSETS> 538,662
<DEPOSITS> 0
<SHORT-TERM> 144,000
<LIABILITIES-OTHER> 118,624
<LONG-TERM> 100,000
0
0
<COMMON> 192
<OTHER-SE> 175,846
<TOTAL-LIABILITIES-AND-EQUITY> 538,662
<INTEREST-LOAN> 66,695
<INTEREST-INVEST> 1,636
<INTEREST-OTHER> 863
<INTEREST-TOTAL> 69,194
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 11,951
<INTEREST-INCOME-NET> 57,243
<LOAN-LOSSES> 43,989
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 138,048
<INCOME-PRETAX> 61,883
<INCOME-PRE-EXTRAORDINARY> 38,058
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,058
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 17.2
<LOANS-NON> 0
<LOANS-PAST> 111,166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 95,669
<CHARGE-OFFS> 195,535
<RECOVERIES> 4,405
<ALLOWANCE-CLOSE> 244,084
<ALLOWANCE-DOMESTIC> 244,084
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
