<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER , 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEXTCARD, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6141 68-0384-606
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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JEREMY R. LENT
CHIEF EXECUTIVE OFFICER
NEXTCARD, INC.
595 MARKET STREET, SUITE 1800
SAN FRANCISCO, CALIFORNIA 94105
(415) 836-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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COPIES TO:
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RONALD H. STAR, ESQ. MICHAEL J. HALLORAN, ESQ.
JOANNE BAL, ESQ. KAREN A. DEMPSEY, ESQ.
ELIZABETH B. KENT, ESQ. DAVINA K. KAILE, ESQ.
BRETT MCDONNELL, ESQ. KAREN M. YAN, ESQ.
HOWARD, RICE, NEMEROVSKI, CANADY, PILLSBURY MADISON & SUTRO LLP
FALK & RABKIN, A PROFESSIONAL CORPORATION 235 MONTGOMERY STREET
THREE EMBARCADERO CENTER, SUITE 700 SAN FRANCISCO, CALIFORNIA 94104
SAN FRANCISCO, CALIFORNIA 94111 (415) 983-1000
(415) 434-1600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNITS (2) PRICE(1)(2) REGISTRATION FEE
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Common Stock, $.001 par
value....................... 8,050,000 $32.75 $263,637,500 $73,291
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(1) Includes shares subject to over-allotment option granted to the
underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended,
based upon the average of the high and low prices of the common stock
as reported on the Nasdaq National Market on November 18, 1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH
WE ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES
USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY
THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE
SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE
PERMITTED OR LEGAL.
SUBJECT TO COMPLETION -- NOVEMBER , 1999
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PROSPECTUS
, 1999
NEXTCARD LOGO
7,000,000 SHARES OF COMMON STOCK
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NEXTCARD, INC.:
- - We are a leading Internet-based provider of consumer credit.
- - Our product, the NextCard Visa(R), is offered through our website,
www.nextcard.com.
- - NextCard, Inc.
595 Market Street, Suite 1800
San Francisco, California 94105
(415) 836-9700
SYMBOL & MARKET:
- - NXCD/Nasdaq National Market
LAST REPORTED SALE PRICE:
- - $32.06
THE OFFERING:
- - We are offering 3,500,000 shares of our common stock, and the selling
stockholders identified in this prospectus are offering 3,500,000 shares of
our common stock.
- - The underwriters have an option to purchase an additional 750,000 shares from
NextCard and 300,000
from selling stockholders to cover over-allotments.
- - We plan to use the net proceeds to us from this offering for general corporate
purposes, including working capital, funding of credit card receivables and
further capitalization of NextBank, N.A.
- - Closing: , 1999
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<CAPTION>
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to NextCard:
Proceeds to selling stockholders:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DONALDSON, LUFKIN & JENRETTE GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL SECURITIES
U.S. BANCORP
PIPER JAFFRAY
DLJDIRECT INC.
<PAGE> 3
[Inside Cover of Prospectus]
[Picture of www.nextcard.com web page]
Apply Now!
<PAGE> 4
[Prospectus Gatefold]
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[NextCard online [NextCard PictureCard [NextCard Go Shopping!
balance transfer web page] web page]
web page] My Visa PictureCard
Internet Shopping Tools
Transfer balances online
You're Approved!
[Picture of
NextCard Visa
credit cards]
[NextCard offers Double Rewards Points offers
customized web page] [NextCard Reward web page]
Customized upgrade offers
[NextCard account
statement web page]
Manage your
account online
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding
Forward-Looking Statements........ 17
Use of Proceeds..................... 18
Price Range of Common Stock......... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial
Data.............................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 23
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Page
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Business............................ 36
Management.......................... 53
Certain Transactions................ 62
Principal and Selling
Stockholders...................... 63
Description of Capital Stock........ 66
Shares Eligible for Future Sale..... 70
Underwriting........................ 71
Legal Matters....................... 73
Experts............................. 74
Additional Information.............. 74
Index to Consolidated Financial
Statements........................ F-1
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Our website is www.nextcard.com. The information on our website is not
incorporated by reference into this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' option to purchase an additional 1,050,000 shares
of common stock.
The shares of common stock we are selling in this offering are voting
shares. We also have a series of nonvoting common stock that will remain
outstanding after the closing of this offering. Except as otherwise indicated,
all references to common stock and common shares include our nonvoting common
stock.
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NextCard is our registered trademark. This prospectus also contains
trademarks of other companies.
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[INTENTIONALLY LEFT BLANK]
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and our common stock being sold in this offering and
our financial statements and the related notes appearing elsewhere in this
prospectus.
NEXTCARD, INC.
OUR BUSINESS
We are a leading Internet-based provider of consumer credit. We were the
first company to offer an online credit approval system for a Visa card and to
provide interactive, customized offers for credit card applicants.
We combine expertise in consumer credit, an exclusive Internet focus and
sophisticated direct marketing techniques with the aim of attracting profitable
customer segments on the Internet. Our product, the NextCard Visa, which we call
the First True Internet Visa, is marketed to consumers through our website,
www.nextcard.com. The NextCard Visa, which can be used for both online and
offline purchases, offers:
- ONLINE CREDIT APPROVAL WITHIN SECONDS
- ONLINE SELECTION OF CUSTOMIZED OFFERS BASED UPON THE APPLICANT'S CREDIT
PROFILE
- INTERNET SHOPPING ENHANCEMENTS
- INTERNET-BASED ACCOUNT MANAGEMENT
OUR MARKET OPPORTUNITY
Due to the growth of electronic commerce, the ability to target customers
on the Internet and the dynamics of the credit card industry, we believe there
is a significant opportunity to offer credit cards through targeted marketing on
the Internet. NextCard was formed to capitalize on this opportunity.
OUR STRATEGY
Our objective is to enhance our position as a leading Internet-based
provider of customized consumer credit products and services. The key elements
of our strategy are:
- DIRECT MARKETING STRATEGY: Use data analysis techniques to expand our
expertise in Internet direct marketing in order to find and attract the
most profitable customers.
- PRODUCT STRATEGY: Offer customized product choices to our customers,
allowing them to design their own credit cards interactively.
- TECHNOLOGY STRATEGY: Apply Internet innovations as they occur to provide
enhanced customer functionality more rapidly than our competitors.
- BRANDING STRATEGY: Leverage our leadership in Internet consumer
financial services to continue to build brand recognition.
The NextCard Visa has experienced significant consumer demand since its
introduction in December 1997. As of September 30, 1999, we had over $268.0
million in loan receivables outstanding, and had approximately 134,000 open
credit card accounts. We earn most of our revenue from the finance charges paid
by our customers based on their outstanding credit card balances. We also earn
revenue from the amounts paid through the Visa system for purchases made with
the NextCard Visa and from fees paid by our cardholders.
3
<PAGE> 8
THE OFFERING
Common stock offered by NextCard...... 3,500,000 shares
Common stock offered by selling
stockholders.......................... 3,500,000 shares
Common stock and nonvoting common
stock to be outstanding after the
offering............................ 49,701,517 shares
Use of proceeds....................... For general corporate purposes,
including working capital, funding
of credit card receivables and
further capitalization of NextBank,
N.A., our limited purpose bank
subsidiary. We will not receive any
of the proceeds from the sale of the
shares of our common stock being
offered by the selling stockholders.
See "Use of Proceeds."
Dividend policy....................... We do not anticipate paying cash
dividends in the foreseeable future.
Nasdaq National Market symbol......... NXCD
The outstanding share information is based on our shares outstanding as of
September 30, 1999. This information excludes:
- 13,235,616 shares reserved under our 1997 Stock Plan, of which 7,433,524
shares are subject to outstanding options at a weighted average exercise
price of $3.08 per share;
- 5,802,092 shares reserved for future option grants under our 1997 Stock
Plan; and
- Warrants to purchase 1,023,621 shares at a weighted average price of
$1.28 per share.
4
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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NINE MONTHS ENDED
PERIOD FROM YEAR ENDED SEPTEMBER 30,
JUNE 5, 1996 (INCEPTION) DECEMBER 31, ------------------
TO DECEMBER 31, 1997 1998 1998 1999
(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS:
Interest income................................... $ 93 $ 502 $ 228 $ 10,577
Interest expense.................................. -- 62 48 5,762
------- -------- ------- --------
Net interest income............................... 93 440 180 4,815
Provision for loan losses......................... -- -- -- 5,227
------- -------- ------- --------
Net interest income (loss) after provision for
loan losses..................................... 93 440 180 (412)
Non-interest income............................... -- 697 306 2,089
Non-interest expenses............................. 1,977 17,199 9,731 54,121
Provision for income taxes........................ 2 2 -- --
------- -------- ------- --------
Net loss.......................................... $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted net loss per share.............. $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Weighted-average shares of common stock
outstanding used in computing basic and diluted
net loss per share(1)........................... 1,747 3,166 3,050 24,809
Pro forma basic and diluted net loss per share
(unaudited)..................................... -- -- -- $ (1.28)
========
Shares used in computing pro forma basic and
diluted net loss per share(1) (unaudited)....... -- -- -- 41,001
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER
MANAGEMENT(2):
Total credit card receivables outstanding......... -- $ 66,042 $35,334 $268,014
Total number of open credit card accounts......... -- 40 19 134
Total revenue: interest income and non-interest
income.......................................... -- $ 1,199 $ 534 $ 12,666
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AS OF SEPTEMBER 30, 1999
-----------------------------
ACTUAL AS ADJUSTED(3)
(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 99,534 $205,634
Credit card loan receivables, net of allowance for loan
losses.................................................... 261,836 261,836
Total assets................................................ 388,906 495,006
Secured borrowings.......................................... 229,129 229,129
Total liabilities........................................... 264,284 264,284
Total stockholders' equity.................................. 124,622 230,722
</TABLE>
- ---------------
(1) See Note 2 of notes to Consolidated Financial Statements for an explanation
of the number of shares used in per share computations.
(2) For the periods ending September 30, 1998 and December 31, 1998, assets
under management represented all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage Bank of Commerce's
balance sheet. For the periods ending March 31, 1999 and June 30, 1999,
assets under management represented all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage Bank of
Commerce's and our balance sheets. As of September 30, 1999, assets under
management represent all credit card loan receivables generated under the
NextCard Visa and outstanding on our balance sheet.
(3) Adjusted to reflect the sale of 3,500,000 shares of common stock offered in
this offering at an assumed public offering price of $32.06 per share and
after deducting estimated underwriting discounts and commissions and
offering expenses payable by us and the application of our estimated net
proceeds from the offering. See "Capitalization."
5
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before making an investment decision.
If any of the following risks occur, our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS AND
PROSPECTS DIFFICULT.
NextCard was formed in June 1996. We introduced the NextCard Visa in
December 1997. We have only a limited operating history on which you can base an
evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as the market
for Internet products and services.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE SIGNIFICANT FUTURE LOSSES.
We incurred net losses of $1.9 million for the period from our inception
through December 31, 1997, $16.1 million for the year ended December 31, 1998
and $52.4 million for the nine months ended September 30, 1999. As of September
30, 1999, we had an accumulated deficit of $70.4 million. To date, we have not
achieved profitability and we expect to incur significant and increasing net
losses for at least the next three years. We intend to continue to invest
significantly in marketing, operations, technology and the development of
statistical analyses. As a result, we will need to generate significant revenue
to achieve profitability. We cannot be certain that we will be able either to
maintain our recent revenue growth rates or to generate adequate revenue to
achieve profitability. If we do achieve profitability, we cannot be certain that
we can sustain or increase profitability on a quarterly or annual basis in the
future. See "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
OUR LIMITED OPERATING HISTORY MAKES OUR FINANCIAL FORECASTING DIFFICULT.
Due to our limited operating history, we cannot forecast operating expenses
based on our historical results. Accordingly, we base our forecast of operating
expenses, in part, on future revenue projections. Most of these expenses are
fixed in the short term and we may not be able to quickly reduce spending if we
achieve lower than anticipated revenue. Our ability to accurately forecast our
revenue is limited. If our revenue does not meet our internally developed
projections, our net losses will be even greater than we anticipate and our
business, operating results and financial condition may be materially and
adversely affected.
OUR UNSEASONED CREDIT CARD PORTFOLIO MAKES OUR PREDICTION OF DELINQUENCY
AND LOSS LEVELS DIFFICULT.
As of September 30, 1999, approximately 75% of our credit card balances
were generated in the last six months. As a result, we cannot accurately predict
the levels of delinquencies and losses that can be expected from our portfolio
over time. As our portfolio becomes more seasoned, the level of losses may
increase. Any material increase in delinquencies or losses above our
expectations could materially and adversely impact our results of operations and
financial condition. See "Business -- Underwriting and Credit Management."
6
<PAGE> 11
WE MAY BE UNABLE TO RETAIN CUSTOMERS WHEN WE INCREASE THEIR INTRODUCTORY OR
FIXED INTEREST RATES.
To attract new customers, we have offered and may continue to offer low
introductory interest rates that increase after expiration of the introductory
period. In addition, we offer fixed rate products that may increase if customers
fail to pay their credit card bills on a timely, consistent basis. Given our
limited operating history, we do not know what percentage of our customers will
continue to use their NextCard Visa after they are repriced. If fewer customers
than we expect continue to use their NextCard Visa after they are repriced, our
results of operations would be adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Underwriting and Credit Management."
WE MAY ENCOUNTER DIFFICULTIES DUE TO OUR UNTESTED CUSTOMER BASE.
We target our credit card products to Internet users. Lenders historically
have not solicited this market to the same extent as more traditional market
segments. As a result, there is less historical experience with respect to the
credit risk and performance of these consumers. We may not be able to
successfully target and evaluate the creditworthiness of these consumers.
Therefore, we may encounter difficulties managing the expected delinquencies and
losses and appropriately pricing our products. In addition, we may consider
using additional internally developed criteria to enhance or replace our
existing criteria. We have limited experience developing and implementing credit
criteria. As a result, as compared to issuers targeting traditional market
segments, we could experience any or all of the following:
- a greater number of cardholder payment defaults or other unfavorable
payment behavior;
- an increase in fraud by our cardholders and third parties; and
- changes in the traditional patterns of cardholder loyalty and usage.
In addition, because we are targeting a new customer base, we have
comparatively little information about the potential size of our target market,
our customer usage patterns and other factors that could significantly affect
the demand for our products and services. Moreover, general economic factors,
such as the rate of inflation, unemployment levels and interest rates may affect
our target market customers more severely than other market segments, which
could increase our delinquencies and losses. See "Business -- Underwriting and
Credit Management."
FLUCTUATIONS IN OUR QUARTERLY REVENUE AND OPERATING RESULTS MAY AFFECT THE
PRICE OF OUR COMMON STOCK.
Quarterly fluctuations in our earnings could adversely affect the market
price of our common stock. Our revenue consists of the finance charges paid by
our customers based on their outstanding balances, the amounts received through
the Visa system based upon a percentage of our customers' purchases and the fees
paid by our customers. As a result, we depend substantially on the level of
customer balances, the level of interest rates on our credit card portfolios
timing of payments of our cardholders and the volume of NextCard Visa purchases.
Variations of these factors could affect our quarterly revenue. Any shortfall in
our revenue would have a direct impact on our operating results for a particular
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our quarterly operating results may fluctuate significantly as a result of
a variety of factors, many of which are outside of our control. These factors
include:
- the volume of credit card loans generated from our products and our
ability to successfully manage our credit card loan portfolio;
7
<PAGE> 12
- the announcement or introduction of new websites, services and products
by us or our competitors and the level of price competition for the
products and services we offer;
- our ability to securitize credit card loan receivables and the timing of
such securitizations;
- the amount and timing of our operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure;
- technical difficulties, system downtime, Internet service problems and
our ability to expand and upgrade our computer systems to handle
increased traffic;
- the success of our brand building, advertising and marketing campaigns,
including our recently announced agreement with Amazon.com, L.L.C.; and
- general economic conditions, including interest rate volatility, and
economic conditions specific to the Internet, online commerce and the
credit card industry.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR WORKING CAPITAL REQUIREMENTS.
If our current funding, including the net proceeds to us generated by this
offering, becomes insufficient to support future operating requirements, we will
need to obtain additional funding either by increasing our lines of credit or by
raising additional debt or equity from the public or private capital markets.
There can be no assurance that such additional funding will be available on
terms attractive to us, or at all. Our failure to raise additional funding when
needed could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through the
issuance of equity securities, the ownership percentage of our then-current
stockholders would be reduced. Furthermore, the equity securities may have
rights, preferences or privileges senior to those of our common stock.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR LOAN PORTFOLIO.
Our primary source of funding is the securitization of our credit card loan
portfolio through commercial paper conduit facilities. We currently fund our
loan portfolio through the following commercial paper conduit facilities: a
$300.0 million facility arranged by Barclays Bank PLC, a $150.0 million facility
arranged by ING Barings (U.S.) Capital Markets LLC and a $220.0 million facility
established November 12, 1999 with First Union Securities, Inc. As of September
30, 1999, $229.1 million was outstanding under the Barclays Bank facility and
there was no amount outstanding under the ING Barings facility.
Securitization transactions involve the sale of beneficial interests in
credit card loan balances. Until now, we have completed securitization
transactions on terms that we believe are favorable. The availability of
securitization funding, however, depends on the difficulty and expense of the
funding. Securitizations can be affected by many factors, such as whether a
third party will be willing to provide credit enhancement and the rates at which
cardholders have repaid their balances in the past. In addition, legal,
regulatory, accounting and tax changes can make securitization funding more
difficult, more expensive or unavailable on any terms. Securitizations may not
always offer us attractive funding, and we may have to seek other more expensive
funding sources in the future. In general, the amount, type and cost of our
financing affect our financial results. Changes within our organization and
changes in the activities of parties with which we have agreements or
understandings could all make the financings available to us more difficult,
more expensive or unavailable on any terms.
8
<PAGE> 13
With the acquisition of NextBank, our funding strategy includes the ability
to fund a portion of our loan portfolio through short-term deposits solicited
and received by NextBank. We may not be able to attract or retain sufficient
deposits at attractive interest rates to fund our loan portfolio through
NextBank. Moreover, if adequate capital is not available, we also may be subject
to an increased level of regulatory supervision that could have an adverse
effect on our operating results and financial condition.
OUR CUSTOMERS MAY BECOME DISSATISFIED BY SYSTEM DISRUPTIONS AND FAILURES.
Our website has in the past experienced, and may in the future experience,
slower than normal response times or other problems, such as system
unavailability. Customers may become dissatisfied by any system failure that
interrupts or delays our ability to provide our services to them. Any
interruption or delay in our operations could materially and adversely affect
our business.
If the number of users of our website increases substantially, we will need
to significantly expand and upgrade our technology, transaction processing
systems and network infrastructure. Our website must accommodate a high volume
of users and deliver frequently updated information. The number of visitors and
credit card applicants to our website has increased substantially since we
introduced the NextCard Visa, and we anticipate that this traffic will further
increase over time. However, it is difficult to predict the future traffic on
our website. Marketing efforts and other events could cause traffic to strain
our website's capacity. We do not know whether we will be able to accurately
project the rate or timing of any traffic increases, or expand and upgrade our
systems and infrastructure to accommodate these increases in a timely manner.
Our systems and operations also are vulnerable to damage or interruption
from human error, natural disasters, power losses, telecommunication failures,
break-ins, sabotage, computer viruses, acts of vandalism and similar events. As
we currently do not have back-up systems for most aspects of our operations, a
failure of a single aspect of our system could cause interruptions or delays in
our entire operation. We do not carry sufficient business interruption insurance
to compensate for losses that could occur.
WE DEPEND ON A LIMITED NUMBER OF VENDORS FOR ESSENTIAL SERVICES.
We rely on a number of services furnished to us by either a single vendor
or a limited number of vendors. We also depend, directly and indirectly, on
other key third party vendors to provide essential services. In the event that
any of our agreements with any of these third parties is terminated, we may not
be able to find an alternative source of support on a timely or commercially
reasonable basis, if at all. Any interruption, deterioration or termination in
these third-party services could be disruptive to our business and harm our
results of operations and financial condition. See "Business --
Operations -- Key Outside Relationships."
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO ATTRACT AND RETAIN KEY
PERSONNEL.
Our success depends largely on the skills, experience and performance of
certain key members of our management. If we lose one or more of these key
employees, particularly Jeremy Lent, our Chairman of the Board, Chief Executive
Officer and President, our business, operating results and financial condition
would be materially adversely affected. Our success also depends on our
continued ability to attract, retain and motivate highly skilled employees.
Competition for employees both for Internet-based businesses and for financial
services businesses is intense, particularly for personnel with technical
training and experience. We may be unable to retain our key employees or to
attract, assimilate or retain other highly qualified employees in the future. We
have from time to time in the
9
<PAGE> 14
past experienced, and we expect to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE THE RAPID GROWTH IN OUR OPERATIONS.
Since the introduction of our NextCard Visa product in December 1997, we
have experienced rapid growth in our operations. From December 31, 1997 through
September 30, 1999, we grew from approximately 18 to 244 employees, and our
loans under management increased from $0 to $268.0 million. We are planning for
continued rapid growth of our operations. This growth requires us to expand our
marketing, customer service and support, credit and technology organizations.
There can be no assurance that we will be able to attract and retain sufficient
numbers of personnel to satisfy our anticipated growth. In particular, as we
rely heavily on temporary personnel to satisfy our growing personnel demands, we
may be unable to continue to attract and retain a sufficient number of temporary
employees to support our future growth. Rapid growth places a significant strain
on our financial reporting, information and management systems and resources.
Our business, results of operations and financial condition will be materially
adversely affected if we are unable to effectively manage our expanding
operations. For example, if we are unable to maintain and scale our financial
reporting and information systems, we may not have access to adequate, accurate
and timely financial information.
WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP NEXTCARD AS A BRAND.
The dynamics of a brand name have traditionally worked differently in the
credit card market than in many other industries. In the credit card market,
consumers have responded more to brand names, such as Visa or MasterCard, than
to the identity of the issuer. The Internet may change underlying market
dynamics for brand recognition as compared to the offline market. Accordingly,
we are aggressively implementing our marketing plan to establish brand
recognition with Internet users to persuade customers to switch to our products
and services, particularly because we compete, or expect to compete, with larger
financial institutions that have well-established brand names. We cannot assure
you that we will successfully develop our brand name. If the brand name of
online credit card issuers becomes important, and if other credit card issuers
begin to compete with us for online brand name recognition, our business,
results of operations and financial condition could be materially and adversely
affected.
RISKS RELATED TO OUR INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET AND INTERNET
COMMERCE.
Our future success depends heavily on the overall continued growth and
acceptance of the Internet, including its use in electronic commerce. If
Internet usage or commerce does not continue to grow or grows more slowly than
expected, our business, operating results and financial condition will be
adversely affected. Consumers and businesses may reject the Internet as a viable
medium for a number of reasons. These include potentially inadequate network
infrastructure, slow development of enabling technologies and insufficient
commercial support. The Internet infrastructure may not be able to support the
demands placed on it by increased Internet usage and bandwidth requirements. In
addition, delays in the development or adoption of new standards and procedures
required to handle increased levels of Internet activity, or increased
government regulation, could cause the Internet to lose its viability as a
commercial medium. Even if the required infrastructure, standards, procedures or
related products, services and facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.
10
<PAGE> 15
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH OF THE FINANCIAL
SERVICES MARKET.
Our business would be adversely affected if the growth in Internet
financial products and services does not continue or is slower than expected.
Although we believe the Internet has the potential to transform the delivery of
consumer financial products, consumers' acceptance of recently introduced
financial products and services is at an early stage and is subject to a high
level of uncertainty. Although our long-term vision is to redefine the banking
experience for the Internet consumer, presently we offer only a single product,
the NextCard credit card. As the online financial services industry matures,
government-imposed regulations could become so stringent that we may be
economically precluded from offering online financial products and services.
INTENSE AND INCREASING COMPETITION IN FINANCIAL SERVICES COULD HARM OUR
BUSINESS.
The financial services market is rapidly evolving and intensely
competitive. The recently enacted Gramm-Leach-Bliley Act of 1999, which permits
the affiliation of commercial banks, insurance companies and securities firms,
may increase the level of competition in the financial services market,
including the credit card business. We operate in this competitive environment
with a number of other companies, many of whom have significantly longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
Some of our competitors may be able to obtain funding at a more favorable rate
than we can obtain. In addition, our business model anticipates that we will
derive a large majority of our revenue from the interest charged on credit card
balances contained in the portfolio of loans we hold. Increased competition
could require us to reduce the interest rates we charge on our customers'
balances. This could have a material adverse effect on our business, results of
operations and financial condition.
Other credit card issuers and traditional commercial banks may increasingly
compete in the online credit card market. Existing Internet providers and new
Internet entrants may launch new websites using commercially available software.
In addition, companies that provide alternate online payment methods, such as
debit card and micropayment offerings, may compete for our business. While the
credit card market traditionally has been very fragmented, the Internet could
change traditional market dynamics and enable new competitors to rapidly acquire
significant market share.
Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. They may be able to:
- devote greater resources than we can to the development, promotion and
sale of their products and services;
- replicate our products and services;
- engage in more extensive research and development;
- undertake farther-reaching marketing campaigns;
- adopt more aggressive pricing policies;
- make more attractive offers to existing and potential employees and
strategic partners;
- more quickly develop new products and services or enhance existing
products and services;
- bundle consumer products and services in a manner that we cannot provide;
and
11
<PAGE> 16
- establish cooperative relationships among themselves or with third
parties, including large Internet participants, to increase the ability
of their products and services to address the needs of our prospective
customers.
We cannot assure you that we will be able to compete successfully or that
competitive pressures will not materially and adversely affect our business,
results of operations or financial condition. See "Business -- Competition."
OUR OPERATING RESULTS ARE SUBJECT TO INTEREST RATE FLUCTUATIONS.
The majority of our revenue is generated by the interest rates we charge on
outstanding balances in the form of finance charges, which are based on
prevailing interest rates. Accordingly, fluctuations in interest rates will
affect our revenue. At the same time, a significant portion of our outstanding
balances are at fixed rates and do not fluctuate with interest rate movements.
Our borrowing costs may also fluctuate based on general interest rate
fluctuations. A rise in our borrowing costs may not be met by a corresponding
increase in revenue generated by finance charges. Likewise, a decrease in
revenue generated by finance charges may not be met by a corresponding decrease
in borrowing costs. Thus, either a rise or a fall in the prevailing interest
rates could materially and adversely affect our results of operations and
financial condition. We may have to manage our interest rate risk through
interest rate hedging techniques. However, we currently do not use hedging
techniques, and they may not be successful in reducing or eliminating our
interest rate risk in the future.
WE MAY BE UNABLE TO INTRODUCE NEW SERVICES, FEATURES AND FUNCTIONS.
The Internet and related financial institutions marketplaces are
characterized by rapidly changing technologies, evolving industry standards,
frequent new product and service introductions and changing customer demands.
Our future success will depend on our ability to adapt to rapidly changing
technologies and to enhance existing products and services, as well as to
develop and introduce a variety of new products and services to address our
customers' changing demands. We may experience difficulties that delay or
prevent the successful design, development, introduction or marketing of our
products and services. In addition, material delays in introducing new products
and services and enhancements may cause customers to forego purchases of our
products and services and purchase instead those of our competitors. See
"Business -- Competition."
SECURITY BREACHES COULD DAMAGE OUR REPUTATION AND BUSINESS.
The secure transmission of confidential information over the Internet is
essential to maintain consumer and supplier confidence in our products and
services. Advances in computer capabilities, new discoveries or other
developments could result in a compromise or breach of the technology used by us
to protect customer transaction data.
A party that is able to circumvent our security systems could steal
proprietary information or cause interruptions in our operations. Security
breaches could damage our reputation and expose us to a risk of loss or
litigation. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches. We cannot
guarantee that our security measures will prevent security breaches. See
"Business -- Operations."
Consumers generally are concerned with security and privacy on the Internet
and any publicized security problems could inhibit the growth of the Internet as
a means of conducting commercial transactions. Our ability to provide financial
services over the Internet would be severely impeded if consumers become
unwilling to transmit confidential information online. As a result, our
operations and financial condition would be materially and adversely affected.
12
<PAGE> 17
WE MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.
To date, communications and commerce on the Internet have not been highly
regulated. However, Congress has held hearings on whether to regulate providers
of services and transactions in the electronic commerce market. It is possible
that Congress or individual states could further enact laws regulating Internet
banking that address issues such as user privacy, pricing and the
characteristics and quality of products and services. For example, the
Gramm-Leach-Bliley Act of 1999 established new privacy requirements applicable
to all financial institutions. Any restrictions on the collection and use of
such consumer information over the Internet could adversely affect our direct
marketing efforts. In addition, several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers in a manner similar to long distance telephone carriers and to impose
access fees on these companies. This could increase the cost of transmitting
data over the Internet. Moreover, it may take years to determine the extent to
which existing laws relating to issues such as property ownership, libel and
personal privacy are applicable to the Internet. Any new laws or regulations
relating to the Internet could adversely affect our business.
Our business is subject to extensive federal and state regulation,
including regulation under consumer protection laws. NextBank, our wholly owned
subsidiary, is a limited purpose national credit card bank, and is subject to
regulation under federal banking laws and certain laws of California and other
states, as well as regulatory supervision by the Office of the Comptroller of
the Currency (OCC) and the FDIC. As an affiliate of NextBank, we are also
subject to oversight by the OCC and the FDIC. Existing and future legislation
and regulatory supervision could have a material adverse effect on our business,
including our credit and authentication policies, pricing and products. See
"Business -- Government Regulation."
NextBank is subject to minimum capital, funding and leverage requirements
prescribed by federal statute and the OCC regulations and orders. If NextBank
fails to meet these regulatory capital requirements, NextBank will be subject to
additional restrictions that could have a material adverse effect on our ability
to conduct normal operations and possibly result in the seizure of NextBank by
government regulators under certain circumstances. Our ability to maintain or
increase NextBank's capital levels in the future will be subject to, among other
things, general economic conditions, our ability to raise new capital and our
ability and willingness to make additional capital contributions to NextBank or
a related institution. See "Business -- NextBank."
WE MAY FACE DIFFICULTIES PROTECTING AND ENFORCING OUR INTELLECTUAL PROPERTY
RIGHTS.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret and trademark laws as well as
confidentiality procedures and contractual provisions. However, any steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property. Any
such infringement or misappropriation could have a material adverse effect on
our business, results of operations and financial condition. In addition, we may
infringe upon the intellectual property rights of third parties, including third
party rights in patents that have not yet been issued. Any such infringement, or
alleged infringement, could have a material adverse effect on our business,
results of operations and financial condition.
We have filed three patent applications and have applied to register
several of our trademarks, both in the United States and abroad. We cannot
assure you that our patent applications or trademark registrations will be
approved. Moreover, even if approved, they may not provide us with any
competitive advantages or may be challenged by third parties. Legal standards
relating to the
13
<PAGE> 18
validity, enforceability and scope of intellectual property rights in
Internet-related industries are uncertain and still evolving, and the future
viability or value of any of our intellectual property rights is uncertain. Any
litigation surrounding such rights could force us to divert important financial
and other resources away from our business operations.
We collect and utilize data derived from applications on the NextCard
website and through transactions made using our products. Although we believe
that we have the right to use such data and compile such data in our database,
we cannot assure you that any intellectual property protection will be available
for such information subject to any limitations related to privacy such as those
contained in the Gramm-Leach-Bliley Act. In addition, third parties may claim
rights to such information.
We have licensed, and may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. See
"Business -- Marketing." While we attempt to ensure that the quality of our
brand is maintained by such business partners, such partners may take actions
that could materially and adversely affect the value of our proprietary rights
or our reputation. This could, in turn, have a material adverse effect on our
business, results of operations and financial condition.
WE FACE COMPUTER SYSTEM AND SOFTWARE RISKS RELATED TO THE YEAR 2000.
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with the year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
The risks posed by year 2000 issues could adversely affect our business in
a number of significant ways. Our internally developed proprietary software,
which includes substantially all of the systems for the operation of our website
could be adversely affected by year 2000 issues. Our information technology
systems also depend on information technology and services supplied by third
parties. Year 2000 problems experienced by us or any third party supplier could
materially adversely affect our business. Additionally, the Internet could face
serious disruptions arising from year 2000 issues.
We cannot guarantee that:
- our or our suppliers' systems will be year 2000 compliant in a timely
manner, or that there will not be significant interoperability problems
among information technology systems;
- consumers will be able to visit our website without serious disruptions
arising from year 2000 issues;
- disruptions in other industries and market segments will not adversely
affect our business; or
- our costs related to year 2000 compliance will be insignificant.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
14
<PAGE> 19
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to be highly
volatile. The market price of the common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- variations in quarterly operating results which differ from market
expectations;
- changes in financial estimates or ratings by securities analysts;
- changes in market valuations of Internet or financial services companies;
- fluctuations in interest rates;
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock or termination of stock transfer restrictions; and
- fluctuations in stock market price and volume, which are particularly
common among securities of Internet companies.
In addition, the Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. The trading prices of many
Internet companies' stocks are at or near historical highs and these trading
prices and multiples are substantially above historical levels. These trading
prices and multiples may not be sustainable. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance.
In the past, following periods of volatility in the market price of a
particular company's securities, stockholders have instituted securities class
action litigation against such company. Securities class action litigation may
result in substantial costs and a diversion of management's attention and our
resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Sales of a substantial number of shares of our common stock in the public
market, could cause the market price of our common stock to decline by
potentially introducing a large number of sellers of our common stock into a
market in which the common stock price is already volatile. In addition, the
sale of these shares could impair our ability to raise capital through the sale
of additional equity securities. Upon completion of this offering, we will have
49,701,517 shares outstanding, or 50,451,517 shares if the underwriters' option
to purchase an additional 750,000 shares of common stock from us is exercised in
full, and 6,447,211 shares subject to currently exercisable options and
warrants. Approximately 37,912,133 shares of common stock were issued and sold
by us in private transactions and are restricted shares. These shares are
eligible for public sale if registered under the Securities Act or sold in
accordance with Rules 144 or 701 under the Securities Act. On November 10, 1999,
"lock-up" agreements applying to 37,667,021 shares executed in connection with
our initial public offering expired. We expect that, in connection with this
offering, our directors, executive officers, certain private equity funds and
selling stockholders will enter into lock-up agreements expiring 90 days from
the date of this prospectus covering an aggregate of 26,514,649
15
<PAGE> 20
shares of our common stock. After execution of the 90-day lockup agreements,
8,142,173 restricted shares will be currently available for sale in the public
market, subject to certain limitations of Rule 144 of the Securities Act.
Beginning 90 days after the date of this prospectus, or earlier with our consent
and the consent of Donaldson, Lufkin & Jenrette Securities Corporation and
Goldman, Sachs & Co., all restricted shares will become available for sale in
the public market, subject to Rule 144 limitations. The 7,000,000 shares sold in
this offering, or 8,050,000 shares if the underwriters' option is exercised in
full, will be freely tradable without restriction or further registration under
the federal securities laws unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act.
Subject to our consent, Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co. may release all or any portion of the shares subject to
lock-up agreements prior to expiration of the lock-up period. See "Shares
Eligible for Future Sale."
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.
Following this offering, our executive officers, directors and 5% or
greater stockholders will own up to approximately 60% of our outstanding common
stock. As a result, they may act together to control all matters submitted to
stockholders for approval (including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets). In
addition, their large ownership position could enable them to effectively
control our management and affairs. Accordingly, the concentration of ownership
may delay, defer or prevent a change in control, impede a merger, consolidation,
takeover or other business combination involving us or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
us. This could, in turn, have an adverse effect on the market price of our
common stock. See "Management" and "Principal and Selling Stockholders."
CERTAIN ANTI-TAKEOVER PROVISIONS MAY DELAY, DEFER OR PREVENT A CHANGE IN
CONTROL.
Provisions of our Amended and Restated Certificate of Incorporation, our
Amended and Restated Bylaws and Delaware law could make it more difficult for a
third party to acquire control of us without the consent of our board of
directors, even if the change was favored by our stockholders. See "Description
of Capital Stock."
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<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results
or to changes in our expectations.
17
<PAGE> 22
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 3,500,000
shares of our common stock offered by us will be approximately $106.1 million,
after deducting estimated underwriting discounts and commissions and offering
expenses. We will not receive any of the proceeds from the sale of the shares of
our common stock being offered by the selling stockholders in this prospectus.
If the underwriters' option to purchase an additional 750,000 shares of common
stock from us is exercised in full, we estimate that such net proceeds will be
approximately $128.9 million.
We intend to use the net proceeds to us from this offering for general
corporate purposes, including working capital, funding of credit card
receivables and further capitalization of NextBank. Pending these uses, we
intend to invest the net proceeds in short-term, investment grade, interest-
bearing securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- NextBank."
PRICE RANGE OF COMMON STOCK
Since our initial public offering on May 14, 1999, our common stock has
been traded on the Nasdaq National Market under the symbol "NXCD." The following
table sets forth, for the periods indicated, the high and low sales prices for
our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1999:
Second Quarter (from May 14)................................ $50.00 $22.00
Third Quarter............................................... 41.50 19.13
Fourth Quarter (through November 18, 1999).................. 53.12 22.81
</TABLE>
On November 18, 1999, the last reported sale price for our common stock on
the Nasdaq National Market was $32.06 per share. As of November 18, 1999, there
were approximately 182 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, our lending facilities contain certain
restrictions on our ability to pay dividends.
18
<PAGE> 23
CAPITALIZATION
The following table sets forth our unaudited capitalization as of September
30, 1999:
- on an actual basis; and
- as adjusted to reflect our receipt of the estimated net proceeds from our
sale of 3,500,000 shares of common stock in this offering at an assumed
public offering price of $32.06 per share (after deducting the estimated
underwriting discounts and commissions and offering expenses) and the
application of our proceeds from this offering:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------
AS
ACTUAL ADJUSTED
<S> <C> <C>
Common stock and nonvoting common stock, 87,432,715 shares
authorized, 46,201,517 shares outstanding actual; 87,432,715
shares authorized, 49,701,517 shares outstanding as
adjusted.................................................... $ 46 $ 50
Notes receivable from officers.............................. (13) (13)
Additional paid-in capital.................................. 209,918 316,014
Deferred stock compensation................................. (14,935) (14,935)
Accumulated deficit......................................... (70,394) (70,394)
-------- --------
Total stockholders' equity........................ 124,622 230,722
-------- --------
Total capitalization.............................. $124,622 $230,722
======== ========
</TABLE>
The outstanding share information is based on our shares outstanding as of
September 30, 1999. The information excludes:
- 7,433,524 shares of common stock issuable upon exercise of options
outstanding on September 30, 1999, with a weighted average exercise price
of $3.08 per share;
- 5,802,092 shares of common stock reserved for issuance of ungranted
options under our 1997 Stock Plan; and
- 1,023,621 shares of common stock subject to outstanding warrants, with a
weighted average exercise price of $1.28 per share.
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<PAGE> 24
DILUTION
The actual net tangible book value as of September 30, 1999, was
approximately $119.6 million, or $2.59 per share of common stock. Net tangible
book value per share represents the amount of total assets, less intangible
assets and total liabilities, divided by the number of shares outstanding. After
giving effect to the issuance and sale of the 3,500,000 shares of common stock
offered by us and deducting underwriting discounts and commissions and estimated
offering expenses payable by us, our adjusted net tangible book value as of
September 30, 1999, would have been $225.7 million, or $4.54 per share. This
represents an immediate increase in the net tangible book value of $1.95 per
share to the existing stockholders and an immediate and substantial dilution of
$27.52 per share to the new public investors purchasing shares in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $32.06
Net tangible book value per share at September 30, 1999..... $2.59
Increase per share attributable to new public
investors............................................. 1.95
-----
Pro forma net tangible book value per share after the
offering.................................................. 4.54
------
Dilution per share to new investors......................... $27.52
======
</TABLE>
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<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data presented below for the period
from June 5, 1996 (date of inception) through December 31, 1997 and for, and as
of, the year ended December 31, 1998 are derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this prospectus. The consolidated statements of
operations for the nine months ended September 30, 1998 and 1999 and the
consolidated balance sheet data at September 30, 1998 and 1999 are derived from
our unaudited consolidated financials statements. The unaudited consolidated
financial statements have been prepared on the same basis as the annual
consolidated financial statements and include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of our
results of operations for such periods and financial condition at such dates.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year or future
periods. The selected consolidated financial data set forth is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Interest income:
Cash and cash equivalents................................. $ 93 $ 502 $ 228 $ 2,585
Credit card loan receivables.............................. -- -- -- 7,992
------- -------- ------- --------
Total interest income....................................... 93 502 228 10,577
Interest expense............................................ -- 62 48 5,762
------- -------- ------- --------
Net interest income......................................... 93 440 180 4,815
Provision for loan losses................................... -- -- -- 5,227
------- -------- ------- --------
Net interest income (loss) after provision for loan
losses.................................................... 93 440 180 (412)
------- -------- ------- --------
Non-interest income:
Servicing and profit and loss sharing..................... -- 662 301 341
Interchange fees.......................................... -- -- -- 1,130
Card fees and other....................................... -- 35 5 618
------- -------- ------- --------
Total non-interest income................................... -- 697 306 2,089
------- -------- ------- --------
Non-interest expenses:
Salaries and employee benefits............................ 1,495 6,730 4,262 15,322
Marketing and advertising................................. 50 4,324 2,201 16,364
Credit card activation and servicing costs................ 1 2,328 1,322 7,116
Occupancy and equipment................................... 137 958 602 2,656
Professional fees......................................... 167 520 167 1,106
Amortization of deferred stock compensation............... -- 1,800 867 7,096
Amortization of loan structuring fee...................... -- -- -- 2,967
Other..................................................... 127 539 310 1,494
------- -------- ------- --------
Total non-interest expenses................................. 1,977 17,199 9,731 54,121
------- -------- ------- --------
Loss before income taxes.................................... (1,884) (16,062) (9,245) (52,444)
Provision for income taxes.................................. 2 2 -- --
------- -------- ------- --------
Net loss.................................................... $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted net loss per share........................ $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Weighted average shares outstanding used in computing basic
and diluted net loss per share(1)......................... 1,747 3,166 3,050 24,809
======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... -- -- -- $ (1.28)
========
Shares used in computing pro forma basic and diluted net
loss per share(1) (unaudited)............................. -- -- -- 41,001
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(2):
Total credit card receivables outstanding................... -- $ 66,042 $35,334 $268,014
Total number of open credit card accounts................... -- 40 17 134
Total revenue: interest income and non-interest income...... -- $ 1,199 $ 534 $ 12,666
</TABLE>
21
<PAGE> 26
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,840 $40,134 $ 99,534
Credit card loan receivables, net of allowance for loan
losses.................................................... -- -- 261,836
Total assets................................................ 3,688 45,542 388,906
Secured borrowings.......................................... -- -- 229,129
Total liabilities........................................... 901 5,605 264,284
Total stockholders' equity.................................. 2,787 39,937 124,622
</TABLE>
- ---------------
(1) See Note 2 of notes to Consolidated Financial Statements for an explanation
of the number of shares used in per share computations.
(2) For the periods ended September 30, 1998 and December 31, 1998, assets under
management represented all credit card loan receivables generated under the
NextCard Visa and outstanding on Heritage Bank of Commerce's balance sheet.
As of September 30, 1999, assets under management represent all credit card
loan receivables generated under the NextCard Visa and outstanding on our
balance sheet.
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto which appear elsewhere
in this prospectus. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to differences include, but are not limited to, those
discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
OVERVIEW
We are a leading Internet-based provider of consumer credit. We were the
first company to offer an online approval system for a Visa(R) card and to
provide interactive, customized offers to credit card applicants.
We combine expertise in consumer credit, an exclusive Internet focus and
sophisticated direct marketing techniques with the aim of attracting profitable
customer segments on the Internet. Our product, the NextCard Visa, which we call
the First True Internet Visa, is marketed to consumers through our website,
www.nextcard.com. We have entered into marketing agreements with leading
websites on the Internet. We also have marketing relationships with
Internet-based affiliates, co-branded partners and affinity groups. For example,
in November 1999, we entered into a five year exclusive credit card marketing
agreement with Amazon.com, L.L.C. We offer our credit card customers a unique
combination of convenience, customization, shopping enhancements and online
customer service. The NextCard Visa can be used for both online and offline
purchases.
We were incorporated on June 5, 1996. The NextCard Visa was first offered
to the public on December 23, 1997. During the period from our inception through
December 31, 1997 (Inception Period), we had no operating income. Our operating
activities were limited primarily to developing the necessary computer
infrastructure, planning and developing our website, building our operations
capacity and establishing vendor relationships.
Our operating costs have increased significantly since our inception. This
reflects the costs associated with our formation, as well as increased efforts
to promote the NextCard brand, build market awareness, attract new customers,
recruit personnel, build operating infrastructure and develop our credit card
application system and customer servicing infrastructure.
We have grown rapidly since launching our product in December 1997. As of
December 31, 1997, we had 18 employees and as of September 30, 1999, we had 244
employees. From December 31, 1997 through September 30, 1999, we significantly
increased the new loans generated through our website as well as the total loans
under our management. These increases were primarily due to our application
process which allows customers to automatically transfer balances from their
other credit cards to their new NextCard Visa. From December 31, 1997 to
September 30, 1999, our loan receivables outstanding grew from $0 to $268.0
million. As of September 30, 1999, we had approximately 134,000 open credit card
accounts.
Since our inception, we have incurred significant losses. As of September
30, 1999, we had an accumulated deficit of $70.4 million. The net losses and
accumulated deficit resulted from the significant infrastructure, marketing,
technology and other costs incurred in the development of our NextCard Visa
product. We expect to incur significant additional losses from operations for
the foreseeable future, and the rate and amount at which such losses will be
incurred may increase significantly from current levels. These expected costs
are related to advertising, marketing and other
23
<PAGE> 28
promotional activities; expansion of our direct marketing, database and testing
capabilities; expansion of our product offerings; and strategic relationship
development.
RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
EARNINGS SUMMARY
Net loss for the three months ended September 30, 1999, was $22.8 million,
or $0.50 per pro forma share, up 375% from $4.8 million for the three months
ended September 30, 1998. The increase in net loss is the result of increases in
interest expense, the provision for loan losses and non-interest expenses. These
increases were partially offset by increases in net interest income and non-
interest income. These increases are largely attributable to the growth in
average managed loans to $212.7 million for the three months ended September 30,
1999 from $20.7 million for the same period in 1998.
Net loss for the nine months ended September 30, 1999, was $52.4 million,
or $1.28 per pro forma share, up 470% from $9.2 million, for the nine months
ended September 30, 1998. The increase in net loss was the result of increases
in interest expense, the provision for loan losses and non-interest expenses.
These increases were partially offset by increases in net interest income and
non-interest income. These increases are largely attributable to the growth in
average managed loans to $142.8 million for the nine months ended September 30,
1999, from $9.5 million for the same period in 1998.
MANAGED LOAN PORTFOLIO
Until January 12, 1999, Heritage Bank of Commerce funded all of the credit
card accounts and loans originated on our website pursuant to our Consumer
Credit Card Program Agreement with Heritage. Under that agreement, we charged
Heritage for origination and servicing of the accounts and shared 50% of the
resulting net profits or losses.
In January 1999, we terminated the Consumer Credit Card Program Agreement
and entered into an Account Origination Agreement with Heritage. We began
purchasing credit card receivables utilizing secured lending facilities extended
to our subsidiary, NextCard Funding Corp. Pursuant to the terms of our Account
Origination Agreement with Heritage, Heritage continued to fund newly originated
credit card receivables, which were then purchased on a daily basis by NextCard
Funding Corp. using borrowings from its secured lending facilities. The
purchased receivables were pledged as collateral for the secured lending
facilities. Heritage's obligation to establish new credit card accounts
terminated in October 1999.
Our managed loan portfolio is comprised of all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage's and our balance
sheets. On July 15, 1999, we exercised our option to purchase (through NextCard
Funding Corp.) all remaining credit card receivables from Heritage. The acquired
credit card portfolio had $21.3 million in outstanding balances. We financed the
acquisition with a combination of proceeds from one of our secured borrowing
facilities and operating cash. Prior to this purchase, since Heritage had funded
and owned a portion of the managed loan portfolio, that portion of the loan
portfolio was not an asset of ours, and therefore, was not shown on our
consolidated balance sheet.
On September 16, 1999, in connection with the acquisition and formation of
NextBank, N.A. (discussed below), we contributed all of the issued and
outstanding capital stock of NextCard
24
<PAGE> 29
Funding Corp. to NextBank. As of that date, NextCard Funding Corp. became a
wholly owned subsidiary of NextBank, which is a wholly owned subsidiary of
NextCard.
The following table summarizes our managed loan portfolio:
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1999
(IN THOUSANDS)
<S> <C> <C>
PERIOD-END BALANCES
Credit card loans:
On-balance sheet................................. $ -- $268,014
Heritage owned................................... 35,334 --
------- --------
Total managed loan portfolio....................... $35,334 $268,014
======= ========
AVERAGE BALANCES
Credit card loans:
On-balance sheet................................. $ -- $117,060
Heritage owned................................... 9,492 25,780
------- --------
Total managed loan portfolio....................... $ 9,492 $142,840
======= ========
</TABLE>
On September 16, 1999, we acquired Textron National Bank, a wholly owned
indirect subsidiary of Textron Corporation, for $5.0 million over its net book
value. Textron had not actively engaged in the banking business for several
years, and on the acquisition date held $2.6 million of cash and cash
equivalents and a single deposit liability of approximately $540,000.
Immediately prior to the acquisition, Textron converted into a national bank
limited to credit card operations and changed its name to "NextBank, National
Association." In September 1999, NextBank became a member of the Visa system and
in October 1999 commenced the issuance of NextCard Visa cards.
NET INTEREST INCOME
Net interest income consists of interest earned on our credit card loan
portfolio, cash and cash equivalents less interest expense on borrowings to fund
these interest earning assets.
Net interest income for the three and nine months ended September 30, 1999,
was $3.6 million and $4.8 million, respectively, compared to $69,000 and
$180,000 for the same periods in 1998. These increases were primarily due to
$203.7 million and $117.1 million increases in on-balance sheet average loans
over the comparable three- and nine-month periods in 1998 and $109.0 million and
$70.5 million increases in average cash and cash equivalents over the comparable
three- and nine-month periods in 1998. The annualized net interest margin on
average earning assets for the three months ended September 30, 1999 was 4.5%
compared with 2.5% for the three months ended June 30, 1999. The net interest
margin for the three months ended September 30, 1999 was favorably affected by
the repricing of our credit card loan portfolio due to the expiration of the
introductory rate periods, introduction of fixed rate credit card products and a
lower cost of funds. The net interest margin for the three months ended
September 30, 1999 was negatively affected by $234,000 of loan fee amortization
expense related to $2.7 million of warrants paid to a finance company in 1999 in
connection with a financing transaction. This loan fee is being amortized over a
three-year period. The annualized net interest spread for the three months ended
September 30, 1999 was 1.2% compared with 1.1% for the three months ended June
30, 1999. The net interest spread is the annualized yield on average interest
earning assets minus the annualized funding rate on average interest bearing
liabilities. The net interest spread is expected to continue to improve as our
loan portfolio seasons; however, there can be no assurances that such spread
will improve.
25
<PAGE> 30
The following tables provide an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data for the
three-and nine-month periods ended September 30, 1999.
STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
----------------------------- -----------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Consumer loans............. $203,652 $5,486 10.78% $117,060 $ 7,992 9.10%
Interest-earning cash.... 118,826 1,400 4.71 76,618 2,585 4.50
-------- ------ ------ -------- ------- ------
Total interest-earning
assets................... 322,478 6,886 8.54% 193,678 10,577 7.28%
Allowance for loan
losses................... (4,134) (2,154)
Other assets............... 20,943 13,247
-------- --------
Total assets............... $339,287 $204,771
======== ========
LIABILITIES AND EQUITY
Interest-bearing
liabilities:
Borrowings............... $177,754 $3,249 7.31% $100,858 $ 5,762 7.62%
Other liabilities.......... 26,236 17,504
-------- --------
Total liabilities.......... 203,990 118,362
Equity..................... 135,297 86,409
-------- --------
Total liabilities and
equity................... $339,287 $204,771
======== ========
NET INTEREST SPREAD........ 1.23% (0.34%)
====== ======
Interest income to average
interest-earning
assets................... 8.54% 7.28%
Interest expense to average
interest-earning
assets................... 4.03 3.97
------ ------
NET INTEREST MARGIN........ 4.51% 3.31%
====== ======
</TABLE>
NON-INTEREST INCOME
Interchange and other credit card fees consist of income from the Visa
system for purchases made with the NextCard Visa and fees paid by our
cardholders, such as late fees, overlimit fees and program fees. The income for
the three and nine months ended September 30, 1999, was $1.1 million and $1.7
million, respectively. Interchange and other credit card fees are expected to
continue to increase in the future as the credit card portfolio grows.
On July 15, 1999, we exercised our option to purchase all remaining credit
card receivables from Heritage. As a result, servicing and profit-and-loss
sharing income, consisting of amounts arising under the Consumer Credit Card
Program Agreement with Heritage for the three and nine months ended September
30, 1999 was $0 and $341,000, respectively, compared to $137,000 and $301,000
for the same periods in 1998.
26
<PAGE> 31
NON-INTEREST EXPENSES
Total non-interest expenses for the three and nine months ended September
30, 1999 were $24.4 million and $54.1 million, respectively, compared to $5.0
and $9.7 million for the same periods in 1998. These increases are primarily due
to higher employee compensation, credit card activation and servicing costs and
marketing expenses. Employee compensation increased due to staffing needs to
support the increase in credit card accounts and other functions. In addition,
the amortization of deferred stock compensation, which represents the difference
between the exercise price of certain stock option grants and the estimated fair
value of our common stock at the time of the grants, for the three and nine
months ended September 30, 1999, was $2.3 million and $7.1 million,
respectively. The increase in credit card activation and servicing costs was
largely due to an increase in the number of credit card accounts, transaction
volumes and loan balances. The increase in other expenses is primarily due to
general growth in the business and the building of an infrastructure to support
this growth.
ASSET QUALITY
Our delinquency and net loan charge-off rates reflect, among other factors,
the credit risk of loans, the average age of our credit card account portfolio,
the success of our collection and recovery efforts and general economic
conditions. Additionally, the credit risk of the loans is affected by the
underwriting criteria we utilize to approve customers. The average age of our
credit card portfolio affects the level and stability of delinquency and loss
rates of the portfolio. We continue to focus our resources on refining our
credit underwriting standards for new accounts, as well as on collections and
post charge-off recovery efforts, to minimize net losses. At September 30, 1999,
the majority of our loan portfolio was less than six months old. Accordingly, we
believe that our loan portfolio will experience increasing or fluctuating levels
of delinquency and loan losses as the average age of our accounts and balances
increases.
For the three months ended September 30, 1999, our managed net charge-off
ratio was 1.72% compared to 0.29% for the three months ended September 30, 1998.
For the nine months ended September 30, 1999, the managed net charge-off ratio
was 1.42% compared to 0.25% for the nine months ended September 30, 1998. We
believe, based on our statistical models and other credit analyses, that this
rate may continue to fluctuate but will generally rise over the next year as our
portfolio ages and becomes more seasoned.
Our primary strategy for managing loan losses is the development of
underwriting criteria and credit scoring algorithms to assess the
creditworthiness of new customers and provide conservative customer credit line
assignments. In addition, we monitor credit lines closely and have built a
collections department, as well as use outside parties, to pursue delinquent
customers. Under these strategies, interest rates and credit line assignments
are established for each credit card account based on its perceived risk
profile. 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
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 our
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. Credit card loans are generally
charged off when the loan becomes contractually past due 180 days, with the
exception of bankrupt accounts, which are
27
<PAGE> 32
charged off no later than the month after formal notification of bankruptcy. The
following table presents the delinquency trends of our credit card loan
portfolio on a managed portfolio basis.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
--------------------- ----------------------
LOANS % OF TOTAL LOANS % OF TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Managed loan portfolio....... $35,334 100.00% $268,014 100.00%
Loans delinquent:
31 - 60 days............... 139 0.39% 1,482 0.55%
61 - 90 days............... 38 0.11 677 0.25
91 or more................. 27 0.08 938 0.35
------- ------ -------- ------
Total........................ $ 204 0.58% $ 3,097 1.15%
======= ====== ======== ======
</TABLE>
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 finance
charges and fees, which are charged against the related income at the time of
charge-off. Losses from new account fraud and fraudulent cardholder activity are
included in non-interest expense.
The following table presents our net charge-offs for the periods indicated
as reported in the consolidated financial statements and on a managed portfolio
basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ON-BALANCE SHEET:
Average loans outstanding..................... $ -- $203,652 $ -- $117,060
Net charge-offs............................... -- 915 -- 949
Net charge-offs as a percentage of average
loans outstanding........................... 0.00% 1.80% 0.00% 1.08%
MANAGED:
Average loans outstanding..................... $20,694 $212,659 $9,492 $142,840
Net charge-offs............................... 15 915 18 1,516
Net charge-offs as a percentage of average
loans outstanding........................... 0.29% 1.72% 0.25% 1.42%
</TABLE>
As our credit card loan portfolio continues to grow and season, net loan
losses will increase, delinquency levels may fluctuate and increase, and the
ratio of the allowance for loan losses to on-balance sheet credit card loans
outstanding will increase. We will continue to monitor delinquency amounts and
actual loan losses, and will adjust our allowance for loan losses accordingly.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained for on-balance sheet loans.
Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable losses
inherent in the existing on-balance sheet loan portfolio. For loans maintained
on Heritage's balance sheet until July 1999, anticipated losses and related
reserves are reflected in the calculations of the servicing and profit-and-loss
sharing income from Heritage.
The provision for loan losses for on-balance sheet loans for the three and
nine months ended September 30, 1999, totaled $3.2 million and $5.2 million,
respectively. We anticipate that the
28
<PAGE> 33
provision for loan losses will increase as the credit card loan portfolio
continues to increase and season. The following table presents the changes in
our allowance for loan losses for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period........................ $2,008 $ --
Provision for loan losses............................. 3,185 5,227
Allowance acquired.................................... 1,900 1,900
Charge-offs........................................... (915) (949)
------ ------
Balance at end of period.............................. $6,178 $6,178
====== ======
</TABLE>
INCEPTION PERIOD AND YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased $409,000 from $93,000 in the Inception Period to
$502,000 in 1998. The increase was attributable to higher average cash and cash
equivalent balances resulting from the sales of our preferred stock during 1998.
We had no interest expense during 1996 and 1997. In 1998, we had interest
expense of $62,000 attributable to our equipment loan.
NON-INTEREST INCOME
We did not recognize any non-interest income during the Inception Period.
In 1998, we recognized $662,000 of servicing and profit and loss sharing income
under our Consumer Credit Card Program Agreement.
NON-INTEREST EXPENSES
Total non-interest expenses increased $15.2 million from $2.0 million in
the Inception Period to $17.2 million in 1998. This increase was primarily due
to higher employee compensation, credit card activation and servicing costs and
marketing expenses. The increase in employee compensation of $5.2 million was
caused by the growth of employees from 18 as of December 31, 1997 to 107 as of
December 31, 1998. The increase in credit card activation and servicing costs of
$2.3 million resulted from the increase in the credit card portfolio. Lastly,
the increase in marketing expenses of $4.3 million was primarily attributable to
the expansion of Internet-based advertising.
PROVISION FOR INCOME TAXES
We have had a net loss for each period since inception. As of December 31,
1998, we had approximately $14.2 million of net operating loss carryforwards for
federal and state income tax purposes. The federal net operating loss
carryforwards will start expiring in 2012 and the state net operating loss
carryforwards will start expiring in 2005. Because of uncertainty regarding
realizability, we have provided a full valuation allowance on our deferred tax
assets consisting primarily of net operating loss carryforwards. See Note 9 of
notes to the Consolidated Financial Statements.
29
<PAGE> 34
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operating
data for the eight quarters ended September 30, 1999. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation for the
quarters presented. This information should be read in conjunction with the
Consolidated Financial Statements and accompanying notes. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Interest income:
Cash and cash equivalents........ $ 49 $ 33 $ 79 $ 116 $ 274 $ 280 $ 905 $ 1,400
Credit card loan receivables..... -- -- -- -- -- 380 2,126 5,486
----- ------- ------- ------- ------- -------- -------- --------
Total interest income.............. 49 33 79 116 274 660 3,031 6,886
Interest expense................... -- -- 1 47 14 647 1,866 3,249
----- ------- ------- ------- ------- -------- -------- --------
Net interest income................ 49 33 78 69 260 13 1,165 3,637
Provision for loan losses.......... -- -- -- -- -- 995 1,047 3,185
----- ------- ------- ------- ------- -------- -------- --------
Net interest income (loss) after
provision for loan losses........ 49 33 78 69 260 (982) 118 452
----- ------- ------- ------- ------- -------- -------- --------
Non-interest income:
Servicing and profit and loss
sharing........................ -- 34 130 137 361 204 136 --
Interchange fees................. -- -- -- -- -- 96 318 717
Credit card fees and other....... -- -- 3 2 30 43 159 416
----- ------- ------- ------- ------- -------- -------- --------
Total non-interest income.......... -- 34 133 139 391 343 613 1,133
----- ------- ------- ------- ------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits... 763 789 1,349 2,124 2,468 3,309 5,288 6,724
Marketing and advertising........ 33 209 936 1,056 2,124 2,555 4,997 8,813
Credit card origination and
servicing costs................ 1 51 391 880 1,005 1,522 2,481 3,114
Occupancy and equipment.......... 62 116 160 326 356 552 877 1,227
Professional fees................ 77 41 77 49 353 255 211 640
Amortization of deferred stock
compensation................... -- 164 235 468 933 1,366 3,381 2,349
Amortization of loan structuring
fee............................ -- -- -- -- -- 568 1,743 655
Other............................ 45 71 133 106 229 216 443 835
----- ------- ------- ------- ------- -------- -------- --------
Total non-interest expenses........ 981 1,441 3,281 5,009 7,468 10,343 19,421 24,357
----- ------- ------- ------- ------- -------- -------- --------
Loss before income taxes........... (932) (1,374) (3,070) (4,801) (6,817) (10,982) (18,690) (22,772)
Provision for income taxes......... 2 -- -- -- 2 -- -- --
----- ------- ------- ------- ------- -------- -------- --------
Net loss........................... $(934) $(1,374) $(3,070) $(4,801) $(6,819) $(10,982) $(18,690) $(22,772)
===== ======= ======= ======= ======= ======== ======== ========
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(1):
Total credit card loan receivables
outstanding...................... -- $ 1,626 $ 9,402 $35,334 $66,042 $ 96,293 $163,446 $268,014
Total number of open credit card
accounts at period end........... -- 1 5 19 40 66 85 134
Total revenue: interest income and
non-interest income.............. -- $ 3 $ 59 $ 292 $ 845 $ 1,885 $ 3,644 $ 8,019
</TABLE>
30
<PAGE> 35
- ---------------
(1) For the periods ending September 30, 1998, and December 31, 1998, assets
under management represented all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage Bank of Commerce's
balance sheet. For the periods ending March 31, 1999 and June 30, 1999,
assets under management represented all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage Bank of
Commerce's and our balance sheets. As of September 30, 1999, assets under
management represent all credit card loan receivables generated under the
NextCard Visa and outstanding on our balance sheet.
We have a limited operating history and are operating in a new and rapidly
changing environment. Therefore, we believe that quarterly comparisons of our
financial results are not necessarily indicative of our future performance. Our
quarterly operating results may fluctuate significantly as a result of a variety
of factors, many of which are outside of our control. These factors include, but
are not limited to:
- the volume of credit card loan receivables generated from our products
and our ability to successfully manage our credit card loan portfolio;
- the announcement or introduction of new websites, products and services
by us or our competitors and the level of price competition for the
products and services we offer;
- timing of any off-balance sheet securitization that we may undertake;
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure;
- technical difficulties, system downtime, Internet service problems and
our ability to expand and upgrade our computer systems to handle
increased traffic;
- the success of our brand building, advertising and marketing campaigns;
and
- general economic conditions, including interest rate volatility, and
economic conditions specific to the Internet, online commerce and the
credit card industry.
Our future revenue will primarily consist of finance charges paid by our
customers based on their outstanding credit card account balances, the amounts
paid through the Visa system for purchases made with the NextCard and other fees
paid by our cardholders. As a result, we will depend substantially on the amount
of loans outstanding in our loan portfolio, the level of new loans originated
through the NextCard website, the retention of existing customers and customer
purchases using the NextCard Visa. Therefore, our quarterly revenue and
operating results are likely to be particularly affected by these variables.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
and public sales of preferred and common stock. Net proceeds from these sales
from inception to September 30, 1999 have totaled approximately $182.0 million.
Net cash used in operating activities was $1.5 million in the Inception
Period and $11.2 million in 1998. For the nine months ended September 30, 1999,
net cash used in operating activities was $30.4 million. Net cash used in
operating activities in all such periods was primarily attributable to net
losses, offset in part by increases in accounts payable, accrued expenses and
amortization of deferred stock compensation and, for the nine months ended
September 30, 1999, also offset by the provision for loan losses and the
amortization of prepaid loan fees.
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Net cash used in investing activities was $309,000 in the Inception Period
and $2.1 million in 1998. Net cash used in investing activities in the Inception
Period and in 1998 was primarily related to the purchase of property and
equipment. For the nine months ended September 30, 1999, net cash used in
investing activities was $280.1 million. For this period, net cash used in
investing activities was primarily related to the purchases of credit card loan
receivables from Heritage, the purchase of Textron National Bank and the
purchase of equipment and leasehold improvements.
Net cash provided by financing activities was $4.7 million in the Inception
Period and $50.5 million in 1998. Net cash provided by financing activities in
the Inception Period and in 1998 resulted primarily from the issuance of
preferred stock and the borrowing of $545,000 against an equipment loan from a
financial institution. For the nine months ended September 30, 1999, net cash
provided by financing activities was $369.8 million. For this period, net cash
provided by financing activities resulted primarily from the borrowing of $229.1
million under our secured borrowing facilities, net proceeds of $127.0 million
from our initial public offering and $11.7 million from our lines of credit from
finance companies.
At September 30, 1999, our principal source of liquidity was approximately
$99.5 million of cash and cash equivalents. In February and May 1999, we entered
into two $5.0 million lines of credit with a finance company. Borrowings under
the lines of credit accrue interest at 12.25% per year and are secured by a
secondary security interest in all of our tangible and intangible assets. These
lines of credit had an aggregate outstanding balance of $10.0 million at
September 30, 1999.
In addition, during 1998, we entered into a $1.3 million equipment loan and
security agreement with a finance company. The loan is secured by a pledge of
all equipment purchased with the proceeds from borrowings under the loan
agreement and bears interest at 7.55% per year. The ability to borrow under the
loan expired on May 31, 1999. The loan had an outstanding balance of $1.0
million at September 30, 1999.
Also during 1998, we entered into a $1.0 million financing arrangement with
a finance company. The financing arrangement is secured by a pledge of all
equipment leased under the arrangement and bears interest at 7.50% per year. The
financing arrangement expires on May 22, 2000, and $850,000 was outstanding at
September 30, 1999.
Until January 12, 1999, Heritage funded all of the credit card amounts and
loans originated through our website. Beginning January 1999, we began
purchasing credit card receivables from Heritage. Until May 21, 1999, we
utilized a $100.0 million secured borrowing facility extended to NextCard
Funding Corp. by Credit Suisse First Boston to fund the majority of those
receivables. On May 21, 1999, we executed a $300.0 million commercial paper
conduit facility through Barclays Bank PLC and began utilizing this facility to
purchase credit card receivables. Borrowings under the facility are secured by
the purchased receivables. We also used a portion of the Barclays facility to
pay off the $87.8 million balance then outstanding under the Credit Suisse
facility. As of September 30, 1999, $229.1 million was outstanding under the
Barclays facility.
In addition, on June 23, 1999 and November 12, 1999, we entered into
similar facilities with ING Barings (U.S.) Capital Markets LLC for $150.0
million and First Union Securities, Inc. for $220.0 million, respectively. Our
borrowings under these facilities are secured by all credit card receivables
that may be purchased by using funds from these facilities. As of September 30,
1999, there was no amount outstanding under the ING Barings facility.
We will have the ability to fund new receivables during the revolving
period of these structures. After the revolving period, principal collections
generated by the receivables will be used to pay the principal amount owed. The
revolving period ends in June 2001 for the Barclays facility, January 2002 for
the ING Barings facility and February 2003 for the First Union facility.
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We are in discussions with financial institutions related to establishing
additional borrowing facilities to fund the origination of credit card loan
receivables. Such new or increased facilities would increase our capacity to
originate credit card loan receivables. There are no assurances that any new or
expanded facility will be established. If such a facility is established and
drawn upon, our aggregate borrowings will increase.
In December 1997, we signed a five-year agreement with First Data for
processing of the credit card portfolio. Under that agreement, we are obligated
to make aggregate minimum servicing payments of $7.5 million over the term of
the agreement.
In connection with our principal executive office lease, in October 1999,
we executed a $1.3 million irrevocable standby letter of credit in favor of the
landlord which expires on October 31, 2000. This letter of credit can be drawn
on by our landlord under certain circumstances if we default under our lease
agreement.
We expect that our existing capital resources, including the net proceeds
raised in this offering, will adequately satisfy our working capital
requirements for the next 12 months, except for the funding of our loan
portfolio. Future working capital requirements, however, depend on many factors
including our ability to execute on our business plan. If our current funding,
including the net proceeds generated by this offering, becomes insufficient to
support future operating requirements, we will need to obtain additional funding
either by increasing our lines of credit or by raising additional debt or equity
from the public or private capital markets. Such funding alternatives, if
available at all, may be on terms that are not favorable to us. Failure by us to
raise additional capital or additional funding when needed could have a material
adverse effect on our business, results of operations and financial condition.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or privileges
senior to those of our common stock.
Our ability to grow our business is limited by the amount of credit we can
extend to our customers and potential customers. Although our credit facilities
are sufficient to fund our current loan portfolio, they are not sufficient to
cover our anticipated loan portfolio over the next 12 months. Therefore, any
loss of funding under these credit facilities or failure to increase or extend
the terms of this credit facility or obtain alternative financing on
commercially reasonable terms would have a material adverse effect on our
results of operations and financial condition.
Now that we have established NextBank, a bank limited to generating and
financing credit card loans, we will fund a portion of our loan portfolio
through short-term deposits raised by NextBank as well as the commercial paper
conduit facilities discussed above. However, we may not be able to attract or
retain sufficient deposits at attractive interest rates to fund a portion of our
loan portfolio. Moreover, if adequate capital is not available, we also may be
subject to an increased level of regulatory supervision that could have an
adverse affect on our operating results and financial condition. See
"Business -- NextBank."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133" to defer the effective date of SFAS 133, until
fiscal years beginning after June 15, 2000. While
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NextCard currently has no derivative financial instruments and does not
currently engage in hedging activities, NextCard anticipates engaging in
derivative and hedging activities in the future, and therefore expects to be
affected by the pronouncement. The impact of SFAS 133 on NextCard's consolidated
financial statements, however, will depend on a variety of factors including the
level of future hedging activities, the types of hedging instruments used and
the effectiveness of such instruments.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use internally developed software, as well as computer technology and
other services provided to us by third-party vendors that may fail due to the
year 2000 phenomenon. For example, we are dependent on First Data for account
processing and other customer functions. We are also dependent on
telecommunications vendors to maintain our network and a third party that hosts
our servers.
Because we founded NextCard less than four years ago, we developed our
systems and technology in consideration of the year 2000 problem, as opposed to
many older companies that rely on legacy systems designed before this problem
was known. On April 30, 1999, we completed our review and testing of year 2000
compliance for all of our internally developed software, which include
substantially all of the systems for the operation of our website, such as our
instant online approval system, customer interaction and transaction systems and
our security, monitoring and back-up capabilities. Based on this testing, we
believe our internally developed software and systems are year 2000 compliant,
which means that all date data will process without error, interruption or loss
of functionality of any software or system due to the change in century.
On April 16, 1999, we completed our assessment of the year 2000 readiness
of our third-party supplied software and hardware and of our vendors. During the
assessment phase, 11 vendors were identified as critical to us, all of whom have
provided us with certifications of year 2000 compliance or a readiness
disclosure statement and we have conducted tests of their systems. Accordingly,
based on the results of the responses we have received and the availability of
alternate year 2000 compliant vendors, we do not believe further remediation
planning is necessary to ensure seamless operation at and after January 1, 2000.
If a year 2000 problem with a vendor's systems that causes the vendor to
fail to provide us with services it had agreed to provide us, we will seek to
recover from that vendor damages for the amount we suffered due to the failure.
Our suit would be based on breach of the vendor's agreement with us and
misrepresentation of the vendor's year 2000 representation to us. However, there
can be no assurance that these agreements and these representations will be
enforceable.
Based on the results of our testing, we believe our worst case scenario
would be the failure of the Internet infrastructure due to a year 2000 problem.
The year 2000 readiness of the general infrastructure necessary to support our
operations is difficult to assess. For instance, we depend on the integrity and
stability of the Internet to provide our services. We also depend on the year
2000 compliance of the computer systems and financial services used by
consumers. A significant disruption in the ability of consumers to reliably
access the Internet or portions of it or to use their credit cards would have an
adverse effect on demand for our services and would have a material adverse
effect on our growth.
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To date, we have incurred approximately $400,000 of expenses relating to
our year 2000 analysis, testing and remediation efforts. We anticipate that,
when all analysis, testing and remediation efforts are complete, we will have
incurred approximately $450,000 of expenses, all of which will be recognized in
1999. However, such expenses could be significantly higher than we anticipated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. NextCard's principal market risk is due to changes in interest rates.
This affects NextCard directly in its lending and borrowing activities, as well
as indirectly as interest rates may impact the payment performance of NextCard's
cardholders.
The majority of NextCard's revenues are generated by the interest rates it
charges on outstanding receivable balances in the form of finance charges.
NextCard's receivables generally yield either a variable interest rate indexed
to the prime rate, or a fixed interest rate, set independently of market
interest rates. Accordingly, fluctuations in interest rates will affect
NextCard's revenues. At the same time, the Company's borrowing costs under
NextCard's commercial paper conduit facilities are generally indexed to variable
commercial paper rates, and may also fluctuate based on general interest rate
fluctuations. A rise in NextCard's borrowing costs may not be met by a
corresponding increase in revenues generated by finance charges. Likewise, a
decrease in revenues generated by finance charges may not be met by a
corresponding decrease in borrowing costs. Thus, either a rise or a fall in the
prevailing interest rates could materially adversely affect NextCard's results
of operations and financial condition.
To manage NextCard's direct risk to market interest rates, management
actively monitors the interest rates and the interest sensitive components of
NextCard's balance sheet to minimize the impact changes in interest rates have
on the fair value of assets, liabilities, net income and cash flow. Management
seeks to minimize the impact of changes in interest rates on NextCard primarily
by matching assets and liability repricings.
NextCard's fixed interest rate credit card receivables have no stated
maturity or repricing period. However, NextCard generally has the right to
increase rates when the customer fails to comply with the terms of the account
agreement. In addition, NextCard's credit card receivables may be repriced by
the Company upon providing the required prior notice to the customer, which is
generally no more than 30 days.
NextCard may manage its interest rate risk through interest rate hedging
techniques. However, NextCard currently does not use such techniques and it may
not be successful in reducing or eliminating NextCard's interest rate risk in
the future.
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BUSINESS
OVERVIEW
We are a leading Internet-based provider of consumer credit. We were the
first company to offer an online credit approval system for a Visa card and to
provide interactive, customized offers for credit card applicants.
We combine expertise in consumer credit, an exclusive Internet focus and
sophisticated direct marketing techniques with the aim of attracting profitable
customer segments on the Internet. Our product, the NextCard Visa, which we call
the First True Internet Visa, is marketed to consumers through our website,
www.nextcard.com. We have entered into marketing agreements with leading
websites on the Internet. We also have marketing relationships with
Internet-based affiliates, co-branded partners and affinity groups. For example,
in November 1999, we entered into a five year exclusive credit card marketing
agreement with Amazon.com, L.L.C. We offer our credit card customers a unique
combination of convenience, customization, shopping enhancements and online
customer service. The NextCard Visa, which can be used for both online and
offline purchases, offers the following features:
CUSTOMIZED APPLICATION PROCESS
- online credit approval within seconds of submitting an application;
- online selection of customized offers based upon the applicant's unique
credit profile;
- automated account balance transfers, permitting the customer to transfer
balances from other credit cards using our website;
- personalization of the look of the NextCard Visa through our My Visa
PictureCard product; and
- Instant Credit, an active account number that can be used for purchases
immediately upon completing the new account application process.
ONLINE SHOPPING ENHANCEMENTS
- NextCard Rewards, an Internet-based incentives program allowing customers
to earn NextCard points that can be redeemed for a variety of goods and
services;
- the NextCard Concierge, electronic wallet software that fills in purchase
forms on websites and remembers passwords;
- GoShopping!, an Internet-based shopping service; and
- 100% protection against credit card fraud.
INTERNET-BASED ACCOUNT MANAGEMENT
- online statements;
- the ability to download account activity into personal financial
management software;
- the ability to pay NextCard bills online using our ClickPay technology;
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- online customer service functionality; and
- online chat capability with a customer service representative at the
website.
The NextCard Visa has experienced significant consumer demand since its
introduction in December 1997. As of September 30, 1999, we had over $268
million in loans receivable outstanding and approximately 134,000 open credit
card accounts. We earn most of our revenue from the finance charges paid by our
customers based on their outstanding credit card account balances. We also earn
revenue from the amounts paid through the Visa system for purchases made with
the NextCard Visa and from fees paid by our cardholders.
INDUSTRY BACKGROUND
Our business lies at the intersection of Internet-based electronic
commerce, sophisticated application of direct marketing and the credit card
industry, as depicted in the following diagram:
LOGO
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation, commonly referred to
as IDC, estimates that there were 142 million Internet users worldwide at the
end of 1998 and anticipates that number will grow to approximately 502 million
users by the end of 2003. In addition, IDC estimates that the worldwide consumer
electronic commerce market is expected to grow from approximately $15 billion in
1998 to approximately $171 billion in 2003. That growth is being driven by a
number of factors, including:
- a growing base of PCs in the home and workplace;
- improvements in network security, infrastructure and bandwidth;
- faster and less expensive Internet access;
- increases in the quantity and quality of content available on the
Internet;
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- the overall increased public awareness of the Internet; and
- the convenience, timeliness and reduced costs of electronic commerce.
Over the last few years, consumers have significantly increased their usage
of the Internet and expanded the categories of products and services they
purchase over the Internet. Consumers increasingly are using the Internet to
obtain information, make purchases and manage their personal finances. As a
result, a new class of Internet-based companies has emerged to address these
online opportunities. These companies are focusing on such areas as retail
consumer goods and services, travel, health care and, increasingly, consumer
financial products and services.
INTERNET DIRECT MARKETING
The Internet provides unique opportunities to apply direct marketing
techniques to target and acquire new customer relationships and enhance existing
customer relationships. This Internet-based approach is relatively new, and
offers significant advantages over the traditional direct marketing techniques
of mass mailing and telemarketing. These advantages include the ability to:
- rapidly evaluate and respond to consumer reactions to marketing programs
and product offerings;
- target the most attractive customer segments and customize advertising to
them across different websites;
- acquire demographic and behavioral data about an individual customer and
quickly customize product offerings for that customer; and
- frequently analyze ongoing purchasing patterns and tailor ongoing product
offerings, thereby strengthening customer relationships and increasing
customer loyalty.
As a result of these factors, we believe the Internet has the potential to
be the most efficient and effective one-to-one direct marketing tool created to
date.
THE CREDIT CARD INDUSTRY
The credit card industry is large and continues to grow. According to The
Nilson Report, the amount of debt owed by U.S. consumers on their Visa and
MasterCard credit cards totaled $404 billion as of December 31, 1998. According
to The Nilson Report, the total charges by U.S. consumers on Visa and MasterCard
credit cards were $750 billion in 1998 and are expected to increase to $929
billion by the year 2000. We believe that the projected growth of the credit
card industry will be driven in part by:
- the shift from more traditional forms of consumer credit (e.g., consumer
installment lending) to credit cards;
- the shift from paper-based payments (e.g., cash and personal checks) to
credit card and other electronic forms of payment; and
- growth in Internet commerce, where credit cards are currently the primary
form of consumer payment.
While the credit card market is very large, it is also highly fragmented.
According to The Nilson Report, there are more than 6,600 financial institutions
in the United States that issue credit cards. As of June 30, 1999, of the total
Visa and MasterCard balances outstanding, no credit card issuer has
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more than 17%, and only five have more than 5%, of this market. We believe this
market fragmentation is largely the result of the use of the Visa brand,
recognized as one of the more powerful brands in the world and generally
available to any insured depository institution. Consumers traditionally have
focused more on the credit card brand (e.g., Visa, MasterCard and Discover(R))
than on the issuing bank when choosing a credit card.
Unlike many industries, in the credit card industry a company can be
profitable without achieving significant market share if its customers have
attractive borrowing and credit profiles. For example, a large credit card
company may be less profitable relative to a small credit card company if the
customers of the large company maintain lower balances or have higher default
rates. As a result, profitability in the credit card industry can be achieved by
targeting specific customers with attractive characteristics, rather than using
mass marketing techniques to achieve large market share.
Certain credit card companies have achieved success through targeting
strategies utilizing the direct mail and telemarketing channels. However, we
believe these traditional channels are becoming less effective. In particular,
we believe that the direct mail channel has become saturated. According to
BAIGlobal's Mail Monitor, the number of credit card offers communicated through
the mail exceeded 3.4 billion in 1998. Credit card issuers must also wait
several weeks or months to determine the response rate to their offers. This
slows a company's ability to make competitive offers based on marketplace
feedback. We also believe that telemarketing is often perceived as intrusive and
untrustworthy. As a result, we believe that the use of the Internet offers
significant advantages over traditional target marketing approaches.
THE NEXTCARD OPPORTUNITY
Due to the growth of electronic commerce, the ability to target customers
on the Internet and the dynamics of the credit card industry, we believe there
is a significant opportunity to offer credit cards through targeted marketing
over the Internet. NextCard was formed to capitalize on this opportunity.
We believe our exclusive focus on the Internet provides us with a
significant competitive advantage. Our business represents the specialized
application of the multiple skills required for credit card lending -- direct
marketing, credit analysis, fraud detection, regulatory compliance, security,
customer service and operations -- to an exclusively Internet-focused business.
We have developed the first Internet-focused credit card -- the NextCard
Visa. Our products and services include:
CUSTOMIZED APPLICATION PROCESS AND PRODUCT OFFERINGS
- At our website, customers can apply easily and quickly for the NextCard
Visa, receive credit approval within seconds, choose customized upgrades,
automatically transfer balances from other credit cards and personalize
their NextCard Visa. Qualifying customers can also receive an active
account number at the time they complete the new account application
process, allowing for instant purchasing. Through the application
process, we are able to gather information we utilize to refine our
direct marketing efforts, thereby increasing the effectiveness of our
future targeted marketing programs and lowering customer acquisition
costs. The automated balance transfer feature enables us to quickly build
our loan portfolio.
- By acquiring demographic and credit data about an individual consumer, we
can customize our product offerings for that consumer at the time of the
initial offer. This helps us target offers that we believe are attractive
to the customer.
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- Our My Visa PictureCard product enables cardholders to personalize the
look of their NextCard Visa by sending us via the Internet their own
picture or selecting from an online library of artwork. We believe that
personalization increases customer loyalty and card usage.
ONLINE SHOPPING ENHANCEMENTS
- Our Internet-based shopping services, our pledge of 100% protection
against credit card fraud and our NextCard Rewards program may enhance
our customers' tendency to purchase goods and services, especially over
the Internet. Additionally, we offer the NextCard Concierge, electronic
wallet software that fills in purchase forms on websites and remembers
passwords, creating a more streamlined online shopping experience. By
providing these value-added services, we expect to broaden our
relationship with our customers and help build our brand. Further, by
tracking our customers' ongoing purchases, we intend to target future
offers to particular customers that may be attractive to them and
profitable for us.
ONLINE CUSTOMER SERVICE
- At our website, customers can access statements, check recent account
activity, pay their NextCard bills, download information to many personal
financial management software programs and communicate with us by e-mail.
These customer support features are available 24 hours a day, seven days
a week and should assist us in building customer relationships and
improving customer loyalty. Customers can also interact online, or
"chat," with a customer service representative during business hours to
ask questions about their NextCard accounts.
BUSINESS STRATEGY
Our objective is to enhance our position as a leading Internet-based
provider of customized consumer credit products and services. The key elements
of our strategy are:
Direct Marketing Strategy. We will enhance our data analysis
techniques to expand our expertise in Internet direct marketing in order to
find and attract our target customers. Our exclusive focus on the Internet
consumer allows us to apply the power of Internet direct marketing to a
significant and growing market. We plan to continue to develop and use our
database and data analysis capabilities as a competitive advantage to
refine our marketing programs, lower customer acquisition costs and
increase potential customer profitability.
Product Strategy. We will continue to offer customized product choices
to our customers, allowing them to design their own products interactively.
The Internet allows us to review an applicant's credit and existing credit
card usage in real time. As a result, we can provide online offers that are
customized to meet the specific needs of particular applicants. For
example, our profile-based pricing capability allows us to use customer
information to offer specific interest rate, credit limit and NextCard
Rewards combinations. Such profile-based pricing improves our ability to
match our products to the credit risk/reward profile of our applicants. We
intend to broaden our online banking products and services, including
online checking accounts, retail certificates of deposit and money market
accounts. We also plan to enter at least one international market in the
year 2000.
Technology Strategy. We seek to apply Internet technology innovations
to provide enhanced customer functionality more rapidly than our
competitors. We believe our technology represents one of the most advanced
online application, credit review, approval and product offering systems
available. We believe technological innovations will continue to transform
the Internet and that we must maintain technological superiority in the
delivery of our products and services.
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Therefore, we plan to lead in the application of new Internet technologies
to offer enhanced product and services and thereby differentiate ourselves
from our competitors.
Branding Strategy. We plan to leverage our leadership in Internet
consumer financial services to continue to build brand recognition.
Branding on the Internet is becoming an increasingly important
differentiating factor for consumers. We believe our exclusive focus on the
Internet has enabled us to begin to establish name recognition among online
consumers of financial products and services. We intend to continue to
expand our marketing activities to enhance our brand awareness. As
competition increases for online financial products and services, we
believe our brand name will provide us with a competitive advantage.
Ultimately, our long-term vision is to redefine the banking experience for
the Internet consumer. We are focusing on consumer credit cards because the
credit card business is a proven direct marketing business, there is significant
consumer demand for applying for credit online and we believe the credit card
business is one of the most profitable businesses in consumer financial
services.
THE NEXTCARD VISA
The NextCard Visa offers a unique combination of Internet-based
functionality, including an automated application process, customized terms,
personalization options and add-on services. We believe the features of the
NextCard Visa increase potential customers' desire to obtain our credit card and
increase existing customers' usage of the NextCard Visa.
CUSTOMIZED APPLICATION PROCESS
- INSTANT ONLINE CREDIT APPROVAL. Through our RapidResults system,
applicants can apply for the NextCard Visa quickly and easily on our
website, with a credit decision returned online within seconds of
submitting an application.
- CUSTOMIZED OFFERS. Based upon an applicant's unique credit and spending
profile, we offer each approved applicant up to two customized upgrades
that vary based on interest rate, NextCard Rewards opportunities, balance
transfer amount, type of card (i.e., Classic, Gold or Platinum) and
credit limit. This allows customers to choose the offering that best
suits their needs and interests.
- AUTOMATED ONLINE BALANCE TRANSFERS. As part of our enrollment process,
customers can elect to transfer balances automatically from their other
credit cards to their new NextCard Visa.
- PERSONALIZATION. Our My Visa PictureCard enables cardholders to
personalize the look of their cards online by scanning in a picture of
choice or choosing from an online library of greater than a thousand
pictures.
- INSTANT CREDIT. Qualifying customers can receive an active account number
at the conclusion of the application process. Providing the account
number at the time of approval may promote purchase activity.
ONLINE SHOPPING ENHANCEMENTS
- NEXTCARD REWARDS. For each dollar charged, cardholders can earn double
reward points simply by transferring and maintaining a balance on their
NextCard Visa. These points can be used to obtain a variety of goods and
services, including discounts at major retailers and miles that can be
redeemed on major airlines. In this way, customers can apply their points
towards offerings of interest to them.
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- NEXTCARD CONCIERGE. We provide electronic wallet software to our
customers that can be downloaded at the conclusion of the application
process, creating a more streamlined online shopping experience. The
NextCard Concierge fills in purchase forms on websites and remembers
passwords.
- GOSHOPPING! Our cardholders can use our Internet-based shopping service,
GoShopping!, to search for products and obtain consumer product
information. Our service offers Bargain Finder, which helps customers
search for the best prices on specific products, Shopping Guide, which
helps NextCard customers evaluate various Internet merchants based on
customer reviews and ratings, and electronic incentives, which provide
discounts to NextCard customers.
- 100% SAFE FOR INTERNET SHOPPING. We provide our customers with 100%
protection against credit card fraud to assure our customers that the
Internet is a safe medium for making transactions.
INTERNET-BASED ACCOUNT MANAGEMENT
- ONLINE CUSTOMER SUPPORT. At our website, customers can perform most
service and account management functions, including receiving and
downloading statements, paying NextCard bills, reviewing account balances
and available credit, viewing and sorting transaction history and
communicating with us through secure e-mail. Our website is available 24
hours a day, seven days a week, enabling our customers to access the
support they need when most convenient for them.
- ONLINE CHAT CAPABILITIES. Customers can interact online with a customer
service representative live on the NextCard website to ask questions
about their NextCard account.
FUTURE PRODUCTS AND SERVICES
We intend to add new financial products and services in the future. Most of
those products and services will be designed to attract and retain targeted
consumer segments on the Internet and stimulate the use of the NextCard Visa,
particularly in electronic commerce. Potential future offerings may include
targeted sweepstakes programs, special incentive offers and enhanced chat
capabilities.
MARKETING
We use direct marketing on the Internet both to attract targeted customers
to our website and as a one-to-one marketing channel to provide customized
offers. To attract potential customers to our website, we focus on four distinct
marketing channels:
TARGETED INTERNET-BASED ADVERTISING
We believe the Internet offers a unique opportunity to build a
database-oriented, direct marketing capability. We use advertisements on
websites, primarily banners, and sponsored e-mails to attract potential
customers to our website. Because we offer online application and credit
approval, we automatically receive information that is well suited for targeted
marketing. We make direct placements of advertising on a diverse selection of
websites that provide millions of ad impressions each day.
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Diversification is a key driver of our success. To date, no particular site
has accounted for more than 18% of our new customers. As a result, we are not
reliant on any particular website to attract applicants to our website.
We have constructed an Internet Database Marketing system, which we call
IDM, that can monitor the click-path of customers who come to our site. With
this system, we are able to evaluate the success of a particular advertisement
on a particular website. For each banner and website combination, we are able to
monitor:
- the click-through rate (percent of people who click from the banner to
our website);
- the application rate (percent of those people who then decide to apply
for our credit card product);
- the credit approval rate (percent of those applicants whom we approve for
credit);
- the booking rate (percent of those approvals who order a NextCard Visa);
and
- the balance transfer rate (the average amount of balances transferred by
a customer to us from their other credit card accounts).
AFFILIATE MARKETING
We form relationships with companies and individuals that have Internet
sites to drive new account volume. Those meeting our quality standards can post
a NextCard logo, providing a direct link to our website. These affiliates
receive payments from us for each new customer we acquire through their website
link. We have developed an automated affiliate sign-up process that has resulted
in rapid growth of our affiliates. As of September 30, 1999, we had more than
17,000 affiliates, and currently we are gaining approximately 3,000 new
affiliates each month.
CO-BRANDED MARKETING
We have recently signed agreements with Amazon.com, United Media (Dilbert),
BizRate.com and PlanetOut to create co-branded credit cards.
In the traditional credit card market, co-branding has been an important
approach to acquiring customers but frequently has failed to promote the brand
of the credit card issuer. Traditionally, a credit card issuer enters into an
agreement with a consumer branded company to offer credit cards under the brand
of the partner. However, the identity of the credit card issuer generally is
subordinate to the identity of the partner. As a result, these relationships
typically do not allow credit card issuers to build their credit card brands.
As an alternative, we work with partners to offer the power of our
customization to their customer bases, with both brands marketed together. We
believe that the power of two Internet brands can create an important message of
industry strength and expertise to the customer, and further promotes our brand.
MICROAFFINITY MARKETING
We also offer credit cards that are designed around a particular affinity
group. To build customer loyalty, a large market historically has been required
to economically market an affinity card. However, our technology allows us to
market affinity cards to groups of all sizes. For larger affinities, we can
tailor advertising and content to appeal to a particular interest group. For
smaller affinities and
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niche market segments, our PictureCard technology allows customers to create an
affinity card using a picture of their choice.
To enhance the effectiveness of our four marketing channels, we also build
our corporate brand and leverage it to attract new customers, affiliates and
partners. For example, we have introduced two offline branding campaigns and
recently, we introduced the NextCard eCommerce Index(SM), which tracks online
purchase activity of NextCard customers. We believe that these types of
initiatives will help build brand awareness.
UNDERWRITING AND CREDIT MANAGEMENT
One of the most significant drivers of profitability in the credit card
industry is the ability to effectively manage credit card losses. Losses from
consumer defaults vary widely by issuer. We believe that credit card issuers
using more advanced information-based credit risk management techniques have
experienced lower loss rates than the industry average.
Members of our team have significant experience in credit risk management
from operational, marketing and strategic perspectives. We have developed a set
of underwriting criteria based on risk models utilizing industry data as well as
our own internally developed decision rules and analytic techniques. In
addition, we consider the potential profitability of a particular customer prior
to making customized offers. Our policies are designed to balance credit risk
and potential profitability by adjusting the interest rate, credit limit and
required minimum balance transfers offered to a particular customer.
Our credit policies have been written, and are administered, by our credit
committee, comprised of members of our senior management. The credit committee
meets regularly to review actual credit performance as compared to plan
assumptions. The committee reviews proposed changes to credit policies and risk
management procedures with a focus on portfolio profitability. Because we have
an unseasoned credit card portfolio, we may be unable to predict accurately the
level of future credit losses.
CREDIT UNDERWRITING ALGORITHM
Our credit approval process is performed on a fully automated basis.
Although a NextCard Visa applicant receives a credit approval decision within
seconds of applying, during that interval we conduct an automated credit
analysis. We access up to three credit bureau reports on each applicant, and
capture the credit score developed by Fair, Isaac & Company, Inc., a nationally
recognized provider of credit bureau scoring information on each of the credit
reports. The credit score is commonly referred to as a FICO score. We also apply
internally developed credit scores to augment the FICO score. If the applicant
meets minimum FICO score criteria and our internally developed criteria, the
applicant is approved for a NextCard Visa. Certain customers may require further
authentication of information before being issued a NextCard Visa. In instances
where an applicant does not have a FICO score, we will approve the applicant
based on minimum scores from our internally developed criteria. Further, to
prevent customers from obtaining additional accounts and thereby increasing our
credit exposure to them, we automatically verify that the applicant is not
already a NextCard Visa holder and has not submitted a duplicate application.
On a periodic basis, we monitor the effectiveness of our credit algorithm
and credit review process and adjust our procedures as necessary. As we further
refine our credit algorithm and credit process, we may consider using additional
internally developed criteria or scoring algorithms, including a lower minimum
FICO score, to enhance or replace our existing credit approval criteria.
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We have limited experience developing and implementing such credit criteria and
we may experience higher credit losses than we had expected using such enhanced
or replaced credit approval criteria.
CREDIT LINE MANAGEMENT
Several objectives are considered in credit line management, including
increasing potential revenue per customer, reducing potential losses and
reducing contingent liabilities. Using credit bureau information, we review the
balances on other credit cards maintained by the applicant. The credit line made
available to the applicant is a function of the customer's risk profile, income
and balances maintained on other cards. Our decisions are based on the
probability of future credit loss projected based on the FICO score, application
of our own criteria and the applicant's income level. In addition, we
periodically monitor our customer accounts and in the future we may adjust
credit lines accordingly.
OPERATIONS
Our operations function is organized and designed to support rapid product
introduction and customer growth. We use internal and external resources for
different functions. For outsourced functions, our operations management team
provides procedural and management oversight. We will continue to move certain
functions in-house as volumes increase and economies of scale are achieved. We
may experience unexpected interruptions or deterioration in our operations due
to such migration of operations. The key functional components of our operations
function are as follows:
ACCOUNT ORIGINATION SUPPORT
We have developed an innovative application processing approach, leveraging
an automated credit decision process with a multi-step customer authentication
routine. The authentication and new account risk management process is a central
function for the operations group.
Applicants that have been approved through our credit review process are
assigned a proprietary fraud score. This fraud score consists of a series of
internally-developed algorithms using credit bureau information to determine the
probability that an application may involve fraud. Customers that pass the
proprietary algorithms receive an active account number and line of credit at
the conclusion of the online application process.
Customers that do not pass the automated fraud scoring process are
processed through several customer authentication tests. Each of these potential
customers is processed through a series of third party fraud databases. We also
have developed an internal database of fraud addresses. Based upon the presence
of certain indicators, the customer will either be approved for the card,
declined for the card, sent correspondence requesting additional information or
routed to an operations specialist who has been trained to look for occurrences
of Internet application fraud. After reviewing the account, either the
information will be validated by a third party or we will initiate telephone
contact to attempt to verify the identity of the applicant. We plan to automate
further our authentication process during the next several quarters.
At the conclusion of this authentication process, which typically takes one
to three weeks, the customer is sent their NextCard Visa.
CUSTOMER SERVICE AND SUPPORT
Customer service and support functions are performed by our operations
staff, as well as through an arrangement with First Data. We maintain internal
customer service coverage during the hours of 6:00 a.m. to 11:00 p.m., Pacific
time, Monday through Friday, and 8:00 a.m. to 6:00 p.m. on Saturday
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and Sunday. After-hours and weekend hours support is provided through an
arrangement with First Data. We expect to continue the process of moving most
customer service and support activities to our San Ramon operations facility.
Customers can access account information on our website or call a customer
service representative 24 hours a day, seven days a week. Customers may also
interact online with a customer service representative over the Internet in
order to ask questions, verify information or review the activity on their
NextCard Visa. Online chat capabilities are currently available from 8:00 a.m.
to 5:00 p.m., Pacific time, Monday through Friday. The technology that enables
online chat capabilities is provided through an agreement with a third party
vendor. We monitor customer communications to ensure the quality of our customer
service. In addition, we use call management software to monitor call
abandonment, call length and other call center productivity measurements. We
plan to increase the hours of online chat support during the next several
quarters.
COLLECTIONS
Collections activities are performed at our San Ramon operations facility.
Collection activity involves contacting the customer and taking other
appropriate actions to secure payment if no payment has been received beginning
10-15 days after the payment due date. Accounts are recorded as delinquent one
day after a monthly cycle in which no payment is received for an account that
had a balance in the prior billing cycle.
PROCESSING
First Data performs certain core processing services for us. These services
include authorizing customer transactions through the Visa system (including
monitoring for purchase-related fraud), performing billing and settlement
processes, generating and monitoring monthly billing statements, and issuing
credit card plastics and new account agreements.
KEY OUTSIDE RELATIONSHIPS
We rely on third parties to provide essential value-added services:
- First Data provides essential fulfillment and customer service functions,
and hosts online customer service capabilities;
- Response Data Corporation provides online balance transfer support to
NextCard customers;
- Exodus Communications, Inc. provides us with technical support and a
secure facility for Internet hosting services;
- Three major credit bureaus (Trans Union, Experian Information Systems,
Inc. and Equifax, Inc.) furnish the credit information that we require to
process our credit card applications;
- First Express Remittance Corporation, formerly National Processing
Corporation, provides collection and lockbox services for customer
payments;
- MyPoints.com, Inc. furnishes administrative and fulfillment services for
our NextCard Rewards incentive program;
- Binary Compass Enterprises, Inc. and WebCentric, Inc. provide software
technology underlying our GoShopping! program;
- Gator.com provides the technology underlying the NextCard Concierge;
- eShare Technologies, Inc. provides the online customer service chat
technology; and
- Heritage Bank provides select correspondent banking services.
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Any interruption, deterioration or termination of these third party
services could have a material adverse effect on our business and reputation. In
addition, as we do not have fully redundant systems in place for most of our key
functions at this time, any interruption of any of our systems could cause a
material interruption or deterioration in our operations.
TECHNOLOGY AND SECURITY
Our business model is based on consumer access to the NextCard website both
to acquire new customers as well as to service existing relationships. As a
result, our development efforts are focused on creating and enhancing
specialized software that enhances our Internet-based customer functionality. In
addition, because we offer a financial product, we seek to offer high levels of
data security and integrity to build customer confidence.
Our security infrastructure is designed to protect data from unauthorized
access, both physically and over the Internet. The major components of our
network are located in San Francisco, California, at our corporate headquarters;
San Ramon, California, in our operations center; and Santa Clara, California, in
the Exodus Communications Data Center. Additionally, we rely upon the security
infrastructure of First Data and Response Data Corporation. Each of these key
business locations is connected through privately leased lines. In all
locations, access to the network servers is tightly restricted. Internet
security is addressed with leading technologies, vendors and design approaches.
Our most sensitive data and hardware reside at the Exodus Communications
Data Center located in Santa Clara, California. Exodus Communications provides
Internet co-location services for hundreds of Internet businesses in seven
locations nationwide. With redundant connections to the Internet, as well as
fault tolerant power and waterless fire suppression, Exodus Communications
provides us with the benefits of a high-end data center without the excessive
cost of building and maintaining our own data center. Because of our special
security needs, our equipment is located in an Exodus Communications vault.
Our customer service website was designed and developed in conjunction with
First Data. The site resides on a web server located in their main data center
in Omaha, Nebraska. Security for the system is provided through a multi-tiered
security design, which includes physical and logical components.
FUNDING THE LOAN PORTFOLIO
In the credit card business, it is necessary to fund the resulting credit
card receivables owed by the cardholder. To date, our funding for the NextCard
Visa has involved relationships with Heritage Bank, Credit Suisse First Boston,
Barclays Bank PLC, ING Barings (U.S.) Capital Markets LLC and First Union
Securities, Inc.
HISTORICAL ARRANGEMENTS
From the introduction of the NextCard Visa through January 12, 1999, all
credit card receivables associated with the NextCard Visa program were funded by
Heritage. Under that arrangement, we billed Heritage for the origination and
servicing of the accounts and participated in 50% of the resulting net profits
and losses.
From January 1999 to May 1999, a majority of the funding of NextCard Visa
receivables was provided by Credit Suisse, in cooperation with Heritage, under a
$100.0 million revolving credit facility. Under the Account Origination
Agreement by and between Heritage Bank and NextCard Funding Corp., our wholly
owned subsidiary, Heritage continued to issue the NextCard Visa and
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NextCard Funding Corp. purchased the receivables from Heritage on a daily basis.
Heritage's compensation under the Account Origination Agreement was primarily an
origination fee for each credit card account originated. In addition, Heritage
is entitled to reimbursement for certain out-of-pocket expenses.
In May 1999, we entered into a $300.0 million commercial paper conduit
credit facility through Barclays Bank PLC and immediately began utilizing this
facility to purchase credit card receivables. Borrowings under this credit
facility are secured by the purchased receivables. We used a portion of this
facility to pay off the $87.8 million balance then outstanding under the Credit
Suisse facility. As of September 1999, $229.1 million was outstanding under the
Barclays Bank credit facility.
In addition, in June 1999 and November 1999, we entered into similar
facilities with ING Barings (U.S.) Capital Markets LLC for $150.0 million and
with First Union Securities, Inc. for $220.0 million, respectively. As of
September 30, 1999, there were no amounts outstanding under these facilities.
We will have the ability to fund new receivables during the revolving
period of these structures. After the revolving period, principal collections
generated by the receivables will be used to pay the principal amount owed. The
revolving period ends in June 2001 for the Barclays facility, January 2002 for
the ING Barings facility and February 2003 for the First Union Securities
facility.
Heritage's obligation to establish new credit card accounts terminated in
October 1999. Heritage will continue to perform account settlement and other
correspondent banking services under an arrangement that will terminate as of
December 31, 2000.
NEXTBANK
On September 16, 1999, we acquired Textron National Bank, a wholly owned
indirect subsidiary of Textron Corporation, for $5.0 million over its net book
value. Textron had not actively engaged in the banking business for several
years, and on the acquisition date held $2.6 million of cash and cash
equivalents and a single deposit liability of approximately $540,000.
Immediately prior to the closing of the acquisition, Textron converted into a
national bank limited to credit card operations and changed its name to
"NextBank, National Association." In September 1999, NextBank became a member of
the Visa system and in October 1999 commenced the issuance of NextCard Visa
cards. We intend to originate NextCard credit card accounts through NextBank and
partially fund credit card loan receivables by accepting deposits of $100,000 or
more. We anticipate operating NextBank by interacting with our customers
primarily over the Internet. As a limited purpose national credit card bank,
NextBank is subject to restrictions on its activities:
- it may engage only in credit card operations;
- it may not accept demand deposits or deposits that the depositor may
withdraw by check or similar means;
- it may not accept savings or time deposits of less than $100,000 (except
as security for its loans);
- it may maintain only one office that accepts deposits; and
- it may not engage in the business of making commercial loans.
NextBank is subject to capital adequacy guidelines adopted by the OCC. The
capital adequacy guidelines and the regulatory framework for prompt corrective
action require NextBank to maintain specific capital levels based upon
quantitative measures of its assets, liabilities and off-balance sheet
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items. Core capital (Tier 1) consists principally of stockholders' equity less
goodwill. Total risk-based capital (Tier 1 + Tier 2) includes a portion of the
allowance for loan losses. Based on these classifications, the capital adequacy
regulations establish three capital ratios that are used to measure whether a
financial institution is "well capitalized." As of September 30, 1999, NextBank
was "well capitalized" in all regulatory capital ratio categories, as set forth
below.
<TABLE>
<CAPTION>
TO BE "WELL
CAPITAL RATIO ACTUAL RATIO CAPITALIZED"
------------- ------------ ------------
<S> <C> <C>
Tier 1 Capital............................... 23.3% 6.00%
Total Capital................................ 24.6% 10.00%
Tier 1 Leverage.............................. 22.2% 5.00%
</TABLE>
In addition to the above capital ratios, the Office of the Comptroller of the
Currency requires that for the first three years of operation, NextBank maintain
a ratio of stockholders' equity plus the allowance for loan losses to total
managed assets at no less than 6.5%. As of September 30, 1999, NextBank was in
compliance with this capital requirement.
COMPETITION
The market for consumer credit card products in the United States is highly
competitive. This competition primarily has been focused in the offline areas of
direct mail, telemarketing and traditional bricks-and-mortar branch banking. In
contrast, our strategy focuses on the Internet channel, a rapidly evolving and
intensely competitive arena. Our ability to compete effectively depends on many
factors, both within and beyond our control.
We believe that the principal factors upon which we will compete for
customers include the pricing of our products and services, reliability and
customer support, the features of our products and services and brand
recognition. In turn, our ability to be an effective competitor against
established and new entrants into the industry will depend on a number of
factors, including our ability to identify and retain attractive customers, the
quality of our credit decisions, the cost of acquiring customers, our ability to
gain technological expertise, the cost of funding our loan portfolio, our
ability to create strategic partnerships with third parties and our ability to
control fraud and delinquencies.
We expect significant additional competition in the future as the Internet
channel grows and many financial institutions become increasingly aware of the
market opportunities available. Many of our current and potential competitors
have greater financial resources and greater name recognition than we have with
the public. We currently compete, or anticipate competing, for online consumers,
directly and indirectly, with the following categories of companies:
Traditional Credit Card Companies. Established credit card companies,
such as Bank One Corporation, Citibank, N.A., Providian Financial Corp. and
American Express Company, have historically generated accounts through
direct mail and telemarketing. Our products and services compete with the
offline offerings of these companies, as well as the online offerings that
certain of these companies have begun to make available. In particular,
certain of these companies are entering into Internet related branding
arrangements, as well as significant arrangements, including exclusive
arrangements, with Internet portals to market their products.
Traditional Banks. Banks, such as Wells Fargo Bank & Co. and Chase
Manhattan Bank, N.A., have historically issued credit cards to consumers
through traditional channels and have begun to provide online credit card
services. As the Internet channel grows, we expect banks to offer more
credit card products and services over the Internet.
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Internet-Focused Entrants. We anticipate the addition of new forms of
financial institutions to compete in the online consumer financial services
industry. Several companies, such as WingspanBank.com, Telebanc Financial
Corporation and Net.B@nk, Inc., are establishing themselves as
Internet-based providers of consumer financial products and services. We
also anticipate that established Internet participants will be attracted
into the marketplace, through partnering or co-branding arrangements with
existing financial institutions. For example, Bank One, in partnership with
Yahoo!, has introduced a Yahoo! branded credit card and promoted that
credit card on the Internet. In addition, alternative forms of payment are
emerging online, such as debit cards and micropayment offerings, which may
affect the use of credit cards for online purchases.
GOVERNMENT REGULATION
Ongoing Governmental Regulation. The relationship between an issuer of
credit cards and its applicants and customers is extensively regulated by
federal and state consumer protection laws, most particularly the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act,
the Electronic Funds Transfer Act and the Fair Debt Collection Practices Act.
These statutes, as well as their enabling regulations, among other things,
impose disclosure requirements when a consumer loan is advertised, when an
application is presented, when an application is processed, when a billing
statement is prepared and when a delinquent account is presented for collection.
In addition, various statutes limit the liability of a credit card holder for
unauthorized use, prohibit discriminatory practices when extending credit,
impose limits on the types and amounts of fees and charges that may be imposed
and restrict the use of consumer credit reports and other account-related
information.
Changes in any of these laws or regulations, or in their interpretation or
application, could harm our business. Various proposals which could affect our
business have been introduced in Congress and in the various state legislatures
in recent years, including, among others, proposals relating to imposing a
statutory cap on credit card interest rates, substantially revising the laws
governing consumer bankruptcy, limiting the use of social security numbers,
restricting telemarketing activities, expanding consumer protection laws and
other regulatory restructuring proposals. It is difficult to determine whether
any of these proposals will become law and, if so, what impact they will have on
us.
We believe that we are in compliance with all relevant statutes and
regulations in relation to our business. However, there can be no assurance that
we will be able to maintain such compliance. The failure to comply with consumer
protection statutes and regulations could have a material adverse effect on our
business, financial condition and results of operations. In addition, due to the
consumer-oriented nature of the credit card industry, there is a risk that we or
other industry participants could be named as defendants in class action
litigation alleging fraud or violations of federal or state laws and
regulations. While we currently are not a party to any such litigation, a
significant judgement against us or the industry, with respect to any business
practice followed by us, could have a material adverse effect on our business,
financial condition and results of operations or our stock price.
To date, all NextCard Visa accounts have been issued by either Heritage, a
California state-chartered bank, or NextBank, a national bank domiciled in the
State of California. Therefore, all of our current accounts are subject to the
provisions of California law with respect to fees, charges, interest rates and
other restrictions imposed on California-based lenders. Our ability to export
the interest rates charged by California banks into other states, and thereby
preempt the interest rate limits that might otherwise be imposed by those
states, has been recognized by the United States Supreme Court, as well as by
the Depository Institutions Deregulation and Monetary Control Act
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(DIDA). However, with respect to state-chartered banks seeking to export
interest rates, the DIDA permits states to "opt out" of this provision. During
the period that the NextCard Visa was offered through Heritage, we decided not
to offer the NextCard Visa in any opt-out jurisdiction and other select
jurisdictions, specifically Alabama, Iowa, Wisconsin and Puerto Rico. Since
states do not have the right to opt out of the federal interest rate preemption
afforded to national banks, the NextCard Visa is now offered by NextBank in all
domestic jurisdictions.
NextBank is subject to regulation and supervision primarily by the OCC and
also is subject to regulation and supervision by the FDIC.
If NextBank decided to expand its activities beyond those permissible for a
limited purpose national credit card bank, we would be required to file an
application with, and receive the prior approval of, the OCC to amend NextBank's
charter. Moreover, we would be required to file an application with, and receive
the prior approval of, the Board of Governors of the Federal Reserve System to
become a bank holding company. If these applications were approved, NextBank
could engage in the full range of permissible banking activities and we would
then become a bank holding company, subject to the regulation (including minimum
capital requirements) of, and supervision by, the Federal Reserve Board. Bank
holding companies are permitted to engage only in activities that are determined
by statute or Federal Reserve Board regulation or order to be properly incident
to the business of banking. While we cannot predict, with certainty, the
activities that we may in the future engage in, we do not believe that bank
holding company status would impact materially our business, as currently
conducted.
Recent Legislation. On November 12, 1999, the Gramm-Leach-Bliley Act of
1999 became law. The Gramm-Leach-Bliley Act repeals the Glass-Steagall Act of
1933, which separated commercial and investment banking, and eliminates the Bank
Holding Company Act's prohibition on insurance underwriting activities by bank
holding companies. As a result, the Gramm-Leach-Bliley Act permits the
affiliation of commercial banks, insurance companies and securities firms. This
change may increase the ability of insurance companies and securities firms to
acquire, or otherwise affiliate with, commercial banks and likely will increase
the number of competitors in the banking industry and the level of competition
for banking products, including credit cards.
The Gramm-Leach-Bliley Act creates a new type of bank holding company, a
"financial holding company," that may engage in a range of activities that are
financial in nature, including insurance and securities underwriting, insurance
sales, merchant banking and real estate development and investment. The
Gramm-Leach-Bliley Act also establishes new privacy requirements applicable to
all financial institutions. Financial institutions are required to establish a
privacy policy and to disclose the policy at the start of a customer
relationship and once a year thereafter. Additionally, financial institutions
must give a customer the opportunity to block the sharing of the customer's
nonpublic personal information with unaffiliated third parties, except in
certain limited circumstances. Further, financial institutions are barred from
sharing credit card numbers, account numbers or access numbers of customers with
third-party marketers. State laws that provide a greater degree of privacy
protection are not preempted by federal law.
The Gramm-Leach-Bliley Act also specifically authorizes a limited purpose
credit card bank to control a foreign bank, subject to certain conditions.
Although we have no present intention to engage in banking activities outside of
the U.S., this change would allow us to do so.
We do not anticipate that the applicable provisions of the Act will have a
material effect on our business or practices. Of course, to the extent that the
Act promotes competition or consolidation among financial service providers
active in the provision of products and services by means of the Internet, we
could experience increased competition for customers, employees and funding.
Further,
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to the extent that the new privacy requirements impact our ability to market the
products and services of third parties to our customers, our revenue could be
affected. We are, however, unable to predict at this time the scope or extent of
any such impact.
INTELLECTUAL PROPERTY
We rely primarily on a combination of copyrights, trademarks and trade
secrets, as well as certain restrictions on disclosure, to protect our
intellectual property. We have filed several patent applications that are now
pending in the United States to protect certain proprietary systems and
applications covering the method and apparatus for credit analysis, application
approval or rejection and the presentation of multiple credit card offers. In
addition, we have applied to register our trade and service marks in the United
States and our United States service mark for "NextCard" has been issued. We
cannot assure you that our patent applications or other trade or service mark
registrations will be approved or that they will provide us with any competitive
advantages. We also enter into confidentiality agreements with our employees and
consultants, and seek to control access to and distribution of our other
proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use certain intellectual property without authorization.
These precautions may not prevent misappropriation or infringement of our
intellectual property. In addition, we can not assure you that we will not
infringe upon the intellectual property rights of third parties. The costs of
defending our proprietary rights or claims that we infringe third-party
proprietary rights may be high.
EMPLOYEES
As of September 30, 1999, we employed 244 people, of which 33 were in
marketing, 69 were in technology, 97 were in operations, 27 were in finance and
administration and 18 were in decision analytics. None of our employees is
represented by a collective bargaining agreement. We consider our relations with
our employees to be good, and we will continue to strive to provide a positive
work environment for our employees.
FACILITIES
We have a five year lease on our principal executive offices of
approximately 14,000 square feet in San Francisco, California. That lease
expires in 2003. In June 1999, we amended the five year lease agreement to
provide for an additional 28,000 square feet, located within the same building
as our current corporate headquarters in San Francisco, and we expect to occupy
the space by the end of the year. In addition, we sublease approximately 17,500
square feet of office space in San Ramon, California, where most of our
operations and customer service activities are located. That lease expires in
June 2001. Our current facilities will not be sufficient to meet our anticipated
growth. We are currently conducting a site search for additional space. There
can be no assurance we will be able to secure such additional space.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation concerning claims
arising in the ordinary course of our business. We are not presently a party to
any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of September 30,
1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Jeremy R. Lent(3).......... 39 Chairman of the Board, Chief Executive Officer and President
Yinzi Cai.................. 32 Senior Vice President, Decision Analytics
Timothy J. Coltrell........ 39 Chief Operating Officer
Shaun C. Deane............. 46 Vice President, Project Integration and Planning
John V. Hashman............ 40 Chief Financial Officer
Molly Lent................. 54 Chief Corporate Development Officer
Robert Linderman........... 47 General Counsel and Secretary
Bruce G. Rigione(2)(3)..... 41 Senior Vice President, Business and International
Development and Director
Daniel D. Springer......... 36 Chief Marketing Officer
Jeffrey D. Brody(1)........ 39 Director
Alan N. Colner(2).......... 44 Director
Tod H. Francis............. 40 Director
Safi U. Qureshey(1)(2)..... 48 Director
</TABLE>
- -------------------------
(1) Member of compensation committee
(2) Member of audit committee
(3) Member of nominating committee
Jeremy R. Lent co-founded NextCard with his wife, Molly Lent, in June 1996
and has been Chairman of the Board, Chief Executive Officer and President since
our inception. From May 1991 to January 1995, Mr. Lent served as Chief Financial
Officer of Providian Bancorp, a direct marketing credit card issuer. From 1994
to January 1995, Mr. Lent also served as a Senior Vice President of Providian.
While at Providian, Mr. Lent was responsible for the company's planning,
treasury, securitization, corporate development and accounting functions. Mr.
Lent received a B.A. and an M.A. from Cambridge University and an M.B.A. from
the University of Chicago. In October 1999, Mr. Lent was awarded the Albert
Einstein Technology Medal for innovation in technology.
Yinzi Cai has served as our Senior Vice President, Decision Analytics since
February 1999. From July 1997 to January 1999, she served as our Vice President,
Decision Analytics. From July 1994 to June 1997, Ms. Cai was a Principal in the
Finance Industry Group of American Management Systems, focusing on risk
management and direct marketing strategies for financial institutions. Ms. Cai
served as a Risk Manager for GE Capital from June 1993 to June 1994. Ms. Cai
holds a B.S. from Fudan University and an M.S. from Case Western Reserve
University.
Timothy J. Coltrell has served as our Chief Operating Officer since June
1997. From August 1996 to June 1997, he served as our Senior Vice President of
Operations. From November 1994 to June 1996, he was the Operations Center
Manager, President and Chief Executive Officer of GE Capital Consumer Credit
Card Company. From April 1987 to November 1994, he held a variety of positions
at Providian Bancorp including Assistant Vice President of Collections, Vice
President of Acquisitions, Vice President of Risk Control and Vice President of
Joint Ventures. Most recently, from August 1994 to November 1994, he held the
position of Vice President of Telemarketing at Worldwide Insurance, a subsidiary
of Providian Corporation. Mr. Coltrell received a B.A. and an M.B.A. from the
University of California at Irvine.
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<PAGE> 58
Shaun C. Deane has served as our Vice President, Project Integration and
Planning, since February 1997. From December 1994 to February 1997, Mr. Deane
was the Vice President and founder of the New Media Products Group at
Addison-Wesley Longman, a leading educational publisher. From 1989 to 1994, Mr.
Deane held a variety of positions at Apple Computer, including Director of its
Evangelism Group from March 1993 to December 1994. Mr. Deane holds a B.A. from
Brandeis University and an M.A. from the University of San Francisco.
John V. Hashman has served as our Chief Financial Officer since September
1997. Prior to joining us, Mr. Hashman worked at Providian Financial, where he
served as Vice President, Direct Telemarketing from June 1995 to September 1997,
Vice President, Operations from November 1993 to June 1995 and Treasurer from
November 1989 to November 1993. Mr. Hashman holds a B.S. from Southeast Missouri
State University and an M.B.A. from the University of San Francisco.
Molly Lent co-founded NextCard with her husband, Jeremy Lent, and, since
April 1998, has served as our Chief Corporate Development Officer. Prior to the
founding of NextCard, Ms. Lent was President of Art Forms, an art distribution
company. Ms. Lent graduated Phi Beta Kappa, cum laude, with a B.A. degree from
State University of New York at Buffalo.
Robert Linderman has served as our General Counsel and Secretary since
October 1997. From January 1993 to January 1996, he served as Associate General
Counsel for San Francisco Federal Savings, and from February 1996 to July 1997,
he served as General Counsel for SIFE Trust Fund. Mr. Linderman received a B.A.
and a J.D. from Boston University.
Bruce G. Rigione has served as our Senior Vice President, Business and
International Development, since July 1999 and as our Director since March 1997.
From January 1999 to August 1999, Mr. Rigione was a private consultant. From
April 1996 to December 1998, he was a Managing Director and Global Head of Asset
Securitization for HSBC Markets, the capital markets subsidiary of HongKong
Shanghai Banking Corporation. From November 1987 to April 1996, Mr. Rigione was
a Managing Director and Head of Securitization for Chase Securities, Inc., a
subsidiary of Chase Manhattan Bank. Mr. Rigione holds a B.A. from Fairfield
University and an M.B.A. from Columbia University.
Daniel D. Springer has served as our Chief Marketing Officer since March
1998. Prior to joining us, from September 1991 to December 1997, Mr. Springer
worked at McKinsey & Co., an international consulting firm, where he consulted
for a wide range of enterprises. Mr. Springer holds a B.A. from Occidental
College and an M.B.A. from Harvard University.
Jeffrey D. Brody has served as our Director since August 1997. Mr. Brody
has been employed by Brentwood Venture Capital since April 1994, and has been a
General Partner since October 1995. He is also a Managing Director of Redpoint
Ventures, a firm he co-founded in October 1999. From December 1988 to April
1994, Mr. Brody was Senior Vice President of Comdisco Ventures, a venture
leasing company. Mr. Brody holds a B.S. from the University of California at
Berkeley and an M.B.A. from Stanford University Graduate School of Business. Mr.
Brody is a member of the board of directors of Concur Technologies, and serves
on its compensation committee. Mr. Brody also is a member of the board of
directors of several private companies.
Alan N. Colner has served as our Director since November 1998. Since August
1996, he has served as Managing Director, Private Equity Investments at Moore
Capital Management, Inc. Before joining Moore, he was a Managing Director of
Corporate Advisors, L.P., the general partner of Corporate Partners, a private
equity fund affiliated with Lazard Freres & Co. LLC. Mr. Colner also serves as a
director of GoTo.com and iVillage Inc., as well as a director of several
privately held companies. Mr. Colner received a B.A. from Yale University and an
M.B.A. from the Stanford University Graduate School of Business.
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<PAGE> 59
Tod H. Francis has served as our Director since May 1998. Mr. Francis has
been a General Partner of Trinity Ventures since March 1996. Prior to being
named as a General Partner, Mr. Francis worked at Trinity Ventures as a
Principal from March 1995 to March 1996 and as an Associate from March 1993 to
March 1995. Prior to joining Trinity Ventures, Mr. Francis was a Partner at RAM
Group, a marketing management firm, and worked at Johnson & Johnson in brand
management. Mr. Francis holds a B.A. and an M.B.A. from Northwestern University.
Mr. Francis serves on the board of directors of Fatbrain.com, Inc. and the board
of directors of several private companies.
Safi U. Qureshey has served as our Director since June 1997. Mr. Qureshey
was the founder of AST Research, a personal computer manufacturer, and served as
its Chairman and Chief Executive Officer from 1980 to 1997. Mr. Qureshey is an
active investor and sits on the boards of several private companies. In
addition, Mr. Qureshey is President of the Southern California Chapter of The
Indus Entrepreneurs, a networking and mentoring organization for entrepreneurs,
and a former member of President Clinton's Export Counsel, a private advisory
group focusing on increasing exports of United States goods and services. Mr.
Qureshey holds a B.S. from the University of Karachi, and a B.S. from the
University of Texas at Arlington.
BOARD COMMITTEES
Our board of directors has a compensation committee, an audit committee and
a nominating committee.
Compensation Committee. Our compensation committee reviews and approves the
salary, stock option and stock purchase grants, benefits and other compensation
of our Chief Executive Officer and reviews and approves policies regarding the
compensation of other senior officers. Approval of stock option grants to other
officers and directors is performed by our full board of directors. The current
members of the compensation committee are Messrs. Brody and Qureshey.
Audit Committee. Our audit committee, among other things, makes
recommendations to our board of directors concerning the engagement of
independent public accountants, monitors and reviews the quality and activities
of our internal audit and quality assurance functions and monitors the results
of our operating and internal controls as reported by management and the
independent public accountants. The current members of the audit committee are
Messrs. Colner, Qureshey and Rigione.
Nominating Committee. Our nominating committee screens and nominates
candidates for election to our board of directors. The current members of the
nominating committee are Messrs. Lent and Rigione.
DIRECTOR COMPENSATION
Although we reimburse members of our board of directors for their
out-of-pocket expenses associated with their participation, directors receive no
other specific compensation for their service as directors or for their service
on any committee of the board of directors. We may, in the future, adopt a
compensation plan for non-employee members of our board of directors.
On May 15, 1997, we entered into a consulting agreement with Safi U.
Qureshey. At that time, Mr. Qureshey was not one of our directors. Mr.
Qureshey's consulting agreement provided that, in exchange for consulting
services including, but not limited to, assisting in our early stage financing
efforts, Mr. Qureshey was to receive (a) a fee warrant exercisable for five
years to acquire 70,677 shares of our common stock at $0.56 per share and (b) a
consulting warrant exercisable for five years
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<PAGE> 60
to acquire 95,963 shares of our common stock at $0.56 per share and vesting
semi-annually in eight equal increments, subject to our continuing to renew Mr.
Qureshey's consultancy. Mr. Qureshey joined our board of directors on June 30,
1997. On April 29, 1998, Mr. Qureshey surrendered the consulting warrant in
exchange for a non-statutory stock option exercisable for 10 years for 95,963
shares of our common stock at $0.06 per share, which the board of directors
determined to be the then fair market value of our common stock. The fee warrant
continues to be outstanding. In March 1999, Mr. Qureshey assigned 2,250 shares
of the fee warrant to each of six persons, for an aggregate assignment of 13,500
shares.
On April 29, 1998, Bruce G. Rigione, one of our directors, was granted a
non-statutory stock option exercisable for 10 years for 67,500 shares of our
common stock at $0.06 per share, which the board of directors determined to be
the then fair market value of our common stock. Effective as of January 20,
1999, Mr. Rigione entered into a consulting agreement with us under which he was
paid $15,000 per month. Under the agreement, Mr. Rigione provided his services
on a full time and exclusive basis on projects associated with securitization,
international opportunities and other areas related to our business. On July 21,
1999, Mr. Rigione joined us as Senior Vice President, International Business
Development. In connection with his employment, Mr. Rigione was granted an
incentive stock option to purchase 150,000 shares of our common stock at an
exercise price of $23.50 per share.
On March 11, 1999, our board of directors approved the grant of
non-statutory stock options exercisable for ten years for 45,000 shares of our
common stock at $6.67 per share to each of Alan Colner, Tod Francis and Jeffrey
Brody. Each option vests over four years, commencing as of the date of each
director's first board meeting with us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or the compensation committee
of any other company, nor has any interlocking relationship existed in the past.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
Our Amended and Restated Bylaws further provide that we must indemnify our
directors and executive officers and may indemnify our other officers and
employees and agents to the fullest extent permitted by Delaware law. We
currently maintain liability insurance for our officers and directors.
We have entered into indemnification agreements with each of our directors
and officers. These agreements require us, among other things, to indemnify each
director and officer for certain expenses (including attorneys' fees),
judgments, fines, penalties and settlement amounts incurred in any
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threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism by reason of any event or occurrence arising out of such
individual's services as our director or officer.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents as to which indemnification is being
sought. We are not aware of any pending or threatened litigation or proceeding
that might result in a claim for indemnification.
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1998, all
compensation of the Chief Executive Officer and each of our four other most
highly compensated executive officers who earned more than $100,000 in 1998 and
were serving as executive officers at the end of 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------------- UNDERLYING
SALARY($) BONUS($) OPTIONS(#)
<S> <C> <C> <C>
Jeremy R. Lent
Chairman, Chief Executive Officer and President...... $209,375 $175,000 1,350,000
Yinzi Cai
Senior Vice President, Decision Analytics.......... 105,125 50,000 171,000
Timothy J. Coltrell
Chief Operating Officer............................ 129,167 50,000 --
John V. Hashman
Chief Financial Officer............................ 115,000 50,000 225,000
Daniel D. Springer
Chief Marketing Officer............................ 113,650 50,000 562,500
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to our Chief
Executive Officer and each of our four other most highly compensated executive
officers for the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED
NUMBER PERCENT OF ANNUAL RATES OF
OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES PRICE PER TERM($)(4)
NAME GRANTED(#) IN FISCAL SHARE EXPIRATION -----------------
---- (1) YEAR(%)(2) ($/SHARE)(3) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Jeremy R. Lent.................... 225,000 4.15% $0.06 3/24/03 $ 3,799 $ 8,395
1,125,000 20.76 0.14 9/29/03 44,067 97,376
Yinzi Cai......................... 58,500 1.08 0.13 7/28/08 4,742 12,017
112,500 2.08 0.56 11/19/08 39,306 99,609
Timothy J. Coltrell............... -- -- -- -- -- --
John V. Hashman................... 225,000 4.15 0.06 3/24/08 7,861 19,922
Daniel D. Springer................ 382,500 7.06 0.06 3/24/08 13,364 33,867
180,000 3.32 0.13 9/29/08 14,590 36,975
</TABLE>
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<PAGE> 62
- -------------------------
(1) Each option vests as follows: 1/4 of the shares of our common stock
underlying each option vests at the first anniversary of the option vesting
date, which is typically the first day of employment, and 1/36 of the
remainder of shares our common stock vests each month thereafter, the
optionee is fully vested on the fourth anniversary of the vesting
commencement date. Certain of the options granted to Jeremy R. Lent are
subject to performance based vesting conditions. The options also are
subject to accelerated vesting under certain circumstances. See
"Management -- Executive Compensation -- Lent Employment Agreement."
(2) Based on a total of 5,419,013 option shares granted to our employees,
directors and consultants under our 1997 Stock Plan during fiscal 1998.
(3) The exercise price per share of each option was equal to the fair market
value of our common stock on the date of grant as determined by our board of
directors. The exercise price may be paid in cash or in shares of our common
stock valued at the full market value of the common stock on the exercise
date.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and
does not represent our prediction of our stock price performance. The
potential realizable value at 5% and 10% appreciation is calculated by
assuming that the exercise price on the date of grant appreciates at the
indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price.
FISCAL YEAR END-OPTION VALUES
The following table sets forth, for our Chief Executive Officer and each of
our four other most highly compensated executive officers, the number and value
of securities underlying options that were held by each executive officer as of
December 31, 1998. No options were exercised by our executive officers in 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, AT DECEMBER 31,
1998(#)(1) 1998($)(2)
---------------------- -------------------------
VESTED UNVESTED VESTED UNVESTED
<S> <C> <C> <C> <C>
Jeremy R. Lent.......................... -- 1,350,000 $ -- $11,826,750
Yinzi Cai............................... 66,938 293,063 592,025 2,529,535
Timothy J. Coltrell..................... 383,909 493,592 3,395,457 4,365,543
John V. Hashman......................... 112,500 450,000 993,750 3,975,000
Daniel D. Springer...................... -- 562,500 -- 4,955,550
</TABLE>
- -------------------------
(1) The heading "Vested" refers to shares that are exercisable as of December
31, 1998; the heading "Unvested" refers to shares that are unexercisable as
of December 31, 1998.
(2) Based on a fair market value of our common stock at the end of 1998 of $8.89
per share.
LENT EMPLOYMENT AGREEMENT
In January 1999, we entered into an employment agreement with Jeremy R.
Lent to employ him as our Chairman of the Board, Chief Executive Officer, and
President. The employment agreement provides that Mr. Lent is entitled to
receive a base salary of $250,000 per year and will be eligible to receive an
annual performance bonus determined at the discretion of the board of directors.
Beginning
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<PAGE> 63
with calendar year 1999, it is anticipated that the annual bonus will be a
minimum of 100% of Mr. Lent's base salary if we and Mr. Lent achieve performance
goals to be established by our board of directors. Mr. Lent may terminate the
agreement at any time upon 30 days prior written notice. If such termination is
for "good reason," Mr. Lent will receive:
- a lump sum severance payment equal to 24 times his highest monthly base
salary during the 12-month period immediately preceding the date of
termination;
- full acceleration of the vesting provisions governing any stock options
and restricted stock held by him;
- health plan, life insurance and disability insurance coverage for a
period of 24 months after the date of termination; and
- any bonus that would otherwise have been paid to him, prorated through
the date of termination.
"Good reason" is defined to include an adverse change in Mr. Lent's
position, duties and responsibilities or status, certain reductions in Mr.
Lent's base salary, certain geographic office relocations, our failure to
provide Mr. Lent reasonable support, our failure to continue certain material
benefits and any other material breach of his employment agreement by us.
We may terminate Mr. Lent's employment for any reason without "cause" upon
30 days prior written notice. If we terminate Mr. Lent's employment without
"cause," Mr. Lent will receive:
- a lump sum severance payment equal to 24 times the higher of his monthly
base salary in effect on the date of notice of termination and his
monthly base salary rate in effect six months prior to the termination
date;
- reasonable outplacement services;
- health plan, life insurance and disability insurance coverage for a
period of 24 months after the date of termination;
- full acceleration of the vesting provisions governing any stock options
and restricted stock held by him; and
- any bonus that would otherwise have been paid to him, prorated through
the date of termination.
The agreement also may be terminated upon the death or disability of Mr.
Lent or for "cause." If the termination is due to death or disability, then half
of the remaining balance of any unvested options held by Mr. Lent and all of the
remaining balance of any restricted stock held by him immediately will become
fully vested, and we will continue to pay Mr. Lent (or his estate) an amount
equal to his salary for 12 months following his termination.
EMPLOYEE BENEFIT PLANS
1997 STOCK PLAN
In April 1997, the board of directors adopted, and in June 1997 the
stockholders approved, our 1997 Stock Plan. The plan provides for the grant of:
- incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, to employees (including officers and
employee directors);
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<PAGE> 64
- non-statutory stock options to employees, directors and consultants; and
- the right to purchase restricted common stock to employees, directors and
consultants.
The plan is administered and interpreted by our board of directors or a
committee designated by our board or directors. It will terminate in April 2007.
As of September 30, 1999, the plan authorized the issuance of up to
14,625,000 shares of common stock. As of September 30, 1999, options to purchase
7,433,524 shares were outstanding, no shares of restricted stock were
outstanding, and 5,802,092 shares remained available for future grants. As of
September 30, 1999, options to purchase an aggregate of 1,389,384 shares of
common stock had been exercised.
The plan administrator has discretion, within the limits of the plan, to
select optionees and to determine the number of shares to be subject to each
option and the exercise price and vesting schedule of each option. The exercise
price of incentive stock options granted under the plan must at least be equal
to the fair market value per share of the common stock on the date of grant and
the exercise price of nonstatutory stock options granted under the plan must be
greater than or equal to 85% of the fair market value per share of the common
stock on the date of the grant. With respect to any participant who is a 10%
stockholder, the per share exercise price of any stock option granted under the
plan must equal at least 110% of the fair market value of the common stock on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the plan may not exceed ten years.
Upon the occurrence of certain transactions deemed under the plan to
constitute a change in control, the plan provides that all options and shares of
restricted stock issued under the plan that are not assumed or substituted with
equivalent options or shares of restricted stock by the successor corporation
immediately shall become vested.
The plan administrator has the discretion, subject to applicable law, to
determine the terms related to any restricted stock offer, including the number
of shares that a recipient may be entitled to purchase and the purchase price.
The administrator also has the discretion to determine whether and to what
extent the restricted stock will be subject to our right to repurchase the stock
upon the purchaser's termination of employment or engagement for any reason.
EMPLOYEE STOCK PURCHASE PLAN
Our board of directors approved the creation of our Employee Stock Purchase
Plan on April 20, 1999.
The employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will contain successive six-month
offering periods. The offering periods generally will start on the first day of
trading on or after January 1 and July 1 of each year, except for the first such
offering period which commenced on May 14, 1999, the date of our initial public
offering, and ended on June 30, 1999.
Employees will be eligible to participate if they meet certain guidelines.
Participants may purchase common stock through payroll deductions of up to 10%
of their salary.
Amounts deducted and accumulated by each participant will be used to
purchase shares of common stock at the end of each offering period. The price of
stock purchased under the purchase plan will be 85% of the lower of the fair
market value per share of our common stock on the first day of the offering
period or on the last day of the offering period. For the first offering period,
the fair
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market value of the common stock on the first day of the offering period was
$20.00, the initial public offering price.
401(k) PLAN
In October 1999, we adopted a 401(k) plan covering our full-time employees.
The 401(k) plan is intended to qualify under Section 401(k) of the Internal
Revenue Code of 1986. Contributions to the 401(k) plan by employees or by us,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) plan. Consequently, contributions by us, if any, will
be deductible by us when made. Employees may elect to reduce up to 15% of their
current compensation by up to the statutorily prescribed annual limit, which was
$10,000 in 1998, and to have the amount of such reduction contributed to the
401(k) plan. The 401(k) plan permits, but does not require, additional matching
contributions to the 401(k) plan by us on behalf of all participants in the
401(k) plan. To date, we have not made any contributions to the 401(k) plan.
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CERTAIN TRANSACTIONS
On July 15, 1996, we sold 4,500,000 shares of common stock to Jeremy and
Molly Lent for an aggregate purchase price of $5,000 ($0.001 per share). On
April 2, 1997, Mr. and Ms. Lent executed a capital contribution agreement
pursuant to which 450,000 of the shares were transferred back to us.
Seventy-five percent of the shares held by the Lents are subject to a repurchase
option in our favor which lapses bi-annually over a four-year period. Vesting of
the shares may be accelerated under certain circumstances. See
"Management -- Executive Compensation -- Lent Employment Agreement." As of
September 30, 1999, 393,750 shares remained subject to the repurchase option.
On September 18, 1996, we sold 472,500 shares of common stock to Timothy
Coltrell for an aggregate purchase price of $2,100 ($0.004 per share). The
shares are subject to a repurchase option in our favor which lapses according to
the following schedule: 1/10 of the shares vested on September 18, 1996 and the
remaining shares vest biannually over a four-year period. As of September 30,
1999, 106,317 shares remained subject to the repurchase option.
In March 1997, Jeremy Lent and Timothy Coltrell each executed a promissory
note in the principal amount of $12,500 in connection with the purchase by each
of 28,125 shares of Series A Preferred Stock. Each promissory note is secured by
the shares of common stock and matures in March 2000. The aggregate balance due
as of September 30, 1999 was $13,140.
Certain of our directors were granted options and warrants to purchase
shares of our common stock in connection with the provision of services to us.
See "Management -- Director Compensation."
Effective as of January 1, 1999, Jeremy Lent, our Chairman, Chief Executive
Officer and President, entered into an employment agreement with us. See
"Management -- Executive Compensation -- Lent Employment Agreement."
Effective as of January 20, 1999, Bruce Rigione, one of our directors,
entered into a consulting agreement with us under which he was paid $15,000 per
month. The agreement was terminated in July 1999 when Mr. Rigione joined us as
an employee.
As of April 30, 1999, each of our executive officers and directors had
entered into indemnification agreements. Such agreements may require us, among
other things, to indemnify our officers and directors (other than for
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Indemnification of Directors and
Executive Officers and Limitations of Liability."
On November 8, 1999 we signed a five year marketing agreement with
Amazon.com under which we will partner with Amazon.com to deliver co-branded
credit card accounts originated on a customized website. We will pay Amazon.com
an origination fee for each co-branded credit card account. We will also pay
additional compensation, including per account renewal fees on each account's
anniversary date. Over the term of the agreement we will make origination
payments of $85.0 million to Amazon.com, subject to performance requirements. We
could also pay up to an additional $17.5 million, based on the number of credit
card accounts originated. We separately received $22.5 million from Amazon.com
in exchange for a warrant to acquire up to 4.4 million of our common shares.
This warrant has an exercise price per share of $39.20, is fully vested and
expires on November 8, 2002.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 1999 and the sale of common
stock offered hereby. The information is provided with respect to:
- each person who is known to us to own beneficially more than 5% of the
outstanding shares of our common stock;
- each of our directors;
- each selling stockholder;
- our Chief Executive Officer and each of our four other most highly
compensated executive officers for the year ended December 31, 1998; and
- all of our directors and executive officers as a group (13 persons).
Except as otherwise indicated by footnote, and subject to community
property laws where applicable, the named person has sole voting and investment
power with respect to all of the shares of common stock shown as beneficially
owned. The table includes information regarding the beneficial ownership of
options and warrants that may be exercised within 60 days of September 30, 1999.
An asterisk indicates beneficial ownership of less than 1% of the common stock
outstanding. The percentages shown assume that the underwriters' option to
purchase up to an additional 750,000 shares of common stock from us is not
exercised.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
NAME AND ADDRESS OF -------------------- --------------------
BENEFICIAL OWNER SHARES
------------------- NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Entities Associated with Brentwood Venture
Capital(2)................................. 7,760,111 15.0% 655,058 7,105,053 12.8%
3000 Sand Hill Road,
Building 1, Suite 260
Menlo Park, CA 94025
Amazon.com, L.L.C.(3)........................ 4,400,000 8.5 -- 4,400,000 8.0
1200 Twelfth Avenue South
Suite 1200
Seattle, WA 98144
Entities associated with Moore Capital
Management, Inc.(4)........................ 3,749,999 7.3 326,087 3,423,912 6.2
1251 Avenue of the Americas
New York, NY 10020
Entities associated with Kleiner Perkins
Caufield & Byers(5)........................ 3,000,002 5.8 -- 3,000,002 5.4
2750 Sand Hill Road
Menlo Park, CA 94025
Entity associated with Forrest Binkley & 2,765,040 5.4 -- 2,765,040 5.0
Brown(6)...................................
800 Newport Center Drive
Suite 725
Newport Beach, CA 92660
Entities associated with Trinity 2,755,089 5.3 239,573 2,515,516 4.6
Ventures(7)................................
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
</TABLE>
63
<PAGE> 68
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
NAME AND ADDRESS OF -------------------- --------------------
BENEFICIAL OWNER SHARES
------------------- NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Entities associated with St. Paul Venture 2,719,863 5.3 1,600,000 1,119,863 2.0
Capital(8)...................................
8500 Normandale Lake Blvd.
Suite 1940
St. Paul, MN 55437
Entities associated with Sequoia 1,875,002 3.6 -- 1,875,002 3.4
Capital(9).................................
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Jeffrey D. Brody(2).......................... 7,793,861 15.1 655,058 7,138,803 13.0
Alan N. Colner(4)............................ 3,772,499 7.3 326,087 3,446,412 6.0
Tod H. Francis(7)............................ 2,777,589 5.4 239,573 2,538,016 5.0
Safi U. Qureshey(10)......................... 993,399 1.9 76,195 917,204 1.7
Bruce G. Rigione(11)......................... 749,807 1.4 64,035 685,772 1.2
Jeremy R. Lent and Molly Lent(12)............ 4,434,516 8.6 389,142 4,045,374 7.3
Yinzi Cai(13)................................ 164,660 * 13,870 150,790 *
Timothy Coltrell(14)......................... 1,067,500 2.1 92,739 974,761 1.8
John V. Hashman(15).......................... 286,594 * 24,660 261,934 *
Daniel D. Springer(16)....................... 217,375 * 18,641 198,734 *
All directors and executive officers as a
group (13 persons)......................... 22,341,396 43.2 1,900,000 20,441,396 37.0
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Shares of common stock subject to options,
warrants or other rights to purchase which are currently exercisable or are
exercisable within 60 days after September 30, 1999 are deemed outstanding
for purposes of computing the percentage ownership of the persons holding
such options, warrants or other rights, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. The
address of each of the directors and executive officers named in the table
is c/o NextCard, Inc., 595 Market Street, Suite 1800, San Francisco,
California 94105.
(2) Represents 228,492 shares held by Brentwood Affiliates Fund, L.P.,
5,663,795 shares held by Brentwood Associates VII, L.P., 1,793,115 shares
held by Brentwood Associates VIII, L.P. and 74,709 shares held by Brentwood
Affiliates Fund II, L.P., of which 228,492 shares, 2,843,798 shares,
1,793,115 and 74,709 shares, respectively, are shares of nonvoting stock
that may be converted into an equal number of shares of voting stock
provided that the holder of the shares will not own more than 9.999% of the
voting power of any class of our equity securities. See "Description of
Capital Stock -- Common Stock." Brentwood Affiliates Fund, Brentwood
Associates VII, Brentwood Associates VIII and Brentwood Affiliates II are
also participating in this offering as selling stockholders by offering to
sell 19,288 shares, 478,100 shares, 151,363 shares and 6,306 shares,
respectively. Jeffrey Brody is a general partner of Brentwood Venture
Capital, which is the general partner of each of the entities. He is also a
director of NextCard. Mr. Brody disclaims beneficial ownership of the
shares held by the entities except to the extent of his interest therein.
Amount shown for Mr. Brody includes 33,750 shares issuable upon exercise of
an option that vests within 60 days of September 30, 1999.
(3) Represents 4,400,000 shares issuable upon exercise of a fully vested
warrant.
(4) Includes 3,074,999 shares of common stock held by Moore Global Investments,
Ltd. , and 675,000 shares of non-voting common stock held by Remington
Investment Strategies, Ltd. Moore Capital Management, Inc., a Connecticut
corporation, is vested with investment discretion with respect to portfolio
assets held for the account of Moore Global Investments. Moore Global
Investments and Remington Investment Strategies are also participating in
this offering as selling stockholders by offering to sell 267,391 shares
and 58,696 shares, respectively. Moore Capital Advisors, L.L.C., a New York
limited liability company, is the sole general partner of Remington
Investment Strategies. Mr. Louis M. Bacon is the majority shareholder of
Moore Capital Management, Inc., and is the majority equity holder of Moore
Capital Advisors, L.L.C. As a result, Mr. Bacon, though he disclaims
beneficial ownership of the shares, may be deemed to be the beneficial
owner of the aggregate shares held by Moore Global Investments and
Remington Investment Strategies. Alan Colner is a Managing Director,
Private Equity Investments, at Moore Capital Management, Inc., which is the
trading advisor of Moore Global Investments. He is also a director of
NextCard. Mr. Colner does not have voting or investment power with respect
to the shares of securities owned by Moore Global Investments or Remington
Investment Strategies, and disclaims beneficial ownership of the shares.
The address of Moore Capital Management, Inc. is 1251 Avenue of the
Americas, New York, NY 10020. Amount shown for Mr. Colner includes 22,500
shares issuable upon exercise of an option that vests within 60 days of
September 30, 1999.
(5) Represents 2,764,800 shares held by Kleiner Perkins Caufield & Byers, VIII,
L.P., 160,200 shares held by KPCB VIII Founders Fund, L.P. and 75,002
shares held by KPCB Information Sciences Zaibatsu Fund II, L.P.
(6) Represents the shares held of record by Mesquite Transaction Partners, L.P.
64
<PAGE> 69
(7) Includes 149,886 shares held by Trinity V Side-By-Side Fund, L.P. and
2,605,203 shares held by Trinity Ventures V, L.P. Trinity V Side-By-Side
Fund and Trinity Ventures V are also participating in this offering as
selling stockholders by offering to sell 13,034 shares and 226,539 shares,
respectively. Tod Francis is a general partner of Trinity Ventures, which
is the general partner of Trinity V Side-By-Side Fund, L.P. and Trinity
Ventures V, L.P. He also is a director of NextCard. Mr. Francis disclaims
beneficial ownership of the shares held by the entities except to the
extent of his interest therein. Amount shown for Mr. Francis includes
22,500 shares issuable upon exercise of an option that vests within 60 days
of September 30, 1999.
(8) Represents 74,794 shares held by St. Paul Venture Capital Affiliates Fund
I, LLC and 2,645,069 shares held by St. Paul Venture Capital IV, LLC. St.
Paul Venture Capital Affiliates Fund and St. Paul Venture Capital IV are
also participating in this offering as selling stockholders by offering to
sell 43,999 shares and 1,556,001 shares, respectively.
(9) Represents 4,122 shares held by Sequoia 1997 Fund, 21,564 shares held by
Sequoia International Technology Partners VIII, 1,699,317 shares held by
Sequoia Capital VIII L.P., 112,500 shares held by Sequoia International
Technology Partners VIII (Q) and 37,499 shares held by CMS Partners LLC.
(10) Includes 57,177 shares issuable upon exercise of a warrant and 59,977
shares issuable upon exercise of an option that vests within 60 days of
September 30, 1999. Also includes 682,448 shares held by the Safi Qureshey
Family Trust, of which Safi U. Qureshey is the grantor, and 193,797 shares
held by Skyline Nevada LLC, of which Mr. Qureshey is a trustee.
(11) Includes 42,188 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999. Also includes 2,300 shares owned by
Mr. Rigione's minor son, of which Mr. Rigione disclaims beneficial
ownership.
(12) Includes 381,250 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999.
(13) Includes 40,074 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999. Also includes 160 shares owned by Ms.
Cai's husband, of which Ms. Cai disclaims beneficial ownership.
(14) Includes 146,533 shares issuable upon exercise of options that vest within
60 days of September 30, 1999.
(15) Includes 283,594 shares issuable upon exercise of options that vest within
60 days of September 30, 1999.
(16) Includes 25,937 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999.
65
<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 77,432,715 shares of common stock,
$0.001 par value, 10,000,000 shares of nonvoting common stock, $0.001 par value
and 12,567,285 shares of preferred stock, $0.001 par value. As of September 30,
1999, 46,201,517 shares of common stock were issued and outstanding, including
3,660,110 shares of nonvoting common stock, and no shares of preferred stock
were issued and outstanding. As of September 30, 1999, we had 242 stockholders.
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our Amended and
Restated Certificate of Incorporation to be effective after the closing of this
offering, our bylaws and the provisions of applicable Delaware law.
COMMON STOCK
Each holder of our common stock is entitled to one vote for each share on
all matters to be voted upon by the stockholders.
Subject to the preferences to which holders of any shares of preferred
stock issued may be entitled, holders of our common stock are entitled to
receive ratably dividends and other distributions, if any, that our board of
directors may, from time to time, declare out of funds legally available
therefor. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, holders of common stock would be entitled to share in any of our
assets remaining after the payment of liabilities and the satisfaction of any
liquidation preference granted to the holders of any outstanding shares of
preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights, nor are there any redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares of common stock offered by us in this offering, when issued and paid
for, will be, fully paid and nonassessable. The rights, preferences and
privileges of the holders of the common stock are subject to, and may be
adversely affected by, the rights of the holders of any shares of preferred
stock that we may designate in the future.
NONVOTING COMMON STOCK
Holders of nonvoting common stock will have the same rights, preferences
and privileges as the holders of voting common stock except that the holders of
nonvoting common stock will have no voting rights except with respect to
approval of amendments to our Amended and Restated Certificate of Incorporation
that could adversely affect their rights. Shares of nonvoting common stock may
be converted into shares of common stock by the holder only when the holder's
total shares will not exceed 9.9% of any class of our equity securities
outstanding after giving effect to the conversion or in connection with a widely
disbursed distribution or private placement of shares in certain circumstances.
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by law, without stockholder approval, from time to time, to fix or alter the
rights, preferences and privileges, including voting rights, conversion rights,
dividend rights, redemption privileges and liquidation preferences of any wholly
unissued series of preferred stock. The rights of the holders of the common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any such preferred stock that may be issued in the future. Issuance
of preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more
66
<PAGE> 71
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of our outstanding voting stock. We have no
present plans to issue any shares of preferred stock.
WARRANTS
As of September 30, 1999, we had issued outstanding warrants to acquire
1,023,620 shares of our common stock, at a weighted average exercise price of
$1.28 per share. On November 8, 1999, we issued to Amazon.com, L.L.C. a warrant
to purchase 4,400,000 shares of our common stock at an exercise price of $39.20
per share. These warrants have net exercise provisions under which the holder
may, in lieu of payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares, based on their fair market value of the common
stock at the time of exercise of the warrant, after deducting the exercise price
of the warrant. These warrants expire on dates ranging from May 14, 1999 to May
2003.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED
BYLAWS
We have adopted provisions in our Amended and Restated Certificate of
Incorporation and in our Amended and Restated Bylaws that do the following:
- eliminate the right of stockholders to call a special meeting of
stockholders or bring matters before a special meeting of stockholders;
- require stockholders to give us advance notice of intent to nominate
directors or bring matters before an annual meeting of stockholders;
- eliminate the ability of stockholders to take action by written consent;
- stagger the terms of our board of directors into three classes so that
only one-third of the directors are elected each year, and effectively
provide that directors may not be removed from office other than for
cause;
- provide that vacancies on the board of directors resulting from increases
in the size of the board of directors or from death, resignation,
retirement or removal may only be filled by the board of directors; and
- permit the board of directors to create one or more series of preferred
stock and to issue the preferred shares once the shares have been
designated.
These provisions could adversely affect the rights of the holders of our
common stock by delaying, deferring or preventing a change in control. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of our board of directors and in the policies formulated by the
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control. These provisions are designed
to reduce our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from actual or rumored
takeover attempts. These provisions also may have the effect of preventing
changes in our management.
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<PAGE> 72
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a publicly held Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that the stockholder
became an interested stockholder, unless:
- prior to the date the stockholder became interested, the board of
directors approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced; and
- on or subsequent to the date the stockholder became interested, the
business combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of our
assets involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by us of any of our stock to the interested
stockholder;
- any transaction involving us that has the effect of increasing the
proportionate share of the stock of any class or series beneficially
owned by the interested stockholder; and
- the receipt by the "interested stockholder" of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
REGISTRATION RIGHTS
The holders of approximately 26,000,000 of the aggregate outstanding shares
of our common stock and nonvoting common stock will be entitled to certain
demand registration rights with respect to the registration of the shares of our
common stock under the Securities Act of 1933, as amended. Under the terms of
our Third Amended and Restated Investors' Rights Agreement, we are not required
to effect more than three registrations pursuant to demand rights. The holders
of the shares entitled to "piggyback" registration rights were entitled to
receive notice of this registration and, subject to certain limitations, include
their shares in this registration.
At any time after we become eligible to file a registration statement on
Form S-3, stockholders who are parties to the Rights Agreement may require us to
file an unlimited number of registration statements on Form S-3 with respect to
their shares of common stock, provided that we are not required to effect more
than one registration statement in any 12-month period.
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<PAGE> 73
Each of the foregoing registration rights is subject to certain conditions
and limitations, among them the right of the underwriters in any underwritten
offering to limit the number of shares of common stock held by stockholders with
registration rights to be included in registration statement. We are generally
required to bear all expenses associated with the registration statements,
except underwriting discounts and commissions, as well as to indemnify the
holders of such registration rights, subject to certain limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is BankBoston, N.A.
EquiServe L.P.
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<PAGE> 74
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering (assuming no exercise of the underwriters'
overallotment option), we will have an aggregate of 49,701,517 shares of common
stock and nonvoting common stock outstanding, assuming no exercise of options or
warrants. Of these shares, the 6,900,000 shares sold in our initial public
offering and the 7,000,000 shares sold in this offering, as well as the
1,073,574 shares subject to options exercisable on the date hereof and
registered on our Registration Statement on Form S-8, will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares held by our affiliates, as that term is defined under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below.
SALES OF RESTRICTED SHARES
As of September 30, 1999, 37,912,133 shares of common stock and nonvoting
common stock are deemed restricted shares under Rule 144. In connection with our
initial public offering, stockholders owning 37,667,021 shares of our common
stock signed 180-day lockup agreements, which expired on November 10, 1999. We
expect that, in connection with this offering, our directors, executive
officers, certain private equity funds and selling stockholders will enter into
lockup agreements expiring 90 days from the date of this prospectus covering an
aggregate of 26,514,649 shares of our common stock. After execution of the
90-day lockup agreements, 8,142,173 restricted shares are currently available
for sale in the public market, subject to certain limitations of Rule 144 of the
Securities Act. Beginning 90 days after the date of this prospectus, or earlier
with our consent and the consent of Donaldson, Lufkin & Jenrette Securities
Corporation and Goldman, Sachs & Co., all restricted shares will become
available for sale in the public market, subject to Rule 144 limitations.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the then-outstanding shares of our common stock (approximately 497,015 shares
after giving effect to this offering) and the average weekly trading volume of
our common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 of the Securities Act are subject to
certain restrictions relating to manner of sale, notice and the availability of
current public information about us. A person who is not our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least two years, would be entitled to sell such shares immediately
following this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent may require an opinion of counsel that a proposed
sale of shares comes within the terms of Rule 144 of the Securities Act prior to
effecting a transfer of such shares.
OPTIONS
As of September 30, 1999, options to purchase a total of 1,073,574 shares
of common stock pursuant to the 1997 Stock Plan were exercisable. An additional
5,802,092 shares of common stock were reserved as of September 30, 1999 for
future option grants or direct issuances under the 1997 Stock Plan. See
"Management -- 1997 Stock Plan and Note 8 of notes to Consolidated Financial
Statements.
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<PAGE> 75
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.,
Thomas Weisel Partners LLC, Prudential Securities Incorporated, U.S. Bancorp
Piper Jaffray Inc. and DLJdirect Inc., have severally agreed to purchase from us
and the selling stockholders the number of shares opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
UNDERWRITERS: ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co. .......................................
Thomas Weisel Partners LLC..................................
Prudential Securities Incorporated..........................
U.S. Bancorp Piper Jaffray Inc. ............................
DLJdirect Inc. .............................................
----------
Total............................................. 7,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval, including the absence of any material adverse
change in our business and receipt of acceptable certificates, opinions and
letters from us, our counsel and the independent auditors. The underwriters are
obligated to purchase and accept delivery of all the shares, other than those
shares covered by the over-allotment option described below, if they purchase
any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the offering of the shares to the public, the
representatives may change the public offering price and such concessions.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling stockholders, and the offering expenses to be
paid by us, in connection with this offering. The underwriting fee is equal to
the public offering price per share of common stock less the amount paid by the
underwriters to us, or the selling stockholders as the case may be, per share of
common stock. Offering expenses, all of which we will pay, are expenses incurred
by us in connection with this offering and include filing fees, Nasdaq listing
fees, printing expenses and legal and accounting
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<PAGE> 76
expenses. The amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of our common stock.
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY NEXTCARD STOCKHOLDERS
-------------------- --------------------
NO FULL NO FULL
EXERCISE EXERCISE EXERCISE EXERCISE
<S> <C> <C> <C> <C>
Underwriting fees per share..................... $ $ $ $
Total underwriting fees.........................
Offering expenses per share.....................
Total offering expenses.........................
</TABLE>
An electronic prospectus is available on the web site maintained by
DLJdirect Inc., a selected dealer and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Other than the prospectus in electronic format,
the information on this website relating to this offering is not a part of this
prospectus and has not been approved and/or endorsed by us or any underwriter,
and should not be relied on by prospective investors.
We and the selling stockholders have granted to the underwriters an option,
exercisable for 30 days after the date of this prospectus, to purchase up to
1,050,000 additional shares at the public offering price on the cover page of
this prospectus minus the underwriting fees. The underwriters may exercise this
option solely to cover over-allotments, if any, made in connection with this
offering. To the extent that the underwriters exercise this option, each
underwriter will become obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to that underwriter's
initial purchase commitment.
We and the selling stockholders have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect of any of those liabilities.
We expect that, in connection with this offering, certain stockholders,
including all of our officers and directors and selling stockholders, will enter
into lock-up agreements expiring 90 days from the date of this prospectus
covering an aggregate of approximately 26,305,185 shares of our common stock.
The stockholders signing these agreements will agree not to, during the lock-up
period, without the prior written consent of Donaldson, Lufkin & Jenrette and
Goldman, Sachs & Co.: (1) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or (2)
enter into any swap or other arrangement that transfer all or a portion of the
economic consequences associated with the ownership of any common stock,
regardless of whether any of the transactions described in clause (1) or (2) is
to be settled by the delivery of common stock, or such other securities, in cash
or otherwise. In addition, during this period, we have agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and some of our stockholders have agreed not to make any demand for,
or exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock (other than a registration statement registering options or shares
granted under a stock option plan) without the prior written consent of
Donaldson, Lufkin & Jenrette and Goldman, Sachs & Co.
Other than in the United States, no action has been taken by us, the
selling stockholders or the underwriters that would permit a public offering of
the shares of our common stock included in this offering in any jurisdiction
where action for that purpose is required. The shares included in this offering
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other
72
<PAGE> 77
offering material or advertisement in connection with the offer and sale of any
these shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of our common stock included in this offering in any jurisdiction where
that would not be permitted or legal.
In the event our common stock does not constitute an excepted security
under the provisions of Regulation M promulgated by the Commission, the
underwriters and dealers may engage in passive market making transactions in
accordance with Rule 103. In general, a passive market maker may not bid for or
purchase shares of common stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the common
stock during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market making
may stabilize or maintain the market price of the common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 88
filed public offerings of equity securities, of which 68 have been completed,
and has acted as a syndicate member in an additional 46 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us pursuant to
the underwriting agreement entered into in connection with this offering.
Mark Lieberman, a Thomas Weisel Partners LLC partner, holds 5,625 shares of
our common stock. Mr. Lieberman's shares are restricted from sale, transfer,
assignment or hypothecation until May 14, 2000.
LEGAL MATTERS
The validity of the shares of common stock being offered by NextCard will
be passed upon for NextCard by Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, San Francisco, California, which has acted as our
counsel in connection with this offering. Howard, Rice holds 4,500 shares of our
common stock. Ronald H. Star, a director of Howard, Rice, holds 2,000 shares of
our common stock. Certain federal bank regulatory legal matters described in
this prospectus will be passed upon for NextCard by Sidley & Austin, Washington,
D.C. Pillsbury Madison & Sutro LLP, San Francisco, California, is acting as
counsel for the underwriters in connection with selected legal matters relating
to the shares of common stock offered by this prospectus.]
73
<PAGE> 78
EXPERTS
The consolidated financial statements of NextCard, Inc. and subsidiary as
of December 31, 1997 and 1998, for the period from June 5, 1996 (inception) to
December 31, 1997 and for the year ended December 31, 1998 appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We filed a registration statement on Form S-1 with respect to this offering
of common stock with the Securities and Exchange Commission. This prospectus,
which forms a part of the registration statement, does not contain all of the
information set forth in the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the registration statement, and each such statement is qualified in all
respects by such reference.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, we file reports and other
information with the Securities and Exchange Commission. Copies of the
registration statement as well as our reports and other information we file with
the Securities and Exchange Commission may be examined without charge at the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Copies of all or any portion of
the registration statement and our publicly filed reports can be obtained from
the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed
fees. Please call the Securities and Exchange commission at 1-800-SEC-0330 for
more information about the operation of the public reference rooms. Our filings
are also available to the public at the Securities and Exchange Commission's
website at www.sec.gov.
74
<PAGE> 79
NEXTCARD, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1997 and 1998
and at September 30, 1999 (unaudited).................. F-3
Consolidated Statements of Operations for the period from
June 5, 1996 (inception) to December 31, 1997, the year
ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................ F-4
Consolidated Statements of Changes in Shareholders' Equity
for the period from June 5, 1996 (inception) to
December 31, 1997, the year ended December 31, 1998 and
the nine months ended September 30, 1998 and 1999
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the period from
June 5, 1996 (inception) to December 31, 1997, the year
ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
NextCard, Inc. and subsidiary
We have audited the accompanying consolidated balance sheets of NextCard,
Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the period from June 5, 1996 (inception) to December 31, 1997 and for
the year ended December 31, 1998. These financial statements are the
responsibility of NextCard, Inc.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 NextCard,
Inc. and subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from June 5, 1996 (inception) to
December 31, 1997, and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
February 5, 1999, except as to Note 4,
as to which the date is
May 13, 1999
F-2
<PAGE> 81
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,840 $ 40,134 $ 85,541
Cash and cash equivalents, restricted....................... -- -- 13,993
Credit card loans receivable less allowance for loan losses
of $6,178 at September 30, 1999........................... -- -- 261,836
Prepaid loan fees........................................... -- 2,100 5,145
Equipment and leasehold improvements, net................... 294 2,102 6,939
Prepaid and other assets.................................... 554 1,206 15,452
------- -------- --------
Total assets................................................ $ 3,688 $ 45,542 $388,906
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................... $ -- $ -- $ 2,541
Accounts payable............................................ 135 3,366 3,914
Accrued expenses and other liabilities...................... 766 1,735 16,821
Other borrowings............................................ -- 504 11,879
Secured borrowings.......................................... -- -- 229,129
------- -------- --------
Total liabilities........................................... 901 5,605 264,284
------- -------- --------
Shareholders' equity:
Convertible preferred stock, Series A, $0.001 par value
(2,756 shares authorized, issued and outstanding at
December 31, 1997; 2,735 shares authorized, issued and
outstanding at December 31, 1998), net of costs of
issuance. Liquidation preference: $1,225 at December 31,
1997 and $1,216 at December 31, 1998.................... 3 3 --
Convertible preferred stock, Series B, $0.001 par value
(authorized 7,200 shares at December 31, 1997; 7,997
shares authorized at December 31, 1998; issued and
outstanding 6,354 shares at December 31, 1997 and 1998),
net of costs of issuance. Liquidation preference: $3,530
at December 31, 1997 and 1998........................... 6 6 --
Convertible preferred stock, Series C, $0.001 par value
(authorized 9,621 shares at December 31, 1998; issued
and outstanding 9,133 shares at December 31, 1998), net
of costs of issuance. Liquidation preference: $11,771 at
December 31, 1998....................................... -- 9 --
Convertible preferred stock, Series D, $0.001 par value
(authorized 20,250 shares at December 31, 1998; issued
and outstanding 14,404 shares at December 31, 1998), net
of costs of issuance. Liquidation preference: $38,410 at
December 31, 1998....................................... -- 15 --
Common stock, $0.001 par value (authorized 90,000 shares
at December 31, 1997, 62,897 shares at December 31, 1998
and 87,433 shares at September 30, 1999; issued and
outstanding 4,895, 4,932 and 46,201 shares at December
31, 1997 and 1998 and September 30, 1999)............... 5 5 46
Additional paid-in capital................................ 4,694 63,875 209,918
Deferred stock compensation............................... -- (6,000) (14,935)
Notes receivable from shareholders........................ (35) (26) (13)
Accumulated deficit....................................... (1,886) (17,950) (70,394)
------- -------- --------
Total shareholders' equity.................................. 2,787 39,937 124,622
------- -------- --------
Total liabilities and shareholders' equity.................. $ 3,688 $ 45,542 $388,906
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 82
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Cash and cash equivalents..................... $ 93 $ 502 $ 228 $ 2,585
Credit card loans............................. -- -- -- 7,992
------- -------- ------- --------
Total interest income........................... 93 502 228 10,577
Interest expense................................ -- 62 48 5,762
------- -------- ------- --------
Net interest income............................. 93 440 180 4,815
Provision for loan losses....................... -- -- -- 5,227
------- -------- ------- --------
Net interest income (loss) after provision for
loan losses................................... 93 440 180 (412)
------- -------- ------- --------
Non-interest income:
Servicing and profit and loss sharing......... -- 662 301 341
Interchange fee............................... -- -- -- 1,130
Credit card fees and other.................... -- 35 5 618
------- -------- ------- --------
Total non-interest income....................... -- 697 306 2,089
------- -------- ------- --------
Non-interest expenses:
Salaries and employee benefits................ 1,495 6,730 4,262 15,322
Marketing and advertising..................... 50 4,324 2,201 16,364
Credit card activation and servicing costs.... 1 2,328 1,322 7,116
Occupancy and equipment....................... 137 958 602 2,656
Professional fees............................. 167 520 167 1,106
Amortization of deferred stock compensation... -- 1,800 867 7,096
Amortization of loan structuring fee.......... -- -- -- 2,967
Other......................................... 127 539 310 1,494
------- -------- ------- --------
Total non-interest expenses..................... 1,977 17,199 9,731 54,121
------- -------- ------- --------
Loss before income taxes........................ (1,884) (16,062) (9,245) (52,444)
Provision for income taxes...................... 2 2 -- --
------- -------- ------- --------
Net loss........................................ $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted net loss per common share..... $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Weighted average common shares used in net loss
per common share calculation.................. 1,747 3,166 3,050 24,809
======= ======== ======= ========
Pro forma basic and diluted net loss per common
share (unaudited, see Note 2)................. $ (1.28)
========
Weighted average common shares used in computing
pro forma basic and diluted net loss per
common share (unaudited, see Note 2).......... 41,001
========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 83
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK SERIES A-D COMMON STOCK ADDITIONAL NOTES
---------------- ---------------- PAID-IN DEFERRED STOCK RECEIVABLE FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS DEFICIT
------- ------ ------- ------ ---------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuances of common stock.... -- $ -- 6,773 $ 7 $ 8 $ -- $ -- $ --
Issuances of convertible
preferred stock Series A..... 2,756 3 -- -- 1,201 -- (35) --
Issuances of convertible
preferred stock Series B... 6,354 6 -- -- 3,488 -- -- --
Return of common stock....... -- -- (630) (1) 1 -- -- --
Repurchase of common stock... -- -- (1,248) (1) (4) -- -- --
Net loss from inception to
December 31, 1997.......... -- -- -- -- -- -- -- (1,886)
------- ---- ------- --- -------- -------- ---- --------
Balances at December 31,
1997....................... 9,110 9 4,895 5 4,694 -- (35) (1,886)
Issuances of convertible
preferred stock Series C... 9,133 9 -- -- 11,662 -- -- --
Issuances of convertible
preferred stock Series D... 14,404 15 -- -- 38,351 -- -- --
Issuances of common stock
upon exercise of stock
options.................... -- -- 37 -- 2 -- -- --
Issuance of preferred stock
warrants................... -- -- -- -- 1,375 -- -- --
Return of convertible
preferred stock Series A in
settlement of notes
receivable................. (21) -- -- -- (9) -- 9 --
Deferred stock
compensation............... -- -- -- -- 7,800 (7,800) -- --
Amortization of deferred
stock compensation......... -- -- -- -- -- 1,800 -- --
Net loss..................... -- -- -- -- -- -- -- (16,064)
------- ---- ------- --- -------- -------- ---- --------
Balances at December 31,
1998....................... 32,626 33 4,932 5 63,875 (6,000) (26) (17,950)
Issuances of common stock
upon exercise of stock
options and warrants
(unaudited)................ -- -- 1,743 1 350 -- -- --
Issuance of common stock for
IPO, net of expenses
(unaudited)................ -- -- 6,900 7 126,969 -- -- --
Issuances of common stock
warrants (unaudited)....... -- -- -- -- 2,693 -- -- --
Conversion of preferred stock
to common stock
(unaudited)................ (32,626) (33) 32,626 33 -- -- -- --
Deferred stock compensation
(unaudited)................ -- -- -- -- 16,031 (16,031) 13 --
Amortization of deferred
stock compensation
(unaudited)................ -- -- -- -- -- 7,096 -- --
Net loss (unaudited)......... -- -- -- -- -- -- -- (52,444)
------- ---- ------- --- -------- -------- ---- --------
Balances at September 30,
1999 (unaudited)........... -- $ -- 46,201 $46 $209,918 $(14,935) $(13) $(70,394)
======= ==== ======= === ======== ======== ==== ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Issuances of common stock.... $ 15
Issuances of convertible
preferred stock Series A..... 1,169
Issuances of convertible
preferred stock Series B... 3,494
Return of common stock....... --
Repurchase of common stock... (5)
Net loss from inception to
December 31, 1997.......... (1,886)
--------
Balances at December 31,
1997....................... 2,787
Issuances of convertible
preferred stock Series C... 11,671
Issuances of convertible
preferred stock Series D... 38,366
Issuances of common stock
upon exercise of stock
options.................... 2
Issuance of preferred stock
warrants................... 1,375
Return of convertible
preferred stock Series A in
settlement of notes
receivable................. --
Deferred stock
compensation............... --
Amortization of deferred
stock compensation......... 1,800
Net loss..................... (16,064)
--------
Balances at December 31,
1998....................... 39,937
Issuances of common stock
upon exercise of stock
options and warrants
(unaudited)................ 351
Issuance of common stock for
IPO, net of expenses
(unaudited)................ 126,976
Issuances of common stock
warrants (unaudited)....... 2,693
Conversion of preferred stock
to common stock
(unaudited)................ --
Deferred stock compensation
(unaudited)................ 13
Amortization of deferred
stock compensation
(unaudited)................ 7,096
Net loss (unaudited)......... (52,444)
--------
Balances at September 30,
1999 (unaudited)........... $124,622
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 84
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR
JUNE 5, 1996 ENDED
(INCEPTION) TO DECEMBER NINE MONTHS ENDED
DECEMBER 31, 31, SEPTEMBER 30,
-------------- -------- -------------------
1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $(1,886) $(16,064) $(9,245) $ (52,444)
Adjustments to net loss to arrive at net cash used in
operating activities:
Provision for loan losses.............................. -- -- -- 5,227
Depreciation and amortization.......................... 15 252 139 4,122
Amortization of deferred stock compensation............ -- 1,800 867 7,096
Changes in operating assets and liabilities:
Increase in accounts payable......................... 135 3,231 1,330 548
Increase in accrued expenses......................... 766 969 589 15,086
Increase (decrease) in prepaid and other assets...... (554) (1,377) 181 (9,994)
------- -------- ------- ---------
Net cash used in operating activities.................... (1,524) (11,189) (6,139) (30,359)
INVESTING ACTIVITIES
Net loans originated or collected........................ -- -- -- (247,540)
Loan portfolio acquisition............................... -- -- -- (22,240)
Purchase of Textron Bank, net of cash acquired........... -- -- -- (4,459)
Purchase of equipment and leasehold improvements......... (309) (2,060) (1,037) (5,846)
------- -------- ------- ---------
Net cash used in investing activities.................... (309) (2,060) (1,037) (280,085)
FINANCING ACTIVITIES
Net increase in deposits................................. -- -- -- 2,000
Net change in secured borrowings......................... -- -- -- 229,129
Proceeds from other borrowings........................... -- 545 539 11,673
Payments made on other borrowings........................ -- (41) -- (298)
Proceeds from issuances of convertible preferred stock... 4,663 50,037 11,671 --
Proceeds from issuances of common stock.................. 10 2 1 127,327
Proceeds from settlement of notes receivable............. -- -- -- 13
------- -------- ------- ---------
Net cash provided by financing activities................ 4,673 50,543 12,211 369,844
Net increase in cash and cash equivalents................ 2,840 37,294 5,035 59,400
Cash and cash equivalents at the beginning of period..... -- 2,840 2,840 40,134
------- -------- ------- ---------
Cash and cash equivalents at the end of period........... $ 2,840 $ 40,134 $ 7,875 $ 99,534
======= ======== ======= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest and taxes..... $ 2 $ 23 $ -- $ 2,688
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Unearned stock based compensation...................... $ -- $ 7,800 $ 6,100 $ 16,031
Issuance of preferred stock warrants for loan
structuring/origination fee.......................... $ -- $ 1,375 $ -- $ 2,693
Issuance/return of convertible preferred stock Series
A.................................................... $ 35 $ 9 $ 9 $ --
Issuance of convertible preferred stock Series C....... $ -- $ -- $11,671 $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 85
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS
NextCard, Inc., formerly known as Internet Access Financial Corporation
("NextCard"), was incorporated on June 5, 1996 in the state of California and
reincorporated in Delaware in May 1999 in connection with the initial public
offering ("IPO") (See Note 2), for the purpose of offering Internet-based
consumer financial services. For the period from June 5, 1996 (inception) to
December 31, 1996, NextCard developed and implemented its corporate structure.
Operations during that period consisted of approximately $50,000 in expenses.
Beginning in 1997, NextCard focused on the initial planning and development of
an Internet-based credit card ("NEXTCARD(R) VISA(R)"), and the development of
the necessary systems infrastructure, website, and supporting operations. Prior
to 1998, NextCard was in the development stage.
On December 23, 1997, NextCard began accepting applications for the
NEXTCARD(R) VISA(R), which through September 30, 1999 were issued solely through
a strategic alliance with Heritage Bank of Commerce ("Heritage Bank" or
"Heritage"), a San Jose, California based depository institution. NextCard
originates credit card relationships and services the related credit card
accounts on behalf of Heritage pursuant to a profit and loss sharing agreement.
NextCard markets its credit card products solely through the Internet and
provides online approval and customized customer product pricing. Other key
product features include a customer service interface which enables the customer
to review statements online, review recent account activity, and download data
into different formats.
On September 16, 1999, NextCard acquired all of the outstanding common
stock of Textron National Bank ("TNB"), a wholly owned indirect subsidiary of
Textron Corporation, for $5.0 million over its net book value. TNB had not
actively engaged in the banking business for several years, and on the
acquisition date held $2.6 million of cash and cash equivalents and a single
deposit liability of approximately $540,000. Immediately prior to the closing of
the acquisition, TNB converted into a national bank limited to credit card
operations and changed its name to "NextBank, National Association"
("NextBank"). On September 16, 1999, in connection with the acquisition and
formation of NextBank, all of the issued and outstanding capital stock of
NextCard Funding Corp. ("NCFC") was contributed to NextBank. Accordingly, NCFC
became a wholly owned subsidiary of NextBank, which, in turn, is a wholly owned
subsidiary of NextCard. The acquisition was accounted for using the purchase
method.
NextCard has experienced operating losses to date and had an accumulated
deficit at December 31, 1998 and September 30, 1999. Significant net losses are
expected for the foreseeable future. Since its formation, NextCard has raised
significant capital through the IPO and private placements of equity securities.
Future capital requirements, however, depend on many factors including
NextCard's ability to execute its business plan. NextCard may need to raise
additional capital through the issuance of debt or equity securities. There can
be no assurance that NextCard will be able to raise additional financing, or
that such financing will be available on terms satisfactory to NextCard, if at
all.
F-7
<PAGE> 86
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
INITIAL PUBLIC OFFERING
On May 19, 1999, NextCard completed its IPO in which it sold 6.9 million
shares of its common stock at a price of $20 per share raising $138.0 million in
gross proceeds. Net offering proceeds to NextCard, net of approximately $9.7
million in aggregate underwriters' discounts and commissions and $1.3 million in
related costs, were approximately $127.0 million.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include NextCard and its wholly owned
subsidiary, NextBank. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to prior year
financial statements to conform to the 1999 presentation.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of September 30, 1999 and
the consolidated statements of operations and cash flows for the nine months
ended September 30, 1998 and 1999 and the consolidated statement of changes in
shareholders' equity for the nine months ended September 30, 1999 are unaudited.
In the opinion of management, the accompanying unaudited interim consolidated
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for the fair statement of interim periods. The data
disclosed in these notes to the consolidated financial statements for these
periods is also unaudited. The consolidated statements of operations and cash
flows for the interim periods are not necessarily indicative of the results to
be expected for any other future interim period.
CASH AND CASH EQUIVALENTS AND CONCENTRATION OF CREDIT RISK
Cash and cash equivalents include cash on hand and investments in money
market funds. NextCard considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents. The carrying
amount reported in the balance sheets for cash and cash equivalents approximates
its fair value.
Financial instruments that potentially subject NextCard to concentrations
of credit risk consist principally of cash deposits at financial institutions.
NextCard places its cash deposits with high credit quality financial
institutions. Balances in NextCard's cash accounts exceed the Federal Deposit
Insurance Corporation (FDIC) limit of $100,000 per account.
ALLOWANCE FOR LOAN LOSSES
Provisions for loan losses are made in amounts necessary to maintain the
allowance for loan losses at a level considered by management to be sufficient
to absorb probable net credit losses inherent in the existing loan portfolio. In
evaluating the adequacy of the allowance for loan losses,
F-8
<PAGE> 87
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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. 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 no later than the month
after formal notification of bankruptcy.
At December 31, 1997 and 1998, there was no allowance for loan losses as
NextCard did not own any loans until January 1999 (see Note 5). The following
table presents the change in NextCard's allowance for loan losses for the nine
months ended September 30, 1999 (In thousands):
<TABLE>
<S> <C>
Balance at beginning of period.............................. $ --
Provision for loan losses................................... 5,227
Allowance acquired.......................................... 1,900
Charge-offs................................................. (949)
------
Balance at September 30, 1999............................... $6,178
======
</TABLE>
On July 15, 1999, NextCard exercised its option to purchase all remaining
credit card receivables from Heritage. The acquired portfolio consisted of $21.3
million in outstanding balances. NextCard recorded an allowance for loan losses
of $1.9 million for the Heritage portfolio upon purchase to reflect the expected
loan losses of the acquired portfolio.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed on a straight-line basis over the
estimated useful lives of the respective assets or lease term. Depreciation is
computed using a three-year life for computer equipment and a five-year life for
furniture and office equipment.
INTANGIBLE ASSETS
In connection with the acquisition of TNB (see Note 1), $5.0 million in
goodwill was recorded, representing the excess purchase price over the estimated
fair value of TNB's net assets. The goodwill is being amortized over 15 years on
a straight-line basis.
PROVISION FOR INCOME TAXES
The liability method of accounting is used for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of existing differences between financial
reporting and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carryforwards, using enacted tax laws and rates.
Deferred tax expense represents the net change in the deferred tax asset or
liability balance during the year. This amount,
F-9
<PAGE> 88
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROVISION FOR INCOME TAXES (CONTINUED)
together with income taxes currently payable or refundable for the current year,
represents the total income tax expense for the year.
SERVICING AND PROFIT AND LOSS SHARING REVENUE RECOGNITION
NextCard generates servicing and profit and loss sharing non-interest
income pursuant to the Consumer Credit Card Program Agreement (the "Agreement")
which NextCard executed with Heritage. Under the Agreement, NextCard charges
Heritage for certain credit card origination and servicing costs associated with
credit card accounts originated and shares equally with Heritage in the profit
and loss sharing income (as defined in the Agreement) generated from these
credit card accounts. The servicing and profit or loss sharing income is
recognized when realized based on the terms of the Agreement.
INTEREST INCOME ON CREDIT CARD LOANS
Interest income on credit card loans is recognized based on the principal
amount of the loans outstanding in accordance with the terms of the applicable
account agreement until the outstanding balance is paid or charged off. At that
time, the accrued interest portion of the charged off balance is deducted from
current period interest income.
CREDIT CARD AND INTERCHANGE FEE INCOME
Credit card and interchange fee income includes late and overlimit charges,
cash advance fees, bonus reward fees, processing fees, interchange activity and
other miscellaneous fees. Credit card and interchange fee income is recognized
in the month realized.
MARKETING, ADVERTISING, CREDIT CARD ORIGINATION AND SERVICING COSTS
NextCard expenses all marketing and advertising costs as incurred. Credit
card origination costs are recognized when the account is originated and credit
card servicing costs are recognized as incurred.
COMPREHENSIVE INCOME (LOSS)
NextCard adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") at December 31, 1998. Under SFAS
130, NextCard is required to display comprehensive income (loss) and its
components as part of the financial statements. Other comprehensive income
(loss) includes certain changes in equity that are excluded from net income
(loss). Specifically, SFAS 130 requires unrealized holding gains and losses on
available-for-sale securities, to be included in accumulated other comprehensive
income (loss). NextCard has no material components of other comprehensive loss
and, accordingly, the comprehensive loss is the same as net loss for all periods
presented.
F-10
<PAGE> 89
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises report
financial and other descriptive information about reportable operating segments
in annual financial statements and interim reporting to shareholders. NextCard
adopted SFAS 131 in 1998. NextCard has determined that through September 30,
1999 it has one operating and reportable segment, origination and servicing of
Internet-based credit card relationships for United States cardholders, which is
further described in Note 1.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of NextCard's consolidated financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect amounts reported in the consolidated
financial statements and the accompanying notes. Actual results could differ
from those estimates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. NextCard has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations ("APB Opinion No. 25") in accounting for its stock
options plans.
NET LOSS PER COMMON SHARE
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 123"), for all periods presented. In accordance
with SFAS 128, basic and diluted net loss per common share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Shares associated with stock
options and convertible preferred stock are not included because their inclusion
would be antidilutive (i.e., reduce the net loss per common share). Pro forma
basic and diluted net loss per common share, as presented in the consolidated
statements of operations, has been computed for the nine months ended September
30, 1999 as described above, and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.
F-11
<PAGE> 90
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per common share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net loss.................................. $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted:
Weighted-average shares of common stock
outstanding.......................... 5,242 4,907 4,894 25,703
Less: Weighted-average shares subject to
repurchase........................... (3,495) (1,741) (1,844) (894)
------- -------- ------- --------
Weighted-average shares used in
computing basic and diluted net loss
per common share..................... 1,747 3,166 3,050 24,809
======= ======== ======= ========
Basic and diluted net loss per common
share................................... $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Pro forma:
Net loss................................ $(52,444)
========
Shares used above....................... 24,809
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock
(unaudited).......................... 16,192
--------
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited).......................... 41,001
========
Pro forma basic and diluted net loss per
common share (unaudited)............. $ (1.28)
========
</TABLE>
NextCard has excluded all convertible preferred stock, warrants for common
stock, warrants for convertible preferred stock, outstanding stock options and
shares subject to repurchase from the calculation of diluted loss per common
share because their inclusion would be antidilutive (i.e., reduce the net loss
per common share) for all periods presented. The total number of shares excluded
from the calculations of diluted net loss per common share are 13,975,817,
42,130,854, 26,949,208 and 8,907,728 for the period from inception to December
31, 1997, for the year ended December 31, 1998 and for the nine months ended
September 30, 1998 and 1999, respectively. Such securities, had
F-12
<PAGE> 91
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
they been dilutive, would have been included in the computations of diluted net
loss per common share using the treasury stock method.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," to defer the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. While NextCard currently has no
derivative financial instruments and does not currently engage in hedging
activities, NextCard anticipates engaging in derivative and hedging activity in
the future, and therefore expects to be impacted by the pronouncement. The
impact of SFAS 133 on NextCard's consolidated financial statements, however,
will depend on a variety of factors including the level of future hedging
activity, the types of hedging instruments used and the effectiveness of such
instruments.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following is a summary of equipment and leasehold improvements (In
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
<S> <C> <C>
Computer equipment.......................................... $262 $1,360
Furniture and office equipment.............................. 33 490
Leasehold improvements...................................... 14 518
---- ------
309 2,368
Less: Accumulated depreciation and amortization............. 15 266
---- ------
$294 $2,102
==== ======
</TABLE>
4. CREDIT FACILITIES
During 1998, NextCard entered into a $1,250,000 equipment loan and security
agreement with a finance company. Borrowings under the loan agreement bear
interest at 7.55% per year and are secured by related equipment purchases.
NextCard's ability to borrow under this loan agreement expired on May 31, 1999.
As of December 31, 1998, the loan had an outstanding balance of $504,101 which
was due in the following years: 1999 -- $147,496; 2000 -- $159,026;
2001 -- $171,457; and 2002 -- $26,122.
F-13
<PAGE> 92
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
4. CREDIT FACILITIES (CONTINUED)
In addition, during 1998 NextCard entered into a $1,000,000 lease/loan
financing arrangement with a financing company. The lease/loan financing
arrangement is secured by a pledge of all equipment leased under the arrangement
and bears interest at 7.5% per year. The lease/loan financing arrangement
expires on May 22, 2000 and was unutilized at December 31, 1998.
In February and May 1999, NextCard entered into separate $5 million lines
of credit with a finance company. Borrowings under the lines of credit accrue
interest at 12.25% per year, are repayable in monthly installments and final
payment is due in May 2000 and April 2002, respectively. These lines are secured
by subordinated security interests in all tangible and intangible assets. These
lines of credit had an aggregate outstanding balance of $10.0 million at
September 30, 1999.
5. CREDIT FACILITIES AND SECURED BORROWINGS
Until January 12, 1999, Heritage funded all of the credit card accounts and
loans originated through NextCard's website. Beginning in January 1999, NextCard
began purchasing such credit card receivables from Heritage. Until May 21, 1999,
NextCard utilized a $100.0 million secured borrowing facility extended to NCFC
by Credit Suisse First Boston ("Credit Suisse") to fund the majority of those
receivables. On May 21, 1999, NextCard executed a $300.0 million commercial
paper conduit facility through Barclays Bank PLC and began utilizing this
facility to purchase credit card receivables. Borrowings under this facility are
secured by the purchased receivables. NextCard also used a portion of the
Barclays facility to pay off the $87.8 million balance then outstanding under
the Credit Suisse facility. As of September 30, 1999, $229.1 million was
outstanding under this facility.
In connection with the $100.0 million secured borrowing facility described
above, NextCard paid the bank a fee for services rendered in connection with
structuring the revolving credit facility of $2,100,000 consisting of $725,000
in cash and warrants to purchase 562,500 shares of preferred stock. The
warrants' estimated fair market value was $1,375,000. These warrants, which are
outstanding at September 30, 1999, are immediately exercisable at a price of
$0.22 per warrant. This loan structuring fee was capitalized and was being
amortized on a straight-line basis over the term of the revolving credit
facility. Upon the termination of this facility in May 1999, the then
unamortized amount was expensed.
In addition, on June 23, 1999, NextCard entered into a $150.0 million
facility with ING Barings (U.S.) Capital Markets. NextCard's borrowings under
this facility are secured by all credit card receivables that may be purchased
using this facility. As of September 30, 1999, there were no amounts outstanding
under the ING Barings facility.
6. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
NextCard leases its office space under separate lease agreements and has
operating leases for office equipment. The minimum payments, by year and in the
aggregate, under lease obligations with
F-14
<PAGE> 93
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
RENTAL COMMITMENTS (CONTINUED)
initial or remaining terms of one year or more, some of which contain renewal
options based on the then current fair market values, consist of the following
at December 31, 1998 (In thousands):
<TABLE>
<S> <C>
1999............................................ $ 780
2000............................................ 786
2001............................................ 716
2002............................................ 650
2003............................................ 663
------
$3,595
======
</TABLE>
In connection with NextCard's principal office lease, NextCard executed a
$450,000 irrevocable standby letter of credit in favor of the landlord which
expires on October 31, 1999. This letter of credit can be drawn on by the
landlord under certain circumstances if NextCard defaults on the lease
agreement. Rent expense for the period from inception to December 31, 1997 and
for the year ended December 31, 1998 was $54,800 and $346,855, respectively.
PROCESSING AGREEMENT
In December 1997, NextCard signed a five-year agreement with a third-party
for processing of credit card receivables with a renewal option. The minimum
payments, which must be made by NextCard, by year and in the aggregate, under
the agreement are as follows at December 31, 1998 (In thousands):
<TABLE>
<S> <C>
1999............................................ $ 275
2000............................................ 1,000
2001............................................ 2,500
2002............................................ 3,750
------
$7,525
======
</TABLE>
Under the terms of the processing agreement, NextCard also received a
$500,000 signing bonus from its third party processor which is being recognized
as a reduction of servicing expense on a pro-rata basis over the five-year term
of the contract. Cash payment of the signing bonus was received in January 1998.
The unamortized portion of this bonus is included in accrued expenses and other
liabilities in the consolidated balance sheets.
F-15
<PAGE> 94
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY
NextCard has two classes of authorized stock: common stock and preferred
stock. Each share of convertible preferred stock automatically converted into
shares of common stock at the then effective conversion rate immediately upon
the consummation of the IPO. A total of 32,625,734 of new common shares were
issued.
Under the amended articles of incorporation adopted as of May 13, 1999,
12,567,285 shares of convertible preferred stock are authorized to be issued in
one or more series. Also, 77,432,715 shares of voting common stock are
authorized and 10,000,000 shares of non-voting common stock are authorized.
COMMON STOCK
On July 15, 1996, the Chairman, Chief Executive Officer and President of
NextCard purchased 4,500,000 shares of newly issued common stock for aggregate
consideration of $5,000, 75% of which were issued subject to NextCard's right,
but not its obligation, to repurchase at the original issue price. NextCard's
repurchase rights lapse semi-annually over a four year period, subject to
continuing employment by NextCard. On April 2, 1997, the Chairman and Chief
Executive Officer returned 450,000 of such shares to NextCard without
consideration. Accordingly, as of December 31, 1997, and 1998 and September 30,
1999, 2,081,250, 1,237,500 and 393,750 shares were subject to repurchase,
respectively. In the event that a sale of any such shares to any competitor,
former employee or certain other persons is proposed, NextCard has a right of
first refusal to repurchase such shares at a negotiated price.
On September 18, 1996, NextCard sold 2,272,500 shares of common stock to
three of its employees (two of whom have since left NextCard's employment) for
aggregate consideration of $10,100. Those shares of common stock are subject to
NextCard's right to repurchase at the original issuance price. NextCard's
repurchase rights to ten percent of the stock lapsed at the date of sale and the
repurchase rights to the remaining shares lapse semi-annually over a four year
period subject to continued employment by NextCard. During 1997, one of the
employees returned 180,000 of such shares to NextCard without consideration, and
NextCard exercised its right to repurchase 1,247,625 shares from employees who
left NextCard. As of December 31, 1997 and 1998 and September 30, 1999, 318,938,
212,625 and 106,317 shares remain subject to repurchase, respectively.
Common stock was reserved for issuances as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
<S> <C> <C>
Conversion of convertible preferred stock................... 32,626 --
Exercise of outstanding stock options....................... 6,976 7,434
Shares of common stock available for grant under the 1997
Stock Plan................................................ 1,987 5,802
Exercise of outstanding warrants............................ 1,139 1,024
---------- ----------
42,728 14,260
========== ==========
</TABLE>
F-16
<PAGE> 95
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock issued and outstanding was as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- ---------------------------
SHARES SHARES
OUTSTANDING(1) AMOUNT(2) OUTSTANDING(1) AMOUNT(2)
<S> <C> <C> <C> <C>
Series A.................. 2,756 $1,204 2,735 $ 1,195
Series B-1, B-2........... 6,354 3,494 6,354 3,494
Series C-1, C-2........... -- -- 9,133 11,671
Series D-1, D-2........... -- -- 14,404 38,366
----- ------ ------ -------
9,110 $4,698 32,626 $54,726
===== ====== ====== =======
</TABLE>
- ------------
(1) The per share issuance price for Series A, Series B, Series C, and Series D
was $0.44, $0.56, $1.29 and $2.67, respectively.
(2) Amount is net of issuance costs.
Dividends on each series of convertible preferred stock are noncumulative
and are payable, in any fiscal year, when and as declared by NextCard.
Holders of Series C and D Convertible Preferred Stock were entitled to
receive a liquidation preference prior and in preference to any distribution to
the holders of Series A or Series B Convertible Preferred Stock and the common
shareholders in an amount equal to all declared but unpaid dividends, if any,
attributable to the Series C and D Convertible Preferred Stock, plus $1.29 and
$2.67 per share of Series C and D Convertible Preferred Stock, respectively,
adjusted for any combinations, consolidations, stock distributions or dividends.
The liquidation preference for holders of Series C and D Convertible Preferred
Stock was $11,770,984 at December 31, 1998.
After payment of the prior liquidation preference to Series C and D
Convertible Preferred Stock, holders of Series A and B Convertible Preferred
Stock were entitled, prior and in preference to any common shareholders to
receive an amount equal to all declared but unpaid dividends, if any,
attributable to the Series A and B Convertible Preferred Stock plus $0.44 and
$0.56 per share of Series A and B Convertible Preferred Stock, respectively, as
adjusted for any combinations, consolidations, stock distributions or dividends.
The liquidation preference for holders of Series A Convertible Preferred Stock
was $1,225,000 and $1,215,624 at December 31, 1997 and 1998, respectively. The
liquidation preference for holders of Series B Convertible Preferred Stock was
$3,530,000 at December 31, 1997 and December 31, 1998.
If the distributable assets are insufficient to permit payment to the
Series C and D Preferred Shareholders of their preferential amount, then the
entire amount of distributable assets, shall be distributed pro rata among the
Series C and D Preferred Shareholders in proportion to their respective
preferential amounts. Similarly, if the remaining distributable assets after
payment of the Series C and D Preferred Shareholders' initial liquidation amount
is insufficient to permit payment to the Series A and B Preferred Shareholders
of their preferred amount, then the remaining
F-17
<PAGE> 96
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
distributable assets shall be distributed pro rata among the Series A and B
Preferred Shareholders in proportion to their respective preferential amounts.
Following payment of such liquidation preference, the remaining assets, if
any, will be available for distribution to the holders of NextCard's Common
Stock, except that the holders of the Series C and D Convertible Preferred Stock
are entitled to participate with the holders of NextCard's Common Stock until
holders of Series C Convertible Preferred Stock have received a total of $2.58
per share and the holders of Series D Convertible Preferred Stock have received
a total of $6.67 per share.
Each share of Series A, B-1, C-1 and D-1 Convertible Preferred Stock
carries voting rights ("Voting Preferred"). Each holder of Voting Preferred is
entitled to the number of votes equal to the number of shares of common stock
into which such shares of Voting Preferred held by such Preferred Shareholder
could then be converted; provided, however, that each holder of Series A
Convertible Preferred Stock shall be entitled to the number of votes equal to
the number of shares of common stock into which such shares of Series A
Convertible Preferred Stock held by such Preferred Shareholder could then be
converted, times 1.1. Shares of Series B-2, C-2 and D-2 Convertible Preferred
Stock are non-voting, except as otherwise required by the relevant provisions of
California law.
8. STOCK OPTION PLAN AND WARRANTS
STOCK OPTION PLAN
Under the 1997 Stock Plan ("the Plan"), NextCard offers options to purchase
shares of its common stock to employees, including officers and directors of,
and consultants to, NextCard who are not also employees of NextCard. At December
31, 1997 and 1998, and September 30, 1999, NextCard had reserved 5,130,000,
9,000,000 and 14,625,000 shares of common stock for issuance through the Plan.
The Plan is administered by the Board of Directors. The Board of Directors may
award a number of forms of stock-based compensation to eligible participants
including incentive and nonqualified stock options which generally vest over a
four year period. Restricted stock purchase rights may also be granted under the
Plan.
F-18
<PAGE> 97
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The following summarizes stock option activity and related information
during the period from plan inception to December 31, 1997, the year ended
December 31, 1998, and the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES EXERCISE PRICE PRICE
------ -------------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Outstanding at April 2, 1997 (Plan
inception)................................... -- -- --
Granted.................................... 2,345 $0.04 - $ 0.06 $0.05
Forfeited.................................. (315) $ 0.04 $0.04
------ -------------- -----
Outstanding at December 31, 1997............. 2,030 $0.04 - $ 0.06 $0.05
Granted.................................... 5,419 $0.06 - $ 0.56 $0.16
Exercised.................................. (37) $0.04 - $ 0.06 $0.05
Forfeited.................................. (435) $0.06 - $ 0.33 $0.09
------ -------------- -----
Outstanding at December 31, 1998............. 6,977 $0.04 - $ 0.56 $0.13
Granted.................................... 2,817 $1.67 - $23.94 $9.61
Exercised.................................. (1,352) $0.04 - $ 0.13 $0.06
Forfeited.................................. (1,008) $0.06 - $23.94 $5.00
------ -------------- -----
Outstanding at September 30, 1999
(unaudited)................................ 7,434 $0.04 - $23.94 $3.08
====== ============== =====
Options exercisable at December 31, 1997..... 204 $ 0.04 $0.04
====== ============== =====
Options exercisable at December 31, 1998..... 802 $0.04 - $ 0.13 $0.05
====== ============== =====
Options exercisable at September 30, 1999
(unaudited)................................ 1,074 $0.04 - $ 0.33 $0.08
====== ============== =====
</TABLE>
F-19
<PAGE> 98
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Exercise prices for stock options outstanding as of December 31, 1997 and
1998, and September 30, 1999, and the weighted average remaining contractual
life are as follows (In thousands, except per share data):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------- ----------- ---------------- -----------
<S> <C> <C> <C>
December 31, 1997
$0.04.................................. 1,292 9.5 years 204
$0.05................................ 738 9.8 years --
----- -----
2,030 204
===== =====
December 31, 1998
$0.04................................ 1,203 8.5 years 500
$0.05................................ 2,150 9.6 years 289
$0.06................................ 225 4.6 years --
$0.13................................ 1,433 9.7 years 13
$0.14................................ 1,125 4.7 years --
$0.33................................ 248 9.8 years --
$0.56................................ 593 9.9 years --
----- -----
6,977 802
===== =====
September 30, 1999
$0.04................................ 675 7.9 years 240
$0.05................................ 1,565 9.0 years 437
$0.06................................ 169 4.0 years 28
$0.13................................ 966 9.1 years 86
$0.14................................ 1,125 4.1 years 282
$0.33................................ 264 9.2 years 1
$0.56................................ 591 9.3 years --
$1.67................................ 152 9.4 years --
$6.67................................ 1,305 9.5 years --
$15.00............................... 219 9.6 years --
$23.50............................... 344 9.8 years --
$23.94............................... 59 9.9 years --
----- -----
7,434 1,074
===== =====
</TABLE>
As discussed in Note 2, NextCard has elected to follow APB Opinion No. 25
and related interpretations in accounting for its employee and director
stock-based awards because, as discussed
F-20
<PAGE> 99
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
below, the alternative fair value accounting provided for under SFAS 123
requires use of option valuation models that were not developed for use in
valuing employee stock-based awards. Under APB Opinion No. 25, NextCard does not
recognize compensation expense with respect to such awards if the exercise price
equals or exceeds the fair value of the underlying security on the date of grant
and other terms are fixed.
The fair value of these awards for the purpose of the alternative fair
value disclosures required by SFAS 123 was estimated as of the date of grant
using the minimum value option pricing model. This model was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected life of the
options. Because NextCard's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. For the purposes of
NextCard's pro forma disclosures, the fair value of options granted during the
period ended December 31, 1997, and the year ended December 31, 1998 was
determined using the minimum value method with a risk-free interest rate of
approximately 5.0%, an expected life of five years, and a dividend yield of
zero.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. NextCard's pro
forma information follows (In thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Net Loss:
As reported....................................... $(1,886) $ (16,064)
Pro Forma......................................... (1,889) (16,533)
Basic and diluted net loss per common share:
As reported....................................... $ (1.08) $ (5.07)
Pro Forma......................................... (1.08) (5.22)
</TABLE>
The compensation cost associated with NextCard's stock-based compensation
plans determined using the minimum value method prescribed above did not result
in a material difference from the reported net loss for the period from June 5,
1996 (inception) to December 31, 1997 and the year ended December 31, 1998.
Future pro forma net income results may be materially different from actual
amounts reported.
F-21
<PAGE> 100
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
DEFERRED STOCK COMPENSATION
In connection with certain stock option grants to employees during the year
ended December 31, 1998, NextCard recorded deferred stock compensation of
$7,800,000 representing the difference between the exercise price and the deemed
fair value of NextCard's common stock on the date such stock options were
granted. Such amount is included as a reduction of shareholders' equity and is
being amortized by charges to operations on a graded vesting method over the
corresponding vesting period of each respective option, generally four years. In
the year ended 1998, NextCard recorded amortization of deferred stock
compensation expense of $1,800,000. At December 31, 1998, $6,000,000 of deferred
stock compensation remained unamortized.
WARRANTS
NextCard had outstanding the following warrants to purchase its securities:
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
-------------------------- --------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
WARRANTS PRICE PER WARRANTS PRICE PER
DESCRIPTION OF SERIES ISSUED SHARE ISSUED SHARE
<S> <C> <C> <C> <C>
Common Stock....................... 515 $0.13 - $0.56 1,024 $0.22 - $20.00
Series C-1 Convertible Preferred
Stock.............................. 39 $1.29 -- --
Series D-1 Convertible Preferred
Stock............................ 585 $0.22 - $2.67 -- --
----- -----
1,139 1,024 --
===== =====
</TABLE>
These warrants were issued to third parties for services rendered and loan
fees. At December 31, 1998, and September 30, 1999, 1,079,433 and 973,637
warrants were exercisable, respectively. Expenses related to the deemed fair
market value of these warrants for services rendered by third parties were not
material. As described further in Note 5, NextCard paid a loan structuring fee
of $2,100,000 consisting of $725,000 in cash and 562,500 warrants with a deemed
fair value of $1,375,000. The warrants are exercisable from March 24, 1997 to
March 24, 2007. During the first quarter of 1999, NextCard paid a loan
structuring fee to a finance company of $2,486,000 consisting of $50,000 in cash
and 262,503 warrants with a deemed fair value of $2,436,000. The warrants are
exercisable for two years from the date of the IPO.
9. INCOME TAXES
The provision for income taxes consists of the minimum California state
franchise tax of $1,600 and results in an effective tax rate that differs from
the federal statutory rate primarily due to net operating losses for which a
valuation allowance has been established.
F-22
<PAGE> 101
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
The following is a summary of deferred tax assets (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 95 $ 6,021
Deferred start-up costs................................... 718 541
Deferred revenue.......................................... -- 209
Other..................................................... 32 72
----- -------
Total deferred tax assets................................... 845 6,843
Valuation allowance......................................... (845) (6,843)
----- -------
Net deferred tax assets..................................... $ -- $ --
===== =======
</TABLE>
At December 31, 1998, NextCard had federal and California net operating
loss carryforwards (NOLs) of approximately $14,200,000 available to offset
future taxable income. The NOLs expire beginning in 2012 for federal purposes
and 2005 for California purposes.
Realization of NOLs is dependent on future taxable earnings, if any, the
timing and the amount of which are uncertain. Accordingly, a valuation allowance
in an amount equal to the deferred tax assets as of December 31, 1997 and 1998
has been established to reflect these uncertainties. The change in the valuation
allowance was a net increase of $5,997,783 for the year ended December 31, 1998.
During the period ended December 31, 1997, NextCard provided a valuation
allowance of $845,217.
Utilization of tax carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation could result in expiration of NOLs before full utilization.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1998, and September 30, 1999, the respective
carrying values of NextCard's financial instruments approximated their fair
values. These financial instruments include cash and cash equivalents, accounts
payable, accrued expenses and other liabilities, and certain other assets and
liabilities that are considered financial instruments. Carrying values were
estimated to approximate fair values for these financial instruments as they are
short-term in nature and are receivable or payable on demand.
The fair value of NextCard's long-term borrowings was estimated using a
discounted cash flow model. The discount rates used were based on yield-curves
appropriate for the remaining maturities of the instruments. The fair value of
long-term debt at December 31, 1998 approximated its carrying value.
F-23
<PAGE> 102
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
11. SUBSEQUENT EVENTS (UNAUDITED)
On November 8, 1999, NextCard signed a five-year marketing agreement with
Amazon.com, L.L.C. whereby NextCard and Amazon.com, L.L.C. will join to deliver
co-branded credit card accounts originated on a customized website. NextCard
will pay to Amazon.com, L.L.C. an origination fee for each co-branded credit
card account, and will pay certain additional compensation including per account
renewal fees on each account's anniversary date. Minimum account payments of
$85.0 million (subject to performance requirements) will be made by NextCard to
Amazon.com, L.L.C. over the term of the agreement. In addition, based on the
number of credit card accounts originated, NextCard could pay up to an
additional $17.5 million. Separately, NextCard received $22.5 million from
Amazon.com, L.L.C. in exchange for a warrant to acquire up to 4.4 million common
shares of NextCard. This warrant has an exercise price per share of $39.20, is
fully vested and expires on November 8, 2002.
In addition, on November 12, 1999, NextCard entered into a $220 million
commercial paper conduit facility with First Union Securities. NextCard
borrowings under this facility are secured by all credit card receivables that
may be purchased using funds from this facility.
F-24
<PAGE> 103
[INSIDE BACK COVER OF PROSPECTUS]
[MY VISA WEB PAGE]
<PAGE> 104
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
LOGO
7,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL SECURITIES
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of NextCard
have not changed since the date hereof.
- --------------------------------------------------------------------------------
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by us in
connection with the sale of the common stock we are offering, other than
underwriting commissions and discounts. All amounts, except the SEC registration
fee and the NASD Filing Fee, are estimates.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ------
<S> <C>
SEC registration fee........................................ $
NASD filing fee.............................................
Blue Sky fees and expenses..................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer Agent and Registrar fees...........................
Miscellaneous expenses......................................
------
Total............................................. $
======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, our Amended and Restated Certificate of
Incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of duty of loyalty to us or to our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
The Amended and Restated Certificate of Incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our Amended and Restated
Certificate of Incorporation covers negligence and gross negligence on the part
of indemnified parties. The Amended and Restated Certificate of Incorporation
also permits us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether Delaware law would permit indemnification.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify such
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in our right, arising out of
such person's services as a director or officer to us, any subsidiary of us or
any other company or enterprise to which the person provides services at our
request.
The underwriting agreement (Exhibit 1.1) provides for indemnification by
our underwriters, our directors, our officers who sign the registration
statement, and our controlling persons for certain
II-1
<PAGE> 106
liabilities, including liabilities arising under the Securities Act, and affords
certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On July 15, 1996, we issued 4,500,000 shares of common stock to our
founders for an aggregate consideration of $5,000. Of such shares, 450,000
subsequently were transferred to us as a capital contribution. A portion of the
remaining 4,050,000 shares held by the founders are subject to our repurchase
right. See "Certain Transactions."
On September 18, 1996, we issued an aggregate of 2,272,500 shares of common
stock to certain key employees for an aggregate consideration of $10,100. Of
such shares, 180,000 were transferred to us as capital contributions and
1,247,625 were repurchased by us at a repurchase price of $0.004 per share.
From December 1996 to March 1997, we issued an aggregate of 607,812 shares
of Series A Preferred Stock (converted on May 14, 1999 into 2,756,250 shares of
common stock) to 27 accredited investors for an aggregate consideration of
$1,225,000. We subsequently cancelled 4,688 shares convertible into 21,056
common shares) in settlement of the outstanding balance attributable to a single
promissory note.
On April 2, 1997, we issued one consultant a warrant to purchase 67,500
shares of common stock at an exercise price of $0.44 per share. On May 7, 1999,
this warrant was exercised by such consultant in full for cash.
On May 15, 1997, we issued one consultant a warrant to purchase 95,963
shares of common stock at an exercise price of $0.56 per share. This warrant
vests 1/8 every six months, commencing on May 15, 1997. On August 15, 1997, we
issued the same consultant an additional warrant to purchase 70,677 shares of
common stock at an exercise price of $0.56 per share. We issued both warrants in
connection such consultant's provision of certain consulting services to us. On
March 31, 1999, we issued a total of 106,663 shares of our common stock to the
consultant upon such consultant's exercise in full of the August 15, 1997
warrant and of the vested amount of the May 15, 1997 warrant, in each case for
cash. On October 1, 1999, we issued an additional 11,992 shares of our common
stock to such consultant upon his exercise for cash of an additional vested
amount of the May 15, 1997 warrant.
From August to September 1997, we issued an aggregate of 1,412,000 shares
of Series B-1 and Series B-2 Preferred Stock (converted on May 14, 1999 into
6,354,000 shares of common stock) to 23 accredited investors for an aggregate
consideration of $3,530,000.
On August 15, 1997, we issued one consultant warrants to purchase 70,677
shares of common stock and 95,963 shares of common stock, respectively, at an
exercise price of $0.56 per share in connection with such consultant's provision
of certain consulting services to us. Such consultant subsequently became one of
our directors and surrendered to us the warrant to purchase 95,963 shares of
common stock in exchange for a non-statutory option to purchase 95,963 shares of
common stock, at an exercise price of $0.56 per share. The remaining outstanding
warrant is exercisable, in whole or in part, in exchange for cash or for shares
equal to the value of the warrant. In March 1999, this consultant assigned 2,250
shares of such warrant to each of six persons, for an aggregate assignment of
13,500 shares. Each of the six assignees has exercised his or her warrants for
cash.
On November 6, 1997, we issued one consultant a warrant to purchase 8,100
shares of common stock at an exercise price of $0.56 per share in connection
with such consultant's provision of certain consulting services to us. The
warrant is exercisable, in whole or in part, in exchange for cash or shares
equal to the value of the warrant.
II-2
<PAGE> 107
On December 10, 1997, we issued one consultant a warrant to purchase 18,000
shares of common stock at an exercise price of $0.56 per share in connection
with such consultant's provision of certain consulting services to us. The
warrant was exercised for cash on June 19, 1999.
On December 10, 1997, we issued one consultant a warrant to purchase 4,500
shares of common stock at an exercise price of $0.56 per share in connection
with such consultant's provision of certain consulting services to us. In April
1999, we issued 4,500 shares of our common stock to such consultant upon her
exercise for cash of the warrant.
On February 24, 1998, we issued our legal counsel a warrant to purchase
4,500 shares of common stock at an exercise price of $0.44 per share in
connection such legal counsel's provision of legal services to us. The warrant
was exercised for cash on June 1, 1999.
From May to June 1998, we issued an aggregate of 2,029,480 shares of Series
C-1 and Series C-2 Preferred Stock (converted on May 14, 1999 into 9,132,660
shares of common stock) to 24 accredited investors for an aggregate
consideration of $11,770,984.
On June 1, 1998, we issued one financial institution a warrant to purchase
8,621 shares of Series C-1 Preferred Stock at an exercise price of $1.29 per
share in connection with the execution of a loan and security agreement. Upon
the closing of our initial public offering, the warrant became exercisable for
38,795 shares of our common stock at an exercise price of $1.29 per share.
On July 28, 1998, we issued one former director a warrant to purchase
67,500 shares of common stock for an exercise price of $0.13 in connection with
such individual's service as a member of our board of directors. This warrant
was exercised in full for cash on May 7, 1999.
On July 28, 1998, we issued one consultant a warrant to purchase 108,198
shares of common stock for an exercise price of $0.56 per share. This warrant
was exercised in full for cash on May 7, 1999.
In November 1998, we issued an aggregate of 13,200,871 shares of Series D-1
and D-2 Preferred Stock (converted on May 14, 1999 into 14,403,920 shares of
common stock) to 45 accredited investors for an aggregate consideration of
$38,410,452.
On November 5, 1998, we issued to Silicon Valley Bank a warrant to purchase
5,000 shares of Series D-1 Preferred Stock at an exercise price of $2.67 per
share in connection with its provision of our revolving line of credit. Upon the
closing of our initial public offering, the warrant became exercisable for
22,500 shares of our common stock. The warrant is exercisable at any time, in
whole or in part, prior to November 5, 2003, in exchange for cash or shares
equal to the value of the warrant.
On December 29, 1998, we issued to NextCard Funding Corp. one warrant to
purchase 125,000 shares of Series D-1 Preferred Stock (converted on May 14, 1999
into 562,500 shares of common stock) at an exercise price of $0.22 per share in
connection with the establishment of a secured lending facility arranged by
Credit Suisse First Boston. The warrant is exercisable, in whole or in part, at
any time prior to December 29, 2005, for cash or shares equal to the value of
the warrant. The warrant has been transferred to Credit Suisse First Boston as
partial payment for an origination fee.
On each of February 9, 1999 and March 29, 1999, we issued to Comdisco,
Inc., a warrant to purchase 29,167 shares of Series D-1 Preferred Stock
(converted on May 14, 1999 into 131,252 shares of common stock) at an exercise
price of $2.67 per share in connection with the execution of a loan and security
agreement. The warrants are exercisable, in whole or in part, at any time prior
to two years after the closing of our initial public offering, for cash or
shares equal to the value of each warrant.
On February 18, 1999, we issued to each of consultants a warrant to
purchase 500 shares of Series D-1 Preferred Stock (converted on May 14,1999 into
2,250 shares of common stock) at an
II-3
<PAGE> 108
exercise price of $0.44 per share in connection with such consultants' provision
of consulting services to us. The warrants are exercisable, in whole or in part,
in exchange for cash or shares equal to the value of the warrant.
On March 11, 1999, we issued one consultant a warrant to purchase 11,250
shares of Series D-1 Preferred Stock at an exercise price of $2.67 per share in
connection with such consultant's provision of consulting services to us. The
warrant is exercisable, in whole or in part, in exchange for cash or shares
equal to the value of the warrant.
On May 14, 1999, we issued to Comdisco, Inc. a warrant to purchase 42,857
shares of common stock at an exercise price of $114.00 per share in connection
with a $5 million advance under our loan and security agreement. The warrant is
exercisable in whole or in part, at any time prior to two years after the
closing of our initial public offering, for cash or shares equal to the value of
the warrant.
On July 13, 1999, we issued one consultant a warrant to purchase 2,250
shares of common stock at an exercise price of $6.67 per share in connection
with such consultant's provision of consulting services to us. The warrant is
exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
On August 15, 1999, we issued Incurrent Solutions, Inc. a warrant to
purchase 2,000 shares of common stock at an exercise price of $20.00 per share
in connection with Incurrent's provision of computer consulting services to us.
The warrant is subject to a one-year performance condition, after which it shall
become exercisable, in whole or in part, in exchange for cash or shares equal to
the value of the warrant.
On November 8, 1999, we issued to Amazon.com a warrant to purchase
4,400,000 shares of common stock at an exercise price of $39.20 per share in
conjunction with the execution of a co-branded credit card marketing
arrangement. The warrant is exercisable, in whole or in part, in exchange for
cash or shares equal to the value of the warrant.
Since our inception, we have issued options to purchase an aggregate of
10,180,090 shares of our common stock to a number of our employees, directors
and consultants.
The issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances of stock options described above were deemed
exempt from registration under the Securities Act in reliance upon Rule 701
promulgated under the Securities Act. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
II-4
<PAGE> 109
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
1.1++ Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
3.2++ Amended and Restated Bylaws (filed as Exhibit 3.2 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
4.1++ Form of Stock Certificate (filed as Exhibit 4.1 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
4.2++ Warrant to Purchase Common Stock (filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the period ended
September 30, 1999 and incorporated herein by reference).
5.1++ Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of issuance
of the common stock registered hereby.
10.1++ Form of Indemnification Agreement between NextCard and each
of its officers and directors (filed as Exhibit 10.1 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.2++ Amended and Restated Stock Restriction Agreement dated March
1999 between NextCard and Jeremy Lent (filed as Exhibit 10.2
to our Registration Statement on Form S-1 (No. 333-74755)
and incorporated herein by reference).
10.3++ Stock Purchase and Restriction Agreement dated September 18,
1996 between NextCard and Timothy Coltrell (filed as Exhibit
10.3 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.4++ Form of Subscription Agreement for Series A Preferred Stock
(filed as Exhibit 10.4 to our Registration Statement on Form
S-1 (No. 333-74755) and incorporated herein by reference).
10.5++ Series B Preferred Stock Purchase Agreement dated August 15,
1997 among NextCard and certain investors (filed as Exhibit
10.5 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.6++ Office Lease dated September 24, 1997 between NextCard and
Market & Second, Inc., as amended (filed as Exhibit 10.6 to
our Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.7++ 1997 Stock Plan and form of Option Agreement under 1997
Stock Plan (filed as Exhibit 10.7 to our Registration
Statement on Form S-1 (No. 333-74755) and incorporated
herein by reference).
10.8++ Consumer Credit Card Program Agreement dated November 25,
1997 between NextCard and Heritage Bank of Commerce (filed
as Exhibit 10.8 to our Registration Statement on Form S-1
(No. 333-74755) and incorporated herein by reference).
10.9++ Remittance Processing Services Agreement dated December 1,
1997 between Heritage Bank of Commerce and National
Processing Company (filed as Exhibit 10.9 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.10++ Professional Services Agreement dated October 14, 1998
between Heritage Bank of Commerce and Response Data
Corporation (filed as Exhibit 10.10 to our Registration
Statement on Form S-1 (No. 333-74755) and incorporated
herein by reference).
</TABLE>
II-5
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.11++ Service Agreement dated December 22, 1997 between NextCard
and First Data Resources Inc. (filed as Exhibit 10.11 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.12++ Master Services Agreement dated December 23, 1997 between
NextCard and Exodus Communications, Inc. (filed as Exhibit
10.12 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.13++ License Agreement dated May 1, 1998 between NextCard and
Binary Compass Enterprises, Inc. (filed as Exhibit 10.13 to
our Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.14++ Series C Preferred Stock Purchase Agreement dated May 13,
1998 among NextCard and certain investors (filed as Exhibit
10.14 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.15++ Sublease dated May 15, 1998 between NextCard and KAO
Infosystems Company (filed as Exhibit 10.15 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.16++ Master Lease Agreement dated May 22, 1998 between NextCard
and Comdisco, Inc. (filed as Exhibit 10.16 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.17++ Loan and Security Agreement dated June 17, 1998 by and
between NextCard and Lighthouse Capital Partners II, L.P.
(filed as Exhibit 10.17 to our Registration Statement on
Form S-1 (No. 333-74755) and incorporated herein by
reference.)
10.18++ Cardholder Rewards Program Agreement dated June 22, 1998
between NextCard and Intellipost Corporation (subsequently
renamed MyPoints.com) (filed as Exhibit 10.18 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.19++ Form of Bottom Dollar Network Membership Agreement (filed as
Exhibit 10.19 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.)
10.20++ Series D Preferred Stock Purchase Agreement dated November
5, 1998 among NextCard and certain investors (filed as
Exhibit 10.20 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.)
10.21+++ Loan Agreement dated December 29, 1998 between
NextCardFunding Corp. and Credit Suisse First Boston (filed
as Exhibit 10.21 to our Registration Statement on Form S-1
(No. 333-74755) and incorporated herein by reference.)
10.22+++ Account Origination Agreement dated December 29, 1998 among
NextCard, NextCard Funding Corp. and Heritage Bank of
Commerce (filed as Exhibit 10.22 to our Registration
Statement on Form S-1 (No. 333-74755) and incorporated
herein by reference.)
10.23++ Employment Agreement dated as of January 1, 1999 between
NextCard and Jeremy R. Lent (filed as Exhibit 10.23 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.24++ Subordinated Loan and Security Agreement dated February 9,
1999 between NextCard and Comdisco, Inc. (filed as Exhibit
10.24 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.)
10.25++ Consulting Agreement dated as of January 20, 1999 between
NextCard and Bruce Rigione (filed as Exhibit 10.25 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.
</TABLE>
II-6
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.27++ Employee Stock Purchase Plan (filed as Exhibit 10.27 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.
10.26++ Amendment Number One to Subordinated Loan and Security
Agreement dated as of February 9, 1999 between NextCard,
Inc., as Borrower, and Comdisco, Inc. as Lender (filed as
Exhibit 10.26 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.
10.27+++ Amended and Restated Pooling and Servicing Agreement, dated
as of May 21, 1999, among NextCard Funding Corp, as
Transferor, NextCard, Inc., as Servicer, and The Bank of New
York, as Trustee (filed as Exhibit 10.1 to our Quarterly
Report of Form 10-Q for the period ended June 30, 1999 and
incorporated herein by reference).
10.28+++ Series 1999-1 Supplement, dated as of May 21, 1999, to the
Amended and Restated Pooling and Servicing Agreement, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, and the Bank of New York, as Trustee (filed as
Exhibit 10.2 to our Quarterly Report of Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference).
10.29+++ Series 1999-2 Supplement, dated as of May 21, 1999, to the
Amended and Restated Pooling and Servicing Agreement, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, and the Bank of New York, as Trustee (filed as
Exhibit 10.3 to our Quarterly Report of Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference).
10.30+++ Amended and Restated Account Origination Agreement dated May
21, 1999, among NextCard, NextCard Funding Corp. and
Heritage Bank of Commerce (filed as Exhibit 10.4 to our
Quarterly Report of Form 10-Q for the period ended June 30,
1999 and incorporated herein by reference).
10.31+++ Amendment No. 1, dated July 15, 1999, to Amended and
Restated Account Origination Agreement, among NextCard,
NextCard Funding Corp. and Heritage Bank of Commerce (filed
as Exhibit 10.5 to our Quarterly Report of Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference).
10.32+++ Certificate Purchase Agreement, dated May 21, 1999, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, Sheffield Receivables Corporation, as Purchaser,
and Barclays Bank PLC, as Agent (filed as Exhibit 10.6 to
our Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.33+++ Certificate Purchase Agreement, dated June 16, 1999, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, Holland Limited Securitization, Inc., as
Purchaser, and ING Baring (U.S.) Capital Markets LLC, as
Agent (filed as Exhibit 10.7 to our Quarterly Report of Form
10-Q for the period ended June 30, 1999 and incorporated
herein by reference).
10.34+++ Co-Branded Bankcard Agreement dated as of November 8, 1999
between NextCard, Inc. and Amazon.com, L.L.C. (filed as
Exhibit 10.1 to our Registration Statement on Form 10-Q for
the period ended September 30, 1999 and incorporated herein
by reference).
10.35 Amendment No. 4 to Office Lease, dated as of June 30, 1999,
by and between NextCard, Inc. and market and Second, Inc.
10.36+ Amended and Restated Pooling and Servicing Agreement, dated
as of May 21, 1999 between NextBank, N.A. as Transferor and
Servicer, and the Bank of New York, as Trustee.
</TABLE>
II-7
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.37+ Certificate Purchase Agreement, dated as of November 10,
1999, among NextBank, N.A. as the Transferor and the
Servicer, Valuable Funding Capital Corporation, as the
Purchaser, and First Union Securities, Inc., as the
Administrative Agent.
23.1++ Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
+ Portions redacted pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission.
++ To be filed by amendment or incorporated therein by reference in connection
with this offering of common stock.
+++
(a) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreements certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
our payment of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offerings of such securities at that time shall be
deemed to be the initial bona fide offerings thereof.
II-8
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act, we have had duly caused
this Form S-1 registration statement to be signed by the undersigned, thereunto
duly authorized, in the city of San Francisco, State of California, on the 19th
day of November, 1999.
NEXTCARD, INC.
By: /s/ JEREMY R. LENT
------------------------------------
Jeremy R. Lent
Chairman of the Board, Chief
Executive Officer and President
Each person whose signature appears below constitutes and appoints John V.
Hashman and Robert Linderman as his true and lawful attorneys-in-fact and
agents, with full power of substitution for him in any and all capacities, to
sign any and all amendments (including post-effective amendments) and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorney-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person.
Pursuant to the requirements of the Securities Act, this to registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JEREMY R. LENT Chairman of the Board, Chief November 19, 1999
- --------------------------------------------------- Executive Officer, President
Jeremy R. Lent and Director (Principal
Executive Officer)
/s/ JOHN V. HASHMAN Chief Financial Officer November 19, 1999
- --------------------------------------------------- (Principal Financial and
John V. Hashman Accounting Officer)
/s/ JEFFREY D. BRODY Director November 19, 1999
- ---------------------------------------------------
Jeffrey D. Brody
/s/ ALAN N. COLNER Director November 19, 1999
- ---------------------------------------------------
Alan N. Colner
/s/ TOD H. FRANCIS Director November 19, 1999
- ---------------------------------------------------
Tod H. Francis
/s/ SAFI U. QURESHEY Director November 19, 1999
- ---------------------------------------------------
Safi U. Qureshey
/s/ BRUCE G. RIGIONE Director November 19, 1999
- ---------------------------------------------------
Bruce G. Rigione
</TABLE>
II-9
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
1.1++ Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
3.2++ Amended and Restated Bylaws (filed as Exhibit 3.2 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
4.1++ Form of Stock Certificate (filed as Exhibit 4.1 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
4.2++ Warrant to Purchase Common Stock (filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the period ended
September 30, 1999 and incorporated herein by reference).
5.1++ Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of issuance
of the common stock registered hereby.
10.1++ Form of Indemnification Agreement between NextCard and each
of its officers and directors (filed as Exhibit 10.1 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.2++ Amended and Restated Stock Restriction Agreement dated March
1999 between NextCard and Jeremy Lent (filed as Exhibit 10.2
to our Registration Statement on Form S-1 (No. 333-74755)
and incorporated herein by reference).
10.3++ Stock Purchase and Restriction Agreement dated September 18,
1996 between NextCard and Timothy Coltrell (filed as Exhibit
10.3 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.4++ Form of Subscription Agreement for Series A Preferred Stock
(filed as Exhibit 10.4 to our Registration Statement on Form
S-1 (No. 333-74755) and incorporated herein by reference).
10.5++ Series B Preferred Stock Purchase Agreement dated August 15,
1997 among NextCard and certain investors (filed as Exhibit
10.5 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.6++ Office Lease dated September 24, 1997 between NextCard and
Market & Second, Inc., as amended (filed as Exhibit 10.6 to
our Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.7++ 1997 Stock Plan and form of Option Agreement under 1997
Stock Plan (filed as Exhibit 10.7 to our Registration
Statement on Form S-1 (No. 333-74755) and incorporated
herein by reference).
10.8++ Consumer Credit Card Program Agreement dated November 25,
1997 between NextCard and Heritage Bank of Commerce (filed
as Exhibit 10.8 to our Registration Statement on Form S-1
(No. 333-74755) and incorporated herein by reference).
10.9++ Remittance Processing Services Agreement dated December 1,
1997 between Heritage Bank of Commerce and National
Processing Company (filed as Exhibit 10.9 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.10++ Professional Services Agreement dated October 14, 1998
between Heritage Bank of Commerce and Response Data
Corporation (filed as Exhibit 10.10 to our Registration
Statement on Form S-1 (No. 333-74755) and incorporated
herein by reference).
10.11++ Service Agreement dated December 22, 1997 between NextCard
and First Data Resources Inc. (filed as Exhibit 10.11 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
10.12++ Master Services Agreement dated December 23, 1997 between
NextCard and Exodus Communications, Inc. (filed as Exhibit
10.12 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.13++ License Agreement dated May 1, 1998 between NextCard and
Binary Compass Enterprises, Inc. (filed as Exhibit 10.13 to
our Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.14++ Series C Preferred Stock Purchase Agreement dated May 13,
1998 among NextCard and certain investors (filed as Exhibit
10.14 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference).
10.15++ Sublease dated May 15, 1998 between NextCard and KAO
Infosystems Company (filed as Exhibit 10.15 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.16++ Master Lease Agreement dated May 22, 1998 between NextCard
and Comdisco, Inc. (filed as Exhibit 10.16 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.17++ Loan and Security Agreement dated June 17, 1998 by and
between NextCard and Lighthouse Capital Partners II, L.P.
(filed as Exhibit 10.17 to our Registration Statement on
Form S-1 (No. 333-74755) and incorporated herein by
reference.)
10.18++ Cardholder Rewards Program Agreement dated June 22, 1998
between NextCard and Intellipost Corporation (subsequently
renamed MyPoints.com) (filed as Exhibit 10.18 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.19++ Form of Bottom Dollar Network Membership Agreement (filed as
Exhibit 10.19 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.)
10.20++ Series D Preferred Stock Purchase Agreement dated November
5, 1998 among NextCard and certain investors (filed as
Exhibit 10.20 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.)
10.21+++ Loan Agreement dated December 29, 1998 between
NextCardFunding Corp. and Credit Suisse First Boston (filed
as Exhibit 10.21 to our Registration Statement on Form S-1
(No. 333-74755) and incorporated herein by reference.)
10.22+++ Account Origination Agreement dated December 29, 1998 among
NextCard, NextCard Funding Corp. and Heritage Bank of
Commerce (filed as Exhibit 10.22 to our Registration
Statement on Form S-1 (No. 333-74755) and incorporated
herein by reference.)
10.23++ Employment Agreement dated as of January 1, 1999 between
NextCard and Jeremy R. Lent (filed as Exhibit 10.23 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.)
10.24++ Subordinated Loan and Security Agreement dated February 9,
1999 between NextCard and Comdisco, Inc. (filed as Exhibit
10.24 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.)
10.25++ Consulting Agreement dated as of January 20, 1999 between
NextCard and Bruce Rigione (filed as Exhibit 10.25 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.
10.27++ Employee Stock Purchase Plan (filed as Exhibit 10.27 to our
Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference.
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
10.26++ Amendment Number One to Subordinated Loan and Security
Agreement dated as of February 9, 1999 between NextCard,
Inc., as Borrower, and Comdisco, Inc. as Lender (filed as
Exhibit 10.26 to our Registration Statement on Form S-1 (No.
333-74755) and incorporated herein by reference.
10.27+++ Amended and Restated Pooling and Servicing Agreement, dated
as of May 21, 1999, among NextCard Funding Corp, as
Transferor, NextCard, Inc., as Servicer, and The Bank of New
York, as Trustee (filed as Exhibit 10.1 to our Quarterly
Report of Form 10-Q for the period ended June 30, 1999 and
incorporated herein by reference).
10.28+++ Series 1999-1 Supplement, dated as of May 21, 1999, to the
Amended and Restated Pooling and Servicing Agreement, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, and the Bank of New York, as Trustee (filed as
Exhibit 10.2 to our Quarterly Report of Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference).
10.29+++ Series 1999-2 Supplement, dated as of May 21, 1999, to the
Amended and Restated Pooling and Servicing Agreement, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, and the Bank of New York, as Trustee (filed as
Exhibit 10.3 to our Quarterly Report of Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference).
10.30+++ Amended and Restated Account Origination Agreement dated May
21, 1999, among NextCard, NextCard Funding Corp. and
Heritage Bank of Commerce (filed as Exhibit 10.4 to our
Quarterly Report of Form 10-Q for the period ended June 30,
1999 and incorporated herein by reference).
10.31+++ Amendment No. 1, dated July 15, 1999, to Amended and
Restated Account Origination Agreement, among NextCard,
NextCard Funding Corp. and Heritage Bank of Commerce (filed
as Exhibit 10.5 to our Quarterly Report of Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference).
10.32+++ Certificate Purchase Agreement, dated May 21, 1999, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, Sheffield Receivables Corporation, as Purchaser,
and Barclays Bank PLC, as Agent (filed as Exhibit 10.6 to
our Registration Statement on Form S-1 (No. 333-74755) and
incorporated herein by reference).
10.33+++ Certificate Purchase Agreement, dated June 16, 1999, among
NextCard Funding Corp., as Transferor, NextCard, Inc., as
Servicer, Holland Limited Securitization, Inc., as
Purchaser, and ING Baring (U.S.) Capital Markets LLC, as
Agent (filed as Exhibit 10.7 to our Quarterly Report of Form
10-Q for the period ended June 30, 1999 and incorporated
herein by reference).
10.34+++ Co-Branded Bankcard Agreement, dated as of November 8, 1999
between NextCard, Inc. and Amazon.com, L.L.C. (filed as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the
period ended September 30, 1999 and incorporated herein by
reference.
10.35 Amendment No. 4 to Office Lease, dated as of June 30, 1999,
by and between NextCard, Inc. and market and Second, Inc.
10.36+ Amended and Restated Pooling and Servicing Agreement, dated
as of May 21, 1999 between NextBank, N.A. as Transferor and
Servicer, and the Bank of New York, as Trustee.
10.37+ Certificate Purchase Agreement, dated as of November 10,
1999, among NextBank, N.A. as the Transferor and the
Servicer, Valuable Funding Capital Corporation, as the
Purchaser, and First Union Securities, Inc., as the
Administrative Agent.
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
23.1++ Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
+ Portions redacted pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission.
++ To be filed by amendment or incorporated herein by reference in connection
with this offering of the common stock.
<PAGE> 1
EXHIBIT 10.36
AMENDMENT NO. 4 TO OFFICE LEASE
THIS AMENDMENT NO. 4 TO OFFICE LEASE ("Amendment") is made and entered
into as of June 30, 1999, by and between MARKET & SECOND, INC., a Delaware
corporation ("Landlord"), and NEXTCARD, INC., a California corporation,
successor-in-interest to Internet Access Financial Corporation, Inc., a
California corporation ("Tenant").
A. Landlord and Tenant have heretofore entered into that certain Office
Lease (the "Office Lease") dated September 24, 1997, for certain premises in
the building commonly known as 595 Market Street, San Francisco, California
(the "Building"). The Office Lease was amended by that certain Tenant Expansion
Agreement dated May 2, 1998, by that certain Amendment No. 2 to Office Lease
dated September 9, 1998 (the "Second Amendment"), by that certain Tenant
Expansion Agreement dated January 29, 1999 (the "Expansion Agreement"), and by
that certain Amendment No. 3 to Office Lease dated April 29, 1999 (the "Third
Amendment") (collectively, the "Prior Amendments"). The Office Lease and the
Prior Amendments are collectively referred to herein as the "Lease". The term
of the Lease is currently scheduled to expire on January 31, 2004 (the
"Scheduled Expiration Date").
B. Landlord and Tenant desire to amend the Lease (1) to provide for the
expansion of the premises leased thereunder to include the entire fifteenth
(15th) floor of the Building, commonly known as Suite 1500, and containing
approximately 13,820 rentable square feet of space, as such space is more
particularly shown on Exhibit A-1 attached hereto and incorporated herein (the
"15th Floor Expansion Premises"), (2) to extend the term of the Lease, (3) to
provide for Tenant's lease, on a temporary basis, of certain additional space
consisting of the entire tenth (10th) floor of the Building, commonly known as
Suite 1000, and containing approximately 13,820 rentable square feet of space,
as such space is more particularly shown on Exhibit A-2 attached hereto and
incorporated herein (the "Temporary Space"), and (4) to make certain other
modifications to the Lease as set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties do hereby agree as
follows:
1. Addition of Expansion Premises. As of the earlier of (a) November 1,
1999, or (b) substantial completion of the Work (as defined in the Work Letter
attached hereto as Exhibit B) (the "15th Floor Expansion Premises Effective
Date"), the 15th Floor Expansion Premises shall be added to and become a part
of the premises leased by Tenant under the Lease, subject to the provisions set
forth herein, and references in the Lease to the "Premises" shall be deemed to
include the 15th Floor Expansion Premises, unless the context clearly requires
otherwise.
2. Amendment of 16th Floor Expansion Premises Effective Date. The phrase
"October 1, 1999" contained in clause (a) of Paragraph 1 of the Third Amendment
is hereby amended to read "November 1, 1999."
3. Extension of Lease Term. The term of the Lease is hereby extended for
a period of nine (9) months following the Scheduled Expiration Date, such that
the term of the Lease will expire on October 31, 2004. The term of the Lease
from the Scheduled Expiration Date through October 31, 2004 is herein referred
to as the "Extended Term." Tenant's lease of the Premises during the Extended
Term shall be on the same terms and conditions as set forth in the Lease (as
amended herein), except that Base Rent for Suite 1800 (as defined in the Second
Amendment) shall be an amount equal to $52,977.00 per month, and Base Rent for
the 16th Floor Expansion Premises (as defined in the Third Amendment) shall
also be an amount equal to $52,977.00 per month.
4. Base Rent for 15th Floor Expansion Premises. From and after the 15th
Floor Expansion Premises Effective Date, Tenant shall pay Base Rent for the
15th Floor Expansion Premises as follows:
<PAGE> 2
15th Floor Expansion Premises $49,522.00 per month, $594,260.00 per year
Effective Date - Oct. 31, 2000:
Nov. 1, 2000 - Oct. 31, 2001: $50,673.00 per month, $608,080.00 per year
Nov. 1, 2001 - Oct. 31, 2002: $51,825.00 per month, $621,900.00 per year
Nov. 1, 2000 - Oct. 31, 2003: $52,977.00 per month, $635,720.00 per year
Nov. 1, 2003 - Oct. 31, 2004: $54,128.00 per month, $649,540.00 per year
5. Tenant's Percentage Share. Tenant's percentage share of Operating
Expenses and Property Taxes with respect to the 15th Floor Expansion Premises
only shall be 3.45% and Tenant's percentage share of Operating Expenses and
Property Taxes with respect to the entire Premises (inclusive of the 15th Floor
Expansion Premises) shall be 10.35%. The Base Year with respect to the 15th
Floor Expansion Premises only shall be the calendar year 2000.
6. Condition of 15th Floor Expansion Premises. Tenant shall accept the
15th Floor Expansion Premises in its "as-is" condition, with no obligation on
the part of Landlord to remodel, repair, refurbish, renovate, improve or alter
the 15th Floor Expansion Premises except as expressly set forth in Exhibit B
attached hereto.
7. Security Deposit.
(a) In addition to the security deposit currently held by Landlord
under the Lease, concurrently with execution and delivery of this Amendment,
Tenant shall deliver to Landlord a letter of credit (the "Second Additional
Letter of Credit") in the amount of $450,000 for the benefit of Landlord,
issued by a major banking institution, and in form and substance reasonably
acceptable to Landlord. The Second Additional Letter of Credit shall be held by
Landlord as security for the faithful performance by Tenant of all of the
provisions of the Lease to be performed by Tenant. If Tenant fails to pay rent
or other sums due hereunder, or otherwise defaults with respect to any
provision of the Lease, Landlord may draw on the Second Additional Letter of
Credit and use, apply or retain all or any portion of the proceeds thereof for
the payment of any rent or other sum in default or for the payment of any other
sum to which Landlord may become obligated by reason of Tenant's default, or to
compensate Landlord for any loss or damage which Landlord may suffer thereby.
If Landlord so uses or applies all or any portion of the proceeds of the Second
Additional Letter of Credit, Tenant shall within ten (10) days after demand
therefor either deposit with Landlord a substitute Second Additional Letter of
Credit in the amount of the Second Additional Letter of Credit prior to such
draw by Landlord hereunder, or deposit with Landlord as a security deposit cash
equal to the amount drawn by Landlord under the Second Additional Letter of
Credit, and Tenant's failure to do so shall be a material breach of the Lease.
Landlord shall not be required to pay interest on, or keep any cash deposited
by Tenant hereunder, or drawn by Landlord under the Second Additional Letter of
Credit, separate from its general accounts.
(b) Provided that Tenant has not been in default under the Lease,
the Second Additional Letter of Credit amount shall be reduced to $365,000.00
on February 1, 2001, to $280,000.00 on February 1, 2002, and to $195,000.00 on
February 1, 2003. Upon such final reduction, Tenant shall provide to Landlord a
Second Additional Letter of Credit in the amount of $195,000.00 for the balance
of the term of the Lease. If at any time during the term of the Lease, Tenant
shall not have provided to Landlord a substitute Second Additional Letter of
Credit or renewal of the Second Additional Letter of Credit at least ten (10)
days prior to the expiration date of the Second Additional Letter of Credit
held by Landlord hereunder, Landlord may draw the full amount of the Second
Additional Letter of Credit, and hold the proceeds thereof as the security
deposit hereunder.
8. Lease of Temporary Space. As of July 15, 1999 (the "Temporary Space
Commencement Date"), the Temporary Space shall be added to and become a part of
the Premises, subject to all of the terms and conditions of the Lease, except
as expressly modified herein.
-2-
<PAGE> 3
(a) The term of the Lease with respect to the Temporary Space only
(the "Temporary Space Term") shall commence on the Temporary Space Commencement
Date and shall terminate on that date (the "Temporary Space Expiration Date")
which is ten (10) business days following the 15th Floor Expansion Premises
Effective Date.
(b) Base Rent for the Temporary Space shall be an amount equal to
Forty-Six Thousand Sixty-Seven Dollars ($46,067.00) per month (i.e., $40.00 per
rentable square foot per year). Base Rent for any fractional month during the
Temporary Space Term shall be equitably prorated based upon the actual number
of days in such month. No Escalation Rent shall be due with respect to the
Temporary Space.
(c) Tenant shall accept possession of the Temporary Space in its "as
is" condition, without any agreements, representations, understandings or
obligations on the part of Landlord to perform any alterations, repairs or
improvements thereto.
(d) Tenant hereby acknowledges and agrees that Landlord shall at all
times, upon reasonable advance verbal notice to Tenant, have access to the
Temporary Space for the purpose of showing the Temporary Space to prospective
tenants. Tenant shall have the right to designate a representative of Tenant to
accompany Landlord on any such tour of the Temporary Premises, provided that
such representative must be available at the time of such tour so as not to
delay or impede such tour.
(e) On or prior to the Temporary Space Expiration Date, Tenant shall
surrender the Temporary Space and deliver possession of the same to Landlord in
a vacant and broom clean condition, free of all of Tenant's personal property,
and otherwise in the condition required pursuant to the terms of the Lease. Any
failure by Tenant to timely surrender possession of the Temporary Space in the
condition required hereunder shall be a material breach of the Lease and, in
addition, shall be subject to the provisions of Section 31 of the Office Lease.
9. Lease of Expansion Space. Pursuant to the Expansion Agreement, Tenant
leased from Landlord the Expansion Space (as such term is defined in the
Expansion Agreement). The term of the Expansion Space is currently scheduled to
expire on that date which is ten (10) business days following the 16th Floor
Expansion Premises Effective Date (as defined in the Third Amendment). Landlord
and Tenant hereby agree to amend the term of the Expansion Space such that the
term of the Expansion Space will expire on that date (the "Amended Expansion
Space Expiration Date") which is ten (10) business days following the 15th
Floor Expansion Premises Effective Date. Tenant's lease of the Expansion Space
shall be on and subject to all the terms and conditions of the Expansion
Agreement, as amended herein. On or prior to the Amended Expansion Space
Expiration Date, Tenant shall surrender the Expansion Space and deliver
possession of the same to Landlord in a vacant and broom clean condition, free
of all of Tenant's personal property, and otherwise in the condition required
pursuant to the terms of the Lease. Any failure by Tenant to timely surrender
possession of the Expansion Space in the condition required hereunder shall be
a material breach of the Lease and, in addition, shall be subject to the
provisions of Section 31 of the Office Lease.
10. Brokers.
(a) Tenant represents and warrants that it has had no dealings with
any broker or agent in connection with this Amendment or the 15th Floor
Expansion Premises other than CB Richard Ellis ("CB"), and Tenant shall
indemnify, defend, reimburse and hold Landlord harmless from and against any
and all claims, demands, costs, charges, losses and liabilities (including,
without limitation, attorneys' fees and costs) asserted by any party other than
CB based upon any dealings of that party with Tenant in connection with the
15th Floor Expansion Premises or this Amendment.
(b) Tenant represents and warrants that it has had no dealings with
any broker or agent in connection with the Temporary Space, and Tenant shall
indemnify, defend, reimburse and hold Landlord harmless from and against any
and all claims, demands, costs, charges, losses and liabilities (including,
without limitation, attorneys' fees and costs) asserted by any party based upon
dealings of that party with Tenant in connection with the Temporary Space.
-3-
<PAGE> 4
(c) The terms and provisions of this Paragraph 10 shall survive the
expiration or any earlier termination of the Lease.
11. Capitalized Terms. All capitalized terms not defined herein shall
have the meaning given to them in the Lease.
12. Effectiveness. Except as expressly modified herein, the terms,
covenants and conditions of the Lease shall remain in full force and effect.
13. Ratification. Landlord and Tenant hereby ratify and confirm all of
the provisions of the Lease as amended by Paragraphs 1 through 12 hereof.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of
the day and year first above written.
TENANT: LANDLORD:
NEXTCARD, INC., MARKET & SECOND, INC.,
a California corporation a Delaware corporation
By: /s/ [Signature Illegible] By: /s/ KENT GOODWIN
--------------------------------- ---------------------------------
KENT GOODWIN
Its: CFO Its: AUTHORIZED SIGNATORY
-------------------------------- --------------------------------
By: /s/ [Signature Illegible] By: /s/ RON KILBY
--------------------------------- ---------------------------------
RON KILBY
Its: VP, Project Integration Its: AUTHORIZED SIGNATORY
-------------------------------- --------------------------------
-4-
<PAGE> 5
EXHIBIT A-1
LOCATION OF FIFTEENTH FLOOR EXPANSION PREMISES
[PLANNING OF 595 MARKET]
595 MARKET FLOOR
SUITE 1500 15
13,820 RSF
ISSUED 5/12/99
PLEASE READ
AND INITIAL
[ILLEGIBLE]
----
EXHIBIT A-1
<PAGE> 6
EXHIBIT A-2
LOCATION OF TEMPORARY SPACE
[PLANNING OF 595 MARKET]
595 MARKET FLOOR
SUITE 1000 10
13,820 RSF
ISSUED 5/12/99
PLEASE READ
AND INITIAL
[ILLEGIBLE]
----
EXHIBIT A-2
<PAGE> 7
EXHIBIT B
WORK LETTER
This Work Letter is an Exhibit to that certain document captioned
Amendment No. 4 to Office Lease (referred to herein for convenience as the
"Lease") between MARKET & SECOND, INC., a Delaware corporation ("Landlord"),
and NEXTCARD, INC., a California corporation ("Tenant"), dated June __, 1999.
I. Dates and Allowance.
Space Plan Date: July 16, 1999
Construction Drawings Date: July 30, 1999
Allowance: Up to Thirty-Five and No/100
Dollars ($35.00) per rentable
square foot of area within the
Premises (i.e., $483,700.00), as
further described in Section IV(b).
II. Construction Representatives, Space Planner, Architect and Engineer.
Landlord's and Tenant's construction representatives for coordination of
planning, construction, approval of change orders, substantial and final
completion, and other such matters (unless either party changes its
representative upon written notice to the other), and the other parties involved
in planning the Work, are:
Landlord's Representative: Jeffrey Brueckner
Tower Realty Management Corporation
Address: 595 Market Street, Suite 2210
San Francisco, CA 94105
Telephone: (415) 512-6801
Fax: (415) 512-6809
Tenant's Representative: Shaun Deane
Address: 595 Market Street, Suite 1800
San Francisco, CA 94105
Telephone: (415) 836-9700
Fax: (415) 836-9790
Space Planner: SPACE Architects
Architect: SPACE Architects
Engineer: One or more California licensed
engineers approved or designated
by Landlord in writing.
II. Plans. The term "Plans" herein shall refer to the Space Plan and
Construction Drawings collectively. The term "Planner" herein shall refer to
the Space Planner, Architect or Engineer, as appropriate, each of whom shall be
retained by Landlord. Tenant has sole responsibility to provide all information
concerning its space planning requirements to the Planner, to cause the Planner
to prepare the Plans, and to obtain Landlord's final approval thereof
(including all revisions) by the dates set forth above. Such dates are critical
and of the essence hereof with respect to contracting out the Work, obtaining
permits, and achieving substantial completion in a timely manner. The Plans
shall be signed or initiated by Tenant, if requested by Landlord, and shall be
prepared and approved in accordance with the following provisions:
<PAGE> 8
(a) Space Plan. By the Space Plan Date, Tenant shall: (1) provide Space
Planner with all information concerning Tenant's requirements in order for
Space Planner to prepare the Space Plan, (2) cause Space Planner to complete
Tenant's Space Plan, (3) obtain Landlord's written approval thereof, and (4)
provide three (3) copies thereof to Architect. "Space Plan" herein means a
floor plan, drawn to scale, showing (i) demising walls, interior walls and
other partitions, including type of wall or partition and height, (ii) doors
and other openings in such walls or partitions, including type of door and
hardware, (iii) any floor or ceiling openings, and any variations to building
standard floor or ceiling heights, (iv) electrical outlets, and any restrooms,
kitchens, computer rooms, file cabinets, file rooms and other special purpose
rooms, and any sinks or other plumbing facilities, or other special electrical,
HVAC, plumbing or other facilities or equipment, including all special loading,
(v) communications system, including location and dimensions of equipment
rooms, and telephone and computer outlet locations, (vi) special cabinet work
or other millwork items, (vii) any space planning considerations under the
Disabilities Acts, (viii) finish selections (i.e., color selection of painted
areas, and selection of floor and any special wall coverings from Landlord's
available building standard selections) (which selections Tenant may defer until
the Construction Drawings Date), and (ix) any other details or features
reasonably required in order to obtain a preliminary cost estimate as described
in Section IV or otherwise reasonably requested by Architect, Engineer or
Landlord in order for the Space Plan to serve as a basis for preparing the
Construction Drawings.
(b) Construction Drawings. By the Construction Drawings Date, Tenant
shall: (1) provide all information concerning Tenant's requirements in order
for Architect and Engineer to prepare the Construction Drawings, (2) cause
Architect and Engineer to complete the Construction Drawings (which shall
include at least three (3) mylar sepias, or such other quantity as Landlord may
reasonably require), and (3) obtain Landlord's written approval thereof.
"Construction Drawings" herein means fully dimensioned architectural
construction drawings and specifications, and any required engineering drawings
(including mechanical, electrical, plumbing, air-conditioning, ventilation and
heating), and shall include any applicable items described above for the Space
Plan, and to the extent applicable: (i) electrical outlet locations, circuits
and anticipated usage therefor, (ii) reflected ceiling plan, including
lighting, switching, and any special ceiling specifications, (iii) duct
locations for heating, ventilating and air-conditioning equipment, (iv) details
of all millwork, (v) dimensions of all equipment and cabinets to be built in,
(vi) furniture plan showing details of space occupancy, (vii) keying schedule,
(viii) lighting arrangement, (ix) location of print machines, equipment in
lunch rooms, concentrated file and library loadings and any other equipment or
systems (with brand names wherever possible) which require special
consideration relative to air-conditioning, ventilation, electrical, plumbing,
structural, fire protection, life-fire-safety system, or mechanical systems,
(x) special heating, ventilating and air conditioning equipment and
requirements, (xi) weight and location of heavy equipment, and anticipated
loads for special usage rooms, (xii) demolition plan, (xiii) partition
construction plan, (xiv) all requirements under the Disabilities Acts and other
governmental requirements, and (xv) final finish selections, and any other
details or features reasonably required in order to obtain a final cost
estimate as described in Section IV or otherwise reasonably requested by
Architect, Engineer or Landlord in order for the Construction Drawings to serve
as a basis for contracting the Work.
(c) Landlord's Approval of Plans. Landlord shall either approve any Plans
or revisions submitted pursuant hereto or disapprove of the same with
suggestions for making the same acceptable. Landlord shall not unreasonably
withhold approval if the Plans provide for a customary office layout, with
finishes and materials generally conforming to building standard finishes and
materials currently being used by Landlord at the Building, are compatible with
the Building's shell and core construction, and if no modifications will be
required for the Building electrical, heating, air-conditioning, ventilation,
plumbing, fire protection, life-fire-safety, or other systems or equipment, and
will not require any structural modifications to the Building, whether required
by heavy loads or otherwise. Landlord may request that Tenant approve
Landlord's suggested changes in writing (such approval shall not be
unreasonably withheld), or Landlord may arrange directly with the Planner for
revised Plans to be prepared incorporating such suggestions (in which case,
Tenant shall sign or initial the revised Plans and/or Landlord's notice
concerning the suggested changes, if requested by Landlord). Landlord's approval
of the
EXHIBIT B
Page 2
<PAGE> 9
Plans shall not be deemed a warranty as to the adequacy or legality of the
design, and Landlord hereby disclaims any responsibility or liability for the
same.
(d) Governmental Approval of Plans. Landlord shall cause its
contractor to apply for any normal building permits required for the Work which
are issued pursuant to a local building code as a ministerial matter. If the
Plans must be revised in order to obtain such building permits, Landlord shall
promptly notify Tenant. In such case, Tenant shall promptly arrange for the
Plans to be revised to satisfy the building permit requirements and shall
submit the revised Plans to Landlord for approval as a Change Order under
Section III(e). Landlord shall have no obligation to apply for any zoning,
parking or sign code amendments, approvals, permits or variances, or any other
governmental approval, permit or action (except normal building permits as
described above). If any such other matters are required, Tenant shall promptly
seek to satisfy such requirements or revise the Plans to eliminate such
requirements.
(e) Changes After Plans Are Approved. If Tenant shall desire any
changes, alterations, or additions to the Plans after they have been approved
by Landlord, Tenant shall submit a detailed written request or revised Plans
(the "Change Order") to Landlord for approval. If reasonable and practicable
and generally consistent with the Plans theretofore approved, Landlord shall
not unreasonably withhold approval, but all costs in connection therewith,
including, without limitation, construction costs, permit fees, and any
additional plans, drawings and engineering reports or other studies or tests,
or revisions of such existing items, shall be paid for by Tenant as a Tenant's
Cost under Section IV. The cost of any corrections for errors or omissions made
by any space planner, architect, engineer or contractor recommended or engaged
by Tenant, including corrections for unforeseen or concealed conditions, shall
be borne by Tenant.
(f) Planning for Disabilities Act. Tenant shall be responsible for
matters under the Disabilities Acts relating to the Premises or improvements
thereto. Without limiting the generality of the foregoing, Tenant shall: (a)
provide complete and accurate information such that the Plans will comply with
the Disabilities Acts, and update such information as needed, and (b) be
responsible for any changes to the Work or Premises resulting from changes in
Tenant's employees, business operations or the Disabilities Acts. Without
limitation as to other provisions, Tenant hereby expressly acknowledges that
Tenant's indemnity and related obligations under the Lease shall apply to
violations of this provision.
IV. COST OF THE WORK, ALLOWANCE AND TENANT'S COST.
(a) Cost of the Work. Except for the Allowance to be provided by
Landlord hereunder, Tenant shall pay the entire cost (herein referred to as the
"Cost of the Work") for or related to: (1) the Work, including, without
limitation, costs of labor, hardware, equipment and materials, contractors'
charges for overhead and fees, and so-called "general conditions" (including
rubbish removal, utilities, freight elevators, hoisting, field supervision,
building permits, occupancy certificates, inspection fees, utility connections,
bonds, insurance, sales taxes, and the like), (2) the Plans, including, without
limitation, all revisions thereto, and engineering reports, or other studies,
reports or tests, air balancing or related work in connection therewith, and (3)
Landlord's costs and administrative fee described below. "Work" herein means:
(i) the improvements and items of work shown on the final approved Plans
(including changes thereto approved by Landlord), and (ii) any demolition,
preparation or other work required in connection therewith, including without
limitation, structural or mechanical work, additional HVAC equipment or
sprinkler heads, or modifications to any building mechanical, electrical,
plumbing or other systems and equipment or relocation of any existing sprinkler
heads, either within or outside the Premises required as a result of the layout,
design, or construction of the Work or in order to extend any mechanical
distribution, fire protection or other systems from existing points of
distribution or connection, or in order to obtain building permits for the work
to be performed within the Premises (unless Landlord requires that the Plans be
revised to eliminate the necessity for such work). The Cost of the Work shall
include a Landlord administrative fee equal to five percent (5%) of all other
amounts included in the Cost of the Work.
(b) Allowance. Landlord shall provide a construction allowance (the
"Allowance") as set forth in Section I above. Landlord shall make the Allowance
available
EXHIBIT B
---------
Page 3
<PAGE> 10
towards: (1) costs of permanent leasehold improvements included in the Work,
including labor, hardware, equipment and materials, contractors' charges for
overhead and fees, and general conditions, (2) costs of the Space Plan and
Construction Drawings, provided such costs, as a share of the Allowance, shall
not exceed Two and 50/100 Dollars ($2.50) per rentable square foot (i.e.,
$34,550.00) (and which shall exclude planning for furniture, fixtures and
equipment), and (3) Landlord's costs and administrative fee, as described
above. The Allowance shall not be used for any other purpose, such as, but not
limited to, furniture, trade fixtures, cabling or personal property. If all or
any portion of the Allowance shall not be used, Landlord shall be entitled to
the savings and Tenant shall receive no credit therefor. If Landlord
terminates the Lease or Tenant's right to possession based on an Event of
Default by Tenant, Tenant shall repay Landlord on demand for the amount of the
Allowance provided hereunder, as additional damages, without in any way
limiting Landlord's other rights or remedies.
(c) Tenant's Cost; Estimates and Payments. Any portion of the Cost
of the Work exceeding the Allowance is referred to herein as "Tenant's Cost."
Landlord may at any time estimate Tenant's Cost in advance, or revise any such
estimate, in which case Tenant shall deposit the estimated amount (or the
increase reflected in any revised estimate) with Landlord within three (3) days
after Landlord so requests. If the Work involves progress payments, Landlord
shall apply the amounts deposited by Tenant first. If, after final completion
and payment for the Work, the actual amount of Tenant's Cost exceeds the
estimated amount, Tenant shall pay the difference to Landlord within three (3)
days after Landlord so requests. If such estimated amount exceeds the actual
amount of Tenant's Cost, Landlord shall provide a refund of the difference.
Tenant's Cost shall be deemed "rent" under the Lease (and all remedies for the
non-payment of rent shall be available to Landlord therefor), and Tenant's
obligations under the Lease to keep the Premises and Building free of liens
shall apply to any liens arising from any failure to pay Tenant's Cost
hereunder.
(d) Tenant's Approval and Nature of Cost Estimates. Landlord may
request Tenant's written approval of any cost estimate hereunder. Tenant shall
not unreasonably withhold such approval, and shall approve or disapprove the
same in writing within three (3) days after Landlord so requests. If Tenant
reasonably disapproves of any such estimate, Tenant shall meet with the Planner
and eliminate or substitute items in order to reduce Tenant's Cost in
connection with preparing a revised version of the Plans as a Change Order
pursuant to Section III above, but the foregoing dates to complete the Plans
shall not be extended thereby. Any cost estimates based on a Space Plan will be
preliminary in nature, and may not be relied on by Tenant. Any written estimate
of Tenant's Cost prepared by Landlord's contractor based on the approved
Construction Drawings is also an estimate only and not a price guaranty, and is
subject to increases, including, but not limited to, increases based on: (a)
changes in the Construction Drawings or the Work, (b) increases in costs of
labor or materials or the delivery thereof, (c) concealed conditions
encountered on the job site, (d) new legal requirements becoming effective
following preparation of the estimate, or (e) strikes, acts of God, shortages
of materials or labor, or other causes beyond Landlord's reasonably control.
V. CONSTRUCTION.
(a) Landlord to Arrange Work. Provided Tenant completes the Plans
on time and deposits with Landlord an amount equal to Landlord's estimate of
Tenant's Cost as provided above, and is not then in violation of the Lease
(including this exhibit), Landlord shall use reasonable efforts to cause
Landlord's contractor to substantially complete the Work by November 1, 1999.
Landlord reserves the right to substitute comparable or better materials and
items for those shown in the Plans, so long as they do not materially and
adversely affect the appearance of the Premises. Landlord's general contractor
shall competitively bid all major subcontractors.
(b) Landlord's Work. Landlord shall, at Landlord's sole expense,
prior to Tenant's taking occupancy of the Premises, complete any work in the
restrooms located in the Premises necessary to cause such restrooms to comply
with applicable building codes including, without limitation, the Disabilities
Acts.
EXHIBIT B
---------
Page 4
<PAGE> 11
(c) Substantial Completion and Walk-Through. Landlord shall be
deemed to have "substantially completed" the Work for purposes hereof if
Landlord has caused the Work to be sufficiently completed such that Tenant can
reasonably use the Premises or complete any improvements or changes to the
Premises to be made by Tenant. When Landlord notifies Tenant that the Work has
been substantially completed, either party may request a joint walk-through
inspection in order for Tenant to identify any necessary final completion or
other "punchlist" items. Neither party shall unreasonably withhold approval
concerning such items. If Tenant fails to participate in a walk-through as
provided above, or otherwise fails to object to Landlord's notice of
substantial completion in writing within three (3) business days thereafter
specifying in detail the items of work needed to be performed in order for
substantial completion, Tenant shall be deemed conclusively to have agreed that
the Work is substantially completed for purposes of the Commencement Date and
commencement of Rent under the Lease as of the date set forth in Landlord's
notice. If there is any dispute as to whether Landlord has substantially
completed the Work, Landlord may request a good faith decision by Landlord's
architect which shall be final and binding on the parties.
(c) Final Completion. Substantial completion shall not prejudice
Tenant's rights to require full completion of any remaining items of Work,
which Landlord shall use reasonable efforts to complete promptly after
substantial completion has occurred. If Landlord notifies Tenant in writing
that the Work is fully completed, and Tenant fails to object thereto in writing
within five (5) business days thereafter specifying in detail the items of
work needed to be completed and the nature of work needed to complete said
items, Tenant shall be deemed conclusively to have accepted the Work as fully
completed (or such portions thereof as to which Tenant has not so objected). In
connection with the Work, Landlord: (1) shall cause building standard suite
identification signage, and building standard window blinds, to be installed
(to the extent not already existing), and (2) will cause a contractor to
perform air balancing tests on the Premises and adjust the HVAC system as a
result thereof. The costs of such items may be charged against the Allowance,
and if the Allowance shall be insufficient, Tenant shall pay Landlord for such
costs as additional rent within thirty (30) days after billed.
(e) Landlord's Role. The parties acknowledge that neither Landlord
nor its managing agent is an architect or engineer, and that the Work will be
designed and performed by independent architects, engineers and contractors.
Landlord and its managing agent shall have no responsibility for construction
means, methods or techniques or safety precautions in connection with the
Work, and do not guarantee that the Plans or Work will be free from errors,
omissions or defects, and shall have no liability therefor. In the event of
such errors, omissions or defects, Landlord shall cooperate in any action
Tenant desires to bring against such parties.
VI. WORK PERFORMED BY TENANT. Landlord, at Landlord's discretion, may
permit Tenant and any of Tenant's space planners, architects, engineers,
contractors, suppliers, employees, agents and other such parties (collectively,
"Tenant's Contractors") to enter the Premises prior to completion of the Work
in order to make the Premises ready for Tenant's use and occupancy. If Landlord
permits such entry prior to completion of the Work, then such permission shall
be deemed a license only and not a lease, and is conditioned upon: (a) Tenant
obtaining Landlord's prior written approval of such entry, Tenant's Contractors
and the work they will perform, and complying with all of the other
requirements of the Lease pertaining to work performed by Tenant in the
Premises, all insurance requirements under the Lease, and all other conditions
imposed by Landlord for the prior submission of security, affidavits and lien
waivers or otherwise in connection therewith, (b) Tenant and Tenant's
Contractors working in harmony and not interfering with Landlord and Landlord's
space planners, architects, engineers, contractors, suppliers, employees,
agents and other such parties (collectively, "Landlord's Contractors") in doing
the Work or with other tenants and occupants of the Building, and (c) Tenant
paying for any utilities and services consumed in connection with such work. If
at any time such entry shall cause or threaten to cause such disharmony or
interference, or violate any of the other foregoing requirements, in
Landlord's sole opinion, Landlord shall have the right to revoke such license
immediately upon oral or written notice to Tenant. Landlord shall not be liable
in any way for any injury, loss or damage which may occur to any decorations,
fixtures, personal property, installations or other improvements or items of
work installed, constructed or brought upon the Premises by or for Tenant or
Tenant' Contractors prior to completion of the
EXHIBIT B
---------
Page 5
<PAGE> 1
EXHIBIT 10.37
===============================================================================
SERIES 1999-3 SUPPLEMENT
Dated as of November 10, 1999
to
AMENDED AND RESTATED
POOLING AND SERVICING AGREEMENT
Dated as of May 21, 1999
------------------------------
NEXTCARD MASTER TRUST I
SERIES 1999-3
------------------------------
between
NEXTBANK, N.A.,
as Transferor and Servicer
and
THE BANK OF NEW YORK,
as Trustee
on behalf of the Series 1999-3 Certificateholders
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I Creation of the Series 1999-3 Certificates............................... 1
Section 1.01. Designation.......................................................... 1
ARTICLE II Definitions.............................................................. 2
Section 2.01. Definitions.......................................................... 2
ARTICLE III Servicing Fee............................................................ 11
Section 3.01. Servicing Compensation............................................... 11
ARTICLE IV Rights of Series 1999-3 Certificateholders and Allocation and
Application of Collections............................................... 11
Section 4.01. Collections and Allocations.......................................... 11
Section 4.02. Determination of Monthly Interest.................................... 13
Section 4.03. Suspension of the Revolving Period; Limited Amortization Period...... 14
Section 4.04. Required Amount...................................................... 14
Section 4.05. Application of Series 1999-3 Allocable Finance Charge
Collections and Available Principal Collections.......................... 14
Section 4.06. Defaulted Amounts; Investor Charge-Offs.............................. 16
Section 4.07. Excess Spread and Excess Finance Charge Collections.................. 16
Section 4.08. Excess Finance Charge Collections.................................... 17
Section 4.09. Shared Principal Collections......................................... 17
Section 4.10. Invested Amount Increases............................................ 17
Section 4.11. Reserve Account...................................................... 18
Section 4.12. Interest Rate Caps................................................... 19
ARTICLE V Distributions and Reports to Series 1999-3 Certificateholders............ 21
Section 5.01. Distributions........................................................ 21
Section 5.02. Reports and Statements to Certificateholders......................... 21
ARTICLE VI Pay Out Events........................................................... 22
Section 6.01. Pay Out Events....................................................... 22
ARTICLE VII Optional Repurchase; Series Termination.................................. 24
Section 7.01. Optional Repurchase.................................................. 24
Section 7.02. Series Termination................................................... 24
ARTICLE VIII Final Distributions...................................................... 25
Section 8.01. Sale of Receivables or Certificateholders' Interest pursuant to
Section 2.06 or 10.01 of the Agreement and Section 7.01 or 7.02
of this Supplement................................................... 25
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IX Miscellaneous Provisions................................................. 25
Section 9.01. Ratification of Agreement............................................ 25
Section 9.02. Counterparts......................................................... 26
Section 9.03. Governing Law........................................................ 26
Section 9.04. Private Placement of Series 1999-3 Certificates; Form of
Delivery of Series 1999-3 Certificates............................... 26
Section 9.05. Successors and Assigns............................................... 26
Section 9.06. Amendments........................................................... 26
Section 9.07. Amendments to Agreement.............................................. 27
Section 9.08. Tax Matters.......................................................... 27
[*]
</TABLE>
*Confidential treatment requested.
<PAGE> 4
SERIES 1999-3 SUPPLEMENT, dated as of November 10, 1999 (the
"Supplement"), between NEXTBANK, N.A., a national banking
association, as Transferor and Servicer, and THE BANK OF NEW
YORK, a New York banking corporation, as Trustee.
Pursuant to the Pooling and Servicing Agreement, dated as of
December 1, 1998, as amended and restated by the Amended and Restated Pooling
and Servicing Agreement, dated as of May 21, 1999 (as amended, restated and
supplemented to date, the "Agreement"), between the Transferor and Servicer (as
successor to NextCard Funding Corp. and NextCard, Inc. as Transferor and
Servicer, respectively) and the Trustee, the Transferor has created the NextCard
Master Trust I (the "Trust"). Section 6.03 of the Agreement provides that the
Transferor may from time to time direct the Trustee to authenticate one or more
new Series of Investor Certificates representing fractional undivided interests
in the Trust. The Principal Terms of any new Series are to be set forth in a
Supplement to the Agreement.
Pursuant to this Supplement, the Transferor and the Trustee shall
create a new Series of Investor Certificates and specify the Principal Terms
thereof.
ARTICLE I
Creation of the Series 1999-3 Certificates
Section 1.01. Designation.
(a) There is hereby created a Series of Investor Certificates to
be issued pursuant to the Agreement and this Supplement to be known as "NextCard
Master Trust I, Series 1999-3." The Series 1999-3 Certificates shall be known as
the "Series 1999-3 Variable Funding Certificates."
(b) Series 1999-3 shall be a Principal Sharing Series. Series
1999-3 shall be an Excess Allocation Series. Series 1999-3 shall not be
subordinated to any other Series. Notwithstanding any provision in the Agreement
or in this Supplement to the contrary, the first Distribution Date with respect
to Series 1999-3 shall be the January 18, 2000 Distribution Date and the first
Monthly Period shall begin on and include the Closing Date and end on and
include December 31, 1999. The Closing Date shall be a Discount Option Date and
the Discount Percentage shall be [*] or such other percentage as shall be
mutually acceptable to the Transferor and the Administrative Agent, which
Discount Percentage shall apply to all Principal Receivables (without giving
effect to the proviso in the definition of Principal Receivables) arising on or
after the Closing Date. Notwithstanding anything to the contrary in the
Agreement, the Transferor shall not reduce or withdraw such Discount Percentage
or otherwise modify the application thereof unless the Rating Agency Condition
shall have been satisfied with respect to such action.
*Confidential treatment requested.
<PAGE> 5
ARTICLE II
Definitions
Section 2.01. Definitions.
(a) Whenever used in this Supplement, the following words and
phrases shall have the following meanings, and the definitions of such terms are
applicable to the singular as well as the plural forms of such terms and the
masculine as well as the feminine and neuter genders of such terms.
"Account Origination Agreement" shall mean the Amended and
Restated Account Origination Agreement by and between the Servicer and
Transferor (as successor to NextCard, Inc. and NextCard Funding Corp.) and
Heritage Bank of Commerce dated as of May 21, 1999, as amended from time to time
in accordance with the terms thereof.
"Additional Amounts" shall have the meaning specified in the
Certificate Purchase Agreement.
"Additional Interest" shall have the meaning specified in Section
4.02(b).
"Administrative Agent" shall mean First Union Securities, Inc., a
Delaware corporation, in its capacity as administrative agent under the
Certificate Purchase Agreement, and any successor thereto appointed pursuant to
the Certificate Purchase Agreement.
"Amortization Period" shall mean, with respect to Series 1999-3,
as the context requires, the Scheduled Amortization Period, the Early
Amortization Period or any Limited Amortization Period.
"Available Principal Collections" shall mean, with respect to any
Monthly Period, an amount equal to the sum of (a) the Series 1999-3 Allocable
Principal Collections received during such Monthly Period, (b) any Shared
Principal Collections with respect to other Series that are allocated to Series
1999-3 in accordance with Section 4.04 of the Agreement and Section 4.09 hereof
and (c) any other amounts which pursuant to Section 4.05, 4.07 or 4.11 hereof
are to be treated as Available Principal Collections with respect to the related
Distribution Date.
"Average Invested Amount" shall mean, for any period, the sum of
the Invested Amounts for each day in such period divided by the number of days
in such period.
"Base Rate" shall mean, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, (a) the numerator of which is
the sum of the Monthly Interest and the Monthly Servicing Fee for such Monthly
Period and (b) the denominator of which is the Average Invested Amount as of the
last day of such Monthly Period.
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"Business Day" shall mean, for purposes of Series 1999-3, any day
other than (a) a Saturday or Sunday, (b) any other day on which banking
institutions in New York, New York, Charlotte, North Carolina or any other State
in which the principal executive offices of the Transferor or any Additional
Transferor or the Trustee are located, are authorized or obligated by law,
executive order or governmental decree to be closed.
"Cap Rate" shall mean [*]% per annum.
"Certificate Assignment" shall have the meaning specified in
Section 9.08(e).
"Certificate Purchase Agreement" shall mean the Certificate
Purchase Agreement, dated as of November 10, 1999, among the Transferor and
Servicer, the Administrative Agent and the Purchaser, and all amendments
thereto.
"Certificate Rate" shall have the meaning specified in the
Certificate Purchase Agreement.
"Certificateholder" shall mean the Person in whose name a
Certificate is registered in the Certificate Register.
"Certificates" shall mean any one of the Series 1999-3 Variable
Funding Certificates executed by the Transferor and authenticated by or on
behalf of the Trustee, substantially in the form of Exhibit A.
"Closing Date" shall have the meaning specified in the
Certificate Purchase Agreement.
"Credit Bureau Agency" shall mean any of Trans Union LLC,
Experian Inc. or Equifax Inc., or any of their respective successors.
"Distribution Date" shall mean January 18, 2000, and the
fifteenth day of each calendar month thereafter, or if such fifteenth day is not
a Business Day, the next succeeding Business Day.
"Early Amortization Period" shall mean the period commencing at
the close of business on the Business Day immediately preceding the day on which
a Pay Out Event with respect to Series 1999-3 is deemed to have occurred, and
ending on the first to occur of (i) the payment in full of the Invested Amount
and (ii) the Series 1999-3 Termination Date.
"Excess Spread" shall mean, with respect to any Distribution
Date, the sum of the amounts, if any, specified pursuant to Section 4.05(a)(iv).
"Excess Spread Percentage" shall mean, for any Monthly Period,
the difference between the Portfolio Yield and the Base Rate for such Monthly
Period.
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"FICO Score" shall mean, with respect to any Obligor, the average
of any two of the risk scores indicated on such Obligor's credit reports, as
calculated by the applicable Credit Bureau Agency using software developed by
Fair, Isaac and Co., Inc.
"Finance Charge Shortfall" shall have the meaning specified in
Section 4.08.
"Increase Amount" shall have the meaning specified in Section
4.10(a).
"Increase Conditions" shall mean, with respect to any requested
Invested Amount Increase hereunder, all of the following:
(a) the request with respect to such Invested Amount Increase
shall have been delivered to the Trustee, the Administrative Agent and the
Servicer by the time, and shall otherwise conform to the requirements, specified
in Section 4.10(a);
(b) after giving effect to such Invested Amount Increase, the
Invested Amount shall not exceed the Maximum Invested Amount;
(c) no Pay Out Event or event that, after the giving of notice or
the lapse of time, would constitute a Pay Out Event, has occurred and is
continuing or would result from such Invested Amount Increase;
(d) the Scheduled Amortization Period shall not have commenced as
of such Increase Date;
(e) all of the representations and warranties of the Transferor
and the Servicer set forth in the Agreement and the Certificate Purchase
Agreement shall be true and correct as though made on and as of such Increase
Date (except that representations and warranties set forth in Sections
2.04(a)(ii), (vii), (viii) and (ix) shall be deemed to be made only as of the
applicable date specified in such sections);
(f) after giving effect to such Invested Amount Increase, the
Transferor Percentage shall be equal to or greater than the Required Transferor
Percentage on such date;
(g) the Servicer shall have delivered to the Administrative
Agent a copy of the Servicer Report prepared as of the immediately prior
Determination Date, signed by a Servicing Officer;
(h) the Interest Rate Cap Requirement is satisfied on such date;
(i) as of the most recent Distribution Date preceding the
applicable Increase Date, no unreimbursed Investor Charge-Offs remain
outstanding;
(j) the amount on deposit in the Reserve Account shall equal
the Required Reserve Account Amount on such Increase Date after giving effect to
the Invested Amount Increase and the Required Reserve Account Addition made on
such Increase Date;
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<PAGE> 8
(k) as of the most recent preceding Determination Date, the
Excess Spread Percentage is equal to or greater than [*]; and
(l) the Transferor shall have delivered to the Trustee, the
Administrative Agent and the Servicer an Officer's Certificate dated as of such
Increase Date certifying that the conditions described in paragraphs (a) through
(k) above have been satisfied.
"Increase Date" shall have the meaning specified in Section
4.10(a).
"Initial Invested Amount" shall mean $0.
"Interest Period" shall mean, with respect to any Distribution
Date, the period from and including the Distribution Date immediately preceding
such Distribution Date (or, in the case of the first Distribution Date, from and
including the Closing Date) to but excluding such Distribution Date.
"Interest Rate Cap" shall mean an interest rate cap agreement for
the benefit of the Trust between the Trustee, acting on behalf of the Trust, and
an Interest Rate Cap Provider, substantially in the form of Exhibit D, obtained
by the Transferor pursuant to Section 4.12(a) and having a cap rate equal to the
Cap Rate, or any Replacement Interest Rate Cap or Qualified Substitute
Arrangement with respect thereto.
"Interest Rate Cap Payment" shall mean, with respect to any
Distribution Date, any payment required to be made on the preceding Business Day
by an Interest Rate Cap Provider to the Trustee for deposit in the Collection
Account as Series 1999-3 Allocable Finance Charge Collections.
"Interest Rate Cap Provider" shall mean any obligor under an
Interest Rate Cap, or if any Replacement Interest Rate Cap or Qualified
Substitute Arrangement is obtained for such Interest Rate Cap pursuant to
Section 4.12, any obligor with respect to such Replacement Interest Rate Cap or
Qualified Substitute Arrangement.
"Interest Rate Cap Requirement" shall mean as of any date of
determination, that (i) the Trust shall have the benefits of Interest Rate Caps,
Replacement Interest Rate Caps or Qualified Substitute Arrangements satisfying
the requirements of Section 4.12 and (ii) the long-term unsecured debt ratings
of each Interest Rate Cap Provider shall be at least AA by Standard & Poor's and
Aa2 by Moody's or the short-term unsecured debt ratings of the Interest Rate Cap
Provider shall be at least A-1 by Standard & Poor's and P-1 by Moody's;
provided, however, that if First Union Securities, Inc. or an Affiliate thereof
is an Interest Rate Cap Provider, no rating requirement will apply to such
Interest Rate Cap Provider.
"Interest Shortfall" shall have the meaning specified in Section
4.02(b).
"Invested Amount" shall mean, on any date of determination, an
amount equal to (a) the Initial Invested Amount, plus (b) the aggregate
principal amount of Invested Amount Increases pursuant to Section 4.10 on or
prior to such date, minus (c) the aggregate amount of
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<PAGE> 9
principal payments made to the Certificateholders on or prior to such date,
minus (d) the excess, if any, of the aggregate amount of Investor Charge-Offs
for all prior Distribution Dates over Investor Charge-Offs reimbursed pursuant
to Section 4.07(b) prior to such date.
"Invested Amount Increase" shall have the meaning specified in
Section 4.10(a).
"Invested Amount Increase Request" shall have the meaning
specified in Section 4.10(a).
"Investment Letter" shall mean an Investment Letter substantially
in the form of Exhibit C executed by a Certificateholder.
"Investor Charge-Offs" shall have the meaning specified in
Section 4.06.
"Investor Default Amount" shall mean, with respect to any Monthly
Period, an amount equal to the product of (a) the Defaulted Amount for the
related Monthly Period and (b) the Series 1999-3 Floating Allocation Percentage
for such Monthly Period.
"Limited Amortization Amount" shall have the meaning specified in
Section 4.03.
"Limited Amortization Period" shall mean, unless the Scheduled
Amortization Period or the Early Amortization Period shall have commenced prior
thereto, a period beginning on the first day of the Monthly Period specified in
the notice delivered by the Transferor in accordance with Section 4.03, and
ending upon the first to occur of (i) the commencement of the Scheduled
Amortization Period or the Early Amortization Period and (ii) the last day of
the Monthly Period related to the Distribution Date on which the applicable
Limited Amortization Amount shall have been paid in full.
"Liquidity Reduction Date" shall have the meaning specified in
the Certificate Purchase Agreement.
"Maximum Invested Amount" shall mean $220,000,000, as such amount
may be increased or decreased from time to time in accordance with the
Certificate Purchase Agreement.
"Monthly Interest" shall have the meaning specified in the
Certificate Purchase Agreement.
"Monthly Servicer Report" shall have the meaning specified in
Section 5.02.
"Monthly Servicing Fee" shall have the meaning specified in
Section 3.01.
"Notional Amount" shall mean the notional amount of any Interest
Rate Cap.
"Official Body" shall mean any government or political
subdivision or any agency, authority, bureau, central bank, commission,
department or instrumentality thereof, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
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<PAGE> 10
"Partial Participant" shall have the meaning specified in Section
9.08(f).
"Participant" shall have the meaning specified in Section
9.08(f).
"Pay Out Event" shall mean any Pay Out Event specified in Section
6.01.
"Payment Rate" shall mean, for any Monthly Period, the percentage
equivalent of a fraction, the numerator of which is the aggregate amount of
Collections of Receivables during such Monthly Period and the denominator of
which is the aggregate amount of Receivables outstanding as of the first day of
such Monthly Period.
"Portfolio Yield" shall mean, with respect to any Monthly Period,
the annualized percentage equivalent of a fraction, (a) the numerator of which
is equal to (i) the amount of Series 1999-3 Allocable Finance Charge Collections
with respect to such Monthly Period minus (ii) the Investor Default Amount for
such Monthly Period and (b) the denominator of which is the Average Invested
Amount for such Monthly Period.
"Purchaser" shall mean Variable Funding Capital Corporation, a
Delaware corporation, together with its successors and permitted assigns.
"Qualified Substitute Arrangement" shall have the meaning
specified in Section 4.12(b).
"Reassignment Amount" shall mean, with respect to any
Distribution Date, after giving effect to any deposits and distributions
otherwise to be made on such Distribution Date, the sum of (i) the Invested
Amount on such Distribution Date, plus (ii) Monthly Interest for such
Distribution Date and any Monthly Interest previously due but not distributed to
the Series 1999-3 Certificateholders, plus (iii) the amount of any Additional
Interest, if any, for such Distribution Date and any Additional Interest
previously due but not distributed to the Certificateholders on a prior
Distribution Date.
"Replacement Interest Rate Cap" shall mean any interest rate cap
having substantially the same terms and conditions as the form of interest rate
agreement set forth in Exhibit D, in the case of a replacement to an Interest
Rate Cap, and otherwise satisfying the conditions set forth in Section 4.12.
"Required Amount" shall have the meaning specified in Section
4.04.
"Required Excess Spread Reserve Account Percentage" shall mean,
with respect to any Determination Date or Increase Date, the percentage in the
right-hand column below corresponding to the applicable Three-Month Average
Excess Spread Percentage set forth in the left-hand column below:
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<PAGE> 11
<TABLE>
<CAPTION>
Three-Month Average Required Excess Spread
Excess Spread Percentage Reserve Account Percentage
------------------------ --------------------------
<S> <C>
<[*]% [*]%
>= [*]% and <[*]% [*]%
>= [*]% and <[*]% [*]%
>= [*]% [*]%
</TABLE>
provided, that, if the Required Excess Spread Reserve Account Percentage has at
any time increased, then the Required Excess Spread Reserve Account Percentage
shall not decrease below the increased percentage unless a lower percentage is
the appropriate Required Excess Spread Reserve Account Percentage for [*];
provided, further, that each of the Required Excess Spread Reserve Account
Percentages set forth in the right-hand column above shall be increased by (i)
[*]% if the average of the annualized ratios of Defaulted Receivables to
Principal Receivables (calculated by dividing (i) the product of (a) the
Defaulted Receivables for the applicable Monthly Period and (b) the quotient
obtained by dividing (x) 360 by (y) the number of days in such Monthly Period by
(ii) the Principal Receivables as of the close of business on the last day of
the immediately prior Monthly Period) determined on any three consecutive prior
Monthly Periods equals or exceeds [*]%, (ii) 1.0% if the average of the Payment
Rates for any three consecutive prior Monthly Periods shall be equal to or less
than [*]% on any Determination Date and (iii) [*]% if the Excess Spread
Percentage is equal to or less than [*]% for the related Monthly Period on any
Determination Date.
"Required Reserve Account Addition" shall have the meaning
specified in Section 4.10(a).
"Required Reserve Account Amount" shall mean, with respect to any
Determination Date or Increase Date, the product of (a) (i) in the case of any
Determination Date, the Invested Amount for the Distribution Date following such
Determination Date after giving effect to the principal distributions to be made
on such Distribution Date and (ii) in the case of any Increase Date, the
Invested Amount after giving effect to the Invested Amount Increase on such
Increase Date, and (b) the greater of (i) [*]% and (ii) the Required Excess
Spread Reserve Account Percentage for such Determination Date or Increase Date;
provided, however, that the Required Reserve Account Amount shall in no event be
reduced below [*].
"Reserve Account" shall have the meaning specified in Section
4.11(a).
"Reserve Account Deficiency" shall have the meaning specified in
Section 4.07(c).
"Reset Date" shall mean each of (a) an Addition Date, (b) a
Removal Date, and (c) a date on which an Invested Amount Increase occurs.
"Revolving Period" shall mean the period beginning at the close
of business on the Closing Date and ending on the earlier of (a) the close of
business on the day immediately preceding the day the Scheduled Amortization
Period commences and (b) the close of business
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<PAGE> 12
on the day immediately preceding the day the Early Amortization Period
commences; provided, however, that the Revolving Period shall be temporarily
suspended for the duration of any Limited Amortization Period.
"Scheduled Amortization Date" shall mean the earlier of (a) the
last day of the February 2003 Monthly Period and (b) the Liquidity Reduction
Date.
"Scheduled Amortization Period" shall mean, unless a Pay Out
Event with respect to Series 1999-3 shall have occurred prior thereto, the
period commencing on the Scheduled Amortization Date and ending upon the first
to occur of (x) the commencement of the Early Amortization Period, (y) the
payment in full of the Invested Amount and (z) the Series 1999-3 Termination
Date; provided, however, that the commencement of the Scheduled Amortization
Period may occur on such later date as may be mutually agreed upon by the
Administrative Agent and the Transferor.
"Series 1999-3" shall mean the Series of Certificates the terms
of which are specified in this Supplement.
"Series 1999-3 Allocable Finance Charge Collections" shall mean
an amount equal to, with respect to any Monthly Period, the product of (i) the
Series 1999-3 Floating Allocation Percentage and (ii) Collections of Finance
Charge Receivables received by the Servicer during such Monthly Period, plus any
Interest Rate Cap Payments received from any Interest Rate Cap Provider prior to
the Distribution Date in the month following such Monthly Period.
"Series 1999-3 Allocable Principal Collections" shall mean an
amount equal to, with respect to any Monthly Period (a) during the Revolving
Period, the product of (i) the Series 1999-3 Floating Allocation Percentage and
(ii) Collections of Principal Receivables received by the Servicer during such
Monthly Period, and (b) during an Amortization Period, the product of (i) the
Series 1999-3 Fixed Allocation Percentage and (ii) Collections of Principal
Receivables received by the Servicer during such Monthly Period.
"Series 1999-3 Certificateholder" shall have the meaning
specified in Section 9.08(e).
"Series 1999-3 Certificateholders' Interest" shall mean the
Certificateholders' Interest for Series 1999-3.
"Series 1999-3 Fixed Allocation Percentage" shall mean an amount
equal to, with respect to any Monthly Period during an Amortization Period, the
percentage equivalent of a fraction, the numerator of which is the Invested
Amount as of the last day of the Revolving Period and the denominator of which
is the greatest of (a) the aggregate amount of Principal Receivables plus the
amount then on deposit in the Excess Funding Account, in each case as of the
last day of such Monthly Period, (b) the Trust Invested Amount as of such last
day and (c) the sum of the numerators used to calculate the allocation
percentages for Collections of Principal Receivables for all Series then
outstanding for such Monthly Period; provided, however, that
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<PAGE> 13
with respect to any Monthly Period in which one or more Reset Dates occurs, the
Series 1999-3 Fixed Allocation Percentage shall be recalculated as provided
above but as of such Reset Date for the period from and after the date on which
any such Reset Date occurs to but excluding the date (if any) that another such
Reset Date occurs or, if no other Reset Date occurs during such Monthly Period,
to and including the last day of such Monthly Period.
"Series 1999-3 Floating Allocation Percentage" shall mean an
amount equal to, with respect to any Monthly Period, the percentage equivalent
of a fraction, the numerator of which is the Invested Amount as of the last day
of the immediately preceding Monthly Period and the denominator of which is the
greater of (a) the aggregate amount of Principal Receivables plus the amount
then on deposit in the Excess Funding Account, in each case as of as of the last
day of such Monthly Period, and (b) the Trust Invested Amount as of such last
day; provided, however, that with respect to any Monthly Period in which one or
more Reset Dates occurs, the Series 1999-3 Floating Allocation Percentage shall
be recalculated as provided above but as of such Reset Date for the period from
and after the date on which any such Reset Date occurs to but excluding the date
(if any) that another such Reset Date occurs or, if no other Reset Date occurs
during such Monthly Period, to and including the last day of such Monthly
Period.
"Series 1999-3 Termination Date" shall mean the Distribution Date
occurring in the 36th calendar month following the earlier to occur of (x) the
commencement of the Scheduled Amortization Period or (y) the commencement of the
Early Amortization Period.
"Series Percentage" shall mean for any Monthly Period, (a) with
respect to Finance Charge Receivables and Defaulted Amounts at any time and
Principal Receivables during the Revolving Period, the Series 1999-3 Floating
Allocation Percentage and (b) with respect to Principal Receivables during any
Amortization Period, the Series 1999-3 Fixed Allocation Percentage.
"Servicing Fee Rate" shall mean 2.0% per annum.
"Shared Principal Collections" shall mean Shared Principal
Collections as defined and described in Section 4.04 of the Agreement; amounts
to be treated as Shared Principal Collections under this Supplement are
described in Sections 4.05(b)(ii) and (c)(ii).
"Three-Month Average Excess Spread" shall mean, (i) for any
Determination Date or Increase Date occurring on or after the Determination Date
in any month, the average of the Excess Spread Percentages for each of the three
preceding Monthly Periods and (ii) for any Increase Date occurring prior to the
Determination Date in any month, the average of the Excess Spread Percentages
for each of the three Monthly Periods preceding the immediately prior Monthly
Period.
(b) Notwithstanding anything to the contrary in the Agreement,
(i) no action that is subject to the Rating Agency Condition or that requires
Rating Agency consent pursuant to the terms of the Agreement or this Supplement
(regardless of whether one or more Series of Investor Certificates rated by any
Rating Agency is then outstanding), shall be taken unless the Administrative
Agent shall have first consented in writing to such action, which consent by the
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<PAGE> 14
Administrative Agent shall not be unreasonably withheld, and (ii) the parties
hereto shall provide the Administrative Agent, at its address set forth in
Section 10.02 of the Certificate Purchase Agreement, with all notices, opinions,
reports, certifications and other items to be provided to each Rating Agency
pursuant to the Agreement as supplemented by this Series Supplement.
(c) Each capitalized term defined herein shall relate to the
Series 1999-3 Certificates and no other Series of Certificates issued by the
Trust, unless the context otherwise requires. All capitalized terms used herein
and not otherwise defined herein have the meanings ascribed to them in the
Agreement. In the event that any term or provision contained herein shall
conflict with or be inconsistent with any term or provision contained in the
Agreement, the terms and provisions of this Supplement shall govern. All
references to sections of the Agreement shall relate to the Agreement without
giving effect to this Supplement.
(d) The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Supplement shall refer to this Supplement as a
whole and not to any particular provision of this Supplement; references to any
Article, subsection, Section or Exhibit are references to Articles, subsections,
Sections and Exhibits in or to this Supplement unless otherwise specified; and
the term "including" means "including without limitation."
ARTICLE III
Servicing Fee
Section 3.01. Servicing Compensation. The share of the Servicing
Fee allocable to the Series 1999-3 Certificateholders with respect to any
Distribution Date (the "Monthly Servicing Fee") shall be equal to one-twelfth of
the product of (a) the Servicing Fee Rate and (b) the Average Invested Amount
for the Monthly Period preceding such Distribution Date; provided, however, that
with respect to the first Distribution Date, the Monthly Servicing Fee shall
equal the product of (a) a fraction, the numerator of which shall be the number
of days in the period beginning on the Closing Date and ending on December 31,
1999 and the denominator of which shall be 360, (b) the Servicing Fee Rate and
(c) the Average Invested Amount for the period beginning on the Closing Date and
ending on December 31, 1999.
ARTICLE IV
Rights of Series 1999-3 Certificateholders and
Allocation and Application of Collections
Section 4.01. Collections and Allocations.
(a) Allocations. Prior to the close of business on each Deposit
Date, Collections of Finance Charge Receivables, Principal Receivables and
Defaulted Receivables allocated to Series 1999-3 pursuant to Article IV of the
Agreement (and, as described herein, Collections of Finance Charge Receivables
reallocated from other Series) shall be allocated and distributed or reallocated
as set forth in this Article IV.
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<PAGE> 15
(b) Allocations to the Series 1999-3 Certificateholders. The
Servicer shall prior to the close of business on any Deposit Date allocate, or
cause the Trustee to allocate, to the Series 1999-3 Certificateholders and the
Holders of the Transferor Certificates as follows:
(i) Allocations of Finance Charge Collections. To the Series
1999-3 Certificateholders and retain in the Collection Account for
application or reallocation as provided herein an amount equal to the
product of (A) the Series 1999-3 Floating Allocation Percentage and (B)
the aggregate amount of Collections of Finance Charge Receivables
deposited in the Collection Account on such Deposit Date.
(ii) Allocations of Principal Collections. To the Series 1999-3
Certificateholders, the following amounts as set forth below:
(x) Allocations During the Revolving Period. During the
Revolving Period, an amount equal to the product of (I) the
Series 1999-3 Floating Allocation Percentage and (II) the
aggregate amount of Collections of Principal Receivables
deposited in the Collection Account on such Deposit Date shall be
allocated to the Series 1999-3 Certificateholders and, if any
other Principal Sharing Series is outstanding and in its
amortization period or accumulation period, shall be retained in
the Collection Account for application, to the extent necessary,
as Shared Principal Collections on the related Distribution Date,
and if no other Principal Sharing Series is outstanding and in
its amortization period or accumulation period, shall be paid to
the Holders of the Transferor Certificates; provided, however,
that such amount to be paid to the Holders of the Transferor
Certificates on any Deposit Date shall be paid to such Holders
only if the Transferor Amount on such Deposit Date is greater
than the Required Transferor Amount (after giving effect
to all Principal Receivables transferred to the Trust on such
day) and otherwise shall be deposited in the Excess Funding
Account.
(y) Allocations During any Limited Amortization Period.
During any Limited Amortization Period, an amount equal to the
product of (I) the Series 1999-3 Fixed Allocation Percentage and
(II) the aggregate amount of Collections of Principal Receivables
deposited in the Collection Account on such Deposit Date shall be
allocated to the Series 1999-3 Certificateholders and retained in
the Collection Account until applied as provided herein;
provided, however, that, if the Series 1999-3 Allocable Principal
Collections deposited on that and each prior Deposit Date during
the then-current Monthly Period exceed the difference between the
Limited Amortization Amount and the total amount of principal
payments paid to the Series 1999-3 Certificateholders during the
related Limited Amortization Period, then such excess shall be
first, if any other Principal Sharing Series is outstanding and
in its amortization period or accumulation period, retained in
the Collection Account for application, to the extent necessary,
as Shared Principal Collections on the related Distribution Date,
and second, paid to the Holders of the Transferor Certificates
only if the Transferor Amount on such Deposit Date is greater
than the Required Transferor Amount (after giving effect
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<PAGE> 16
to all Principal Receivables transferred to the Trust on such
day) and otherwise shall be deposited in the Excess Funding
Account.
(z) Allocations During the Scheduled Amortization Period
or the Early Amortization Period. During the Scheduled
Amortization Period or the Early Amortization Period, an amount
equal to the product of (I) the Series 1999-3 Fixed Allocation
Percentage and (II) the aggregate amount of Collections of
Principal Receivables deposited in the Collection Account on such
Deposit Date shall be allocated to the Series 1999-3
Certificateholders and retained in the Collection Account until
applied as provided herein; provided, however, that if after the
date on which an amount of such Collections equal to the Invested
Amount has been deposited into the Collection Account and
allocated to the Series 1999-3 Certificateholders, amounts
allocated to the Series 1999-3 Certificateholders pursuant to
this subsection (z) shall be first, if any other Principal
Sharing Series is outstanding and in its amortization period or
accumulation period, retained in the Collection Account for
application, to the extent necessary, as Shared Principal
Collections on the related Distribution Date, and second, paid to
the Holders of the Transferor Certificates only if the Transferor
Amount on such Deposit Date is greater than the Required
Transferor Amount (after giving effect to all Principal
Receivables transferred to the Trust on such day) and otherwise
shall be deposited in the Excess Funding Account.
The withdrawals to be made from the Collection Account pursuant
to this Section 4.01 do not apply to deposits into the Collection Account that
do not represent Collections, including payment of the purchase price for the
Certificateholders' Interest pursuant to Section 2.06 or 10.01 of the Agreement,
payment of the purchase price for the Series 1999-3 Certificateholders' Interest
pursuant to Section 7.01 of this Supplement and proceeds from the sale,
disposition or liquidation of Receivables pursuant to Section 9.01 or 12.02 of
the Agreement.
Section 4.02. Determination of Monthly Interest.
(a) The amount of monthly interest distributable from the
Collection Account with respect to the Certificates on any Distribution Date
shall be amounts equal to the amounts calculated by the Administrative Agent
pursuant to the Certificate Purchase Agreement as the Monthly Interest for the
related Interest Period. Notwithstanding anything to the contrary herein, the
Monthly Interest shall be distributed on the Certificates only to the extent
permitted by applicable law.
(b) Two Business Days prior to each Distribution Date, the
Servicer shall determine and notify the Trustee in writing of the excess, if any
(the "Interest Shortfall"), of (x) the Monthly Interest for such Distribution
Date over (y) the amount which will be available to be distributed with respect
to the Certificates on such Distribution Date in respect thereof pursuant to
this Supplement. If, on any Distribution Date, the Interest Shortfall is greater
than zero, on each subsequent Distribution Date until such Interest Shortfall is
fully paid, an
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additional amount ("Additional Interest") equal to (x) the actual
number of days in the Interest Period commencing on such Distribution Date
divided by 360, multiplied by (y) the product of (i) the Certificate Rate for
such Interest Period plus 2.0% per annum and (ii) such Interest Shortfall shall
be payable as provided herein with respect to the Certificates. Notwithstanding
anything to the contrary herein, Additional Interest shall be distributed with
respect to the Certificates only to the extent permitted by applicable law.
(c) On or before the fourth Business Day preceding each
Distribution Date, the Administrative Agent shall calculate the Certificate Rate
and the Monthly Interest for the related Interest Period. Pursuant to the
Certificate Purchase Agreement, the Administrative Agent shall provide the
Servicer with written notice of the Certificate Rate and the Monthly Interest
for such Interest Period on or before the fourth Business Day preceding such
Distribution Date.
Section 4.03. Suspension of the Revolving Period; Limited
Amortization Period. The Transferor may from time to time, in its sole
discretion, unless a Pay Out Event shall have occurred prior thereto, suspend
the Revolving Period and cause a Limited Amortization Period to commence for one
or more Monthly Periods by delivering to the Servicer, the Trustee and the
Administrative Agent an irrevocable written notice by 5:00 p.m. (North Carolina
time) on the second Business Day preceding the first day of the Monthly Period
in which such Limited Amortization Period is scheduled to commence, which notice
shall specify the aggregate amount of the decrease in the Invested Amount (the
"Limited Amortization Amount") for such Limited Amortization Period; provided,
however, that any Limited Amortization Amount shall be in an amount of at least
$1,000,000 or any higher multiple of $100,000; provided further that the
Transferor may not cause a Limited Amortization Period to commence unless, in
the reasonable belief of the Transferor, such Limited Amortization Period would
not result in the occurrence of a Pay Out Event.
Section 4.04. Required Amount. With respect to each Distribution
Date, on the related Determination Date, the Servicer shall determine the amount
(the "Required Amount"), if any, by which (x) the sum of the amounts required
pursuant to subsections 4.05(a)(i), (ii) and (iii) for such Distribution Date
exceeds (y) the Series 1999-3 Allocable Finance Charge Collections for such
Distribution Date. In the event that the difference between (x) the Required
Amount for such Distribution Date and (y) the amount of Excess Spread and Excess
Finance Charge Collections allocated to Series 1999-3 applied with respect
thereto pursuant to Section 4.07(a) on such Distribution Date is greater than
zero, the Servicer shall give written notice to the Trustee of such positive
Required Amount on the date of computation.
Section 4.05. Application of Series 1999-3 Allocable Finance
Charge Collections and Available Principal Collections. The Servicer shall
apply, or shall cause the Trustee to apply by written instruction to the
Trustee, on each Distribution Date, Series 1999-3 Allocable Finance Charge
Collections and Available Principal Collections on deposit in the Collection
Account with respect to such Distribution Date to make the following
distributions:
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(a) On each Distribution Date, an amount equal to the Series
1999-3 Allocable Finance Charge Collections will be distributed or deposited in
the following priority:
(i) an amount equal to Monthly Interest for such
Distribution Date, plus the amount of any Monthly Interest previously
due but not distributed to Certificateholders, plus the amount of any
Additional Interest for such Distribution Date and any Additional
Interest previously due but not distributed to Certificateholders on a
prior Distribution Date, shall be distributed to the Certificateholders;
(ii) an amount equal to the Investor Default Amount for
such Distribution Date shall be treated as a portion of Available
Principal Collections for such Distribution Date;
(iii) an amount equal to the Monthly Servicing Fee for
such Distribution Date plus the amount of any Monthly Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, shall be distributed to the Servicer (unless such
amount has been netted against deposits to the Collection Account in
accordance with Section 4.04 of the Agreement); provided, however, that
if NextBank, N.A. or an Affiliate is the Servicer and the amount of
Excess Spread and Excess Finance Charge Collections allocated to Series
1999-3 with respect to the related Monthly Period would otherwise be
insufficient to make the deposit to the Reserve Account required by
Section 4.07(c), the amount distributed to the Servicer pursuant to this
Section 4.05(a)(iii) on such Distribution Date shall be reduced, not
below zero, by an amount equal to the Reserve Account Deficiency; and
(iv) the balance, if any, shall constitute Excess Spread
and shall be allocated and distributed or deposited as set forth in
Section 4.07.
(b) On each Distribution Date with respect to the Limited
Amortization Period, an amount equal to the Available Principal Collections for
the related Monthly Period shall be distributed in the following order of
priority:
(i) an amount which, together with the aggregate amounts
distributed pursuant to this clause (i) on prior Distribution Dates with
respect to the same Limited Amortization Amount, equals the Limited
Amortization Amount, shall be distributed to the Certificateholders; and
(ii) the balance of such Available Principal Collections
shall be treated as Shared Principal Collections and applied in
accordance with Section 4.04 of the Agreement.
(c) On each Distribution Date with respect to the Scheduled
Amortization Period or the Early Amortization Period, an amount equal to the
Available Principal Collections for the related Monthly Period shall be
distributed in the following order of priority:
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(i) an amount up to the Invested Amount on such
Distribution Date shall be distributed to the Certificateholders; and
(ii) for each Distribution Date beginning on the
Distribution Date on which the Invested Amount is paid in full, an
amount equal to the balance, if any, of such Available Principal
Collections shall be treated as Shared Principal Collections and applied
in accordance with Section 4.04 of the Agreement.
Section 4.06. Defaulted Amounts; Investor Charge-Offs. On each
Determination Date, the Servicer shall calculate the Investor Default Amount, if
any, for the related Distribution Date. If, on any Distribution Date, the
Required Amount for the related Monthly Period exceeds the sum of (a) the amount
of Excess Spread and Excess Finance Charge Collections allocable to Series
1999-3 with respect to such Monthly Period, and (b) the amount then on deposit
in the Reserve Account, the Invested Amount shall be reduced by the amount by
which such Required Amount exceeds such sum, but not by more than the Investor
Default Amount for such Distribution Date (an "Investor Charge-Off"). Investor
Charge-Offs shall thereafter be reimbursed and the Invested Amount increased
(but not by an amount in excess of the aggregate unreimbursed Investor
Charge-Offs) on any Distribution Date by the amount of Series 1999-3 Allocable
Finance Charge Collections and Excess Spread and Excess Finance Charge
Collections allocated to Series 1999-3 with respect to the related Monthly
Period which are allocated and available for that purpose pursuant to Section
4.07(b).
Section 4.07. Excess Spread and Excess Finance Charge
Collections. The Servicer shall apply, or shall cause the Trustee to apply by
written instruction to the Trustee, on each Distribution Date, Excess Spread and
Excess Finance Charge Collections allocated to Series 1999-3 with respect to the
related Monthly Period, to make the following distributions or deposits in the
following order of priority:
(a) an amount equal to the Required Amount shall be distributed
by the Trustee to fund the Required Amount in accordance with, and in
the priority set forth in, subsections 4.05(a)(i), (ii) and (iii);
(b) an amount equal to the aggregate amount of Investor
Charge-Offs which have not been previously reimbursed shall be treated
as a portion of Available Principal Collections for such Distribution
Date;
(c) if the amount on deposit in the Reserve Account is less than
the Required Reserve Account Amount for the immediately preceding
Determination Date (such difference, the "Reserve Account Deficiency"),
an amount equal to such Reserve Account Deficiency shall be deposited in
the Reserve Account;
(d) any Additional Amounts due and payable to the Administrative
Agent pursuant to the Certificate Purchase Agreement with respect to
such Distribution Date shall be paid to the Administrative Agent; and
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(e) the balance, if any, will constitute a portion of Excess
Finance Charge Collections for such Distribution Date and will be
available for allocation to other Series or to the Holders of the
Transferor Certificates as described in Section 4.04 of the Agreement.
Section 4.08. Excess Finance Charge Collections. Series 1999-3
shall be an Excess Allocation Series. Subject to Section 4.04 of the Agreement,
Excess Finance Charge Collections with respect to the Excess Allocation Series
for any Distribution Date will be allocated to Series 1999-3 in an amount equal
to the product of (x) the aggregate amount of Excess Finance Charge Collections
with respect to all the Excess Allocation Series for such Distribution Date and
(y) a fraction, the numerator of which is the Finance Charge Shortfall for
Series 1999-3 for such Distribution Date and the denominator of which is the
aggregate amount of Finance Charge Shortfalls for all the Excess Allocation
Series for such Distribution Date. The "Finance Charge Shortfall" for Series
1999-3 for any Distribution Date will be equal to the excess, if any, of (a) the
full amount required to be paid, without duplication, pursuant to subsections
4.05(a)(i)-(iii) and subsections 4.07(a) through (d) on such Distribution Date
over (b) the Series 1999-3 Allocable Finance Charge Collections applied on such
Distribution Date.
Section 4.09. Shared Principal Collections. Subject to Section
4.04 of the Agreement, Shared Principal Collections for any Distribution Date
will be allocated to Series 1999-3 in an amount equal to the product of (x) the
aggregate amount of Shared Principal Collections with respect to all Principal
Sharing Series for such Distribution Date and (y) a fraction, the numerator of
which is the Series 1999-3 Principal Shortfall for such Distribution Date and
the denominator of which is the aggregate amount of Principal Shortfalls for all
the Series which are Principal Sharing Series for such Distribution Date. The
"Principal Shortfalls" for Series 1999-3 will be equal to for any Distribution
Date with respect to (a) the Revolving Period, zero; (b) the Limited
Amortization Period, the excess, if any, of the Limited Amortization Amount not
previously distributed over the amount of Available Principal Collections for
such Distribution Date (excluding any portion thereof attributable to Shared
Principal Collections), and (c) the Scheduled Amortization Period or the Early
Amortization Period, the excess, if any, of the Invested Amount over the amount
of Available Principal Collections for such Distribution Date (excluding any
portion thereof attributable to Shared Principal Collections).
Section 4.10. Invested Amount Increases.
(a) The Series 1999-3 Certificateholders agree, by acceptance of
their Certificates, that the Transferor may, from time to time, prior to the
earlier of the commencement of the Scheduled Amortization Period and the
commencement of the Early Amortization Period and so long as a Limited
Amortization Period is not outstanding, and subject to the terms, conditions and
restrictions set forth in this Section 4.10(a) and in the Certificate Purchase
Agreement, request that, the Certificateholders acquire additional undivided
interests in the Trust in specified amounts (each, an "Invested Amount
Increase"). Each and every Invested Amount Increase shall, however, be subject
to the satisfaction of the Increase Conditions, and shall be permitted only (i)
during the Revolving Period and (ii) upon the request made by the Transferor
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to the Administrative Agent to increase the outstanding principal balance of the
Certificates held by the Purchaser and the Invested Amount to an amount not to
exceed the Maximum Invested Amount. Any such Invested Amount Increase shall be
in a minimum amount of [*] or an integral multiple of [*] in excess of that
amount. To request any such increase, the Transferor shall be required to give
to each of the Trustee, the Servicer and the Administrative Agent, by 5:00 p.m.
(North Carolina time) on the Business Day prior to the date of the requested
Invested Amount Increase, an irrevocable notice substantially in the form
attached hereto as Exhibit E (each, an "Invested Amount Increase Request"),
specifying (i) the amount of such increase (the "Increase Amount"), (ii) the
date on which such Invested Amount Increase is to occur, which date shall be a
Business Day during the Revolving Period (an "Increase Date"), (iii) the
difference between the Required Reserve Account Amount for such Increase Date
after giving effect to the Increase Amount on such Increase Date and the amount
then on deposit in the Reserve Account (such difference, the "Required Reserve
Account Addition") and (iv) the payment instructions for remittance of the
proceeds of such requested Invested Amount Increase. The proceeds of such
Invested Amount Increase shall be remitted to the Transferor and the Trustee,
for deposit in the Reserve Account in accordance with Section 4.11.(c), in
accordance with such payment instructions.
(b) On the Increase Date for such Invested Amount Increase, after
satisfaction of all conditions to such Invested Amount Increase, the Purchaser
shall initiate the remittance of such Increase Amount, to the extent it has
otherwise agreed or committed to fund such Increase, no later than 3:00 p.m.
(North Carolina time) in same day funds in accordance with the payment
instructions specified in the Invested Amount Increase Request, and upon such
remittance the outstanding principal balance of the Certificates held by the
Purchaser and the Invested Amount shall be increased by the amount of such
remittance. Concurrently with the making of such Invested Amount Increase, the
Transferor and the Administrative Agent shall deliver to the Trustee a
confirmation of such Invested Amount Increase, specifying the Increase Amount,
and the Trustee shall promptly annotate the Certificate Register accordingly.
Section 4.11. Reserve Account.
(a) The Servicer, for the benefit of the Series 1999-3
Certificateholders, shall establish and maintain with the Trustee or its nominee
in the name of the Trustee, on behalf of the Trust, an Eligible Account
(including any subaccount thereof) bearing a designation clearly indicating that
the funds and other property credited thereto are held for the benefit of the
Series 1999-3 Certificateholders (the "Reserve Account").
The Reserve Account shall be under the sole dominion and control
of the Trustee for the benefit of the Series 1999-3 Certificateholders. Except
as expressly provided in this Supplement or the Agreement, the Servicer agrees
that it shall have no right of setoff or banker's lien against, and no right to
otherwise deduct from, any funds held in the Reserve Account for any amount owed
to it by the Trustee, the Trust or any Series 1999-3 Certificateholder. If, at
any time, the Reserve Account ceases to be an Eligible Account, the Trustee (or
the Servicer on its behalf) shall within 10 Business Days (or such longer
period, not to exceed 30 calendar days, as to which the Administrative Agent may
consent) establish a new Reserve Account meeting the
*Confidential treatment requested.
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conditions specified above, transfer all monies, documents, instruments,
securities, security entitlements, certificates of deposit and other property on
deposit in the previous Reserve Account to such new Reserve Account and from the
date such new Reserve Account is established, it shall be the "Reserve Account."
The Servicer shall have the power, revocable by the Trustee, to make withdrawals
and payments from the Reserve Account and to instruct the Trustee to make
withdrawals and payments from the Reserve Account for the purposes of carrying
out the Servicer's or the Trustee's duties hereunder.
(b) On each Distribution Date, the Servicer shall direct the
Trustee in writing to (i) withdraw an amount equal to the lesser of (A) the
excess of (x) Required Amount for such Distribution Date over (y) the amount of
Excess Spread and Excess Finance Charge Collections allocated for Series 1999-3
with respect to the related Monthly Period and (B) the amount available in the
Reserve Account, from the Reserve Account, (ii) deposit such amount into the
Collection Account and (iii) apply such amount in the amounts and pursuant to
the priorities set forth in subsection 4.07(a). If on any Distribution Date,
after giving effect to all withdrawals from and deposits to the Reserve Account,
the amount on deposit in the Reserve Account would exceed the Required Reserve
Account Amount, such excess shall be deposited into the Collection Account and
treated as Collections of Finance Charge Receivables.
(c) On each Increase Date, the Trustee shall deposit all funds
remitted by the Administrative Agent on such Increase Date that constitute the
Required Reserve Account Addition for such Increase Date into the Reserve
Account.
(d) Funds on deposit in the Reserve Account shall at the
written direction of the Servicer be invested by the Trustee or its nominee in
Eligible Investments selected by the Servicer. All such Eligible Investments
shall be held by the Trustee for the benefit of the Series 1999-3
Certificateholders. Investments of funds representing Collections collected
during any Monthly Period shall be invested in Eligible Investments that will
mature so that such funds will be available no later than the close of business
on each monthly Transfer Date following such Monthly Period in amounts
sufficient to the extent of such funds to make the required distributions on the
following Distribution Date. No such Eligible Investment shall be disposed of
prior to its maturity; provided, however, that the Trustee may sell, liquidate
or dispose of any such Eligible Investment before its maturity, at the written
direction of the Servicer, if such sale, liquidation or disposal would not
result in a loss of all or part of the principal portion of such Eligible
Investment or if, prior to the maturity of such Eligible Investment, a default
occurs in the payment of principal, interest or any other amount with respect to
such Eligible Investment. Unless directed by the Servicer in writing, funds
deposited in the Reserve Account on a Transfer Date with respect to the
immediately succeeding Distribution Date are not required to be invested
overnight.
Section 4.12. Interest Rate Caps.
(a) The Transferor shall obtain Interest Rate Caps in favor of
the Trustee for the benefit of the Trust with aggregate Notional Amounts at any
time at least equal to the then-outstanding Invested Amount. Each Interest Rate
Cap shall provide that (i) the Trust shall not be
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required to make any payments thereunder, (ii) the Interest Rate Cap shall
terminate on the earlier of (A) the date of the final payment with respect to
the Series 1999-3 Certificates and (B) the date on which the Notional Amount is
reduced to zero and (iii) the Trust shall be entitled to receive Interest Rate
Cap Payments (determined in accordance with the Interest Rate Cap) from the
applicable Interest Rate Cap Provider on the Business Day immediately preceding
each Distribution Date if the composite interest rate for "AA" commercial paper
with a maturity of 30 days, as reported by the Federal Reserve Bank of New York
in Federal Reserve Statistical Release H.15, for any Interest Period exceeds the
Cap Rate. Each Interest Rate Cap Payment and any payments upon early termination
of an Interest Rate Cap shall be deposited into the Collection Account as Series
1999-3 Allocable Finance Charge Collections. Payments received by the Trustee
from an Interest Rate Cap Provider upon the early termination of an Interest
Rate Cap shall be applied to the purchase of a Replacement Interest Rate Cap or
Qualified Substitute Arrangement, or if no Replacement Interest Rate Cap or
Qualified Substitute Arrangement is obtained, shall be applied in accordance
with Section 4.05.
(b) If (i) an Interest Rate Cap Provider is a Person other
than the Administrative Agent or an Affiliate of the Administrative Agent, (ii)
the long-term unsecured debt rating of such Interest Rate Cap Provider is
withdrawn or reduced below AA by Standard & Poor's or Aa2 by Moody's, and (iii)
the short-term unsecured debt rating of such Interest Rate Cap Provider is
withdrawn or reduced below A-1 by Standard & Poor's or P-1 by Moody's, then
within 30 days after such Interest Rate Cap Provider has received notice of such
decline in the creditworthiness of such Interest Rate Cap Provider as determined
by Standard & Poor's or Moody's, as the case may be, either (x) such Interest
Rate Cap Provider, upon satisfaction of the Rating Agency Condition, will enter
into an arrangement the purpose of which shall be to ensure performance by such
Interest Rate Cap Provider of its obligations under the applicable Interest Rate
Cap; or (y) the Servicer shall at its option take one of the following actions:
(i) provided that a Replacement Interest Rate Cap or Qualified Substitute
Arrangement meeting the requirements of Section 4.12(c) has been obtained,
direct the Trustee (A) to provide written notice to such Interest Rate Cap
Provider of its intention to terminate the applicable Interest Rate Cap within
such 30-day period and (B) to terminate the applicable Interest Rate Cap within
such 30-day period, to request the payment to it of all amounts due to the Trust
under the applicable Interest Rate Cap through the termination date and to
deposit any such amounts so received, on the day of receipt, into the Collection
Account, (ii) establish any other arrangement (including an arrangement or
arrangements in addition to or in substitution for any prior arrangement made in
accordance with the provisions of this Section 4.12(b)) which satisfies the
Rating Agency Condition (a "Qualified Substitute Arrangement") or (iii) give
notice to the Trustee of the occurrence of the event described in Section
6.01(k).
(c) The Trustee shall not terminate an Interest Rate Cap
unless, prior to the expiration of the 30-day period referred to in said Section
4.12(b), the Transferor delivers to the Trustee (i) a Replacement Interest Rate
Cap or a Qualified Substitute Arrangement, (ii) to the extent applicable, an
Opinion of Counsel as to the due authorization, execution and delivery and
validity and enforceability of such Replacement Interest Rate Cap or Qualified
Substitute Arrangement, as the case may be, and (iii) evidence that the
termination of such Interest Rate
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Cap and its replacement with such Replacement Interest Rate Cap or Qualified
Substitute Arrangement has satisfied the Rating Agency Condition.
(d) The Servicer shall notify the Trustee and the Rating
Agencies within five Business Days after obtaining knowledge that the senior
long-term or short-term rating of an Interest Rate Cap Provider has been
withdrawn or reduced by Standard & Poor's or Moody's.
(e) Notwithstanding the foregoing, the Transferor may at any
time obtain a Replacement Interest Rate Cap for any Interest Rate Cap, provided
that the Transferor delivers to the Trustee (i) an Opinion of Counsel as to the
due authorization, execution and delivery and validity and enforceability of
such Replacement Interest Rate Cap and (ii) evidence that the termination of the
then-current Interest Rate Cap and its replacement with such Replacement
Interest Rate Cap has satisfied the Rating Agency Condition.
(f) The Trustee hereby appoints the Servicer to perform the
duties of the calculation agent under each Interest Rate Cap Agreement and the
Servicer accepts such appointment.
(g) By virtue of its acceptance of a Series 1999-3
Certificate, each Series 1999-3 Certificateholder shall be deemed to have agreed
that it will have no direct right of action against the Interest Rate Cap
Providers for any failure to make any payment due under the Interest Rate Caps.
(h) The Transferor shall have the option to terminate any
Interest Rate Cap at any time if the Transferor obtains a Qualified Substitute
Arrangement for such Interest Rate Cap.
ARTICLE V
Distributions and Reports to
Series 1999-3 Certificateholders
Section 5.01. Distributions. On each Distribution Date, the
Trustee shall distribute to the Series 1999-3 Certificateholders of record on
the preceding Record Date (other than as provided in Section 12.02 of the
Agreement respecting a final distribution), no later than 2:00 p.m. (North
Carolina time), the amounts required to be distributed thereon pursuant to
Article IV hereof. Distributions to Series 1999-3 Certificateholders hereunder
shall be made by wire transfer in immediately available funds.
Section 5.02. Reports and Statements to Certificateholders.
(a) No later than the Business Day following each Determination
Date, the Servicer will provide to the Administrative Agent and the Trustee
statements, substantially in the form of Exhibit B hereto (each, a "Monthly
Servicer Report"), setting forth certain information relating to the Trust and
the Certificates.
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(b) On or before January 31 of each calendar year, beginning with
calendar year 2000, the Trustee shall furnish or cause to be furnished to each
Person who at any time during the preceding calendar year was a Series 1999-3
Certificateholder, a statement prepared by the Servicer containing the
information which is required to be contained in the statement to Series 1999-3
Certificateholders as set forth in paragraph (a) above, aggregated for such
calendar year or the applicable portion thereof during which such Person was a
Series 1999-3 Certificateholder, together with other information as is required
to be provided by an issuer of indebtedness under the Code and such other
customary information as is necessary to enable the Series 1999-3
Certificateholders to prepare their tax returns. Such obligation of the Trustee
shall be deemed to have been satisfied to the extent that substantially
comparable information shall be provided by the Trustee pursuant to any
requirements of the Code as from time to time in effect.
ARTICLE VI
Pay Out Events
Section 6.01. Pay Out Events. If any one of the following events
shall occur with respect to the Series 1999-3 Certificates:
(a) the occurrence of an Insolvency Event relating to the
Transferor, an Account Owner or the Servicer;
(b) the Trust or the Transferor becomes an investment company
within the meaning of the Investment Company Act;
(c) the Transferor shall become unable, for any reason, to
transfer Receivables to the Trust pursuant to the Agreement;
(d) the Transferor or the Servicer shall fail (i) to make any
payment or deposit required by the terms of the Agreement or this Supplement on
or before the date occurring five Business Days after the date such payment or
deposit is required to be made therein or herein or (ii) to observe or perform
any other covenants or agreements of the Transferor or the Servicer set forth in
the Agreement, the Certificate Purchase Agreement or this Supplement, which
failure has a material adverse effect on the Certificateholders and which
continues unremedied for a period of 30 days after the date on which written
notice of such failure, requiring the same to be remedied, shall have been given
to the Transferor or the Servicer, as applicable, by the Trustee, or to the
Transferor or the Servicer, as applicable, and the Trustee by any Holder of the
Certificates;
(e) any representation or warranty made by the Transferor or the
Servicer in the Agreement or this Supplement shall prove to have been incorrect
in any material respect when made or when delivered and continues to be
incorrect in any material respect for a period of 30 days after the date on
which written notice of such failure, requiring the same to be remedied, shall
have been given to the Transferor or the Servicer, as applicable, by the
Trustee, or to the Transferor and the Trustee by any Holder of the Series 1999-3
Certificates and as a result of which the interests of the Certificateholders
are materially and adversely affected for
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such period; provided, however, that a Pay Out Event pursuant to this Section
6.01(e) shall not be deemed to have occurred if the Transferor has accepted
reassignment of the related Receivable, or all of such Receivables, if
applicable, during such period in accordance with the provisions of the
Agreement;
(f) the average of the Portfolio Yields for any three consecutive
Monthly Periods is less than the average of the Base Rates for such three
consecutive Monthly Periods;
(g) if Heritage Bank of Commerce is an Account Owner, the
occurrence of any uncured material default under the Account Origination
Agreement or the Account Origination Agreement is terminated;
(h) a court of competent jurisdiction shall issue a final
non-appealable order to the effect that the Trustee shall, for any reason, fail
to have a valid and perfected first priority security interest in the
Receivables;
(i) any failure to pay to Certificateholders the full amount of
interest due on the Certificates on any Distribution Date;
(j) failure on the part of an Interest Rate Cap Provider to make
an Interest Rate Cap Payment;
(k) at any time, the Interest Rate Cap Requirement is not
satisfied;
(l) a failure of the Transferor to convey Receivables in
Additional Accounts to the Trust within five Business Days after it is required
to do so pursuant to Section 2.09(a)(i) of the Agreement;
(m) any Governmental Authority having jurisdiction over the
Purchaser shall prohibit the Purchaser from issuing or selling its commercial
paper; or
(n) the Purchaser is unable to issue its commercial paper for a
period of ninety consecutive days due to a suspension or material limitation in
the trade of commercial paper in the United States;
then, in the case of any event described in subparagraph (d), (e), (i), (j),
(k), (m) or (n) after the applicable grace period, if any, set forth in such
subparagraphs, either the Trustee or the Holders of Series 1999-3 Certificates
evidencing more than 50% of the aggregate unpaid principal amount of
Certificates by notice then given in writing to the Transferor and the Servicer
(and to the Trustee if given by the Certificateholders) may declare that a Pay
Out Event has occurred with respect to Series 1999-3 as of the date of such
notice, and, in the case of any event described in subparagraph (a), (b), (c),
(f), (g), (h) or (l) or a Pay Out Event shall occur with respect to Series
1999-3 without any notice or other action on the part of the Trustee or the
Series 1999-3 Certificateholders immediately upon the occurrence of such event.
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ARTICLE VII
Optional Repurchase; Series Termination
Section 7.01. Optional Repurchase.
(a) On any day occurring on or after the date on which the
Invested Amount is reduced to 15% or less of the highest Invested Amount during
the Revolving Period, at any time on or after the Closing Date, the Transferor
shall have the option to purchase the Series 1999-3 Certificateholders'
Interest, at a purchase price equal to (i) if such day is a Distribution Date,
the Reassignment Amount for such Distribution Date or (ii) if such day is not a
Distribution Date, the Reassignment Amount for the Distribution Date following
such day.
(b) The Transferor shall give the Servicer, the Trustee and the
Administrative Agent at least 30 days prior written notice of the date on which
the Transferor intends to exercise such purchase option. Not later than 2:00
p.m., New York City time, on the exercise date the Transferor shall deposit the
Reassignment Amount into the Collection Account in immediately available funds.
Such purchase option is subject to payment in full of the Reassignment Amount.
Following the deposit of the Reassignment Amount into the Collection Amount in
accordance with the foregoing, the Invested Amount for Series 1999-3 shall be
reduced to zero and the Series 1999-3 Certificateholders shall have no further
interest in the Receivables. The Reassignment Amount shall be distributed as set
forth in Section 8.01(c).
Section 7.02. Series Termination.
(a) If, on the Distribution Date occurring two months prior to
the Series 1999-3 Termination Date, the Invested Amount (after giving effect to
all changes therein on such date) would be greater than zero, the Servicer, on
behalf of the Trustee, shall, within the 40-day period which begins on such
Distribution Date, solicit bids for the sale of Principal Receivables and the
related Finance Charge Receivables (or interests therein) in an amount equal to
the Invested Amount together with accrued and unpaid interest at the close of
business on the last day of the Monthly Period preceding the Series 1999-3
Termination Date (after giving effect to all distributions required to be made
on the Series 1999-3 Termination Date, except pursuant to this Section 7.02).
Such bids shall require that such sale shall (subject to Section 7.02(b)) occur
on the Series 1999-3 Termination Date. The Transferor shall be entitled to
participate in, and to receive from the Trustee a copy of each other bid
submitted in connection with, such bidding process.
(b) The Servicer, on behalf of the Trustee, shall sell such
Receivables (or interests therein) on the Series 1999-3 Termination Date to the
bidder who made the highest cash purchase offer. The proceeds of any such sale
shall be treated as Collections on the Receivables allocated to the Series
1999-3 Certificateholders pursuant to the Agreement and this Supplement;
provided, however, that the Servicer shall determine conclusively the amount of
such proceeds which are allocable to Finance Charge Receivables and the amount
of such proceeds which are allocable to Principal Receivables. During the period
from the Distribution Date occurring two months prior to the Series 1999-3
Termination Date to the Series 1999-3 Termination Date, the
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<PAGE> 28
Servicer shall continue to collect payments on the Receivables and allocate and
deposit such Collections in accordance with the provisions of the Agreement and
the Supplements.
ARTICLE VIII
Final Distributions
Section 8.01. Sale of Receivables or Certificateholders' Interest
pursuant to Section 2.06 or 10.01 of the Agreement and Section 7.01 or 7.02 of
this Supplement.
(a) The amount to be paid by the Transferor with respect to
Series 1999-3 in connection with a reassignment of Receivables to the Transferor
pursuant to Section 2.06 of the Agreement shall equal the Reassignment Amount
for the first Distribution Date following the Monthly Period in which the
reassignment obligation arises under the Agreement.
(b) The amount to be paid by the Transferor with respect to
Series 1999-3 in connection with a repurchase of the Certificateholders'
Interest pursuant to Section 10.01 of the Agreement shall equal the Reassignment
Amount for the Distribution Date of such repurchase.
(c) With respect to the Reassignment Amount deposited into the
Collection Account pursuant to Section 7.01 or any amounts allocable to the
Series 1999-3 Certificateholders' Interest deposited into the Collection Account
pursuant to Section 7.02, the Trustee shall, in accordance with the written
direction of the Servicer, not later than 12:00 noon, New York City time, on the
related Distribution Date, make deposits or distributions of the following
amounts (in the priority set forth below and, in each case after giving effect
to any deposits and distributions otherwise be made on such date) in immediately
available funds: (x) the Invested Amount on such Distribution Date will be
distributed to the Paying Agent for payment to the Certificateholders and (y) an
amount equal to the sum of (A) Monthly Interest for such Distribution Date and
(B) any Monthly Interest previously due but not distributed to the
Certificateholders on a prior Distribution Date will be distributed to the
Paying Agent for payment to the Certificateholders.
(d) Notwithstanding anything to the contrary in this Supplement
or the Agreement, all amounts distributed to the Paying Agent pursuant to
Section 8.01(c) for payment to the Series 1999-3 Certificateholders shall be
deemed distributed in full to the Series 1999-3 Certificateholders on the date
on which such funds are distributed to the Paying Agent pursuant to this Section
and shall be deemed to be a final distribution pursuant to Section 12.02 of the
Agreement.
ARTICLE IX
Miscellaneous Provisions
Section 9.01. Ratification of Agreement. As supplemented by this
Supplement, the Agreement is in all respects ratified and confirmed and the
Agreement as so supplemented by this Supplement shall be read, taken and
construed as one and the same instrument.
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<PAGE> 29
Section 9.02. Counterparts. This Supplement may be executed in
two or more counterparts, and by different parties on separate counterparts,
each of which shall be an original, but all of which shall constitute one and
the same instrument.
Section 9.03. Governing Law. THIS SUPPLEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, 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 9.04. Private Placement of Series 1999-3 Certificates;
Form of Delivery of Series 1999-3 Certificates.
(a) The Series 1999-3 Certificates have not been registered under
the Securities Act of 1933, as amended, (the "Securities Act"), or any state
securities law. No transfer of any Series 1999-3 Certificate shall be made
except to the Purchaser or in accordance with the terms of the Certificate
Purchase Agreement and either (i) pursuant to an effective registration under
the Securities Act and applicable state securities or "blue sky" laws or (ii) in
a transaction exempt from the registration requirements of the Securities Act
and applicable state securities or "blue sky" laws, (A) to the Transferor or an
affiliate of the Transferor, (B) to a person who the transferor reasonably
believes is a Qualified Institutional Buyer within the meaning thereof in Rule
144A under the Securities Act that is aware that the resale or other transfer is
being made in reliance on Rule 144A or (C) pursuant to Regulation S under the
Securities Act. The Series 1999-3 Certificates shall bear legends to the effect
set forth in Exhibit A. The Transferor is not obligated to register the Series
1999-3 Certificates under the Securities Act or any other securities or "blue
sky" law or to take any other action not otherwise required under this
Supplement or the Agreement to permit the transfer of Series 1999-3 Certificates
without registration or as described above.
(b) The Series 1999-3 Certificates shall be delivered as
Registered Certificates as provided in Section 6.01 of the Agreement.
Section 9.05. Successors and Assigns. This Supplement shall be
binding upon and inure to the benefit of the parties hereto and their respective
permitted successors and assigns, except that the Transferor may not assign or
transfer any of its rights under this Supplement without the prior written
consent of the Administrative Agent and without prior notice to each Rating
Agency.
Section 9.06. Amendments.
In addition to the conditions to the amendment of the Agreement
and this Supplement set forth in the Agreement, neither the Agreement nor this
Supplement may be amended without the prior written consent of the
Administrative Agent; provided, however, that, the Agreement may be amended
without the prior written consent of the Administrative Agent if, not less than
five Business Days prior to the effectiveness of any such amendment, there shall
have been delivered to the Administrative Agent (i) an Opinion of Counsel
addressed to the
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<PAGE> 30
Administrative Agent and the Purchaser that any such amendment shall not
adversely affect in any material respect the interests of the Series 1999-3
Certificateholders and (ii) a copy of such amendment.
Section 9.07. Amendments to Agreement.
(a) For the term of this Supplement, the definition of "Eligible
Account" is hereby amended with the addition of the following condition:
(i) The Obligor of which had a FICO score as of the date
of the approval of the origination of the Account of at least
[*].
(b) For the terms of this Supplement, Section 2.09(c) of the
Agreement is hereby amended with the addition of the following condition (ix):
(ix) after giving effect to the Additional Accounts, no
more than [*] of the Accounts (calculated on the basis of the
amount of outstanding Principal Receivables relating to the
Accounts on the dates they became Accounts) shall have related
Obligors with FICO Scores as of the date of origination of their
Accounts of less than [*].
(c) For the terms of this Supplement, Section 3.03 of the
Agreement is hereby amended with the addition of the following paragraph (l):
(l) Year 2000 Readiness. The Servicer has reviewed the
areas within its business and operations that could reasonably be
expected to be adversely affected by the risk that computer
applications used by it (or by its suppliers and vendors) to
process any data related to this Agreement may produce materially
adverse consequences in performing date-sensitive functions
subsequent to any date after December 31, 1999 (such risk being
referred to herein as the "Year 2000 Problem"). The Servicer is
taking or causing to be taken reasonable measures to address the
Year 2000 Problem on a timely basis. To the best of the
Servicer's knowledge, the Year 2000 Problem will not materially
and adversely affect the Servicer's ability to perform its
obligations under this Agreement.
Section 9.08. Tax Matters.
(a) Notwithstanding anything to the contrary herein, each of the
Paying Agent, Servicer or Trustee shall be entitled to withhold any amount that
it reasonably determines in its sole discretion is required to be withheld
pursuant to Section 1446 of the Code and such amount shall be deemed to have
been paid for all purposes of the Agreement.
(b) Each of the Series 1999-3 Certificateholders agrees that
prior to the date on which the first interest payment hereunder is due thereto,
it will provide to the Servicer and the Trustee (i) if such Series 1999-3
Certificateholder is incorporated or organized under the laws of a jurisdiction
outside the United States, two duly completed copies of the United States
*Confidential treatment requested.
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<PAGE> 31
Internal Revenue Service Form 4224 or successor applicable or required forms,
(ii) if the Transferor so requests, a duly completed copy of United States
Internal Revenue Service Form W-9 or successor applicable or required forms, and
(iii) such other forms and information as the Transferor may reasonably request
to confirm the availability of any applicable exemption from United States
federal, state or local withholding taxes. Each Series 1999-3 Certificateholder
agrees to provide to the Servicer and Trustee, like additional subsequent duly
completed forms satisfactory to the Servicer and Trustee on or before the date
that any such form expires or becomes obsolete, or upon the occurrence of any
event requiring an amendment, resubmission or change in the most recent form
previously delivered by it, and to provide such extensions or renewals as may be
reasonably requested by the Servicer or Trustee. Each Series 1999-3
Certificateholder certifies, represents and warrants that as of the date of this
Agreement, or in the case of a Series 1999-3 Certificateholder which is an
assignee as of the date of such Certificate Assignment, that (i) it is entitled
(x) to receive payments under this Agreement without deduction or withholding of
any United States federal income taxes (other than taxes required to be withheld
pursuant to Section 1446 of the Code) and (y) to an exemption from United States
backup withholding tax and (ii) it will pay any taxes attributable to its
ownership of an interest in the Certificates.
(c) Each Series 1999-3 Certificateholder agrees with the
Transferor that: (a) such Series 1999-3 Certificateholder will deliver to the
Transferor on or before the Closing Date or the effective date of any
participation or Certificate Assignment an Investment Letter, executed by such
assignee Series 1999-3 Certificateholder, in the case of a Certificate
Assignment, or by the Participant, in the case of a participation, with respect
to the purchase by such Series 1999-3 Certificateholder or Participant of a
portion of an interest relating to the Investor Certificate and (b) all of the
statements made by such Series 1999-3 Certificateholder in its Investment Letter
shall be true and correct as of the date made.
(d) [RESERVED]
(e) Subject to the provisions of subsection 9.04(a), each Series
1999-3 Certificateholder may at any time sell, assign or otherwise transfer, to
the extent of such Series 1999-3 Certificateholder's interest in the Investor
Certificates (each, a "Certificate Assignment"), to (i) the Administrative
Agent, the Purchaser or any other Person specified in Section 10.04(c)(i) of the
Certificate Purchase Agreement or (ii) any other Person to which the Transferor
may consent, which consent shall not be unreasonably withheld (upon such
Certificate Assignment, a "Series 1999-3 Certificateholder") all or part of its
interest in the Investor Certificates; provided, however, that any Certificate
Assignment shall be void unless (i) the minimum amount of such Certificate
Assignment shall be $5,000,000, (ii) such assignee Series 1999-3
Certificateholder shall comply with this Section 9.08 and shall have delivered
to the Trustee, prior to the effectiveness of such Certificate Assignment, a
copy of an agreement under which such assignee Series 1999-3 Certificateholder
has made the representations, warranties and covenants required to be made
pursuant to this Section 9.08, (iii) there shall not be, in the aggregate, more
than [*] Certificateholders and Partial Participants after giving effect to
such Assignment, and (iv) such proposed assignee shall provide the forms
described in (i), (ii) and (iii) of subsection 9.08(b) (subject to the
Transferor's consent, as applicable and as set forth therein) in the manner
*Confidential treatment requested.
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<PAGE> 32
described therein. In connection with any Certificate Assignment to a Person
other than the Administrative Agent, the Purchaser or any other Person specified
in Section 10.04(c)(i) of the Certificate Purchase Agreement, the assignor
Series 1999-3 Certificateholder shall request in writing to the Trustee (who
shall promptly deliver it to the Transferor) for the consent of the Transferor
(the Transferor shall respond to any such request within ten Business Days after
its receipt and the Transferor will not unreasonably withhold such consent) it
being understood that the obtaining of such consent is a condition to the
effectiveness of such a Certificate Assignment. Each assignee Series 1999-3
Certificateholder is subject to the terms and conditions of subsection 9.08(b)
on an ongoing basis and hereby makes the certifications, representations and
warranties contained therein, and the assigning Series 1999-3 Certificateholder
hereby certifies, represents and warrants that its assignee's certifications,
representations and warranties thereunder are true.
(f) Subject to the provisions of subsection 9.04(a), any Series
1999-3 Certificateholder may at any time grant a participation in all or part
(but not less than $5,000,000) of its interest in Investor Certificates to (i)
the Administrative Agent, the Purchaser or any other Person specified in Section
10.04(c)(i) of the Certificate Purchase Agreement or (ii) any other Person to
which the Transferor may consent, which consent shall not be unreasonably
withheld (the Administrative Agent, the Purchaser and each such other Person, a
"Participant" and each Participant acquiring a participation in less than all of
a Certificateholder's rights with respect to payments due thereunder, a "Partial
Participant"); provided, however, that such participation shall be void, unless
(i) such Participant complies with the applicable provisions of this Section
9.08, (ii) there shall not be, in the aggregate, more than four
Certificateholders and Partial Participants after giving effect to such
participation, and (iii) such Series 1999-3 Certificateholder delivers to the
Trustee, prior to the effectiveness of its participation, a copy of an agreement
under which such Participant has made the representations, warranties and
covenants required to be made pursuant to this Section. In connection with the
granting of any such participation to any Person other than to the
Administrative Agent, the Purchaser or any other Person specified in Section
10.04(c)(i) of the Certificate Purchase Agreement, the granting Series 1999-3
Certificateholder shall provide a written request to the Trustee (who shall
promptly deliver it to the Transferor) for the consent of the Transferor to the
granting of the specified interest to any identified prospective Participant,
the Transferor shall respond to any such request within ten Business Days after
its receipt, it being understood that the obtaining of such consent is a
condition to the effectiveness of such a participation. Each Series 1999-3
Certificateholder hereby acknowledges and agrees that any such participation
will not alter or affect in any way whatsoever such Series 1999-3
Certificateholder's direct obligations hereunder and that the Transferor shall
have no obligation to have any communication or relationship whatsoever with any
Participant of such Series 1999-3 Certificateholder in order to enforce the
obligations of such Series 1999-3 Certificateholder hereunder. Each Series
1999-3 Certificateholder shall promptly notify the Trustee (which shall promptly
notify the Transferor) in writing of the identity and interest of each
Participant upon any such disposition. In granting any participation, the Series
1999-3 Certificateholder certifies, represents and warrants that (i) such
Participant is entitled to (x) receive payments with respect to its
participation without deduction or withholding of any United States federal
income taxes and (y) an exemption from United States backup withholding tax,
(ii) prior to the date on which the
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<PAGE> 33
first interest payment is due to the Participant, such Series 1999-3
Certificateholder will provide to the Servicer and Trustee, the forms described
in (i), (ii) and (iii) of subsection 9.08(b) (subject to the Transferor's
consent, as applicable and as set forth therein) as though the Participant were
a Series 1999-3 Certificateholder, and (iii) such Series 1999-3
Certificateholder similarly will provide subsequent forms as described in
subsection 9.08(b) with respect to such Participant as though it were a Series
1999-3 Certificateholder.
(g) Any holder of an interest in the Trust acquired pursuant to
Section 12.01(b) of the Agreement in respect of the Series 1999-3 Certificates
shall be required to represent and covenant in connection with such acquisition
that (x) it has neither acquired, nor will it sell, trade or transfer any
interest in the Trust or cause any interest in the Trust to be marketed on or
through either (i) an "established securities market" within the meaning of Code
section 7704(b)(1), including without limitation an interdealer quotation system
that regularly disseminates firm buy or sell quotations by identified brokers or
dealers by electronic means or otherwise or (ii) a "secondary market (or the
substantial equivalent thereof)" within the meaning of Code section 7704(b)(2),
including a market wherein interests in the Trust are regularly quoted by any
person making a market in such interests and a market wherein any person
regularly makes available to the public bid or offer quotes with respect to
interests in the Trust and stands ready to effect buy or sell transactions at
the quoted prices for itself or on behalf of others, (y) unless the Transferor
consents otherwise (which consent shall be based on an Opinion of Counsel
generally to the effect that the action taken pursuant to the consent will not
cause the Trust to become a publicly traded partnership treated as a
corporation), such holder (i) is properly classified as, and will remain
classified as, a "corporation" as described in Code section 7701(a)(3) and (ii)
is not, and will not become, an S corporation as described in Code section 1361,
and (z) it will (i) cause any participant with respect to such interest
otherwise permitted hereunder to make similar representations and covenants for
the benefit of the Transferor and the Trust and (ii) forward a copy of such
representations and covenants to the Trustee. Each such holder shall further
agree in connection with its acquisition of such interest that, in the event of
any breach of its (or its participant's) representation and covenant that it (or
its participant) is and shall remain classified as a corporation other than an S
corporation, the Transferor shall have the right to procure a replacement
investor to replace such holder (or its participant), and further that such
holder shall take all actions necessary to permit such replacement investor to
succeed to its rights and obligations as a holder (or to the rights of its
participant).
[Signature Page to Follow]
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IN WITNESS WHEREOF, the undersigned have caused this Supplement
to be duly executed and delivered by their respective duly authorized officers
on the day and year first above written.
NEXTBANK, N.A.,
as Transferor and Servicer
By: /s/ John V. Hashman
------------------------------
Name: John V. Hashman
Title: Chief Financial Officer
THE BANK OF NEW YORK,
as Trustee
By: /s/ Kimberly Gilfoil
------------------------------
Name: Kimberly Gilfoil
Title: Assistant Treasurer
<PAGE> 1
EXHIBIT 10.38
================================================================================
CERTIFICATE PURCHASE AGREEMENT
Dated as of November 10, 1999
among
NEXTBANK, N.A.,
as the Transferor and the Servicer,
VARIABLE FUNDING CAPITAL CORPORATION,
as the Purchaser,
and
FIRST UNION SECURITIES, INC.,
as the Administrative Agent
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE ONE
DEFINITIONS
<S> <C>
Section 1.01. Defined Terms.............................................................. 2
Section 1.02. Accounting Terms; Other Terms.............................................. 8
Section 1.03. Other Rules of Construction................................................ 9
Section 1.04. Computation of Time Periods................................................ 9
ARTICLE TWO
PURCHASE AND SALE; PURCHASE COMMITMENT
Section 2.01. Purchase and Sale of the Certificates...................................... 10
Section 2.02. Purchase Price............................................................. 10
Section 2.03. Increases and Decreases in the Invested Amount............................. 10
Section 2.04. Commitment Fee............................................................. 10
Section 2.05. Termination or Reduction of the Purchase Commitment; Scheduled
Liquidity Termination Date.............................................. 11
Section 2.06. Calculation and Payment of Monthly Interest and Fees; Selection of
Commercial Paper Note Maturities........................................ 11
Section 2.07. Increased Costs............................................................ 12
Section 2.08. Increased Capital.......................................................... 13
Section 2.09. Taxes...................................................................... 14
ARTICLE THREE
CLOSING
Section 3.01. Closing.................................................................... 17
Section 3.02. Transactions to be Effected at the Closing................................. 17
ARTICLE FOUR
PURCHASER CONDITIONS PRECEDENT
Section 4.01. Conditions Precedent to the Purchase of the Certificates................... 18
Section 4.02. Conditions Precedent to Invested Amount Increases.......................... 19
ARTICLE FIVE
TRANSFEROR CONDITIONS PRECEDENT
Section 5.01. Conditions Precedent to the Sale of the Certificates....................... 20
</TABLE>
i
<PAGE> 3
<TABLE>
ARTICLE SIX
REPRESENTATIONS AND WARRANTIES
<S> <C>
Section 6.01. Representations and Warranties of the Transferor and Servicer.............. 21
Section 6.02. Representations and Warranties of the Purchaser and the Administrative
Agent................................................................... 24
ARTICLE SEVEN
COVENANTS OF THE TRANSFEROR
Section 7.01. Access to Information...................................................... 26
Section 7.02. Reporting Requirements of the Transferor................................... 26
Section 7.03. Optional Repurchase........................................................ 27
Section 7.04. Location of Chief Executive Office......................................... 27
ARTICLE EIGHT
INDEMNIFICATION
Section 8.01. Indemnification by the Transferor and the Servicer......................... 28
Section 8.02. Costs and Expenses......................................................... 28
ARTICLE NINE
THE ADMINISTRATIVE AGENT
Section 9.01. Authorization and Action................................................... 30
Section 9.02. Administrative Agent's Reliance, Etc....................................... 30
Section 9.03. Administrative Agent and Affiliates........................................ 31
Section 9.04. Purchase Decision.......................................................... 31
Section 9.05. Indemnification............................................................ 31
Section 9.06. Successor Administrative Agent............................................. 32
ARTICLE TEN
MISCELLANEOUS
Section 10.01. Amendments, Etc........................................................... 33
Section 10.02. Notices, Etc.............................................................. 33
Section 10.03. No Waiver; Remedies....................................................... 34
Section 10.04. Binding Effect; Assignability............................................. 34
Section 10.05. Certificates as Evidence of Indebtedness.................................. 36
Section 10.06. Governing Law............................................................. 36
Section 10.07. No Proceedings............................................................ 36
Section 10.08. Execution in Counterparts................................................. 37
Section 10.09. No Recourse............................................................... 37
Section 10.10. Confidentiality........................................................... 38
</TABLE>
ii
<PAGE> 4
THIS CERTIFICATE PURCHASE AGREEMENT dated as of November 10, 1999, is
among NEXTBANK, N.A., a national banking association ("NextBank"), as Transferor
and Servicer, VARIABLE FUNDING CAPITAL CORPORATION, a Delaware corporation (the
"Purchaser"), and FIRST UNION SECURITIES, INC, a Delaware corporation ("First
Union Securities"), as administrative agent (the "Administrative Agent") for the
Purchaser and the other "Owners" (as defined below).
In consideration of the representations, warranties and agreements
herein contained, the parties agree as follows:
1
<PAGE> 5
ARTICLE ONE
DEFINITIONS
Section 1.01. Defined Terms. As used herein, the following terms shall
have the meanings specified below. Capitalized terms used herein that are not
otherwise defined shall have the meanings ascribed thereto in the Pooling and
Servicing Agreement or the Supplement, as the case may be.
"Act" means the Securities Act of 1933, as amended.
"Additional Amounts" means, for each Interest Period, an amount equal to
the sum of (i) the aggregate amount payable to all Affected Parties pursuant to
Sections 2.07, 2.08 and 2.09 in respect of such Interest Period and (ii) the
aggregate of such amounts with respect to prior Interest Periods which remain
unpaid.
"Affected Party" means the Purchaser, the Administrative Agent, First
Union, each Liquidity Provider, any permitted assignee of the Purchaser or any
Liquidity Provider, any Enhancement Provider and any assignee of any Enhancement
Provider.
"Agreement" means this agreement and any supplements, amendments,
exhibits and schedules hereto.
"Alternate Base Rate" means, on any date, a fluctuating rate of interest
per annum equal to the greater of (i) the rate of interest most recently
announced by First Union National Bank at its principal office in Charlotte,
North Carolina as its prime rate; and (ii) the Federal Funds Rate plus the
Federal Funds Margin.
"Alternative Rate" means, with respect to any Interest Period (or
portion thereof), an interest rate per annum equal to the Eurodollar Rate
(Reserve Adjusted); provided, however, (i) upon the occurrence of an Alternative
Rate Date, the Alternative Rate with respect to the Purchaser will be the
Alternate Base Rate for a period of three Business Days commencing on the
Alternative Rate Date and (ii) upon the occurrence of the Alternative Rate
Event, the Alternative Rate will be the Alternate Base Rate.
"Alternative Rate Date" means, if the Purchaser is the Owner, the date
on which the Owner commences funding its share of the Invested Amount through
means other than the issuance of Commercial Paper Notes.
"Alternative Rate Event" means the occurrence or existence of any of the
following events or conditions:
(i) on or before the first day of such Interest Period, the
Purchaser notifies the Administrative Agent that a Eurodollar Rate
Disruption Event has occurred;
(ii) the outstanding Certificate Principal Balance is less than
$100,000;
2
<PAGE> 6
(iii) any Owner has notified the Administrative Agent on or
before the applicable rate determination date that the Eurodollar Rate
for any Interest Period (or portion thereof) does not accurately reflect
the cost to such Owners of funding their respective investments in the
Certificates for such Interest Period (or portion thereof), unless (a)
such Owner is the Purchaser and the commercial paper rating on the
Commercial Paper Notes has been downgraded to a level less than A-1 from
Standard & Poor's and P-1 from Moody's for reasons unrelated to the
investment of the Purchaser in the Certificates or (b) the Agent and the
Transferor agree in writing to a different rate.
"Applicable Margin" shall have the meaning specified in the Fee Letter.
"Breakage Costs" means, for each Owner for each funding period, to the
extent that an Owner is funding the maintenance of its investment in the
Invested Amount during such funding period through the issuance of Commercial
Paper Notes or at the Eurodollar Rate (Reserve Adjusted), during which the
amount of such investment is reduced (in whole or in part) prior to the end of
the period for which it was originally scheduled to remain outstanding, whether
as a result of the commencement of a Limited Amortization Period or otherwise
(the amount of such reduced investment being referred to as the "Allocated
Amount"), the excess of (i)the sum of (a) the discount or interest that would
have accrued on the Allocated Amount during the remainder of such funding period
if such reduction had not occurred and (b) other costs and expenses incurred by
such owner as a result of such reduction (including costs incurred due to the
related early termination of any agreement entered into for the purpose of
hedging such Owner's obligations under this Agreement) over (ii) the net income
scheduled to be received by such Owner from investing the Allocated Amount for
the remainder of such funding period, it being understood that in investing such
Allocated Amount such Owner will, but without limitation to its discretion,
endeavor to minimize the associated Breakage Costs.
"Business Day" means a day that is (i) a "Business Day" as such term is
defined in the Pooling and Servicing Agreement and (ii) when used in connection
with the Eurodollar Rate, a day on which dealings in Dollars are carried on in
the London interbank market and, if the Eurodollar Rate is being determined
pursuant to the second sentence of the definition of "Eurodollar Rate," in the
eurodollar interbank market of the Administrative Agent's Eurodollar Office.
"Certificate Documents" means the Pooling and Servicing Agreement, the
Series 1999-3 Supplement, each Receivables Purchase Agreement and the
Certificates.
"Certificate Principal Balance" means, as of any date, the difference
between (i) the sum of (a) the Initial Invested Amount, and (b) the aggregate
principal amount of Invested Amount Increases pursuant to Section 4.10 on or
prior to such date, and (ii) the aggregate amount of principal payments made to
the Certificateholders on or prior to such date.
"Certificate Rate" means, for any Interest Period, the Cost of Funds,
adjusted, as necessary, to yield, when applied to the Certificate Principal
Balance, an amount sufficient to pay interest on the incremental effective
principal balance of any funding resulting from the capitalization of interest
during such Interest Period; provided, however, to the extent that a Pay Out
Event (other than a Pay Out Event occurring pursuant to Section 6.01(m) or (n)
of the
3
<PAGE> 7
Supplement) is continuing for all or any portion of any Interest Period, the
Certificate Rate for such Interest Period shall be increased by a percentage
equal to the product of (a) [*] and (b) a fraction having as its numerator,
the number of days in such Interest Period that such Pay Out Event was
continuing, and as its denominator, 360. On the Business Day immediately
preceding each Determination Date, the Administrative Agent shall notify the
Servicer and the Trustee of the Certificate Rate for the related Interest
Period.
"Closing" shall have the meaning set forth in Section 3.01.
"Closing Date" shall have the meaning set forth in Section 3.01.
"Collection Date" means the earliest Business Day following the
termination (as opposed to suspension) of the Revolving Period on which the
Invested Amount shall have been reduced to zero and all other amounts due to the
Owners shall have been paid in full.
"Commercial Paper Notes" means short-term promissory notes issued or to
be issued by the Purchaser to fund its investments in accounts receivable and
other financial assets.
"Commitment Fee Rate" shall have the meaning specified in the Fee
Letter.
"Cost of Funds" means, for any Interest Period, the weighted average
(based upon time and dollar amount) of the following rates applicable during
such Interest Period for each Owner, to the extent such Owner (i) is the
Purchaser and funds its share of the Certificate Principal Balance for such
Interest Period by issuing Commercial Paper Notes, a rate equal to the CP Rate
for such Interest Period and (ii) either (a) is not the Purchaser or (b) is the
Purchaser and funds its share of the Invested Amount for such Interest Period
other than by issuing Commercial Paper Notes, a rate equal to the Alternative
Rate for such Interest Period or such other rate as the Administrative Agent and
the Transferor shall agree to in writing.
"CP Rate" means with respect to any Interest Period (or portion
thereof), the sum of (a) the Applicable Margin and (b) the per annum rate
calculated to yield the Weighted Average Cost related to the issuance of
Commercial Paper Notes that are allocated, in whole or in part by the Purchaser
(or by the Administrative Agent) to fund or maintain its interest in the
Certificates during such Interest Period (or portion thereof) and all interests
in receivables or other financial assets of Other Pool Transferors, if any, held
by the Purchaser; provided, however, that if any component of such rate is a
discount rate, in calculating the "CP Rate" for such Interest Period (or portion
thereof) the Purchaser shall for such component use the rate resulting from
converting such discount rate to an interest-bearing equivalent rate per annum,
and provided, further, that at all times following the occurrence of a Pay Out
Event, the "CP Rate" for any Interest Period (or portion thereof) shall be the
Alternative Rate in effect from time to time.
"Enhancement Agreement" means and includes any agreement (other than any
Liquidity Agreement) outstanding from time to time for the benefit of the
Purchaser providing for the issuance of one or more letters of credit or surety
bonds for the account of the Purchaser, the making of loans to the Purchaser or
any other extensions of credit to or for the account of the Purchaser to support
all or any part of the Purchaser's payment obligations under its Commercial
Paper Notes or to provide an alternate means of funding the Purchaser's
investments in accounts
*Confidential treatment requested.
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<PAGE> 8
receivable or other financial assets, in each case, as amended, supplemented or
otherwise modified from time to time.
"Enhancement Provider" means and includes First Union, First Union
Securities and any other or additional bank, financial guaranty insurance
company or other financial institution now or hereafter extending credit or
having a commitment to extend credit to or for the account of the Purchaser
under an Enhancement Agreement so long as such other or additional bank,
financial guaranty insurance company or other financial institution is, at the
time of each extension of such credit and each occurrence of a commitment to
extend such credit, First Union, First Union Securities or a Person consented to
in writing by the Transferor (such consent not to be unreasonably withheld).
"Eurocurrency Liabilities" shall have the meaning assigned to that term
in Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Office" means such office or offices through which the
Administrative Agent determines the Eurodollar Rate, which office or offices
may, at the option of the Administrative Agent, be either domestic or foreign.
"Eurodollar Rate (Reserve Adjusted)" means, with respect to any Interest
Period (or portion thereof), the sum of (i) the Applicable Margin and (ii) the
per annum rate of interest (rounded upward, if necessary, to the nearest whole
multiple of 1/16th of one percent per annum) determined by dividing (a) the
LIBOR Rate by (b) one minus the Eurodollar Reserve Percentage (expressed as a
decimal).
"Eurodollar Rate Disruption Event" means, for any Owner for any Interest
Period, (i) a determination by such Owner that it would be contrary to law or to
the directive of any central bank or other Governmental Authority (whether or
not having the force of law) to obtain Dollars in the London interbank market to
fund or maintain its investment in the Certificates for such Interest Period or
(ii) the inability of such Owner to obtain United States Dollars in such market
to fund its investment in the Certificates for such Interest Period.
"Eurodollar Reserve Percentage" means, with respect to any Interest
Period (or portion thereof), the reserve percentage (rounded upwards, if
necessary, to the nearest 1/16th of one percent per annum) applicable during
such Interest Period (or portion thereof) (or, if more than one such percentage
shall be so applicable during such Interest Period, the daily average of such
percentages for those days in such Interest Period (or portion thereof) during
which any such percentages shall be in effect) under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement (including, without
limitation, any emergency, supplemental or other marginal reserve requirement)
for First Union with respect to liabilities or assets consisting of or including
Eurocurrency Liabilities having a term equal to such Interest Period (or portion
thereof).
"Excluded Taxes" shall have the meaning specified in Section 2.09(a).
"Federal Bankruptcy Code" means the bankruptcy code of the United States
of America codified in Title 11 of the United States Code.
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<PAGE> 9
"Federal Funds Margin" shall have the meaning in the Fee Letter.
"Federal Funds Rate" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to the weighted average of the
federal funds rates as quoted by First Union and confirmed in Federal Reserve
Board Statistical Release H.15 (519) or any successor or substitute publication
selected by First Union (or, if such day is not a Business Day, for the next
preceding Business Day), or, if, for any reason, such rate is not available on
any day, the rate determined, in the sole opinion of First Union, to be the rate
at which federal funds are being offered for sale in the national federal funds
market at 9:00 a.m. (New York City time).
"Fee Letter" means the letter agreement, dated as of the Closing Date,
among the Transferor, NextBank, the Purchaser and the Administrative Agent,
setting forth, among other things, the Commitment Fee Rate, Federal Funds
Margin, the Applicable Margin and certain other fees payable by the Transferor
under or in connection with this Agreement, as the same may be amended, restated
or otherwise modified from time to time.
"First Union" means First Union National Bank, a national banking
association, and its successors or assigns.
"First Union Securities" means First Union Securities, Inc., a North
Carolina corporation, and its successors.
"Governmental Actions" means any and all consents, approvals, permits,
orders, authorizations, waivers, exceptions, variances, exemptions or licenses
of, or registrations, declarations or filings with, any Governmental Authority
required under any Governmental Rules.
"Governmental Rules" means any and all laws, statutes, codes, rules,
regulations, ordinances, orders, writs, decrees and injunctions of any
Governmental Authority and any and all legally binding conditions, standards,
prohibitions, requirements and judgments of any Governmental Authority.
"Interpretation" as used in Sections 2.07 and 2.08 with respect to any
law or regulation, means the interpretation or application of such law or
regulation by any Governmental Authority (including any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government), central bank, accounting standards board, financial
services industry advisory body or any comparable entity.
"LIBOR Rate" means, with respect to any Interest Period (or portion
thereof), an interest rate per annum equal to the average (rounded upward to the
nearest one-sixteenth (1/16) of one percent) per annum rate of interest
determined by First Union on the basis of the offered rates for deposits in
dollars for a term equal to the Interest Period (or portion thereof), and
commencing on the first day of such Interest Period, appearing on Telerate Page
3750 (or, if, for any reason, Telerate Page 3750 is not available, the Reuters
Screen LIBO Page) as of 11:00 A.M. (London time) on the Business Day which is
the second Business Day immediately preceding the first day of the applicable
Interest Period. If neither Telerate Page 3750 nor the Reuters Screen LIBO Page
is available, then the LIBOR Rate shall be the rate determined by First Union at
its principal office in Charlotte, North Carolina as its LIBOR Rate (each such
determination, absent
6
<PAGE> 10
manifest error, to be conclusive and binding on all parties hereto and their
assignees) as of two Business Days prior to the applicable Interest Period as
the rate at which deposits in same day funds in U.S. dollars are being, have
been, or would be offered or quoted by First Union to major banks in the
applicable interbank market for Eurodollar deposits at or about 11:00 A.M.
(Charlotte, North Carolina time) on the Business Day which is the second
Business Day immediately preceding the first day of the applicable Interest
Period for delivery on the first day of such Interest Period for a term equal to
such Interest Period.
"Liquidity Agreement" means and include (i) the Liquidity Agreement of
even date herewith among the Purchaser, First Union Securities and the Liquidity
Providers supporting the Purchaser's payment obligations with respect to the
Commercial Paper Notes issued to fund its purchase or maintenance of the
Certificates hereunder, as amended, supplemented or otherwise modified from time
to time, and (ii) any other agreement outstanding from time to time for the
benefit of the Purchaser providing for the sale by the Purchaser of undivided
percentage interests in the Certificates or the making of loans or other
extensions of credit to support all or part of the Purchaser's payment
obligations under the Commercial Paper Notes issued to fund its purchase or
maintenance of the Certificates or to provide an alternate means of funding the
Purchaser's investment in the Certificates hereunder, and under which the amount
available from such sale or such extension of credit is limited to an amount
calculated by reference to the value or eligible unpaid balance of such
Certificates or any portion thereof or the level of credit enhancement available
with respect thereto, in each case as amended, supplemented or otherwise
modified from time to time.
"Liquidity Provider" means a financial institution providing liquidity
support to or for the account of the Purchaser pursuant to or in connection with
a Liquidity Agreement, so long as, at the time of each extension of such support
and each occurrence of a commitment to extend such support, such financial
institution is First Union, First Union Securities or a Person consented to in
writing by the Transferor (such consent not to be unreasonably withheld).
"Liquidity Reduction Date" means either (a) unless the applicable
Liquidity Provider is earlier replaced by the Administrative Agent with a
commercial bank satisfactory to the Administrative Agent having a commercial
paper or short-term deposit rating of A-1+ from Standard & Poor's and P1 from
Moody's, the latest of (i) the day on which any portion of the commitment of any
Liquidity Provider to provide liquidity support to the Purchaser in connection
with the Certificates shall be terminated, (ii) such later date as the
Administrative Agent may specify and (iii) the first Business Day that is at
least 90 days after delivery by the Administrative Agent to the Transferor of
written notice that the commitment of any Liquidity Provider to provide
liquidity support to the Purchaser in connection with the Certificates shall be
terminated or (b) unless the applicable Liquidity Provider is earlier replaced
by the Administrative Agent with a commercial bank satisfactory to the
Administrative Agent having a commercial paper or short-term deposit rating of
A-1+ from Standard & Poor's and P1 from Moody's the latest of (i) the first
Business Day that is 30 days after the date on which a Liquidity Provider is
downgraded to a level less than that required by the rating agencies rating the
commercial paper notes of the Purchaser (a "Downgrade Event"), (ii) such later
date as the Administrative Agent may specify and (iii) the first Business Day
that is at least 30 days after delivery by the Administrative Agent to the
Transferor of written notice of the applicable Downgrade Event.
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<PAGE> 11
"Losses" shall have the meaning set forth in Section 8.01(a).
"Monthly Interest" means with respect to any Distribution Date, an
amount equal to the sum of (i) the product of (a) the Certificate Rate in effect
with respect to the Interest Period ending immediately prior to such
Distribution Date, (b) the average daily Certificate Principal Balance during
such Interest Period and (c) a fraction the numerator of which is the actual
number of days in such Interest Period and the denominator of which is 360, plus
(ii) all Breakage Costs incurred by Owners during the immediately preceding
Interest Period.
"NextCard" means NextCard, Inc., a Delaware corporation.
"Other Pool Transferors" means all other Persons that transfer interests
(including security interests) in receivables or other financial assets to the
Purchaser to the extent that such interests in receivables or other financial
assets are aggregated with the interest of the Purchaser in the Certificates and
funded on a pooled basis by the Purchaser.
"Other Taxes" means any present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies that arise from
any payment or deposit required to be made hereunder, under the Pooling and
Servicing Agreement or the Supplement or from the execution, delivery or
registration of, or otherwise with respect to, any of the foregoing.
"Owner" means the Purchaser and all other owners by assignment,
participation or otherwise of a Certificate or any interest therein.
"Pooling and Servicing Agreement" means the Amended and Restated Pooling
and Servicing Agreement, dated as of May 21, 1999, among the Transferor, the
Servicer and the Trustee, as amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Purchase Commitment" means the commitment of the Purchaser to acquire
interests in the Certificates at a maximum Certificate Principal Balance
outstanding from time to time not to exceed $220,000,000 (as such amount may be
reduced from time to time pursuant to Section 2.05).
"Purchase Commitment Termination Date" means the earlier of the Business
Day preceding the day on which the Scheduled Amortization Period commences and
the Business Day preceding the day on which the Early Amortization Period
commences.
"Purchase Price" shall have the meaning set forth in Section 2.02.
"Required Owners" means, at any time, those Owners owning interests in
Certificates aggregating 66-2/3% of the Certificate Principal Balance at such
time.
"Scheduled Liquidity Termination Date" means November 8, 2000, as such
date may be extended pursuant to Section 2.05(b).
"Supplement" means the Series 1999-3 Supplement, dated as of November
10, 1999, among the Transferor, the Servicer and the Trustee.
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<PAGE> 12
"Taxes" shall have the meaning set forth in Section 2.09(a).
"Transferee" shall have the meaning set forth in Section 10.04(d).
"Transferor" shall have the meaning specified in the preamble hereto.
"UCC" means the Uniform Commercial Code as from time to time in effect
in the applicable jurisdiction.
"Weighted Average Cost" means, for any Interest Period, the sum of (i)
the amounts paid or payable by the Purchaser as interest or otherwise (by means
of interest rate hedges or otherwise) in respect of the Commercial Paper Notes
(ii) the commissions of placement agents and dealers in respect of such
Commercial Paper Notes, and (iii) other borrowings by the Purchaser (other than
under any Liquidity Agreement), including to fund small or odd dollar amounts
that are not easily accommodated in the commercial paper market.
"Year 2000 Plan" shall have the meaning set forth in Section 6.01(m).
"Year 2000 Problem" shall have the meaning set forth in Section 6.01(m).
Section 1.02. Accounting Terms; Other Terms. All accounting terms used
in this Agreement shall, unless otherwise specifically provided, have the
meanings customarily given to them in accordance with generally accepted United
States accounting principles or United States regulatory accounting principles,
as applicable, as in effect from time to time, and all financial computations
hereunder shall, unless otherwise specifically provided, be computed in
accordance with generally accepted United States accounting principles or United
States regulatory accounting principles, as applicable, as in effect from time
to time, consistently applied. 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 1.03. Other Rules of Construction. References in this Agreement
to sections, schedules and exhibits are to sections of and schedules and
exhibits to this Agreement unless otherwise indicated. The words "hereof",
"herein", "hereunder" and comparable terms refer to the entirety of this
Agreement and not to any particular article, section or other subdivision hereof
or attachment hereto. Words in the singular include the plural and in the plural
include the singular. Unless the context otherwise requires, the word "or" is
not exclusive. The word "including" shall be deemed to mean "including, without
limitation". The section and article headings and table of contents contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Except as otherwise specified
herein, all references herein (i) to any Person shall be deemed to include such
Person's successors and assigns and (ii) to any Governmental Rule or contract
specifically defined or referred to herein shall be deemed references to such
Governmental Rule or contract as the same may be supplemented, amended, waived,
consolidated, replaced or modified from time to time, but only to the extent
permitted by, and effected in accordance with, the terms thereof.
Section 1.04. 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 mean "to but excluding."
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<PAGE> 13
ARTICLE TWO
PURCHASE AND SALE; PURCHASE COMMITMENT
Section 2.01. Purchase and Sale of the Certificates. On the terms and
subject to the conditions set forth in this Agreement, and in reliance on the
covenants, representations, warranties and agreements herein set forth, the
Transferor agrees to sell, transfer and deliver to the Purchaser, at the
Closing, and the Purchaser agrees to purchase from the Transferor, at the
Closing, the Certificates.
Section 2.02. Purchase Price. The Certificates are to be purchased at an
initial purchase price (the "Purchase Price") of $0, representing 100% of the
Initial Invested Amount. Upon satisfaction of the conditions to Closing set
forth in Articles Four and Five, the Purchase Price is to be remitted to the
Transferor in same day funds by wire transfer pursuant to written instructions
to be provided to the Administrative Agent at least five Business Days prior to
the Closing Date.
Section 2.03. Increases and Decreases in the Invested Amount.
(a) Subject to the terms and conditions of Section 4.10 of the
Supplement, the Purchaser hereby agrees from the Closing Date to (but not
including) the Purchase Commitment Termination Date to fund any Invested Amount
Increase requested by the Transferor from the Purchaser in accordance with the
procedures described in Section 4.10 of the Supplement; provided, however, that
at no time shall the Certificate Principal Balance allocable to the Purchaser
exceed the Purchase Commitment. On the date of the applicable Invested Amount
Increase, the Purchaser shall remit to the Administrative Agent, in same day
funds, the amount of such Invested Amount Increase, whereupon the Administrative
Agent will remit such amount, in same day funds, to the Transferor in accordance
with such payment instructions as the Transferor shall have delivered in writing
to the Administrative Agent at least one Business Day prior to the date of such
Invested Amount Increase.
(b) The Invested Amount may be decreased from time to time in accordance
with the procedures described in the Supplement and, so long as the Purchase
Commitment Termination Date has not occurred, subsequently increased in
accordance with the requirements of this Agreement and Section 4.10 of the
Supplement.
(c) Notwithstanding anything to the contrary contained herein, if any
Invested Amount Increase is not made on the date specified by the Transferor in
its written request therefor delivered pursuant to Section 4.10 of the
Supplement, the Transferor shall indemnify each Affected Party against any
reasonable loss, cost or expense incurred by such Affected Party as a result of
such occurrence, including, without limitation, any reasonable loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such Affected Party to fund such anticipated Invested
Amount Increase.
Section 2.04. Commitment Fee. From and after the Closing Date until the
Purchase Commitment Termination Date, the Transferor shall pay to the Purchaser
a commitment fee
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<PAGE> 14
equal to the product of (i) the Purchase Commitment and (ii) the Commitment Fee
Rate, payable in arrears on each Distribution Date.
Section 2.05. Termination or Reduction of the Purchase Commitment;
Scheduled Liquidity Termination Date.
(a) Upon at least five Business Days' notice to the Purchaser, the
Transferor may terminate in whole or reduce in part the unused portion of the
Purchase Commitment; provided, however, that any such reduction in part shall be
in a minimum amount of $10,000,000 or an integral multiple of $1,000,000 in
excess thereof and (ii) if, after giving effect to such reduction, the Purchase
Commitment would be less that $100,000,000, such reduction shall be either in
such smaller amount as will not cause the Purchase Commitment to be less than
$100,000,000 or in a amount sufficient to reduce the Purchase Commitment
hereunder to zero.
(b) If the Scheduled Liquidity Termination Date in effect at any time
will not be extended, the Administrative Agent agrees that it will so notify the
Transferor and the Servicer in writing at least 90 days prior to such Scheduled
Liquidity Termination Date. To the extent that the Administrative Agent has not
delivered a notice of nonextension as contemplated in the preceding sentence,
the Administrative Agent will, on or before the Scheduled Liquidity Termination
Date then in effect, notify the Transferor and the Servicer of the new Scheduled
Liquidity Termination Date, whereupon such new date shall be the effective
Scheduled Liquidity Termination Date.
Section 2.06. Calculation and Payment of Monthly Interest and Fees;
Selection of Commercial Paper Note Maturities.
(a) The amount of interest payable on each Distribution Date in respect
of Certificates shall equal the Monthly Interest for such Distribution Date. The
Administrative Agent shall notify the Servicer, the Trustee and the Purchaser,
on the Business Day preceding each Determination Date, of the Monthly Interest
for the related Distribution Date and the Certificate Rate for the related
Interest Period.
(b) Out of the Monthly Interest received by the Administrative Agent for
each Interest Period as contemplated in Section 9.01(b), the Administrative
Agent shall remit to each Owner an amount of interest equal to the product of
(i) such Owner's cost of funds and (ii) such Owner's allocable share of the
Invested Amount during such Interest Period, plus the amount of any Breakage
Costs applicable to such Owner in respect of such Distribution Date.
(c) All computations of interest, fees and other amounts under this
Agreement shall be made on the basis of a year of 360 days and the actual number
of days elapsed. Whenever any payment or deposit to be made hereunder shall be
due on a day other than a Business Day, such payment or deposit shall be made on
the next succeeding Business Day and such extension of time shall be included in
the computation of such payment or deposit.
(d) The Purchaser (or the Administrative Agent on its behalf) shall
select the maturities of Commercial Paper Notes allocated to fund or maintain
the Purchaser's interest in the Certificates in consultation with the
Transferor; provided, however, that notwithstanding the Administrative Agent's
agreement to consult with the Transferor in selecting maturities for such
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<PAGE> 15
Commercial Paper Notes, the Administrative Agent, on behalf of the Purchaser,
shall retain full and absolute discretion to select such maturities.
Section 2.07. Increased Costs.
(a) If due to the introduction of or any change (including, without
limitation, any change by way of imposition or increase of reserve requirements)
in or in the Interpretation of any law or regulation or the imposition of any
guideline or request from any central bank or other Governmental Authority after
the date hereof, there shall be an increase in the cost to an Affected Party of
making, funding or maintaining any investment in the Certificates or any
interest therein or of agreeing to purchase or invest in the Certificates or any
interest therein, as the case may be (other than by reason of any Interpretation
of or change in laws or regulations relating to Taxes or Excluded Taxes), such
Affected Party shall promptly submit to the Transferor, the Servicer and the
Administrative Agent a certificate setting forth in reasonable detail, the
calculation of such increased costs incurred by such Affected Party. In
determining such amount, such Affected Party may use any reasonable averaging
and attribution methods, consistent with the averaging and attribution methods
generally used by such Affected Party in determining amounts of this type. The
amount of increased costs set forth in such certificate (which certificate
shall, in the absence of manifest error, be prima facie evidence as to such
amount) shall be included in the Additional Amounts for (i) the first full
Interest Period immediately succeeding the date on which the certificate
specifying the amount owing was delivered and (ii) to the extent remaining
outstanding, each Interest Period thereafter until paid in full. The
Administrative Agent shall, out of amounts received by it (as contemplated in
Section 9.01(b)) in respect of the Additional Amounts on any Distribution Date
(as contemplated in Section 9.01(b)), pay to each Affected Party, any increased
costs due pursuant to this Section; provided, however, that if the amount
distributable in respect of the Additional Amounts on any Distribution Date is
less than the aggregate amount payable to all Affected Parties pursuant to
Sections 2.07, 2.08 and 2.09 for the corresponding Interest Period, the
resulting shortfall shall be allocated among such Affected Parties on a pro rata
basis (determined by the amount owed to each). Failure on the part of any
Affected Party to demand compensation for any amount pursuant to this Section
for any period shall not constitute a waiver of such Affected Party's right to
demand compensation for such period; provided, however, that no Affected Party
shall be entitled to compensation for any such amount relating to any period
ending more than six months prior to the date that such Affected Party notifies
the Transferor, the Servicer and the Administrative Agent in writing thereof.
(b) Each Owner agrees that it shall use its best efforts to take (or
cause any Affected Party claiming through such Owner to take) such steps as
would eliminate or reduce the amount of any increased costs described in this
Section incurred by such Owner or Affected Party; provided that no such steps
shall be required to be taken if, in the reasonable judgment of such Owner or
Affected Party, such steps would be disadvantageous to such Owner or Affected
Party or inconsistent with its internal policy and legal and regulatory
restrictions. To the extent that, notwithstanding such efforts, any Owner that
is a Liquidity Provider (or any Affected Party claiming through an Owner that is
a Liquidity Provider) is unable to eliminate such increased costs and makes a
demand hereunder, the Purchaser may replace such Liquidity Provider with another
commercial bank satisfactory to the Purchaser, the Administrative Agent and the
Transferor; provided, however, that the Purchaser shall be under no obligation
to so replace a
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<PAGE> 16
Liquidity Provider requesting any amount under this Section, and shall in no
event replace such Liquidity Provider if it is First Union Securities.
Section 2.08. Increased Capital.
(a) If the introduction of or any change in or in the Interpretation of
any law or regulation or the imposition of any guideline or request from any
central bank or other Governmental Authority, in each case, after the date
hereof, affects or would affect the amount of capital required or expected to be
maintained by any Affected Party, and such Affected Party determines that the
amount of such capital is increased as a result of (i) the existence of the
Purchaser's agreement to make or maintain an investment in the Certificates or
any interest therein and other similar agreements or facilities or (ii) the
existence of any agreement by Affected Parties to make or maintain an investment
in the Certificates or any interest therein or to fund any such investment and
any other commitments of the same type, such Affected Party shall promptly
submit to the Transferor, the Servicer and the Administrative Agent a
certificate setting forth the additional amounts required to compensate such
Affected Party in light of such circumstances. In determining such amount, such
Affected Party may use any reasonable averaging and attribution methods,
consistent with the averaging and attribution methods generally used by such
Affected Party in determining amounts of this type. The amount set forth in such
certificate (which certificate shall, in the absence of manifest error, be prima
facie evidence as to such amount) shall be included in the Additional Amounts
for (i) the first full Interest Period immediately succeeding the date on which
the certificate specifying the amount owing was delivered and (ii) to the extent
remaining outstanding, each Interest Period thereafter until paid in full. The
Administrative Agent shall, out of amounts received by it in respect of the
Additional Amounts on any Distribution Date (as contemplated in Section
9.01(b)), pay to each Affected Party any amount due pursuant to this Section,
provided, however, that if the amount distributable in respect of the Additional
Amounts on any Distribution Date is less than the aggregate amount payable to
all Affected Parties pursuant to Sections 2.07, 2.08 and 2.09 for the
corresponding Interest Period, the resulting shortfall shall be allocated among
such Affected Parties on a pro rata basis (determined by the amount owed to
each). Failure on the part of any Affected Party to demand compensation for any
amount pursuant to this Section for any period shall not constitute a waiver of
such Affected Party's right to demand compensation for such period; provided,
however, that no Affected Party shall be entitled to compensation for any such
amount relating to any period ending more than six months prior to the date that
such Affected Party notifies the Transferor, the Servicer and the Administrative
Agent in writing thereof.
(b) Each Owner agrees that it shall use its best efforts to take (or
cause any Affected Party claiming through such Owner to take) such steps as
would eliminate or reduce the amount of any increased costs described in this
Section incurred by such Owner or Affected Party; provided that no such steps
shall be required to be taken if, in the reasonable judgment of such Owner or
Affected Party, such steps would be disadvantageous to such Owner or Affected
Party or inconsistent with its internal policy and legal and regulatory
restrictions. To the extent that, notwithstanding such efforts, any Owner that
is a Liquidity Provider (or any Affected Party claiming through an Owner that is
a Liquidity Provider) is unable to eliminate such amount in respect of which
compensation is payable pursuant to this Section and makes a demand hereunder,
the Purchaser may replace such Liquidity Provider with another commercial bank
satisfactory to the Purchaser, the Administrative Agent and the Transferor;
provided, however,
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<PAGE> 17
that the Purchaser shall be under no obligation to so replace a Liquidity
Provider requesting any amount under this Section, and shall in no event replace
such Liquidity Provider if it is First Union Securities, Inc.
Section 2.09. Taxes.
(a) Subject to Section 2.09(d), any and all payments and deposits
required to be made hereunder or under the Pooling and Servicing Agreement or
the Supplement by the Transferor or the Trustee to or for the benefit of the
Administrative Agent or any Owner shall be made, to the extent allowed by law,
free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto imposed by any Governmental Authority, excluding, in the case of
each Owner and the Administrative Agent, (i) taxes, levies, imposts, deductions,
charges or withholdings imposed on, or measured by reference to, the net income
of such Owner or the Administrative Agent, as applicable, franchise taxes
imposed on such Owner or the Administrative Agent, as applicable (including,
branch profits taxes, minimum taxes and taxes computed under alternative
methods, at least one of which is based on net income), and any other taxes
(other than withholding taxes not imposed by Section 1446 of the Code and Other
Taxes), levies, imposts, deductions, charges or withholdings based or imposed on
income or the receipts or gross receipts of such Owner or the Administrative
Agent, as applicable, in each case, by any of (A) the United States or any State
thereof, (B) the state or foreign jurisdiction under the laws of which such
Owner or the Administrative Agent, as applicable, is organized, with which it
has a present or former connection (other than solely by reason of this
Agreement), or in which it is otherwise doing business or (C) any political
subdivision thereof; (ii) any taxes, levies, imposts, duties, charges or fees to
the extent of any credit or other benefit actually realized by such
Administrative Agent or Owner, as applicable, as a result thereof; and (iii) any
taxes, levies, imposts, duties, charges or fees imposed as a result of a change
by the Administrative Agent or Owner, as applicable, of the office in which all
or any part of its interest in the Certificates is acquired, accounted for or
booked (all such excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being referred to herein as "Excluded Taxes" and
all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities being referred to herein as "Taxes"). If the Transferor or the
Trustee shall be required by law to deduct any Taxes from or in respect of any
sum required to be paid or deposited hereunder to or for the benefit any Owner
or the Administrative Agent, then, to the extent provided in Section 2.09(d),
(i) such sum shall be increased as may be necessary so that, after making all
required deductions (including deductions applicable to additional sums payable
under this Section), such Owner or the Administrative Agent (as the case may be)
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Transferor or the Trustee (as appropriate) shall
make such deductions and (iii) the Transferor or the Trustee (as appropriate)
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) To the extent provided in Section 2.09(d), each Owner and the
Administrative Agent shall be reimbursed for the full amount of Taxes or Other
Taxes (including, without limitation, any Taxes or Other Taxes imposed by any
jurisdiction on amounts otherwise payable under this Section) paid by such Owner
or the Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Each Owner and the Administrative Agent agrees to promptly notify the Transferor
and the
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Servicer of any payment of such Taxes or Other Taxes made by it and, if
practicable, any request, demand or notice received in respect thereof prior to
such payment. In addition, in the event any Owner is required, in accordance
with and pursuant to the terms of any agreement or other document providing
liquidity support, credit enhancement or other similar support to such Owner in
connection with the Certificates or the funding or maintenance of an interest
therein, to compensate a bank or other financial institution in respect of taxes
under circumstances similar to those described in this Section, then, to the
extent provided in Section 2.09(d), such Owner shall be reimbursed for any such
compensation so paid by it. A certificate as to the amount of any
indemnification pursuant to this Section submitted to the Transferor by such
Owner or the Administrative Agent, as the case may be, setting forth in
reasonable detail the basis for and the calculation thereof, shall (absent
manifest error) be prima facie evidence as to such amount.
(c) Within 30 days after the date of any payment of Taxes or Other
Taxes, the Transferor will furnish to the Administrative Agent the original or a
certified receipt evidencing payment thereof.
(d) Any amounts payable to an Owner or the Administrative Agent pursuant
to this Section shall be included in the Additional Amounts for (i) in the case
of amounts payable pursuant to Section 2.09(a), the Interest Period in respect
of which the payment subject to withholding is made, (ii) in the case of amounts
payable pursuant to Section 2.09(b), the first full Interest Period immediately
succeeding the date on which the certificate specifying the amount owing was
delivered and (iii) in either case, to the extent remaining outstanding, each
Interest Period thereafter until paid in full. The Administrative Agent shall,
out of amounts received by it in respect of the Additional Amounts on any
Distribution Date (as contemplated in Section 9.01(b)), pay to each Owner and
itself, as applicable, any reimbursement due pursuant to this Section, provided,
however, that if the amount distributable in respect of the Additional Amounts
on any Distribution Date is less than the aggregate amount payable to all
Affected Parties pursuant to Sections 2.07, 2.08 and 2.09 for the corresponding
Interest Period, the resulting shortfall shall be allocated among such Affected
Parties on a pro rata basis (determined by the amount owed to each).
(e) The Administrative Agent and each Owner (i) that is organized under
the laws of a jurisdiction outside the United States hereby agrees to complete,
execute and deliver to the Trustee from time to time prior to the initial
Distribution Date on which such Person will be entitled to receive distributions
pursuant to the Supplement and this Agreement, Internal Revenue Service form
4224 (or any successor form), (ii) at the request of the Transferor, hereby
agrees to complete, execute and deliver to the Trustee from time to time prior
to the initial Distribution Date on which such Person will be entitled to
receive distributions pursuant to the Supplement and this Agreement, Internal
Revenue Service form W-9 (or any successor form), and (iii) hereby agrees to
complete, execute and deliver to the Trustee from time to time prior to the
initial Distribution Date on which such Person will be entitled to receive
distributions pursuant to the Supplement and this Agreement, such other forms or
certificates as may be required under the laws of any applicable jurisdiction in
order to permit the Transferor or the Trustee to make payments to, and deposit
funds to or for the account of, such Person hereunder and under the Pooling and
Servicing Agreement and the Supplement without any deduction or withholding for
or on account of any United States tax. Each of the Administrative Agent and
each Owner agrees to provide like additional subsequent duly executed forms on
or before the
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<PAGE> 19
date that any such form expires or becomes obsolete, or upon the occurrence of
any event requiring an amendment, resubmission or change in the most recent form
previously delivered by it and to provide such extensions or renewals as may be
reasonably requested by the Transferor or the Trustee. Each of the
Administrative Agent and the Owner certifies, represents and warrants that as of
the date of this Agreement, or in the case of an Owner which is an assignee as
of the date of such assignment, that (i) it is entitled (A) to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes (other than taxes subject to withholding pursuant to Code
Section 1446) and (B) to an exemption from United States backup withholding tax
and (ii) it will pay any taxes attributable to its ownership of an interest in
the Certificates. Each of the Administrative Agent and each Owner further agrees
that compliance with this Section 2.09(e) (including by reason of Section
10.04(c) in the case of any sale or assignment of any interest in Certificates)
is a condition to the payment of any amount otherwise due pursuant to Sections
2.09(a) and 2.09(b). Notwithstanding anything to the contrary herein, each of
the Paying Agent, Servicer and Trustee shall be entitled to withhold any amount
that it reasonably determines in its sole discretion is required to be withheld
pursuant to Section 1446 of the Code and such amount shall be deemed to have
been paid to the Administrative Agent or Owner, as applicable, for all purposes
of the Agreement.
(f) Any Owner entitled to the payment of any additional amount pursuant
to this Section shall use its reasonable efforts (consistent with its internal
policy and legal and regulatory restrictions) to take such steps as would
eliminate or reduce the amount of such payment; provided that no such steps
shall be required to be taken if, in the reasonable judgment of such Owner, such
steps would be materially disadvantageous to such Owner. To the extent that,
notwithstanding such efforts, any Owner that is a Liquidity Provider is unable
to eliminate an amount payable under this Section and makes a demand hereunder,
the Purchaser shall use its reasonable efforts to replace such Liquidity
Provider with another commercial bank satisfactory to the Purchaser, the
Administrative Agent and the Transferor; provided, however, that the Purchaser
shall be under no obligation to so replace such Liquidity Provider if it is
First Union Securities.
(g) Without prejudice to the survival of any other agreement of the
Transferor hereunder, the agreements and obligations of the Transferor contained
in this Section shall survive the termination of this Agreement.
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<PAGE> 20
ARTICLE THREE
CLOSING
Section 3.01. Closing. The closing of the purchase and sale of the
Certificates (the "Closing") shall take place at the offices of Orrick,
Herrington & Sutcliffe LLP, 400 Sansome Street, San Francisco, CA 94111, at
10:00 a.m. (Pacific Standard Time), on November 12, 1999, or, if the conditions
to closing set forth in Articles Four and Five shall not have been satisfied or
waived by such date, as soon as practicable after such conditions shall have
been satisfied or waived, or at such other time, date and place as the parties
shall agree upon (the date of the Closing being referred to herein as the
"Closing Date").
Section 3.02. Transactions to be Effected at the Closing. At the
Closing, (i) the Purchaser will deliver to the Transferor (by wire transfer of
same day funds to a bank account designated by the Transferor at least two
Business Days prior to the Closing Date) an amount equal to the Purchase Price
and (ii) the Transferor shall deliver the Certificates to the Administrative
Agent on behalf of the Purchaser.
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ARTICLE FOUR
PURCHASER CONDITIONS PRECEDENT
Section 4.01. Conditions Precedent to the Purchase of the Certificates.
The obligation of the Purchaser to purchase and pay for the Certificates on the
Closing Date is subject to the satisfaction at the time of the Closing of the
following conditions:
(a) Performance by the Transferor. All the terms, covenants,
agreements and conditions of this Agreement, the Pooling and Servicing
Agreement and the Supplement to be complied with and performed by the
Transferor by the Closing shall have been complied with and performed in
all material respects.
(b) Representations and Warranties of the Transferor. Each of the
representations and warranties of the Transferor made in this Agreement,
the Pooling and Servicing Agreement and the Supplement shall be true and
correct in all material respects as of the time of the Closing as though
made as of such time (except to the extent they expressly relate to an
earlier time).
(c) Officers' Certificate. The Administrative Agent shall have
received from the Transferor, in form and substance reasonably
satisfactory to the Purchaser and the Administrative Agent, an Officer's
Certificate, dated the Closing Date, certifying as to the satisfaction
of the conditions set forth in Sections 4.01(a) and 4.01(b).
(d) Certain Opinions of Counsel. The Administrative Agent shall
have received from Orrick, Herrington & Sutcliffe LLP, acting as counsel
for the Transferor, the Servicer and/or certain other parties, as
applicable, favorable opinions, dated the Closing Date and reasonably
satisfactory in form and substance to the Purchaser, the Administrative
Agent and their counsel.
(e) Opinion of Counsel for the Trustee. The Administrative Agent
shall have received from McGuire, Woods, Battle & Boothe LLP, counsel
for the Trustee, a favorable opinion, dated the Closing Date and
reasonably satisfactory in form and substance to the Purchaser, the
Administrative Agent and their counsel.
(f) Financing Statements. The Administrative Agent shall have
received evidence reasonably satisfactory to the Purchaser and the
Administrative Agent that, on or before the Closing Date, UCC-1
financing statements have been filed in the offices of the Secretary of
State or comparable offices of the applicable states and in the
appropriate office or offices in such other locations as may be
specified in the relevant opinions of counsel delivered pursuant to
Section 4.01(d) and in such other jurisdictions as its counsel deems
appropriate, reflecting the assignments contemplated by such opinions of
counsel and the respective interests of the applicable parties.
(g) Receipt of Certain Documents. The Administrative Agent and
the Purchaser shall have received a fully executed copy of each of the
Pooling and Servicing Agreement, the Supplement and the other
instruments, documents and agreements
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<PAGE> 22
required to be delivered thereunder. Each of the Pooling and Servicing
Agreement and the Supplement shall have been duly authorized, executed
and delivered by the Transferor, the Servicer, and the Trustee, and
shall be in full force and effect on the Closing Date.
(h) No Actions or Proceedings. No action, suit, proceeding or
investigation by or before any Governmental Authority shall have been
instituted to restrain or prohibit the consummation by the Transferor,
the Administrative Agent or the Purchaser of, or to invalidate, the
transactions contemplated by this Agreement, the Supplement or any of
the Liquidity Agreements or Enhancement Agreements in any material
respect.
(i) Approvals and Consents. All Governmental Actions of
Governmental Authorities required by the Administrative Agent, the
Purchaser or the Transferor with respect to the transactions
contemplated by this Agreement, the Supplement and the Liquidity
Agreements and Enhancement Agreements shall have been obtained or made.
(j) Commercial Paper Market. The commercial paper market shall be
available to the Purchaser at the time of the Closing.
(k) Payment of Fees. All fees required to be paid to the
Administrative Agent or the Purchaser in connection with the Closing
pursuant to the Fee Letter shall have been paid.
(l) Other Documents. The Transferor shall have furnished to the
Purchaser or the Administrative Agent, as the case may be, such other
information, certificates and documents as the Purchaser, the
Administrative Agent or their counsel may reasonably request.
Section 4.02. Conditions Precedent to Invested Amount Increases. The
obligation of the Purchaser to make any Invested Amount Increase is subject to
the satisfaction, as of the applicable Increase Date, of each of the applicable
Increase Conditions and the other applicable conditions specified herein.
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<PAGE> 23
ARTICLE FIVE
TRANSFEROR CONDITIONS PRECEDENT
Section 5.01. Conditions Precedent to the Sale of the Certificates. The
obligation of the Transferor to sell the Certificates to the Administrative
Agent on the Closing Date for the benefit of the Purchaser and the subsequent
Owners from time to time is subject to the satisfaction at the time of the
Closing of the following conditions:
(a) Performance by the Purchaser and the Administrative Agent.
All the terms, covenants, agreements and conditions of this Agreement to
be complied with and performed by the Purchaser or the Administrative
Agent, as the case may be, by the Closing shall have been complied with
and performed in all material respects.
(b) Representations and Warranties. Each of the representations
and warranties of each of the Purchaser and the Administrative Agent
made in this Agreement shall be true and correct in all material
respects as of the time of the Closing as though made as of such time
(except to the extent they expressly relate to an earlier time).
(c) Officer's Certificate. The Transferor shall have received
from the Purchaser, in form and substance reasonably satisfactory to the
Transferor, a certificate signed by an officer of the Purchaser, dated
the Closing Date, certifying as to the satisfaction of the conditions
set forth in Sections 5.01(a) and 5.01(b).
(d) Opinion of Counsel for the Trustee. The Transferor shall have
received from McGuire, Woods, Battle & Boothe LLP, counsel for the
Trustee, a favorable opinion, dated the Closing Date and reasonably
satisfactory in form and substance to the Transferor and its counsel.
(e) No Actions or Proceedings. No action, suit, proceeding or
investigation by or before any Governmental Authority shall have been
instituted to restrain or prohibit the consummation by the Transferor,
the Administrative Agent or the Purchaser of, or to invalidate, the
transactions contemplated by this Agreement in any material respect.
(f) Approvals and Consents. All Governmental Actions of
Governmental Authorities required by the Purchaser, the Administrative
Agent or the Transferor with respect to the transactions contemplated by
this Agreement shall have been obtained or made.
(g) Other Documents. The Purchaser or the Administrative Agent,
as applicable, shall have furnished to the Transferor such other
information, certificates and documents as the Transferor or its counsel
may reasonably request.
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<PAGE> 24
ARTICLE SIX
REPRESENTATIONS AND WARRANTIES
Section 6.01. Representations and Warranties of the Transferor and
Servicer. Each of the Transferor and the Servicer hereby represents and warrants
to the Owners and the Administrative Agent with respect to itself (giving
effect, in the case of any Successor Servicer, any successor to the Transferor
or any Additional Transferor, to such changes to Section 6.01(a) as may be
necessary to reflect accurately the incorporation or other formation of such
Successor Servicer, successor to the Transferor or Additional Transferor) as of
the date of this Agreement, as of the Closing Date, and as of (and as a
condition to any Invested Amount Increase occurring on) each Increase Date (but
excluding, in the case of any Increase Date, Section 6.01(e)), in each case with
reference to the facts and circumstances then existing, as follows:
(a) Corporate Existence. Each of the Transferor and the Servicer
is a national banking association organized, validly existing and in
good standing under the federal laws of the United States, with full
power and authority under such laws to own its properties and conduct
its business as such properties are presently owned and such business is
presently conducted and to execute, deliver and perform its obligations
under this Agreement and each Certificate Document to which it is a
party.
(b) Corporate Authority. Each of the Transferor and the Servicer
has the corporate power, authority and right to make, execute, deliver
and perform this Agreement and each Certificate Document to which it is
a party and all the transactions contemplated hereby and thereby and has
taken all necessary corporate action to authorize the execution,
delivery and performance of this Agreement and each Certificate Document
to which it is a party; and, when executed and delivered, each of this
Agreement and the Certificate Documents to which it is a party will
constitute its legal, valid and binding obligation, enforceable in
accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium, receivership, conservatorship
and other laws relating to or affecting the enforcement of rights of
creditors of banking institutions the accounts of which are insured by
the Federal Deposit Insurance Corporation or any other instrumentality
of the federal government from time to time in effect. The
enforceability of its obligations under such agreements is also subject
to general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and no
representation or warranty is made with respect to the enforceability of
its obligations under any indemnification provisions in such agreements
to the extent that indemnification is sought in connection with
securities laws violations and is contrary to public policy.
(c) No Consents Required. No consent, license, approval or
authorization of, or registration with, any Governmental Authority is
required to be obtained by the Transferor or the Servicer, as
applicable, in connection with the execution, delivery or performance by
the Transferor or the Servicer, as applicable, of each of this Agreement
and the Certificate Documents that has not been duly obtained and which
is not and will
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<PAGE> 25
not be in full force and effect on the Closing Date or the relevant
Increase Date, as applicable.
(d) No Violation. The execution, delivery and performance of each
of this Agreement and the Certificate Documents do not violate any
provision of any existing law or regulation applicable to the Transferor
or the Servicer, as applicable, any order or decree of any court or
other judicial authority to which it is subject, its charter or By-laws
or any mortgage, indenture, contract or other agreement to which it is a
party or by which it or any significant portion of its properties is
bound (other than violations of such laws, regulations, orders, decrees,
mortgages, indentures, contracts and other agreements which,
individually or in the aggregate, would not have a material adverse
effect on the Transferor's or the Servicer's, as applicable, ability to
perform its obligations under, or the validity or enforceability of,
this Agreement or the Certificate Documents).
(e) Financial Statements. Prior to the Closing Date, the
Transferor has delivered or caused to be delivered to the Administrative
Agent complete and correct copies of, (i) the audited consolidated
balance sheet of NextCard and its subsidiaries as of December 31, 1998,
and the related audited consolidated statements of income and cash flows
of NextCard and its subsidiaries for the fiscal year then ended,
accompanied by the opinion of NextCard independent certified public
accountants and (ii) the unaudited consolidated balance sheet of
NextCard and its subsidiaries as of September 30, 1999, and the related
unaudited consolidated statements of income and cash flows of NextCard
and its subsidiaries for the fiscal quarter then ended. Such financial
statements are complete and correct in all material respects and fairly
present the financial condition of NextCard and its subsidiaries as of
their respective dates and the results of operations of NextCard and its
subsidiaries for the applicable periods then ended, subject to year-end
adjustments in the case of unaudited information, all in accordance with
generally accepted accounting principles or regulatory accounting
principles, as applicable, consistently applied.
(f) No Proceeding. There is no action, litigation or proceeding
before any court, tribunal or governmental body presently pending or, to
the knowledge of the Transferor or the Servicer, as applicable,
threatened against the Transferor or the Servicer, as applicable, with
respect to this Agreement, the Certificate Documents, the transactions
contemplated hereby or thereby or the issuance of the Certificates, and
there is no such litigation or proceeding against it or any significant
portion of its properties which would have a material adverse effect on
the transactions contemplated by, or its ability to perform its
obligations under, this Agreement or any Certificate Document to which
it is a party.
(g) Trust Indenture Act; Investment Company Act. Neither the
Pooling and Servicing Agreement nor the Supplement is required to be
qualified under the Trust Indenture Act of 1939, and the Trust is not
required to be registered under the Investment Company Act of 1940, as
amended.
(h) No Pay Out Event or Other Default. No Pay Out Event or
Servicer Default has occurred and is continuing, both before and
immediately after giving effect to
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<PAGE> 26
the purchase or issuance of the Certificates or the relevant Invested
Amount Increase, as applicable, and no event, act or omission has
occurred and is continuing which, with the lapse of time, the giving of
notice, or both, would constitute a Pay Out Event or Servicer Default.
(i) The Certificates. The Certificates have been duly and validly
authorized, and, when executed and authenticated in accordance with the
terms of the Pooling and Servicing Agreement and the Supplement and
delivered to the Administrative Agent in accordance with this Agreement,
will be duly and validly issued and outstanding, and will be entitled to
the benefits of, as applicable, this Agreement and the applicable
Certificate Documents.
(j) Absence of Material Adverse Change. Since December 31, 1998,
there has not been any material adverse change in the condition
(financial or otherwise) of NextCard or NextBank that has not been
disclosed in writing by the Transferor to the Administrative Agent.
(k) Taxes, Etc. Any taxes, fees and other charges of Governmental
Authorities imposed upon the Transferor or the Servicer, as applicable,
in connection with the execution, delivery and performance by the
Transferor or the Servicer, as applicable, of this Agreement, the
Pooling and Servicing Agreement, the Supplement and, the Certificates or
otherwise in connection with the Trust have been paid or will be paid by
the Transferor or the Servicer, as applicable, at or prior to the
Closing Date or the relevant Increase Date, as applicable, to the extent
then due.
(l) Disclosure. All written factual information heretofore
furnished by the Transferor, the Servicer or any of their respective
representatives to the Administrative Agent or any Owner or any of their
representatives for purposes of or in connection with this Agreement,
including, without limitation, information relating to the Accounts and
Receivables and the Transferor's credit card businesses, was true and
correct in all material respects on the (i) date such information was
furnished by the Transferor or the Servicer, as applicable, or (ii) if
such information specifically relates to an earlier date, on such
earlier date.
(m) Year 2000 Plan. Each of the Transferor and the Servicer have
reviewed the areas within its business and operations that could
reasonably be expected to be adversely affected by, and have developed a
plan (the "Year 2000 Plan") to address on a timely basis, the risk that
computer applications used to process any data related to this Agreement
(whether by the Transferor, the Servicer or any of their respective
suppliers or vendors) may produce materially adverse consequences in
performing date-sensitive functions involving certain dates prior to and
any date after December 31, 1999 (such risk being referred to herein as
the "Year 2000 Problem"). Each of the Transferor and the Servicer is
taking or causing to be taken reasonable measures to address the Year
2000 Problem on a timely basis. To the best of the Transferor's and the
Servicer's knowledge, the Year 2000 Problem will not materially and
adversely affect the interests of the Owners under this Agreement, the
Supplement and the Pooling and Servicing Agreement.
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<PAGE> 27
(n) FICO Scores. As of the Closing Date, no more than [*] of the
Accounts (calculated on the basis of the amount of outstanding Principal
Receivables relating to the Accounts on the dates they became Accounts)
have related Obligors with FICO Scores as of the date of the origination
of their Accounts of less than [*].
(o) Location of Offices. The Transferor's principal place of
business and chief executive office is located in the State of
California, or such other jurisdiction with respect to which the
requirements specified in Section 7.04 have been satisfied.
(p) Pooling and Servicing Representations and Warranties. Its
representations and warranties in Sections 2.03 and 2.04 (in the case of
a Transferor) or Section 3.03 (in the case of the Servicer) of the
Pooling and Servicing Agreement are true and correct in all material
respects as of the dates they were made (unless they specifically refer
to an earlier date, in which case they were true and correct on such
earlier date).
Section 6.02. Representations and Warranties of the Purchaser and the
Administrative Agent. Each of the Purchaser and the Administrative Agent hereby
represents and warrants to the Transferor as to itself as of the date of this
Agreement and as of the Closing Date as follows:
(a) Organization. The Purchaser has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware. The Administrative Agent has been duly organized and
is validly existing as a limited liability company in good standing
under the laws of the State of Delaware.
(b) Authority. The Purchaser or the Administrative Agent, as
applicable, has the corporate power, authority and right to make,
execute, deliver and perform this Agreement and all the transactions
contemplated hereby and has taken all necessary corporate action to
authorize the execution, delivery and performance of this Agreement;
and, when executed and delivered, this Agreement will constitute its
legal, valid and binding obligation, enforceable in accordance with its
terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium, receivership, conservatorship and other laws of general
applicability relating to or affecting creditors' rights generally from
time to time in effect. The enforceability of its obligations under this
Agreement is also subject to general principles of equity, regardless of
whether such enforceability is considered in a proceeding in equity or
at law, and no representation or warranty is made with respect to the
enforceability of its obligations under any indemnification provisions
in such agreements to the extent that indemnification is sought in
connection with securities laws violations and is contrary to public
policy.
(c) Act. The Certificates purchased by the Purchaser pursuant to
this Agreement will be acquired for investment only and not with a view
to any public distribution thereof, and the Purchaser will not offer to
sell or otherwise dispose of any Certificates so acquired by it (or any
interest therein) in violation of any of the registration requirements
of the Act or any applicable state or other securities laws. Each of the
Purchaser and the Administrative Agent acknowledges that it has no right
to require the Transferor to register under the Act or any other
securities law any Certificates to be acquired by the Purchaser or any
other Owner pursuant to this
24
*Confidential treatment requested.
<PAGE> 28
Agreement. The Purchaser will execute and deliver to the Transferor on
or before the Closing Date an Investment Letter with respect to the
purchase of the Certificates.
(d) Investment Company Act. Neither the Purchaser nor the
Administrative Agent is subject to registration as an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
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ARTICLE SEVEN
COVENANTS OF THE TRANSFEROR
Section 7.01. Access to Information. From the Closing Date until the
Collection Date, each of the Transferor and the Servicer will, at any time and
from time to time during regular business hours, on at least five Business Days'
(or if a Pay Out Event or Servicer Default or event that with the giving of
notice or lapse of time or both would constitute a Pay Out Event or Servicer
Default, has occurred, one Business Day's) notice to the Transferor or the
Servicer, as the case may be, permit the Administrative Agent or any Owner, or
its agents or representatives, at the Administrative Agent's or such Owner's
expense (or if a Pay Out Event or Servicer Default or event that with the giving
of notice or lapse of time or both would constitute a Pay Out Event or Servicer
Default, has occurred, at the expense of the Transferor in the case of a Pay Out
Event or the Servicer in the case of a Servicer Default), (i) to examine all
books, records and documents (including computer tapes and disks) in the
possession or under the control of the Transferor or the Servicer, as the case
may be, relating to the Receivables (other than names of account holders and
strategic plans for the Servicer's credit card business), including the forms of
Cardholder Agreements under which such Receivables arise, and (ii) to visit the
offices and properties of the Transferor or the Servicer, as applicable, for the
purpose of examining such materials described in clause (i) above.
Section 7.02. Reporting Requirements of the Transferor. From the Closing
Date until the Collection Date, the Transferor will furnish to the
Administrative Agent:
(a) a copy of each certificate, report, statement, notice or
other communication furnished by or on behalf of the Transferor or the
Servicer to the Trustee or any Rating Agency, or any Series Enhancer
(other than investment instructions or any such item furnished to the
Trustee or any Rating Agency relating solely to one or more Series other
than Series 1999-3), concurrently therewith, and promptly after receipt
thereof, a copy of each notice, demand or other communication received
by or on behalf of the Transferor or the Servicer under the Pooling and
Servicing Agreement or the Supplement (other than any such item relating
solely to one or more Series other than Series 1999-3);
(b) copies of all material amendments to any Receivables Transfer
Agreement;
(c) prompt notice of any failure on the part of any party thereto
to observe or perform any material term of any Receivables Transfer
Agreement;
(d) (i) within 90 days following the end of each fiscal year of
NextCard, beginning with the fiscal year ending December 31, 1999, the
audited consolidated balance sheet of NextCard and its subsidiaries as
of the end of such fiscal year, and the related audited consolidated
statements of income and cash flows of NextCard and its subsidiaries for
such fiscal year, accompanied by the opinion of nationally-recognized
independent certified public accountants and (ii) within 45 days
following the end of each
26
<PAGE> 30
fiscal quarter of NextCard, beginning with the fiscal quarter
ending December 31, 1999, the unaudited consolidated balance sheet of
NextCard and its subsidiaries as of the end of such fiscal quarter, and
the related unaudited consolidated statements of income and cash flows
of NextCard and its subsidiaries for such fiscal quarter;
(e) such other available information, documents, records or
reports respecting NextCard, the Transferor, any Account Owner or the
condition or operations, financial or otherwise, of NextCard, the
Transferor or any Account Owner as the Administrative Agent or any Owner
may from time to time reasonably request; and
(f) such other information, documents, records or reports
respecting the Accounts, the Receivables or the servicing thereof or the
Trust as the Administrative Agent or any Owner may from time to time
reasonably request.
Section 7.03. Optional Repurchase. The Transferor shall not exercise its
right to repurchase the Certificates pursuant to Section 7.01 of the Supplement
and Section 12.05 of the Pooling and Servicing Agreement unless the Owners and
the Administrative Agent have been paid, or will be paid upon such repurchase,
the Certificate Principal Balance, all interest thereon and all other amounts
owing hereunder in full.
Section 7.04. Location of Chief Executive Office. The Transferor shall
not move its principal place of business and chief executive office to a
location outside the State of California unless it shall have given the
Administrative Agent at least 30 days' prior written notice of such relocation
and shall have executed and filed such UCC financing statements and other items
and delivered such opinions as the Administrative Agent deems reasonably
necessary to maintain the Trustee's perfected security interest in the
Receivables.
27
<PAGE> 31
ARTICLE EIGHT
INDEMNIFICATION
Section 8.01. Indemnification by the Transferor and the Servicer.
(a) The Transferor shall indemnify and hold harmless each Owner, the
Administrative Agent, their respective Affiliates and their respective officers,
directors, employees, stockholders, agents and representatives, against any and
all losses, claims, damages, liabilities or reasonable expenses (including legal
and accounting fees) (collectively, "Losses"), as incurred (payable promptly
upon written request), for or on account of or arising from or in connection
with or otherwise with respect to any breach of any representation or warranty
of the Transferor set forth in this Agreement, the Supplement or the Pooling and
Servicing Agreement or in any certificate delivered pursuant hereto or thereto;
provided, however, that the Transferor shall not be so required to indemnify any
such Person or otherwise be liable to any such Person hereunder for (i) any
Losses incurred for or on account of or arising from or in connection with or
otherwise with respect to any breach of any representation or warranty set forth
in the Pooling and Servicing Agreement a remedy for the breach of which is
provided in Section 2.05 or 2.06 of the Pooling and Servicing Agreement or (ii)
any Losses asserted by any such Person constituting indirect or consequential
damages incurred by such Person.
(b) The Servicer shall indemnify and hold harmless each Owner, the
Administrative Agent, their respective Affiliates and their respective officers,
directors, employees, stockholders, agents and representatives, against any and
all Losses, as incurred (payable promptly upon written request), for or on
account of or arising from or in connection with or otherwise with respect to
any breach of any representation or warranty of the Servicer set forth in this
Agreement, the Supplement or the Pooling and Servicing Agreement or in any
certificate delivered pursuant hereto or thereto; provided, however, that the
Servicer shall not be so required to indemnify any such Person or otherwise be
liable to any such Person hereunder for (i) any Losses incurred for or on
account of or arising from or in connection with or otherwise with respect to
any breach of any representation or warranty set forth in the Pooling and
Servicing Agreement a remedy for the breach of which is provided in Section 3.03
of the Pooling and Servicing Agreement or (ii) any Losses asserted by any such
Person constituting indirect or consequential damages incurred by such Person.
Section 8.02. Costs and Expenses. The Transferor agrees to pay on demand
(a) to the Administrative Agent and the Purchaser all reasonable costs and
expenses in connection with the preparation, execution, delivery and
administration (including any amendments, waivers or consents, other than
amendments, waivers and consents made solely at the request of the Purchaser or
the Administrative Agent, as opposed to the Transferor or the Servicer) of this
Agreement and the other documents to be delivered hereunder or in connection
herewith, including, without limitation, (i) the reasonable fees and
out-of-pocket expenses of counsel for each of the Administrative Agent and the
Purchaser, with respect thereto and with respect to advising each of the
Administrative Agent and the Purchaser, as to its respective rights and remedies
under this Agreement and the other documents delivered hereunder or in
connection herewith, (ii) rating agency fees, costs and expenses incurred in
connection with the purchase by
28
<PAGE> 32
the Purchaser of the Certificates, and (iii) other reasonable fees, costs and
expenses incurred by the Purchaser or the Administrative Agent in connection
with the purchase by the Purchaser of the Certificates (including trustee's
fees, costs and expenses), and (b) to the Administrative Agent and any other
Affected Party, all reasonable costs and expenses, if any (including reasonable
counsel fees and expenses), in connection with the enforcement of this
Agreement, and the other documents delivered hereunder or in connection
herewith.
29
<PAGE> 33
ARTICLE NINE
THE ADMINISTRATIVE AGENT
Section 9.01. Authorization and Action.
(a) Each of the Owners hereby designates and appoints First Union
Securities as Administrative Agent hereunder, and authorizes the Administrative
Agent to take such action as agent on its behalf and to exercise such powers as
are delegated to the Administrative Agent under this Agreement and any related
agreement, instrument and document as are delegated to the Administrative Agent
by the terms hereof or thereof, together with such powers as are reasonably
incidental thereto. The Administrative Agent reserves the right, in its sole
discretion to exercise any rights and remedies under this Agreement or any
related agreement, instrument or document executed and delivered pursuant
hereto, or pursuant to applicable law, and also to agree to any amendment,
modification or waiver of this Agreement or any related agreement, instrument
and document, in each instance, on behalf of the Owners. The Administrative
Agent shall not have any duties or responsibilities, except those expressly set
forth herein, or any fiduciary relationship with any Owner, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities on
the part of the Administrative Agent shall be read into this Agreement or
otherwise exist for the Administrative Agent. In performing its functions and
duties hereunder, the Administrative Agent does not assume nor shall be deemed
to have assumed any obligation or relationship of trust or agency with or for
the Transferor or any of its successors or assigns. Notwithstanding anything
herein or elsewhere to the contrary, the Administrative Agent shall not be
required to take any action which exposes the Administrative Agent to personal
liability or which is contrary to this Agreement or applicable law.
(b) The Purchaser and each subsequent Owner from time to time hereby
acknowledges and agrees that all payments in respect of any Certificates and in
respect of fees and other amounts owing to the Owners under this Agreement
shall, except as otherwise expressly provided herein, be remitted by the
applicable payor to the Administrative Agent on behalf of the Owners, and the
Administrative Agent shall distribute all such amounts, promptly following
receipt thereof, to the applicable parties in interest according to their
respective interests therein, determined by reference to the terms of the
Pooling and Servicing Agreement, the Supplement, this Agreement and the
Administrative Agent's books and records relating to such Certificates, the
Pooling and Servicing Agreement, the Supplement and this Agreement (it being
agreed that the entries made in such books and records of the Administrative
Agent shall be conclusive and binding for all purposes absent manifest error).
Section 9.02. 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 related
agreement, instrument or document 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, the
Servicer or the Trustee), 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
30
<PAGE> 34
such counsel, accountants or experts; (ii) makes no warranty or representation
to any Owner and shall not be responsible to any Owner for any statements,
warranties or representations made in or in connection with this Agreement or in
connection with any related agreement, instrument or document; (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 related
agreement, instrument or document on the part of the Transferor, the Servicer or
the Trustee or to inspect the property (including the books and records) of the
Transferor, the Servicer or the Trustee; (iv) shall not be responsible to any
Owner for the due execution, legality, validity, enforceability, genuineness or
sufficiency of value of this Agreement or any related agreement, instrument or
document; (v) shall not be deemed to be acting as any Owner's trustee or
otherwise in a fiduciary capacity hereunder or in connection with any related
agreement, instrument or document; and (vi) shall incur no liability under or in
respect of this Agreement or any related agreement, instrument or document by
acting upon any notice (including notice by telephone), consent, certificate or
other instrument or writing (which may be by telex or facsimile) believed by it
to be genuine and signed or sent by the proper party or parties.
Section 9.03. Administrative Agent and Affiliates. To the extent that
the Administrative Agent or any of its Affiliates shall become an Owner, the
Administrative Agent or such Affiliate, in such capacity, shall have the same
rights and powers under this Agreement and each related agreement, instrument
and document as would any Owner and may exercise the same as though it were not
the Administrative Agent or such Affiliate, as the case may be. The
Administrative Agent and its Affiliates may generally engage in any kind of
business with the Transferor or the Trustee, any Obligor or any of their
respective Affiliates and any Person who may do business with or own securities
of any of the foregoing, all as if it were not the Administrative Agent or such
Affiliate, as the case may be, and without any duty to account therefor to the
Owners.
Section 9.04. Purchase Decision. Each Owner acknowledges that it has,
independently and without reliance upon the Administrative Agent, any other
Owner or any of their respective Affiliates, and based on such documents and
information as it has deemed appropriate, made its own evaluation and decision
to enter into this Agreement and to invest in the Certificates (or such interest
therein as such Owner may hold). Each Owner also acknowledges that it will,
independently and without reliance upon the Administrative Agent, any other
Owner or any of their respective 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 or any related
agreement, instrument or other document.
Section 9.05. Indemnification. Each Owner (other than the Purchaser)
agrees to indemnify the Administrative Agent (to the extent not reimbursed by
any the Transferor), ratably according to its share of the Certificate Principal
Balance from time to time, 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 related agreement,
instrument or document, or any action taken or omitted by the Administrative
Agent under this Agreement, or any related agreement, instrument or document;
provided, however, that an Owner shall not 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.
31
<PAGE> 1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 5, 1999, except as to Note 4, as to which the
date is May 13, 1999, in the Registration Statement on Form S-1 to be filed
with the Securities and Exchange Commission on or about November 19, 1999, and
the related Prospectus of NextCard, Inc. and subsidiary for the registration of
7,000,000 shares of its common stock.
San Francisco, California
November 18, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NEXTCARD, INC. FOR THE QUARTER ENDED
SEPTEMBER, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 99,534
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<LOANS> 268,014
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<TOTAL-ASSETS> 388,906
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<LIABILITIES-OTHER> 20,735
<LONG-TERM> 11,879
0
0
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<TOTAL-LIABILITIES-AND-EQUITY> 388,906
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<INTEREST-INVEST> 2,585
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,577
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 5,762
<INTEREST-INCOME-NET> 4,815
<LOAN-LOSSES> 5,227
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 54,121
<INCOME-PRETAX> (52,444)
<INCOME-PRE-EXTRAORDINARY> (52,444)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,444)
<EPS-BASIC> (2.11)
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<LOANS-PAST> 938
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<CHARGE-OFFS> 949
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<ALLOWANCE-CLOSE> 6,178
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
