<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1999
REGISTRATION NO. 333-91333
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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 -- DECEMBER 9, 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 shares
from selling stockholders to cover over-allotments.
- - We plan to use the net proceeds we receive from this offering for general
corporate purposes, including working capital, funding of credit card loan
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 loan 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
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- ---------------
(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,
the 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 approximately 26,528,135
15
<PAGE> 20
shares of our common stock (or approximately 28,107,615 shares, if options and
warrants exercisable during such 90-day period are included). Upon execution of
the 90-day lockup agreements, 8,987,101 restricted shares will be 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 we receive 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 loan
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.
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<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
(UNAUDITED)
<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 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 for 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
these 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 loan 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. 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 credit facilities. 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. Our principal market risk is due to changes in interest rates. This
affects us directly in its lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of our
cardholders.
The majority of our revenue is generated by the interest rates we charge on
outstanding receivable balances in the form of finance charges. Our 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 our revenue. At the same time, our
borrowing costs under our 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 our 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 and adversely affect our results of
operations and financial condition.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our 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 us primarily by matching assets and
liability repricings.
Our fixed interest rate loan receivables have no stated maturity or
repricing period. However, we generally have the right to increase rates when
the customer fails to comply with the terms of the account agreement. In
addition, we may reprice our credit card receivables upon providing the required
prior notice to the customer, which is generally no more than 30 days.
We may manage our interest rate risk through interest rate hedging
techniques. However, we currently do not use such techniques and it may not be
successful in reducing or eliminating our 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;
- 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 Development and Director
Daniel D. Springer......... 36 Chief Marketing Officer
Jeffrey D. Brody(1)........ 39 Director
Alan N. Colner(2).......... 44 Director
Daniel R. Eitington........ 54 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
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
Daniel R. Eitington was elected as one of our Directors in November 1999.
Mr. Eitington has approximately 30 years of financial and technology experience.
Mr. Eitington is the former President of the Global Support Services Group and
served as a member of the Management Executive Committee of Visa International.
Prior to joining Visa International, Mr. Eitington was an Executive Vice
President responsible for the technology banking group and served as a member of
the Executive Operating Committee of First Interstate Bank. Mr. Eitington holds
a B.S. from Cornell University, an M.B.A. from the University of Chicago and an
M.S.E.E. from the University of California at Berkeley.
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.
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<PAGE> 60
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 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;
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- 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 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 $175,000 1,350,000
Yinzi Cai
Senior Vice President, Decision Analytics.......... 105,125 50,000 171,000
Timothy J. Coltrell
Chief Operating Officer............................ 129,167 50,000 --
John V. Hashman
Chief Financial Officer............................ 115,000 50,000 225,000
Daniel D. Springer
Chief Marketing Officer............................ 113,650 50,000 562,500
</TABLE>
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<PAGE> 62
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to our Chief
Executive Officer and each of our four other most highly compensated executive
officers for the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED
NUMBER PERCENT OF ANNUAL RATES OF
OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES PRICE PER TERM($)(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>
- -------------------------
(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.
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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 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.
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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);
- 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
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<PAGE> 65
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 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 (14 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 16.8% 655,058 7,105,053 14.3%
3000 Sand Hill Road,
Building 1, Suite 260
Menlo Park, CA 94025
Amazon.com, L.L.C.(3)........................ 4,400,000 8.7 -- 4,400,000 8.1
1200 Twelfth Avenue South
Suite 1200
Seattle, WA 98144
Entities associated with Moore Capital
Management, Inc.(4)........................ 3,749,999 8.1 326,087 3,423,912 6.9
1251 Avenue of the Americas
New York, NY 10020
Entities associated with Kleiner Perkins
Caufield & Byers(5)........................ 3,000,002 6.5 -- 3,000,002 6.0
2750 Sand Hill Road
Menlo Park, CA 94025
Entity associated with Forrest Binkley & 2,795,040 6.0 -- 1,313,790 2.6
Brown(6)...................................
800 Newport Center Drive
Suite 725
Newport Beach, CA 92660
Entities associated with Trinity 2,755,089 6.0 239,573 2,515,516 5.1
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 5.9 1,600,000 1,119,863 2.2
Capital(8)...................................
8500 Normandale Lake Blvd.
Suite 1940
St. Paul, MN 55437
Entities associated with Sequoia 1,875,002 4.1 -- 1,875,002 3.8
Capital(9).................................
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Jeffrey D. Brody(2).......................... 7,793,861 16.8 655,058 7,138,803 14.4
Alan N. Colner(4)............................ 3,772,499 8.2 326,087 3,446,412 6.9
Tod H. Francis(7)............................ 2,777,589 6.0 239,573 2,538,016 5.1
Safi U. Qureshey(10)......................... 993,399 2.1 76,195 917,204 1.8
Bruce G. Rigione(11)......................... 749,807 1.6 64,035 685,772 1.4
Jeremy R. Lent and Molly Lent(12)............ 4,434,516 9.5 389,142 4,045,374 8.1
Yinzi Cai(13)................................ 164,660 * 13,870 150,790 *
Timothy Coltrell(14)......................... 1,067,500 2.3 92,739 974,761 2.0
John V. Hashman(15).......................... 283,594 * 24,660 258,934 *
Daniel D. Springer(16)....................... 217,375 * 18,641 198,734 *
All directors and executive officers as a
group (14 persons)......................... 22,520,146 47.4 1,900,000 20,620,146 40.4
</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.
Prior to the date of this offering, 1,451,250 shares were sold.
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<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 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 286,281 shares issued pursuant to
exercised options and registered on our Registration Statement on Form S-8, will
be freely tradable without restriction or further registration under the
Securities Act, unless such shares are held by our affiliates, as that term is
defined under the Securities Act, or are subject to lockup agreements.
SALES OF RESTRICTED SHARES
Upon completion of this offering, 35,515,236 shares of common stock will be
deemed restricted shares under Rule 144 of the Securities Act. 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
approximately 26,528,135 shares of our common stock (or approximately 28,107,615
shares, if options and warrants exercisable during such 90-day period are
included). Upon execution of the 90-day lockup agreements, 8,987,101 restricted
shares will be 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 such
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, 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. Under
Rule 144(k), 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. Upon expiration of the
lockup period, approximately 6,811,513 shares will be available for sale without
regard to volume limitations. 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 executive officers, directors, 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 approximately
26,528,135 shares of our common stock (or approximately 28,107,615 shares,
including options and warrants exercisable during such 90-day period). The
stockholders signing these agreements will agree not to, during the lock-up
period, without the prior written consent of us as well as 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
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<PAGE> 77
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 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
73
<PAGE> 78
connection with selected legal matters relating to the shares of common stock
offered by this prospectus.
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
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>
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........................................ $ 73,300
NASD filing fee............................................. 30,500
Blue Sky fees and expenses.................................. 6,700
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 50,000
Transfer Agent and Registrar fees........................... 60,000
Miscellaneous expenses...................................... 4,500
--------
Total............................................. $500,000
========
</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 Form of 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>
II-5
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
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.
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.
</TABLE>
II-6
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
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.
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.
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.
II-7
<PAGE> 112
++ 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 9th
day of December, 1999.
NEXTCARD, INC.
By: *
------------------------------------
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 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>
* Chairman of the Board, Chief December 9, 1999
- --------------------------------------------------- Executive Officer, President
Jeremy R. Lent and Director (Principal
Executive Officer)
* Chief Financial Officer December 9, 1999
------------------------------------------------- (Principal Financial and
John V. Hashman Accounting Officer)
* Director December 9, 1999
-------------------------------------------------
Jeffrey D. Brody
* Director December 9, 1999
-------------------------------------------------
Alan N. Colner
* Director December 9, 1999
-------------------------------------------------
Daniel R. Eitington
* Director December 9, 1999
-------------------------------------------------
Tod H. Francis
</TABLE>
II-9
<PAGE> 114
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director December 9, 1999
- ---------------------------------------------------
Safi U. Qureshey
* Director December 9, 1999
-------------------------------------------------
Bruce G. Rigione
*By: /s/ JOHN V. HASHMAN
---------------------------------------------
Attorney-in-fact
</TABLE>
II-10
<PAGE> 115
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 Form of 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> 116
<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> 117
<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.
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.
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.
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
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 1.1
7,000,000 Shares
NextCard, Inc.
Common Stock
UNDERWRITING AGREEMENT
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL SECURITIES
INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
DLJdirect Inc.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
NextCard, Inc., a Delaware corporation (the "COMPANY"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and certain stockholders of the Company named in Schedule II
hereto (the "SELLING STOCKHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of 7,000,000 shares of the Common Stock, par value
$0.001 of the Company (the "FIRM SHARES"), of which 3,500,000 shares are to be
issued and sold by the Company and 3,500,000 shares are to be sold by the
Selling Stockholders, each Selling Stockholder selling the amount set forth
opposite such Selling Stockholder's name in Schedule II hereto. The Company and
the Selling Stockholders also propose to issue and sell to the several
Underwriters not more than an additional 1,050,000 shares of the Common Stock of
the Company, par value $0.001 (the "ADDITIONAL Shares") if requested by the
Underwriters as provided in Section 2 hereof, of which 750,000 shares would be
issued and sold by the Company and 300,000 shares would be sold by the Selling
Stockholders, each Selling Stockholder selling the amount set forth opposite
such Selling Stockholder's name in Schedule II hereto. The Firm Shares and the
Additional Shares are hereinafter referred to collectively as the "SHARES". The
shares of common stock of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK".
The Company and the Selling Stockholders are hereinafter sometimes referred to
collectively as the "SELLERS."
-1-
<PAGE> 2
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
3,500,000 Firm Shares, (ii) each Selling Stockholder agrees, severally and not
jointly, to sell the number of Firm Shares set forth opposite such Selling
Stockholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
$______ (the "PURCHASE PRICE") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Firm Shares to be sold by such Seller as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedules I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell, and the Selling Stockholders agree to sell, the Additional Shares and
the Underwriters shall have the right to purchase, severally and not jointly, up
to 1,050,000 Additional Shares from the Sellers at the Purchase Price.
Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
Underwriters may exercise their right to purchase Additional Shares in whole or
in part from time to time by giving written notice thereof to the Company within
30 days after the date of this Agreement. You shall give any such notice on
behalf of the Underwriters and such notice shall specify the aggregate number of
Additional Shares to be purchased pursuant to such exercise and the date for
payment and delivery thereof, which date shall be a business day (i) no earlier
than two business days after such notice has been given (and, in any event, no
earlier than the Closing Date (as hereinafter defined)) and (ii) no later than
ten business days after such notice has been given. If any Additional Shares are
to be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Company the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
-2-
<PAGE> 3
Each Seller hereby agrees not to (i) 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 Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers 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 (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 90 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co. Notwithstanding the foregoing, during such period (i) the Company
may grant stock options pursuant to the Company's existing stock option plan;
(ii) the Company may issue shares of Common Stock pursuant to its Employee Stock
Purchase Plan; (iii) the Company may issue shares of Common Stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof; (iv) the Company may issue shares of Common Stock in connection
with the Company's acquisition of businesses; and (v) the Company may issue
warrants to purchase Common Stock to third parties that provide debt financing
to the Company or its subsidiaries. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 90 days after the date of the Prospectus without the prior written
consent of the Company, and of Donaldson, Lufkin & Jenrette Securities
Corporation and Goldman, Sachs & Co. In addition, each Selling Stockholder
agrees that, for a period of 90 days after the date of the Prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co., it will not 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. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each Selling Stockholder, (ii) each of the
directors and executive officers of the Company who is not a Selling Stockholder
and (iii) each stockholder listed on Annex I hereto to the effect that such
person will not, during the period commencing on the date such person signs such
agreement and ending 90 days after the date of the Prospectus, without the prior
written consent of Donaldson, Lufkin & Jenrette Corporation and Goldman, Sachs &
Co., (A) engage in any of the transactions described in the first sentence of
this paragraph or (B) 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.
SECTION 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes
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thereon duly paid by the respective Sellers, to Donaldson, Lufkin & Jenrette
Securities Corporation through the facilities of The Depository Trust Company
("DTC"), for the respective accounts of the several Underwriters, against
payment to the Sellers of the Purchase Price therefore by wire transfer of
Federal or other funds immediately available in New York City. The certificates
representing the Shares shall be made available for inspection not later than
9:30 A.M., New York City time, on the business day prior to the Closing Date or
the applicable Option Closing Date, as the case may be, at the office of DTC or
its designated custodian (the "DESIGNATED OFFICE"). The time and date of
delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time,
on ________, 1999 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery and payment for the Firm Shares are
hereinafter referred to as the "CLOSING DATE". The time and date of delivery and
payment for any Additional Shares to be purchased by the Underwriters shall be
9:00 A.M., New York City time, on the date specified in the applicable exercise
notice given by you pursuant to Section 2 or such other time on the same or such
other date as Donaldson, Lufkin & Jenrette Securities Corporation and the
Company shall agree in writing. The time and date of delivery and payment for
any Additional Shares are hereinafter referred to as the "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, Three Embarcadero Center, Seventh Floor, San Francisco, CA 94111 Attn:
Joanne Bal, and the Shares shall be delivered at the Designated Office, all on
the Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you five (5) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration
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<PAGE> 5
Statement as so filed and of each amendment to it, without exhibits, as you may
reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request. The Company shall bear the
cost of any amendment to the Registration Statement or amendment or supplement
to, or delivery of, the Prospectus pursuant to Section 5(c) above, this Section
5(d) or Section 5(e) below for any such amendment or supplement made within
twelve months of the date of this Agreement, and thereafter, the Company's
out-of-pocket costs incurred pursuant to any such amendment or supplement shall
be borne by the Underwriters.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action
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<PAGE> 6
that would subject it to general consent to service of process or taxation other
than as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
December 31, 2000 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all costs and expenses incident to the listing
of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Stockholders hereunder for which provision is not otherwise made in this
Section. The provisions of this Section shall not supersede or otherwise affect
any agreement that the Company and the Selling Stockholders may otherwise have
for allocation of such expenses among themselves.
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<PAGE> 7
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
and each Selling Stockholder who is an officer or director of the Company
(collectively, the "PRINCIPAL STOCKHOLDERS") jointly and severally represent and
warrant to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or, to the Company's or any of the Principal
Selling Stockholders' knowledge, threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon
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<PAGE> 8
information relating to any Underwriter or the Underwriters' method of
distributing the Shares furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter or the
Underwriters' method of distributing the Shares furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or
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<PAGE> 9
condition contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its subsidiaries,
taken as a whole, to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries or their respective property is
bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or will likely be a party or to which any of their respective property is or
will likely be subject that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of
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<PAGE> 10
the Company and its subsidiaries, taken as a whole. Each such Authorization is
valid and in full force and effect and each of the Company and its subsidiaries
is in compliance with all the terms and conditions thereof and with the rules
and regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no restrictions that
are burdensome to the Company or any of its subsidiaries; except where such
failure to be valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(o) This Agreement has been duly authorized, executed and delivered by
the Company.
(p) Ernst & Young, LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(r) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
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<PAGE> 11
(s) Except as disclosed in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(u) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(v) The Company and its subsidiaries have good and marketable title to
all personal property reflected as owned by them in the Prospectus or which is
material to the business of the Company and its subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are disclosed in
the Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, in each case except as disclosed
in the Prospectus. The Company and its subsidiaries do not own any real
property.
(w) The Company and its subsidiaries own or possess, or can acquire or
license on reasonable terms, all patents, patent rights, inventions, copyrights,
trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently
employed by them in connection with the business now operated by them except
where the failure to own or possess or otherwise be able to acquire or license
such intellectual property would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operation of the Company and its subsidiaries, taken as a whole; and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to any
of such intellectual property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(x) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the
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<PAGE> 12
businesses in which they are engaged; and neither the Company nor any of its
subsidiaries (i) has received notice from any insurer or agent of such insurer
that substantial capital improvements or other material expenditures will have
to be made in order to continue such insurance or (ii) has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers at a
cost that would not have a material adverse effect on the business, prospects,
financial conditions or results of operations of the Company and its
subsidiaries, taken as a whole.
(y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be disclosed in the
Registration Statement or the Prospectus which is not so disclosed.
(z) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the Company's knowledge,
threatened against the Company or any of its subsidiaries before the National
Labor Relations Board or any state or local labor relations board, (ii) strike,
labor dispute, slowdown or stoppage pending or threatened against the Company or
any of its subsidiaries or (iii) union representation question existing with
respect to the employees of the Company and its subsidiaries, except for such
actions specified in clause (i), (ii) or (iii) above, which, singly or in the
aggregate, would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. To the best of the Company's knowledge, no
collective bargaining organizing activities are taking place with respect to the
Company or any of its subsidiaries.
(aa) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(bb) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(cc) The Company has reviewed its operations to evaluate its
preparedness for the Year 2000. As a result of such review, the Company does not
believe that there are any issues related to the Company's preparedness for the
Year 2000 that (i) are of a character required to be described or referred to in
the Registration Statement or Prospectus by the Act which have not been
accurately described in the Registration Statement or Prospectus or (ii) might
reasonably be
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<PAGE> 13
expected to result in any material adverse change in the business or operations
of the Company. All internal computer systems of the Company and each
Constituent Component (as defined below) of those systems will, by December 31,
1999, fully comply with the Year 2000 Qualification Requirements. "Year 2000
Qualification Requirements" means that the internal computer systems of the
Company and each Constituent Component (as defined below) of those systems (i)
have been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether the
date contains dates and times before, on or after January 1, 2000, (ii) have
been designed to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all hardware or software of the Company
used in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind. The Company has inquired of material vendors as
to their preparedness for the Year 2000 and has disclosed in the Registration
Statement or Prospectus any issues, resulting from such inquiry, that might
reasonably be expected to result in any material adverse change. Notwithstanding
any of the foregoing, the Company makes no representations or warranties with
respect to any material adverse change in the Company's operations or business
that might result from any interruptions or delays in the availability of the
Internet as a result of the Year 2000.
SECTION 7. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement signed by
such Selling Stockholder and_______________, as Custodian, relating to the
deposit of the Shares to be sold by such Selling Stockholder (the "CUSTODY
AGREEMENT") and the Power of Attorney of such Selling Stockholder appointing
certain individuals as such Selling Stockholder's attorneys-in-fact (the
"ATTORNEYS") to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
(the "POWER OF ATTORNEY") and to sell, assign, transfer and deliver the Shares
to be sold by such Selling Stockholder in the manner provided herein and
therein.
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(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Stockholder or any property
of such Selling Stockholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
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(k) Each certificate signed by or on behalf of such Selling Stockholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to the
Underwriters as to the matters covered thereby.
SECTION 8. Indemnification. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter or the Underwriters' method of
distributing the Shares furnished in writing to the Company by such Underwriter
through you expressly for use therein provided however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendment or
supplement thereto was provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability pursuant to this Section 8(a) of any Selling Stockholder who
is not a Principal Stockholder shall be limited to an amount equal to the total
proceeds received by such Selling Stockholder from the Underwriters for the sale
of the Shares sold by such Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter or the
Underwriters' method of distributing the Shares furnished in writing to the
Company by such Underwriter through you expressly for use in the Registration
Statement (or any amendment
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<PAGE> 16
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Stockholders and all persons, if any, who control any Selling
Stockholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such control
persons of any Selling Stockholders, such firm shall be designated in writing by
the Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for
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reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply with
such reimbursement request. No indemnifying party shall, without the prior
written consent of the indemnified party (such consent not to be unreasonably
withheld), effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages,
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<PAGE> 18
liabilities or judgments. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies, which may otherwise be available to any
indemnified party at law, or in equity.
(f) Each Selling Stockholder hereby designates NextCard, Inc., 595
Market Street, Suite 1800, San Francisco, California 94105, as its authorized
agent, upon which process may be served in any action which may be instituted in
any state or federal court in the State of New York by any Underwriter, any
director or officer of any Underwriter or any person controlling any Underwriter
asserting a claim for indemnification or contribution under or pursuant to this
Section 8, and each Selling Stockholder will accept the jurisdiction of such
court in such action, and waives, to the fullest extent permitted by applicable
law, any defense based upon lack of personal jurisdiction or venue. A copy of
any such process shall be sent or given to such Selling Stockholder, at the
address for notices specified in Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company and the
Principal Stockholders contained in this Agreement shall be true and correct on
the Closing Date with the same force and effect as if made on and as of the
Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Jeremy R. Lent and John V. Hashman, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
respectively, confirming the matters set forth in Sections 6(t), 9(a) and 9(b)
and that the Company has complied with all of the agreements and satisfied all
of the conditions herein contained and required to be complied with or satisfied
by the Company on or prior to the Closing Date.
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(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date (x) an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
counsel for the Company and certain of the Selling Stockholders, with respect to
the Company and such Selling Stockholders and (y) as applicable, for paragraphs
(xvii) through (xx) below, an opinion or opinions (satisfactory to you and
counsel for the Underwriters), dated the Closing Date, of counsel for any and
all other Selling Stockholders not represented by Howard, Rice, Nemerovski,
Canady, Falk & Rabkin, with respect to such Selling Stockholders, to the effect
that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with requisite
corporate power and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) each of the Company and its subsidiaries is duly qualified
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole;
(iii) other than as set forth or contemplated in the Prospectus,
to such counsel's knowledge, there are no legal or governmental actions,
suits or proceedings, pending or threatened against the Company or any
of its subsidiaries or any of their respective properties or to which
the Company or any of its subsidiaries is or may be a party or to
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which any property of the Company or any of its subsidiaries is or may
be the subject which is required by the Securities Act to be so set
forth.
(iv) to such counsel's knowledge, there are no material
contracts that are required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement that are not described therein or filed as exhibits thereto.
(v) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling
Stockholder;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be sold by the Company (including
the Shares to be sold by the Selling Stockholders) have been duly
authorized and are validly issued, fully paid, non-assessable and not
subject to any preemptive or similar rights;
(viii) the Shares to be issued and sold by the Company under
this Agreement have been duly authorized and, when issued and delivered
to the Underwriters in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of
such Shares is not subject to any preemptive or similar rights under the
Certificate of Incorporation or Bylaws or under any agreement known to
such counsel;
(ix) the statements in the Prospectus under the captions
"Management--Employee Benefit Plans," "Certain Transactions,"
"Description of Capital Stock," "Shares Eligible for Future Sale" and in
Part II of the Registration Statement in Items 14 and 15, insofar as
such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents or proceedings;
(x) the Registration Statement and the Prospectus and any
amendments and supplements thereto (other than the financial statements
and related schedules and statistical data therein) comply as to form in
all material respects with the requirements of the Securities Act and
rules promulgated thereunder by the Commission;
(xi) the Company is not, nor with the giving of notice or lapse
of time or both will the Company be, in violation of or in default
under, its Certificate of Incorporation or Bylaws, except for violations
and defaults which individually and in the aggregate are not material to
the Company and its subsidiaries taken as a whole; the issue and sale of
the Shares being delivered on the closing date, and the performance by
the Company of its obligations under this Agreement and the consummation
of the transactions contemplated therein in accordance with the terms
thereof do not result in a breach of any of the terms or provisions of,
or constitute a default under, any agreement or instrument filed as an
exhibit to the Registration Statement, nor does any such action result
in any violation of
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the provisions of the Certificate of Incorporation or the Bylaws of the
Company or any Applicable Laws or any order of any court of governmental
agency in which the Company is a named party;
(xii) no consent, approval, authorization, order, license,
registration or qualification of or with any court or governmental
agency or body is required for the Company's issuance and sale of the
Shares or the consummation of the other transactions contemplated by
this Agreement, except such consents, approvals, authorizations, orders,
licenses, registrations or qualifications as have been obtained under
the Securities Act and as may be required under state securities laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
(xiii) the Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or
entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended;
(xiv) such counsel has no reason to believe that (A) that the
Prospectus and Registration Statement (except as to the financial
statements, schedules and data or other financial or accounting
information contained therein, as to which such counsel are not called
upon to, and do not, express any opinion or belief) does not comply as
to form with the Act, (B) at the time the Registration Statement became
effective or on the date of this Agreement, the Registration Statement
and the Prospectus (except for the financial statements, schedules and
information and other financial or accounting information, as to which
such counsel need not express any belief) contained any untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) such counsel has no reason to believe that the
Prospectus, as amended or supplemented, if applicable (except for the
financial statements, schedules and information and other financial and
accounting information, as to which such counsel need not express any
belief) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading;
(xv) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
(xvi) to the best of such counsel's knowledge after due inquiry
and except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or
to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement;
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<PAGE> 22
(xvii) each Selling Stockholder is the lawful owner of the
Shares to be sold by such Selling Stockholder pursuant to this Agreement
and has good and clear title to such Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
(xviii)each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney
of such Selling Stockholder and to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder in the manner provided
herein and therein;
(xix) the Custody Agreement of each Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and
is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms;
(xx) the Power of Attorney of each Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and
is a valid and binding instrument of such Selling Stockholder,
enforceable in accordance with its terms, and, pursuant to such Power of
Attorney, such Selling Stockholder has, among other things, authorized
the Attorneys, or any one of them, to execute and deliver on such
Selling Stockholder's behalf this Agreement and any other document they,
or any one of them, may deem necessary or desirable in connection with
the transactions contemplated hereby and thereby and to deliver the
Shares to be sold by such Selling Stockholder pursuant to this
Agreement;
(xxi) upon delivery of and payment for the Shares to be sold by
each Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever; and
(xxii) the execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of each Selling
Stockholder by such Selling Stockholder, the compliance by such Selling
Stockholder with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will
not (A) require any consent, approval, authorization or other order of,
or qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states), (B) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the organizational documents
of such Selling Stockholder, if such Selling Stockholder is not an
individual, or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Selling Stockholder is a party or
by which any property of such Selling Stockholder is bound or (C)
violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or
agency having jurisdiction over such Selling Stockholder or any property
of such Selling Stockholder.
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The opinions described in Section 9(f) above shall be rendered to you at
the request of the Company and the Selling Stockholders and shall so state
therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Pillsbury, Madison & Sutro LLP, counsel for the Underwriters,
as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but only with
respect to the Company), and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), Howard, Rice, Nemerovski, Canady, Falk & Rabkin and Pillsbury,
Madison & Sutro LLP may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
(h) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from Ernst & Young, independent public
accountants, containing the information and statements of the type ordinarily
included in accountants' "comfort letters" to Underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(i) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(k) The Underwriters shall have received on the Closing Date an opinion
of Sidley & Austin, regulatory affairs counsel for the Company, dated the
Closing Date, to the effect that:
(i) Such counsel represents the Company in certain matters
related to banking regulation.
(ii) Such counsel is familiar with the business of the Company
and has read the portions of the Registration Statement and the
Prospectus entitled "Risk Factors -- We may face increased governmental
regulation and legal uncertainties" and "Business -- Government
Regulation" (together, the "Regulatory Portion") and, in such counsel's
opinion, the Regulatory Portion, insofar as such statements constitute
descriptions of applicable banking statutes, laws, regulations or
proceedings, are accurate and complete in all material respects.
(iii) Such counsel has no reason to believe that the information
contained in the Regulatory Portion of the Registration Statement or the
Prospectus at the time it became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statement therein
not misleading or that, at the Closing Date, the information contained
in the Regulatory Portion of the Prospectus or any amendment or
supplement to the Prospectus contains
-23-
<PAGE> 24
any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(l) The Company and the Selling Stockholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholders, as the case may be, on or prior to the Closing Date.
(m) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the
-24-
<PAGE> 25
case may be, which it has or they have agreed to purchase hereunder on such date
and the aggregate number of Firm Shares or Additional Shares, as the case may
be, which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the total number of Firm
Shares or Additional Shares, as the case may be, to be purchased on such date by
all Underwriters, each non-defaulting Underwriter shall be obligated severally,
in the proportion which the number of Firm Shares set forth opposite its name in
Schedule I bears to the total number of Firm Shares which all the non-defaulting
Underwriters have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case may be,
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Firm
Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to Section 2 hereof be increased pursuant to this
Section 10 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased by all Underwriters and arrangements
satisfactory to you, the Company and the Selling Stockholders for purchase of
such Firm Shares are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter,
the Company or the Selling Stockholders. In any such case which does not result
in termination of this Agreement, either you or the Sellers shall have the right
to postpone the Closing Date, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 11. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
-25-
<PAGE> 26
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
NextCard, Inc., 595 Market St., Suite 1800, San Francisco, CA 94105, (ii) if to
the Selling Stockholders, to Robert Linderman c/o NextCard, Inc., 595 Market
St., Suite 1800, San Francisco, CA 94105 and (iii) if to any Underwriter or to
you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention: Syndicate Department, or in any
case to such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder or any person controlling such Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses,
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts, which together
shall constitute one and the same instrument.
-26-
<PAGE> 27
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
NextCard, Inc.
By:
-------------------------------
Jeremy R. Lent
Chief Executive Officer
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE
II HERETO, ACTING SEVERALLY
By:
-------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL SECURITIES INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
DLJdirect Inc.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-27-
<PAGE> 28
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters Being Sold
- ------------ ---------------------
<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
</TABLE>
SI-1
<PAGE> 29
SCHEDULE II
Selling Stockholders
<TABLE>
<CAPTION>
Number of
Shares Being Sold
-------------------------------
Additional
Name Firm Shares Shares
- ---- ------------ ----------
<S> <C> <C>
Entities Associated with Brentwood Venture Capital 655,058 113,259
Entities Associated with Moore Capital 326,087 48,913
Entities Associated with St. Paul Venture Capital 1,600,000 -
Entities Associated with Trinity Ventures 239,573 35,936
Jeremy and Molly Lent 389,142 58,371
Yinzi Cai 13,870 2,080
Timothy J. Coltrell 92,739 13,911
John V. Hashman 24,660 3,699
Safi U. Qureshey 76,195 11,429
Bruce G. Rigione 64,035 9,605
Daniel D. Springer 18,641 2,796
------------ ---------
Total 3,500,000 300,000
============ =========
</TABLE>
SII-1
<PAGE> 30
ANNEX I
Selling Stockholders
Entities Associated with Brentwood Venture Capital
Entities Associated with Moore Capital
Entities Associated with St. Paul Venture Capital
Entities Associated with Trinity Ventures
Jeremy and Molly Lent
Yinzi Cai
Timothy J. Coltrell
John V. Hashman
Safi U. Qureshey
Bruce G. Rigione
Daniel D. Springer
Other Stockholders
[Amazon.com L.L.C.]
Entities Associated with Kleiner Perkins Caufield & Byers
Entities Associated with Forrest Binkley & Brown
Jeffrey D. Brody
Alan N. Colner
Shaun C. Deane
Tod H. Francis
Robert Linderman
Ann-1
<PAGE> 1
EXHIBIT 5.1
TYPE: EX-5.1
SEQUENCE: 4
DESCRIPTION: FORM OF OPINION OF HOWARD, RICE, ET AL.
[HOWARD RICE LETTERHEAD]
DECEMBER____, 1999
NextCard, Inc.
595 Market Street, Suite 1800
San Francisco, CA 94105
Re: 3,500,000 SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE
Ladies and Gentlemen:
You have requested our opinion of counsel for NextCard, Inc., a Delaware
corporation (the "Company"), in connection with the registration statement on
Form S-1 No. 333-91333 (together with all amendments and exhibits thereto, the
"Registration Statement") filed with the Securities and Exchange Commission with
respect to the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of 3,500,000 shares of Common Stock of the Company (the
"Offered Shares").
We have examined originals or copies certified or otherwise identified to
our satisfaction as authentic copies of the Registration Statement, the Amended
and Restated Certificate of Incorporation and Amended and Restated Bylaws of the
Company, resolutions and unanimous written consents of the Board of Directors of
the Company, certificates of one or more officers of the Company, and such other
corporate records of the Company and other documents of which we are aware as we
considered necessary for purposes of enabling us to render the opinion set forth
below.
In connection with this opinion we have assumed the following: (a) the
authenticity of original documents and the genuineness of all signatures; (b)
the conformity to the originals of all documents submitted to us as copies; and
(c) the truth, accuracy and completeness of the information, representations and
warranties contained in the instruments, documents, records and certificates we
have reviewed.
As to matters of fact material to our opinions, we have relied on our
review of the documents referred to above and statements made to us by officers
of the Company. We have not independently verified any factual matters or any
assumptions made by us in this letter and disclaim any inference as to the
reasonableness of any such assumption.
Based upon the foregoing and subject to the exceptions, qualifications and
limitations set forth hereinafter, we are of the opinion that upon the issuance
and sale of the Offered Shares in accordance with the terms or the Registration
Statement, the Offered Shares will be legally issued, fully paid
<PAGE> 2
and non-assessable.
We are members of the bar of the State of California and are not admitted
to practice in any other jurisdiction. The opinions set forth above are limited
in all respects to matters governed by the federal laws of the United States of
America and the General Corporation Law of the State of Delaware.
The opinion set forth herein is given as of the date hereof and is
expressly limited to the matters stated. No opinion is implied or may be
inferred beyond what is explicitly stated in this letter.
We are delivering this opinion to the Company to satisfy the requirement
of the Securities and Exchange Commission set forth in Item 601(a) and Item
601(b)(5)(i) of Regulation S-K under the Securities Act. Copies of this letter
may not be circulated or furnished to any other person or entity, and this
letter may not be referred to in any report or document furnished to any other
person or entity, without our prior written consent.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
prospectus constituting part of the Registration Statement.
Very truly yours,
-----------------------------------------------
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN
A Professional Corporation
<PAGE> 1
EXHIBIT 10.34
CO-BRANDED BANKCARD AGREEMENT
THIS CO-BRANDED BANKCARD AGREEMENT, incorporating any schedules or
exhibits attached hereto (collectively the "Agreement"), dated as of November 8,
1999, ("Effective Date") is entered into between Amazon.com, L.L.C., a Delaware
limited liability company and an affiliate of Amazon.com, Inc., a Delaware
corporation, with its principal place of business at 1200 Twelfth Avenue South,
Suite 1200, Seattle, Washington ("Amazon.com") and NextCard, Inc. a Delaware
corporation with its principal place of business at 595 Market Street, San
Francisco, California ("NextCard").
RECITALS
Whereas, NextCard presently operates a VISA(R) credit card program under
which bankcards are issued by NextBank, N.A. (the "Issuer"), a member of Visa
International Service Association ("VISA");
Whereas, Amazon.com and its affiliates presently hold all worldwide
right, title, and interest in and to the Amazon.com web site currently located
at www.amazon.com (the "Property") including, but not limited to all worldwide
copyrights therein (the "Amazon.com Copyrights") and trademarks, trade names and
logos relating thereto (the "Amazon.com Marks") and all subsidiary rights
therein and is engaged in the business of operating the Property, and NextCard
presently holds all worldwide right, title, and interest in and to the
Nextcard.com web site currently located at www.nextcard.com and its financial
services operations (the "Business") including, but not limited to all worldwide
copyrights therein (the "NextCard Copyrights") and trademarks, trade names and
logos relating thereto (the "NextCard Marks") and all subsidiary rights therein
and is engaged in the operating the Business;
Whereas, Amazon.com and NextCard (each a "Party" or "party" or
collectively the "Parties" or "parties") desire to market a bankcard issued by
the Issuer and branded with the NextCard Copyrights and Amazon.com Copyrights
(collectively, the "Copyrights") and NextCard Marks and Amazon.com Marks
(collectively, the "Marks") and with the VISA trademarks, trade names and/or
logos (the "VISA Marks") and;
Whereas, this Agreement sets forth the terms and conditions under which
the Parties shall participate in marketing the Co-Branded Card and the
respective rights and obligations with respect to Co-Branded Accounts and to the
individuals to whom Co-Branded Cards are issued.
NOW, THEREFORE, NextCard and Amazon.com agree as follows:
SECTION ONE
DEFINITIONS
1.1. "Account Fee" is defined in Section 1 of Schedule C.
<PAGE> 2
1.2. "Amazon.com Competitor" means any Company designated by Amazon.com
on Schedule B hereto, as may be amended from time to time pursuant to Section
3.2.2. By agreement of the parties, Schedule B hereto is intentionally left
blank as of the Effective Date, and will be supplied by Amazon.com to NextCard
not later than six (6) weeks following the Effective Date, at which time it will
be appended hereto and made a part hereof.
1.3. "Amazon.com Customer Information" means information provided to
Amazon.com by an Amazon.com customer for storage and subsequent use by an
Amazon.com customer on the Internet including an Amazon.com customer's identity,
address, credit card number(s), personal information, purchasing preferences or
history, or similar information.
1.4. "Applicable Law" means applicable federal, state and local
statutes, regulations, regulatory guidelines and judicial or administrative
interpretations as well as any rules or requirements established by VISA (or,
should the Parties determine to issue a "MasterCard," those rules or
requirements established by MasterCard).
1.5. "Business Day" means Monday through Friday, excluding Federal
banking holidays.
1.6. "Cardholder Agreement" means the document in substantially the form
included as Schedule D to this Agreement, and as may be amended from time to
time, which governs the Co-Branded Accounts and use of the Co-Branded Cards. By
agreement of the parties, Schedule D hereto is intentionally left blank as of
the Effective Date, and will be drafted by NextCard and mutually approved by the
parties not later than six (6) weeks following the Effective Date, at which time
it will be appended hereto and made a part hereof.
1.7. "Co-Branded Account" means an unsecured, revolving, open-end credit
account provided by NextCard for Amazon.com customers through the Issuer and
established pursuant to this Agreement, which is accessed solely by a Co-Branded
Card, the features and terms of which are further described on Schedule A to
this Agreement.
1.8. "Co-Branded Card" means a bankcard issued pursuant to this
Agreement that bears the Copyrights and Marks and the VISA Marks and that
accesses a Co-Branded Account.
1.9. "Co-Branded Cardholder" means the holder of a Co-Branded Card
issued pursuant to this Agreement.
1.10. "Confidential Information" means the terms of this Agreement, the
Customer Data and all information, materials or reports provided to or in
connection with either Party's performance under this Agreement, including
without limitation, Registered Buyer information or other Amazon.com Customer
Information, all names, address, demographic, behavioral, and credit information
relating to Co-Branded Cardholders or potential Co-Branded Account cardholders,
cardholder communication materials and issuance strategies or methods, business
Page 2 of 42
<PAGE> 3
objectives, assets and properties, marketing programs and methods; and
programming techniques and technical, developmental, cost and processing
information.
1.11. "Copyrights" is defined in the third paragraph of the Recitals.
1.12. "Customer Data" means all information, whether personally
identifiable or in aggregate, that is submitted and/or obtained as a result of a
Co-Branded Account relationship or an application (whether or not completed) for
a Co-Branded Account relationship, including without limitation, NextCard
Customer Information, credit information, financial standing and demographic
data, and primary transactional data generated by a Co-Branded Cardholder's use
of the Co-Branded Card (including Transaction Data).
1.13. "Customer Retention Fund" means that pool of monies used to fund
certain retention efforts (other than the Co-Branded Loyalty Program) related to
the Co-Branded Accounts.
1.14. "Fortnight" shall mean a period of fourteen (14) consecutive
calendar days.
1.15. "Marketing Materials" means badges, links, sponsored e-mails,
micro-sites, splash pages, other placements on the web sites, and trade,
broadcast or banner advertisements, press communications, and any printed
physical elements designed to promote the Co-Branded Card or a Party hereto.
"Marketing Materials" shall also include [*] information on value-added products
and services provided directly or indirectly by a marketing partner of NextCard,
and delivered by NextCard to the Co-Branded Cardholders; provided that no [*]
will be sent to any Co-Branded Cardholder who has opted out from the receipt of
such messages.
1.16. "Minimums" is defined in Section 3 of Schedule C.
1.17. "New Co-Branded Account Goals" means those goals that are set
forth in the table in Schedule C.
1.18. "NextCard Customer Information" means information provided by a
NextCard customer to NextCard for storage and subsequent use by a NextCard
customer including a NextCard customer's identity, address, credit card number,
personal information, purchasing preferences or history, or similar information.
1.19. "Registered Buyers" means those visitors to the Property who have
purchased at least one item or service from Amazon.com (not including the
Co-Branded Card) through use of a unique and nonduplicative email address and
for whom Amazon.com has a viable means to contact (either valid email address,
Property visits, physical mailings or other means mutually agreed upon by the
Parties).
1.20. "Shared Customer Data" means and is specifically limited to [*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Page 3 of 42
<PAGE> 4
[*] "Shared Customer Data" specifically excludes (i) information provided on
application materials, such as social security number, income, debt or other
personal financial information, (ii) credit bureau scores and other credit
report information, and (iii) credit reference information obtained directly
from other creditors or businesses. Notwithstanding the foregoing, "Shared
Customer Data" may include application-level information (other than the
information specifically described in clause (i), above) that the parties
mutually agree to request from applicants, and shall exclude any Customer Data
that NextCard reasonably determines, upon the written advice of outside counsel,
would result in NextCard becoming a consumer reporting agency or, if provided by
NextCard to Amazon.com, would constitute a violation under Applicable Law.
1.21. "Transaction Data" is defined as Merchant Category Code (MCC) as
defined by Visa regulations, transaction amount, merchant description and
transaction date, individually identifiable for each Co-Branded Cardholder
purchase transaction.
SECTION TWO
CO-BRANDED CARD PROGRAM
2.1 Design of Card. The parties shall create mutually acceptable designs
for the front of the Co-Branded Card, which will include the Copyrights and
Marks and the VISA Marks and be subject to Applicable Law. The Amazon.com Mark
will be in a primary position and the NextCard Mark will be in a secondary
position on the front of the Co-Branded Card; provided that, the size of the
NextCard Mark shall be no less than a percentage, expressed as the fraction
"1(divided by)(square root of pi)" (expressed for convenience as fifty-six
percent (56%)) of the size of the Amazon.com Mark.
2.2 MasterCard Program. At Amazon.com's request, NextCard will take all
necessary steps to offer to Co-Branded Account applicants a Co-Branded Card
through MasterCard within twelve (12) months following NextCard's receipt of
such request, under such terms and conditions as mutually upon agreed by the
Parties.
2.3 Features and Terms of Accounts. The features and terms of Co-Branded
Accounts to be offered initially by NextCard are described on Schedule A to this
Agreement. [*] Except for the foregoing requirement, NextCard shall have
complete discretion to change any terms and conditions on existing Co-Branded
Accounts and the terms on which new Co-Branded Accounts are originated, or to
add additional terms and conditions; provided, however, that NextCard shall use
its best efforts to give Amazon.com prior written notice of any material change.
Notwithstanding the above, [*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Page 4 of 42
<PAGE> 5
measured by Bank Rate Monitor or, if Bank Rate Monitor no longer exists, a
mutually acceptable proxy therefor.
2.4 Co-Branded Account Origination Web Site. No later than fourteen (14)
days prior to the Launch Date, NextCard, at its sole cost and expense, shall
create, and, at all times while this Agreement is in effect, operate, host and
maintain a web site within the "nextcard.com" domain (the "Origination Web
Site"), which may be accessed from any on-line location, for the purpose of
soliciting Co-Branded Card applications, effecting online approvals, customized
Co-Branded Card offers and automated balance transfers. The Origination Web Site
will clearly indicate that NextCard and the Issuer, and not Amazon.com, are the
entities granting credit and that the Issuer is the sole owner of the Co-Branded
Accounts. The parties may mutually agree to add additional fields or pages to
the application process.
2.5 Credit Decisions. NextCard shall have complete discretion to make
all credit decisions regarding the Co-Branded Accounts. Nothing in this
Agreement shall require NextCard to provide a Co-Branded Card to any person who
NextCard determines does not meet NextCard's credit underwriting standards.
Without limiting the foregoing, such discretion shall include decisions relating
to approval of applicants for Co-Branded Accounts, choice of type of Co-Branded
Card to be issued, including Platinum or Classic, credit limit adjustments upon
application from a Co-Branded Cardholder, termination, suspension or
reactivation of credit privileges on Co-Branded Accounts, and collection of
amounts owing on the Co-Branded Accounts. NextCard shall be solely responsible
for taking and reviewing applications for Co-Branded Accounts, issuing plastics,
providing customer service and otherwise administering and operating the
Co-Branded Accounts. NextCard or the Issuer, as the case may be, shall bear all
risk of credit loss and program operating costs for the Co-Branded Accounts and
Amazon.com shall have no responsibility for any such loss or costs.
2.6 Approvals. NextCard will use best efforts to maximize booking rates
for Co-Branded Cards and Accounts by experimenting with various Co-Branded
Account pricing terms.
2.7 Cardholder Agreement. Co-Branded Accounts and use of Co-Branded
Cards will be governed by the terms of the Cardholder Agreement. Such Cardholder
Agreement shall comply with Applicable Law. Notwithstanding any other
limitations contained in this Agreement, NextCard may amend the Cardholder
Agreement at any time to comply with Applicable Law.
[*]
2.9 Ownership and Operation of Accounts. NextCard shall be the sole and
absolute owner of, and Amazon.com shall have no right or title to, or interest
in, the Co-Branded
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 6
Accounts and the Co-Branded Cards. NextCard shall be responsible for all aspects
of operating and servicing the Co-Branded Accounts and for compliance with
Applicable Laws relating to the solicitation, operation and servicing of the
Co-Branded Accounts.
2.10 Co-Branded Account Customer Service. NextCard will develop, operate
and maintain, at NextCard's sole cost and expense, a full service online
customer service and support web site (the "Customer Service Web Site") for the
servicing of only Co-Branded Accounts. The Customer Service Web Site shall be
hosted by NextCard within the "nextcard.com" domain, shall be operational not
less than fourteen (14) days prior to the Launch Date, and shall be branded and
have a look and feel consistent with the Property no later than March 1, 2000;
provided, that, until the Customer Service Web Site is fully operational,
NextCard shall not display any marketing messages to any Co-Branded Cardholder
other than those allowed by this Agreement. NextCard shall provide Amazon.com
with a test account on the Customer Service Web Site. All users of the Customer
Service Web Site will understand that they are interfacing and doing business
with NextCard and/or the Issuer. In addition to the Customer Service Web Site
and other customer support channels, and at the request of Amazon.com,
Co-Branded Cardholders will have access to all other customer service channels
provided by NextCard to its other cardholders. NextCard will meet or exceed the
performance requirements set forth in Schedule E "Customer Service and Account
Service Performance Requirements."
2.11 Marketing Materials. The Parties shall jointly agree to insert
prominent and persistent Marketing Materials on appropriate Co-Branded customer
materials (as described in Section 2.12). NextCard shall provide an easy process
for Co-Branded Cardholders to opt out of receiving e-mail messages that are not
required by Applicable Law.
2.12 Co-Branded Customer Materials. The parties will jointly review and
approve, all Co-Branded customer materials (with the exception of insignificant
materials as agreed by the Parties) featuring the Marks and Copyrights such as
pages on the Customer Service Web Site or the Origination Web Site, official
Co-Branded communications, and any other Co-Branded customer materials,
regardless of media, that either of the parties reasonably believe constitutes a
significant customer "touch point." All Co-Branded customer materials will have
a look and feel consistent with the Property. The Origination and Customer
Service Web Sites will include back buttons and links to the Property as
appropriate. The parties will cooperate so that all materials relating to the
Co-Branded program are made available with adequate time for advance review and
modification of graphic design and text copy, as well as to ensure error-free
functionality and pre-Launch user testing.
2.13 Customer Data.
2.13.1 Collection and Ownership. NextCard shall collect,
maintain, and be the sole owner of all Customer Data. NextCard may use the
Customer Data in a manner consistent with this Agreement for any legitimate
business purpose, provided that no personally identifiable Customer Data may be
disclosed or transferred to any Amazon.com Competitor or any third party (other
than credit bureaus or as otherwise necessary or appropriate for administration,
servicing and funding of the Co-Branded Accounts), and provided further that
NextCard shall not
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<PAGE> 7
release any portfolio-level Customer Data pertaining to the Co-Branded Accounts
unless required by Applicable Law or for the administration of the Co-Branded
Accounts. Whenever NextCard is required to disclose such portfolio-level
Customer Data it will request confidential treatment from the recipient.
Amazon.com will not disclose or transfer any Shared Customer Data to any third
party.
2.13.2 Opt-out and Data Sharing. The application form for the
Co-Branded Card will contain the provision set forth in Schedule G that will
permit each Co-Branded Account applicant to "opt-out" of having Shared Customer
Data shared with Amazon.com. NextCard shall be solely responsible for tracking
such election and, unless the applicant exercises such opt-out privilege, shall
make available such Shared Customer Data to Amazon.com pursuant to Section
2.13.4. Each Co-Branded Cardholder will have the ability to change their data
sharing option through the Co-Branded Customer Service Web Site. In the event a
Co-Branded Cardholder who has not previously opted out decides to opt-out, that
Co-Branded Cardholder's Shared Customer Data shall no longer be shared with
Amazon.com and Amazon.com will purge all such data from its systems to the
extent required by Applicable Law. [*]
2.13.3 Use by Amazon.com. Subject to Applicable Law, NextCard
will make available to Amazon.com, and Amazon.com will receive and may use the
Shared Customer Data only for the purposes of (i) selling goods and services,
and (ii) for internal analysis of trends and performance. Amazon.com will not
use or distribute the Shared Customer Data in any manner not specifically
provided in the preceding sentence, including using it to screen referrals to
third parties (except this restriction shall not preclude Amazon.com from
marketing or promoting the products or services of a third party based on the
Shared Customer Data in a manner that is otherwise consistent with this
Agreement), using it to determine eligibility for credit, insurance, or
employment, distributing or publishing it, or using it in a manner inconsistent
with Applicable Law.
2.13.4 Within ten (10) Business Days from the Effective Date,
the parties will agree on (i) the manner in which the Shared Customer Data is to
be formatted, (ii) how frequently the Shared Customer Data will be transmitted
from NextCard to Amazon.com. and (iii) a schedule for test transmissions of
Shared Customer Data. At any time during the Term, and at Amazon.com's request
and at its sole expense, NextCard will create and maintain a segregated, secure
database for Shared Customer Data, which Amazon.com will access and download.
2.14 Periodic Statements and Inserts.
2.14.1 The periodic statement will include the Copyrights and
the Marks. The Parties shall agree on all other elements of the periodic
statement for the Co-Branded Accounts, except those required by Applicable Law,
which shall be determined by NextCard.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 8
2.14.2 At Amazon.com's request, NextCard shall include up to two
marketing inserts per month on or with the periodic statements sent to
Co-Branded Cardholders via U.S. mail in paper form, subject to Applicable Law
and NextCard's right to review and approve such inserts. Amazon.com will pay for
the design and production of such inserts, provided that NextCard will cooperate
with Amazon.com to secure the most favorable design and production cost.
NextCard will pay for all standard insertion and mailing costs. Amazon.com shall
reimburse NextCard for any additional postage or other costs incurred as a
result of including inserts with periodic statements only to the extent such
costs are attributable to Amazon.com inserts. Except as set forth above,
NextCard may impose reasonable limitations on the number or volume of such
marketing inserts, or may delay the inclusion of such materials to accommodate
requirements under Applicable Law. If Amazon.com declines to use such space in a
particular statementing cycle, NextCard may use the space for other collateral
marketing materials consistent with this Agreement.
2.14.3 At Amazon.com's request, any printed materials
distributed to Co-Branded Cardholders pursuant to this Agreement will be printed
in or disseminated from a State or a location as mutually agreed by the Parties.
Amazon.com will pay for all expenses, including reasonable overhead costs,
incurred, directly and indirectly, as a result of Amazon.com's request to
utilize a state other than the one currently used by First Data Resources on
behalf of NextCard.
2.15 Payments. If any Co-Branded Cardholder incorrectly makes a check,
money order, draft or other form of payment for a Co-Branded Account payable to
the order of Amazon.com rather than to the order of NextCard or its agents,
Amazon.com hereby expressly authorizes NextCard to endorse the item on
Amazon.com's behalf and to credit the payment to the appropriate Co-Branded
Account. Amazon.com shall not accept payments from Co-Branded Cardholders for
any Co-Branded Account.
2.16 Launch Date. The Parties shall use their best efforts to have the
Co-Branded Card program operational by the calendar date that is no later than
ten (10) weeks from the Effective Date. The date the Co-Branded Accounts are
first offered shall be the "Launch Date". The Parties may begin joint marketing
efforts prior to the Launch Date with mutual agreement.
2.17 Credit Card Issuer. Subject to Amazon.com's prior approval, which
shall not be unreasonably withheld, NextCard may select which financial
institution shall be the issuer of the Co-Branded Cards and may change such
issuer at any time during this Agreement, provided, however, that any such
issuer shall at all times be a member in good standing of VISA or MasterCard.
SECTION THREE
COMPENSATION, EXCLUSIVITY AND LICENSE
3.1 Compensation Paid by NextCard. During the Term of the Agreement,
NextCard agrees to provide compensation to Amazon.com in the amounts and in the
manner described in Schedule C to this Agreement, contingent upon Amazon.com's
continuing to satisfy, in all
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<PAGE> 9
material respects, its obligations hereunder. All amounts owing to any party
shall be sent via wire transfer to such account(s) as may be specified, in
writing, not later than two (2) business days prior to the date such amounts are
transmitted. NextCard shall pay Amazon.com interest on any late payment (as
defined in Schedule C) at a rate of one and one half percent (1.5%) per month.
3.1.1 All accounting statements shall be sent by NextCard to the
following address:
Amazon.com
Attn: [*]
1200 Twelfth Avenue South, Suite 1200
Seattle, WA 98144-2734
3.1.2 Any promotional payments or amounts, excluding Interchange
fees, that NextCard or Amazon.com receives from VISA or MasterCard specifically
attributable to the Co-Branded Cards or the Co-Branded Accounts will be itemized
separately on the reconciliation statements referred to in the following
paragraph, and, subject to any disbursement instructions from VISA or
MasterCard, allocated [*].
3.1.3 An appropriate reconciliation statement shall accompany each such
payment. The receipt or acceptance by Amazon.com of any statements furnished
pursuant to this Agreement, or the receipt or acceptance of any payments made,
or the fact that Amazon.com has previously audited the periods covered by such
statements, shall not preclude Amazon.com from questioning their accuracy at any
time. If any inconsistencies or mistakes are discovered in such statements or
payments, the parties shall make appropriate adjustments within thirty (30)
days. During the Term and for two (2) years thereafter (or such other period of
time as may be required by Applicable Law), NextCard shall keep full and
accurate books of account and copies of all documents and other material
relating to this Agreement at NextCard's principal office. Amazon.com, by its
duly authorized agents and representatives, shall have the right on reasonable
prior notice and at Amazon.com's sole cost and expense to audit or make copies
of such books, documents, and other material during ordinary business hours. At
Amazon.com's request, NextCard shall provide an authorized employee to assist in
the examination of NextCard's records. If any audit of NextCard's books and
records reveals that NextCard has failed properly to account for and pay amounts
owing to Amazon.com, and the amount of any amounts which NextCard has failed
properly to account for and pay for any quarterly accounting period exceeds, by
ten percent (10%) or more, the amounts actually accounted for and paid to
Amazon.com for such period, NextCard shall, in addition to paying Amazon.com
such past due amounts, reimburse Amazon.com for professional fees and direct
out-of-pocket expenses incurred in conducting such audit, in accordance with
NextCard's normal expense guidelines.
3.2 Exclusivity.
3.2.1 By Amazon.com. During the Term of this Agreement, neither
Amazon.com nor any entity controlled by Amazon.com or in common control with
Amazon.com will on its own or in conjunction with others, directly or indirectly
for any reason whatsoever
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 10
enter into an agreement to assist in the marketing in the United States or any
of its territories or possessions of any application for any credit, debit or
charge card, except for the Co-Branded Cards, or recommend or endorse the
acquisition of any debit, credit or charge card, except as provided for in this
Agreement. The restrictions set forth in this section shall not apply to
co-branded individual bankcards offered solely to employees of Amazon.com
through a credit union affiliated with Amazon.com. Nothing in this Agreement
shall prevent Amazon.com from offering a private label credit facility (a
"house" charge account) that the parties mutually agree shall not be competitive
with the Co-Branded Card.
3.2.2 By NextCard. Amazon.com shall have the right to designate
up to [*] companies (the "Restricted List") with which NextCard shall be
prohibited from working to promote the sale of products or services to the
Co-Branded Cardholder base. The initial Restricted List will be attached hereto
as Schedule B not later than six (6) weeks from the Effective Date. Amazon.com
shall have the right to substitute up to [*] of the companies on the Restricted
List once every six months from the Effective Date, provided that Amazon.com
must give not less than one month's advance written notice of such substitution;
and provided further, that no company may be substituted in to the Restricted
List that provides debit, credit or charge card-related products or services as
a material part of their business, including facilitating purchasing activity
(other than merchants) and the extension of credit; and provided further that no
company may be added by Amazon.com to the Restricted List if NextCard has a
current relationship, or is in significant discussions, with a company not
primarily involved in the merchandise or consumer goods business to provide a
free non-merchandise product or service to the Co-Branded Cardholders. In
addition, NextCard shall not promote any other debit, credit, secured or other
charge card or account without Amazon.com's prior written consent, nor shall
NextCard promote the products or services of any company on the Restricted List,
to declined Co-Branded Card applicants.
3.3 Ownership and License.
3.3.1 NextCard Marks and NextCard Copyrights. Amazon.com hereby
acknowledges that as between the Parties the NextCard Marks and NextCard
Copyrights shall be the property of NextCard and NextCard hereby grants
Amazon.com a nonexclusive, nontransferable, restricted and royalty-free license
to use the NextCard Marks and NextCard Copyrights only in a manner and at such
times as are expressly authorized by this Agreement, as follows:
3.3.1.1 All materials produced by Amazon.com which
utilize the NextCard Copyrights or the NextCard Marks, including advertising
materials, will be submitted to NextCard not less than five (5) business days
prior to its first intended use for its prior written approval. If NextCard does
not object within the five-day period, NextCard shall be deemed to have
consented to Amazon.com's use of such materials;
3.3.1.2 All NextCard-related materials created by
Amazon.com will, at NextCard's election, contain an appropriate NextCard
copyright or trademark notice and a visible printed reference or hyperlink, as
appropriate, to the Origination Web Site.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 11
3.3.2 Amazon.com Copyrights and Amazon.com Marks. NextCard
hereby acknowledges that as between the Parties all rights in the Amazon.com
Copyrights and the Amazon.com Marks shall be the property of Amazon.com, and
Amazon.com hereby grants NextCard a nonexclusive, nontransferable, restricted
and royalty-free license to use the Amazon.com Copyrights and Amazon.com Marks
only in a manner and at such times as are expressly authorized by this
Agreement, as follows:
3.3.2.1 All materials produced by NextCard which utilize
the Amazon.com Copyrights or the Amazon.com Marks, including advertising
materials, will be submitted to Amazon.com not less than five (5) business days
prior to its first intended use for its prior written approval. If Amazon.com
does not object within the five-day period, Amazon.com shall be deemed to have
consented to NextCard's use of such materials;
3.3.2.2 All Amazon.com-related materials created by
NextCard will, at Amazon.com's election, contain an appropriate Amazon.com
copyright or trademark notice and a visible printed reference or hyperlink, as
appropriate, to the Origination Web Site and/or the Property;
3.3.2.3 The physical Co-Branded Cards will display the
URL for the Customer Service Web Site; and
3.3.2.4 All non-Internet ads must display the
Origination Web Site URL.
3.3.3 Except as specified in this Agreement, all uses of the
Marks will inure to the benefit of the Parties; provided that nothing in this
Section shall be read to imply that Amazon.com shall have any right, title or
interest in or to any Co-Branded Account receivable generated by any Co-Branded
Account holder.
3.3.4 Each Party grants to the other a nonexclusive,
nontransferable, restricted and royalty-free license: (i) to establish
hyperlinks to its appropriate Internet web sites (in the case of Amazon.com,
NextCard may link only to the Property) and, (ii) in connection with
establishing such links, to use each graphical image file of the Party,
including all Marks, contained therein (each an "Image") in conjunction with the
Co-Branded Card program only as contemplated by this Agreement; provided,
however, that neither Party shall add, subtract or in any way alter or edit any
Image (including, for this purpose, any machine-readable code which may be a
part of any Image) of the other Party, or make any use whatsoever of any Image
of the other Party other than for the purposes of, and as expressly contemplated
by, this Agreement. Each Party represents and warrants that it has the requisite
power to grant such license.
3.3.5 Upon termination or expiration of this Agreement, each
Party shall, except where authorized in writing by the other Party or under this
Agreement, cease the use or reference to the other Party's name, Marks, Images,
Copyrights and hyperlinks in any manner whatsoever, and destroy, at its own
expense, all Marketing Materials or other publications and
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<PAGE> 12
promotional materials bearing the other Party's name, Marks, Images, Copyrights
and hyperlinks in its possession and in the possession of its agents, employees,
and independent contractors.
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<PAGE> 13
SECTION FOUR
CUSTOMER RETENTION PROGRAMS
4.1. Establishment of Co-Branded Loyalty Program. The Co-Branded Card
will include a customer loyalty program (the "Co-Branded Loyalty Program")
designed by NextCard to promote use of the Co-Branded Card. Under the Co-Branded
Loyalty Program, Cardholders will receive points for using the Co-Branded Card
to purchase goods and services which points may be redeemed for rewards provided
through the Co-Branded Loyalty Program. The number of points required to earn
rewards under the Co-Branded Loyalty Program will be no greater than [*] times
the number of points required to earn rewards under the current NextCard loyalty
program. The rules and regulations governing the Co-Branded loyalty program
offered to NextCard's account holders (the "Rules and Regulations") are attached
hereto as Schedule H. By agreement of the parties, Schedule H hereto is
intentionally left blank as of the Effective Date, and will be drafted by
NextCard and mutually approved by the parties not later than six (6) weeks
following the Effective Date, at which time it will be appended hereto and made
a part hereof. Under the Co-Branded Loyalty Program, each Co-Branded Account
holder shall be given an offer that will allow participation in a single-points
reward program with no fees or balance transfers required.
4.2. NextCard's Rights and Responsibilities for the Loyalty Program.
4.2.1. NextCard shall be responsible for managing the Loyalty
Program, and for all administrative costs related thereto. The Loyalty Program
will be funded by NextCard at a rate of not less than [*] basis points [*]
of net Co-Branded Cardholder spending (defined as purchases less returns
and credits).
4.2.1.1. As soon as practicable following the Effective
Date, Amazon.com will contact the third-party provider of the Co-Branded Loyalty
Program rewards, [*], and commence negotiations to permit Amazon.com products to
be offered to Co-Branded Cardholders redeeming points earned under the Loyalty
Program If [*] does not accommodate Amazon.com's reasonable requests to (i)
discontinue the participation of certain vendors of goods and services through
the Co-Branded Loyalty Program that Amazon.com deems competitive to Amazon.com
or, (ii) substitute a vendor of Amazon.com's choosing for vendors currently
participating in the Co-Branded Loyalty Program, then NextCard will suppress
such vendors' participation in the Co-Branded Loyalty Program; provided,
however, that the parties must mutually agree on any Amazon.com suppression
request for any vendor not on the Restricted List.
4.2.1.2. Co-branded Cardholders may be offered
"double-points" for a fee not to exceed the fee charged from time to time by
NextCard to its other account holders.
4.2.2. NextCard may in its sole and complete discretion change
the terms or structure of the Co-Branded Loyalty Program, including the rules
and regulations and the provider of the program, at any time; provided, however,
that it shall give Amazon.com notice of any material change. Amazon.com hereby
acknowledges that it shall have no rights or interests
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 14
in the relationships and agreements between NextCard and its designated
affiliates or rewards provider. NextCard will provide a monthly report to
Amazon.com detailing all actual expenditures attributable to the Co-Branded
Loyalty Program, exclusive of overhead charges.
4.3. Amazon.com's Loyalty Program Option. Amazon.com may, at its sole
option and expense, develop a loyalty program to be offered to the Co-Branded
Cardholders (the "Amazon Program"). Following the development of the Amazon
Program, the parties will conduct a test, not to exceed four (4) calendar
months, whereunder the Amazon Program will be offered to a mutually agreed upon
percentage of new applicants for a Co-Branded Card. During the test, Amazon.com
will receive [*] basis points of net Co-Branded Cardholder spending for all
Co-Branded Cardholders who elect the Amazon Program. At the conclusion of the
test period, the parties will jointly evaluate the performance of the Amazon
Program, as compared with the Co-Branded Loyalty Program, with the objective of
choosing, in good faith, the program which, in the reasonable judgment of the
parties, is more likely to stimulate balance build and purchase activity.
4.3.1 Funding for the Amazon Program. If the Parties choose to
substitute the Amazon Program for the Co-Branded Loyalty Program, NextCard will
provide to Amazon.com funding for the Amazon Program of [*] basis points [*] of
net Co-Branded Cardholder spending.
4.4. Opportunities for Amazon.com. For Loyalty Programs offered to other
NextCard cardholders in general, NextCard will, subject to the approval of any
third-party operator of the such Loyalty Programs, provide Amazon.com with
opportunities for itself, its affiliates and entities with which it has formed
an alliance to have their goods and/or services included in the incentive
offerings on terms and conditions at least as favorable as those provided to
other vendors that participate in the Loyalty Programs.
4.5. Customer Retention Fund. NextCard shall establish, manage, and
maintain the Customer Retention Fund, to be held by NextCard in a non-commingled
bank account. The Customer Retention Fund shall be funded equally,
dollar-for-dollar, by NextCard and Amazon.com, provided that Amazon.com shall
determine when and in what amount funds shall be deposited, and provided further
that the maximum amount to be contributed in to the Customer Retention Fund
shall not exceed [*] per Co-Branded Account. Funds in the Customer Retention
Fund may only be spent on promotions and activities that the parties shall
mutually agree are designed to encourage Co-Branded Cardholders to retain and
use their Co-Branded Cards.
SECTION FIVE
MARKETING AND PROMOTION
5.1 Reporting. Amazon.com will provide monthly reports to NextCard of
the number of clicks. NextCard will provide monthly reports to Amazon.com of the
number of new Co-Branded Accounts applied for and the number and type of
Co-Branded Accounts accepted and opened. NextCard agrees to provide at least
monthly reports to Amazon.com of the: (i) number
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Page 14 of 42
<PAGE> 15
of active Co-Branded Cards, (ii) average monthly purchases on Co-Branded Cards,
(iii) all operational reports related to the performance of NextCard's
obligations under Schedule E, (iv) all reports related to the performance of
NextCard's obligations under Schedule C, (v) average yield on the Co-Branded
Account portfolio, (vi) average annual percentage rate charged to Co-Branded
Accounts opened during the reporting period, (vii) percentage of Co-Branded
Account applicants that exercise the "opt-out" privilege described in Schedule
G, and (viii) data on the performance of each marketing tool (such as e-mail,
banner ads, etc.) employed by Amazon.com to promote the Co-Branded Card program.
NextCard will make reasonable efforts to automate such reporting and make it
available to Amazon.com via email.
5.2 Monthly Program Review. At least once per month following the
Effective Date of this Agreement and until termination or expiration of this
Agreement, the Parties shall conduct a monthly Co-Branded Card program review.
At a minimum, such review will include a report on the progress of the
financial, operational and marketing aspects of the Co-Branded Card program and
this Agreement and will review plans designed to achieve the New Co-Branded
Account Goals and the other requirements of this Agreement.
SECTION SIX
CONFIDENTIALITY, PROMOTION AND NONSOLICITATION.
6.1. Confidential Information. Each Party acknowledges that it may
acquire Confidential Information of the other Party in the course of exercising
its rights and carrying out its obligations under this Agreement. Each Party
agrees not to use Confidential Information of the other Party for its own
benefit or to disclose such information to any third party, except as
specifically authorized by this Agreement or reasonably necessary for the Party
to carry out its obligations hereunder. Each Party further agrees that its
employees, agents and independent contractors shall treat the other Party's
Confidential Information in the same manner as such Party is required to treat
such Confidential Information. Each Party to this Agreement shall not disclose
any information about the relationships created by this Agreement or any
information on the operation of the Co-Branded Card program, including but not
limited to, amounts paid and reports and financial information provided pursuant
to this Agreement, to any third party, except to the extent necessary to carry
out the Party's respective obligations under this Agreement, or with the prior
written consent of the other Party. In addition, either Party may disclose
Confidential Information to the extent that, in the reasonable opinion of its
legal counsel, it is legally required to be disclosed. The Party seeking to
disclose the Confidential Information shall notify the other Party a reasonable
time prior to disclosure and allow the other Party a reasonable opportunity to
seek appropriate protective measures.
6.2 Nothing in this Section 6 shall be deemed to prohibit:
6.2.1. Use or disclosure of the Party's Confidential Information
if a Party obtains such information from a source other than pursuant to the
relationship created by this Agreement, or
6.2.2. Disclosure of information required by subpoena, court
order or process, or governmental inquiry, provided that the Party from which
such information is sought provides
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<PAGE> 16
the other Party with notice of the request of such information and a reasonable
opportunity to prevent disclosure of the information or to seek appropriate
protective measures.
6.3 Disposition of Confidential Information. Upon either Party's demand,
or upon the termination or expiration of this Agreement, the Parties shall
comply with each other's reasonable instructions regarding the disposition of
Confidential Information, which may include the return or destruction of any and
all Confidential Information (including any copies, extracts, compilations, or
reproductions thereof). Upon request, such compliance shall be certified in
writing, including a statement that no copies of Confidential Information have
been kept.
6.4 Targeting. Except as specifically provided by this Agreement,
NextCard will not target individuals for solicitation based solely on account of
their Co-Branded Account holder status. Nothing in this Section 6.4 shall
preclude NextCard from marketing products or services to a general population of
potential customers, some of whom may be Registered Buyers or Co-Branded Account
holders but are not targeted as such. NextCard shall not sell, license,
disclose, distribute or transfer to any third party a list consisting of
individuals known to NextCard to be Co-Branded Cardholders or any aggregate
purchasing or demographic information about individuals known to NextCard to be
Co-Branded Cardholders, that identifies the individuals as Co-Branded
Cardholders, either expressly or by direct implication. For a period of [*]
from the Launch Date, NextCard will not market the products and/or services of
any Amazon.com Competitor to that subset of NextCard's general cardholder base
that NextCard determines has purchased such products and/or services from
Amazon.com and no other merchant. Amazon.com shall not sell, license, disclose,
distribute or transfer to any third party a list consisting of individuals known
to Amazon.com to be Co-Branded Cardholders or any aggregate purchasing or
demographic information about individuals known to Amazon.com to be Co-Branded
Cardholders, that identifies the individuals as Co-Branded Cardholders, either
expressly or by direct implication.
6.5 Injunctive Relief. Each Party agrees that any unauthorized use or
disclosure of Confidential Information or a breach of this Section 6 may cause
immediate and irreparable harm to the affected Party for which money damages
shall not constitute an adequate remedy. Therefore, each Party agrees that
injunctive relief, including without limitation Ex Parte relief, without notice
or the posting of bond, shall be warranted in addition to any other remedies the
affected Party may have. In addition, the other Party agrees promptly to advise
the affected Party in writing of any unauthorized misappropriation, disclosure
or use by any person of the Confidential Information which may come to its
attention and to take all steps at its own expense reasonably requested by the
affected Party to limit, stop or otherwise remedy such misappropriation,
disclosure or use.
6.6 Promotion. The parties understand that their participation in this
relationship will be announced in a mutually agreed upon press release or press
event in advance of the Launch Date, and that from time to time additional press
releases will be required or deemed desirable by both parties. Amazon.com and
NextCard will pool their media-relations resources, internal and external, as
appropriate to develop a coordinated media plan and execute the desired or
necessary public relations goals. Both parties will provide advance approval for
inclusion of boilerplate
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 17
copy and for press releases and other public disclosures related to the
Co-Branded Card program. For inclusion in the main copy section of a release,
each Party's approval will be obtained in writing and not unreasonably withheld,
at least two Business Days in advance of the release date.
6.6.1 If either Amazon.com or NextCard reasonably determines
that the use of Shared Customer Data has resulted in a public protest (including
a lawsuit filed against either party) that, in the reasonable judgment of such
party, is reasonably likely to result in a material adverse effect on the
business, prospects or financial condition of such party, then Amazon.com and
NextCard will work together in good faith to respond to the protest, which may
include the issuance of a mutually acceptable press release discussing [*].
SECTION SEVEN
DURATION AND MODIFICATION OF THE AGREEMENT
7.1 Term. Subject to the provisions of this Section 7, this Agreement
shall be effective as of the Effective Date and shall continue for a term of
five (5) years from and after the Launch Date (the "Initial Term"). Following
the Initial Term, this Agreement shall be renewed for successive renewal terms
of [*] each (each, a "Renewal Term"), unless a Party provides written notice to
the other at least [*] prior to the termination of the Initial Term or each then
current Renewal Term stating that it does not wish to renew this Agreement. The
Initial Term and the Renewal Terms, if any, may be collectively referred to
herein as the "Term."
7.2 Default; Breach. If there is a material breach of any representation
or warranty, or default in the performance of any covenant or obligation of this
Agreement, by either Party, and such breach or default shall continue for a
period of thirty (30) days after receipt by the breaching or defaulting Party of
written notice thereof from the non-breaching or defaulting Party (setting
forth in detail the nature of such default), then this Agreement may terminate
at the option of the non-breaching or -defaulting Party as of the thirty-first
(31st) day following the receipt of such written notice. If, however, the breach
or default cannot be remedied within such thirty (30) day period, such time
period shall be extended for an additional period of not more than a Fortnight,
so long as the breaching or defaulting Party has notified the non breaching or
- -defaulting Party in writing and in detail of its plans to initiate substantive
steps to remedy the breach or default and diligently and continuously thereafter
pursues the same to completion within such additional Fortnight. Notwithstanding
the foregoing, any failure to perform by NextCard, as defined in Schedule E,
constitutes a material default by NextCard of this Agreement, allowing for
immediate termination by Amazon.com upon written notice to NextCard.
7.3 Insolvency. This Agreement shall be deemed immediately terminated,
without the requirement of further action or notice by either Party, in the
event that either Party, or a direct or indirect holding company of either
Party, shall become subject to voluntary or involuntary bankruptcy, insolvency,
receivership, conservatorship or like proceedings (including, but not limited
to, the takeover of such Party by the applicable regulatory agency) pursuant to
Applicable Law.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 18
7.4 Change in Applicable Law. If there is a modification or other change
in Applicable Law that has a material adverse effect on the ability of either
NextCard or Amazon.com to continue the Co-Branded Card program contemplated by
this Agreement, the parties shall meet or otherwise discuss whether it is
possible to modify this Agreement to continue the Co-Branded Card program. If
the parties are unable to agree to a modification to the Agreement, either Party
may terminate this Agreement upon prior written notice to the other Party. A
"material adverse effect" includes, among other things, any change in Applicable
Law that has a significant impact on the financial or operational burdens or
rewards of either Party under this Agreement. The Parties agree to modify the
Co-Branded Card program as necessary from time to time to comply with all
Applicable Law.
7.5 Change in Control. If either Party enters into any merger,
acquisition, transfer of control, or sale of substantially all of its assets, or
any similar transaction resulting in a change of control (the "Acquired Party"),
then the other Party (the "Non-Acquired Party") shall have the right to
terminate this Agreement without breach or penalty upon [*] days' notice;
provided that, the foregoing provision shall not affect the sale, assignment,
pledge or other hypothecation by the Issuer of any receivable(s), including any
finance charge, fee or other obligation owed to the Issuer by any Co-Branded
Account holder. Notwithstanding the foregoing, if the Non-Acquired Party
exercises its right to terminate this Agreement and (a) the successor to the
Acquired Party is not reasonably construed to be a competitor of the
Non-Acquired Party, or (b) if continuation of this Agreement by the Non-Acquired
Party with the successor to the Acquired Party would not constitute a material
breach by the Non-Acquired Party of any contract existing at the time the
Acquired Party entered into the change of control transaction, then, upon any
purchase of the Co-Branded Account portfolio by Amazon.com, pursuant to Section
8 hereof, (y) if Amazon.com is the Non-Acquired Party, the purchase price for
the Co-Branded Account portfolio shall be [*] of FMV, and (z) if NextCard is the
Non-Acquired Party, the purchase price for the Co-Branded Account portfolio
shall be [*] of FMV, in each case as FMV is defined and [*] calculated pursuant
to Section 8.2 hereof.
7.6 Termination for Convenience. So long as Amazon.com does not exercise
any of its rights under the Warrant (as defined below), Amazon.com shall have
the right to terminate this Agreement without cause, for convenience, at the end
of the [*] from the Launch Date upon delivery of at least [*] prior written
notice to NextCard; provided, that NextCard shall have the right to reject
unilaterally such termination if Amazon.com exercises the Warrant, in whole or
in part, at any time following any notification of termination for convenience.
7.7 Process upon Termination. Upon termination, expiration or breach of
this Agreement, the provisions of Section 8 shall apply and, consistent
therewith:
7.7.1 Amazon.com and NextCard shall work together to ensure an
orderly termination of the Co-Branded Card program; and
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 19
7.7.2 Each Party shall promptly return to the other Party any
materials that have been supplied by such Party to the other, if any.
7.8 Warrant In Favor of Amazon.com. As soon as possible after the
Effective Date, NextCard shall issue, execute and deliver a valid warrant,
attached as Schedule F hereto, in favor of Amazon.com entitling Amazon.com to
purchase up to 4,400,000 shares of common stock of NextCard at a purchase price
of equal to one hundred and forty percent (140%) of the closing price of
NextCard common stock on the Business Day preceding the Effective Date, as
reported by the National Association of Securities Dealers Automated Quotation
System (the "Warrant"). In consideration for the Warrant, Amazon.com will pay to
NextCard, by wire transfer, twenty two million, five hundred thousand dollars
($22,500,000). If NextCard fails to issue, execute or deliver the Warrant, then
this Agreement (including the payment obligations of Amazon.com set forth in
this Section 7.8) shall fail of its essential purpose, and shall be null and
void as if never executed by the parties.
SECTION EIGHT
SALE OF ACCOUNTS
8.1 Sale of Accounts. At such time as this Agreement is terminated, for
whatever reason, Amazon.com shall have the option, subject to Applicable Law and
approval from all applicable parties involved in NextCard receivables financing,
as legally required, to purchase all of the Co-Branded Accounts (other than the
intellectual property associated with NextCard's prior use of the Customer Data)
by providing notice to NextCard of a desire to do so within five months prior to
the date fixed for termination of this Agreement. In the event of a termination
of this Agreement due to the breach of either party, then Amazon.com shall have
seven (7) days in which to give notice to NextCard of its intention to purchase
the portfolio.
8.2 Purchase Price; Appraisal Process. The purchase price for the
Co-Branded Account portfolio shall be the fair market value ("FMV") of the
portfolio as determined by appraisal; provided that, in the event of a
termination of this Agreement resulting from a material breach by Amazon.com,
the purchase price for the Co-Branded Account portfolio shall be [*] of the FMV;
and provided further, that in the event of a termination of this Agreement
resulting from (i) a material breach by NextCard or (ii) Amazon.com's
termination for convenience pursuant to Section 7.6, the purchase price for the
Co-Branded Account portfolio shall be FMV minus [*], provided that, if FMV is
less than [*], NextCard shall not be obligated to pay the difference to
Amazon.com. All third-party appraisal costs and expenses incurred during the
appraisal process shall be shared equally by the Parties. The conclusion of the
appraiser(s) shall be binding upon the Parties and conclusive for the purposes
described herein. Any appraiser selected under this Section 8 must be a top tier
United States investment bank with experience in credit card securitization.
8.2.1. If Amazon.com exercises its purchase option, the entire
portfolio of Co-Branded Accounts (including all Co-Branded Accounts in
charge-off or delinquent status) must be purchased and a purchase and sale
agreement shall be executed and shall establish a closing
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
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<PAGE> 20
date that allows NextCard, upon the exercise of its best efforts in regard
thereto, to remove the Co-Branded Accounts and associated balances from any
applicable loan or asset securitization arrangement. The purchase and sale
agreement shall also provide that upon payment of the purchase for the
Co-Branded Accounts to NextCard NextCard's obligation to continue to fund the
Co-Branded Loyalty Program shall cease.
8.2.2 The determination of FMV hereunder shall consider the
value of the portfolio of Co-Branded Accounts as if they had remained serviced
by NextCard, so as to fairly represent the portfolio's value, including customer
servicing, active customer management, cross-selling, and up-selling.
8.2.3 During the term of this Agreement, and subject to
Applicable Law, NextCard will take no action that would prevent the orderly
transfer of the Co-Branded Accounts following any termination of this Agreement.
8.2.4 In the event of a termination of this Agreement due to
either (i) Amazon.com's termination for convenience, or (ii) NextCard's
termination due to Amazon.com's breach, then, as soon as possible following
NextCard's receipt of Amazon.com's election to purchase, NextCard will choose an
appraiser to determine the FMV of the portfolio, which appraisal shall be
completed as soon as commercially reasonable. Should Amazon.com disagree with
the FMV in good faith within seven (7) days of the initial appraisal, then,
within an additional seven (7) days, each party will choose an additional
appraiser (for a total of three appraisers) to determine FMV as soon as might be
commercially reasonable thereafter, and the average of the three appraisals will
be binding. In the event of Amazon.com's termination of this Agreement due to
NextCard's breach, then, as soon as possible following NextCard's receipt of
Amazon.com's election to purchase, Amazon.com will choose an appraiser to
determine the FMV of the portfolio, which appraisal shall be completed as soon
as might be commercially reasonable. Should NextCard disagree with the FMV in
good faith within seven (7) days of the initial appraisal, then, within an
additional seven (7) days, each party will choose an additional appraiser (for a
total of three appraisers) to determine FMV as soon as might be commercially
reasonable thereafter, and the average of the three appraisals will be binding.
In the event of a termination of this Agreement at the end of the Term, then, as
soon as possible following NextCard's receipt of Amazon.com's election to
purchase, NextCard will choose an appraiser to determine the FMV of the
portfolio, which appraisal shall be completed as soon as might be commercially
reasonable. Should Amazon.com disagree with the FMV in good faith within seven
(7) days of the initial appraisal, then, within an additional seven (7) days,
Amazon.com will choose an additional appraiser (for a total of two appraisers)
to determine FMV as soon as might be commercially reasonable thereafter, and the
average of the two appraisals will be binding.
8.3 Termination Assistance. Upon notice of termination of this
Agreement, NextCard will provide to Amazon.com an account file in
industry-standard format for the Co-Branded Account portfolio as soon as
commercially reasonable. In the event of termination, NextCard will assist in
the transfer of the Co-Branded Accounts and Customer Data in a timely manner,
and will, for a period of [*] [*], not target any Co-Branded Cardholder for a
credit
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
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<PAGE> 21
card solicitation solely on the basis of their status as Co-Branded Cardholders.
Upon payment by Amazon.com for the portfolio, NextCard shall provide whatever
reasonable transitional assistance is requested at industry-standard rates for
such assistance.
8.4 Run-off Period. If, five months prior to the end of the Term or, in
the case of a termination for cause, within seven (7) days following NextCard's
receipt of Amazon.com's termination notice, Amazon.com does not choose to
purchase the existing portfolio of Co-Branded Accounts, then NextCard will
immediately discontinue offering new Co-Branded Accounts and will continue
servicing existing Co-Branded Accounts under the terms of this Agreement and any
Loyalty Program until the expiration of each Co-Branded Card or Account. In such
circumstances, replacement Co-Branded Cards will not be issued following their
expiration. For a period of [*] from the end of the Term, Amazon.com will not
target (for example, by use of email or welcome greeting) Co-Branded Cardholders
with an offer for any other bankcard, and, where reasonable, will identify and
exclude Co-Branded Cardholders from any such offer solicitation.
8.4.1 Following any event of termination, the Customer Retention
Fund shall be immediately distributed equally to the parties, after payment of
all outstanding or accrued costs, expense, charges or other liabilities.
SECTION NINE
REPRESENTATIONS, WARRANTIES, COVENANTS, AND INDEMNIFICATION
9.1 Representations, Warranties and Covenants of the Parties
9.1.1 By NextCard. NextCard represents and warrants that: (i) it
is a duly organized, validly existing Delaware corporation and in good standing
under the laws of Delaware; (ii) the execution and delivery by NextCard of this
Agreement, and the performance by NextCard of it obligations contemplated
hereunder, are within NextCard's corporate powers, have been duly authorized by
all necessary corporate action, do not require any consent or other action by or
in respect of, or filing with, any third party or governmental body or agency
(other than informational filings, including approval of card design, as
required by MasterCard or VISA), and do not contravene, violate or conflict
with, or constitute a default under, any provision of Applicable Law, or of the
charter or by-laws of NextCard or of any agreement, judgment, injunction, order,
decree or other instrument binding upon NextCard, or of any applicable VISA or
MasterCard rules or regulations; (iii) it is not currently aware of any claims,
and is not currently involved in any litigation, challenging NextCard's
ownership of NextCard Marks; (iv) all intellectual property used by NextCard
(excluding the intellectual property being provided by Amazon.com) in connection
with its obligations under this Agreement is either owned or properly licensed
by NextCard for the uses contemplated hereby and that such intellectual property
does not infringe the rights of any third parties (except that, as to patents,
this representation is given only as to current knowledge); (v) the services to
be provided by NextCard shall be performed in a diligent and professional manner
in accordance with NextCard's obligations under this Agreement and to
Amazon.com's reasonable satisfaction; (vi) all of NextCard's systems being used
in connection with the services contemplated
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<PAGE> 22
hereunder are year 2000 compliant in that all systems will provide the following
functions: (a) handle date information before, during and after January 1, 2000,
including without limitation, to accepting date input, providing date output and
performing calculations on dates or portions of dates; (b) function accurately
and without interruption before, during and after January 1, 2000, without any
change in operations associated with the advent of the new century and any
subsequent leap years; (c) respond to two-digit year-date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and predetermined
manner; and (d) store and provide output of date information in ways that are
unambiguous as to century; and (vii) NextCard will comply with all Applicable
Laws related to the offering, approving, denying, operating and servicing and
reporting of consumer credit products, services and accounts including the
Co-Branded Accounts and Co-Branded Cards. NextCard covenants that it will not
enter into an agreement with any party related to financing the receivables of
the Co-Branded Account portfolio that would interfere with Amazon.com's ability
to purchase the Co-Branded Account portfolio pursuant to this Agreement.
9.1.2 By Amazon.com. Amazon.com represents and warrants that:
(i) it is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) the execution and delivery by
Amazon.com of this Agreement, and the performance by Amazon.com of the
transactions contemplated hereby, are within Amazon.com's powers, have been duly
authorized by all necessary corporate action, do not require any consent or
other action by or in respect of, filing with, any third party or any
governmental body or agency, and do not contravene, violate or conflict with, or
constitute a default under, any provision of applicable law, court decision,
regulation, or under any governing documents, charter or bylaw, or any
agreement, judgment, injunction, order, decree or other instrument binding on
Amazon.com; (iii) it is not currently aware of any claims, and is not currently
involved in any litigation, challenging Amazon.com's ownership of Amazon.com
Marks, other than Amazon Bookstore Cooperative, Inc. v. Amazon.com; (iv) all
intellectual property used by Amazon.com (excluding the intellectual property
being provided by NextCard) in connection with its obligations under this
Agreement is either owned or properly licensed by Amazon.com for the uses
contemplated hereby and that such intellectual property does not infringe the
rights of any third parties (except that, as to patents, this representation is
given only as to current knowledge); (v) the services to be provided by
Amazon.com shall be performed in a diligent and professional manner in
accordance with Amazon.com's obligations under this Agreement and to NextCard's
reasonable satisfaction; (vi) on or before December 31, 1999, all of
Amazon.com's systems being used in connection with the services contemplated
hereunder will be year 2000 compliant in that all systems will provide the
following functions: (a) handle date information before, during and after
January 1, 2000, including without limitation, to accepting date input,
providing date output and performing calculations on dates or portions of dates;
(b) function accurately and without interruption before, during and after
January 1, 2000, without any change in operations associated with the advent of
the new century and any subsequent leap years; (c) respond to two-digit
year-date input in a way that resolves the ambiguity as to century in a
disclosed, defined, and predetermined manner; and (d) store and provide output
of date information in ways that are unambiguous as to century; and (vii)
Amazon.com will comply with all Applicable Laws related to its obligations
hereunder. Amazon.com represents and warrants
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<PAGE> 23
that it has the right, power and authority to execute this Agreement and act in
accordance herewith.
9.1.3 By Amazon.com, Inc. Amazon.com,Inc. guarantees to NextCard
(but not to any third party) the performance of the obligations hereunder of
Amazon.com, L.L.C. (the "Obligations"); provided, however, that: (a) Amazon.com,
Inc. agrees only to act as a guarantor of the performance of the Obligations,
and not as a party thereto; (b) NextCard will include Amazon.com, Inc. as a
party to receive notice of breach of the Obligations pursuant to Section 7.2 of
the Agreement; and (c) Amazon.com shall have no greater obligation to perform
the Obligations than Amazon.com, L.L.C. with respect thereto.
9.2 Indemnification
9.2.1 NextCard shall not be responsible in any way for any
misrepresentation, negligent act or omission or willful misconduct of
Amazon.com, its affiliates, officers, directors, agents, or employees in
connection with the entry into or performance of any obligation of Amazon.com
under this Agreement. Further, Amazon.com shall indemnify, defend and hold
NextCard harmless from and against all claims, actions, suits or other
proceedings, and any and all losses, judgments, damages, expenses or other costs
(including reasonable counsel fees and disbursements), arising from or in any
way relating to: (i) any actual or alleged violation or inaccuracy of any
representation or warranty of Amazon.com contained in Section 9.1 above, (ii)
any actual or alleged infringement of any trademark, copyright, trade name or
other proprietary ownership interest resulting from the use by NextCard of the
Amazon.com Copyrights and the Amazon.com Marks as contemplated by this
Agreement, (iii) any negligent act or omission or willful misconduct of
Amazon.com or its directors, officers, employees, agents or assigns in
connection with the entry into or performance of this Agreement, and (iv) any
use or disclosure by Amazon.com of the Shared Customer Data in a manner not in
accordance with Applicable Law.
9.2.2 Amazon.com shall not be responsible in any way for any
misrepresentation, negligent act or omission or willful misconduct of NextCard,
its affiliates, officers, directors, agents, subcontractors or employees in
connection with the entry into or performance of any obligation of NextCard
under this Agreement. Further, NextCard shall indemnify, defend and hold
Amazon.com harmless from and against all claims, actions, suits or other
proceedings, and any and all losses, judgments, damages, expenses or other costs
(including reasonable counsel fees and disbursements), arising from or in any
way relating to: (i) any actual or alleged violation or inaccuracy of any
representation, warranty, or obligation of NextCard contained in this Agreement,
(ii) any act or omission of NextCard in connection with the issuance of
Co-Branded Card(s) and/or the administration of Co-Branded Accounts which
constitutes a violation of State of California or federal banking or consumer
credit laws or regulations or applicable VISA or MasterCard rules and
regulations, (iii) any actual or alleged infringement of any trademark,
copyright, trade name or other proprietary ownership interest resulting from the
use by Amazon.com of the NextCard Copyrights and the NextCard Marks as
contemplated by this Agreement, and (iv) any negligent act or omission or
willful misconduct of
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<PAGE> 24
NextCard or its directors, officers, employees, agents or assigns in connection
with the entry into or performance of this Agreement.
SECTION 10
NOTICES
All notices under this Agreement shall be in writing, and shall be deemed given
when personally delivered, when sent by confirmed fax, when sent by confirmed
e-mail, or one business day after being sent by reputable overnight courier to
the address of the party to be notified as set forth in this section, or such
other address as such party last provided to the other by written notice
For NextCard: For Amazon:
[*] [*]
[*] [*]
NextCard, Inc. Amazon.com
595 Market Street, 18th Floor 1200 Twelfth Avenue South, Suite 1200
San Francisco, CA 94105 Seattle, WA 98144-2734
Fax: 415-836-9701 FAX: 206.266.1355
With a copy to: With a copy to:
[*] [*]
[*] [*]
NextCard, Inc. Amazon.com
595 Market Street, 18th Floor 1200 Twelfth Avenue South, Suite 1200
San Francisco, CA 94105 Seattle, WA 98144-2734
Fax: 415-836-9701 FAX: 206.834.7010
SECTION 11
SURVIVAL
Sections 8, 9, 10, 11, and 12 will survive any termination of this Agreement.
SECTION 12
MISCELLANEOUS
12.1 Subject to Applicable Law, neither party may disclose the terms of
this Agreement to any third party other than its financial and legal advisors
without the other party's prior written consent. For all purposes of this
Agreement, each party shall be and act as an independent contractor and not as
partner, joint venturer, or agent of the other and shall not bind nor attempt to
bind the other to any contract.
12.2 Neither party shall have any right or ability to assign, transfer,
or sublicense any obligations or benefit under this Agreement without the
written consent of the other (and any such attempt shall be void), except that a
party may assign and transfer this Agreement and its
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
Page 24 of 42
<PAGE> 25
rights and obligations hereunder to any third party who succeeds to
substantially all its business or assets, in which case the provisions of this
Agreement shall inure to the benefit of and be binding upon such third party and
the consent of the non-assigning party shall not be required; provided that
nothing herein shall be construed to prohibit the sale, assignment, pledge or
other hypothecation by the Issuer, of any receivable(s), including any finance
charge, fee or other obligation owed to the Issuer by any Co-Branded Account
holder.
12.3 The failure of either party to enforce its rights under this
Agreement at any time for any period shall not be construed as a waiver of such
rights. This Agreement supersedes all proposals, oral or written, any letters of
intent, all negotiations, conversations, or discussions between or among parties
relating to the subject matter of this Agreement and all past dealing or
industry custom. No changes, modifications, or waivers are to be made to this
Agreement unless evidenced in writing and signed for and on behalf of both
parties. In the event that any provision of this Agreement shall be determined
to be illegal or unenforceable, that provision will be limited or eliminated to
the minimum extent necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable.
12.4 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to conflicts of law
provisions thereof. Each party acknowledges that any breach of the provisions of
this Agreement may cause the other party immediate and irreparable harm for
which there are no adequate remedies at law and will entitle such party to seek
immediate injunctive relief, in addition to any other remedies which may be
available. Any litigation pertaining to the interpretation or enforcement of
this Agreement shall be filed in and heard by the United States District Court
for the District of Delaware, and the parties hereby submit to the jurisdiction
of and waive any venue objections against such courts.
12.5 Headings herein are for convenience of reference only and shall in
no way affect interpretation of the Agreement. Unless the context clearly
requires otherwise, (a) the plural and singular members shall each be deemed to
include the other; (b) the masculine, feminine, and neuter genders shall each be
deemed to include the others; (c) "shall," "will," or "agrees" are mandatory,
and "may" is permissive; (d) "or" is not exclusive; (e) "includes" and
"including" are not limiting; and (f) "days" means calendar days unless
specifically provided otherwise. No provision of this Agreement shall inure to
the benefit of any third parties so as to constitute any such person a
third-party beneficiary of this Agreement. This Agreement shall be construed
without regard to any presumption or rule requiring construction against the
drafting party. Each of the individuals executing this Agreement on behalf of a
party individually represents and warrants that he or she has been authorized to
do so and has the power to bind the party for whom he or she is signing. The
parties hereby agree to execute such other documents and perform such other acts
as may be necessary or appropriate to carry out the purposes of this Agreement.
This Agreement may be executed in counterparts, each of which shall be deemed to
be an original but all of which together shall constitute one and the same
instrument. Signatures executing this Agreement may be delivered by facsimile
transmission.
12.6 Each party shall pay its own costs and expenses relating to the
negotiation, execution, delivery and performance of this Agreement.
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12.7 Force Majeure. Neither party will be liable for non-performance
hereunder to the extent such performance is prevented by fire, earthquake,
tornado, flood, explosion, embargo, war, riot, governmental regulation or act,
act of God, act of public enemy, or by reason of any other cause beyond such
party's reasonable control. A party's obligations to perform timely will be
excused to the extent, but only to the extent, that such performance is
prevented by a force majeure event.
12.8 Limitation on Damages. In no event will either party be entitled to
recover special, punitive, incidental or consequential damages, including
damages based on lost profits or lost business opportunities, arising out of a
breach of the other party's obligations hereunder, even if the party in breach
has been advised of the possibility of such damages.
IN WITNESS WHEREOF, NextCard and Amazon.com have caused this Agreement
to be executed by their duly authorized officers as of the date first written
above.
NextCard, Inc.
By:_________________________
Name:_______________________
Title:______________________
Amazon.com, L.L.C.
By:_________________________
Name:_______________________
Title:______________________
Amazon.com, Inc.
By:_________________________
Name:_______________________
Title:______________________
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<PAGE> 27
SCHEDULE A: PRODUCT DESIGN
FEATURES BANKCARD OFFERING
Co-Branded Classic, Classic VISA or MasterCard: unsecured revolving line
Platinum and of credit.
PictureCard
Platinum VISA or MasterCard: Travel accident
insurance, auto rental insurance, medical and legal
referral and assistance, and toll-free access to the
VISA Assistance Center 24 hours a day, 365 days a
year.
PictureCard VISA or MasterCard: Build your own Classic
or Platinum card by uploading a digital image or
choosing from the online photo gallery.
No other types of Co-Branded Cards or Accounts shall
be issued to any applicant who applies for a
NextCard-branded credit card through the Origination
Web Site without Amazon.com's prior written approval,
which it may withhold in its sole discretion.
Credit Line Classic and Platinum: [*]
Interest rate The interest rates offered are based on each
applicant's unique credit profile. Various price
points will be offered including:
Classic and Platinum: Fixed rates (between [*] and
[*]) and low introductory rates (as low as [*])
going to fixed (as low as [*]) or variable (as low
as [*] + [*]).
Fees Classic and Platinum: No annual fee and tiered late
fees (e.g. $7 if five days late, $10 if ten days late
and $15 if fifteen days late); low over-limit charges
(e.g. $10).
Service Charges Service charges for cash advances and returned
items to be charged in accordance with the standard
fees charged by NextCard in its other card programs.
Payment Terms Grace period of 25 days when previous balance is
paid in full; No grace period for balance transfers or
cash advances.
Loyalty Program See Section 4
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
Page 27 of 42
<PAGE> 28
SCHEDULE B
AMAZON.COM COMPETITORS
Refer to Section 1.2 for completion requirements for Schedule B
Page 28 of 42
<PAGE> 29
SCHEDULE C
COMPENSATION BY NEXTCARD TO AMAZON.COM
1. Account Fee. During the Term, NextCard will pay [*] [*] for each
Co-Branded Account opened during the Term (the "Account Fee"). Account Fees
shall be paid within thirty (30) days after the end of each month during which
the Co-Branded Account was opened.
2. Renewal Fee. During the Term, NextCard shall pay to Amazon.com a
renewal fee of [*] for each existing Co-Branded Account in good standing within
thirty (30) days after each such account's annual anniversary date (the "Renewal
Fee"). For purposes of this paragraph, the term "good standing" shall mean any
Co-Branded Account that on such anniversary date (i) is not [*] or more days
past due, or (ii) has had purchase activity in the preceding [*] days.
3. Guaranteed Minimum Payments. NextCard shall make guaranteed minimum
payments against the Account Fee within thirty (30) days after the end of each
month in the amounts set forth in the table below (the "Minimums"). Of each
Minimum, a dollar amount equal to [*] times the New Co-Branded Account Goal for
the given month shall be paid directly to Amazon.com. If in any given month, the
new Co-Branded Accounts opened exceed that month's New Account Goal, then
NextCard shall pay Amazon.com the Minimum plus the Account Fee for each
Co-Branded Account opened in excess of that month's New Account Goal. Payment of
Minimums, but not the Account Fees, shall cease upon the earlier of (i) the
termination of the Initial Term (unless the Parties agree otherwise), or (ii)
the date on which the cumulative New Co-Branded Account Goals for the Initial
Term are met (and, if such date occurs in the middle of a month during the
Initial Term, a pro-rata Minimum shall apply for such month). No Account Fees
above the monthly minimum shall be paid in any given month if the total of all
payments made in connection with this Agreement by NextCard to Amazon.com
divided by [*] is greater than the total of all Co-Branded Accounts originated
up through the date on which such calculation is performed divided by [*]. As an
example, if the monthly account goals for a four month period were [*] each
month, and the actual accounts achieved were [*] then the payments would be for
[*] accounts respectively. As an additional example, if the monthly account
goals for a four month period were [*] each month, and the actual accounts
achieved were [*] then the payments would be for [*] accounts respectively.
4. Performance. In return for the guaranteed payments received from
NextCard, Amazon.com agrees to deliver new co-branded accounts not to be less
than [*]% of the goal. If the actual number of new accounts achieved is less
than [*]% of the cumulative account goal during four consecutive months,
NextCard may suspend additional guaranteed payments to Amazon.com until the
actual cumulative number of new accounts reaches [*]% of the original goal
level.
5. Notwithstanding any termination for convenience by Amazon.com, on the
business day following the third anniversary of the Launch Date, NextCard will
pay to
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Page 29 of 42
<PAGE> 30
Amazon.com a first incentive payment equal to the product of (i) [*] dollars [*]
and (ii) a fraction, the numerator of which shall be [*], and the denominator of
which shall be [*]. For example, if on the third anniversary, NextCard had
booked [*] Co-Branded Accounts but the cumulative Co-Branded Account Goal for
the first three years of the program was [*], Amazon.com would receive a payment
of [*]. Under no circumstances may the first incentive payment by NextCard to
Amazon.com, as calculated pursuant to the preceding formula, be greater than
[*]. Thus, if in the preceding example, NextCard books [*] accounts, the first
incentive payment would be capped at [*].
On the business day following the fifth anniversary of the
Launch Date, NextCard will pay to Amazon.com a second incentive payment equal to
the product of (i) [*] and (ii) a fraction, the numerator of which shall be [*],
and the denominator of which shall be (A) [*] minus (B) [*]. For example, if for
years [*] and [*], NextCard books [*] Co-Branded Accounts but the cumulative
Co-Branded Account Goal for the [*] years of the program was [*], Amazon.com
would receive a payment of [*]. Under no circumstances may the second incentive
payment by NextCard to Amazon.com, as calculated pursuant to the preceding
formula, be greater than [*] dollars [*]. Thus, if in the preceding example,
NextCard books [*] accounts, the second incentive payment would be capped at
[*]. No payment shall be made pursuant to this paragraph if Amazon.com has
exercised its right to terminate this Agreement due to a breach by NextCard, as
set forth in Section 7.2, and elects to purchase the Co-Branded Account
portfolio.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Page 30 of 42
<PAGE> 31
New Account Marketing and Payment Schedule
THE FIRST DAY OF MONTH ONE IS CONCURRENT WITH THE "LAUNCH DATE."
<TABLE>
<CAPTION>
YEAR 1 Month 1 2 3 4 5 6
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 2 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 3 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 4 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 5 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
</TABLE>
<TABLE>
<CAPTION>
YEAR 1 Month 7 8 9 10 11 12 Total
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 2 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 3 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 4 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 5 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
</TABLE>
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Page 2 of 42
<PAGE> 32
SCHEDULE D
CARDHOLDER AGREEMENT
Refer to Section 1.6 for completion requirements for Schedule D
<PAGE> 33
SCHEDULE E
CUSTOMER SERVICE AND ACCOUNT SERVICE PERFORMANCE STANDARDS
GENERAL REQUIREMENTS:
- 100% of customer servicing performed in-house as long as program
growth is within plan (see Schedule C: New Account Marketing and
Payment Schedule). In the event program growth is in excess of
such plan, NextCard will implement appropriate contingency plan
subject to Amazon.com's approval.
- Contingency plan will provide that if customer servicing must be
outsourced to a third party, NextCard will use best efforts to
ensure that 100% of the NextCard cardholder base (co-branded and
otherwise) will be outsourced before Co-Branded Accounts are
affected.
- In the event that Co-Branded Accounts must be outsourced to a
third party, all service standards will remain in effect and
will apply for any work performed by a third party. NextCard
will select and Amazon.com will approve the selected vendor.
- NextCard and Amazon.com will work together to evaluate the
capability of remote call and e-mail monitoring of dedicated
Amazon.com Customer Service.
- The following processes and procedures will be developed,
approved and implemented into the training curriculum not later
than one fortnight prior to launch.
- Delineated process (to be developed by NextCard and
approved by Amazon.com) to re-direct mail, voice, and
e-mail inquiries to/from Amazon.com. NextCard and
Amazon.com will work together to enable the technical
capability to accomplish routing of inquiries between
parties. NextCard will develop and amazon.com will
approve scripts and processes to allow for redirecting
Amazon.com specific questions within * days of launch.
- Delineated process and policy (to be developed by
NextCard and approved by Amazon.com) to address, in
real-time, customers whose credit card application is
declined.
Page 2 of 42
An asterisk [*] indicates that certain
information has been omitted from this
agreement pursuant to a request for
confidential treatment and has been
filed separately with the Securities
and Exchange Commission.
<PAGE> 34
- Amazon.com may, at its option, assist in training for Co-Branded
service representatives
- Base Level Requirements for Servicing the Co-Branded Accounts
Include:
- Dedicated Co-Branded customer service team (and Manager)
for phone and email support.
- Dedicated Co-Branded 800-number.
- Integrated Co-Branded on-line customer service platform.
- Co-Branded E-mail customer service capability.
- Co-Branded cardholder correspondence.
- NextCard will use best efforts to provide Co-Branded
customer service and support in multiple languages
during regular business hours and to be at parity with
Amazon.com customer service language capabilities.
- Ability and agreement to conduct customer surveys as
reasonably requested by Amazon.com.
- NextCard must maintain a "live" 24 hour-per-day, 7
day-per-week customer service telephone center.
Co-Branded calls may be blended with other calls when
the volume of calls is insufficient to justify a
dedicated group.
- For the Co-Branded Accounts, the average time for a
"live" service rep to answer a call will not exceed
* (*) seconds.
- For the Co-Branded Accounts, the average time for
customer service to respond to complaints and inquiries
submitted in writing shall be * (*) business days
from the receipt of the underlying complaint or inquiry.
- For the Co-Branded Accounts, the average time for
customer service to respond to complaints and inquiries
submitted via e-mail shall be less than * (*) hours from
the receipt of the underlying complaint or inquiry.
- Customer service personnel ratios for the Co-Branded
Accounts will be no less favorable than the following:
An asterisk [*] indicates that certain
information has been omitted from this
agreement pursuant to a request for
confidential treatment and has been
filed separately with the Securities
and Exchange Commission.
Page 3 of 42
<PAGE> 35
* (reps to supervisors)
* (reps to managers)
* (customers to reps)
CUSTOMER SERVICE LEVEL AGREEMENTS:
Telephone:
- METRIC 1: At least * percent (*%) of all incoming
telephone calls, which require an agent, must be answered by a
"live" service person within * (*)seconds.
- METRIC 2: The number of callers who terminate their calls prior
to completion must not exceed * percent (*%) of all incoming
calls.
- There will be * percent (*%) blockage factor associated
with incoming calls.
Mail:
- At least * (*%) of all incoming written
correspondence must be responded to within * (*) business
days following the receipt thereof (with the exception of
applicants requesting that a denial of credit be reconsidered or
other correspondence for which research is required which will
be governed by NextCard's "reconsideration/decline process").
- In all cases, notification of pending action will be given to
the customer within * (*) days of receipt.
- At least * percent (*%) of all incoming written
correspondence must be responded to within * (*) business
days following the receipt thereof by NextCard.
E-Mail:
- METRIC 3: At least * percent (*%) of all incoming
e-mail correspondence must be responded to within *
(*) hours following receipt.
An asterisk [*] indicates that certain
information has been omitted from this
agreement pursuant to a request for
confidential treatment and has been
filed separately with the Securities
and Exchange Commission.
Page 4 of 42
<PAGE> 36
Dispute Resolution, Complaints & Inquiries:
- At least * percent (*%) of all cardholder "disputes"
must be responded to within * (*) business days and resolved
in accordance with Association requirements.
- At least * percent (*%) of all cardholder complaints
or inquiries requiring a follow-up action will be acted upon
within * (*) business days
PLASTIC ISSUANCE, STATEMENTS & MISCELLANEOUS SERVICE:
- At least * percent (*%) of customers will be
presented with their account number on line or sent their cards
within * (*) business days after the completion of the
application (with the exception of picture cards).
- At least * percent (*%) of all Co-Branded Cards
issued in connection with an online application for credit must
be sent to their intended recipients by first class mail within
* (*) business days following the date NextCard first decides
to issue the individual Co-Branded Card in question.
- At least * percent (*%) of all Co-Branded Cards which
must be replaced due to loss, theft or damage must be sent by
first class mail to their intended recipients within * (*)
business days following the receipt by NextCard of the
underlying notice in question. And, in the case of emergency
card replacement, requests will be processed in accordance with
Visa emergency card replacement policies.
- At least * percent (*%) of all Cardholder monthly
statements must be issued monthly on an error-free basis.
- At least * percent (*%) of all Cardholder change of
address requests must be processed within *
of NextCard's receipt.
- At least * percent (*%) of all credit line increase
requests must be processed within one (*) * of NextCard's
receipt *, within * days of launch of the program.
Page 5 of 42
An asterisk [*] indicates that certain
information has been omitted from this
agreement pursuant to a request for
confidential treatment and has been
filed separately with the Securities
and Exchange Commission.
<PAGE> 37
CUSTOMER SERVICE LEVEL PERFORMANCE TRACKING:
- Monthly reporting package will be delivered within * (*)
business days of month's end documenting performance against
each customer service level standard along with explanation and
resolution plan to address any deviations.
- Weekly reports showing performance against the customer service
level agreements will be delivered within 48-hours of week's
end.
- If Metric 1 is less than *% but greater than *%, or Metric 2
is greater than *% but less than *%, or Metric 3 is less than
*% but greater than *%, for * (*) of * (*) consecutive
weeks, NextCard has * (*) days to bring the Metric or
Metrics to the outlined level (*% for Metric 1, *% for Metric
2, *% for Metric 3). Failure to cure within * (*) days is
a failure to perform under this Agreement. If Metric 1 is *% or
lower, or if Metric 2 is *% of greater, or Metric 3 is *% or
lower, for * (*) of * (*) consecutive weeks, this will be
considered a failure to perform under this Agreement. The
failure to meet Metric 1, 2 or 3 for * (*) of * (*)
consecutive weeks due to new Co-Branded Account application
volume in that * (*) week period exceeding new Co-Branded
Account application volume in the prior * (*) week period by a
factor of * (*), will not be considered a failure to perform
under this Agreement.
- Failure to meet * percent (*%) of all other customer
service level agreements for * (*) consecutive months will be
considered a failure to perform under this Agreement.
- Failure to meet any one of all other customer service level
agreements for * (*) consecutive months, unless changed by
NextCard and approved by Amazon.com, will be considered a
failure to perform under this Agreement.
OPERATIONAL SERVICE LEVEL AGREEMENTS:
Co-Branded Account Origination & Customer Service Web Sites:
- Origination Web Site will have a response time to process credit
applications of not more than * (*) seconds.
- Co-Branded Web Sites will not have less than *
percent (*%) availability 24X7 (twenty-four hours a day, seven
days a week).
Page 6 of 42
An asterisk [*] indicates that certain
information has been omitted from this
agreement pursuant to a request for
confidential treatment and has been
filed separately with the Securities
and Exchange Commission.
<PAGE> 38
- Scheduled down-time for Co-Branded Web Sites will not exceed
industry standards.
OPERATIONAL SERVICE LEVEL PERFORMANCE TRACKING:
- Weekly reports showing performance against the operational
service level agreements will be delivered within *-hours of
week's end.
- Failure to meet any one of the operational service level
agreements for * (*) of * (*) consecutive weeks, unless
changed by NextCard and approved by Amazon.com, will be
considered a failure to perform under this agreement
ALLOWANCE FOR INNOVATION:
- In the event that technology innovations allow for more
efficient servicing, the above minimum customer service
personnel requirements, and the customer service and account
service performance standards will be adjusted by mutual
agreement by NextCard and Amazon.com.
Page 7 of 42
An asterisk [*] indicates that certain
information has been omitted from this
agreement pursuant to a request for
confidential treatment and has been
filed separately with the Securities
and Exchange Commission.
<PAGE> 39
SCHEDULE F
FORM OF WARRANT
[ATTACHED SEPARATELY]
Page 8 of 42
<PAGE> 40
SCHEDULE G
OPT OUT PROVISION
You agree that NextCard will share certain information relating to your
account with Amazon.com. This information will only be shared with Amazon.com
and will not be shared with any other party by either NextCard or Amazon.com
without your express consent, or as otherwise required by law or to administer
your account. Use of this information by Amazon.com will be limited to the
marketing of products and services, and will in no way be used in determining
your credit worthiness or to evaluate you for any extension of credit. You can
opt out of this information sharing by unchecking the checkbox adjacent to this
paragraph. You can also change your election at any time in the future by
visiting the Customer Service Web Site.
Page 9 of 42
<PAGE> 41
SCHEDULE H: TERMS AND CONDITIONS OF LOYALTY PROGRAM
Refer to Section 4.1 for completion requirements for Schedule H
Page 10 of 42
<PAGE> 1
EXHIBIT 10.35
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> 12
Work, all of the same being at Tenant's sole risk, and Tenant hereby agrees to
protect, defend, indemnify and hold Landlord and its employees, agents, and
affiliates harmless from all liabilities, losses, damages, claims, demands, and
expenses (including attorney's fees) arising from early entry to the Premises
pursuant hereto.
VII. MISCELLANEOUS.
(a) Interpretation. If this Work Letter is attached as an Exhibit
to an amendment to an existing lease ("Original Lease"), whether such amendment
adds space, relocates the Premises or makes any other modifications, the term
"Lease" herein shall refer to such amendment, or the Original Lease as amended,
as the context implies. By way of example, in such case, references to the
"Premises" and "Commencement Date" herein shall refer, respectively, to such
additional or relocated space and the effective date for delivery thereof under
such amendment, unless expressly provided to the contrary herein. Capitalized
terms not otherwise defined herein shall have the meanings ascribed thereto in
the Lease.
(b) Application. This Exhibit shall not apply to any additional
space added to the Premises at any time, whether by any options or rights under
the Lease or otherwise, or to any portion of the Premises in the event of a
renewal or extension of the term of the Lease, whether by any options or rights
under the Lease or otherwise, unless expressly so provided in the Lease or any
amendment or supplement thereto.
(c) Lease Provisions and Modification. This Exhibit is intended to
supplement and be subject to the provisions of the Lease, including, without
limitation, those provisions requiring that any modification or amendment be in
writing and signed by authorized representatives of both parties.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Work
Letter as of the day and year first above written.
TENANT: LANDLORD:
NEXTCARD, INC., MARKET & SECOND, INC.,
a California corporation a Delaware corporation
By: By:
------------------------------- -------------------------------------
Its: Its:
------------------------------- -------------------------------------
By: By:
------------------------------- -------------------------------------
Its: Its:
------------------------------- -------------------------------------
EXHIBIT B
Page 6
<PAGE> 1
EXHIBIT 10.36
===============================================================================
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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<PAGE> 6
"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.
25
<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
26
<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.
28
<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]
30
<PAGE> 34
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> 35
EXHIBIT A
FORM OF CERTIFICATE
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"). NEITHER THIS CERTIFICATE NOR ANY PORTION
HEREOF MAY BE OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE REGISTRATION PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE
PROVISIONS OF ANY STATE BLUE SKY OR SECURITIES LAWS OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION PROVISIONS. THE TRANSFER OF THIS CERTIFICATE IS
SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE AMENDED AND RESTATED POOLING AND
SERVICING AGREEMENT AND THE SERIES 1999-3 SUPPLEMENT THERETO REFERRED TO HEREIN.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE
TRANSFERRED TO AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT THAT IS SUBJECT TO THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR DESCRIBED IN
SECTION 4975(e)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE
TRANSFERRED, ASSIGNED, EXCHANGED OR OTHERWISE PLEDGED OR CONVEYED, EXCEPT IN
ACCORDANCE WITH THE AMENDED AND RESTATED POOLING AND SERVICING AGREEMENT AND
SERIES 1999-3 SUPPLEMENT REFERRED TO HEREIN.
THE OUTSTANDING PRINCIPAL BALANCE OF THIS SERIES 1999-3
CERTIFICATE WILL BE REDUCED FROM TIME TO TIME BY DISTRIBUTIONS ON THIS SERIES
1999-3 CERTIFICATE ALLOCABLE TO PRINCIPAL. IN ADDITION, THIS SERIES 1999-3
CERTIFICATE MAY BE INCREASED AT THE REQUEST OF THE TRANSFEROR SUBJECT TO CERTAIN
TERMS AND CONDITIONS SET FORTH IN THE SERIES 1999-3 SUPPLEMENT REFERRED TO
HEREIN. ACCORDINGLY, FOLLOWING THE INITIAL ISSUANCE OF THE SERIES 1999-3
CERTIFICATES, THE OUTSTANDING PRINCIPAL BALANCE OF THIS SERIES 1999-3
CERTIFICATE MAY BE LESS THAN THE MAXIMUM OUTSTANDING PRINCIPAL BALANCE. ANYONE
ACQUIRING THIS SERIES 1999-3 CERTIFICATE MAY ASCERTAIN THE CURRENT OUTSTANDING
PRINCIPAL BALANCE OF THIS SERIES CERTIFICATE BY INQUIRY OF THE TRUSTEE. ON THE
DATE OF THE INITIAL ISSUANCE OF THE SERIES 1999-3 CERTIFICATES, THE TRUSTEE IS
THE BANK OF NEW YORK.
A-1
<PAGE> 36
REGISTERED
No. R-_______
NEXTCARD MASTER TRUST I
SERIES 1999-3 VARIABLE FUNDING CERTIFICATE
Evidencing an undivided interest in certain assets of a trust, the corpus of
which consists primarily of an interest in receivables generated from time to
time in the ordinary course of business in a portfolio of revolving credit card
accounts serviced by
NEXTBANK, N.A.
and other assets and interests constituting the Trust under the Amended and
Restated Pooling and Servicing Agreement referred to below.
(Not an interest in or obligation of NextBank, N.A. (the "Transferor"), the
Account Owners or any of their respective affiliates). This certifies that
[___________________](the "Certificateholder") is the registered owner of a
fractional undivided interest in certain assets of a trust (the "Trust") created
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, by and among NextCard Funding Corp.
("Funding"), as transferor, NextCard, Inc. ("NextCard"), as servicer, and The
Bank of New York, as trustee (the "Trustee"), as assigned, assumed and amended
by the Assignment, Assumption and Amendment thereto, dated as of October 18,
1999, among Funding, NextCard, the Trustee and the Transferor (as so assigned,
assumed and amended, the "Agreement"), and as supplemented by the Series 1999-3
Supplement, dated as of November 10, 1999 (the "Supplement"), between the
Transferor, as transferor and servicer, and the Trustee. To the extent not
defined herein, the capitalized terms used herein have the meanings ascribed to
them in the Agreement or the Supplement, as applicable. The corpus of the Trust
consists of all of the Transferor's right, title and interest in and to a
portfolio of receivables (the "Receivables") existing or arising in the consumer
revolving credit card accounts identified under the Agreement from time to time
until the termination of the Trust, all monies due or to become due and all
amounts received with respect thereto and all proceeds thereof. This Certificate
does not, however, represent any interest in any monies or other property on
deposit in or credited to or held in the Collection Account or the Series
Accounts except as specifically provided in the Agreement and Supplement.
Although a summary of certain provisions of the Agreement and the Supplement is
set forth below and in the Summary of Terms and Conditions attached hereto and
made a part hereof, this Certificate does not purport to summarize the Agreement
and the Supplement and reference is made to the Agreement and the Supplement for
information with respect to the interests, rights, benefits, obligations,
proceeds and duties evidenced hereby and the rights, duties and obligations of
the Trustee. A copy of the Agreement and the Supplement (without schedules) may
be requested from the Trustee by writing to the Trustee at 101 Barclay Street,
12th Floor East, New York, New York 10286, Attention: Corporate Trust Department
- -- Trustee.
A-2
<PAGE> 37
This Certificate is issued under and is subject to the terms,
provisions and conditions of the Agreement and the Supplement, to which
Agreement and Supplement, each as amended and supplemented from time to time
(other than as supplemented by a supplement to the Agreement creating a series
of Investor Certificates unrelated to Series 1999-3), the Certificateholder by
virtue of the acceptance hereof assents and is bound.
It is the intent of the Transferor and each Certificateholder
that, for federal, state and local income and franchise tax purposes only, the
Certificates will qualify as indebtedness of the Transferor secured by the
Receivables. Each Certificateholder, by the acceptance of its Certificate,
agrees to treat the Certificates for federal, state and local income and
franchise tax purposes as debt of the Transferor.
In general, payments of principal with respect to the
Certificates are limited to the Invested Amount, which may be less than the
unpaid principal balance of the Certificates.
This Certificate may not be acquired by or for the account of any
employee benefit plan, trust or account, including an individual retirement
account, that is subject to the Employee Retirement Security Act of 1974, as
amended, or that is described in Section 4975(e)(1) of the Internal Revenue Code
of 1986, as amended, or an entity whose underlying assets include plan assets by
reason of a plan's investment in such entity (a "Benefit Plan"). By accepting
and holding this Certificate, the Holder hereof shall be deemed to have
represented and warranted that it is a not a Benefit Plan. By acquiring any
interest in this Certificate, the applicable Certificateholder shall be deemed
to have represented and warranted that it is not a Benefit Plan.
Unless the certificate of authentication hereon has been executed
by or on behalf of the Trustee, by manual signature, this Certificate shall not
be entitled to any benefit under the Agreement or the Supplement or be valid for
any purpose.
A-3
<PAGE> 38
IN WITNESS WHEREOF, the Transferor has caused this Certificate to
be duly executed.
NEXTBANK, N.A.
By:
-------------------------------
Name:
Title:
Dated:
A-4
<PAGE> 39
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is the Certificate described in the within-mentioned Agreement and
Supplement.
[ ],
-----------------------
as Trustee,
By:
----------------------------------------
Authorized Officer
or
By:
----------------------------------------
as Authenticating Agent for the Trustee,
By:
----------------------------------------
Authorized Officer
A-5
<PAGE> 40
NEXTCARD MASTER TRUST I
SERIES 1999-3 VARIABLE FUNDING CERTIFICATE
Summary of Terms and Conditions
The Receivables consist of Principal Receivables which arise
generally from the purchase of goods and services and Finance Charge
Receivables. This Certificate is one of a Series of Certificates entitled
NextCard Master Trust I, Series 1999-3 (the "Certificates"), each of which
represents a fractional, undivided interest in certain assets of the Trust. The
assets of the Trust are allocated in part to the Investor Certificateholders of
all outstanding Series (the "Certificateholders' Interest") with the remainder
allocated to the Holder of the Transferor Certificate. The aggregate interest
represented by the Certificates at any time in the Principal Receivables in the
Trust shall not exceed an amount equal to the Invested Amount at such time. The
Initial Invested Amount is $0. The Invested Amount on any determination date
will be an amount equal to (a) the Initial Invested Amount, plus (b) the
aggregate principal amount of Invested Amount Increases pursuant to Section 4.10
of the Supplement on or prior to such date, minus (c) the aggregate amount of
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) of the Supplement prior to such date.
Subject to the terms and conditions of the Agreement, the
Transferor may, from time to time, direct the Trustee, on behalf of the Trust,
to issue one or more new Series of Investor Certificates, which will represent
fractional, undivided interests in certain of the Trust Assets.
On each Distribution Date, the Trustee shall distribute to each
Certificateholder of record on the last Business Day of the preceding calendar
month (each a "Record Date") such amounts as are payable to the
Certificateholders pursuant to the Agreement and the Supplement. Distributions
with respect to this Certificate will be made by the Trustee by wire transfer of
immediately available funds. Final payment of this Certificate will be made only
upon presentation and surrender of this Certificate at the office or agency
specified in the notice of final distribution delivered by the Trustee to the
Series 1999-3 Certificateholders in accordance with the Agreement and the
Supplement.
On any day occurring on or after the day on which the Invested
Amount is reduced to 15% or less of the highest Invested Amount during the
Revolving Period, the Transferor has the option to purchase the Series 1999-3
Certificateholders' Interest in the Trust. The repurchase price will be equal to
(a) if such day is a Distribution Date, the Reassignment Amount for such
Distribution Date or (b) if such day is not a Distribution Date, the
Reassignment Amount for the Distribution Date following such day. Following the
deposit of the Reassignment Amount in the Collection Account, the Invested
Amount for Series 1999-3 shall be reduced to zero and the Series 1999-3
Certificateholders will not have any interest in the Receivables and the Series
1999-3 Certificates will represent only the right to receive such Reassignment
Amount.
A-6
<PAGE> 41
THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF, OR AN
INTEREST IN, THE TRANSFEROR, THE SERVICER, THE ACCOUNT OWNERS OR ANY OF THEIR
AFFILIATES AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY. THIS
CERTIFICATE IS LIMITED IN RIGHT OF PAYMENT TO CERTAIN COLLECTIONS WITH RESPECT
TO THE RECEIVABLES (AND CERTAIN OTHER AMOUNTS), ALL AS MORE SPECIFICALLY SET
FORTH HEREINABOVE AND IN THE AGREEMENT AND THE SUPPLEMENT.
The transfer or exchange of this Certificate shall be registered
in the Certificate Register upon surrender of this Certificate for registration
of transfer or exchange at any office or agency maintained by the Transfer Agent
and Registrar accompanied by a written instrument of transfer, in a form
satisfactory to the Trustee or the Transfer Agent and Registrar, duly executed
by the Certificateholder or such Certificateholder's attorney, and duly
authorized in writing with such signature guaranteed, and thereupon one or more
new Certificates of authorized denominations and for the same aggregate
fractional undivided interest will be issued to the designated transferee or
transferees.
As provided in the Agreement and subject to certain limitations
therein set forth, Certificates are exchangeable for new Certificates evidencing
like aggregate fractional, undivided interests as requested by the
Certificateholder surrendering such Certificates. No service charge may be
imposed for any such exchange but the Transfer Agent and Registrar may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith.
The Trustee, the Transferor, the Servicer, the Paying Agent and
the Transfer Agent and Registrar and any agent of any of them, may treat the
person in whose name this Certificate is registered as the owner hereof for all
purposes, and neither the Trustee, the Transferor, the Servicer, the Paying
Agent, the Transfer Agent and Registrar, nor any agent of any of them, shall be
affected by notice to the contrary except in certain circumstances described in
the Agreement.
THIS CERTIFICATE 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.
A-7
<PAGE> 42
EXHIBIT B
FORM OF MONTHLY SERVICER REPORT
[TO BE SEPARATELY PROVIDED BY NEXTBANK]
<TABLE>
<S> <C>
-----------------------------------------------------
NEXTCARD FUNDING CORP Distribution Date: XXXXX, 1999
NEXTCARD MASTER TRUST I: SERIES 1999-3 Determination Date: XXXXX, 1999
-----------------------------------------------------
MONTHLY CERTIFICATEHOLDERS STATEMENT
MONTHLY PERIOD ENDED SEPTEMBER 30, 1999
I RECEIVABLES IN THE TRUST
A. Activity for the Period
(a) Beginning of Period Receivables $-
(b) Sales 0.00
(c) Cash Advances 0.00
(d) Returns 0.00
(e) Payments 0.00
(f) Finance Charges and Other 0.00
(g) Transfers In 0.00
(h) Transfers Out 0.00
(i) Account Additions 0.00
(j) Charge Offs -
========
(k) End of Period Total Receivables $-
========
B. Ending Balance Breakdown:
(a) End of Period Principal Receivables, net of discount $-
(b) End of Period Finance Charge Receivables -
========
(c) End of Period Total Receivables $-
========
========
(d) Average Total Receivables $-
========
========
(e) Average Principal Balance $-
========
C. Payment Rate
(a) Payment Rate (Payments / Beginning Month Receivables Balance) 0.00%
========
(b) Payment Rate for Prior month 0.00%
========
(c) Payment Rate for Two Months Prior 0.00%
========
========
(d) Three month average Payment Rate 0.00%
========
If <=9%, Reserve Account % increases by 1%
D. NUMBER OF ACCOUNTS:
(a) Total Number of Accounts at Beginning of Period -
(b) Net Change in Number of Accounts -
========
(c) Total Number of Accounts at End of Period -
========
II PERFORMANCE SUMMARY
A. COLLECTIONS
(a) Total Collections $-
========
(i) Total Principal Collections $-
B. DELINQUENCIES AND LOSSES Number Receivables
------ -----------
(a) Current Accounts 0 0.0%
End of month delinquencies:
(i) 30-59 Days 0 0.0%
(ii) 60-89 Days 0 0.0%
(iii) 90-119 Days 0 0.0%
(iv) 120-149 Days 0 0.0%
(v) 150-179 Days 0 0.0%
(vi) 180-209 Days - 0.0%
(vii) Over 209 Days - 0.0%
-------------- -----
(viii)SubTotal -- 30+ Days Delinquent 0 0.0%
-------------- -----
============== =====
(b) Total Accounts 0 0.0%
============== =====
% of Total
C. DELINQUENCIES AND LOSSES Amount Receivables
------ -----------
(a) Current Balances $- 0.0%
End of month delinquencies:
(i) 30-59 Days - 0.0%
(ii) 60-89 Days - 0.0%
(iii) 90-119 Days - 0.0%
(iv) 120-149 Days - 0.0%
(v) 150-179 Days - 0.0%
(vi) 180-209 Days - 0.0%
(vii) Over 209 Days - 0.0%
------------ -------------
(viii)SubTotal -- 30+ Days Delinquent - 0.0%
------------ -------------
============ =============
(b) Total Balances $- 0.0%
============ =============
D. DEFAULTS
(a) Gross Principal Defaults during the month $-
===========
===========
(b) Gross Principal Defaults as a percentage of the Average Principal Amount 0.00%
===========
===========
(c) Default % for prior month 0.00%
===========
===========
(d) Default % for two months prior 0.00%
===========
===========
(e) Three month default % average 0.00%
===========
if >=10%, Reserve Account % increases by 1%
III EXCESS FUNDING ACCOUNT
(a) Beginning Excess Funding Account Balance $-
(i) Plus: Interest income from investments in the related Monthly Period -
(ii) Plus: Deposits pursuant to Series 1999-3 Supplement -
(iii) Less: Distributions pursuant to the Pooling and Servicing Agreement -
-------
(b) Excess Funding Account Amount $-
=======
IV SELLER'S INTEREST
(a) Beginning Transferor Amount $-
(b) Transferor Percentage at the end of the Monthly Period was equal to 0.0%
(c) Ending Transferor Amount $-
V SERIES 1999-3 Information
(a) Beginning Invested Amount $--
(i) Plus: Invested Amount Increases pursuant to Section 4.10 -
(ii) Minus: Principal Payments made to the Certificateholders -
--------------------
(b) Month End Invested Amount $-
====================
(c) The Certificate Rate with respect to the Interest Period preceeding such -
Distribution Date
(d) Average Invested Amount for the Monthly Period $--
(e) The Series 1999-3 Floating Allocation Percentage with respect to the
Monthly Period preceding such Distribution Date was equal to (Average
Investor %)
(f) The Series 1999-3 Fixed Allocation Percentage with respect to the
Monthly Period N/A preceding such Distribution Date was equal to (If
Applicable)
(g) Series 1999-3 Allocable Finance Charge Collections for such Distribution Date $--
(h) Series 1999-3 Allocable Principal Collections for such Distribution Date $--
(i) The Monthly Servicing Fee allocable to Series 1999-3 Certificates $--
VI RESERVE ACCOUNT
(a) Required Excess Spread Reserve Account Percentage -
(b) Required Excess Spread Reserve Account Amount $--
(c) Amount on Deposit in the Spread Account $--
(a) Beginning Reserve Account balance $--
(i) Less withdraws made in accordance with Section 4.11 (b) of the Supplement
- For application pursuant to subsection 4.07 (a) -
- Excess withdrawn and treated as Collections of Finance Charge Receivables -
(ii) Plus Required Reserve Account Additions pursuant to Section 4.11 (c) of the $--
Supplement
(iii) Plus Interest Earned on the Reserve Account -
--------------------
(b) Ending Reserve Account Balance $-
====================
VII APPLICATION OF FUNDS
(a) Series 1999-3 Allocable Finance Charge Collections for such Distribution Date $--
(i) The Monthly Interest for such Distribution Date -
(ii) Monthly Interest previously due but not distributed to Certificateholders, -
(ii) Additional Interest for such Distribution Date and any
Additional Interest previously due but not distributed to
Certificateholders on a prior Distribution Date
(iii) Monthly Servicing Fee for such Distribution Date -
(iv) 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);
(v) Investor Default Amount for such Distribution Date -
---------------
(vi) the balance, if any, shall constitute Excess Spread $-
===============
(b) During the Revolving Period, and amount equal to Series 1999-3 Allocable Principal $--
Collections shall be paid to the Transferor in exchange for additional receivables
(c) On each Distribution Date with respect to the Limited Amortization
Period, an amount N/A 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 N/A this clause (i) on prior Distribution Dates with
respect to the same Limited Amortization Amount, equals the
Limited Amortization Amount
(ii) the balance of such Available Principal Collections shall be
treated as Shared N/A Principal Collections and applied in
accordance with Section 4.04 of the
Agreement.
(d) On each Distribution Date with respect to the Scheduled Amortization
Period or the N/A 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:
(i) the Invested Amount on such Distribution Date shall be distributed to the N/A
Certificateholders
(ii) an amount equal to the balance, if any, of such Available
Principal Collections N/A shall be treated as Shared Principal
Collections and applied in accordance with Section 4.04 of the
Agreement.
VIII A. PORTFOLIO YIELD
(a) Portfolio Yield for the current Monthly Period -
(b) Base Rate for the current Monthly Period -
(c) Excess Spread Percentage for the current Monthly Period -
B. EXCESS SPREAD
(a) Current Excess Spread -
(b) Excess Spread (prior month) -
(c) Excess Spread (2 months prior) -
(d) 3 Month Average Gross Portfolio Yield -
</TABLE>
-----------------------------------
Douglas R. Wachtel
Controller
NextCard, Inc.
B-1
<PAGE> 43
EXHIBIT C
FORM OF INVESTMENT LETTER
_________, ___ 1999
NextBank, N.A.
595 Market Street
Suite 1800
San Francisco, CA 94104
Attn: Chief Financial Officer
The Bank of New York
101 Barclay Street
12th Floor East
New York, NY 10286
Attn: Corporate Trust Administration
Re: NextCard Master Trust I Series 1999-3 Certificates (the
"Certificates")
Ladies and Gentlemen:
This letter (the "Investment Letter") is delivered by
[__________________](the "Purchaser") pursuant to Section 9.04 of the Series
Supplement, dated as of November 10, 1999, between NextBank, N.A. ("NextBank"),
as transferor and servicer (in such capacities, the "Transferor" and the
"Servicer," respectively), and The Bank of New York, as trustee (the "Trustee"),
to the Amended and Restated Pooling and Servicing Agreement, dated as of May 21,
1999, by and among NextCard Funding Corp. ("Funding"), as transferor, NextCard,
Inc. ("NextCard"), as servicer, and the Trustee, as assigned, assumed and
amended by the Assignment, Assumption and Amendment thereto, dated as of October
18, 1999, among Funding, NextCard, the Trustee and NextBank (as so assigned,
assumed and supplemented, the "Pooling and Servicing Agreement"). Capitalized
terms used herein without definition shall have the meanings set forth in the
Pooling and Servicing Agreement. The Purchaser represents to the Transferor and
the Trustee as follows:
(i) the Purchaser has such knowledge and experience
in financial and business matters as to be capable of
evaluating the merits and risks of an investment in the
Certificates and the Purchaser is able to bear the
economic risk of such investment;
(ii) the Purchaser has reviewed the Pooling and
Servicing Agreement (including the schedule and exhibits
thereto) and has had the opportunity to perform due
diligence with respect thereto and to ask
C-1
<PAGE> 44
questions of and receive answers from the Transferor and
its representatives concerning the Transferor, the Trust
and the Certificates;
(iii) the Purchaser is not acquiring the Certificates
as an agent or otherwise for any other person. The
Purchaser is a [__________] corporation;
(iv) the Purchaser is an "accredited investor" as
defined in Rule 501 promulgated by the Securities and
Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended. The Purchaser
understands that the offering and sale of the
Certificates have not been and will not be registered
under the Securities Act of 1933, as amended, and have
not and will not be registered or qualified under any
applicable "blue sky" law, and that the offering and
sale of the Certificates have not been reviewed by,
passed on or submitted to any federal or state agency or
commission, securities exchange or other regulatory
body;
(v) the Purchaser is acquiring the Certificates
without a view to any distribution, resale or other
transfer thereof, except as contemplated by the
following sentence. The Purchaser will not resell,
participate or otherwise transfer the Certificates, any
interest therein or any portion thereof, unless (A) it
receives a letter from the buyer or transferee thereof
or participant therein in substantially the form hereof,
and (B) such sale, participation or transfer is (i) a
transaction exempt from the registration requirements of
the Securities Act of 1933, as amended, and applicable
state securities or "blue sky" laws; (ii) to the
Transferor or any affiliate of the Transferor; (iii) to
a person who the Purchaser and Administrative Agent
reasonably believe is a qualified institutional buyer
(within the meaning thereof in Rule 144A under the
Securities Act of 1933, as amended) that is aware that
the resale or other transfer is being made in reliance
upon Rule 144A; or (iv) pursuant to Regulation S under
the Securities Act of 1933, as amended.
(vi) the Purchaser understands that each Certificate
will bear a legend to substantially the following
effect:
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"). NEITHER THIS CERTIFICATE NOR
ANY PORTION HEREOF MAY BE OFFERED, SOLD, PLEDGED, OR OTHERWISE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF THE
1933 ACT AND ANY APPLICABLE PROVISIONS OF ANY STATE BLUE SKY OR
SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH
REGISTRATION PROVISIONS. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO
CERTAIN CONDITIONS SET FORTH IN THE AMENDED AND RESTATED
C-2
<PAGE> 45
POOLING AND SERVICING AGREEMENT AND THE SERIES 1999-3 SUPPLEMENT THERETO
REFERRED TO HEREIN.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED TO
AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT THAT IS SUBJECT TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR DESCRIBED IN SECTION
4975(e)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED,
ASSIGNED, EXCHANGED OR OTHERWISE PLEDGED OR CONVEYED, EXCEPT IN ACCORDANCE WITH
THE AMENDED AND RESTATED POOLING AND SERVICING AGREEMENT AND SERIES 1999-3
SUPPLEMENT REFERRED TO HEREIN.
(vii) this Investment Letter has been duly authorized,
executed and delivered and constitutes the legal, valid
and binding obligations of the Purchaser, enforceable
against the Purchaser in accordance with its terms,
except as such enforceability may be limited by
receivership, conservatorship, bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and general
principles of equity;
(viii) the Purchaser represents and warrants that it is
not (i) an employee benefit plan (as defined in Section
3(3) of ERISA) that is subject to the provisions of
Title I of ERISA, (ii) a plan described in Section
4975(e)(1) of the Internal Revenue Code, or (iii) an
entity whose underlying assets include plan assets by
reason of a plan's investment in such entity;
(ix) the Purchaser, by its acceptance of the interest
in the Certificates purchased hereunder, agrees to treat
the Certificates for federal, state and local income and
franchise tax purposes as indebtedness of the
Transferor; and
(x) The Purchaser shall, prior to the date on which
the first interest payment hereunder is due thereto,
provide to the Servicer and the Trustee (i) if the
Purchaser is incorporated or organized under the laws of
a jurisdiction outside the United States, two duly
completed copies of the United States Internal Revenue
Service Form 4224 or successor applicable or required
forms, (ii) a duly completed copy of United States
International Revenue Service Form W-9 or successor
applicable or required forms, and (iii) such other forms
and information as may be required to confirm the
availability of any applicable exemption from United
States federal, state or local withholding taxes. The
Purchaser
C-3
<PAGE> 46
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 to it, and to provide such
extensions or renewals as may be reasonably requested by
the Servicer or Trustee. The Purchaser certifies,
represents and warrants that as of the date of its
acquisition of an interest in the Certificates that (i)
it is entitled (x) to receive payments under the Pooling
and Servicing 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.
Very truly yours,
[ ],
----------------------------
as Purchaser
By:
-------------------------------
Name:
Title:
C-4
<PAGE> 47
EXHIBIT D
FORM OF INTEREST RATE CAP AGREEMENT
D-1
<PAGE> 48
[FIRST UNION LETTERHEAD]
RATE CAP TRANSACTION CONFIRMATION
DATE: December 1, 1999
TO: Mr. John Bunting
Next Card Master Trust I ("Counterparty")
595 Market Street, Suite 1800
San Francisco, CA 94105
Fax: 415-369-5526
From: First Union National Bank ("First Union")
Subject: Rate Cap
Ref. No. 125690/176668
- --------------------------------------------------------------------------------
Dear Mr. Bunting:
The purpose of this letter agreement is to set forth the terms and
conditions of the Rate Cap Transaction entered into between the Counterparty and
First Union on the Trade Date specified below (the "Transaction").
1. The definitions and provisions contained in the 1991 ISDA Definitions,
as amended and supplemented by the 1998 Supplement to the ISDA Definitions (as
published by the International Swap Dealers Association, Inc.) (together, the
"Definitions"), are incorporated into this Confirmation. In the event of any
inconsistency between those definitions and provisions and this Confirmation,
this Confirmation will govern.
If at any time there exists a master agreement (however described) between
the parties governing this Transaction ("Master Agreement"), this Confirmation
supplements, forms part of and will be governed by the Master Agreement.
In the absence of such Master Agreement, this Confirmation incorporates by
reference the 1992 ISDA Master Agreement (Local Currency -- Single Jurisdiction
version) published by the International Swaps and Derivatives Association, Inc.
("ISDA Master"), and for that purpose "Market Quotation" and the "Second Method"
shall apply under the ISDA Master as though this paragraph were deemed to be the
"Schedule" to the ISDA Master, and this Confirmation together with the ISDA
Master shall form a binding and complete contract between the parties governed
by the law (and not the law of conflicts) of the State of New York. Neither
party is acting as the other party's financial advisor for this Transaction nor
is it relying on the other party for any evaluation of the present or future
results, consequences, risks, and benefits of this transaction, whether
financial, accounting, tax, legal, or otherwise.
Each party is hereby advised, and each such party acknowledges, that the
other party has engaged in (or refrained from engaging in) substantial financial
transactions and has taken other material actions in reliance upon the parties'
entry into the Rate Cap Transaction to which this Confirmation relates on the
terms and conditions set forth below.
Each party will make each payment specified in this Confirmation as being
payable by it, not later than the due date for value on that date in the place
of the account specified below, in freely transferable funds and in the manner
customary for payments in the required currency. If on any date amounts would
otherwise be payable in the same currency by each party to the other, then, on
such date, each party's obligation to make payment of any such amount will be
automatically satisfied and discharged and, if the aggregate amounts that would
otherwise have been payable by one party exceeds the aggregate amount that would
otherwise have been payable by the other party, replaced by an obligation upon
the party by whom the larger aggregate amount would have been payable to pay to
the other party the excess of the larger aggregate amount over the smaller
aggregate amount.
<PAGE> 49
2. The terms of the particular Rate Cap Transaction to which this
Confirmation relates are as follows:
<TABLE>
<S> <C>
Transaction Type: Rate Cap
Notional Amount $220,000,000.00
Trade Date: November 30, 1999
Effective Date: December 1, 1999
Termination Date: December 15, 2000, subject to adjustment in
accordance with the Modified Following
Business Day Convention.
Fixed Amounts:
Fixed Rate Payer: Counterparty
Fixed Amount: *
Fixed Amount Payer
Payment Date: December 2, 1999
Floating Amounts:
Floating Rate Payer: First Union
Cap Rate: *
Floating Rate Payer Monthly on the 15th day of each month,
Payment Dates: commencing December 15, 1999 through and
including the Termination Date, subject to
the Modified Following Business Day
Convention.
Floating Rate for Initial
Calculation Period: Determined on the Effective Date
Floating Rate Option: USD-CP-H.15
Designated Maturity: 1 Month
Floating Rate Day
Count Fraction: Actual/360
Floating Rate Determined: Determined on each Reset Date
Reset Dates: Each New York Banking Day in each
Calculation Period
Method of Averaging: Unweighted Average
Compounding: Inapplicable
</TABLE>
USD-CP-H.15: "USD-CP-H.15" means that the rate for a Reset Date will be the
Money Market Yield of the rate set forth in H.15 (519) for that day opposite the
Designated Maturity under the caption "Commercial Paper-Nonfinancial." If on
the Calculation Date for a Calculation Period the appropriate rate for a Reset
Date in that Calculation Period is not yet published in H.15 (519), the rate for
that Reset Date will be determined as if the parties had specified
"USD-CP-Reference Dealers" as the applicable Floating Rate Option.
* Confidential treatment requested
2
<PAGE> 50
Calculation Agent: First Union
Business Days: New York
Business Day Convention: Modified Following
Governing Law: State of New York
Payments to First Union: First Union Charlotte
Capital Markets
Attention: Derivatives Desk
Fed. ABA No. 053000219
Ref. No.: 125690/176668
Payments to Counterparty: Please forward instruction to First Union in
Charlotte, N.C.
No payments will be made prior to receipt of
Counterparty's payment instructions.
First Union Contacts: Settlements and/or Rate Resets:
Tel: (704) 715-1875
Fax: (704) 383-9139
Documentation and/or Collateral:
Tel: (704) 715-1960
Fax: (704) 383-9139
Please quote transaction reference number.
3
<PAGE> 51
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing a copy of this Confirmation enclosed for that purpose
and returning it to us.
Very truly yours,
FIRST UNION NATIONAL BANK
By:
----------------------------------
Name:
Title:
Date:
--------------------------------
By:
----------------------------------
Name:
Title:
Date:
--------------------------------
Accepted and confirmed as of
the date first above written:
NEXT CARD MASTER TRUST I
By:
------------------------
Name:
------------------------
Title:
------------------------
Date:
------------------------
4
<PAGE> 52
EXHIBIT E
FORM OF INVESTED AMOUNT INCREASE REQUEST
[Date]
THE BANK OF NEW YORK, as Trustee
Corporate Trust Department--Trustee
101 Barclay Street
12th Floor East
New York, New York 10286
NEXTBANK, N.A.
595 Market Street
Suite 1800
San Francisco, California 94105
FIRST UNION SECURITIES, INC.
One First Union Center, TW-9
301 South College Street
Charlotte, North Carolina 28288
Attention: Bennett S. Cole
Re: NextCard Master Trust I, Series 1999-3
Ladies and Gentlemen:
Pursuant to Section 4.10 of the Series 1999-3 Supplement dated as
of November 10, 1999, by and between NextBank, N.A., as Transferor and Servicer,
and The Bank of New York, as Trustee (terms defined therein being used herein as
therein defined), the Transferor hereby irrevocably requests an Invested Amount
Increase in the amount of $___________.(1)
The Transferor requests that such increase in the Invested Amount
be made and (i) $[_________] of the proceeds of such increase in the Invested
Amount be remitted on the applicable Increase Date in immediately available
funds to the Trustee for deposit in the Reserve Account in accordance with
Section 4.11(c) of the Supplement and (ii) the remaining proceeds of such
increase in the Invested Amount be remitted on the applicable Increase Date in
immediately available funds to the Transferor, in each case in accordance with
the terms and conditions specified in the Supplement and the Certificate
Purchase Agreement.
E-1
<PAGE> 53
Such Invested Amount Increase is requested to be made on the
______________.
Very truly yours,
NEXTBANK, N.A., as Transferor
By:
- -------------
(1) Each such Invested Amount Increase shall be in the minimum amount and
integral multiple in excess of that amount specified in Section 4.10 of the
Supplement
E-2
<PAGE> 1
EXHIBIT 10.37
================================================================================
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>
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<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:
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<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;
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<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.
4
<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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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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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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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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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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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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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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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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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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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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<PAGE> 29
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
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<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.
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<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
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<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.
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<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.
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<PAGE> 35
Without limitation of the generality of the foregoing, each Owner (including the
Purchaser, but only to the extent the Purchaser is reimbursed by the Transferor
for such a expenses) agrees to reimburse the Administrative Agent, ratably
according to its share of the Certificate Principal Balance from time to time,
promptly upon demand, for any out-of-pocket expenses (including reasonable
counsel fees) incurred by the Administrative Agent in connection with the
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement or and related agreement,
instrument or document.
Section 9.06. Successor Administrative Agent. The Administrative Agent
may resign at any time by giving 30 days' notice thereof to the Owners, the
Transferor and the Trustee and such resignation shall become effective upon the
appointment and acceptance of a successor Administrative Agent as described
below. Upon any such resignation, the Owners shall have the right to appoint a
successor Administrative Agent approved by the Transferor (which approval will
not be unreasonably withheld or delayed). If no successor Administrative Agent
shall have been so appointed by the Owners and accepted such appointment within
30 days after the retiring Administrative Agent's giving of notice of
resignation, then the retiring Administrative Agent may, on behalf of the
Owners, appoint a successor Administrative Agent approved by the Transferor
(which approval will not be unreasonably withheld or delayed), which successor
Administrative Agent shall be (i) either (a) a commercial bank having a combined
capital and surplus of at least $250,000,000 or (b) an Affiliate of such bank
and (ii) experienced in the types of transactions contemplated by this
Agreement. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall thereupon succeed to and become vested with all of the rights,
powers, privileges and duties of the retiring Administrative Agent, and the
retiring Administrative Agent shall be discharged from its duties and
obligations hereunder. After any retiring Administrative Agent's resignation or
removal hereunder as Administrative Agent, the provisions of this Article shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Administrative Agent hereunder.
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<PAGE> 36
ARTICLE TEN
MISCELLANEOUS
Section 10.01. Amendments, Etc. No amendment or waiver of any provision
of this Agreement, and no consent to any departure by the Transferor or the
Servicer herefrom, shall in any event be effective unless (i) the same shall be
in writing and signed by the Transferor, the Servicer, the Required Owners and
the Administrative Agent, and (ii) each Rating Agency then rating the Commercial
Paper Notes shall have confirmed that such amendment, waiver or consent will not
result in a reduction or withdrawal of its then-current rating of such
Commercial Paper Notes. Any such amendment, waiver or consent shall be effective
in any event only in the specific instance and for the specific purpose for
which given.
Section 10.02. Notices, Etc. All notices and other communications
provided for hereunder shall, unless otherwise stated herein, be in writing
(including telecopies, telegraphic, telex or cable communication) and mailed,
telecopied, telegraphed, telexed, cabled or delivered, as to each party hereto,
at its address set forth below or at such other address as shall be designated
by such party in a written notice to the other party hereto. All such notices
and communications shall, when mailed, telecopied, telegraphed, telexed or
cabled, be effective when deposited in the mails, telecopied, delivered to the
telegraph company, confirmed by telex answer back or delivered to the cable
company, respectively.
If to the Purchaser:
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
With a copy to the Administrative Agent;
If to the Administrative Agent:
First Union Securities, Inc.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Bennett S. Cole
Facsimile No.: (704) 374-3254
Telephone No.: (704) 383-3766
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<PAGE> 37
If to the Transferor or the Servicer:
NextBank, N.A.
595 Market Street
Suite 1800
San Francisco, California 94105
Attention: Chief Financial Officer
Telephone No.: (415) 826-9700
Telecopier No.: (415) 836-9701
Section 10.03. No Waiver; Remedies. No failure on the part of any party
hereto to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 10.04. Binding Effect; Assignability.
(a) This Agreement shall be binding upon each of and inure to the
benefit of the Transferor, the Servicer, the Administrative Agent, the Owners
and their respective successors and permitted assigns.
(b) Neither the Transferor nor the Servicer may assign any of its rights
and obligations hereunder or any interest herein without the prior written
consent of the Required Owners and the Administrative Agent.
(c) An Owner may, at any time, subject to the terms and conditions
hereinafter set forth and the terms and conditions of the Supplement, (i)
without the consent of the Transferor, assign, or grant undivided participation
interests in, any or all of its rights and obligations hereunder or under the
Certificates to the Purchaser, any Liquidity Provider, any Enhancement Provider
or First Union Securities and (ii) with the prior written consent of the
Transferor, such consent not to be unreasonably withheld, assign, or grant
undivided participation interests in, any or all of its rights and obligations
hereunder or under the Certificates to any other Person; provided, however, that
(A) without the prior written consent of the Transferor, such consent not to be
unreasonably withheld, no participant (other than the Purchaser, a Liquidity
Provider, any Enhancement Provider or First Union Securities) or Affected Party
claiming through a participant (other than the Purchaser, a Liquidity Provider,
an Enhancement Provider or First Union Securities) shall be entitled to receive
any payment pursuant to Sections 2.07, 2.08, 2.09 or 9.02 in excess of the
amount that the Owner granting such participation interest would have been
entitled to receive had such participation interest not been sold to such
participant; (B) in the case of any transfer by sale, assignment or
participation, the transferee as a condition of transfer shall be subject to
compliance with Sections 2.09(e) and (f) hereof; (C) the aggregate number of
Owners at any time shall not exceed [*] (excluding, if applicable, any Federal
Reserve Bank to which a pledge is made); and (D) no assignment or participation
hereunder shall be effective unless the Administrative Agent shall have first
consented thereto in writing, such consent being required for the purpose of
assuring compliance with the requirements of this Section. Any assignment or
grant of a participation interest by an Owner pursuant to this Section
*Confidential treatment requested.
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<PAGE> 38
shall be effected pursuant to documentation satisfactory in form and substance
to the Administrative Agent. Upon the consummation of any such assignment or
sale hereunder, the assignee shall be subject to all of the obligations and
entitled to all of the rights and benefits of the assignor hereunder. The
Administrative Agent shall promptly notify the Transferor of any sale,
assignment or participation under this Section. The Purchaser hereby agrees that
promptly following the sale of any assignment or participation by any Liquidity
Provider or Enhancement Provider of all or any portion of its rights and
obligations under the applicable Liquidity Agreement or Enhancement Agreement,
the Purchaser, to the extent that the Transferor's prior consent to such
assignment or participation is not required hereunder, shall notify the
Transferor thereof, specifying the transferor, the transferee and the extent of
the applicable assignment or participation.
(d) It is expressly agreed that, in connection with any assignment, sale
or other transfer or any proposed assignment, sale or other transfer of any
Certificate or any interest therein, each Owner making or proposing to make such
assignment, sale or other transfer may provide such information regarding the
Receivables, the Trust, the Pooling and Servicing Agreement and the Supplement
as such Owner may deem appropriate to any such assignee, purchaser or other
transferee or proposed assignee, purchaser or other transferee, as applicable
(any such Person being a "Transferee"), of such Certificate or such interest
therein, provided that the Transferor shall have the right to review and
participate in the preparation of such information for distribution to any
Transferee and, provided, further, that prior to any such disclosure of such
information, such Transferee shall have agreed to maintain the confidentiality
of such information designated by the Transferor as confidential on
substantially the basis set forth in Section 10.10.
(e) Except as otherwise expressly provided herein, no owner shall
assign, sell or otherwise transfer any Certificates or any interest therein to
any Person unless such Person delivers to the Transferor a duly executed letter
substantially in the form of the Investment Letter.
(f) The Administrative Agent may assign at any time its rights and
obligations hereunder and interests herein as Administrative Agent (i) without
the consent of the Owners or the Transferor, to any Affiliate of First Union
Securities and (ii) with the prior written consent of the Transferor (such
consent not to be unreasonably withheld), to any other Person.
(g) Each Owner may assign and pledge all or a portion of such Owner's
interest in the Certificates to any Federal Reserve Bank as collateral to secure
any obligation of such Owner to such Federal Reserve Bank. Notwithstanding
anything to the contrary herein or in the Supplement, such assignment may be
made at any time without notice or other obligation with respect to the
assignment, including the delivery of an Investment Letter.
(h) This Agreement shall create and constitute the continuing
obligations of the parties hereto in accordance with its terms, and shall remain
in full force and effect until the Collection Date; provided, however, that the
provisions of Sections 8.01, 8.02, 10.07, 10.09 and 10.10 shall be continuing
and shall survive any termination of this Agreement.
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<PAGE> 39
(i) To the extent that pursuant to the terms of the Supplement or this
Agreement, the Transferor has the right to procure a replacement for the
Administrative Agent or any Owner, and the Person proposed to be replaced is
either First Union Securities or the Purchaser, the Transferor agrees that it
shall not be entitled to replace either such Person in any capacity under or in
connection with this Agreement or the Supplement unless each of the Purchaser
and First Union Securities is replaced in each and every capacity in which it
acts under or in connection with this Agreement and the Supplement. Without
limiting the foregoing, each of the Purchaser and the Administrative Agent
hereby agrees to take all actions necessary to permit a replacement to succeed
to its respective rights and obligations hereunder.
Section 10.05. Certificates as Evidence of Indebtedness. It is the
intent of the Transferor, the Purchaser and the other Owners that, for all
federal, state, local and foreign taxes, the Certificates will be evidence of
indebtedness of the Transferor. Each of the Transferor, the Purchaser and the
other Owners agrees to treat the Certificates for purposes of all federal,
state, local and foreign taxes as indebtedness of the Transferor secured by the
Receivables and other assets held in the Trust.
Section 10.06. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW PROVISIONS EXCEPT SECTION 5-1401 OF THE
NEW YORK GENERAL OBLIGATIONS LAW.
Section 10.07. No Proceedings.
(a) The Transferor, each Owner and the Administrative Agent each hereby
agrees that it will not, prior to the date that is one year and one day after
the latest maturing commercial paper note, medium term note or other debt
instrument issued by the Purchaser has been issued, acquiesce, petition or
otherwise invoke or cause the Purchaser to invoke the process of any
Governmental Authority for the purpose of commencing or sustaining a case
against the Purchaser under any Federal or state bankruptcy, insolvency or
similar law or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Purchaser or any substantial part
of its property or ordering the winding-up or liquidation of the affairs of the
Purchaser. The Transferor, each Owner and the Administrative Agent each hereby
further agrees that prior to the date that is one year and one day after the
latest maturing commercial paper note, medium term note or other debt instrument
issued by the Purchaser has been issued, amounts payable by the Purchaser under
or in connection with this Agreement as reimbursement for out-of-pocket expenses
or indemnification shall be payable only to the extent that payment thereof will
not render the Purchaser insolvent and is made from funds of the Purchaser that
are freely distributable by the Purchaser at the Purchaser's discretion.
(b) Each Owner and the Administrative Agent hereby agrees that it will
not, prior to the date that is one year and one day after the termination of the
Pooling and Servicing Agreement with respect to the Trust or the Transferor,
acquiesce, petition or otherwise invoke or cause the Trust or the Transferor to
invoke the process of any Governmental Authority for the purpose of commencing
or sustaining a case against the Trust or the Transferor under any Federal or
state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator,
36
<PAGE> 40
assignee, trustee, custodian, sequestrator or other similar official of the
Trust or the Transferor or any substantial part of its property or ordering the
winding-up or liquidation of the affairs of the Trust or the Transferor. Each
Owner and the Administrative Agent each further agrees that prior to the date
that is one year and one day after the termination of the Pooling and Servicing
Agreement with respect to the Transferor, amounts payable by the Transferor
under or in connection with this Agreement as reimbursement for out-of-pocket
expenses or indemnification shall be payable only to the extent that payment
thereof will not render the Transferor insolvent and is made from funds of the
Transferor that are freely distributable by the Transferor at the Transferor's
discretion.
(c) The provisions of this Section shall survive the termination of this
Agreement.
Section 10.08. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
Section 10.09. No Recourse.
(a) No recourse under or with respect to any obligation, covenant or
agreement (including, without limitation, the payment of any fees or any other
obligations) of the Purchaser (whether in its capacity as the Purchaser or as an
Owner under this Agreement) as contained in this Agreement or any other
agreement, instrument or document entered into by it pursuant hereto or in
connection herewith shall be had against any incorporator, affiliate,
stockholder, officer, employee or director of the Purchaser, as such, by the
enforcement of any assessment or by any legal or equitable proceeding, by virtue
of any statute or otherwise (except to the extent that recourse against any such
Person arises from the gross negligence or willful misconduct of such Person);
it being expressly agreed and understood that the agreements of the Purchaser
contained in this Agreement and all of the other agreements, instruments and
documents entered into by it pursuant hereto or in connection herewith are, in
each case, solely the corporate obligations of the Purchaser, provided that,
such obligations shall be paid only after the repayment in full of all
Commercial Paper Notes and all other liabilities contemplated in the program
documents with respect to the Purchaser, and that no personal liability
whatsoever shall attach to or be incurred by any incorporator, stockholder,
affiliate, officer, employee or director of the Purchaser, as such, or any of
them, under or by reason of any of the obligations, covenants or agreements of
the Purchaser contained in this Agreement or in any other such instruments,
documents or agreements, or which are implied therefrom, and that any and all
personal liability of each incorporator, stockholder, affiliate, officer,
employee or director of the Purchaser, or any of them, for breaches by the
Purchaser of any such obligations, covenants or agreements, which liability may
arise either at common law or at equity, or by statute or constitution, or
otherwise, is hereby expressly waived except to the extent that such personal
liability of any such Person arises from the gross negligence or willful
misconduct of such Person.
(b) Notwithstanding anything contained in this Agreement, the Purchaser
shall have no obligation to pay any amount required to be paid by it hereunder
to any of the Liquidity Provider, the Administrative Agent or any Owner, in
excess of any amount available to the Purchaser after paying or making provision
for the payment of its Commercial Paper Notes. All
37
<PAGE> 41
payment obligations of the Purchaser hereunder are contingent upon the
availability of funds in excess of the amounts necessary to pay Commercial Paper
Notes; and each of the Liquidity Provider, the Administrative Agent and each
Owner agrees that they shall not have a claim under Section 101(5) of the United
States Bankruptcy Code if and to the extent that any such payment obligation
exceeds the amount available to the Purchaser to pay such amounts after paying
or making provision for the payment of its Commercial Paper Notes.
(c) The provisions of this Section shall survive the termination of this
Agreement.
Section 10.10. Confidentiality. Each Owner and the Administrative Agent
hereby agrees to take such measures as shall be reasonably requested by the
Transferor to protect and maintain the confidentiality of such information
relating to the Receivables as such Transferor may from time to time expressly
identify to such Owner or the Administrative Agent (as the case may be) as
confidential information; provided, however, that none of the Owners or the
Administrative Agent shall be obligated to take or observe any such measure if
to do so would, in the reasonable judgment of such Owner or the Administrative
Agent, as the case may be, (i) be inconsistent with any Requirement of Law or
compliance by such Owner or the Administrative Agent with any binding request of
any regulatory body having jurisdiction over such Owner or the Administrative
Agent, as the case may be or (ii) materially and adversely affect the ability of
such Owner or the Administrative Agent to perform its obligations hereunder or
in connection herewith or to enforce its rights hereunder or in connection
herewith.
38
<PAGE> 42
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
NEXTBANK, N.A.
By:/s/ John V. Hashman
--------------------------------------------
Name:
Title:
VARIABLE FUNDING CAPITAL CORPORATION
By: FIRST UNION SECURITIES, INC., as
attorney-in-fact
By:[Illegible]
--------------------------------------------
Name:
Title:
FIRST UNION SECURITIES, INC.,
By:[Illegible]
--------------------------------------------
Name:
Title:
39
<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 December 9, 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
December 7, 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
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 268,014
<ALLOWANCE> 6,178
<TOTAL-ASSETS> 388,906
<DEPOSITS> 2,541
<SHORT-TERM> 229,129
<LIABILITIES-OTHER> 20,735
<LONG-TERM> 11,879
0
0
<COMMON> 46
<OTHER-SE> 124,576
<TOTAL-LIABILITIES-AND-EQUITY> 388,906
<INTEREST-LOAN> 7,992
<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)
<EPS-DILUTED> (2.11)
<YIELD-ACTUAL> 7.28
<LOANS-NON> 0
<LOANS-PAST> 938
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 949
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 6,178
<ALLOWANCE-DOMESTIC> 6,178
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
