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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1999
REGISTRATION NO. 333-74755
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
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
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(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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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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JEREMY R. LENT
CHIEF EXECUTIVE OFFICER
NEXTCARD, INC.
595 MARKET STREET, SUITE 1800
SAN FRANCISCO, CALIFORNIA 94105
(415) 836-9700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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RONALD H. STAR, ESQ. JAY K. HACHIGIAN, ESQ.
PAUL A. REINER, ESQ. BROOKS STOUGH, ESQ.
JOANNE BAL, ESQ. WILLIAM E. GROWNEY, JR., ESQ.
ROLA J. YAMINI, ESQ. KIRIL M. DOBROVOLSKY, ESQ.
BRETT MCDONNELL, ESQ. GUNDERSON DETTMER STOUGH
HOWARD, RICE, NEMEROVSKI, CANADY, VILLENEUVE FRANKLIN & HACHIGIAN, LLP
FALK & RABKIN, A PROFESSIONAL CORPORATION 155 CONSTITUTION DRIVE
THREE EMBARCADERO CENTER, SUITE 700 MENLO PARK, CALIFORNIA 94025
SAN FRANCISCO, CALIFORNIA 94111 (650) 321-2400
(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.
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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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
SUBJECT TO COMPLETION -- MAY 13, 1999.
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PROSPECTUS
, 1999
LOGO
5,000,000 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.
PROPOSED SYMBOL AND MARKET:
- - NXCD/Nasdaq National Market
THE OFFERING:
- - NextCard is offering 5,000,000 shares of its common stock.
- - The underwriters have an option to purchase an additional 750,000 shares from
NextCard to cover over-allotments.
- - We currently estimate that the price of the shares will be between $17 and
$19.
- - This is our initial public offering.
- - Closing: , 1999.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to NextCard:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAW 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.
<PAGE> 3
[Inside Cover of Prospectus]
[Picture of www.nextcard.com web page]
Apply Now!
<PAGE> 4
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[Prospectus Gatefold]
[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 customized Double Rew@rds Points
offers 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.............................. 16
Use of Proceeds........................... 17
Dividend Policy........................... 17
Capitalization............................ 18
Dilution.................................. 19
Selected Consolidated Financial Data...... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
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Page
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Business.................................. 33
Management................................ 48
Certain Transactions...................... 56
Principal Stockholders.................... 58
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 65
Underwriting.............................. 67
Legal Matters............................. 69
Experts................................... 69
Additional Information.................... 70
Index to Consolidated Financial
Statements.............................. F-1
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Our corporate headquarters and business address is 595 Market Street, Suite
1800, San Francisco, California 94105 and our telephone number is (415)
836-9700. 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 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 common stock.
Unless otherwise indicated, all information in this prospectus:
- gives effect to the conversion of all of our outstanding shares of
preferred stock into shares of common stock upon the closing of this
offering;
- assumes no exercise of the underwriters' option to purchase an additional
750,000 shares of common stock;
- gives effect to the 4.5-for-1 stock split to occur prior to the closing
of this offering;
- displays the number of authorized and issued shares of preferred stock on
an as-converted into common stock basis; and
- gives effect to our reincorporation from California to Delaware, to
become effective prior to the closing of this offering.
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 be outstanding
upon the closing of this offering. Except as otherwise indicated, references to
common stock and common shares do not include our nonvoting common stock.
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to each dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to its unsold
allotments or subscriptions.
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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 our company and the 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(R) 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(R) Visa, which we
call the First True Internet Visa, is marketed to consumers exclusively 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 product 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 March 31, 1999, we had received more than
1.7 million applications for the NextCard Visa and had generated over $170.0
million in new loans. We earn most of our revenues from the finance charges paid
by our customers based on their outstanding balances. We also earn revenues from
the amounts paid through the Visa system for purchases made with the NextCard
Visa and from fees paid by our cardholders.
3
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THE OFFERING
Common stock offered by NextCard...... 5,000,000 shares
Common stock and nonvoting common
stock to be outstanding after the
offering............................ 42,667,021 shares(1)
Use of proceeds....................... For general corporate purposes,
including working capital, funding of
credit card receivables and potential
future capitalization of NextBank,
N.A., our proposed limited purpose
bank subsidiary. See "Use of
Proceeds."
Dividend policy....................... We do not anticipate paying cash
dividends in the foreseeable future.
Proposed Nasdaq National Market
symbol.............................. NXCD
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(1) Based on the number of shares outstanding as of March 31, 1999. Excludes
12,337,502 shares reserved under our 1997 Stock Plan, of which 8,354,137
shares are subject to outstanding options at a weighted average exercise
price of $1.19 per share and 3,983,365 shares are reserved for future option
grants, and outstanding warrants to purchase 1,308,749 shares at a weighted
average exercise price of $0.88 per share. See "Management -- Employee
Benefit Plans."
4
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
PERIOD FROM YEAR ENDED MARCH 31,
JUNE 5, 1996 (INCEPTION) DECEMBER 31, -------------------------
TO DECEMBER 31, 1997 1998 1998 1999
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Interest income......................... $ 93 $ 502 $ 33 $ 660
Interest expense........................ -- 62 -- 647
------- -------- ------- --------
Net interest income..................... 93 440 33 13
Non-interest income..................... -- 697 34 343
Non-interest expenses................... 1,977 17,199 1,441 10,343
Net loss................................ (1,886) (16,064) (1,374) (10,982)
======= ======== ======= ========
Basic and diluted net loss per share.... $ (1.08) $ (5.07) $ (0.48) $ (2.84)
======= ======== ======= ========
Weighted-average shares of common stock
outstanding used in computing basic
and diluted net loss per share(1)..... 1,747 3,166 2,891 3,867
Pro forma basic and diluted net loss per
share (unaudited)..................... -- -- -- $ (0.30)
========
Shares used in computing pro forma basic
and diluted net loss per share(1)
(unaudited)........................... -- -- -- 36,493
SUPPLEMENTAL OPERATING DATA -- ASSETS
UNDER MANAGEMENT(2):
Total credit card receivables
outstanding........................... -- $ 66,042 $ 1,626 $ 96,293
Total number of open credit card
accounts.............................. -- 40 1 66
Total revenue: finance charges, fees and
interchange income.................... -- $ 1,199 $ 3 $ 1,885
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AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED(3)
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(UNAUDITED) (UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 25,456 $107,950
Credit card loan receivables, net of allowance for loan
losses.................................................... 67,358 67,358
Total assets................................................ 101,271 183,765
Secured borrowings.......................................... 54,069 54,069
Total liabilities........................................... 68,456 68,456
Total stockholders' equity.................................. 32,815 115,309
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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) Assets under management represent all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage Bank of Commerce's and
our balance sheet.
(3) Adjusted to reflect our sale of 5,000,000 shares of common stock offered in
this offering at an assumed initial public offering price of $18.00 per
share and after deducting estimated underwriting discounts and commissions
and offering expenses payable by us and the application of our net proceeds
from the offering. See "Capitalization."
5
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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 $11.0 million for the three months ended March 31, 1999. As of March 31,
1999, we had an accumulated deficit of $28.9 million. To date, we have not
achieved profitability and we expect to incur significant and increasing net
losses for 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 revenues to achieve
profitability. We cannot be certain that we will be able either to maintain our
recent revenue growth rates or to generate adequate revenues 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 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 revenues. Our ability to accurately forecast our revenues is
limited. If our revenues do 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 March 31, 1999, over 70% of our credit card accounts 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 of accounts 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
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WE MAY BE UNABLE TO RETAIN CUSTOMERS WHEN WE INCREASE THEIR INTRODUCTORY
INTEREST RATES.
To attract new customers, we generally offer low introductory interest
rates that increase after expiration of the introductory period. Given our
limited operating history, we do not know what percentage of our customers will
continue to use their NextCard Visa after the end of this period. If fewer
customers than we expect continue to use their NextCard Visa after the
expiration of the introductory offer, 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 such consumers to
manage the expected delinquencies and losses or to appropriately price 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 such 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 customer payment defaults or other unfavorable
cardholder 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. See
"Business -- Underwriting and Credit Management."
FLUCTUATIONS IN OUR QUARTERLY REVENUES 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 and
the volume of NextCard Visa purchases. Variations of such factors could affect
our quarterly revenues. 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 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;
- 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;
7
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- 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;
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 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. Failure by us 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, such equity securities might have
rights, preferences or privileges senior to those of our common stock.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR LOAN PORTFOLIO.
We currently fund our loan portfolio through a $100.0 million secured
credit facility arranged by Credit Suisse First Boston, of which approximately
$45.9 million was unutilized as of March 31, 1999. The credit facility is
subject to a number of conditions and terminates on December 29, 1999. We may
not be able to continue to satisfy all of the lending conditions of the credit
facility, to renew the credit facility upon its termination or to obtain
alternate or additional funding on terms favorable to us, if at all.
Our ability to grow our business is limited by the amount of credit we can
extend to our customers and potential customers. Our credit facility is not
sufficient to fund our anticipated growth in our loan portfolio over the next 12
months. Therefore, any loss of funding under this credit facility or failure to
increase or extend the term of the credit facility or to obtain alternative
financing on commercially reasonable terms would have a material adverse effect
on our results of operations and financial condition.
We are in the process of applying for a charter to form a subsidiary,
NextBank, as a limited purpose national bank, which would be limited to
generating and financing credit card loans. If we successfully create NextBank,
our strategy will be to fund a portion of our loan portfolio through short-term
deposits 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 would have an
adverse effect on our operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- NextBank."
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.
8
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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, such as publicity resulting
from this offering, could cause traffic to strain our site'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 such increases in a timely manner.
Our systems and operations also are vulnerable to damage or interruption
from human error, natural disasters, power loss, 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 interruption or delay in
our entire operations. 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. For example, all of the NextCard Visa credit
cards generated on our website are issued by Heritage Bank of Commerce in
accordance with an account origination agreement. Under the agreement, Heritage
issues credit cards to each applicant who qualifies under specified credit card
guidelines. Heritage's obligation to establish new credit card accounts
terminates on September 30, 1999. If successfully created, NextBank would
replace Heritage as the issuer of the NextCard Visa. If we are not successful in
creating NextBank on a timely basis, our failure to extend our arrangement with
Heritage or enter into an alternative arrangement would have a material adverse
effect on us.
We also depend, directly and indirectly, on other key third party vendors
to provide essential services. See "Business -- Operations -- Key Outside
Relationships." Any interruption, deterioration or termination in these
third-party services could be disruptive to our business. 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. As a result, any such interruption, deterioration
or termination would have a material adverse effect on our results of operations
and financial condition.
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 past experienced, and we expect to experience in
the future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications.
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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
March 31, 1999, we grew from approximately 18 to 135 employees, and our loans
under management increased from $0 to $96.3 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
and 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 the brand name of Visa(R) or MasterCard(R) than
to the identity of the issuer. The Internet may change the 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 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.
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
10
<PAGE> 15
financial products and services is at an early stage and is subject to a high
level of uncertainty. To date, there exist relatively few proven online
financial institutions. Although our long-term vision is to redefine the banking
experience for the Internet consumer, presently we offer only a single product,
the NextCard Visa, and we have no specific plans for additional products. In
addition, 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. We operate in this intensely 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. 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. In addition, existing Internet
providers and new Internet entrants may launch new websites using commercially
available software. 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
- 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 revenues are 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 revenues. At the same time, our borrowing costs under our
11
<PAGE> 16
secured lending facility, and the interest we will pay on deposits when, and if,
NextBank is created and begins to accept deposits, 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 adversely affect our results of
operations and financial condition. We may to manage our interest rate risk
through interest rate hedging techniques. However, we currently do not use such
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 the NextCard service.
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 adversely affected.
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 enact laws regulating Internet banking
that address issues such as user privacy, pricing and the characteristics and
quality of products and services. 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
12
<PAGE> 17
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. If we successfully form
NextBank, it would be subject to regulation under federal and California banking
laws as well as regulatory supervision from the Office of the Comptroller of the
Currency, or OCC, and the FDIC. As an affiliate of NextBank, we also will be
subject to oversight by the OCC and 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 also will be subject to minimum capital, funding and leverage
requirements prescribed by federal statute and OCC regulations or 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 applied to register several of
our trademarks in the United States. 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 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. 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
13
<PAGE> 18
could, in turn, have a material adverse effect on our business, results of
operations and financial condition.
PROTECTION OF OUR DOMAIN NAME IS UNCERTAIN.
We currently hold the domain name nextcard.com. The regulations governing
the acquisition and maintenance of domain names are subject to change. Governing
bodies could, among other things, modify the requirements for holding domain
names. Accordingly, we may be unable to acquire or maintain our domain name in
all jurisdictions in which we would otherwise seek to do so. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our domain name, trademarks and
other proprietary rights.
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 such 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 of such third parties could
materially adversely affect our business. Additionally, the Internet could face
serious disruptions arising from the year 2000 problem.
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 the year 2000 problem;
- 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."
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. We negotiated and determined the initial public
offering price with the representatives of the underwriters based on several
factors. This price may vary from the market price of the common stock after
this offering.
14
<PAGE> 19
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;
- changes in financial estimates by securities analysts;
- changes in market valuations of Internet or financial services companies;
- 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 the past, following periods of volatility in the market price of a
company's securities, securities class action litigation often has been
instituted against such a company. Such litigation could 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 common stock after the offering
could adversely affect the market price of the common stock by potentially
introducing a large number of sellers of our common stock into a market in which
the common stock price is already volatile, thus driving the common stock price
down. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional equity securities. On completion of this
offering, we will have 42,667,021 shares outstanding, or 43,417,021 shares if
the underwriters' option to purchase an additional 750,000 shares of common
stock is exercised in full, and 2,581,237 shares subject to currently
exercisable options and warrants. The 5,000,000 shares sold in this offering, or
5,750,000 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 "affiliates" of NextCard as that term is
defined in Rule 144 under the Securities Act. The remaining 37,667,021 shares
outstanding on completion of the offering will be "restricted securities" as
that term is defined in Rule 144.
All of our directors, executive officers and substantially all of our
stockholders have executed lock-up agreements that limit their ability to sell
common stock. These stockholders have agreed not to sell or otherwise dispose of
any shares of common stock for a period of at least 180 days after the date of
this prospectus without the prior written approval of Donaldson, Lufkin &
Jenrette Securities Corporation. When the lock-up agreements expire, these
shares and the shares underlying the options will become eligible for sale
subject to the applicable requirements of Rule 144. See "Shares Eligible for
Future Sale."
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.
Upon completion of this offering, our executive officers, directors and 5%
or greater stockholders, and their respective affiliates, could, in the
aggregate, own up to approximately 50% of our outstanding common stock. As a
result, they could 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, such
15
<PAGE> 20
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
Stockholders."
CERTAIN ANTI-TAKEOVER PROVISIONS MAY PRODUCE RESULTS DISFAVORED BY OUR
STOCKHOLDERS.
Provisions of our Certificate of Incorporation, our 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 such change was favored by our
stockholders. See "Description of Capital Stock."
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 change in our expectations.
16
<PAGE> 21
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock offered will be approximately $82.5 million, after deducting
estimated underwriting discounts and commissions and offering expenses. If the
underwriters' option to purchase an additional 750,000 shares of common stock is
exercised in full, we estimate that such net proceeds will be approximately
$95.0 million. We intend to use up to $15.0 million of the net proceeds to
finance our credit card receivables under our secured borrowing facility. We
plan to use at least $20.0 million of the net proceeds to capitalize NextBank,
when, and if, NextBank commences operations. We will use the balance of the net
proceeds of this offering for working capital, including marketing and
acquisition costs related to obtaining credit card receivables, interest expense
under our borrowing facilities, and general corporate overhead expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- NextBank."
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> 22
CAPITALIZATION
The following table sets forth our unaudited capitalization as of March 31,
1999: (1) on an actual basis; (2) on a pro forma basis after giving effect to
the conversion of all outstanding shares of preferred stock into common stock
and the filing of our amended and restated certificate of incorporation in
Delaware; and (3) as adjusted to reflect our receipt of the estimated net
proceeds from our sale of 5,000,000 shares of common stock in this offering at
an assumed initial offering price of $18.00 per share (after deducting the
estimated underwriting discounts and commissions and offering expenses) and the
application of our proceeds from this offering:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible preferred stock, 40,603,109 shares
authorized, 32,625,734 shares outstanding actual;
12,567,285 shares authorized, no shares outstanding
pro forma; 12,567,285 shares authorized, no shares
outstanding as adjusted............................ $ 33 $ -- $ --
-------- -------- --------
Common stock and nonvoting common stock, 62,896,892
shares authorized, 5,041,287 shares outstanding
actual; 87,432,175 shares authorized, 37,667,021
shares outstanding pro forma; 87,432,175 shares
authorized, 42,667,021 shares outstanding as
adjusted(1)(2)..................................... 5 38 43
Notes receivable from officers....................... (26) (26) (26)
Additional paid-in capital........................... 77,069 77,069 159,558
Deferred stock compensation.......................... (15,334) (15,334) (15,334)
Accumulated deficit.................................. (28,932) (28,932) (28,932)
-------- -------- --------
Total stockholders' equity......................... 32,815 32,815 115,309
-------- -------- --------
Total capitalization....................... $ 32,815 $ 32,815 $115,309
======== ======== ========
</TABLE>
- ------------
(1) Excludes 8,354,137 shares of common stock issuable upon exercise of options
outstanding on March 31, 1999, with a weighted average exercise price of
$1.19 per share, and 3,983,365 shares of common stock reserved for issuance
of ungranted options under our 1997 Stock Plan. Also excludes 1,308,749
shares of common stock subject to outstanding warrants, with a weighted
average exercise price of $0.88 per share.
(2) In connection with the conversion of preferred stock into common stock,
preferred stockholders will have the right to convert some or all of their
preferred stock into nonvoting common stock, with our consent.
18
<PAGE> 23
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $32.8 million, or $0.87 per share of common stock. Net tangible
book value per share represents the amount of total assets less total
liabilities, divided by the number of shares outstanding. After giving effect to
the issuance and sale of the 5,000,000 shares of common stock offered by us at
an assumed initial public offering price of $18, and deducting underwriting
discounts and commissions and estimated offering expenses payable by us, our
adjusted net tangible book value as of March 31, 1999 would have been $115.3
million, or $2.70 per share. This represents an immediate increase in the net
tangible book value of $1.83 per share to the existing stockholders and an
immediate dilution of $15.30 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 initial public offering price per share............. $18.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $0.87
Increase per share attributable to new public investors... 1.83
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.70
------
Dilution per share to new investors......................... $15.30
======
</TABLE>
The following table sets forth on a pro forma basis, as of March 31, 1999,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock (including nonvoting common stock) upon completion of
this offering, the differences between the existing stockholders and the
purchasers of shares of common stock in this offering (before deducting
underwriting discounts and commissions and estimated offering expenses) with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 37,667,021 88.3% $ 54,980,246 37.9% $ 1.46
New stockholders........ 5,000,000 11.7 90,000,000 62.1 $18.00
---------- ----- ------------ -----
Total......... 42,667,021 100.0% $144,980,246 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of stock options to
purchase 8,354,137 shares of common stock and warrants to purchase 1,308,749
shares of common stock outstanding as of March 31, 1999, with weighted average
exercise prices of $1.19 and $0.88, respectively. To the extent any of these
options or warrants are exercised, there will be further dilution to new public
investors. See "Capitalization," "Management -- Director Compensation" and Note
2 of notes to Financial Statements.
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<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL 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 statement of
operations for the three months ended March 31, 1999 and the consolidated
balance sheet data at March 31, 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 three
months ended March 31, 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 THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATE:
Interest income:
Cash and investments...................................... $ 93 $ 502 $ 33 $ 280
Credit card loan receivables.............................. -- -- -- 380
------- -------- ------- --------
Total interest income....................................... 93 502 33 660
Interest expense............................................ -- 62 -- 647
------- -------- ------- --------
Net interest income......................................... 93 440 33 13
Provision for loan losses................................... -- -- -- 995
------- -------- ------- --------
Net interest income after provision for loan losses......... 93 440 33 (982)
Non-interest income:
Servicing and profit and loss sharing..................... -- 662 34 204
Interchange fee........................................... -- -- -- 96
Card fees and other....................................... -- 35 -- 43
------- -------- ------- --------
Total non-interest income................................... -- 697 34 343
Non-interest expenses:
Salaries and employee benefits............................ 1,495 6,730 789 3,309
Marketing and advertising................................. 49 4,325 209 2,555
Credit card activation and servicing costs................ 1 2,327 52 1,522
Occupancy and equipment................................... 137 958 115 552
Professional fees......................................... 168 520 41 255
Amortization of deferred compensation..................... -- 1,800 164 1,366
Amortization of loan structuring fee...................... -- -- -- 568
Other..................................................... 127 539 71 216
------- -------- ------- --------
Total non-interest expenses................................. 1,977 17,199 1,441 10,343
Loss before income taxes.................................... (1,885) (16,062) (1,374) (10,982)
Provision for income taxes.................................. 2 2 -- --
------- -------- ------- --------
Net loss.................................................... $(1,886) $(16,064) $(1,374) $(10,982)
======= ======== ======= ========
Basic and diluted net loss per share........................ $ (1.08) $ (5.07) $ (0.48) $ (2.84)
======= ======== ======= ========
Weighted average shares outstanding used in computing basic
and diluted net loss per share(1)......................... 1,747 3,166 2,891 3,867
======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... -- -- -- $ (0.30)
========
Shares used in computing pro forma basic and diluted net
loss per share(1) (unaudited)............................. -- -- -- 36,493
========
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(2):
Total credit card receivables outstanding................... -- $ 66,042 $ 1,626 $ 96,293
Total number of open credit card accounts................... -- 40 1 66
Total revenue: finance charges, fees and interchange
income.................................................... -- $ 1,199 $ 3 $ 1,885
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------ MARCH 31,
1997 1998 1999
-------------- ------------ ---------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,840 $ 40,134 $ 25,456
Credit card loan receivables, net of allowance for loan
losses.................................................... -- -- 67,358
Total assets................................................ 3,688 45,542 101,271
Secured borrowings.......................................... -- -- 54,069
Total liabilities........................................... 901 5,606 68,456
Total stockholders' equity.................................. 2,787 39,937 32,815
</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) Assets under management represent all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage's and our balance
sheets.
20
<PAGE> 25
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 such 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 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 exclusively through our
website, www.nextcard.com. We offer 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 (the "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 the formation of our company, 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 March 31, 1999, we had 135
employees. From December 31, 1997 through March 31, 1999, we significantly
increased the new loans generated through our website as well as the total loans
under 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 March 31,
1999, our loans under management grew from $0 to $96.3 million. As of March 31,
1999, we had over 66,000 open credit card accounts.
As of March 31, 1999, we had received more than 1.7 million applications
for the NextCard Visa and had generated over $170.0 million in new credit card
loans. Due to our underwriting criteria, the number of customer applications we
approve is substantially less than the number of applications we receive.
Since our inception, we have incurred significant losses. As of March 31,
1999, we had an accumulated deficit of $28.9 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 expect that the rate and amount at which such losses
will be incurred will increase significantly from current levels. These expected
costs are related to: advertising, marketing
21
<PAGE> 26
and other promotional activities; expansion of our direct marketing, database
and testing capabilities; expansion of our product offerings; and strategic
relationship development.
Until January 12, 1999, Heritage 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 charge Heritage for
origination and servicing of the accounts and share 50% of the resulting net
profits or losses.
In January 1999, we began purchasing credit card receivables utilizing a
$100.0 million secured lending facility extended to our subsidiary, NextCard
Funding Corp. Pursuant to the terms of our Account Origination Agreement with
Heritage, Heritage continues to fund newly originated credit card receivables,
which are then purchased on a daily basis by NextCard Funding using borrowings
from Credit Suisse First Boston. The purchased receivables are pledged as
security for the Credit Suisse borrowings. By holding and managing those credit
card receivables, we earn income from:
- finance charges paid by our customers based on their outstanding
balances;
- amounts paid through 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.
NEXTBANK
We have taken steps to establish a limited purpose national credit card
bank, which would be our wholly owned subsidiary. NextBank may in the future be
a vehicle for issuing NextCard Visa accounts and funding our NextCard Visa loan
portfolio. See "Business -- NextBank."
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1999 AND 1998
NET INTEREST INCOME
Interest Income on Cash and Investments. Interest income on cash and
investments consists of earnings on our cash and cash equivalents. Interest
income increased $247,000 from $33,000 for the quarter ended March 31, 1998 to
$280,000 for the quarter ended March 31, 1999. The increase was attributable to
higher average cash and cash equivalent balances resulting from the sales of our
preferred stock in November 1998. The amount of interest income we will
recognize on cash and investments in the future will depend on the level of cash
and cash equivalents balances we maintain.
Interest Income on Credit Card Loan Receivables. Interest income on credit
card loan receivables consists of finance charges paid by our customers based on
their outstanding balances. In January 1999, we began purchasing credit card
loan receivables from Heritage. For the quarter ended March 31, 1999, we earned
$380,000 of interest income from these credit card loan receivables. We expect
the amount of interest income on credit card loan receivables to increase in the
future to the extent we continue to purchase credit card loan receivables from
Heritage and potentially originate and fund our own credit card loan receivables
through NextBank. The amount of interest income we recognize depends on:
- the amount of outstanding balances on our credit card loan receivables;
- the percentage of those receivables that are not paid off on a monthly
basis;
- the interest rate we charge on those unpaid receivables; and
- the retention of credit card accounts of customers after expiration of
their low introductory rates.
Interest Expense. Interest expense consists of interest we pay associated
with our borrowings. We had no borrowing for the quarter ended March 31, 1998.
For the quarter ended March 31, 1999, we had interest expense of $647,000
primarily attributable to outstanding borrowings under NextCard Funding Corp's.
secured lending facility with Credit Suisse First Boston. Total borrowings under
this
22
<PAGE> 27
facility at March 31, 1999 were $54.1 million. We expect interest expense to
increase as we increase our borrowings under this and other similar facilities
to fund the purchase of credit card receivables from Heritage. In addition,
interest expense may increase if we raise deposits through NextBank to fund
NextBank credit card loan originations.
Net Interest Margin. Our net interest margin for the quarter ended March
31, 1999 was $13,000. Our net interest margin consists of interest income we
recognize on cash and investment securities and credit card loan receivables
less interest we pay on borrowings used to fund these earning assets. Our net
interest margin is, and will continue to be, adversely affected if:
- we do not retain the credit card balances of many of our current
customers whose low introductory rates will expire and reprice to higher
interest rates;
- we do not originate new customers at higher introductory rates; or
- the rate we pay on our borrowings increases.
Provision for Loan Losses and Asset Quality. The provision for loan losses
consists of charges to earnings to maintain the allowance for loan losses at a
level that, in our judgement, is adequate to provide for probable net loan
losses from known and inherent risks in our owned credit card loan portfolio. In
evaluating the adequacy of the allowance for loan losses, we take into
consideration several factors, including:
- our loan portfolio's historical delinquency and loss experience;
- industry delinquency and loan loss experience;
- current economic conditions and the impact such conditions might have on
anticipated losses in our loan portfolio; and
- due to our limited operating history, obtaining and using credit bureau
information about our current customer base, which provides us with
additional information concerning potential loan losses in our portfolio.
Actual loan losses may exceed our allowance for loan losses. In general, we
do not record loan losses until an account is past due 180 days, at which time
the loan is charged-off. Since our owned credit card loan portfolio reflects
receivables originated since approximately December 1, 1998, our owned credit
card loan portfolio had no loan losses for the quarter ended March 31, 1999. The
following table sets forth the activity in the allowance for loan losses for our
owned credit card loan portfolio for the quarter ended March 31, 1999:
<TABLE>
<S> <C>
Balance at January 1, 1999.................................. $ 0
Provision for loan losses................................... 995,000
Net credit losses........................................... 0
--------
Balance at March 31, 1999................................... $995,000
========
</TABLE>
Because our owned credit card loan portfolio is less than two months old on
average, we determined our allowance for loan losses as of March 31, 1999 in the
following manner. We considered the net credit card losses experienced by the
Heritage owned credit card loan portfolio over the approximately 15 month period
since inception of the NextCard Visa program. We believed this to be appropriate
because our own credit card loan portfolio was underwritten using substantially
the same criteria as for the Heritage credit card loan portfolio managed by us.
In addition, NextCard Visa customers generally have higher credit bureau scores
than are typical in the industry. The credit card loan portfolio owned by
Heritage, but under our management, had experienced, as of March 31, 1999, an
aggregate of $347,000 in loan losses since inception of the program in December
1997. That figure represents less than 1.0% of average credit card loan
receivables that were owned by Heritage since inception of the program. We then
increased that percentage based upon our own qualitative judgments about
uncertainty over the continuation of the strong economic conditions experienced
in
23
<PAGE> 28
1998 and early 1999, as well as industry data and factors related to our
relatively unseasoned and growing level of credit card loan receivables. As a
result, our $995,000 allowance for loan losses as of March 31, 1999 was
established at approximately 1.5% of owned credit card loans outstanding on that
date.
A customer's account is contractually delinquent if the minimum payment is
not received by the due date printed on the customer's statement. The following
table presents the delinquency information for our owned credit card loan
portfolio as March 31, 1999:
<TABLE>
<CAPTION>
LOANS % OF TOTAL
(IN THOUSANDS) LOANS
-------------- ----------
<S> <C> <C>
Credit card loans outstanding......................... $68,352 100.0%
Loans delinquent:
30 - 59 days........................................ 1,347 2.0%
60 - 89 days........................................ 97 0.1%
90 or more days..................................... 22 0.0%
------- -----
Total................................................. $ 1,466 2.1%
======= =====
</TABLE>
As our credit card loan portfolio continues to grow and seasons, net loan
losses will increase, delinquency levels may fluctuate and increase, and the
ratio of the allowance for loan losses to owned 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.
NON-INTEREST INCOME
Servicing and Profit and Loss Sharing. Servicing and profit and loss
sharing income consists of amounts arising under the Consumer Credit Card
Program Agreement with Heritage. Such income increased $170,000 from $34,000 for
the quarter ended March 31, 1998 to $204,000 for the quarter ended March 31,
1999. This increase was attributable to more credit card accounts and loans
originated and outstanding under the Consumer Credit Card Program Agreement for
the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998.
However, we anticipate servicing and profit and loss sharing income to decrease
in the future because we are now purchasing all of the new credit card loan
receivables from Heritage under the Account Origination Agreement.
Interchange and Other Credit Card Fees. 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. In January 1999, we began purchasing credit card receivables from
Heritage. For the quarter ended March 31, 1999, we had $96,000 of interchange
fees and $43,000 of other credit card fees from these credit card loan
receivables. We expect the amount of interchange and other credit card fee
income to increase in the future as we continue to purchase receivables from
Heritage and potentially originate and fund our own receivables through
NextBank.
NON-INTEREST EXPENSES
Salaries and Employee Benefits. Salaries and employee benefits include all
of our employees' salaries and benefit expenses, contract labor expenses,
consulting fees and recruiting fees. Salaries and employee expenses increased
$2.5 million from $789,000 for the quarter ended March 31, 1998 to $3.3 million
for the quarter ended March 31, 1999. This increase was caused by the growth of
employees from 18 as of December 31, 1997 to 135 as of March 31, 1999. We expect
salaries and employee benefit expenses to continue to increase as we expand our
staffing in response to the anticipated growth of our business.
Marketing and Advertising. Marketing and advertising expenses consist
primarily of Internet-based advertising, promotional expenditures and public
relations. Marketing and advertising expenditures increased $2.3 million from
$209,000 for the quarter ended March 31, 1998 to
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<PAGE> 29
$2.6 million for the quarter ended March 31, 1999. This increase in marketing
and advertising expenditures in the first quarter of 1999 was primarily
attributable to expansion of Internet-based advertising. We expect our marketing
and advertising expenses to increase significantly as we expand our
Internet-based advertising campaigns and branding activities.
Credit Card Activation and Servicing Costs. Credit card activation and
servicing costs consist of all costs associated with processing new credit card
accounts and servicing the NextCard Visa credit card portfolio. These costs
include the payment made for accessing applicants' credit bureau reports,
maintaining the security over our network, the card issuance fees we pay
Heritage as well as the payments we make to First Data and other third-party
vendors who provide selected fulfillment and service functions. Credit card
activation and servicing costs increased $1.4 million from $52,000 for the
quarter ended March 31, 1998 to $1.5 million for the quarter ended March 31,
1999. These costs are expected to increase in the future as we grow our credit
card loan portfolio.
Occupancy and Equipment. Occupancy and equipment expenses include office
lease payments for our office space in both San Francisco and San Ramon, as well
as all utilities and depreciation expenses recognized on all of our furniture
and equipment. Occupancy and equipment expenses increased $437,000 from $115,000
for the quarter ended March 31, 1998 to $552,000 for the quarter ended March 31,
1999. The increase was due to significant increases in both our San Francisco
and San Ramon office space requirements and purchasing additional equipment. We
expect our occupancy and equipment costs to increase as we expand our staffing,
network infrastructure and office space requirements in both San Francisco and
San Ramon locations.
Professional Fees. Professional fees include primarily outside legal and
accounting fees. Professional fees increased $214,000 from $41,000 for the
quarter ended March 31, 1998 to $255,000 for the quarter ended March 31, 1999.
This increase was primarily related to fees paid to outside law firms who are
assisting us in a number of corporate activities including the application and
potential chartering of NextBank and ongoing legal costs incurred in connection
with administering the Credit Suisse First Boston secured borrowing facility. We
anticipate our professional fees to increase due to the additional requirements
of being a public company.
Amortization of Deferred Compensation. A portion of the value of certain
stock options granted in the first quarter of 1999 and in 1998 have been
considered to be compensatory. Deferred compensation associated with such
options amounted to $18.5 million. This amount represents the difference between
the exercise price of certain stock option grants and our estimate of the fair
value of our common stock at the time of such grants. Of this amount, $164,000
was charged to operations for the quarter ended March 31, 1998 and $1.4 million
for the quarter ended March 31, 1999.
Approximately $15.3 million will be amortized using an accelerated method
over the vesting periods of the applicable options through 2003. The remaining
amortization of this deferred compensation will be approximately $6.8 million in
1999, $4.3 million in 2000, $2.1 million in 2001, $1.5 million in 2002 and $0.6
million in 2003.
Amortization of Loan Structuring Fee. As part of the Credit Suisse First
Boston secured borrowing facility, we paid a loan structuring fee of $2.1
million consisting of $725,000 in cash and warrants to purchase 562,500 shares
of preferred stock. The estimated fair market value of the warrant was
$1,375,000. This loan structuring fee has been capitalized and is being
amortized on a straight-line basis over the term of the revolving credit
facility. A portion of this amount has been charged to operations for the
quarter ended March 31, 1999.
Other Expenses. Other expenses include primarily travel, insurance and
general corporate expenses. Other expenses increased $145,000 from $71,000 for
the quarter ended March 31, 1998 to $216,000 for the quarter ended March 31,
1999. We expect other expenses to increase as we anticipate incurring additional
costs related to being a publicly held entity, including director and officers
liability insurance and investor relations programs.
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<PAGE> 30
INCEPTION PERIOD AND YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME
Interest Income on Cash and Investments. 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.
Interest Expense. We had no debt during 1997. In 1998, we had interest
expense of $62,000 attributable to our equipment loan.
NON-INTEREST INCOME
Servicing and Profit and Loss Sharing. 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
Salaries and Employee Benefits. Salaries and employee benefit expenses
increased $5.2 million from $1.5 million in the Inception Period to $6.7 million
in 1998. This increase was caused by the growth of employees from 18 as of
December 31, 1997 to 107 as of December 31, 1998.
Marketing and Advertising. Marketing and advertising expenditures
increased $4.2 million from $50,000 in the Inception Period to $4.3 million in
1998. This increase in marketing and advertising expenditures in 1998 was
primarily attributable to the expansion of Internet-based advertising.
Credit Card Activation and Servicing Costs. There were no credit card
activation or servicing costs during the Inception Period. In 1998, these costs
were $2.3 million and are expected to increase as we increase our credit card
loan portfolio.
Occupancy and Equipment. Occupancy and equipment expenses increased
$821,000 from $137,000 in the Inception Period to $958,000 in 1998. The increase
was due to significant increases in both our San Francisco and San Ramon office
space requirements and purchasing additional equipment.
Professional Fees. Professional fees increased $352,000 from $168,000 in
the Inception Period to $520,000 in 1998. The increase was primarily related to
ongoing fees paid to outside law firms who are assisting us in a number of
corporate activities including the application and potential chartering of
NextBank and structuring the Credit Suisse First Boston secured borrowing
facility.
Amortization of Deferred Compensation. A portion of the value of certain
stock options granted in 1998 have been considered to be compensatory. Deferred
compensation associated with such options amounted to $7.8 million. Of this
amount, $1.8 million was charged to operations in 1998.
Other Expenses. Other expenses increased $412,000 from $127,000 in the
Inception Period to $539,000 in 1998. The increase was due to the significant
growth of our company in 1998.
TAXES
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 carryforward will start expiring in 2012 and the state net
operating loss carryforward 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.
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<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operating
data for the eight quarters ended March 31, 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
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Interest income:
Cash and investments.................. $ 10 $ 24 $ 49 $ 33 $ 79 $ 116 $ 274 $ 280
Credit card loan receivables.......... -- -- -- -- -- -- -- 380
----- ----- ----- ------- ------- ------- ------- --------
Total interest income................... 10 24 49 33 79 116 274 660
Interest expense........................ -- -- -- -- 1 47 14 647
----- ----- ----- ------- ------- ------- ------- --------
Net interest income 10 24 49 33 78 69 260 13
Provision for loan losses............... -- -- -- -- -- -- -- 995
----- ----- ----- ------- ------- ------- ------- --------
Net interest income after provision for
loan losses........................... 10 24 49 33 78 69 260 (982)
----- ----- ----- ------- ------- ------- ------- --------
Non-interest income:
Servicing and profit and loss
sharing............................. -- -- -- 34 130 137 361 204
Interchange fee....................... -- -- -- -- -- -- -- 96
Credit card fees and other............ -- -- -- -- 3 2 30 43
----- ----- ----- ------- ------- ------- ------- --------
Total non-interest income............... -- -- -- 34 133 139 391 343
----- ----- ----- ------- ------- ------- ------- --------
Non-interest expenses:
Salaries and employee benefits........ 193 363 763 789 1,349 2,124 2,468 3,309
Marketing and advertising............. 6 5 33 209 936 1,056 2,124 2,555
Credit card origination and servicing
costs............................... -- -- 1 51 391 880 1,005 1,522
Occupancy and equipment............... 24 32 62 116 160 326 356 552
Professional fees..................... 23 44 77 41 77 49 353 255
Amortization of deferred
compensation ....................... -- -- -- 164 235 468 933 1,366
Amortization of loan structuring
fee................................. -- -- -- -- -- -- -- 568
Other................................. 17 43 45 71 133 106 229 216
----- ----- ----- ------- ------- ------- ------- --------
Total non-interest expenses............. 263 487 981 1,441 3,281 5,009 7,468 10,343
----- ----- ----- ------- ------- ------- ------- --------
Loss before income taxes................ (253) (463) (932) (1,374) (3,070) (4,801) (6,817) (10,982)
Provision for income taxes.............. -- -- 2 -- -- -- 2 --
----- ----- ----- ------- ------- ------- ------- --------
Net loss................................ $(253) $(463) $(934) $(1,374) $(3,070) $(4,801) $(6,819) $(10,982)
===== ===== ===== ======= ======= ======= ======= ========
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(1):
Total credit card loan receivables
outstanding........................... -- -- -- $ 1,626 $ 9,402 $35,334 $66,042 $ 96,293
Total number of open credit card
accounts at period end................ -- -- -- 1 5 19 40 66
Total revenue: finance charges, fees and
interchange income.................... -- -- -- $ 3 $ 59 $ 292 $ 845 $ 1,885
</TABLE>
- ------------
(1) Assets under management represents all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage's and our
balance sheets.
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<PAGE> 32
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:
- our ability to generate new customer relationships and retain profitable
accounts;
- 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, services and products
by us or our competitors and the level of price competition for the
products and services we offer;
- 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;
- the level of use of the Internet and online financial services;
- our ability to attract and retain high-quality employees;
- regulation by federal, state or local governments; 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 the finance charges paid by
our customers based on their outstanding 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 revenues and operating results
are likely to be particularly affected by these variables.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Cash and Cash Equivalents. Cash and cash equivalents decreased $14.6
million from $40.1 million at December 31, 1998 to $25.5 million at March 31,
1999. This decrease was primarily attributable to funding current operating
expenditures as well as the purchases of credit card receivables from Heritage
offset by borrowings of $54.1 million under our secured lending facility. Cash
and cash equivalents increased $37.3 million from $2.8 million at December 31,
1997 to $40.1 million at December 31, 1998. This increase was primarily
attributable to private sales of preferred stock in May and November 1998 offset
by ongoing funding of current operating expenditures.
Net Credit Card Loan Receivables and Secured Borrowings. In January 1999,
we began purchasing credit card loan receivables from Heritage utilizing a
$100.0 million secured lending facility extended to our subsidiary, NextCard
Funding Corp. Net credit card loan receivables of $67.4 million at March 31,
1999, represent the amount of outstanding balances our customers owe to us.
Secured borrowings outstanding of $54.1 million at March 31, 1999, represent the
total borrowings we have made under this lending facility to fund these
receivables. These balances will continue to
28
<PAGE> 33
increase as we continue to purchase credit card loan receivables from Heritage
and potentially originate and fund our own credit card receivables through
NextBank.
Stockholders' Equity. Stockholder's equity decreased $7.1 million from
$39.9 million at December 31, 1998 to $32.8 million at March 31, 1999. This
decrease was primarily attributable to our net loss for the quarter ended March
31, 1999 offset by the issuance of warrants to purchase preferred stock for $2.4
million and the amortization of deferred compensation of $1.4 million.
Stockholder's equity increased $37.1 million from $2.8 million at December 31,
1997 to $39.9 million at December 31, 1998. This increase was primarily
attributable to private sales of preferred stock in May and November 1998 offset
by our net loss for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of preferred stock. Net proceeds from these sales from inception to March
31, 1999 have totaled approximately $54.7 million.
Net cash used in operating activities was $1.5 million in the Inception
Period and $11.2 million in 1998. For the quarter ended March 31, 1999, net cash
used in operating activities was $8.3 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 compensation and, for the quarter ended March 31, 1999, also offset by
the provision for loan losses and the amortization of prepaid loan fees.
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 quarter ended March 31, 1999, net cash used in investing
activities was $66.2 million. For this period, net cash used in investing
activities was primarily related to the purchases of credit card loan
receivables from Heritage 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 $546,000 against an equipment loan from a
financial institution. For the quarter ended March 31, 1999, net cash provided
by financing activities was $59.8 million. For this period, net cash provided by
financing activities resulted primarily from the borrowing of $54.1 million
under our secured borrowing facility and $5.0 million from our line of credit
from a finance company.
At March 31, 1999, our principal source of liquidity was approximately
$25.5 million of cash and cash equivalents. In February 1999, we entered into a
$5.0 million line of credit with a finance company. Borrowings under the line 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. This line of
credit had an outstanding balance of $5.0 million at March 31, 1999. In April
1999, we entered into another agreement with the finance company to increase the
line of credit by an additional $5.0 million.
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 expires on May 31, 1999. The loan had an outstanding balance of $1.2
million at March 31, 1999.
Also during 1998, we entered into a $1.0 million lease/loan financing
arrangement with a finance company. The lease/loan financing arrangement is
secured by a pledge of all equipment leased under
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the arrangement and bears interest at 7.50% per year. The lease/loan financing
arrangement expires on May 22, 2000 and no balance was outstanding at March 31,
1999.
In addition, on December 29, 1998, we executed a $100.0 million secured
borrowing facility with Credit Suisse. The revolving credit facility is secured
by credit card receivables, which may be purchased, from time to time, using the
revolving credit facility's proceeds. The revolving credit facility bears
interest, at our option, at either 2.50% over LIBOR or the prime rate, and
matures on December 29, 1999. This credit facility had an outstanding balance of
$54.1 million at March 31, 1999.
We are in discussions with financial institutions related to establishing
additional borrowing facilities to fund the purchase of credit card loan
receivables. In addition, we are in contact with Credit Suisse related to a
possible increase in our existing borrowing facility. Such new or increased
facilities would increase our capacity to purchase credit card loan receivables
from Heritage or potentially fund a portion of our own credit card loan
receivables originated through NextBank. There are no assurances that any new or
expanded facility will be put in place. If such a facility is put in place 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 next five
years.
In connection with our principal executive office lease, in September 1998,
we 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 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 facility is
sufficient to fund our current loan portfolio, it is not sufficient to cover our
anticipated loan portfolio over the next 12 months. Therefore, any loss of
funding under this credit facility 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.
In the future, if we successfully create NextBank, a bank limited to
generating and financing credit card loans, we will seek to fund our loan
portfolio through short-term deposits raised by NextBank as well as capital
contributed by us. However, we may not be able to attract or retain sufficient
deposits at attractive interest rates to fund 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."
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which is effective for financial statements for fiscal
years beginning after June 15, 1999. This new standard will require us to record
all derivatives on the balance sheet at fair value. Changes in derivative fair
values will be either recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments, or, for
forecasted transactions, deferred and recorded as a component of comprehensive
income in stockholders' equity until the hedged transactions occurs and are
recognized in earnings. The ineffective portion of a hedging derivative's change
in fair value will be immediately recognized in earnings. While we currently
have no derivative financial instruments and do not currently engage in hedging
activities, we anticipate engaging in derivative and hedging activity in the
future, and therefore expect to be impacted by the pronouncement. The impact of
this new standard on our 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.
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 Resources 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.
As we started NextCard less than three years ago, we developed our systems
and technology in light 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 such 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. Of 142
vendor inquiries made, 141 have provided a year 2000 readiness disclosure
statement certifying year 2000 compliance or representing that they have, and
are following, a year 2000 readiness plan. During the assessment phase, eleven
vendors were identified as critical to us, all of whom have provided us with
certifications of year 2000 compliance or a readiness disclosure statement.
Testing (including leap year testing) of our systems with those of First Data
Resources will not be completed until mid-summer of 1999. However, based on the
results of preliminary testing of all affected systems, we believe that the
systems will be year 2000 compliant. Accordingly, based on the results of the
responses we have received and the availability of alternate
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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 one of our vendor's systems causes such vendor
to fail to provide us services it had agreed to provide us, we would seek to
recover from such vendor damages for the amount we suffered due to such failure.
We would base our suit on breach of the vendor's agreement with us and
misrepresentation of such vendor's year 2000 representation to us. However,
there can be no assurance that such agreements and such 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 us.
To date, we have incurred approximately $200,000 of expense relating to
year 2000 analysis, testing and remediation efforts. We anticipate that, when
all analysis, testing and remediation efforts are complete, we will have
incurred approximately $600,000 of expenses, all of which will be recognized in
1999. However such expenses could be significantly higher than we anticipated.
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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 exclusively through our
website, www.nextcard.com. We offer 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; and
- personalization of the look of the NextCard Visa through our My Visa
PictureCard product.
ONLINE SHOPPING ENHANCEMENTS
- GoShopping!, an Internet-based shopping service;
- NextCard Rewards, an Internet-based incentives program allowing customers
to earn NextCard points that can be redeemed for a variety of goods and
services; and
- 100% protection against credit card fraud.
INTERNET-BASED ACCOUNT MANAGEMENT
- online statements;
- the ability to download account activity into personal financial
management software; and
- online customer service functionality.
The NextCard Visa has experienced significant consumer demand since its
introduction in December, 1997. As of March 31, 1999, we had received more than
1.7 million applications for the NextCard Visa and had generated over $170.0
million in new loans. We earn most of our revenues from the finance charges paid
by our customers based on their outstanding balances. We also earn revenues from
the amounts paid through the Visa system for purchases made with the NextCard
Visa and from fees paid by our cardholders.
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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 97 million Internet users worldwide at the end
of 1998 and anticipates that number will grow to approximately 320 million users
by the end of 2002. In addition, IDC estimates that the worldwide consumer
electronic commerce market is expected to grow from approximately $11 billion in
1998 to approximately $94 billion in 2002. 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;
- 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.
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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 $413 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 $678 billion in 1997 and are expected to increase to $896
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. Of the total Visa and MasterCard
balances outstanding, no credit card issuer has 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.
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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 the 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. 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.
- 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. 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.
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ONLINE CUSTOMER SERVICE
- Our customers can access statements online, check recent account
activity, 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. These
features should assist us in building customer relationships and
improving customer loyalty.
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 to particular applicants that are customized to meet their specific
needs. 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. For applicants who become customers, we intend to offer an
array of financial products and services over time based upon the
customer's credit and spending profile.
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 credit review and approval 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. 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 is bundled with a unique combination of Internet-based
functionality, including an automated application process, customized terms,
personalization options and add-on
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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 three customized upgrade
opportunities 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 more than a thousand
pictures.
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 as well as miles that
can be redeemed on major airlines. In this way, customers can apply their
points towards offerings of interest to them.
- 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, to help 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, checking 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.
FUTURE PRODUCTS AND SERVICES
We intend to add new credit card 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
electronic wallets, targeted sweepstakes programs and special incentive offers.
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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 three
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 diversified selection
of websites that provide millions of ad impressions each day.
Diversification is a key driver of our success. To date, no particular site
has accounted for more than 15% 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 site. For each banner/site configuration, we are able to
monitor:
- the click-through rate (percent of people who click from the banner to
our site);
- the application rate (percent of those people who then decide to apply
for our 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 that have Internet sites to drive new
account volume and strengthen customer loyalty and retention. Companies 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 March
31, 1999, we had more than 5,200 affiliates and have gained approximately 500
new affiliates each month since September 1998.
CO-BRANDING
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 will enter 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 have begun to work with partners to offer the power
of our customization to their customer base, with both brands marketed together.
We believe that the power of two Internet brands can create an important message
to the customer, and promote our brand.
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In addition to the above three marketing channels, we will continue to
build the NextCard brand and leverage it to attract new customers, affiliates
and partners. Through our marketing of the NextCard Visa, we have received over
seven million visits to our website.
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. These policies have
also been reviewed and adopted by Heritage. 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 loss.
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
analyze an internally developed credit score to augment the FICO score. If the
applicant meets both minimum FICO score criteria and passes all of our
internally developed criteria, the applicant is approved for a NextCard Visa,
subject to authentication of customer information. In instances where an
applicant does not have a FICO score, we will approve the applicant based on a
minimum score 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. 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
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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 are in the process of moving
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.
Once an applicant has been approved through our credit process, our
operations group performs several customer authentication tests. The
authentication process involves a set of internally developed procedures using
third-party databases and credit bureau information to determine the probability
that an application may involve fraud.
Each application is processed through a series of 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, telephone contact
may be initiated to attempt to verify the identity of the applicant. We plan to
automate further our authentification process during the next several years.
At the conclusion of this 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. During the second half
of 1999, we expect to move 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. The quality of our
customer service is reviewed through monitoring of telephone contacts with
customers. In addition, we use call management software to monitor call
abandonment, call length and other call center productivity measurements.
COLLECTIONS
Collections activities currently are performed by First Data under our
direction and policy-making. Accounts are recognized 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. Collection activity involves contacting the
customer and taking other appropriate actions. We review the effectiveness of
the collection efforts and make recommendations for process improvements to
First Data. During the
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second half of 1999, we expect to move a portion of collections activities to
our San Ramon operations facility.
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:
- Heritage issues the NextCard Visa;
- 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 provides us technical support and secure facility
for Internet hosting services;
- Three major credit bureaus (TransUnion, Experian and Equifax) furnish the
credit information that we require to process our credit card
applications;
- National Processing Corporation provides collection and lockbox services
for customer payments;
- MyPoints.com furnishes administrative and fulfillment services for our
NextCard Rewards incentive program; and
- Binary Compass Enterprises, Inc. and WebCentric, Inc. provide software
technology underlying our GoShopping! program.
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 a high level of
data security 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, at our corporate headquarters; San Ramon,
California, in our operations center; and Santa Clara, California, in the Exodus
Data Center. Additionally, we rely upon the security infrastructure of First
Data and Response Data. Each of these key business locations is connected
through private leased lines. In all locations, access to the network servers is
tightly restricted. Internet security is addressed with leading technologies,
vendors and design approaches.
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Our most sensitive data and hardware reside at one of the Exodus Data
Centers 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 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 arrangements for
the NextCard Visa have involved relationships with Heritage Bank and Credit
Suisse First Boston.
HISTORICAL ARRANGEMENTS
Heritage Bank issues the NextCard Visa credit cards. From introduction of
the product 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.
As of January 12, 1999, a majority of the funding of NextCard Visa
receivables began to be provided by Credit Suisse, in cooperation with Heritage.
Under the Account Origination Agreement, Heritage continues to issue the
NextCard Visa, and our wholly-owned subsidiary, NextCard Funding Corp.,
purchases the receivables from Heritage on a daily basis. Credit Suisse provides
a $100 million revolving credit facility for this purpose. Our subsidiary has
pledged all of its assets to secure the loans under the Credit Suisse credit
facility, including an $8.0 million demand note we contributed to our
subsidiary. Loans fund 85% of the credit card receivables and bear interest, at
our option, at either 2.50% over LIBOR or Credit Suisse's prime rate. Our
subsidiary is also required to pay a fee of 0.25% per annum on the undrawn
portion of the total available commitment of $100.0 million. We may increase
Credit Suisse's financing to 90% of the credit card receivables upon payment of
additional compensation to Credit Suisse. Our arrangement with Credit Suisse
terminates December 29, 1999.
Heritage's obligation to establish new credit card accounts terminates on
September 30, 1999, and the remaining terms of the agreement (other than certain
indemnification and similar obligations) terminate on December 31, 1999. The
agreement may be extended if certain conditions are satisfied. However, if we
are successful in creating NextBank, our proposed credit card banking
subsidiary, we expect to have NextBank issue the NextCard Visa. If we are not
successful in creating NextBank on a timely basis, our failure to extend our
agreement with Heritage or enter into an alternative arrangement with Heritage
or another credit card issuer would have a material adverse effect on us.
Heritage's compensation under the Account Origination Agreement is primarily an
origination fee for each credit card account. In addition, Heritage is entitled
to reimbursement for certain out-of-pocket expenses.
FUTURE ARRANGEMENTS
Growth of our business depends on our ability to finance the creation of
credit card receivables associated both with new and existing accounts. Our plan
is to continue primarily to employ debt financing to fund credit card
receivables until we successfully establish NextBank. At that point in
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time, we anticipate taking deposits in our NextBank subsidiary to fund a portion
of our credit card loan receivables.
We are seeking to establish an additional new credit card loan receivables
purchase facility or an increase in the size of our current facility. If put in
place, our capacity to purchase credit card loan receivables from Heritage would
increase. In addition, such a facility could be used to fund a portion of credit
card receivables created through NextBank.
NEXTBANK
We have taken initial steps to establish a limited purpose national credit
card bank that may in the future be a vehicle for issuing NextCard Visas and
funding our NextCard Visa loan portfolio. In December 1998, we filed a limited
purpose national bank application with the Office of the Comptroller of the
Currency, or the OCC, to charter NextBank, a nationally chartered bank limited
to generating and financing credit card loans. On May 8, 1999, the OCC granted
preliminary approval of our application to charter NextBank. Final approval of
the OCC is subject to several conditions NextBank must satisfy. There can be no
assurance NextBank will satisfy these conditions and receive final approval from
the OCC. We have also filed, on behalf of NextBank, an application for federal
deposit insurance with the FDIC. If we are successful in obtaining a charter
from the OCC and federal deposit insurance from the FDIC, we intend to begin
originating NextCard accounts through NextBank and partially funding 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 will be
subject to the following 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.
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 the current and potential competitors
have greater financial resources and name recognition than we
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have. 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 BancOne and Providian Financial, 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 Citibank, Wells Fargo and Chase
Manhattan, 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.
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 TeleBank and Net.B@nk, 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,
BancOne, in partnership with Yahoo!, has introduced a Yahoo! branded credit
card and promoted that credit card on the Internet.
GOVERNMENT 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 Truth-in-Lending, Equal Credit Opportunity, Fair Credit
Reporting, Telemarketing and Consumer Fraud and Abuse Prevention, Electronic
Funds Transfer and Fair Debt Collection Practices Acts. 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 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 and other regulatory restructuring proposals.
There have also been proposals in state legislatures in recent years to restrict
telemarketing activities, impose statutory caps on consumer interest rates,
limit the use of social security numbers and expand consumer protection laws. 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
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be named as defendants in class action litigation alleging fraud or violations
of federal or state laws and regulations, including fraud. 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 Heritage, a
California bank. 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. However, with
respect to state chartered banks seeking to export interest rates, this act
provided that states could "opt out" of the reciprocity provisions. We have
determined not to offer the NextCard in any opt-out jurisdiction and other
select jurisdictions. We do not currently offer the NextCard in Alabama, Iowa,
Wisconsin and Puerto Rico.
We are not currently a regulated financial institution; however, we have
applied to the OCC for a charter for NextBank, a to-be-organized national bank
limited to credit card operations. In addition, we have applied for insurance of
deposit accounts for NextBank from the FDIC. Following the chartering of
NextBank, NextBank will commence the solicitation of deposits, in amounts of
$100,000 or more, and it, and to a lesser extent, we, will be subject to
regulations under federal and state banking laws and the supervision of the OCC
and the FDIC. These laws and supervision could have a material impact on our
operations including our credit and authentication policies, pricing and
products.
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 three patent applications pending in the
United States to protect certain proprietary systems 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 trademarks in the United States and our United States trademark for
"NextCard" has been issued. We cannot assure you that our patent applications or
trademark 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 March 31, 1999, we employed 135 people, of which 20 were in
marketing, 43 were in technology, 45 were in operations, 18 were in finance and
administration and 9 were in decision analytics. All but two of our employees as
of March 31, 1999 were located either in San Francisco or San Ramon, California.
None of our employees are 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 working environment for our employees.
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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 addition, we sublease approximately 7,000 square feet of
office space in San Ramon, California, where most of our operations and customer
service activities are located. That lease expires in 2001. We have entered into
a sublease for an additional 10,000 square feet of space in San Ramon,
California. That space is contiguous to our current space. The sublease also
expires in 2001. Our current facilities will not be sufficient to meet our
anticipated growth. As such, we will need to secure additional space to satisfy
this growth. 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 March 31, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeremy R. Lent(3)........... 38 Chairman of the Board, Chief Executive Officer and
President
Yinzi Cai................... 32 Senior Vice President, Decision Analytics
Timothy J. Coltrell......... 38 Chief Operating Officer
Olivia V. Dillan............ 41 Senior Vice President, Technology
John V. Hashman............. 39 Chief Financial Officer
Molly Lent.................. 53 Chief Corporate Development Officer
Robert Linderman............ 47 General Counsel and Secretary
Daniel D. Springer.......... 35 Chief Marketing Officer
Jeffrey D. Brody(1)......... 39 Director
Alan N. Colner(2)........... 44 Director
Tod H. Francis.............. 39 Director
Safi U. Qureshey(1)(2)...... 48 Director
Bruce G. Rigione(2)(3)...... 41 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.
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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Olivia V. Dillan has served as our Senior Vice President, Technology since
March 1999. From August 1998 to March 1999, Ms. Dillan served as Vice President,
Engineering, NetDynamics Business Unit, Java Software Division, for Sun
Microsystems, Inc. From March 1998 to August 1998, prior to the purchase of
NetDynamics, Inc. by Sun Microsystems, Ms. Dillan served as Vice President,
Engineering at NetDynamics. Prior to this position, from March 1997 to February
1998, Ms. Dillan was Vice President, Product Development at Pretty Good Privacy
Inc. From September 1996 to March 1997, she served as Vice President,
Engineering for Portal Information Network and from February to August 1996, she
served as Vice President, Product Development for Internet Profiles Corporation.
From April 1994 to February 1996, Ms. Dillan served as Vice President, New Media
Tools and Applications Division at Oracle Corporation. Ms. Dillan holds a B.A.
in Computer Science from Hunter College.
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.
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 a Director of NextCard since August 1997.
Mr. Brody has been employed by Brentwood Venture Capital since April 1994, and
has been a General Partner since October 1995. 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.
Tod H. Francis has served as a Director of NextCard 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 Computer Literacy, Inc. and the
boards of directors of several private companies.
Alan N. Colner has served as a Director of NextCard 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
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of Corporate Partners, a private equity fund affiliated with Lazard Freres & Co.
LLC. Mr. Colner also serves as a director of 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.
Safi U. Qureshey has served as a Director of NextCard 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.
Bruce G. Rigione has served as a Director of NextCard since March 1997. Mr.
Rigione has been a private consultant since January 1999. From April 1996 to
December 1998, Mr. Rigione 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.
BOARD COMMITTEES
The board of directors has a compensation committee, an audit committee and
a nominating committee.
Compensation Committee. The 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. The audit committee, among other things, makes
recommendations to the 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. The nominating committee screens and nominates
candidates for election to our board. The current members of the nominating
committee are Messrs. Lent and Rigione.
DIRECTOR COMPENSATION
Although we reimburse members of the 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
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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 such common
stock. The fee warrant continues to be outstanding. In March 1999, Mr. Qureshey
assigned 2,250 shares of such 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 such common stock. Effective as of January 20,
1999, Mr. Rigione entered into a Consulting Agreement with us under which he
will be paid $15,000 per month. Under the agreement, Mr. Rigione provides his
services on a full time and exclusive basis on projects associated with
securitization, international opportunities and other areas related to our
business. The agreement is terminable by either party upon 30 days' notice.
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 such
director's first board meeting with us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the board of directors or the
compensation committee and the board of directors or the compensation committee
of any other company, nor has any such interlocking relationship existed in the
past.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
Our Amended and Restated Bylaws further provide that we must indemnify our
directors and executive officers and may indemnify our other officers and
employees and agents to the fullest extent permitted by Delaware law. We
currently maintain liability insurance for our officers and directors.
We have entered into indemnification agreements with each of our directors
and officers. These agreements require us, among other things, to indemnify such
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, penalties and settlement amounts incurred by any such person
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 person's services as a director or officer. In addition, our board of
directors has approved a proposal to purchase up to $25 million in directors'
and officers' liability insurance coverage.
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 such indemnification.
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<PAGE> 56
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 $100,000 in 1998 and
were serving as executive officers at the end of 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- --------- -------- ----------
<S> <C> <C> <C>
Jeremy R. Lent.......................................... $209,375 $175,000 1,350,000
Chairman, Chief Executive Officer and President
Yinzi Cai............................................... 105,125 50,000 171,000
Senior Vice President, Decision Analytics
Timothy J. Coltrell..................................... 129,167 50,000 --
Chief Operating Officer
John V. Hashman......................................... 115,000 50,000 225,000
Chief Financial Officer
Daniel D. Springer...................................... 113,650 50,000 562,500
Chief Marketing Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to our Chief
Executive Officer and each of our four other most highly compensated executive
officers for the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------
NAME GRANTED(1) FISCAL YEAR(2) PER 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 such option vests as follows: 1/4 of the shares of common stock
underlying such 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 such shares vests each month thereafter, such that 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 certain
performance based vesting conditions. Such 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 the common stock on the date of grant as determined by the board of
directors. The exercise price may be paid in cash, in shares of our common
stock valued at the full market value of such 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
52
<PAGE> 57
value at 5% and 10% appreciation is calculated by assuming that the exercise
price on the date of grant appreciates at the indicated rate for the entire
term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price.
FISCAL YEAR END-OPTION VALUES
The following table sets forth, for our Chief Executive Officer and each of
our four other most highly compensated executive officers, the number and value
of securities underlying options that were held by such executive officers as of
December 31, 1998. No options were exercised by such 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)
---------------------- --------------------------
NAME 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. The goals for
1999 have not yet been established. 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.
53
<PAGE> 58
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 such 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);
- nonstatutory 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 the board of directors or a
committee designated by the board. It will terminate in April 2007.
As of March 31, 1999, the plan authorized the issuance of up to 12,375,000
shares of common stock. As of March 31, 1999, options to purchase 8,354,137
shares were outstanding, no shares of restricted stock were outstanding, and
3,983,365 shares remained available for future grants. As of March 31, 1999,
options to purchase an aggregate of 37,498 shares of common stock had been
exercised.
The plan administrator has discretion, within the limits of the plan, to
select optionees and to determine the number of shares to be subject to each
option and the exercise price and vesting schedule of each option. The exercise
price of incentive stock options granted under the plan must at least be equal
to the fair market value per share of the common stock on the date of grant and
the exercise price of nonstatutory stock options granted under the plan must be
greater than or equal to 85% of the fair market value per share of the common
stock on the date of the grant. With respect to any participant who is a 10%
stockholder, the per share exercise price of any stock option granted under the
plan must equal at least 110% of the fair market value of the common stock on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the plan may not exceed ten years.
54
<PAGE> 59
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 will commence on the effectiveness of this offering and
end 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 the 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 will be the initial public offering price.
55
<PAGE> 60
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 such 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 biannually over a four-year period. Vesting of
such shares may be accelerated under certain circumstances. See
"Management -- Executive Compensation -- Lent Employment Agreement." As of March
31, 1999, 815,625 shares remained subject to such 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 such shares vested on September 18, 1996 and the
remaining shares vest biannually over a four-year period. As of March 31, 1999,
159,469 shares remained subject to such 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
such shares of Series A Preferred Stock and matures in March 2000. The aggregate
balance due as of March 31, 1999 was $26,280.
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 will be paid $15,000
per month. The agreement is terminable by either party upon 30 days' notice.
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."
The following table summarizes the shares of preferred stock purchased by
our directors and 5% stockholders, and persons and entities associated with
them, in private placement transactions. Each share of Series A, Series B-1,
Series C-1 and Series D-1 Preferred Stock automatically converts into one share
of voting common stock, and each share of Series B-2, Series C-2 and Series D-2
Preferred Stock automatically converts into one share of non-voting common
stock, upon the closing of this offering. We sold our preferred stock for the
following per share prices on the following dates: Series A Preferred
Stock -- $0.44 per share, December 1996 - March 1997; Series B-1 and B-2
Preferred Stock -- $0.56 per share, August -- September 1997; Series C-1 and C-2
Preferred
56
<PAGE> 61
Stock -- $1.29 per share, May -- June 1998; and Series D-1 and D-2 Preferred
Stock -- $2.67 per share, November 1998.
<TABLE>
<CAPTION>
SERIES B-1 AND SERIES C-1 AND SERIES D-1 AND
SERIES A SERIES B-2 SERIES C-2 SERIES D-2
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
ENTITIES ASSOCIATED WITH
DIRECTORS(1)
Entities associated with
Brentwood Venture Capital
(Jeffrey D. Brody)............ -- 4,680,000 1,212,287 1,867,824
Entities associated with Moore
Capital Management (Alan N.
Colner)....................... -- -- -- 3,749,999
Entities associates with Trinity
Ventures (Tod H. Francis)..... -- -- 2,327,589 427,500
Safi U. Qureshey(2)............. 225,000 306,000 209,484 205,277
Bruce G. Rigione................ 112,500 225,000 163,112 193,608
OTHER 5% STOCKHOLDERS(1)
Forrest, Binkley & Brown........ -- -- 2,288,790 506,250
Kleiner Perkins Caufield & Byers
VIII, L.P..................... -- -- -- 3,000,002
Entities associated with St.
Paul Venture Capital.......... -- -- 2,288,790 431,073
Entities associated with Sequoia
Capital....................... -- -- -- 1,875,002
</TABLE>
- ------------
(1) See "Principal Stockholders" for a summary of the affiliations of each of
the persons and entities described above.
(2) Includes 34,758 shares held by Wasi Qureshey, a brother of Mr. Qureshey, and
34,758 shares held by Lubna Bokhari, a sister of Mr. Qureshey.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 1999 as adjusted to reflect the
conversion of all outstanding shares of preferred stock into common stock
(including nonvoting common stock) 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 common stock (including nonvoting common stock);
- each of our directors;
- our Chief Executive Officer and each of our four other most highly
compensated executive officers for the year ended December 31, 1998; and
- all of our directors and executive officers as a group (13 persons).
Except as otherwise indicated by footnote, and subject to community property
laws where applicable, the named person has sole voting and investment power
with respect to all of the shares of common stock shown as beneficially owned.
An asterisk indicates beneficial ownership of less than 1% of the common stock
(including nonvoting common stock) outstanding. The percentages shown assume
that the underwriters' option to purchase up to an additional 750,000 shares of
common stock is not exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF NUMBER OF -----------------------------------
BENEFICIAL OWNER SHARES PRIOR TO OFFERING AFTER OFFERING
------------------- --------- ----------------- --------------
<S> <C> <C> <C>
Entities associated with Brentwood Venture
Capital(2)................................... 7,760,111 20.6% 18.2%
3000 Sand Hill Road,
Building 1, Suite 260,
Menlo Park, CA 94025
Entities associated with Moore Capital
Management, Inc.(3).......................... 3,749,999 10.0 8.8
1251 Avenue of the Americas,
New York, NY 10020
Entities associated with Kleiner Perkins
Caufield & Byers(4).......................... 3,000,002 8.0 7.0
2750 Sand Hill Road
Menlo Park, CA 94025
Entity associated with Forrest Binkley &
Brown(5)..................................... 2,795,040 7.4 6.6
800 Newport Center Drive
Suite 725
Newport Beach, CA 92660
Entities associated with Trinity Ventures(6)... 2,755,089 7.3 6.5
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Entities associated with St. Paul Venture
Capital(7)................................... 2,719,863 7.2 6.4
8500 Normandale Lake Blvd.
Suite 1940
St. Paul, MN 55437
Entities associated with Sequoia Capital(8).... 1,875,002 5.0 4.4
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Jeffrey D. Brody(2)............................ 7,782,611 20.7 18.2
</TABLE>
58
<PAGE> 63
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF NUMBER OF -----------------------------------
BENEFICIAL OWNER SHARES PRIOR TO OFFERING AFTER OFFERING
------------------- --------- ----------------- --------------
<S> <C> <C> <C>
Alan N. Colner(3).............................. 3,755,624 10.0 8.8
Tod H. Francis(6).............................. 2,766,339 7.3 6.5
Safi U. Qureshey(9)............................ 981,401 2.6 2.3
Bruce G. Rigione(10)........................... 719,532 1.9 1.7
Jeremy R. Lent and Molly Lent(11).............. 4,103,262 10.9 9.6
Yinzi Cai(12).................................. 86,625 *
Timothy J. Coltrell(13)........................ 919,967 2.4 2.2
John V. Hashman(14)............................ 213,287 *
Daniel D. Springer(15)......................... 111,564 *
All directors and executive Officers as a
Group (13 persons)........................... -- 57.3% 50.6%
</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 March 31, 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 such 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." 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 22,500 shares
issuable upon exercise of an option that vests within 60 days of March 31,
1999.
(3) Includes 2,002,649 shares of Series D-1 Preferred Stock and 1,072,350
shares of Series D-2 Preferred Stock held by Moore Global Investments, Ltd.
("MGI"), and 675,000 shares of Series D-1 Preferred Stock held by Remington
Investment Strategies, Ltd. ("RIS"). Moore Capital Management, Inc., a
Connecticut corporation, is vested with investment discretion with respect
to portfolio assets held for the account of MGI. Moore Capital Advisors,
L.L.C., a New York limited liability company, is the sole general partner
of RIS. 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 such shares, may be deemed to be the beneficial owner of the
aggregate shares held by MGI and RIS. Alan Colner is a Managing Director,
Private Equity Investments, at Moore Capital Management, Inc., which is the
trading advisor of MGI. 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 MGI or RIS, and disclaims beneficial ownership of such
shares. The address of Moore Capital Management, Inc. is 1251 Avenue of the
Americas, New York, NY 10020. Amount shown for Mr. Colner includes 11,250
shares issuable upon exercise of an option that vests within 60 days of
March 31, 1999.
(4) 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.
(5) Such shares are held of record by Mesquite Transaction Partners, L.P.
(6) 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. 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 5,625 shares issuable upon exercise of an option
that vests within 60 days of March 31, 1999.
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<PAGE> 64
(7) Represents 74,795 shares held by St. Paul Venture Capital Affiliates Fund
I, LLC and 2,645,069 shares held by St. Paul Venture Capital IV, LLC.
(8) 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.
(9) Includes 57,177 shares issuable upon exercise of a warrant and 47,979
shares issuable upon exercise of an option that vests within 60 days of
March 31, 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.
(10) Includes 25,313 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
(11) Includes 65,628 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
(12) Represents 86,625 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
(13) Includes 419,342 shares issuable upon exercise of options that vest within
60 days of March 31, 1999.
(14) Represents 213,287 shares issuable upon exercise of options that vest
within 60 days of March 31, 1999.
(15) Represents 111,564 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
60
<PAGE> 65
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 March 31,
1999, 5,041,287 shares of common stock were issued and outstanding, no shares of
nonvoting common stock were issued and outstanding and 7,250,163 shares of
preferred stock, convertible into 32,625,734 shares of common stock or nonvoting
common stock upon the completion of the offering, were issued and outstanding.
As of March 31, 1999, we had 64 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 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 after the offering may be entitled, holders of the common stock are
entitled to receive ratably such dividends and other distributions, if any, that
the 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 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 9.999% 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 difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a
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<PAGE> 66
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
WARRANTS
Upon completion of the offering, we will have outstanding warrants to
acquire 1,308,749 shares of common stock, at a weighted average exercise price
of $0.88 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 two
years from the closing of this offering to May 2003. In addition, in connection
with the April 1999 increase in our line of credit with a finance company from
$5,000,000 to $10,000,000, we will issue additional common stock warrants on May
31, 1999 with an aggregate exercise price of $600,000. The exercise price per
share of the warrants will be 70% of the initial public offering price of our
shares.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
We have adopted provisions in an 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 NextCard 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 board into three classes so that only one-third of the board
members 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 resulting from increases in the size
of the board or from death, resignation, retirement or removal may only
be filled by the board; and
- permit the board of directors to create one or more series of preferred
stock and to issue the shares thereof.
These provisions could adversely affect the rights of the holders of 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 the 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, such
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. Such provisions also may have the effect of preventing
changes in our management.
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<PAGE> 67
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 such
stockholder became an interested stockholder, unless:
- prior to such date, 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 such date, the business combination is approved by
the 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
After this offering, the holders of 76.47% of the aggregate outstanding
shares of common stock and nonvoting common stock will be entitled to certain
demand registration rights with respect to the registration of such shares under
the Securities Act. Under the terms of our Third Amended and Restated Investors'
Rights Agreement, we are not required to effect more than three such
registrations pursuant to such demand rights; further, the demand registration
rights expire on the six-month anniversary of the closing of the offering. In
the event that we propose to register any of our securities under the Securities
Act, the holders of shares entitled to "piggyback" registration rights are
entitled to receive notice of such registration and, subject to certain
limitations, include their shares therein.
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 such registration statement in any 12-month period.
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 share of
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<PAGE> 68
common stock held by stockholders with registration rights to be included in
such registration statement. We are generally required to bear all expenses
associated with such 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 the common stock is BankBoston, N.A.
EquiServe L.P.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering (assuming no exercise of the underwriters'
overallotment option), we will have an aggregate of 42,667,021 shares of common
stock and nonvoting common stock outstanding, assuming no exercise of options or
warrants. Of these shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, except that any shares held by our affiliates, as that term is defined
under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 37,667,021 shares of common stock and nonvoting common stock
are deemed restricted shares under Rule 144. Sale in the public market of these
restricted shares is limited by restrictions under the Securities Act and
lock-up agreements or similar arrangements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. On the date of
this prospectus, no shares other than the 5,000,000 shares offered hereby will
be eligible for sale in the public market. Beginning 180 days after the date of
this prospectus, or earlier with the consent of Donaldson, Lufkin & Jenrette
Securities Corporation, 37,667,021 restricted shares will become available for
sale in the public market, subject to certain limitations of Rule 144 of the
Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the then-outstanding shares of our common stock (approximately 426,670 shares
after giving effect to this offering) and the average weekly trading volume of
our common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 of the Securities Act are subject to
certain restrictions relating to manner of sale, notice and the availability of
current public information about us. A person who is not our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least two years, would be entitled to sell such shares immediately
following this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent may require an opinion of counsel that a proposed
sale of shares comes within the terms of Rule 144 of the Securities Act prior to
effecting a transfer of such shares.
Prior to this offering, there has been no public market for our common
stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
OPTIONS
As of March 31, 1999, options to purchase a total of 1,332,464 shares of
common stock pursuant to the 1997 Stock Plan were exercisable. All of the shares
subject to options are subject to lock-up agreements or similar arrangements.
See "Lock-up Agreements." An additional 3,983,365 shares of common stock were
reserved as of March 31, 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> 70
We intend to file a registration statement on Form S-8 under the Securities
Act to register all shares of common stock subject to outstanding stock options
and common stock issued or issuable under our 1997 Stock Plan and our 1999
Employee Stock Purchase Plan. We expect to file such a registration statement
shortly after the closing of this offering. Such registration statement is
expected to become effective upon filing. Shares covered by this registration
statement will thereupon be eligible for sale in the public markets, subject to
the lock-up agreements.
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<PAGE> 71
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement, the underwriters named below, for whom Donaldson, Lufkin & Jenrette
Securities Corporation, Thomas Weisel Partners LLC and U.S. Bancorp Piper
Jaffray Inc. are acting as representatives, have severally agreed to purchase,
and NextCard has agreed to sell to them, severally, the respective number of
shares of common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS: SHARES
- ------------- ------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
--------
Total.............................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from NextCard and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
An electronic prospectus is available on the website maintained by
DLJdirect Inc., a selected dealer and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. The underwriters have agreed to allocate a
limited number of shares to DLJdirect Inc. for sale to its brokerage account
holders.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to an aggregate of 750,000
additional shares of common stock at the initial public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of common stock offered hereby. To the extent such option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of common
stock as the number set forth next to such underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to the
names of all underwriters in the preceding table. If the underwriters' option is
exercised in full, the total price to the public for this offering would be
$103.5 million, the total underwriters' discounts and commissions would be $7.2
million and the net total proceeds to NextCard would be $95.0 million.
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<PAGE> 72
The underwriters have informed us that each principal underwriter in this
offering may, subject to the approval of Donaldson, Lufkin & Jenrette Securities
Corporation, sell to discretionary accounts over which such principal
underwriter executes discretionary authority. The underwriters have further
informed us that they estimate that such will not exceed five percent of the
total number of shares of common stock offered by them.
NextCard has applied to list the common stock on the Nasdaq National Market
under the symbol "NXCD."
At the request of NextCard, the underwriters will reserve up to 500,000
shares of common stock to be issued by NextCard and offered hereby for sale, at
the initial public offering price, to directors, officers, employees, business
associates and related persons of NextCard. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
NextCard, our directors, executive officers, and certain other stockholders
and optionholders have each agreed that, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
underwriters, he, she or it will not, during the period ending 180 days after
the date of this prospectus:
- 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, lend 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
- enter into any swap or similar arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
The restrictions described in the previous paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by NextCard of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than NextCard relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
- the granting of stock options pursuant to existing NextCard employee
benefit plans, provided that such options do not become exercisable and
such options do not vest during such 180-day period; and
- certain gifts, distributions or transfers to trusts, provided that
transferees in transactions described in this clause enter into lock-up
agreements similar to those described in the previous paragraph.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the 5,000,000 shares of common stock NextCard has agreed
to sell them. This over-allotment would create a short position in the common
stock for the underwriters' account. To cover any over-allotments or to
stabilize the price of the
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<PAGE> 73
common stock, the underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above interdependent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
NextCard and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Thomas Weisel Partners LLC 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 32 filed public offerings of equity securities, of
which 8 have been completed, and has acted as a syndicate member in an
additional 10 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 Series D-1 Preferred Stock, which will be converted into common stock upon
completion of this offering. Mr. Lieberman's shares are restricted from sale,
transfer, assignment or hypothecation for one year following the effective date
of this offering.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
our common stock or any other of our securities. The initial public offering
price for the shares of common stock was determined by negotiations between the
representatives and us. Among the factors considered in determining the initial
public offering price were our future prospects and our industry in general,
sales, earnings and certain other financial and operating information of about
us in recent periods, and the price-earnings ratios, price-sales ratios, market
prices of securities and certain financial and operating information of
companies engaged in activities similar to ours.
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 a warrant to
purchase 4,500 shares of NextCard's common stock at an exercise price of $0.44
per share. Certain federal bank regulatory legal matters in connection with this
offering will be passed upon for NextCard by Sidley & Austin, Washington, D.C.,
which has acted as our special federal bank regulatory counsel in connection
with this offering. Certain legal matters in connection with this offering will
be passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Menlo Park, California.
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
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<PAGE> 74
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 have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock being offered. 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.
Copies of the registration statement 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, and the Securities and Exchange
Commission's Regional Offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any portion of the registration
statement 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. The Securities and Exchange Commission
maintains a website that contains registration statements, reports, proxy and
information statements and other information regarding registrants (including
us) that file electronically. The address of such website is http://www.sec.gov.
We intend to distribute annual reports containing audited financial
statements and will make copies of quarterly reports available for the first
three quarters of each fiscal year containing unaudited interim financial
statements.
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<PAGE> 75
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 March 31, 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 three months ended
March 31, 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 three months ended March 31, 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 three months ended
March 31, 1998 and 1999 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 76
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.
San Francisco, California
February 5, 1999, except as to Note 4,
and Note 11
as to which the date is
May XX, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
restatement of capital accounts described in Note 11 to the consolidated
financial statements.
ERNST & YOUNG LLP
San Francisco, California
May 10, 1999
F-2
<PAGE> 77
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
---- ---- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,840,267 $ 40,134,274 $ 25,455,951
Credit card loans receivable less allowance for loan losses
of $994,608 at March 31, 1999............................. -- -- 67,357,516
Receivable from third-party processor....................... 500,000 -- --
Servicing and profit-sharing receivable..................... -- 965,825 --
Prepaid loan fees........................................... -- 2,100,000 4,011,000
Equipment and leasehold improvements, net................... 293,298 2,102,647 3,358,020
Prepaid and other assets.................................... 54,184 239,666 1,088,765
----------- ------------ ------------
Total assets................................................ $ 3,687,749 $ 45,542,412 $101,271,252
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 134,701 $ 3,366,350 $ 2,721,119
Due to Heritage............................................. -- -- 3,599,057
Accrued expenses............................................ 266,401 1,242,238 1,421,499
Equipment loan.............................................. -- 504,101 1,156,669
Other borrowings............................................ -- -- 5,000,000
Deferred revenue............................................ 500,000 493,119 488,614
Secured borrowings.......................................... -- -- 54,069,349
----------- ------------ ------------
Total liabilities........................................... 901,102 5,605,808 68,456,307
Shareholders' equity:
Convertible preferred stock, Series A, $0.001 par value
(2,756,250 shares authorized, issued and outstanding at
December 31, 1997; 2,735,154 shares authorized, issued
and outstanding at December 31, 1998 and March 31,
1999), net of costs of issuance. Liquidation preference:
$1,225,000 at December 31, 1997 and $1,215,624 at
December 31, 1998 and March 31, 1999.................... 2,756 2,735 2,735 $ --
Convertible preferred stock, Series B, $0.001 par value
(authorized 7,200,000 shares at December 31, 1997;
7,996,500 shares authorized at December 31, 1998 and
March 31, 1999; issued and outstanding 6,354,000 shares
at December 31, 1997 and 1998 and March 31, 1999), net
of costs of issuance. Liquidation preference: $3,530,000
at December 31, 1997 and 1998 and March 31, 1999........ 6,354 6,354 6,354 --
Convertible preferred stock, Series C, $0.001 par value
(authorized 9,621,455 shares at December 31, 1998 and
March 31, 1999; issued and outstanding 9,132,660 shares
at December 31, 1998 and March 31, 1999), net of costs
of issuance. Liquidation preference: $11,770,984 at
December 31, 1998 and March 31, 1999.................... -- 9,133 9,133 --
Convertible preferred stock, Series D, $0.001 par value
(authorized 20,250,000 shares at December 31, 1998 and
March 31, 1999; issued and outstanding 14,403,920 shares
at December 31, 1998 and March 31, 1999), net of costs
of issuance. Liquidation preference: $38,410,452 at
December 31, 1998 and March 31, 1999.................... -- 14,404 14,404 --
Common stock, $0.001 par value (authorized 90,000,000
shares at December 31, 1997 and 62,896,892 shares at
December 31, 1998 and March 31, 1999; issued and
outstanding 4,894,875, 4,932,374 and 5,041,287 shares at
December 31, 1997 and 1998 and March 31, 1999).......... 4,895 4,932 5,041 37,667
Additional paid-in capital................................ 4,694,590 63,875,162 77,069,796 77,069,796
Deferred stock compensation............................... -- (6,000,000) (15,334,308) (15,334,308)
Notes receivable from shareholders........................ (35,654) (26,280) (26,280) (26,280)
Accumulated deficit....................................... (1,886,294) (17,949,836) (28,931,930) (28,931,930)
----------- ------------ ------------ ------------
Total shareholders' equity.................................. 2,786,647 39,936,604 32,814,945 $ 32,814,945
----------- ------------ ------------ ============
Total liabilities and shareholders' equity.................. $ 3,687,749 $ 45,542,412 $101,271,252
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 78
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Cash and investments.................... $ 92,726 $ 501,879 $ 32,863 $ 280,177
Credit card loans....................... -- -- -- 379,570
----------- ------------ ----------- ------------
Total interest income..................... 92,726 501,879 32,863 659,747
Interest expense.......................... -- 61,574 -- 647,053
----------- ------------ ----------- ------------
Net interest income....................... 92,726 440,305 32,863 12,694
Provision for loan losses................. -- -- -- 994,608
----------- ------------ ----------- ------------
Net interest income (loss) after provision
for loan losses......................... 92,726 440,305 32,863 (981,914)
Non-interest income:
Servicing and profit and loss sharing... -- 661,825 34,252 204,344
Interchange fee......................... -- -- -- 95,691
Credit card fees and other.............. -- 34,968 -- 43,092
----------- ------------ ----------- ------------
Total non-interest income................. -- 696,793 34,252 343,127
Non-interest expenses:
Salaries and employee benefits.......... 1,495,155 6,730,079 789,183 3,309,175
Marketing and advertising............... 49,656 4,324,638 208,610 2,554,756
Credit card activation and servicing
costs................................ 799 2,327,646 51,919 1,521,732
Occupancy and equipment................. 137,141 958,074 115,455 551,985
Professional fees....................... 167,608 519,737 40,846 255,155
Amortization of deferred compensation... -- 1,800,000 164,000 1,365,692
Amortization of loan structuring fee.... -- -- -- 568,379
Other................................... 127,061 538,866 70,729 216,433
----------- ------------ ----------- ------------
Total non-interest expenses............... 1,977,420 17,199,040 1,440,742 10,343,307
Loss before income taxes.................. (1,884,694) (16,061,942) (1,373,627) (10,982,094)
Provision for income taxes................ 1,600 1,600 -- --
----------- ------------ ----------- ------------
Net loss.................................. $(1,886,294) $(16,063,542) $(1,373,627) $(10,982,094)
=========== ============ =========== ============
Basic and diluted net loss per common
share................................... $ (1.08) $ (5.07) $ (0.48) $ (2.84)
=========== ============ =========== ============
Weighted average common shares used in net
loss per common share calculation....... 1,746,864 3,166,317 2,891,142 3,866,963
=========== ============ =========== ============
Pro forma basic and diluted net loss per
common share (unaudited, see Notes 2 and
11)..................................... $ (0.30)
============
Weighted average common shares used in
computing pro forma basic and diluted
net loss per common share (unaudited,
see Notes 2 and 11)..................... 36,492,697
============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 79
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK SERIES A-D COMMON STOCK ADDITIONAL NOTES
---------------------- -------------------- PAID-IN DEFERRED STOCK RECEIVABLE FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS
----------- -------- ---------- ------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuances of common
stock............... -- $ -- 6,772,500 $6,773 $ 8,327 $ -- $ --
Issuances of
convertible
preferred stock
Series A............ 2,756,250 2,756 -- -- 1,201,858 -- (35,654)
Issuances of
convertible
preferred stock
Series B............ 6,354,000 6,354 -- -- 3,488,072 -- --
Return of common
stock............... -- -- (630,000) (630) 630 -- --
Repurchase of common
stock............... -- -- (1,247,625) (1,248) (4,297) -- --
Net loss from
inception to
December 31, 1997... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ------------ --------
Balances at December
31, 1997............ 9,110,250 9,110 4,894,875 4,895 4,694,590 -- (35,654)
Issuances of
convertible
preferred stock
Series C............ 9,132,660 9,133 -- -- 11,662,213 -- --
Issuances of
convertible
preferred stock
Series D............ 14,403,920 14,404 -- -- 38,350,957 -- --
Issuances of common
stock upon exercise
of stock options.... -- -- 37,499 37 1,755 -- --
Issuance of preferred
stock warrants...... -- -- -- -- 1,375,000 -- --
Return of convertible
preferred stock
Series A in
settlement of notes
receivable.......... (21,096) (21) -- -- (9,353) -- 9,374
Deferred stock
compensation........ -- -- -- -- 7,800,000 (7,800,000) --
Amortization of
deferred stock
compensation........ -- -- -- -- -- 1,800,000 --
Net loss.............. -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ------------ --------
Balances at December
31, 1998............ 32,625,734 32,626 4,932,374 4,932 63,875,162 (6,000,000) (26,280)
Issuances of common
stock upon exercise
of warrants
(unaudited)......... -- -- 108,913 109 58,634 -- --
Issuances of preferred
stock warrants
(unaudited)......... -- -- -- -- 2,436,000 -- --
Deferred stock
compensation
(unaudited)......... -- -- -- -- 10,700,000 (10,700,000) --
Amortization of
deferred stock
compensation
(unaudited)......... -- -- -- -- -- 1,365,692 --
Net loss
(unaudited)......... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ------------ --------
Balances at March 31,
1999 (unaudited).... 32,625,734 $32,626 5,041,287 $5,041 $77,069,796 $(15,334,308) $(26,280)
========== ======= ========== ======= =========== ============ ========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Issuances of common
stock............... $ -- $ 15,100
Issuances of
convertible
preferred stock
Series A............ -- 1,168,960
Issuances of
convertible
preferred stock
Series B............ -- 3,494,426
Return of common
stock............... -- --
Repurchase of common
stock............... -- (5,545)
Net loss from
inception to
December 31, 1997... (1,886,294) (1,886,294)
------------ ------------
Balances at December
31, 1997............ (1,886,294) 2,786,647
Issuances of
convertible
preferred stock
Series C............ -- 11,671,346
Issuances of
convertible
preferred stock
Series D............ -- 38,365,361
Issuances of common
stock upon exercise
of stock options.... -- 1,792
Issuance of preferred
stock warrants...... -- 1,375,000
Return of convertible
preferred stock
Series A in
settlement of notes
receivable.......... -- --
Deferred stock
compensation........ -- --
Amortization of
deferred stock
compensation........ -- 1,800,000
Net loss.............. (16,063,542) (16,063,542)
------------ ------------
Balances at December
31, 1998............ (17,949,836) 39,936,604
Issuances of common
stock upon exercise
of warrants
(unaudited)......... -- 58,743
Issuances of preferred
stock warrants
(unaudited)......... -- 2,436,000
Deferred stock
compensation
(unaudited)......... -- --
Amortization of
deferred stock
compensation
(unaudited)......... -- 1,365,692
Net loss
(unaudited)......... (10,982,094) (10,982,094)
------------ ------------
Balances at March 31,
1999 (unaudited).... $(28,931,930) $ 32,814,945
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 80
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $(1,886,294) $(16,063,542) $(1,373,627) $(10,982,094)
Adjustments to net loss to arrive at cash used
in operating activities:
Provision for loan losses.................... -- -- -- 994,608
Depreciation and amortization................ 15,500 250,512 19,987 704,071
Amortization of deferred stock
compensation............................... -- 1,800,000 164,000 1,365,692
Changes in operating assets and liabilities:
(Increase) decrease in servicing and profit
and loss sharing receivable............. -- (965,825) -- 965,825
Decrease in receivable from third party
processor............................... -- 500,000 500,000 --
Increase (decrease) in accounts payable.... 134,701 3,231,649 (64,151) (645,231)
Increase (decrease) in accrued expenses.... 266,401 968,956 (139,589) 179,261
(Increase) decrease in prepaid and other
assets.................................. (54,184) (910,482) 27,175 (853,604)
----------- ------------ ----------- ------------
Net cash used in operating activities.......... (1,523,876) (11,188,732) (866,205) (8,271,472)
INVESTING ACTIVITIES
Net loans originated or collected.............. -- -- -- (68,352,124)
Change in due to Heritage...................... -- -- -- 3,599,057
Purchase of equipment and leasehold
improvements................................. (308,798) (2,059,861) (144,486) (1,434,443)
----------- ------------ ----------- ------------
Net cash used in investing activities.......... (308,798) (2,059,861) (144,486) (66,187,510)
FINANCING ACTIVITIES
Net change in secured borrowings............... -- -- -- 54,069,349
Proceeds from other borrowings................. -- -- -- 5,000,000
Proceeds from issuances of convertible
preferred stock.............................. 4,663,386 50,036,707 -- --
Proceeds from issuances of common stock........ 9,555 1,792 -- 58,743
Proceeds from equipment loan................... -- 545,545 -- 692,795
Payments made on equipment loan................ -- (41,444) -- (40,228)
----------- ------------ ----------- ------------
Net cash provided by financing activities...... 4,672,941 50,542,600 -- 59,780,659
Net increase (decrease) in cash and cash
equivalents.................................. 2,840,267 37,294,007 (1,010,691) (14,678,323)
Cash and cash equivalents at the beginning of
period....................................... -- 2,840,267 2,840,267 40,134,274
----------- ------------ ----------- ------------
Cash and cash equivalents at the end of
period....................................... $ 2,840,267 $ 40,134,274 $ 1,829,576 $ 25,455,951
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest and
taxes...................................... $ 1,800 $ 23,300 -- $ 639,930
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Unearned stock based compensation............ -- $ 7,800,000 -- $ 10,700,000
Issuance of preferred stock warrants for loan
structuring/origination fee................ -- $ 1,375,000 -- $ 2,436,000
Issuance/return of convertible preferred
stock Series A............................. $ 35,654 $ 9,374 -- --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 81
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 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 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 VISA, which are issued 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 product
solely through the Internet and provides online approval and customized 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.
NextCard has experienced operating losses to date and had an accumulated
deficit at December 31, 1998. Increasing and significant net losses are expected
for the foreseeable future. Since its formation, NextCard has raised significant
capital through private placements of equity securities. At December 31, 1998,
NextCard had $40.1 million in cash and cash equivalents. 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. Failure by NextCard
to raise additional funding when needed could have a material adverse effect on
its business, results of operations and financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include NextCard, Inc. and its wholly
owned subsidiary, NextCard Funding Corp. ("NC Funding"). All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior year financial statements to conform
to the 1998 presentation.
INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of March 31, 1999 and the
consolidated statements of operations and cash flows for the three months ended
March 31, 1999 and 1998 and the consolidated statement of changes in
shareholders' equity for the three months ended March 31, 1999 are unaudited. In
the opinion of management, these 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
F-7
<PAGE> 82
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL INFORMATION (CONTINUED)
the consolidated financial statements for these periods is also unaudited. The
consolidated statement of operations and cash flows for the interim period are
not necessarily indicative of the results to be expected for any other interim
future 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 a high credit quality financial
institution. Balances in NextCard's cash accounts exceed the Federal Deposit
Insurance Corporation (FDIC) limits 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, 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 immediately upon formal notification of
bankruptcy. As of March 31, 1999, NextCard has had no charge-off activity.
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.
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-8
<PAGE> 83
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF 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" ("FAS 130") at December 31, 1998. Under FAS
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, FAS 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-9
<PAGE> 84
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF 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" ("FAS 131"), which is effective for
financial statements for periods beginning after December 15, 1997. FAS 131
establishes standards for the way that public business enterprises report
financial and descriptive information about reportable operating segments in
annual financial statements and interim reporting to shareholders. NextCard
adopted FAS 131 in 1998. NextCard has determined that 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 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. These estimates are based on
information available as of the date of the consolidated financial statements;
therefore, actual results could differ from those estimates, although management
does not believe that any differences would materially affect NextCard's
consolidated financial position or results of operations.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 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" ("FAS 128"), for all periods presented. In accordance
with FAS 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 share). Pro forma basic and
diluted net loss per common share, as presented in the consolidated statements
of operations, has been computed for the year ended December 31, 1998 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-10
<PAGE> 85
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma (See Note 11) basic and diluted net loss per common share:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, --------------------------
-------------------------- MARCH 31, MARCH 31,
1997 1998 1998 1999
---- ---- ----------- ------------
<S> <C> <C> <C> <C>
Net loss.......................... $(1,886,294) $(16,063,542) $(1,373,627) $(10,982,094)
=========== ============ =========== ============
Basic and diluted:
Weighted-average shares of
common stock outstanding..... 5,241,902 4,906,935 4,894,875 4,957,835
Less: Weighted-average shares
subject to repurchase........ (3,495,038) (1,740,618) (2,003,733) (1,090,872)
----------- ------------ ----------- ------------
Weighted-average shares used in
computing basic and diluted
net loss per common share.... 1,746,864 3,166,317 2,891,142 3,866,963
=========== ============ =========== ============
Basic and diluted net loss per
share........................... $ (1.08) $ (5.07) $ (0.48) $ (2.84)
=========== ============ =========== ============
Pro forma (See Note 11):
Net loss........................ $(10,982,094)
============
Shares used above............... 3,866,963
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible
preferred stock
(unaudited).................. 32,625,734
------------
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited).................. 36,492,697
============
Pro forma basic and diluted net
loss per common share
(unaudited).................. $ (0.30)
============
</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, 15,637,883 and 43,203,727 for the period from inception to December
31, 1997, for the year ended December 31, 1998 and for the three months ended
March 31, 1998 and 1999 respectively. Such securities, had
F-11
<PAGE> 86
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF 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" ("FAS
No. 133"), which is effective for financial statements for fiscal years
beginning after June 15, 1999. FAS No. 133 will require NextCard to record all
derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of accumulated
comprehensive income in shareholders' equity until the hedged transactions occur
and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
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 FAS No. 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:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment.......................................... $262,121 $1,360,293
Furniture and office equipment.............................. 32,897 490,692
Leasehold improvements...................................... 13,780 517,674
-------- ----------
308,798 2,368,659
Less: Accumulated depreciation and amortization............. 15,500 266,012
-------- ----------
$293,298 $2,102,647
======== ==========
</TABLE>
4. CREDIT FACILITIES
During 1998, NextCard entered into a $1,250,000 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. NextCard's ability to borrow under this
agreement expires on May 31, 1999. The loan had an outstanding balance of
$504,101 at December 31, 1998. This loan matures in installments in the
following years: 1999 -- $147,496; 2000 -- $159,026; 2001 -- $171,457; and
2002 -- $26,122.
F-12
<PAGE> 87
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 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 finance 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 1999, NextCard entered into a $5.0 million line of credit with
a finance company. Borrowings under the line of credit accrue interest at 12.25%
per year, are repayable in 36 monthly installments of principal and interest
through February 2002 and are secured by a subordinated security interest in all
tangible and intangible assets.
5. SECURED BORROWING
On December 29, 1998, NextCard operating through a wholly owned,
bankruptcy-remote, special purpose subsidiary, NC Funding, executed a $100
million secured borrowing facility (the "revolving credit facility") with an
investment banking company ("the bank"). The revolving credit facility will be
secured by credit card receivables which may be purchased using the revolving
credit facility's proceeds. The revolving credit facility bears interest at the
prime rate or LIBOR plus 2.50% at NextCard's option, matures on December 29,
1999, requires that NextCard pay an annual 25 basis point fee on the unutilized
commitment and provides for certain financial covenants. The revolving credit
facility provides financing for 85% of the purchase price of the receivables
with NC Funding providing the remaining 15%. NextCard may increase the bank's
financing to 90% upon payment of an additional fee including warrants to the
bank.
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 are
immediately exercisable at a price of $0.22 per warrant. This loan structuring
fee has been capitalized and is being amortized on a straight-line basis over
the term of the revolving credit facility.
Effective January 1999, pursuant to the terms of the Account Origination
Agreement, Heritage continues to fund newly originated credit card receivables
which NC Funding is now required to purchase on a daily basis. On January 12,
1999, NC Funding utilized the revolving credit facility to purchase
approximately $24.0 million of credit card receivables from Heritage.
NextCard, through NC Funding, expects to continue to utilize the proceeds
of the revolving credit facility to purchase additional credit card receivables
on a continuous basis from Heritage. NextCard paid $130,000 in November 1998 to
acquire the right to purchase all remaining credit card receivables from
Heritage on or prior to September 30, 1999 at a negotiated fair value. The
option fee has been capitalized and is included in other assets. The option fee
is being amortized on a straight-line basis over ten months beginning in
December 1998.
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-13
<PAGE> 88
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 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:
<TABLE>
<S> <C>
1999........................................ $ 779,592
2000........................................ 786,206
2001........................................ 715,945
2002........................................ 649,540
2003........................................ 663,360
----------
$3,594,643
==========
</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:
<TABLE>
<S> <C>
1999........................................ $ 275,000
2000........................................ 1,000,000
2001........................................ 2,500,000
2002........................................ 3,750,000
----------
$7,525,000
==========
</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 deferred revenue on the
consolidated balance sheet.
7. SHAREHOLDERS' EQUITY
NextCard has two classes of authorized stock: common stock and preferred
stock. In October 1998, the Shareholders approved a decrease in the originally
authorized number of shares of common stock from 90,000,000 to 62,896,892 and
preferred stock from 45,000,000 to 40,603,109.
F-14
<PAGE> 89
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
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 at $0.001 per
share, 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 March 31, 1999, 2,081,250,
1,237,500 and 815,625 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 a
purchase price of $0.004 per share. 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 March 31, 1999, 318,938,
212,625 and 159,458 shares remain subject to repurchase, respectively.
Common stock was reserved for issuances as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
Conversion of convertible preferred stock................... 32,625,734 32,625,734
Exercise of outstanding stock options....................... 6,975,563 8,354,137
Shares of common stock available for grant under the 1997
Stock Plan................................................ 1,986,939 3,983,365
Exercise of outstanding warrants............................ 1,139,409 1,308,749
---------- ----------
42,727,645 46,271,985
========== ==========
</TABLE>
CONVERTIBLE PREFERRED STOCK
NextCard is authorized to issue 40,603,109 shares of convertible preferred
stock in one or more series. Dividends on each series of convertible preferred
stock are noncumulative and are payable, in any fiscal year, when and as
declared by NextCard.
F-15
<PAGE> 90
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Convertible preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
DECEMBER 31, 1997 AND MARCH 31, 1999
---------------------------- -----------------------------
SHARES SHARES
OUTSTANDING(1) AMOUNT(2) OUTSTANDING(1) AMOUNT(2)
-------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Series A............... 2,756,250 $1,204,614 2,735,154 $ 1,195,240
Series B-1, B-2........ 6,354,000 3,494,426 6,354,000 3,494,426
Series C-1, C-2........ -- -- 9,132,660 11,671,346
Series D-1, D-2........ -- -- 14,403,920 38,365,361
--------- ---------- ---------- -----------
9,110,250 $4,699,040 32,625,734 $54,726,373
========= ========== ========== ===========
</TABLE>
- ------------
(1) The per share issuance cost 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.
Holders of Series C and D Convertible Preferred Stock are 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 and $38,410,452 at December 31, 1998 and March 31, 1999.
After payment of the prior liquidation preference to Series C and D
Convertible Preferred Stock, holders of Series A and B Convertible Preferred
Stock are 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
$3,530,000 at December 31, 1997, December 31, 1998 and March 31, 1999.
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 distributable assets shall be
distributed pro rata among the Series A and B Preferred Shareholders in
proportion to their respective preferential amounts.
F-16
<PAGE> 91
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
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.
Each share of Voting Preferred is convertible at the option of the holder
into shares of common stock equal to the number of preferred shares multiplied
by the then effective Conversion Rate. At December 31, 1997 and 1998, the
Conversion Rate for each series of voting and non-voting Preferred Stock was one
share of common stock for each share of preferred stock.
In addition, each share of convertible preferred stock shall automatically
be converted into shares of common stock at the then effective Conversion Rate
for such share immediately upon the consummation of a firmly underwritten public
offering of common stock (other then a registration on Form S-8 or comparable
form), provided that the price per share is not less than $5.56 (subject to
appropriate adjustment for stock splits, stock dividends, combinations,
recapitalizations and the like) and the aggregate gross proceeds to NextCard are
not less than $25 million after deduction of underwriters' commissions and
expenses.
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, 1998 and March 31, 1999, NextCard had reserved 5,130,000, 9,000,000
and 12,375,000 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-17
<PAGE> 92
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 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 years ended December 31, 1997 and 1998 and the three months ended
March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES EXERCISE PRICE PRICE
------ -------------- --------
<S> <C> <C> <C>
Outstanding at April 2, 1997 (Plan
inception)............................... -- -- --
Granted.................................. 2,344,500 $0.04 - $0.06 $0.05
Forfeited................................ (315,000) $ 0.04 $0.04
--------- ------------- -----
Outstanding at December 31, 1997........... 2,029,500 $0.04 - $0.06 $0.05
Granted.................................. 5,419,013 $0.06 - $0.56 $0.16
Exercised................................ (37,499) $0.04 - $0.06 $0.05
Forfeited................................ (435,451) $0.06 - $0.33 $0.09
--------- ------------- -----
Outstanding at December 31, 1998........... 6,975,563 $0.04 - $0.56 $0.13
Granted.................................. 1,522,350 $1.67 - $6.67 $5.99
Forfeited................................ (143,776) $0.13 - $6.67 $1.05
--------- ------------- -----
Outstanding at March 31, 1999
(unaudited).............................. 8,354,137 $0.04 - $6.67 $1.19
========= ============= =====
Options exercisable at December 31, 1997... 204,467 $ 0.04 $0.04
========= ============= =====
Options exercisable at December 31, 1998... 801,540 $0.04 - $0.13 $0.05
========= ============= =====
Options exercisable at March 31, 1999
(unaudited).............................. 1,332,464 $0.04 - $6.67 $0.25
========= ============= =====
</TABLE>
F-18
<PAGE> 93
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 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, 1998
and March 31, 1999 and the weighted average remaining contractual life are as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------- ----------- ---------------- -----------
<S> <C> <C> <C>
December 31, 1997
$0.04................................ 1,291,500 9.5 years 204,467
$0.05................................ 738,000 9.8 years --
--------- ---------
2,029,500 204,467
========= =========
December 31, 1998
$0.04................................ 1,201,500 8.5 years 500,058
$0.05................................ 2,149,763 9.6 years 288,828
$0.06................................ 225,000 4.6 years --
$0.13................................ 1,433,025 9.7 years 12,654
$0.14................................ 1,125,000 4.7 years --
$0.33................................ 248,175 9.8 years --
$0.56................................ 593,100 9.9 years --
--------- ---------
6,975,563 801,540
========= =========
March 31, 1999 (unaudited)
$0.04................................ 1,201,500 8.3 years 555,750
$0.05................................ 2,149,763 9.4 years 668,435
$0.06................................ 225,000 4.4 years 56,250
$0.13................................ 1,338,750 9.5 years 12,654
$0.14................................ 1,125,000 4.5 years --
$0.33................................ 241,424 9.6 years --
$0.56................................ 590,850 9.7 years --
$1.67................................ 171,000 9.8 years --
$6.67................................ 1,310,850 9.9 years 39,375
--------- ---------
8,354,137 1,332,464
========= =========
</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 below, the alternative fair value
accounting provided for under FAS 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.
F-19
<PAGE> 94
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The fair value of these awards for the purpose of the alternative fair
value disclosures required by FAS 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Net Loss:
As reported....................................... $(1,886,294) $(16,063,542)
Pro Forma......................................... (1,888,511) (16,533,081)
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 income 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.
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.
F-20
<PAGE> 95
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
WARRANTS
NextCard had outstanding the following warrants to purchase its securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 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..................... 515,615 $0.13 - $0.56 406,702 $0.13 - $0.56
Series C-1 Convertible Preferred
Stock.......................... 38,794 $1.29 38,794 $1.29
Series D-1 Convertible Preferred
Stock.......................... 585,000 $0.22 - $2.67 863,253 $0.22 - $2.67
--------- ---------
1,139,409 1,308,749
========= =========
</TABLE>
These warrants were issued to third parties for services rendered and loan
fees. At December 31, 1998, and March 31, 1999, 1,079,433 and 1,248,773 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 the
shorter of five years or two years from the date of an initial public offering.
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.
The following is a summary of deferred tax assets:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 95,307 $ 6,021,000
Deferred start-up costs.............................. 718,202 541,000
Deferred revenue..................................... -- 209,000
Other................................................ 31,708 72,000
--------- -----------
Total deferred tax assets.............................. 845,217 6,843,000
Valuation allowance.................................... (845,217) (6,843,000)
--------- -----------
Net deferred tax assets................................ $ -- $ --
========= ===========
</TABLE>
F-21
<PAGE> 96
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
At December 31, 1998, NextCard has 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 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, the respective carrying values of
NextCard's financial instruments approximated their fair values. These financial
instruments include cash and cash equivalents, due from third-party processor
amounts, accounts payable, accrued expenses, short-term borrowings 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.
11. PROPOSED INITIAL PUBLIC OFFERING AND OTHER SUBSEQUENT EVENTS
NextCard is contemplating filing a registration statement with the
Securities and Exchange Commission relating to an initial public offering of
shares of its unissued common stock. If the initial public offering is
consummated under the terms presently anticipated, all of the preferred stock
outstanding will automatically convert into common stock or non voting common
stock at the shareholder's election subject to NextCard's agreement. At December
31, 1998, on an unaudited pro forma basis, 32,625,734 shares of common stock
would be issued upon automatic conversion of the preferred stock. The pro forma
effect on stockholders' equity and pro forma effect on basic and diluted net
loss per common share, as adjusted for the assumed conversion of the preferred
stock, is set forth on the accompanying consolidated balance sheet and statement
of operations, and in Note 2 under Net Loss per Common Share.
In April 1999, NextCard's board of directors declared a stock split of 4.5
shares for every one share of common stock then outstanding. The stock split
will become effective immediately prior to the closing of the initial public
offering. In addition, the board of directors approved the reincorporation of
NextCard from California to Delaware. All share and per share data in the
accompanying consolidated financial statements and notes have been restated to
reflect the stock split and the reincorporation.
F-22
<PAGE> 97
[INSIDE BACK COVER OF PROSPECTUS]
[MY VISA WEB PAGE]
<PAGE> 98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
LOGO
5,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 99
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, the NASD Filing Fee and the Nasdaq National Market listing fee, are
estimates.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
SEC registration fee........................................ $ 30,371.50
NASD filing fee............................................. 9,125.00
Nasdaq National Market listing fee.......................... 100,000.00
Blue Sky fees and expenses.................................. 10,000.00
Printing and engraving expenses............................. 240,000.00
Legal fees and expenses..................................... 550,000.00
Accounting fees and expenses................................ 250,000.00
Transfer Agent and Registrar fees........................... 10,000.00
Miscellaneous expenses...................................... 6,897.50
-------------
Total............................................. $ 1,206,314
=============
</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> 100
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 2,756,250
shares of Series A Preferred Stock to 27 accredited investors for an aggregate
consideration of $1,225,000. We subsequently repurchased 21,056 such shares in
settlement of certain promissory notes.
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 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. 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 37,031 shares of our
common stock to the consultant upon such consultant's exercise of both warrants.
From August to September 1997, we issued an aggregate of 6,354,000 shares
of Series B-1 and Series B-2 Preferred 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, Mr. Qureshey assigned 500
shares of such warrant to each of six persons, for an aggregate assignment of
3,000 shares. One such person exercised his warrant in April for 500 shares of
our common stock.
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 for shares
equal to the value of the warrant.
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 is exercisable, in whole or in part, in exchange for cash or shares
equal to the value of the warrant.
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
II-2
<PAGE> 101
consulting services to us. In April 1999, we issued 4,500 shares of our common
stock to such consultant upon her exercise 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
is exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
From May to June 1998, we issued an aggregate of 9,132,660 shares of Series
C-1 and Series C-2 Preferred 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
38,795 shares of Series C 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 this offering, the warrant will be exercisable for shares of our
common stock. The warrant is exercisable at any time, in whole or in part, prior
to May 28, 2003, in exchange for cash or shares equal to the value of the
warrant.
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. Such warrant is
exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
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. The warrant is
exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
In November 1998, we issued an aggregate of 14,403,920 shares of Series D-1
and D-2 Preferred 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
22,500 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 this offering, the warrant will be exercisable for 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. two warrants to
purchase 562,500 and 525,002 shares of Series D-1 Preferred Stock, respectively,
at exercise prices of $0.22 and $2.67 per share, respectively, in connection
with the establishment of a secured lending facility arranged by Credit Suisse
First Boston. Upon the closing of this offering, the warrants will be
exercisable for shares of our common stock. Each 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 to purchase 562,500 shares of
Series D-1 Preferred Stock was transferred to Credit Suisse First Boston as
partial payment for an origination fee. The warrant to purchase 525,002 shares
of Series D Preferred Stock has not yet been transferred to Credit Suisse First
Boston and therefore, is not deemed "outstanding" for purposes of computing our
capitalization.
On February 9, 1999, we issued to Comdisco, Inc., a warrant to purchase
131,252 shares of Series D-1 Preferred Stock at an exercise price of $2.67 per
share in connection with the execution of a loan and security agreement. Upon
the closing of this offering, the warrant will be exercisable for shares of our
common stock. The warrant is exercisable, in whole or in part, at any time prior
to two years after the closing of this offering, for cash or shares equal to the
value of the warrant.
On February 18, 1999, we issued one consultant a warrant to purchase 2,250
shares of Series D-1 Preferred Stock at an exercise price of $0.44 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.
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<PAGE> 102
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 March 29, 1999, we issued to Comdisco, Inc. a warrant to purchase
131,252 shares of Series D-1 Preferred Stock in connection with a $5 million
advance under our loan and security agreement. Upon the closing of this
offering, the warrant will be exercisable for shares of our common stock. The
warrant is exercisable in whole or in part, at any time prior to two years after
the closing of this offering, for cash or shares equal to the value of the
warrant.
Since our inception, we have issued options to purchase an aggregate of
9,285,863 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> 103
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
1.1++ Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation.
3.2++ Amended and Restated Bylaws.
4.1++ Form of Stock Certificate.
5.1++ Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of issuance
of the common stock registered hereby.
10.1++ Form of Indemnification Agreement between NextCard and each
of its officers and directors.
10.2++ Amended and Restated Stock Restriction Agreement dated March
1999 between NextCard and Jeremy Lent.
10.3++ Stock Purchase and Restriction Agreement dated September 18,
1996 between NextCard and Timothy Coltrell.
10.4++ Form of Subscription Agreement for Series A Preferred Stock.
10.5++ Series B Preferred Stock Purchase Agreement dated August 15,
1997 among NextCard and certain investors.
10.6++ Office Lease dated September 24, 1997 between NextCard and
Market & Second, Inc., as amended.
10.7++ 1997 Stock Plan and form of Option Agreement under 1997
Stock Plan.
10.8+ Consumer Credit Card Program Agreement dated November 25,
1997 between NextCard and Heritage Bank of Commerce.
10.9++ Remittance Processing Services Agreement dated December 1,
1997 between Heritage Bank of Commerce and National
Processing Company.
10.10++ Professional Services Agreement dated October 14, 1998
between Heritage Bank of Commerce and Response Data
Corporation.
10.11+ Service Agreement dated December 22, 1997 between NextCard
and First Data Resources Inc.
10.12++ Master Services Agreement dated December 23, 1997 between
NextCard and Exodus Communications, Inc.
10.13++ License Agreement dated May 1, 1998 between NextCard and
Binary Compass Enterprises, Inc.
10.14++ Series C Preferred Stock Purchase Agreement dated May 13,
1998 among NextCard and certain investors.
10.15++ Sublease dated May 15, 1998 between NextCard and KAO
Infosystems Company.
10.16++ Master Lease Agreement dated May 22, 1998 between NextCard
and Comdisco, Inc.
10.17++ Loan and Security Agreement dated June 17, 1998 by and
between NextCard and Lighthouse Capital Partners II, L.P.
10.18++ Cardholder Rewards Program Agreement dated June 22, 1998
between NextCard and Intellipost Corporation (subsequently
renamed MyPoints.com).
10.19++ Form of Bottom Dollar Network Membership Agreement.
</TABLE>
II-5
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
10.20++ Series D Preferred Stock Purchase Agreement dated November
5, 1998 among NextCard and certain investors.
10.21+++ Loan Agreement dated December 29, 1998 between NextCard
Funding Corp. and Credit Suisse First Boston.
10.22+ Account Origination Agreement dated December 29, 1998 among
NextCard, NextCard Funding Corp. and Heritage Bank of
Commerce.
10.23++ Employment Agreement dated as of January 1, 1999 between
NextCard and Jeremy R. Lent.
10.24++ Subordinated Loan and Security Agreement dated February 9,
1999 between NextCard and Comdisco, Inc.
10.25++ Consulting Agreement dated as of January 20, 1999 between
NextCard and Bruce Rigione.
10.27 Employee Stock Purchase Plan.
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.
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.
++ Previously filed.
(b) 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.
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<PAGE> 105
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.
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<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act, we have had duly caused
this amendment no. 4 to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, State of
California, on the 13(th) day of May, 1999.
NEXTCARD, INC.
By: /s/ JEREMY R. LENT
------------------------------------
Jeremy R. Lent
Chairman of the Board,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act, this amendment no. 4 to
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ JEREMY R. LENT Chairman of the Board, Chief May 13, 1999
- --------------------------------------------------- Executive Officer, President and
Jeremy R. Lent Director (Principal Executive
Officer)
/s/ JOHN V. HASHMAN Chief Financial Officer May 13, 1999
- --------------------------------------------------- (Principal Financial and
John V. Hashman Accounting Officer)
* Director May 13, 1999
- ---------------------------------------------------
Jeffrey D. Brody
* Director May 13, 1999
- ---------------------------------------------------
Alan N. Colner
* Director May 13, 1999
- ---------------------------------------------------
Tod H. Francis
* Director May 13, 1999
- ---------------------------------------------------
Safi U. Qureshey
* Director May 13, 1999
- ---------------------------------------------------
Bruce G. Rigione
*By: /s/ JOHN V. HASHMAN
- ---------------------------------------------------
John V. Hashman
Attorney-in-fact
</TABLE>
II-8
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBITS
NUMBER EXHIBIT INDEX PAGE
- -------- ------------- ----
<S> <C> <C>
1.1++ Form of Underwriting Agreement..............................
3.1++ Amended and Restated Certificate of Incorporation...........
3.2++ Amended and Restated Bylaws.................................
4.1++ Form of Stock Certificate...................................
5.1++ Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of issuance
of the common stock registered hereby.......................
10.1++ Form of Indemnification Agreement between NextCard and each
of its officers and directors...............................
10.2++ Amended and Restated Stock Restriction Agreement dated March
1999 between NextCard and Jeremy Lent.......................
10.3++ Stock Purchase and Restriction Agreement dated September 18,
1996 between NextCard and Timothy Coltrell..................
10.4++ Form of Subscription Agreement for Series A Preferred
Stock.......................................................
10.5++ Series B Preferred Stock Purchase Agreement dated August 15,
1997 among NextCard and certain investors...................
10.6++ Office Lease dated September 24, 1997 between NextCard and
Market & Second, Inc., as amended...........................
10.7++ 1997 Stock Plan and form of Option Agreement under 1997
Stock Plan..................................................
10.8+ Consumer Credit Card Program Agreement dated November 25,
1997 between NextCard and Heritage Bank of Commerce.........
10.9++ Remittance Processing Services Agreement dated December 1,
1997 between Heritage Bank of Commerce and National
Processing Company..........................................
10.10++ Professional Services Agreement dated October 14, 1998
between Heritage Bank of Commerce and Response Data
Corporation.................................................
10.11+ Service Agreement dated December 22, 1997 between NextCard
and First Data Resources Inc. ..............................
10.12++ Master Services Agreement dated December 23, 1997 between
NextCard and Exodus Communications, Inc. ...................
10.13++ License Agreement dated May 1, 1998 between NextCard and
Binary Compass Enterprises, Inc. ...........................
10.14++ Series C Preferred Stock Purchase Agreement dated May 13,
1998 among NextCard and certain investors...................
10.15++ Sublease dated May 15, 1998 between NextCard and KAO
Infosystems Company.........................................
10.16++ Master Lease Agreement dated May 22, 1998 between NextCard
and Comdisco, Inc. .........................................
10.17++ Loan and Security Agreement dated June 17, 1998 by and
between NextCard and Lighthouse Capital Partners II, L.P....
10.18++ Cardholder Rewards Program Agreement dated June 22, 1998
between NextCard and Intellipost Corporation (subsequently
renamed MyPoints.com).......................................
10.19++ Form of Bottom Dollar Network Membership Agreement..........
10.20++ Series D Preferred Stock Purchase Agreement dated November
5, 1998 among NextCard and certain investors................
</TABLE>
II-9
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBITS
NUMBER EXHIBIT INDEX PAGE
- -------- ------------- ----
<S> <C> <C>
10.21+++ Loan Agreement dated December 29, 1998 among NextCard
Funding Corp. and Credit Suisse First Boston................
10.22+ Account Origination Agreement dated December 29, 1998 by and
between NextCard and Heritage Bank of Commerce..............
10.23++ Employment Agreement dated as of January 1, 1999 between
NextCard and Jeremy R. Lent.................................
10.24++ Subordinated Loan and Security Agreement dated February 9,
1999 between NextCard and Comdisco, Inc. ...................
10.25++ Consulting Agreement dated as of January 20, 1999 between
NextCard and Bruce Rigione .................................
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............
10.27++ Employee Stock Purchase Plan................................
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.
++ Previously filed.
II-10
<PAGE> 1
EXHIBIT 10.8
CONSUMER CREDIT CARD PROGRAM AGREEMENT
This Agreement (the "AGREEMENT") is made this 25th day of
November, 1997 (the "EFFECTIVE DATE") between Internet Access Financial
Corporation ("IAFC"), a California corporation, and Heritage Bank of Commerce
("HERITAGE"), a California state-chartered bank.
WHEREAS, IAFC has developed a program pursuant to which consumers
may be offered an opportunity to apply for and maintain an open end, revolving
VISA credit card account through which credit may be extended for personal,
family, or household use; and
WHEREAS, Heritage is a VISA member and wishes to issue VISA
credit cards to customers solicited by IAFC and approved by Heritage; and
WHEREAS, Heritage and IAFC wish to cooperate in a deposit-raising
program in support of the credit card program contemplated by the parties,
NOW, THEREFORE, the parties agree as follows:
1. Definitions.
a. "ACCOUNT" means an open-end, revolving VISA
"NextCard"-branded credit card account opened by Heritage pursuant to an
Application solicited by IAFC, other credit card accounts opened pursuant to the
Program, and any Heritage- or IAFC-owned credit accounts into which Accounts may
from time to time be converted.
b. "APPLICABLE LAW" means any federal, state, or local
law, statute, rule or regulation, or judicial, governmental, or administrative
order, decree or ruling, applicable to the Program or the actions of either
party to this Agreement in the performance of their respective obligations
hereunder.
c. "APPLICANT" means any person who submits an
Application.
d. "APPLICATION" means an application referred by IAFC to
Heritage to open an Account under the Program.
e. "CARD" means a VISA credit card issued by Heritage to
Cardholders under the Program.
f. "CARDHOLDER" means any person for whom Heritage opens
an Account under the Program.
g. "CHARGEABLE HERITAGE PROGRAM EXPENSES," for any month,
means (i) the sum of the Loan Loss Provision, Cost of Funds, Program fraud
losses for such month and the Servicing Costs, plus (ii) the lesser of (A)
actual Heritage Program Expenses for such month, or (B) the Heritage Program
Expense Cap for such month. For this purpose, "Heritage Program Expenses" means
reasonable variable expenses incurred by Heritage in
<PAGE> 2
connection with establishing and administering the Program and servicing Program
Deposits. Heritage Program Expenses are limited to marginal costs incurred by
Heritage in connection with the Program. Heritage Program Expenses will include,
without limitation, legal expenses relating to the Program and the drafting and
negotiation of this Agreement. Heritage Program Expenses will not include
non-Program-related Heritage costs.
h. "CHARGEABLE IAFC PROGRAM EXPENSES," for any month,
means the lesser of (i) actual IAFC Program Expenses, or (ii) the IAFC Program
Expense Cap for such month. For this purpose, "IAFC Program Expenses" means the
reasonable variable expenses incurred by IAFC in connection with the promotion
of the Program and servicing of Cardholders and Program depositors, including,
without limitation the cost of maintaining the Program Web site, developing,
printing, and distributing Program Materials, and any costs associated with the
ongoing analysis, targeting and management of the customer relationship. IAFC
Program Expenses are limited to marginal costs incurred by IAFC in connection
with the Program. IAFC Program Expenses will include, without limitation, legal
expenses relating to the Program and the drafting and negotiation of this
Agreement. IAFC Program Expenses do not include non-Program-related IAFC costs.
i. "COMMENCEMENT DATE" means the first date that
Applications are accepted under the Program.
j. "COST OF FUNDS" means accrued interest on Program
Deposits, plus associated regulatory charges where charges are based on the
amount of average or period-end deposits.
k. "CUT-OFF AMOUNT" means the target level of originations
of Program Assets that, assuming asset growth, will in time result in Program
Assets approximating the Maximum Program Size. The Cut-Off Amount will be agreed
upon by the parties from time to time.
l. "EXCESS DEPOSITS" means the amount by which Program
Deposits exceed Program Assets.
m. "FEES" means any accrued fees owed by a Cardholder
related to his or her Account, including, without limitation, late fees,
overlimit fees and other amounts paid by a Cardholder pursuant to the
Cardholder's Account agreement.
n. "FINANCE CHARGE" means interest accrued on Program
Assets, as defined under Section 226.4 of the Federal Reserve Board's Regulation
Z.
o. "FULLY ORIGINATED" is defined in paragraph 4.b.
p. "FUNDING CONSTRAINT" is defined in paragraph 4.c.
q. "HERITAGE PROGRAM EXPENSE CAP" shall mean: (i) $5,000
per month for the period from December 1, 1997 through March 31, 1998; (ii)
$7,500 per month for the
2
<PAGE> 3
period from April 1, 1998 through December 31, 1999; and (iii) $10,000 per month
for the period from January 1, 2000 through December 31, 2002. To the extent
that the parties agree in writing, such agreement not to be unreasonably
withheld, the Heritage Program Expense Cap may be changed for any month.
r. "IAFC PROGRAM EXPENSE CAP" shall mean: (i) $10,000 per
month for the period from December 1, 1997 through March 31, 1998; (ii) $15,000
per month for the period from April 1, 1998 through December 31, 1998; (iii)
$20,000 per month for the period from January 1, 1999 through December 31, 1999;
and (iv) $25,000 per month for the period from January 1, 2000 through December
31, 2002. To the extent that the parties agree in writing, such agreement not to
be unreasonably withheld, the IAFC Program Expense Cap may be changed for any
month.
s. "INTERCHANGE INCOME" means amounts accrued through the
VISA settlement system and payable to Heritage by a Third Party Data Processor
with respect to a Customer's transactions.
t. "INTEREST RECEIVED ON EXCESS DEPOSITS" means the
interest accrued on the balance of the Excess Deposits during any calendar
month.
u. "LOAN LOSS PROVISION" means, for any month, the amount
expensed during such month for actual or anticipated losses (including without
limitation fraud losses) in the Program's loan portfolio. The amount expensed
will be the sum of the actual charge-offs experienced in the accounting period
plus or minus an amount added to or subtracted from the Loan Loss Reserve
according to GAAP and RAP.
v. "LOAN LOSS RESERVE" means the reserve established for
anticipated (as distinguished from actual) losses in the Program's loan
portfolio, as mutually agreed by IAFC and Heritage, according to GAAP and RAP.
w. "MAXIMUM PROGRAM SIZE" means the maximum level of
Program Assets agreed to by the parties from time to time, as provided in
paragraph 4.a.
x. "PERFORMANCE SHORTFALL" means a material failure of the
Program to meet the financial expectations set forth in the Program Pro Forma
which failure presages, in the reasonable judgment of a party, significant
long-term underperformance of the Program.
y. "PRICING ALGORITHM" is defined in paragraph 8.b.
z. "PROGRAM PRO FORMA" means the pro forma spreadsheet
attached as Exhibit "A." The Program Pro Forma shows the parties' expectations
with regard to the financial performance of the Program.
aa. "PROGRAM" means the program pursuant to which IAFC
will solicit, and Heritage will accept, Accounts and Deposits.
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ab. "Program Assets" means the aggregate outstanding
balances from time to time of receivables in connection with the Accounts;
provided, however, that, for purposes of calculating the Cut-off Amount and
Maximum Program Size, the term "Program Assets" will be deemed to exclude
Account balances which have been charged off.
ac. "PROGRAM DEPOSITS" means certificates of deposits and
other deposits raised from institutional or individual customers through
national deposit-raising efforts by or through IAFC, and all renewals of such
deposits and accounts. "Program Deposits" will include deposits designated by
Heritage pursuant to paragraph 9.e.
ad. "PROGRAM EARNINGS (LOSSES)," for any month, will mean
(i) Program Revenues for such month minus (ii) the sum of (A) Chargeable
Heritage Program Expenses and (B) Chargeable IAFC Program Expenses for such
month.
ae. "PROGRAM MATERIALS" is defined in paragraph 7.a.
af. "PROGRAM REVENUES" means all revenues accrued from (i)
Finance Charges and Fees charged on Accounts, (ii) Interest Received on Excess
Deposits, and (iii) Interchange Income.
ag. "ORIGINATION SUSPENSION" is defined in paragraph 5.a.
ah. "SERVICING COSTS" means amounts paid by Heritage to
IAFC or a Third Party Data Processor for servicing the Accounts, including but
not limited to processing Applications, servicing and support of Program Assets,
collection activities, and credit bureau reports on Applicants.
ai. "THIRD PARTY DATA PROCESSORS" means any third party
providing any of the data processing services described in either Section 6.b or
Section 7.c.
aj. "UNDERWRITING ALGORITHM" is defined in paragraph 3.a.
2. Solicitation of Accounts.
a. IAFC will use direct marketing channels, including the
Internet, to solicit potential Applicants to submit Applications to open
Accounts. IAFC's Internet marketing activities may include, in IAFC's
discretion, targeted e-mail solicitations, banner advertising, hyperlinks, and
agreements with other sites and companies on the Internet. The Accounts and
Cards offered under the Program will include Internet-enhanced features,
including online approval, online balance transfers, and online customer
service. IAFC may, in consultation with Heritage, from time to time implement
additional Internet-enhanced features.
b. All advertising and marketing materials will indicate
that Heritage is the issuer of Cards under the Program and the party with whom
the Accounts are maintained.
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c. IAFC does not warrant or guarantee that it will
generate any particular number of Applications or Accounts under the Program.
This negative representation is not meant to exclude or limit any right either
party may have under any other paragraph of this Agreement.
3. Approval of Applications and Acceptance of Accounts.
a. IAFC will propose an Underwriting Algorithm (the
"UNDERWRITING ALGORITHM") to manage the underwriting of Applications. The
Underwriting Algorithm will determine whether a prospective Cardholder will be
approved, and will determine the credit line for an approved Cardholder. The
Underwriting Algorithm will use data supplied by the prospective Cardholder and
by at least one of the three of the following national credit bureaus:
TransUnion; Equifax; or Experian.
b. Prior to the Commencement Date, Heritage will review
and approve the Underwriting Algorithm.
c. IAFC will process each Application using the
Underwriting Algorithm. Provided that an Application meets the underwriting
criteria contained in the Underwriting Algorithm, Heritage will approve such
Application and open an Account with the credit line as determined by the
Underwriting Algorithm for such Customer. However, Heritage will have no
obligation to approve Applications during an Origination Suspension or after
termination of this Agreement.
d. The Card will be issued by Heritage and will bear
IAFC's "NextCard" brand name. All assets and liabilities relating to the Program
will be reflected on the books of Heritage.
e. Either party may from time to time propose to the other
in writing changes in the Underwriting Algorithm that (i) the parties mutually
agree would improve the economic performance of the Program or (ii) cause the
Program to comply with the requests or directions of the banking regulators.
f. IAFC will from time to time provide to Heritage
analyses concerning the performance of the Underwriting Algorithm and the
performance of the marketing programs and other Account acquisition costs and
expenses.
g. The parties will cooperate in good faith to ensure that
the Underwriting Algorithm and other procedures related to the processing of
Applications and establishment of Accounts are in compliance with all fair
lending and other applicable federal and California banking laws and
regulations. The parties intend that the Underwriting Algorithm, all
solicitations and evaluations of Applications, opening of Accounts, and
extensions of credit under the Program will comply with applicable law,
including laws proscribing discrimination on the basis of race, color, religion,
national origin, sex, marital status, or age.
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4. Maximum Program Size and Funding Constraints.
a. The Maximum Program Size is set initially at $35
million. The parties will set a Cut-Off Amount by agreement prior to the time
Program Assets exceed $25 million. The parties may change the Maximum Program
Size or the Cut-Off Amount by agreement at any time.
b. At any time when Program Assets materially exceed the
Cut-Off Amount, the Program will be deemed to be "FULLY ORIGINATED."
c. A "FUNDING CONSTRAINT" will be deemed to exist from the
time when Program Assets exceed Program Deposits by more than [ * ] until
the time when sufficient additional Program Deposits are raised such that
Program Deposits substantially equal Program Assets. Heritage may by written
notice to IAFC declare that a Funding Constraint does not exist, notwithstanding
the existence of the condition stated in the preceding sentence.
5. Suspension of Originations.
a. Either party may (i) effective upon the giving of
written notice (if either the Program is Fully Originated or the regulators have
directed changes in the Underwriting Algorithm that, in the reasonable judgment
of either party are likely to result in a Performance Shortfall), or (ii)
effective upon 90 days prior written notice (in all other cases), declare an
"ORIGINATION SUSPENSION" if, at the time such notice is given: (i) the Program
is experiencing, or may reasonably be expected to experience, a Performance
Shortfall and the parties are unable to agree on changes to the terms of the
Underwriting Algorithm, the Pricing Algorithm or the terms and conditions
governing the Accounts; (ii) there exists a Funding Constraint; (iii) the
Program is Fully Originated; or (iv) there exists a Performance Shortfall. An
Origination Suspension will also automatically occur upon termination of this
Agreement.
b. For purposes of this paragraph, the effect of an
Origination Suspension will be that (i) IAFC will have no further obligation to
solicit Applications and otherwise market the Program under paragraph 2; (ii)
Heritage will have no further obligation to accept Applications and open
Accounts under paragraph 3; (iii) IAFC will have no further obligation to
solicit, and Heritage will have no further obligation to accept, Program
Deposits under paragraph 9; and (iv) the restrictions in paragraph 15 on IAFC's
right to market or sponsor competitive programs will lapse. All of the parties'
other rights and obligations under this Agreement will remain in effect
notwithstanding the pendency of an Origination Suspension.
c. An Origination Suspension will terminate, and the
parties' duties referred to in paragraph 5.b will be reinstated, if the
condition that precipitated the Origination Suspension ceases to exist and the
party responsible for declaring the Origination Suspension notifies the other
party; provided, however, that if any Origination Suspension
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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shall last more than sixty (60) calendar days, such termination and
reinstatement will only occur if the parties mutually agree in writing.
6. Additional Heritage Obligations.
a. Prior to the Commencement Date, Heritage will become a
member of VISA. Heritage will maintain its membership in VISA in good standing
during the term of this Agreement.
b. Heritage will enter into such contractual relationships
with Third Party Data Processors as shall be mutually agreed to by IAFC and
Heritage as may be necessary or appropriate to ensure (1) management of the
applications process, (2) settlement of payments as between Cardholders and
Heritage, (3) settlement of payments as between Heritage and its merchant
creditors, and (4) any other feature required to implement or operate the
Program. Heritage will maintain such contractual relationships in good standing
during the term of the Program.
7. Additional IAFC Obligations.
a. IAFC will create, maintain, and update the form of
Applications, advertising, Web sites and content, disclosures, Account
agreements, Account statements, billing and collection notices, and other
documentation relating to the Accounts ("PROGRAM MATERIALS"). In its discretion,
IAFC may acquire some or all of the Program Materials from one or more third
parties. IAFC may offer online delivery of Program Materials. Heritage will have
the right to approve all Program Materials, provided that such approval will not
be unreasonably withheld.
b. IAFC will be responsible for Account collection
activities. All Account collection activities will be conducted in accordance
with Applicable Law. IAFC may utilize the services of Third Party Data
Processors to perform certain collection activities. Heritage will have the
right to approve the collection policies used in the Program, provided that such
approval will not be unreasonably withheld.
c. IAFC will enter into such contractual arrangements with
Third Party Data Processors (including but not limited to the three major credit
bureaus) as may be necessary or appropriate to ensure (1) management of the
applications process, (2) settlement of payments as between Cardholders and
Heritage, (3) settlement of payments as between Heritage and its merchant
creditors, and (4) any other feature required to implement or operate the
Program. IAFC will maintain such contractual relationships in good standing
during the term of the Program
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8. Terms and Conditions of the Accounts; Pricing.
a. Heritage and IAFC will determine by mutual agreement
the terms and conditions to be offered to Cardholders under the Program,
including the credit limit, annual percentage rate to be charged on Accounts,
Fees and minimum monthly payment rates.
b. IAFC will propose an algorithm pursuant to which the
interest rates and certain other charges on the Accounts will be set (the
"PRICING ALGORITHM"). The Pricing Algorithm will include ranges of pricing
elements to provide flexibility for marketing tests and differing market
conditions. Heritage will approve the Pricing Algorithm prior to the
Commencement Date.
c. Either party may from time to time propose to the other
changes in the Account terms and conditions or the Pricing Algorithm that would
improve the economic performance of the Program. Such changes will subject to
the approval of both parties.
9. Deposit-Raising Activities.
a. Heritage and IAFC will target the monthly average
amount of Program Deposits to be within [ * ] of the monthly average amount of
Program Assets. Program Deposits are initially expected to be in the form of
institutional certificates of deposit.
b. IAFC will use its reasonable efforts to assist Heritage
in raising Program Deposits. IAFC will not solicit Program Deposits during any
period when an Excess Deposit Constraint exists. An "EXCESS DEPOSIT CONSTRAINT"
will be deemed to exist from the time when Program Deposits exceed Program
Assets by more than [ * ] until the time when Program Deposits exceed Program
Assets by less than [ * ]. Heritage may by written notice to IAFC declare that
an Excess Deposit Constraint does not exist, notwithstanding the existence of
the above conditions.
c. The parties will cooperate in facilitating the raising
of deposits. Heritage will use its ITI deposit system and provide wire services
for the raising of Program Deposits, statementing and tax reporting. Heritage
will provide reasonable assistance to support the marketing of Program Deposits,
including, but not limited to, supplying financial statements and other
materials and discussing financial results with potential depositors.
d. Heritage and IAFC will consult with each other on the
setting of interest rates for Program Deposits, in conjunction with Heritage's
weekly pricing committee.
e. Subject to IAFC's approval, from time to time Heritage
may designate as Program Deposits deposits not solicited by IAFC for a specified
period. The foregoing notwithstanding, Heritage may not so designate or
originate Program Deposits if such designation or origination would cause
Program Deposits to exceed Program Assets by more than [ * ] of the amount of
such Program Assets.
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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f. Excess Deposits will be invested in short-term,
low-risk investments in a manner consistent with Heritage's
investment policy until such time as they are required to fund Program Assets.
g. IAFC and Heritage will attempt to structure the Program
Deposit program to avoid the deposits being considered "brokered deposits" for
regulatory purposes. However, the parties acknowledge that there is no assurance
as to the classification of the Program Deposits. The classification of Program
Deposits as brokered deposits will not excuse Heritage's obligation to accept
Applications and open Accounts as long as Heritage remains a "well-capitalized"
financial institution as defined in the Federal Deposit Insurance Corporation
Improvement Act.
h. Heritage will use its reasonable best efforts to
maintain sufficient capital to be considered "well capitalized" in order to help
facilitate the Program Deposit raising activities. If and for so long as
Heritage is not considered "well capitalized," IAFC will be relieved of any
obligations in connection with the solicitation of Program Deposits to the
extent that such obligations could reasonably be determined to be "deposit
broker" activities, as defined in the Federal Deposit Insurance Act.
i. IAFC does not warrant or guarantee that it will
generate any particular level of Program Deposits.
10. Commencement Date.
a. Each of the parties will use commercially reasonable
efforts to cause the Commencement Date to occur and to commence offering
Accounts and accepting Program Deposits by December 8, 1997. If the Commencement
Date does not occur by March 31, 1998 despite each party's performance of its
duties hereunder, either party may terminate this Agreement pursuant to the
terms of paragraph 19.a(2). The preceding sentence shall not be construed as
excusing or relieving any party of any undertaking or obligation assumed under
this Agreement.
11. Regulatory Compliance.
a. IAFC will be responsible for compliance of the Program
Materials with federal and state Applicable Law. IAFC will also be responsible
for compliance of the Program with federal and state Applicable Law relating to
consumer credit and consumer debt collection. The foregoing notwithstanding,
IAFC will not be responsible for Heritage's failure to act in compliance with
Applicable Law.
b. Heritage will be responsible for the Program's
compliance with banking laws and regulations applicable to it (other than
consumer credit laws and regulations).
12. Servicing of Accounts. IAFC and Heritage, as the case may
be, will
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contract with one or more Third Party Data Processors in order to ensure that
the Accounts originated pursuant to the Program are serviced in accordance with
industry standards for the servicing of such Accounts.
13. Sharing of Program Revenues and Expenses. It is the express
intent of this Agreement that the parties will share equally in the Program
revenues and expenses.
a. On a monthly basis, IAFC will provide to Heritage a
statement in reasonable detail itemizing the IAFC Chargeable Program Expenses.
b. Within 15 business days after receiving the statement
of IAFC Chargeable Program Expenses, Heritage will deliver to IAFC a monthly
profit and loss statement (the "Monthly P&L") setting forth Program Revenues,
IAFC Chargeable Program Expenses, Heritage Chargeable Program Expenses, and
Program Earnings (Losses). The Monthly P&L will include an attachment itemizing
in reasonable detail the Heritage Chargeable Program Expenses.
c. The Monthly P&L will also include a calculation
indicating for such month whether Heritage owes money to IAFC,
or IAFC owes money to Heritage. The rules set forth below provide an example of
how program revenues and expenses will be equally shared.
(1) If Program Revenues ("PR") exceed the
difference between Heritage Chargeable Program Expenses
("HCPE") and IAFC Chargeable Program Expenses ("ICPE"),
Heritage will pay to IAFC 50% of such difference:
For example, if PR for a month are 150, HCPE is 110, and ICPE is
20, Heritage would pay to IAFC 50% x [150 - (110-20)] = 30, and
Heritage would retain the remaining 120 of PR.
(2) If PR does not exceed [HCPE -ICPE], IAFC will
pay to Heritage 50% of such difference:
For example, if PR is 80, HCPE is 110, and ICPE is 20, IAFC would
pay 50% x [(110-20) - 80] = 5.
d. Amounts payable as indicated in the Monthly P&L will be
due and payable upon delivery of the Monthly P&L to IAFC (if money is due IAFC),
or 30 days after such delivery (if money is due Heritage). Amounts not paid by
such date will bear interest at the rate of 1.5% per month until paid. The
foregoing notwithstanding, such amounts will accrue for the period from the
Commencement Date until April 1, 1998, and the cumulative accrued amounts will
be due and payable on the normal billing cycle after such period.
e. Payment obligations arising under this paragraph will
continue notwithstanding the pendency of an Origination Suspension. Upon
termination of this Agreement, neither party will have any further obligation to
make payments other than
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obligations that have accrued prior to termination.
14. Trademarks and Other Intellectual Property.
a. Trademarks.
(1) Heritage acknowledges that, as between IAFC
and Heritage, IAFC owns and will own the service marks "NextBank," "NextCard,"
"Credit Choice," and derivatives of the foregoing, and any other presently
existing or future trademarks, service marks, trade names, rights in packaging,
rights of publicity, merchandising rights, advertising rights, and similar
rights by which the Program is or becomes known or with which the Program is or
becomes associated, other than the mark "Heritage" and derivatives thereof
(collectively, the "IAFC Marks").
(2) Heritage acknowledges that IAFC owns all
rights in the URL addresses used in conjunction with the Program, including
without limitation "nextcard.com," "nextbank.com," and "creditchoice.com."
(3) IAFC acknowledges that Heritage owns the
service mark "Heritage," and derivatives thereof (collectively, the "Heritage
Marks").
(4) All goodwill that is or becomes associated
with the above-referenced marks as a result of the use of such marks in
association with the Program will accrue solely to the benefit of the respective
owner of such marks. After termination of this Agreement, either party may use
its marks free of any claim whatsoever of ownership or interest by the other
party.
(5) Heritage hereby licenses IAFC during the term
of this Agreement the use of the "Heritage" mark solely in connection with the
performance of its marketing and other obligations hereunder. Specifically, IAFC
may use the "Heritage" mark in any marketing or advertising materials relating
to the Program. IAFC will follow Heritage instructions regarding the appearance,
use, and display of such mark.
(6) IAFC hereby licenses to Heritage during the
term of this Agreement the use of the Program Materials and the mark "NextCard"
to identify the Card and the Program. Heritage will follow IAFC's instructions
regarding the appearance, use, and display of such mark.
b. Copyright. IAFC will own all copyrights in all Program
Materials and derivative works thereof.
15. Activities Outside the Program. IAFC may during the term
hereof engage in origination, marketing, and other activities with respect to
credit card, loan, or deposit-taking programs offered by IAFC's own bank,
whether or not such activities and programs compete with the Program; provided,
however, that IAFC's competitive activities may not create a Performance
Shortfall. Until the Program Assets exceed the Cut-Off Amount, IAFC
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will direct at least [ * ] of the credit card approvals it generates to the
Program; provided, that this obligation will lapse after the effective date of
an Origination Suspension. IAFC will not be restricted with regard to marketing
or sponsoring competitive programs in association with third parties after the
effective date of an Origination Suspension. IAFC may use the IAFC Marks in
connection with competitive activities and programs permitted by this paragraph.
IAFC will from time to time notify Heritage of its progress in purchasing its
own bank, and when it has entered into a definitive agreement to purchase a
financial institution and that information is made publicly available.
16. Ownership and Use of Program Information.
a. Cardholder names, postal and electronic mail addresses,
telephone numbers and Cardholder-specific transaction information will be
referred to collectively as "CARDHOLDER-SPECIFIC INFORMATION," and will be owned
by Heritage. IAFC will have a perpetual, unrestricted license (i) during the
term of this Agreement, to use the Cardholder-Specific Information for Program
purposes, including but not limited to the servicing of the Accounts, and (ii)
following the termination of this Agreement, to use the Cardholder-Specific
Information only for statistical and analytic purposes.
b. All information (other than Cardholder-Specific
Information) acquired through the Program or concerning the Accounts will be
referred to collectively as "PROGRAM INFORMATION." Program Information will
include the Cardholder-Specific Information to the extent that the
Cardholder-Specific Information is redacted to mask any correlation between the
Cardholder-Specific Information and the identity of any specific Cardholder.
IAFC and Heritage will own jointly the Program Information, and each party may
use the Program Information for its own purposes; provided, that each party will
treat any Program Information in its possession at any time as Program
Proprietary Information.
c. Heritage and IAFC (i) acknowledge that the Program
Information will be used by each of them to create certain analyses and
statistical models which may have predictive value beyond the Program, and (ii)
agree that such analyses and statistical models will be the sole and exclusive
property of the party creating such analyses and statistical models and will be
treated as Party Proprietary Information. IAFC represents and warrants to
Heritage that no such analyses or statistical models will include information
that is identified with any specifically identifiable Cardholder.
d. During the term of this Agreement, (i) IAFC shall not
use the Program Information to market any proprietary or third party product,
other than pursuant to the Program, without first having obtained the written
consent of Heritage, and (ii) Heritage shall not use the Program Information to
market any proprietary or third party product which competes with the products
or services offered pursuant to the Program. After the termination of the
Program, the non-acquiring party may not use the Program Information to market
any proprietary or third party product to customers of the acquiring party
without first having obtained the written consent of the acquiring party;
provided, that Heritage may market any proprietary or third party product to any
Cardholder with whom it has developed an independent business relationship.
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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17. Reporting, Recordkeeping, and Audit Rights.
a. Reporting. Heritage will generate, on a monthly basis,
a Balance Sheet and Profit and Loss Statement for the Program. Key asset,
liability, income and expense items will be detailed on such statement. IAFC and
Heritage will work to develop the form of the statement prior to the end of the
first calendar month after the Commencement Date.
b. Recordkeeping. Heritage will create and maintain
records in reasonable detail concerning all Accounts, Program Deposits, and
transactions related to the Program. Such recordkeeping will (i) be sufficient
to meet all GAAP and RAP requirements, and (ii) segregate Program-related
assets, liabilities, revenues and expenses from non-Program-related Heritage
activities. Heritage will maintain records of Program-related assets,
liabilities, income, and expenses at a reasonable level of detail. IAFC will
assist Heritage in setting up general ledger and other accounts at Heritage for
the proper monitoring and accounting of the Program. IAFC will arrange, as
Heritage's agent, for appropriate training of Heritage personnel by FDR. IAFC
will comply with all reasonable requests by Heritage for information required so
that Heritage may fulfill its recordkeeping responsibilities.
c. Financial Statements. Each of Heritage and IAFC will
provide to the other on a quarterly basis unaudited financial statements. Such
obligation will terminate upon the effective date of an Origination Suspension.
d. Audit Rights. Either party, through its employees,
accountants, or agents, may audit the other's relevant records to the extent
reasonably necessary to verify the accuracy of reports and statements relating
to Accounts, Program Deposits, Program Revenues and Earnings, Chargeable Program
Expenses, and transactions originating with or effected through the Program. A
party may exercise its audit rights upon reasonable written notice during normal
business hours and in a manner that does not unreasonably burden the party being
audited. A party may conduct the audit either through its employees or its
authorized representatives.
18. Representations and Warranties.
a. Each party represents and warrants that (i) it is a
corporation duly incorporated, or an entity duly organized, under the laws of
the jurisdiction where it is incorporated or organized, is validly existing and
in good standing under the laws of such jurisdiction, and has and will have at
all times during the term hereof all requisite power and authority, corporate or
otherwise, to perform its obligations under this Agreement; (ii) the execution
and delivery of this Agreement has been approved by all necessary corporate
action; and (iii) the Agreement is enforceable against such party in accordance
with its terms, except as limited by bankruptcy and other laws of general
application relating to insolvency or the protection of creditors' rights.
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b. Each party represents and warrants that the execution,
delivery, and performance by such party of this Agreement will not (i) conflict
with or result in a breach of or constitute a default under or result in the
termination of any contract, agreement, or other instrument to which such party
is a party or by which it is bound or to which any of its assets are subject, or
result in the creation of any lien or encumbrance upon any of said party's
assets, or impair the ability of the parties hereto to perform their obligations
under the Agreement; or (ii) conflict with, violate, or result in a breach of or
constitute a default under any judgment, order, decree, law, rule, regulation,
or other restriction of any court, government or governmental agency to which
such party is subject.
c. Each party represents and warrants that the execution,
delivery, and performance by such party of this Agreement will not require the
consent or approval of any governmental agency or other regulatory authority
with jurisdiction over such party, or if such consent or approval is required,
such consent or approval has been obtained.
d. Heritage represents and warrants that it is a bank duly
chartered under the laws of the State of California, and that as of the
Effective Date its regulatory classification is "well-capitalized."
19. Term and Termination
a. The term of this Agreement will commence on the date
first set forth above and will continue indefinitely until terminated in
accordance with the following provisions:
(1) By mutual agreement of the parties;
(2) By either party effective 90 days after the
giving of written notice if the Commencement Date has not occurred by March 31,
1998; provided, however, that neither party will have the right to terminate
this Agreement under this subparagraph after the Commencement Date actually
occurs;
(3) At any time after the Program Assets first
equal or exceed the Cut-Off Amount, by either party effective upon written
notice to the other party if Program Assets are then less than 10% of the
Maximum Program Size;
(4) If a party is in material breach of any of its
material obligations under this Agreement the other party may give written
notice to the party in default citing this section and specifying in detail the
nature of the breach. The party in default will have 60 days in which to cure
such breach, or, if such breach cannot be completely cured within such period, a
reasonable time (but no more than 90 days) to cure such breach as long as the
party in default is diligently pursuing the cure of such breach (the "Cure
Period"). If the party in default has not cured the default within the Cure
Period, the other party may terminate this Agreement upon the giving of written
notice to the party in default; and
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(5) By either party, if the other party (i)
generally becomes unable to pay its debts when due whether or not said debts are
subject to a bona fide dispute, otherwise becomes insolvent or admits in writing
that it is insolvent; (ii) makes a general assignment for the benefit of
creditors; (iii) enters into a composition agreement or similar agreement for
the compromise and settlement of claims of its creditors; (iv) makes a general
assignment to an agent authorized to liquidate any substantial amount of its
property; (v) files, or consents to the filing of, any proceeding, petition or
case under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors which
constitutes the commencement of a case and/or constitutes an order for relief or
which seeks: (A) an adjudication that it is bankrupt or insolvent, (B) a
reorganization, arrangement, winding up, liquidation, dissolution, composition
or other relief with respect to its debts, or (C) the appointment of a receiver,
trustee, custodian or other similar official for it or any substantial portion
of its assets; (vi) has filed against it such a proceeding, petition or case if
such proceeding, petition or case remains undischarged, undismissed or unbonded
for 60 days or results in such an adjudication, the entry of an order for such
relief or such an appointment; or (vii) becomes subject to a proceeding
initiated by a governmental authority or self-regulatory organization having
jurisdiction over such party or its assets in the country of its organization or
principal office, which proceeding is taken pursuant to any insolvency, banking,
insurance, or similar law or regulation governing the operation of such party,
and which prevents such party from performing its obligations under this
Agreement as and when due.
b. Immediately following any termination of this
Agreement, the parties will negotiate in good faith an estimate of the fair
market value of the Program Assets; provided, however, if the parties are unable
to agree within thirty (30) calendar days following termination, a third party
shall be chosen by mutual agreement for the sole purpose of establishing a fair
market value of the Program Assets. The cost of such third party evaluation
shall be borne equally by the parties, and the decision of such third party
shall be binding upon both parties. Following the establishment of the fair
market value of the Program Assets, the parties will negotiate in good faith (i)
the amount and form of the purchase price to Heritage by IAFC, if it is
determined that IAFC is to purchase the Program Assets, or (ii) the amount and
form of a payment to IAFC, if Heritage is to retain the Program Assets;
provided, however, that in either case the amount to be paid by one party to the
other shall take into consideration the fact that the Program has established
and maintained the Loan Loss Reserve.
c. The provisions of paragraphs 14.a(1)-(5), 14.b, 16,
17.d, 18, 21, 22, 23, 24 and 26 hereof will survive termination of this
Agreement.
20. Purchase and Sale of Program Assets Other than at
Termination.
a. In the event (i) there exists a Performance Shortfall,
(ii) IAFC proposes modifications to the terms of certain Accounts that, in the
reasonable judgment of IAFC, will improve the financial performance of such
Accounts, and (iii) Heritage declines to approve of such proposed modifications,
then IAFC will have the right to purchase the Accounts that are the subject of
the proposed modifications at their fair market value.
15
<PAGE> 16
b. Heritage will not sell, transfer, or assign the Program
Assets without IAFC's approval, which approval may not be unreasonably withheld.
In the event that Heritage proposes to sell the Program Assets pursuant to a
bona fide offer from a third party, IAFC will have a right of first refusal to
purchase the Program Assets on the same terms and conditions offered by such
third party.
21. Indemnification.
a. By IAFC. IAFC will defend, indemnify, and hold Heritage
and its directors, officers, shareholders, employees, agents, and affiliates
("Heritage Indemnitees") harmless from and against any claims by third parties
(including governmental authorities) and any losses, damages, settlements,
fines, penalties, liabilities or expenses resulting therefrom (collectively,
"Claims"), to the extent such Claims relate to the Program and arise out of or
are based on:
(1) failure of the Program Materials developed
by IAFC to comply with, or any action or omission by IAFC that constitutes a
violation of, the Federal Truth in Lending Act, Federal Truth in Savings Act,
Federal Fair Debt Collection Act, California laws and regulations relating to
the solicitation and offering of consumer credit, California laws relating to
collection of debts, and California laws relating to false, unfair, and
deceptive advertising;
(2) failure of the Underwriting Algorithm to
comply with the Federal Equal Credit Opportunity Act or with other laws and
regulations relating to non-discrimination in the offering of consumer credit;
(3) a breach of any representation or warranty made
by IAFC herein;
(4) a claim that the IAFC Marks infringe on the
intellectual property rights of any third party; or
(5) IAFC's negligent or intentionally improper acts
or omissions.
The foregoing notwithstanding, such indemnification obligation will not extend
to Claims to the extent that they arise out of circumstances as to which
Heritage has an obligation to indemnify IAFC Indemnitees under the following
subparagraph. IAFC will reimburse Heritage Indemnitees for attorney's fees and
other reasonable expenses as incurred by them in connection with investigating
or defending any Claim as to which IAFC has an obligation to indemnify.
b. Heritage will defend, indemnify, and hold IAFC and its
directors, officers, shareholders, employees, agents,
and affiliates ("IAFC Indemnitees") harmless from and against any claims by
third parties (including governmental authorities) and any losses, damages,
settlements, fines, penalties, liabilities or expenses resulting therefrom
(collectively,
16
<PAGE> 17
"Claims"), to the extent such Claims relate to the Program and arise out of or
are based on:
(1) any action or omission by Heritage that
constitutes a violation of the Federal Truth in Lending Act, Federal Truth in
Savings Act, Federal Fair Debt Collection Act, California laws and regulations
relating to the solicitation and offering of consumer credit, California laws
relating to collection of debts, and California laws relating to false, unfair,
and deceptive advertising;
(2) a breach of any representation or warranty made
by Heritage herein;
(3) a claim that the Heritage Marks infringe on the
intellectual property rights of any third party; or
(4) Heritage's negligent or intentionally improper
acts or omissions.
The foregoing notwithstanding, Heritage's indemnification obligation will not
extend to Claims to the extent that they arise out of circumstances as to which
IAFC has an obligation to indemnify Heritage Indemnitees under the preceding
subparagraph. Heritage will reimburse IAFC Indemnitees for attorney's fees and
other reasonable expenses as incurred by them in connection with investigating
or defending any Claim as to which Heritage has an obligation to indemnify.
c. Upon receiving notice of a Claim for which
indemnification may be sought under this Agreement, a Heritage
Indemnitee or IAFC Indemnitee (an "Indemnitee") will promptly notify the party
from whom such Indemnitee seeks indemnification (an "Indemnitor") in writing of
such Claim; provided, that any failure to give such notice will not waive any
rights of the Indemnitee except to the extent the rights of the Indemnitor are
materially prejudiced by such failure. The Indemnitor will elect whether to
participate with Indemnitee in the defense of such Claim or to defend against
such Claim in its own name, in the name of Indemnitee or in the name of the
party against whom the Claim is made. Provided the Indemnitor acknowledges in
writing its obligation to indemnify hereunder, such Indemnitor may elect to
defend and control the course of any defense. In such event, Indemnitee will
cooperate with Indemnitor in such defense. If the Indemnitor elects not to
control the defense, the Indemnitor will have the right to select counsel of its
choice and participate in such defense. In any event, Indemnitor will not be
responsible for any Claim settled or compromised, or for any judgment resulting
from a stipulation or confession of judgment, unless Indemnitor has consented in
writing to the Indemnitee's entering into such settlement, compromise, or
stipulation or confession of judgment.
22. Non-Solicitation of Employees. Except as may be otherwise
agreed to in writing by the parties, each party will refrain from soliciting the
other party's employees for the period commencing with the Effective Date and
ending two years after the date of termination of this Agreement.
17
<PAGE> 18
23. Proprietary Information.
a. In the course of performing under this Agreement, each
of IAFC and Heritage will come into possession of confidential and proprietary
information belonging to the other party ("PARTY PROPRIETARY INFORMATION").
Information will become Party Proprietary Information only if a party designates
it as such in a written notice given to the other party. IAFC hereby designates
the following information as its Party Proprietary Information: IAFC's
confidential business plans, projections, and analyses, and financial statements
and information relating to IAFC; the website design developed by IAFC for the
Program; and all computer coding used by IAFC to create and operate the Program.
Heritage hereby designates as its Party Proprietary Information all material
non-public information concerning Heritage's confidential business plans,
projections, and analyses, and financial statements which have been delivered to
IAFC in connection with the Program. Each of IAFC and Heritage will hold in
confidence any Party Proprietary Information disclosed to it by the other party,
and will not use such Party Proprietary Information for any purpose other than
the performance of their duties hereunder.
b. As used herein, "PROGRAM PROPRIETARY INFORMATION" means
the Underwriting Algorithm, the Pricing Algorithm and the Program Information
(as that term is defined in paragraph 16). Prior to the effective date of an
Origination Suspension, each party will hold Program Proprietary Information in
confidence, and may use Program Proprietary Information only in connection with
the performance of its duties hereunder. The foregoing notwithstanding, IAFC may
use Program Proprietary Information (other than Program Information, the use of
which is governed by paragraph 16) in connection with activities permitted under
paragraph 15. For a period ending two years after the effective date of an
Origination Suspension, Heritage may not, for the purpose of marketing credit
cards over the Internet, (i) disclose Program Proprietary Information to any
third party, or (ii) copy Program Proprietary Information. After the effective
date of an Origination Suspension, IAFC will not be restricted in its right to
disclose to third parties Program Proprietary Information.
c. In furtherance of its performance hereunder, either
party may disclose Party or Program Proprietary Information to its auditors and
attorneys and, if required, to a regulatory authority with jurisdiction over
such party. Such information may also be disclosed to the extent necessary to
each party's employees or others in a confidential relationship with such party
who have a need for access to such information.
d. The foregoing notwithstanding, "Party and Program
Proprietary Information" will not include information that (i) is, or has
become, readily publicly available without restriction through no fault of the
disclosing party or its employees, agents or contractors; (ii) is received by
either party without restriction from a third party who is lawfully in
possession of such information and who is lawfully empowered to disclose such
information; (iii) was lawfully in the possession of the disclosing party
without restriction prior to its disclosure to such party, or (iv) was developed
independently by employees, agents or contractors of the disclosing party who
had no prior access to such Proprietary Information.
18
<PAGE> 19
e. The parties agree that in the event of a breach or
threatened breach by either of them of the provisions of this paragraph, the
non-breaching party will have no adequate remedy in money damages and, that
accordingly, injunctive relief is an appropriate remedy, in addition to all
other remedies available at law or in equity.
24. Dispute Resolution.
a. Any dispute or claim arising out this Agreement will be
resolved through a binding arbitration procedure conducted before a single
arbitrator selected according to the Rules of the American Arbitration
Association. The party wishing to resolve such a dispute or claim may commence
such arbitration procedure by delivering a written notice (the "Arbitration
Notice") to the other party. Arbitration will be held in San Francisco,
California, in accordance with the commercial arbitration rules and regulations
of the American Arbitration Association. The parties will instruct the
arbitrator to take all reasonable measures to ensure that the arbitration
proceeding is completed and a decision is rendered as expeditiously as possible,
and in any event within 180 days of the date of the Arbitration Notice.
b. During the 60-day period following delivery of the
Arbitration Notice, the parties will consult with a view to defining and
limiting the issues. The arbitrator may in his or her discretion order the
parties to provide discovery, including document discovery, designation of
experts and other witnesses, and depositions.
c. The arbitrator will be directed to render a decision in
a written opinion stating the rationale for such decision. The arbitrator's
decision will be conclusive and binding upon the parties, and any resulting
award may be filed with the clerk of a court of competent jurisdiction as a
final adjudication of the claim involved, or application may be made to such
court for judicial acceptance of the award and an order of enforcement, as the
case may be. The expenses of each party, including legal and accounting fees, if
any, with respect to the arbitration shall be borne by each such party.
25. 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 "Force Majeure Event"). 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.
26. General.
a. Remedies Not Exclusive. Any remedy conferred on a party
by this Agreement will be considered cumulative with and not exclusive of any
other remedy conferred by this Agreement or available at law or in equity, and
the exercise of any one remedy shall not preclude the exercise of any other.
19
<PAGE> 20
b. Attorney's Fees. The prevailing party in any dispute
over the performance or construction of this Agreement will be entitled to
recover its reasonable attorney's fees and costs.
c. 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.
d. Costs. Each party will bear its own costs incurred in
the performance of this Agreement and all development activities hereunder,
except as otherwise provided.
e. Notices. Unless otherwise provided herein, all notices
or other communications under this Agreement must be in writing and signed by a
duly authorized representative of the party giving such notice, or such other
persons as either party shall specify in a written notice to the other.
All such notices shall be deemed given and received (i) if by
hand delivery, upon receipt thereof; (ii) if mailed, three days after deposit in
the U.S. mails, postage prepaid, certified mail, return receipt requested, or
(iii) as of the day received by Express mail, Federal Express, or other similar
services, or (iv) upon facsimile transmission by the sender and issuance by the
transmitting machine of a confirmation slip confirming the number of pages
constituting the notice have been transmitted without error. In the case of
notices sent by facsimile transmission, the sender shall contemporaneously send
a copy of the notice to the addresses at the addresses provided for below, by an
overnight courier service; however such mailing shall not alter the time at
which the facsimile notice is deemed received. The parties' notice addresses
are:
20
<PAGE> 21
If to Heritage: Heritage Bank of Commerce
150 Almaden Boulevard
San Jose, CA 95113
ATTN: Kenneth B. Silveira
Sr. Vice President-Operations &
Administration
With a copy to: James M. Rockett, Esq.
McCutcheon, Doyle, Brown & Enersen, L.L.P.
Three Embarcadero Center
San Francisco, CA 94111-4067
If to IAFC: Internet Access Financial Corporation
595 Market Street - Suite 2250
San Francisco, CA 94105
ATTN: John Hashman
Chief Financial Officer
f. Compliance with Laws. Each party shall comply with all
laws, rules and regulations, whether local, state, or federal, applicable to its
activities hereunder, but only to the extent such laws, rules and regulations
are applicable to such party.
g. Assignment. Other than as set forth in any agreement
with any Third Party Data Processor, neither party may assign or subcontract its
rights, duties, or obligations under this Agreement to any person or entity, in
whole or in part, without the other party's prior written consent. The foregoing
notwithstanding, upon 30 days written notice a party may assign this Agreement
without first obtaining consent to (i) a company controlling, controlled by, or
under common control with the assigning party, provided that the assigning party
will guarantee the performance of the assignee's performance hereunder; or (ii)
the assigning party's successor in interest in the event of a corporate
reorganization, merger, or acquisition of all or substantially all of a party's
assets, provided that such successor gives reasonable assurances to the
non-assigning party that the successor will perform its obligations hereunder.
The foregoing notwithstanding, in no event will a party assign its rights and
obligations to an entity which, at the time of such assignment, is in
substantial and direct competition with the other party, or under common control
with an entity in substantial and direct competition with the other party. Any
attempt by either party to assign or subcontract its rights or obligations under
this Agreement will be deemed both void and a material breach of this Agreement.
21
<PAGE> 22
h. Modification, Amendment, and Waiver. No modification,
amendment, supplement to, or waiver of this Agreement shall be binding upon the
respective parties unless such modification, etc., specifically refers to this
section and is consented to in a writing signed by an authorized representative
of the party against whom such modification, etc. is asserted. A party's failure
or delay to enforce at any time any of the provisions of this Agreement, or to
exercise any option herein provided, or to require strict performance of any
term hereof, shall not be deemed a continuing waiver of rights under this
Agreement. Nor shall any single or partial exercise of any such right preclude
any other or further exercise thereof or of any other right.
i. Relationship of the Parties. Nothing contained in this
Agreement will be construed to create a joint venture, partnership, or agency
relationship. Rather, the relationship between the parties will be one of
independent contractors. Neither party will have any right, power or authority
to act on behalf of or bind the other party.
j. Severability. If any one or more provisions of this
Agreement shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired; provided, however, that in
such case the parties will in good faith use their best efforts to achieve the
purpose of the invalid provision by agreeing on a substitute provision that is
legally enforceable.
k. Headings. The section headings in this Agreement are
for purposes of reference only and shall not limit or otherwise affect any of
the terms hereof.
l. Choice of Law. This Agreement will be construed under
the laws of the State of California, as applied to contracts entered into and
performed completely within California; provided, however, that the arbitration
provisions of paragraph will be governed by the Federal Arbitration Act.
m. Entire Agreement. This Agreement states the entire
agreement between the parties with respect to the subject matter hereof, and all
prior or
22
<PAGE> 23
contemporaneous written or oral agreements and understandings are merged herein
and superseded hereby.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective the date first stated above.
HERITAGE BANK OF COMMERCE INTERNET ACCESS FINANCIAL CORPORATION
By: /s/ ROSSEL By: /s/ JEREMY LENT
------------------------------ -----------------------------------
Name: ROSSEL Name: JEREMY R. LENT
---------------------------- --------------------------------
Title: CEO Title: CHIEF EXECUTIVE OFFICER
--------------------------- --------------------------------
23
<PAGE> 24
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
EXHIBIT A DOLLAR STATEMENT
<TABLE>
<CAPTION> 1998
<S> <C> <C> <C> <C> <C> <C>
Average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------- ----------- ----------- ----------- -------------- -----------
Q1 Q2 Q3 Q4 Full year 1998 1999
----------- ----------- ----------- ----------- -------------- -----------
Finance charge $ [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
---------- ----------- ----------- ----------- ----------- -----------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Aq. Cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acq. Cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAPC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
---------- ----------- ----------- ----------- ----------- -----------
Total expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax earnings [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Taxes [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
---------- ----------- ----------- ----------- ----------- -----------
After-tax earnings [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
========== =========== =========== =========== =========== ===========
$ sharing of revenues/costs:
- ----------------------------
Heritage Bank share $ [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Nextcard share $ [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Average assets $ [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------- ----------- -----------
2000 2001 2002
----------- ----------- -----------
Finance charge $ [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ]
----------- ----------- -----------
Total yield [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ]
Aq. Cost - deferred - - -
Acq. Cost - expensed - - -
Account servicing [ * ] [ * ] [ * ]
IAPC costs [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ]
----------- ----------- -----------
Total expenses [ * ] [ * ] [ * ]
Pre-tax earnings [ * ] [ * ] [ * ]
Taxes [ * ] [ * ] [ * ]
----------- ----------- -----------
After-tax earnings [ * ] [ * ] [ * ]
=========== =========== ===========
5 year
$ sharing of revenues/costs: time horizon
- ---------------------------- ------------
Heritage Bank share $ [ * ] [ * ] [ * ] [ * ]
Nextcard share $ [ * ] [ * ] [ * ] [ * ]
</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> 25
HERITAGE BANK/NEXTCARD ASSETS GENERATION ANALYSIS
EXHIBIT A SPREAD STATEMENTS
<TABLE>
<CAPTION>
1998
----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------------------------------------------
Full Year
Q1 Q2 Q3 Q4 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
------ ------ ------ ------ ------ ------ ------ ------ ------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost -
expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAPC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
------ ------ ------ ------ ------ ------ ------ ------ ------
Total expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Taxes [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------------------------------------------
After-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
==========================================================================================================
Heritage annualized
pretax average ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
- ----------------------------------------------------------------------
ASSUMPTIONS
- ----------------------------------------------------------------------
Heritage Bank share of earnings 50%
Nextcard share of earnings 50%
Servicing cost cap 0.00% No cap
IAPC program cost cap 0.00% Cap specified in agreement
HBC program cost cap 0.00% Cap specified in agreement
- ----------------------------------------------------------------------
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> 26
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A
SPREAD ANALYSIS
----------------------------------------------------------------------------------------------------
DEC-97 JAN-98 FEB-98 MAR-98 APR-98 MAY-98 JUN-98
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
SPREADS
- --------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Intercharge income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost -
deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost -
expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - IAPC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------------------------------------
Total expense [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage Bank ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-------------------------------------------------------------------------------------
JUL-98 AUG-98 SEP-98 OCT-98 NOV-98 DEC-98
-------------------------------------------------------------------------------------
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
SPREADS
- --------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Intercharge income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
[ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
---------------------------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost -
deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost -
expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - IAPC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
---------------------------------------------------------------------------------------
Total expense [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage Bank ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 27
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- --------------- ----------------------------------------------------------------------
JAN-99 FEB-99 MAR-99 APR-99 MAY-99 JUN-99
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
SPREADS
- -------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--IAPC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX SPREAD [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
HERITAGE BANK ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- --------------- ----------------------------------------------------------------------
JUL-99 AUG-99 SEP-99 OCT-99 NOV-99 DEC-99
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
---------- ---------- ---------- ---------- ---------- ----------
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
SPREADS
- -------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--IAPC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX SPREAD [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
HERITAGE BANK ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 28
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JAN-00 FEB-00 MAR-00 APR-00 MAY-00 JUN-00
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
SPREADS
- -----------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - IAFC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL EXPENSE [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX SPREAD [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
HERITAGE BANK ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JUL-00 AUG-00 SEP-00 OCT-00 NOV-00 DEC-00
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
SPREADS
- -----------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - IAFC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL EXPENSE [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX SPREAD [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
HERITAGE BANK ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 29
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JAN-01 FEB-01 MAR-01 APR-01 MAY-01 JUN-01
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
SPREADS
- -----------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - IAFC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage Bank ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JUL-01 AUG-01 SEP-01 OCT-01 NOV-01 DEC-01
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
SPREADS
- -----------------------------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - IAFC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs - Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage Bank ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 30
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- --------------- ----------------------------------------------------------------------
JAN-02 FEB-02 MAR-02 APR-02 MAY-02 JUN-02
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
SPREADS
- -------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--IAFC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Total Expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage Bank ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
SPREAD ANALYSIS
- --------------- ----------------------------------------------------------------------
JUL-02 AUG-02 SEP-02 OCT-02 NOV-02 DEC-02
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASE CASE
New accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total Accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Total active accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Average no. of accounts [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Avg. Account Balance [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month end assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Month average assets [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
SPREADS
- -------
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Total yield [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--IAFC [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other costs--Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribution to LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
----------------------------------------------------------------------
Total Expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax spread [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage Bank ROA [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 31
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
EXHIBIT A
<TABLE>
<CAPTION>
Dollar analysis Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98
- -------------- ------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
------ -------- ------- ------- ------- -------- -------- -------- -------- -------- -------- ------- --------
Total revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cot of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
cost-deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acq. cost - [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/ [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
------ -------- ------- ------- ------- -------- -------- -------- -------- -------- -------- ------- --------
Total Expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Pre-tax
earnings
(loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
Revenue/Cost Sharing Structure (note: cash settlement for the months of December
through March will be done in April 1998.)
<TABLE>
<CAPTION>
Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98
-------- --------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Programme revenue [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC Expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Earnings [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party Proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other
party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage-final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Nextcard-final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 32
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
DOLLAR ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JAN-99 FEB-99 MAR-99 APR-99 MAY-99 JUN-99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL REVENUES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost-deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acq cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAPC Costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
DOLLAR ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JUL-99 AUG-99 SEP-99 OCT-99 NOV-99 DEC-99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL REVENUES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost-deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acq cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAPC Costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
REVENUE/COST SHARING STRUCTURE
- ------------------------------
-----------------------------------------------------------------------------
JAN-99 FEB-99 MAR-99 APR-99 MAY-99 JUN-99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAPC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Earnings [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares
(50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split
income(loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to
other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Nextcard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
REVENUE/COST SHARING STRUCTURE
- ------------------------------
-----------------------------------------------------------------------------
JUL-99 AUG-99 SEP-99 OCT-99 NOV-99 DEC-99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAPC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Earnings [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares
(50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split
income(loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to
other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Nextcard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 33
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
DOLLAR ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JAN-00 FEB-00 MAR-00 APR-00 MAY-00 JUN-00
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
REVENUE/COST SHARING STRUCTURE
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
EARNINGS [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
[ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
DOLLAR ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JUL-00 AUG-00 SEP-00 OCT-00 NOV-00 DEC-00
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
Total expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
REVENUE/COST SHARING STRUCTURE
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
EARNINGS [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
[ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 34
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
DOLLAR ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JAN-01 FEB-01 MAR-01 APR-01 MAY-01 JUN-01
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL REVENUES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
REVENUE/COST SHARING STRUCTURE
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
EARNINGS [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
DOLLAR ANALYSIS
- ---------------
-----------------------------------------------------------------------------
JUL-01 AUG-01 SEP-01 OCT-01 NOV-01 DEC-01
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL REVENUES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
REVENUE/COST SHARING STRUCTURE
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
EARNINGS [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 35
HERITAGE BANK/NEXTCARD ASSET GENERATION ANALYSIS
<TABLE>
<CAPTION>
EXHIBIT A EXHIBIT A
- -------------------------------------------------------------------------------------------------------------------
DOLLAR ANALYSIS Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
--------------------------------------------------------------------------
TOTAL REVENUES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost-deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acq cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
- -------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
REVENUE/COST SHARING STRUCTURE
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
EARNINGS [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
<CAPTION>
EXHIBIT A EXHIBIT A
- -------------------------------------------------------------------------------------------------------------------
DOLLAR ANALYSIS Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance charge [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Interchange income [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Annual fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Other fees [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
--------------------------------------------------------------------------
TOTAL REVENUES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Cost of funds [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Servicing cost [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acquisition cost-deferred [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Acq cost - expensed [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Account servicing [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage costs [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Contribute/Reduce LLR [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
- -------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
PRE-TAX EARNINGS (LOSS) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
REVENUE/COST SHARING STRUCTURE
Program revenues [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
IAFC expenses [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
EARNINGS [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Party proportionate shares (50%) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage pre-split income (loss) [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard (HBC) sends to other party [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
Heritage - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
NextCard - final [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</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> 36
[NEXTCARD LETTERHEAD]
August 24, 1998
Kenneth Silveira
Senior Vice President
Heritage Bank of Commerce
150 Almaden Boulevard
San Jose, CA 95113
Dear Mr. Silveira:
Pursuant to Section 4(a) and Section 26(h) of the Consumer Credit Card Program
Agreement, dated November 25, 1997 (the "Agreement"), between Heritage Bank of
Commerce ("Heritage") and Internet Access Financial Corporation ("IAFC"), the
parties hereby agree to raise the Maximum Program Size, as set forth in Section
4(a) of the Agreement, from $35 million to $50 million.
If the foregoing correctly sets forth our mutual intent, please execute the
enclosed duplicate original of this letter and return it to the undersigned,
signifying your agreement to amend the Agreement.
Very truly yours,
/s/ John Hashman
John Hashman
Chief Financial Officer
ACCEPTED & AGREED:
Heritage Bank of Commerce
By: /s/ Kenneth Silveira
-------------------------------
Kenneth Silveira
Senior Vice President
<PAGE> 1
EXHIBIT 10.11
EXECUTION COPY
SERVICE AGREEMENT
DATED DECEMBER 22, 1997
BETWEEN
FIRST DATA RESOURCES INC.
AND
INTERNET ACCESS FINANCIAL CORPORATION
<PAGE> 2
TABLE OF CONTENTS
Article 1
Definitions ............................................................. 1
1.1 "AAA" ............................................................ 1
1.2 "Acquirer" ....................................................... 1
1.3 "Affiliate" ...................................................... 1
1.4 "Agreement" ...................................................... 1
1.5 "Alternative" .................................................... 2
1.6 "Arbitration Demand" ............................................. 2
1.7 "Arbitration Panel" .............................................. 2
1.8 "Basic Qualifications" ........................................... 2
1.9 "Business Continuity Plan" ....................................... 2
1.10 "Cardholder" ..................................................... 2
1.11 "Cardholder Account" ............................................. 2
1.12 "cc:Mail Software" ............................................... 2
1.13 "Core Processing Services" ....................................... 2
1.14 "Customer's Agent Bank" .......................................... 2
1.15 "Customer's Accounts" ............................................ 2
1.16 "Customer's Issuer Affiliate" .................................... 2
1.17 "Customer's Proprietary Information" ............................. 2
1.18 "Customer's Transaction Card Affiliates" ......................... 2
1.19 "Customer's Transaction Card Affiliate Agreement" ................ 2
1.20 "Daily Amount" ................................................... 2
1.21 "Deconversion" ................................................... 3
1.22 "Dispute" ........................................................ 3
1.23 "Disputing Party" ................................................ 3
1.24 "Entity" ......................................................... 3
1.25 "Failed Guideline" ............................................... 3
1.26 "Failed Month" ................................................... 3
1.27 "FDR's Proprietary Information" .................................. 3
1.28 "FDR System" ..................................................... 3
1.29 "FDR Settlement Rules" ........................................... 3
1.30 "Growth Credit" .................................................. 3
1.31 "Indemnified Party" .............................................. 3
1.32 "Indemnifying Party" ............................................. 3
1.33 "InfoSight Software" ............................................. 3
1.34 "Insolvency Event" ............................................... 3
1.35 "Interchange" .................................................... 4
1.36 "Interchange Settlement" ......................................... 4
1.37 "Issuer" ......................................................... 4
1.38 "Liquidated Damages" ............................................. 4
i
<PAGE> 3
1.39 "MasterCard" ..................................................... 4
1.40 "Merchant" ....................................................... 4
1.41 "Merchant Account" ............................................... 4
1.42 "Minimum Processing Fees" ........................................ 4
1.43 "Net Settlement Amount" .......................................... 4
1.44 "Non-Core Processing Services" ................................... 4
1.45 "Non-Performance" ................................................ 5
1.46 "Notice" ......................................................... 5
1.47 "Old Year" ....................................................... 5
1.48 "Original Term" .................................................. 5
1.49 "Performance Guidelines" ......................................... 5
1.50 "Processing Fees" ................................................ 5
1.51 "Processing Year" ................................................ 5
1.52 "Processing Year 1" .............................................. 5
1.53 "Recovery 1 Software" ............................................ 5
1.54 "Renewal Term" ................................................... 5
1.55 "Scheduled Start-Up Date" ........................................ 5
1.56 "Settlement Account" ............................................. 5
1.57 "Settlement Late Payment Fee" .................................... 5
1.58 "Settlement System" .............................................. 5
1.59 "Signing Bonus" .................................................. 5
1.60 "Special Fees" ................................................... 5
1.61 "Start-Up" ....................................................... 5
1.62 "Term" ........................................................... 5
1.63 "Total Annual Processing Fees" ................................... 6
1.64 "Transaction Card" ............................................... 6
1.65 "Transaction Card Ticket" ........................................ 6
1.66 "VISA" ........................................................... 6
1.67 "Year 1 Minimum Processing Feel" ................................. 6
1.68 "Year 2000 Compliant" ............................................ 6
Article 2
Services ................................................................ 6
2.1 Basic Services ................................................... 6
2.2 Communication Links .............................................. 6
2.3 Ancillary Services ............................................... 7
2.4 Start-Up ......................................................... 7
2.5 Compliance With Laws ............................................. 7
2.6 Performance Guidelines .......................................... 10
2.7 Failed Performance .............................................. 10
2.8 Sole Remedy ..................................................... 10
ii
<PAGE> 4
Article 3
Exclusivity and Execution by Affiliates ................................ 11
3.1 Sole and Exclusive Provider ..................................... 11
3.2 Execution of Agreement by Customer's Affiliates ................. 11
Article 4
Payment for Services ................................................... 12
4.1 Fees and Charges ................................................ 12
Article 5
Indemnification ........................................................ 13
5.1 Customer's Indemnification ...................................... 13
5.2 FDR's Indemnification ........................................... 13
5.3 Notification .................................................... 13
5.4 Claims Period ................................................... 14
Article 6
Limitation of Liability ................................................ 14
6.1 Limitation on Liability ......................................... 14
6.2 No Special Damages .............................................. 15
Article 7
Disclaimer of Warranties ............................................... 15
Article 8
Term of Agreement ...................................................... 15
Article 9
Termination ............................................................ 15
9.1 Termination by FDR .............................................. 15
9.2 Termination by Customer ......................................... 16
9.3 Effect of Termination ........................................... 17
9.4 Payments Upon Termination ....................................... 18
9.5 Liquidated Damages .............................................. 18
Article 10
Confidential Nature of Data ............................................ 19
10.1 Customer's Proprietary Information .............................. 19
10.2 FDR's Proprietary Information ................................... 19
10.3 Confidentiality of Agreement .................................... 19
10.4 Confidentiality ................................................. 20
10.5 Release of Information .......................................... 20
10.6 Exclusions ...................................................... 20
iii
<PAGE> 5
10.7 Remedy ............................................................ 21
Article 11
Representations ........................................................ 21
11.1 Presentations ................................................... 21
11.2 Customer's Representations ...................................... 22
11.3 Financial Information ........................................... 23
Article 12
Transaction Settlement ................................................. 23
12.1 Interchange Settlement Account .................................. 23
12.2 Transfer of Funds ............................................... 23
12.3 Daily Amount .................................................... 24
12.4 Failure to Transfer ............................................. 24
12.5 Settlement Late Payment Fee ..................................... 24
12.6 No Independent Obligation ....................................... 25
12.7 Violation of Rules .............................................. 25
12.8 Reliance on Other Parties ....................................... 25
12.9 Compliance with Instructions .................................... 25
12.10 Restrictions on Setoff .......................................... 26
12.11 Trailing Activity ............................................... 26
Article 13
General ................................................................ 26
13.1 Assignment ...................................................... 26
13.2 Relationship of Parties ......................................... 26
13.3 Business Continuity Plan ........................................ 27
13.4 State Law ....................................................... 27
13.5 Notice .......................................................... 27
13.6 Headings ........................................................ 28
13.7 Waiver .......................................................... 28
13.8 Force Majeure and Restricted Performance ........................ 28
13.9 Severability .................................................... 29
13.10 Audit ........................................................... 29
13.11 Risk of Loss .................................................... 29
13.12 Equal Employment Opportunity .................................... 29
13.13 Informal Dispute Resolution ..................................... 29
13.14 Arbitration ..................................................... 30
13.15 Judicial Procedure .............................................. 32
13.16 Federal Arbitration Act ......................................... 32
13.17 Insurance ....................................................... 32
13.18 Entire Agreement ................................................ 32
iv
<PAGE> 6
EXHIBITS
Exhibit Title
- ------- -----
A Services
B Payment and Term
C Customer Transaction Card Affiliate Agreement
D Performance Guidelines
v
<PAGE> 7
SERVICE AGREEMENT
This Service Agreement dated as of December 22,1997, is between Internet
Access Financial Corporation, 595 Market Street, Suite 2250, San Francisco,
California 94105 ("Customer") and First Data Resources Inc., 7302 Pacific
Street, Omaha, Nebraska 68114 ("FDR").
RECITALS
A. Customer and Customer's Transaction Card Affiliates desire to
obtain data processing and other related services from FDR in connection with
their respective Transaction Card businesses.
B. FDR is willing to perform data processing and other related
services for the Transaction Card businesses in accordance with the terms and
conditions of this Agreement, including the acknowledgment of Customer and
Customer's Transaction Card Affiliates that FDR is acting solely as an agent in
performing the settlement functions and that FDR has no obligation to supply or
advance funds for settlement purposes.
In consideration of the foregoing premises and of the mutual covenants
and conditions hereinafter set forth, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
DEFINITIONS
The following definitions apply to the terms set forth below when used
in this Agreement:
1.1 "AAA" is defined in Section 13.14(a) of this Agreement.
1.2 "Acquirer" means an Entity which has an arrangement with a
Merchant to obtain Transaction Card Tickets from the Merchant and present the
Transaction Card Tickets through an Interchange to an Issuer.
1.3 "Affiliate" means, with respect to Customer, any Entity which,
directly or indirectly, owns or controls, is owned or controlled by, or is under
common ownership or common control with Customer. As used herein, "control"
means the power to direct the management or affairs of an Entity and "ownership"
means the beneficial ownership of 50% or more of the equity securities of the
Entity.
1.4 "Agreement" shall mean this Service Agreement as amended from
time to time including any Exhibits attached hereto from time to time and the
executed Affiliate Agreements, if any.
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1.5 "Alternative" is defined in Section 2.5(f) of this Agreement.
1.6 "Arbitration Demand" is defined in Section 13.14(b) of this
Agreement.
1.7 "Arbitration Panel" is defined in Section 13.14(b) of this
Agreement.
1.8 "Basic Qualifications" is defined in Section 13.14(b) of this
Agreement.
1.9 "Business Continuity Plan" is defined in Section 13.3 of this
Agreement.
1.10 "Cardholder" means an individual or Entity which has a
Cardholder Account with an Issuer.
1.11 "Cardholder Account" means an arrangement between an individual
or an Entity and an Issuer which provides that the Entity may use one or more
Transaction Cards issued by the Issuer.
1.12 "cc:Mail Software" is defined in Section III - B of Exhibit "A"
to this Agreement.
1.13 "Core Processing Services" is defined in Section 3.1 of this
Agreement.
1.14 "Customer's Agent Bank" means an Entity which at any time during
the Term of this Agreement has an arrangement with Customer or an Affiliate of
Customer which (a) permits the Entity to act as an Issuer or an Acquirer and
obtain services related to the activities from either or both of Customer or one
or more of Customer's Affiliates, or (b) provides that an Entity may act as an
Issuer or Acquirer in conjunction with Customer or one or more of Customer's
Affiliates.
1.15 "Customer's Accounts" means the Cardholder Accounts and Merchant
Accounts of Customer or any of Customer's Transaction Card Affiliates.
1.16 "Customer's Issuer Affiliate" means an Affiliate of Customer
that acts as an Issuer (either alone or in conjunction with one of Customer's
Agent Banks) at any time during the Term.
1.17 "Customer's Proprietary Information" is defined in Section 10.1
of this Agreement.
1.18 "Customer's Transaction Card Affiliates" means any and all of
Customer's Issuer Affiliates and Customer's Agent Banks.
1.19 "Customer's Transaction Card Affiliate Agreement" shall mean an
agreement substantially in the form of Exhibit "C" which is executed by
Customer's Issuer Affiliates.
1.20 "Daily Amount" is defined in Section 12.2 of this Agreement.
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1.21 "Deconversion" means the removal of information concerning
Customer's Accounts from the FDR System.
1.22 "Dispute" is defined in Section 13.13 of this Agreement.
1.23 "Disputing Party" is defined in Section 13.14(a) of this
Agreement.
1.24 "Entity" means a corporation, partnership, sole proprietorship,
joint venture, or other form of organization.
1.25 "Failed Guideline" is defined in Section 2.7(a) of this
Agreement.
1.26 "Failed Month" is defined in Section 2.7(b) of this Agreement.
1.27 FDR's Proprietary Information" is defined in Section 10.2 of
this Agreement.
1.28 "FDR System" means the computer equipment, computer software and
related equipment and documentation used at any time and from time to time by
FDR to provide the services contemplated by this Agreement.
1.29 "FDR Settlement Rules" means the policies, rules and procedures
adopted by FDR from time to time and in effect from time to time to provide for
the payment of amounts due as the result of Interchange Settlement.
1.30 "Growth Credit" is defined in Section I-h of Exhibit "B" to this
Agreement.
1.31 "Indemnified Party" is defined in Section 5.3 of this Agreement.
1.32 "Indemnifying Party" is defined in Section 5.3 of this
Agreement.
1.33 "InfoSight Software" is defined in Section III - A of Exhibit
"A" to this Agreement.
1.34 "Insolvency Event" occurs, with respect to any party, when such
party:
(i) is dissolved, becomes insolvent, generally fails
to pay or admits in writing its inability generally to pay its
debts as they become due;
(ii) makes a general assignment, arrangement, or
composition agreement with or for the benefit of its creditors;
or
(iii) files a petition in bankruptcy or institutes any
action under federal or state law for the relief of debtors or
seeks or consents to the appointment of an administrator,
receiver, custodian, or similar official for the wind up of its
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business (or has such a petition or action filed against it and
such petition action or appointment is not dismissed or stayed
within thirty (30) days).
1.35 "Interchange" means the contracts, agreements, rules,
regulations and procedures governing the relationships between, or the actions
in accordance with the contracts, agreements, rules, regulations and procedures
by, any two or more Entities in connection with the Interchange Settlement.
1.36 "Interchange Settlement" means the process by which FDR, on
behalf of either or both of Customer or Customer's Transaction Card Affiliates,
(a) initiates payment for MasterCard and VISA Transaction Card Tickets presented
by Acquirers to Customer and Customer's Transaction Card Affiliates, (b)
receives payment for MasterCard and VISA Transaction Card Tickets presented by
Customer and Customer's Transaction Card Affiliates to Issuers, and (c) remits
and receives payments for chargebacks and other Interchange fees and expenses of
or payable by Customer or Customer's Transaction Card Affiliates.
1.37 "Issuer" means an Entity that has a Cardholder Account with a
Cardholder.
1.38 "Liquidated Damages" is defined in Section 9.5 of this
Agreement.
1.39 "MasterCard" means MasterCard International Incorporated or its
successors or assigns.
1.40 "Merchant" means an Entity that has the right to acquire or
otherwise acquires a Transaction Card Ticket as payment for goods, services, or
otherwise.
1.41 "Merchant Account" means an arrangement between an Acquirer and
a Merchant which permits a Merchant to present Transaction Card Tickets to the
Acquirer for payment through the Interchange. It is understood and agreed that
any Merchant Accounts of Customer hereunder shall be considered Processing
Merchants (i.e. - branch bank locations performing Merchant related transactions
such as authorizations, cash advances, etc.).
1.42 "Minimum Processing Fees" is defined in Section I-d of Exhibit
"B" to this Agreement.
1.43 "Net Settlement Amount" means the net dollar amount for each
business day of FDR of all (a) transactions processed for Customer and
Customer's Transaction Card Affiliates for the day determined in accordance with
the applicable rules of MasterCard, VISA and the FDR Settlement Rules, (b)
Interchange fees and expenses relating to Customer and Customer's Transaction
Card Affiliates, and (c) account expenses including overdraft charges, activity
charges, wire transfer fees and other charges relating to Customer and
Customer's Transaction Card Affiliates.
1.44 "Non-Core Processing Services" is defined in Section 3.1 of this
Agreement.
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1.45 "Non-Performance" is defined in Section 2.7(a) of this
Agreement.
1.46 "Notice" is defined in Section 2.5(f) of this Agreement.
1.47 "Old Year" is defined in Section I-a of Exhibit "B" to this
Agreement.
1.48 "Original Term" is defined in Section III-a of Exhibit "B" to
this Agreement.
1.49 "Performance Guidelines" is defined in Section 2.6 of this
Agreement.
1.50 "Processing Fees" means all fees and charges incurred (prior to
any Growth Credit for which Customer qualifies pursuant to Exhibit "B", Section
I-h) for services performed at the prices set forth in Exhibit "B", as adjusted
from time to time consistent with this Agreement, with the exception of Special
Fees and specifically excluding all charges for taxes and interest.
1.51 "Processing Year" is defined in Section III-a of Exhibit "B" to
this Agreement.
1.52 "Processing Year 1" is defined in Section III-a of Exhibit "B"
to this Agreement.
1.53 "Recovery 1 Software" is defined in Section III-H of Exhibit "A"
to this Agreement.
1.54 "Renewal Term" is defined in Section III-b of Exhibit "B" to
this Agreement.
1.55 "Scheduled Start-Up Date" is defined in Section 2.4 of this
Agreement.
1.56 "Settlement Account" is defined in Section 12.1 of this
Agreement.
1.57 "Settlement Late Payment Fee" is defined in Section 12.5 of this
Agreement.
1.58 "Settlement System" is defined in Section 12.1 of this
Agreement.
1.59 "Signing Bonus" is defined in Section I-g of Exhibit "B" to this
Agreement.
1.60 "Special Fees" means the tariff line rates, WATS lines rates,
data circuit charges or any other rates charged to FDR by a communications
common carrier, postage, courier and any other similar charges and methods of
reimbursement described in Exhibit "B".
1.61 "Start-Up" means the preparation of the FDR System for the entry
of Customer's and Customer's Transaction Card Affiliates' data relating to
Customer's Accounts.
1.62 "Term" means the Original Term together with any Renewal Term or
any other extension of this Agreement.
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1.63 "Total Annual Processing Fees" is defined in Section I-d of
Exhibit "B" to this Agreement.
1.64 "Transaction Card" means a payment card issued pursuant to a
license from MasterCard, VISA or any other card issuing organization for which
FDR currently provides service support. This shall include any credit card,
debit card or any small business account card, purchasing account card or
corporate travel and expense account card ("Commercial Card") program offered by
Customer.
1.65 "Transaction Card Ticket" means a record (whether paper,
magnetic, electronic or otherwise) which is created to evidence the use of a
Transaction Card as payment for goods, services, cash advances or otherwise or
for a credit or refund or otherwise.
1.66 "VISA" means, individually or collectively, as appropriate, VISA
U.S.A. Inc. or VISA INTERNATIONAL or either of their successors or assigns.
1.67 "Year 1 Minimum Processing Fee" is defined in Section I-d of
Exhibit "B" to this Agreement.
1.68 "Year 2000 Compliant" is defined in Section 11.1(d) of this
Agreement.
ARTICLE 2
SERVICES
2.1 BASIC SERVICES. FDR shall make available to and perform for
Customer and Customer's Transaction Card Affiliates the services described in
Exhibit "A" which are applicable to their respective Issuer and Acquirer
businesses or as specifically provided in Exhibit "A". Exhibit "A" and any
document or service referred to as Exhibit "A" shall be subject to revision by
FDR from time to time during the Term of this Agreement to reflect changes and
improvements to the FDR System or the services provided by FDR and offered
generally to FDR customers and to reflect any changes and improvements in the
specific services provided to Customer and Customer's Transaction Card
Affiliates; provided, however, that: (i) FDR shall not effect any change to the
FDR System which would eliminate or materially degrade the services provided by
FDR under this Agreement unless such change is required by the MasterCard or
VISA rules or regulations or applicable federal or state statutes, laws or
regulations applicable to FDR or its customers and (ii) FDR shall not increase
the fees set forth in Exhibit "B" (except as provided for in Exhibit "B",
Section 1, Paragraph (a)) pursuant to this Section 2.1.
2.2 COMMUNICATION LINKS. FDR from time to time shall install,
provide or cause to be installed or provided the means for communicating data
from its facilities or equipment to the facilities or equipment of Customer,
Customer's Transaction Card Affiliates and third parties designated by Customer
as FDR determines is desirable to perform this Agreement. The method
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of transmission and the media employed will be determined by FDR taking into
consideration relevant factors such as traffic type, inbound and outbound
message sizes, traffic loading distribution, and the equipment or devices which
are or may be used.
2.3 ANCILLARY SERVICES. The ancillary services to be provided by FDR
or made available to Customer and Customer's Transaction Card Affiliates are set
forth in Exhibit "A".
2.4 START-UP.
(a) FDR will provide, subject to any applicable approvals of
VISA or MasterCard, for completion of the Start-Up on or before December
18, 1997, or at an earlier or later date as may be mutually agreed upon
by FDR and Customer (the "Scheduled Start-Up Date"). To the extent that
FDR and Customer mutually agree, the Scheduled Start-Up Date may be
modified from time to time prior to Start-Up. FDR will use all
reasonable resources, including the assignment of adequate personnel to
assure timely performance of those functions required of FDR under the
Start-Up so as to enable Start-Up to be completed on or by the Scheduled
Start-Up Date.
(b) Customer will (i) use all reasonable resources,
including the assignment of adequate personnel to assure timely
performance of those functions required of Customer under the Start-Up,
and (ii) comply with any directions of FDR given thereunder so as to
enable Start-Up to be completed on or before the Scheduled Start-Up
Date.
(c) Except as otherwise provided herein, each party shall be
responsible for and pay all costs and expenses incurred by it in
connection with the Start-Up.
2.5 COMPLIANCE WITH LAWS.
(a) Prior to the Scheduled Start-Up Date, Customer will
review the parameter settings and options within the FDR System, as
described in the User Manuals set forth in Exhibit "A", Section 1, and
determine that FDR's System provides such features and options, which
will, if properly selected by or on behalf of Customer, allow Customer
and Customer's Transaction Card Affiliates to comply with all applicable
federal and state laws and contractual agreements of Customer and
Customer's Transaction Card Affiliates. To the extent that Customer
notifies FDR of any change in federal and state law, subject to the
limitations set forth below, FDR agrees to develop reasonable
enhancements to the FDR System responsive to the identified change in
federal and state law as specifically requested by Customer. The
obligation of FDR set forth in the previous sentence is subject to the
following limitations:
(i) the change in federal and state law is generally
applicable to a significant portion of FDR's client base and
does not relate solely to a requirement or preference of
Customer or Customer's Transaction Card Affiliates;
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(ii) the responsive enhancement requested by Customer
is consistent with the response requested by the majority of the
affected client base (Customer acknowledges that in many
instances, responsive enhancements will be mediated by certain
client advisory groups maintained by FDR and agrees that
development of an enhancement approved by such client advisory
groups as responsive to the change in law shall satisfy FDR's
obligations under this subsection (a));
(iii) FDR shall have a reasonable time from the date
Customer notifies FDR of the change in law and specifies the
requested enhancement in which to design, code, test and
implement the enhancement (in the determination of
reasonableness, the extent and impact of the change in law on
the FDR client base, the relative importance of other
enhancements, the complexity of the enhancement, and related
issues of impact and resource allocation shall be considered and
the effective date of the change in law shall not be
determinative); and
(iv) the responsive enhancement requested by Customer
does not impose a burden on FDR (or the FDR System) to determine
the facts not available on the FDR System, to make legal
interpretations or conclusions, or to in any way shift
Customer's and Customer's Transaction Card Affiliates'
compliance responsibility to FDR.
(b) Customer acknowledges and agrees that it is solely
responsible for monitoring legal developments applicable to the
operation of its business and Transaction Card operations, interpreting
applicable state and federal laws, determining the requirements for
compliance with all applicable state and federal laws, and maintaining
an ongoing compliance program. Consequently, Customer agrees that FDR
has no responsibility to monitor or interpret laws applicable to
Customer's or Customer's Transaction Card Affiliates' business, to
monitor or review the terms and conditions of Customer's or Customer's
Transaction Card Affiliates' Transaction Card programs or Customer's
selection of system options and programming, or to assure that
Customer's selection of any system option or programming (either alone
or acting in conjunction with other system options and programming
selected by Customer) is consistent with laws applicable to Customer and
Customer's Transaction Card Affiliates or the terms and conditions of
Customer's or Customer's Transaction Card Affiliates' credit agreements
with, or disclosure to, its Cardholders. FDR shall use its reasonable
best efforts to give Customer timely notice by bulletin, notice, or
other method, of all changes to the FDR System which are being made to
comply with any known changes in federal, state or card association
laws, rules, or regulations.
(c) FDR shall be entitled to rely upon and use, without
verification, any and all information, data and instructions any time
submitted to FDR by Customer having to do with
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Customer or Customer's Accounts, and FDR shall have no responsibility or
liability whatsoever for (i) the accuracy or inaccuracy thereof, (ii)
the wording or text authored or submitted by Customer to FDR, for
materials to be prepared or for other purposes, (iii) the wording or
text appearing on any forms, Transaction Cards or other materials
furnished by Customer to FDR, or (iv) any noncompliance of such
information, data, instruction, wording or text with applicable laws,
rules or regulations.
(d) If any change in the services provided by FDR hereunder
is required by the applicable operating rules of VISA and MasterCard
relating to the business of Customer, FDR shall notify Customer of such
modifications or changes and make modifications or changes, as necessary
to, (i) the FDR System and/or (ii) the manner and methods used to
provide the services hereunder as soon as practicable after FDR has been
notified of such required changes by VISA or MasterCard. In the event
such changes cannot reasonably be implemented, FDR shall provide
customer with reasonable alternatives to allow Customer to comply with
such requirements. Any such change or alternative required by the
applicable operating rules of VISA and MasterCard shall be made at FDR's
sole expense.
(e) If any enhancement developed by FDR pursuant to Section
2.5(a) is required by federal law, such enhancement shall be developed
by FDR at FDR's expense; provided, however, if any change in federal law
is not generally applicable to a significant portion of FDR's client
base, based on the number of Cardholder Accounts on file of such
clients, or if such change relates solely to a requirement or preference
of Customer, then subject to the provisions of Section 2.5(a)(iii) and
(iv), FDR will develop the requested enhancement at Customer's expense
or at the equal expense of Customer and any other FDR customers subject
to such federal law as appropriate. If any enhancement developed by FDR
pursuant to Section 2.5(a) is required by state law and is not generally
applicable to a significant portion of FDR's client base, based on the
number of Cardholder Accounts on file of such clients, or if such change
relates solely to a requirement or preference of Customer, then such
enhancement shall be developed subject to the provisions of Section
2.5(a)(iii) and (iv) by FDR at the expense of Customer or at the equal
expense of Customer and any other FDR customers subject to such state
law as appropriate.
(f) If Customer, in its reasonable determination, concludes
that any enhancement which FDR developed pursuant to the notification
from Customer regarding the change in federal or state law does not
allow Customer to be in compliance with the applicable federal or state
law, then Customer shall notify FDR in writing (the "Notice"). The
Notice shall specify in reasonable detail Customer's basis for its
position together with all information regarding the requirements which
Customer reasonably needs to be in compliance with the federal or state
law. After receipt of the Notice, FDR shall provide Customer with any
alternative enhancements which FDR can reasonably propose based on the
Notice from Customer (the "Alternative"). If Customer, in its reasonable
determination, concludes that the Alternative does not allow Customer to
be in compliance with the applicable federal or state law, then Customer
may elect to terminate this Agreement; provided, however, that this
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termination option is exercised within sixty (60) days after Customer
receives the Alternative, and provided that such termination shall
become effective on a date specified by Customer, which date shall not
be later than nine (9) months after Customer's delivery to FDR of a
written notice of its intention to so terminate this Agreement. Other
than payment to FDR of the unamortized portion of the Signing Bonus as
specified in Section 9.4 of this Agreement, Customer shall not be
responsible for any other termination fees, including costs of
Deconversion, if this Agreement is terminated pursuant to this Section
2.5(f).
2.6 PERFORMANCE GUIDELINES. While this Agreement is in effect, FDR
shall at all times maintain the necessary telephone lines, computer capacity and
staff necessary to provide service in accordance with the list of performance
guidelines set forth in Exhibit "D" as such list may, from time to time, be
amended by the parties (the "Performance Guidelines"). By the twentieth (20th)
day of each calendar month, FDR agrees to provide Customer with a monthly report
setting forth the Performance Guidelines and its performance during the just
concluded calendar month in connection with those services which Customer used
during the calendar month.
2.7 FAILED PERFORMANCE.
(a) During any calendar month, each failure to achieve a
Performance Guideline shall constitute a "Failed Guideline". If FDR,
during any six (6) consecutive calendar months, fails to achieve the
same Performance Guideline, then such failure shall constitute "Non
Performance" and the sole and exclusive provisions of Section 3.1 of
this Agreement shall not apply for such Failed Guideline for the
remainder of the Tenn.
(b) In addition to the provisions of paragraph (a) of this
Section 2.7, if FDR fails to achieve five (5) or more Performance
Guidelines in any one calendar month, then such month shall be
considered to be a "Failed Month" for purposes of this Section 2.7 (b).
If FDR experiences three (3) consecutive Failed Months, then FDR shall
provide Customer with a credit equal to two percent (2%) of the
Processing Fees paid during the third such Failed Month. If FDR
experiences four (4) consecutive Failed Months, then FDR shall provide
Customer with a credit equal to 3% of the Processing Fees paid during
the fourth such Failed Month. If FDR experiences five (5) consecutive
Failed Months, then FDR shall provide Customer with a credit equal to
four percent (4%) of the Processing Fees paid during the fifth such
Failed Month. If FDR experiences six (6) consecutive Failed Months, then
Customer, at its election, may terminate this Agreement; provided,
however, that this termination option is exercised within sixty (60)
days after Customer receives notice of FDR's sixth Failed Month, and
provided that such termination shall become effective on a date
specified by Customer, which date shall be not later than nine (9)
months after Customer's delivery to FDR of a written notice of its
intention to so terminate this Agreement.
2.8 SOLE REMEDY. Customer hereby agrees that due to the difficulty
of determining and calculating its damages upon FDR's failure to perform in
accordance with the Performance Guidelines, the remedies, as set forth in
Sections 2.7(a), and 2.7 (b) are its sole and exclusive
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remedies for such failures and that Customer hereby elects to waive any and all
other remedies to which Customer may be entitled under this Agreement, at law or
in equity, based on the failure of FDR to perform in accordance with the
Performance Standards; provided, however, that nothing in this Section 2.7 shall
be construed as a waiver of any of Customer's rights under any other provision
of this Agreement which are not based on the failure of FDR to perform in
accordance with the Performance Guidelines.
ARTICLE 3
EXCLUSIVITY AND EXECUTION BY AFFILIATION
3.1 SOLE AND EXCLUSIVE PROVIDER. During the Term of this Agreement,
FDR shall be the sole and exclusive third party provider to Customer and
Customer's Transaction Card Affiliates of all services set forth in Exhibit "A"
of this Agreement which are not preceded by an * ("Core Processing Services").
Neither Customer nor Customer's Transaction Card Affiliate shall agree with any
third party to have such third party perform or provide any of the Core
Processing Services. Those services set forth in Exhibit "A" which are preceded
by an * shall be known as "Non-Core Processing Services". Customer and/or
Customer's Transaction Card Affiliate may perform or provide, or have a third
party perform or provide, any of the Non-Core Processing Services for themselves
or for each other. If Customer, after the effective date of this Agreement,
elects to discontinue use of any or all of the Cardholder Support Services
described in Section III G of Exhibit "A", then Customer shall provide FDR with
written notice of such discontinuance at least ninety (90) days prior thereto.
Such notice may not be given prior to February 28, 1998.
3.2 EXECUTION OF AGREEMENT BY CUSTOMER'S AFFILIATES. Subject to the
terms and conditions of Exhibit "C", each of Customer's Issuer Affiliates shall
be or become a party to this Agreement and each has executed a Customer
Transaction Card Affiliate Agreement or shall execute Customer Transaction Card
Affiliate Agreement when it becomes a Customer Issuer Affiliate. Customer and
each of Customer's Issuer Affiliates, in addition to the terms of Customer
Transaction Card Affiliate Agreement, covenant and represent the following:
(a) Customer shall have full authority to represent
Customer's Issuer Affiliate and to act fully on Customer's Issuer
Affiliate's behalf in connection with this Agreement and the Customer
Transaction Card Affiliate Agreement including the negotiating with FDR
of any amendments, extensions or revisions of this Agreement or the
Customer Transaction Card Affiliate Agreement, the asserting,
negotiating and resolving any controversy, dispute or claim under this
Agreement or the Customer Transaction Card Affiliate Agreement and the
execution or delivery of any documents.
(b) If Customer shall fail to pay any amounts due under this
Agreement (and payment of such amounts by Customer's Transaction Card
Affiliates are not specifically excluded in the Customer Transaction
Card Affiliate Agreement), including but not limited to any Processing
Fees, Special Fees, or other fees, taxes, interest payments, charges, or
amounts due or payable by Customer, Customer's Issuer Affiliate shall
pay FDR on demand
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the portion of the amounts due from Customer to FDR for services
performed by FDR for or on behalf of Customer's Issuer Affiliate, as
determined by FDR, which approximates the percentage that the Processing
Fees relating to processing for Customer's Issuer Affiliate are of the
total Processing Fees under this Agreement.
ARTICLE 4
PAYMENT FOR SERVICES
4.1 FEES AND CHARGES.
(a) The initial Processing Fees for the services to be
performed under this Agreement are set forth in Exhibit "B". Exhibit "B"
also contains initial prices to be charged or methods for computing
charges by FDR for Special Fees such as but not limited to
reimbursements, assessments and pass through fees. If FDR commences to
offer any new services or products to its customers after the execution
of this Agreement and Customer or Customer's Transaction Card Affiliates
use any such service or product, then FDR shall provide and Customer and
Customer's Transaction Card Affiliates shall receive any such service or
product at FDR's then current fees and charges, as such fees and charges
may be increased pursuant to Exhibit "B", Section I.
(b) Six (6) months following the execution of this
Agreement, and annually thereafter, the parties may review the prices
charged by FDR for Core Processing Services. If either party determines,
in the exercise of its reasonable business judgement, that pricing for
Core Processing Services does not properly reflect (i) in the case of
FDR, FDR's ability to recover the cost of delivering such Core
Processing Services, or (ii) in the case of Customer, the price that
Customer would pay for similar services from an unaffiliated third party
(considering factors such as, but not limited to, the mix of services,
volumes associated therewith, service levels, features, functionality,
contractual terms and quality of any such similar services) then the
parties may agree to negotiate, in good faith, an appropriate revision
to the prices charged for Core Processing Services.
(c) Within sixty (60) days following the Start-Up Date, FDR
and Customer will review the method of computing charges for the
Cardholder Support Services set forth in Section III-G of Exhibit "A" to
this Agreement. If Customer and FDR determine, in the exercise of their
reasonable business judgement, that each party would benefit by
computing charges for the Cardholder Support Services on a talk-time or
other basis, rather than per active account basis, then the parties
agree to amend this Agreement to reflect such alternative method of
computing charges. If the parties are unable to agree on an alternative
method for computing charges for the Cardholder Support Services, then
the current pricing structure shall remain in effect.
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ARTICLE 5
INDEMNIFICATION
5.1 CUSTOMER'S INDEMNIFICATION. Customer and Customer's Transaction
Card Affiliates shall indemnify and hold harmless FDR and its directors,
officers, employees, agents and affiliates from and against any and all claims,
liabilities, losses and damages (including reasonable attorney fees, expert
witness fees, expenses and costs of settlement) arising out of or with respect
to this Agreement, to the extent that the claim, liability, loss or damage is
caused by, relates to or arises out of:
(a) The negligence of Customer or any of Customer's
Transaction Card Affiliates;
(b) The breach by Customer or any of Customer's Transaction
Card Affiliates of any promises or covenants of Customer or Customer's
Transaction Card Affiliates set forth in Article 12 of this Agreement,
including but not limited to any amount which FDR may be called upon to
pay under the applicable rules of VISA or MasterCard with respect to any
Interchange obligations of Customer or Customer's Transaction Card
Affiliates following the failure of FDR to receive any Daily Amount; or
(c) FDR's payment of fees and charges relating to Customer's
Accounts pursuant to Section 12.11, Trailing Activity.
Customer and Customer's Transaction Card Affiliates shall not have any
obligation to indemnify FDR against any claim, liability, loss or damage FDR or
its directors, officers, employees, agents or affiliates may suffer arising
solely out of FDR's negligent performance of any of the services provided under
this Agreement.
5.2 FDR's INDEMNIFICATION. FDR shall indemnify Customer and
Customer's Transaction Card Affiliates, and their respective directors,
officers, employees and agents from and against any and all claims, liabilities,
losses or damages (including reasonable attorney fees, expert witness fees,
expenses and costs of settlement) arising out of or with respect to FDR's
negligent performance of any of the services provided under this Agreement,
provided that FDR's obligation to indemnify Customer and Customer's Transaction
Card Affiliates and their respective directors, officers, employees and agents,
shall be limited to:
(a) The actual cost to FDR of reprocessing to correct the
negligent performance; and
(b) The additional out-of-pocket expenses incurred by
Customer and Customer's Transaction Card Affiliates as a direct result
of the negligent performance.
5.3 NOTIFICATION. In the event a claim, suit or proceeding by a
third party for which indemnification may be available under this Agreement is
made or filed against a party or any Entity,
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the party against which the claim, suit or proceeding is made (the "Indemnified
Party"), shall promptly notify the other party (the "Indemnifying Party") in
writing of the claim, suit or proceeding. The Indemnifying Party, within thirty
(30) days, or such shorter period as is required to avoid any prejudice in the
claim, suit or proceeding, after the notice, may elect to defend, compromise, or
settle the third party claim, suit or proceeding at its expense. In any third
party claim, suit or proceeding which the Indemnifying Party has elected to
defend, compromise or settle, the Indemnifying Party shall not after the
election be responsible for the expenses, including counsel fees, of the
Indemnified Party but the Indemnified Party may participate therein and retain
counsel at its own expense. In any third party claim, suit or proceeding the
defense of which the Indemnifying Party shall have assumed, the Indemnified
Party will not consent to the entry of any judgment or enter into any settlement
with respect to the matter without the consent of the Indemnifying Party and the
Indemnifying Party will not consent to the entry of any judgment or enter into
any settlement affecting the Indemnified Party to the extent that the judgment
or settlement involves more than the payment of money without the written
consent of the Indemnified Party. The Indemnified Party shall provide to the
Indemnifying Party all information, assistance and authority reasonably
requested in order to evaluate any third party claim, suit or proceeding and
effect any defense, compromise or settlement.
5.4 CLAIMS PERIOD. Any claim for indemnification under this
Agreement must be made prior to the earlier of:
(a) One year after the party claiming indemnification
becomes aware of the event for which indemnification is claimed, or
(b) One year after the earlier of the termination of this
Agreement or the expiration of the Term of this Agreement.
ARTICLE 6
LIMITATION OF LIABILITY
6.1 LIMITATION ON LIABILITY.
(a) Except as provided in Section 6.1(b), FDR's cumulative
liability for any loss or damage, direct or indirect, for any cause
whatsoever (including, but not limited to those arising out of or
related to this Agreement) with respect to claims relating to events in
any one Processing Year shall not under any circumstances exceed the
amount of the Processing Fees paid to FDR pursuant to this Agreement for
services performed in the immediately preceding twelve (12) month
period, and in the case of the Processing Year 1, the Year 1 Minimum
Processing Fees specified in Section I of Exhibit "B".
(b) Notwithstanding the limitation of liability provided for
in Section 6.1(a), in the event that FDR's liability in connection
with this Agreement arises out of the gross negligence or wilful
misconduct of FDR with respect to those obligations of FDR contained
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in Section 2.5 of this Agreement, then FDR's liability in connection
with this Agreement shall not exceed two (2) times the amount of
Processing Fees paid to FDR for services performed in the immediately
preceding twelve (12) month period, and, in the case of Processing Year
1, the Year 1 Minimum Processing Fees specified in Section I of Exhibit
"B".
6.2 NO SPECIAL DAMAGES. IN NO EVENT SHALL FDR OR CUSTOMER BE LIABLE
UNDER ANY THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY FOR ANY LOST PROFITS, EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT
OR CONSEQUENTIAL DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE
PARTIES REGARDLESS OF WHETHER OR NOT FDR OR CUSTOMER HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
ARTICLE 7
DISCLAIMER OF WARRANTIES
FDR SPECIFICALLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED
ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
NONINFRINGEMENT, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES.
FDR, CUSTOMER AND CUSTOMER'S TRANSACTION CARD AFFILIATES HEREBY AGREE THAT FDR'S
OBLIGATIONS TO CUSTOMER AND CUSTOMER'S TRANSACTION CARD AFFILIATES ARE RELATED
TO FDR PROVIDING SERVICES, THAT THIS AGREEMENT IS A SERVICE AGREEMENT FOR
PURPOSES OF THE UNIFORM COMMERCIAL CODE AND THEREFORE THE PROVISIONS OF THE
UNIFORM COMMERCIAL CODE SHALL NOT APPLY TO THIS AGREEMENT.
ARTICLE 8
TERM OF AGREEMENT
8.1 TERM AND RENEWALS. This Agreement is effective from the date
hereof and shall extend for the Original Term and Renewal Term(s) set forth in
Exhibit "B", Section III.
ARTICLE 9
TERMINATION
9.1 TERMINATION BY FDR. Despite anything to the contrary herein
contained, FDR, at its option, may terminate this Agreement under the following
circumstances:
(a) If Customer fails to establish the account required by
Section I-b of Exhibit "B" within three (3) business days after written
notice to Customer of its failure to establish the account or within
thirty (30) business days after written notice to Customer of its
failure thereafter to maintain the account during the Term of this
Agreement;
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(b) If FDR is unable to receive payment from Customer
because sufficient funds are not available in the account established
pursuant to Section I-b of Exhibit "B" and Customer, within thirty (30)
business days after written notice to Customer, fails to provide and
maintain sufficient funds in the account to permit FDR to receive full
payment from the account or within ten (10) business days after written
notice to Customer if FDR has given notice more than three times in any
twelve month period;
(c) Immediately without notice upon the termination of
Customer's membership in VISA or MasterCard or either of their
successors in interest, or if FDR has the right to give notice to
MasterCard or VISA under Section 12.4 whether or not the notice is
given;
(d) Immediately, without notice, with respect to any of
Customer's Transaction Card Affiliates upon termination of such
Transaction Card Affiliates' membership in VISA or MasterCard or either
of their successors in interest, or if FDR has the right to give notice
to MasterCard or VISA under Section 12.4 with respect to such
Transaction Card Affiliate, whether or not notice is given.
(e) If Customer fails to pay any Daily Amount when required
under Article 12 of this Agreement and does not cure the failure within
two (2) business days after written notice to Customer of the failure or
within one (1) business day after written notice to Customer if FDR has
given notice of a failure to pay more than three times in any twelve
month period;
(f) If Customer, without explanation, fails to pay any
amount due under this Agreement which does not give rise to the right to
terminate under any other provision of this Section 9.1 within thirty
(30) business days after written notice to Customer of its failure to
pay the amount;
(g) Upon twenty-four (24) hours notice by FDR if FDR has
terminated Interchange Settlement of transactions on behalf of Customer
or Customer's Transaction Card Affiliates pursuant to Section 12.7 for
more than ten (10) consecutive days or for more than twenty (20) days in
any Processing Year;
(h) If any Insolvency Event occurs with respect to Customer.
The rights of FDR to terminate under this Section 9.1 are cumulative and the
existence of the right under any provision or subsection is not exclusive of the
right under any other provision or subsection.
9.2 TERMINATION BY CUSTOMER. Despite anything to the contrary herein
contained, Customer, at its option, may terminate this Agreement under the
following circumstances:
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(a) Immediately, without notice to FDR, in the event any
Insolvency Event occurs with respect to FDR.
(b) With advance written notice if directed to terminate
this Agreement by the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the Federal Financial Institutions
Examination Council, the Office of Thrift Supervision and, with respect
to Customer's Transaction Card Affiliate, regulatory banking authorities
of the State of California.
(c) If FDR shall fail to perform or observe any of the
material terms, covenants and conditions to be performed hereunder so
that Customer, considering FDR's performance as a whole, is not
receiving the services for which it contracted and such failure
materially jeopardizes Customer's ability to operate its business and
continues unremedied for a period of sixty (60) days after written
notice from Customer to FDR specifying the failure and demanding that
the same be remedied; or
(d) As provided in Sections 2.5(f) or 2.7(b).
9.3 EFFECT OF TERMINATION. Upon the termination of this Agreement,
FDR shall have no further obligation to provide services to Customer or
Customer's Transaction Card Affiliates and all outstanding unpaid amounts due
and owing to FDR under the terms of this Agreement shall become immediately due
and payable. The termination of this Agreement shall not affect the following:
(a) The obligation of Customer to pay for services rendered
or any other obligation or liability owing or which becomes owing under
this Agreement whether the obligations arise prior to or after the date
of termination including the obligations to make the payments provided
in Sections 9.4, 9.5, 12.1 and Section I of Exhibit "B";
(b) The obligations set forth in this Agreement in
connection with the InfoSight Software, the cc:Mail Software, the
Recovery 1 Software and the HNC Software;
(c) The provisions of Article 5 or any other indemnification
obligations of either party;
(d) The provisions of Article 6;
(e) The provisions of Article 7; and
(f) The provisions of Article 10 or any other
confidentiality obligations of either party.
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9.4 PAYMENTS UPON TERMINATION. Despite anything in this Agreement to
the contrary, if FDR terminates this Agreement in accordance with the provisions
of Section 9.1 (other than as provided for in Section 9.1(d)) at any time prior
to the expiration of the Term, Customer shall pay to FDR upon the termination,
and prior to Deconversion, an amount equal to the sum of:
(a) Minimum Processing Fees, as set forth in Section I-d of
Exhibit "B", for the Processing Year in which the termination occurs
(after crediting Customer for any Processing Fees paid for services
provided in the Processing Year); and
(b) Liquidated Damages calculated as set forth
in Section 9.5.
In addition, in the event that this Agreement is terminated, for any reason,
prior to the conclusion of the Original Term, Customer hereby agrees to pay FDR
an amount equal to the Signing Bonus; provided, that such amount shall be
reduced by an amount equal to one-sixtieth (1/60) of the Signing Bonus for each
whole calendar month of the Original Term which has elapsed prior to the
effective date of such termination.
9.5 LIQUIDATED DAMAGES. The prices for services under this Agreement
were determined by mutual agreement based upon certain assumed volumes of
processing activity and the length of the Term of this Agreement. Customer
acknowledges that without the certainty of revenue from the Year 1 Minimum
Processing Fees and the Minimum Processing Fees provided in Section I of Exhibit
"B", FDR would have been unwilling to provide processing services at the prices
set forth in this Agreement. The parties agree it would be difficult or
impossible to ascertain FDR's actual damages for a termination or other breach
of this Agreement by Customer resulting in a termination of this Agreement
before the end of the Term. The parties further agree that an amount equal to
the sum of the present values of the payment in each full Processing Year which
remains during the Term of this Agreement in an amount equal to thirty five
percent (35%) of the Year 1 Minimum Processing Fee or Minimum Processing Fees,
as applicable, for the Processing Year in which termination occurs (the
"Liquidated Damages") is a reasonable estimation of the actual damages which FDR
would suffer if FDR were to fail to receive the processing business for the full
Term. In determining the present value of the amount, an interest rate equal to
the three (3) month Treasury Bill Rate, as quoted by The Wall Street Journal for
the date on which termination occurs, or if not available on the date of
termination, as soon thereafter as the next edition of The Wall Street Journal
is published, shall be assumed and the payments shall be assumed to be made on
the first day of each Processing Year. Each party acknowledges and agrees, after
taking into account the terms of this Agreement and all relevant circumstances
at the date hereof, that the Liquidated Damages payable under this Section 9.5
represents a reasonable and genuine pre-estimate of the damages which would be
suffered by FDR in the event of early termination of this Agreement and does not
constitute a penalty. Despite the foregoing, nothing in this Agreement shall
limit FDR's right to recover from Customer or Customer's Transaction Card
Affiliates (a) any amounts advanced by FDR on behalf of Customer or Customer's
Transaction Card Affiliates for Interchange Settlement, (b) any amounts for
which Customer or Customer's Transaction Card Affiliates are liable other than
for Processing Fees, or
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(c) any payment under any provision for indemnification under this Agreement.
Nothing in this Agreement shall limit the right of any party to this Agreement
to seek injunctive relief, to the extent available, in respect of breaches of
this Agreement.
ARTICLE 10
CONFIDENTIAL NATURE OF DATA
10.1 CUSTOMER'S PROPRIETARY INFORMATION. FDR shall not obtain any
proprietary rights in any proprietary or confidential information which has been
or at any time after the date of this Agreement is disclosed, directly or
indirectly, to FDR by Customer or any of Customer's Transaction Card Affiliates
("Customer's Proprietary Information"). FDR shall maintain in confidence and
shall not disclose to any third party, except as otherwise provided herein,
Customer's Proprietary Information and FDR agrees that such information will be
used by FDR only to perform services in accordance with this Agreement and for
internal research and development with the intent of improving the Services or
other services to be offered pursuant to this Agreement. FDR agrees to return to
Customer upon the expiration or termination of this Agreement and payment for
Deconversion as provided in Section I of Exhibit "B" and upon written request
from Customer, all or any requested portion of Customer's Proprietary
Information including, but not limited to:
Cardholder Master Files
Merchant Master Files
Agent Bank Master Files
Cardholder Revolving Transaction Files
CIS Memo Files
Authorizations, posted transactions, statement files, and all
other data relating to Customer's Accounts
10.2 FDR'S PROPRIETARY INFORMATION. Neither Customer nor Customer's
Transaction Card Affiliates shall obtain any proprietary rights in any
proprietary or confidential information which has been or at any time after the
date of this Agreement is disclosed, directly or indirectly, to Customer or any
of Customer's Transaction Card Affiliates by FDR, including without limitation,
any data or information that is a trade secret or competitively sensitive
material, FDR's user manuals, screen displays and formats, FDR's computer
software and documentation, software performance results, flow charts and other
specifications (whether or not electronically stored), data and data formats
(collectively, "FDR's Proprietary Information") whether any of the materials are
developed or purchased specifically for performance of this Agreement or
otherwise. Customer agrees to, and shall cause its Affiliates to, return to FDR
all of FDR's Proprietary Information upon the expiration or termination of this
Agreement.
10.3 CONFIDENTIALITY OF AGREEMENT. Except as required by law,
Customer shall keep confidential and not disclose, and shall cause its
Affiliates and their respective directors, officers, employees, representatives,
agents and independent contractors to keep confidential and not
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disclose, any of the terms and conditions of this Agreement to any third party
without the prior written consent of FDR.
10.4 CONFIDENTIALITY. FDR, Customer and Customer's Transaction Card
Affiliates agree to maintain Customer's Proprietary Information and FDR's
Proprietary Information, respectively, in strict confidence. Without limiting
the generality of the foregoing, FDR, Customer and Customer's Transaction Card
Affiliates each agree:
(a) Not to disclose or permit any other person or Entity
access to Customer's Proprietary Information or FDR's Proprietary
Information, as appropriate, except that the disclosure or access shall
be permitted to an employee, officer, director, agent, representative,
external or internal auditors or independent contractor of the party
requiring access to the same in the course of his or her employment or
services;
(b) To ensure that its employees, officers, directors,
agents, representatives and independent contractors are advised of the
confidential nature of Customer's Proprietary Information and FDR's
Proprietary Information, as appropriate, and are precluded from taking
any action prohibited under this Article 10, provided that in any event
Customer and FDR shall each be liable for any breach of this Article 10
by their respective employees, officers, directors, agents,
representatives and independent contractors;
(c) Not to alter or remove any identification, copyright or
proprietary rights notice which indicates the ownership of any part of
Customer's Proprietary Information or FDR's Proprietary Information, as
appropriate; and
(d) To notify the other promptly and in writing of the
circumstances surrounding any possession, use or knowledge of Customer's
Proprietary Information or FDR's Proprietary Information, as
appropriate, at any location or by any Entity other than those
authorized by this Agreement.
10.5 RELEASE OF INFORMATION. Despite the foregoing, Customer agrees
that Customer's Proprietary Information may be made available to VISA,
MasterCard or to supervisory or regulatory authorities of Customer or Customer's
Transaction Card Affiliates upon the written request of the Entity and notice to
Customer.
10.6 EXCLUSIONS. Nothing in this Article 10 shall restrict either
party with respect to information or data identical or similar to that contained
in Customer's Proprietary Information or FDR's Proprietary Information, as
appropriate, but which:
(a) That party rightfully possessed before it received the
information from the other as evidenced by written documentation;
(b) Subsequently becomes publicly available through no fault
of that party;
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(c) Is subsequently furnished rightfully to that party by a
third party (no Affiliate of Customer shall be considered to be a third
party) not known to be under restrictions on use or disclosure;
(d) Is independently developed by an employee, agent or
contractor of such party; or
(e) Is required to be disclosed by law, regulation or court
order, provided that the disclosing party will exercise reasonable
efforts to notify the other party prior to disclosure.
10.7 REMEDY. In the event of any breach of this Article 10, the
parties agree that the non-breaching party will suffer irreparable harm and the
total amount of monetary damages for any injury to the non-breaching party from
any violation of this Article 10 will be impossible to calculate and will
therefore be an inadequate remedy. Accordingly, the parties agree that the
non-breaching party shall be entitled to temporary and permanent injunctive
relief against the breaching party, its employees, officers, directors, agents,
representatives or independent contractors, and the other rights and remedies to
which the non-breaching party may be entitled to at law, in equity and under
this Agreement for any violation of this Article 10. The provisions of this
Article 10 shall survive the expiration or termination of this Agreement.
ARTICLE 11
REPRESENTATIONS
11.1 FDR'S REPRESENTATIONS. FDR represents and warrants that:
(a) It is a corporation validly organized and existing under
the laws of the State of Delaware;
(b) It has full power and authority under its organizational
documents and the laws of the State of Delaware to execute and deliver
this Agreement and to perform its obligations hereunder;
(c) It has by proper action duly authorized the execution
and delivery of this Agreement and when validly executed and delivered
this Agreement shall constitute a legal, valid and binding Agreement of
FDR enforceable in accordance with its terms; and
(d) The execution and delivery of this Agreement and the
consummation of the transaction herein contemplated does not conflict in
any material respect with or constitute a material breach or material
default under its organizational documents or under the terms and
conditions of any documents, agreements or other writings to which it is
a party.
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(e) FDR represents and warrants that the Services shall be
Year 2000 Compliant by December 31, 1999. "Year 2000 Compliant" means
that, for mission-critical applications:
(i) date data from at least 1900 through 2049 will
process without error or interruption due solely to the change
in century, in any level of computer hardware, software or
services FDR provides, including, but not limited to, microcode,
firmware, system and application programs, files, databases and
computer services;
(ii) there will be no loss of any functionality of
the Services due solely to the change in century, with respect
to the introduction, processing or output of records containing
dates falling on or after January 1, 2000;
(iii) On and after January 1, 2000, Services that FDR
provides will continue to be interoperable, in the same manner
as they are prior to January 1, 2000, with software and hardware
which may deliver records to, receive records from or interact
with the Services in the course of processing data, provided
that such other software and hardware uses a century windowing
or interpretive approach (with a pivot year of 50).
(f) The Services design shall accommodate, at a minimum, all
of the following: (i) date data century recognition; (ii) calculations
which accommodate same- and multi-century formulas and date values; and
(iii) implied century on input/output of data.
11.2 CUSTOMER'S REPRESENTATIONS. Customer represents and warrants
that:
(a) It is a corporation validly organized and existing under
the laws of the California;
(b) It has full power and authority under its organizational
documents and the laws of the California to execute and deliver this
Agreement and to perform its obligations hereunder;
(c) It has by proper action duly authorized the execution
and delivery of this Agreement and when validly executed and delivered
this Agreement shall constitute a legal, valid and binding agreement of
Customer enforceable in accordance with its terms; and
(d) The execution and delivery of this Agreement and the
consummation of the transaction herein contemplated does not conflict in
any material respect with or constitute
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a material breach or material default under its organizational documents
or under the terms and conditions of any documents, agreements or other
writings to which it is a party.
(e) Customer represents and warrants that any hardware or
software provided by Customer or its vendors which is intended to
deliver records to, receive records from or interact with the Services
is Year 2000 Compliant as defined in this Section.
(f) Customer agrees to cooperate fully, and to ensure that
its vendors cooperate fully, with FDR to ensure the interoperability of
the Services with hardware and software of the Customer or its vendors.
FDR shall have the right, at its discretion, to reject any data file
which it in good faith believes will interfere with the ability of the
Services to be Year 2000 Compliant.
11.3 FINANCIAL INFORMATION. In 1998, Customer shall, on quarterly
basis, provide FDR with current copies of Customer's Balance Sheet and Income
Statements in order to allow FDR to monitor Customer's financial status. In the
event that Customer, in the reasonable opinion of FDR, is unable to pay its
debts in the ordinary course of business or as they become due, or in the
reasonable opinion of FDR Customer is unable to perform its obligations under
this Agreement, then the parties agree to negotiate, in good faith, can
amendment to or a revision of this Agreement to reflect Customer's changed
financial status. All information provided under this Section 11.3 shall be
Customer's Proprietary Information and shall be subject to the provisions of
Article 10 of this Agreement.
ARTICLE 12
TRANSACTION SETTLEMENT
12.1 INTERCHANGE SETTLEMENT ACCOUNT. In order for FDR to provide its
services to Customer and Customer's Transaction Card Affiliates pursuant to this
Agreement, it is necessary for FDR to handle and settle Interchange Settlement
for Customer and Customer's Transaction Card Affiliates through the
international Interchange networks of MasterCard and VISA. It shall be the
responsibility of Customer and Customer's Transaction Card Affiliates to provide
ICA and BIN numbers from MasterCard and VISA, respectively, for use by FDR in
the settlement of transactions for Customer and Customer's Transaction Card
Affiliates. Customer and Customer's Transaction Card Affiliates understand that
FDR handles the Interchange Settlement with MasterCard and VISA for its clients
including Customer and Customer's Transaction Card Affiliates on a net
settlement basis (the "Settlement System"). To facilitate the Settlement System,
FDR has established, will establish or will direct Customer to establish and may
in the future establish or direct Customer to establish one or more interchange
settlement Central Clearing Accounts (collectively the "Settlement Account") at
one or more banks.
12.2 TRANSFER OF FUNDS. FDR shall calculate and inform Customer on
each business day of the amount of funds to be transferred (the "Daily Amount")
as the result of (a) current transaction processing, and (b) funding required
for incoming transactions of Customer and
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Customer's Transaction Card Affiliates. If the Daily Amount is negative,
Customer must transfer to the Settlement Account, by the close of business of
the Federal Reserve System in New York, an amount equal to the Daily Amount. If
the Daily Amount is positive, FDR will transfer to Customer, or will cause
MasterCard or VISA to transfer to Customer, immediately available funds equal to
the Daily Amount prior to the close of business of the Federal Reserve System in
New York on such date.
12.3 DAILY AMOUNT. The Daily Amount shall equal:
(a) The Net Settlement Amount for Customer and Customer's
Transaction Card Affiliates, plus
(b) The amount necessary to fund incoming Interchange
transactions not yet processed, determined in accordance with the FDR
Settlement Rules, minus
(c) The amount previously advanced by Customer with respect
to prior incoming Interchange transactions for which processing is
complete.
12.4 FAILURE TO TRANSFER. In the event of the failure of Customer on
any business day when required by the terms of this Agreement or the FDR
Settlement Rules, to transfer the Daily Amount to the Settlement Account, FDR
may refuse, after two (2) business days' written notice to Customer and without
incurring any liability to Customer or Customer's Transaction Card Affiliates,
to act as Customer's agent in discharging any VISA or MasterCard Interchange
obligations of Customer and Customer's Transaction Card Affiliates and shall
have the right to immediately notify MasterCard and VISA that it will no longer
cause the MasterCard or VISA Interchange obligations of Customer and Customer's
Transaction Card Affiliates to be discharged. In addition to the foregoing, FDR
may take such actions with respect to Customer's and Customer's Transaction Card
Affiliate's obligations under the Settlement System as FDR deems reasonable to
protect FDR or its customers from any loss arising from Customer's non-payment
of the Daily Amount. If Customer, within two (2) business days after written
notice from FDR pays FDR the Daily Amount which Customer had failed to transfer
to the Settlement Account together with late payment fees as set forth in
Section 12.5 of this Agreement, then FDR shall continue to act as Customer's
agent in discharging Customer's VISA or MasterCard Interchange Settlement
obligations.
12.5 SETTLEMENT LATE PAYMENT FEE. In addition to any other provisions
in this Agreement, in the event of Customer's failure to transfer or make
available the Daily Amount for any business day, Customer shall pay to FDR a
late payment fee (the "Settlement Late Payment Fee") which shall be equal to the
amount Customer and Customer's Transaction Card Affiliates would have been
required to pay as a late payment fee under MasterCard and VISA rules. The
amount shall be calculated in accordance with the rules and shall continue to
accrue until FDR shall have received the Daily Amount from Customer. Settlement
Late Payment Fees shall be
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paid to FDR based upon the rules even though FDR may have elected to make
settlement with MasterCard or VISA in a timely manner on behalf of Customer and
Customer's Transaction Card Affiliates. If FDR has received funds from VISA
and/or MasterCard as a result of Interchange Settlement on behalf of Customer or
Customer's Transaction Card Affiliates and fails to make available the Daily
Amount to Customer, FDR shall pay to Customer a late payment fee based on the
Daily Amount calculated in the same manner as the Settlement Late Payment Fee.
12.6 NO INDEPENDENT OBLIGATION. The obligation of FDR to discharge
any VISA or MasterCard Interchange obligations of Customer or Customer's
Transaction Card Affiliates shall be solely as an agent of Customer and
Customer's Transaction Card Affiliates in accordance with the terms and
provisions of this Agreement and the FDR Settlement Rules. FDR shall have no
independent obligation with respect to the discharge of the Interchange
obligations of Customer or Customer's Transaction Card Affiliates.
12.7 VIOLATION OF RULES. In the event that MasterCard or VISA shall
notify FDR of any violation of the rules and regulations of MasterCard or VISA,
relating to Customer or Customer's Transaction Card Affiliates or transactions
processed for Customer or Customer's Transaction Card Affiliates, FDR shall have
the right, without liability to Customer or Customer's Transaction Card
Affiliates, to terminate Interchange Settlement of transactions on behalf of
Customer and Customer's Transaction Card Affiliates under this Agreement until
the time as FDR shall have been notified by MasterCard or VISA that the
violation has been corrected.
12.8 RELIANCE ON OTHER PARTIES. Customer acknowledges that
performance of Interchange Settlement involves the settlement of certain of
Customer's and Customer's Transaction Card Affiliates' transactions jointly and
on a combined net basis with the settlement of transactions of other customers
of FDR. Accordingly, the payment or receipt by FDR of settlement monies on
behalf of Customer and Customer's Transaction Card Affiliates may be dependent
on equivalent payments or receipts being received or made by or for other
customers of FDR and in respect of transactions involving Transaction Cards
issued by such other customers. FDR and Customer will cooperate and use all
reasonable resources to identify the reason for any settlement failure and shall
attempt to work to its resolution.
12.9 COMPLIANCE WITH INSTRUCTIONS. FDR shall be entitled without
further inquiry to execute or otherwise act upon (a) instructions or information
or purported instructions or information received through the MasterCard and
VISA payment systems and instructions or information, or (b) purported
instructions or information received in accordance with the MasterCard and VISA
rules or settlement manuals otherwise than through the payment systems or in
accordance with the FDR Settlement Rules notwithstanding that it may afterwards
be discovered that the instructions or information were not genuine or were not
initiated by Customer or Customer's Transaction Card Affiliates. Such execution
or action shall constitute a good discharge to FDR, and FDR shall not be liable
for any liability, damage, expense, claim or loss (including loss of business,
loss of profit or exemplary, punitive, special, indirect or consequential
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damages of any kind) whatsoever arising in whatever manner, directly or
indirectly, from or as a result of the execution or action.
12.10 RESTRICTIONS ON SETOFF. Customer and Customer's Transaction Card
Affiliates agree to discharge their Interchange Settlement obligations to FDR
under this Article 12 in full and on first written demand waiving any defense,
setoff or right of counterclaim (without prejudice to the ability of Customer or
Customer's Transaction Card Affiliates to pursue these independently) and
notwithstanding any act or omission or alleged act or omission or any
insufficiency or deficiency that there is or has been or that may be alleged in
the performance by FDR of its obligations under this Agreement or otherwise. FDR
agrees, however, that it shall not setoff against any payment to be made by it
to Customer or Customer's Transaction Card Affiliates or on their behalf
pursuant to this Article 12 any amount due and payable by Customer or Customer's
Transaction Card Affiliates to FDR (without prejudice to the ability of FDR to
pursue these independently) other than amounts due and payable by Customer or
Customer's Transaction Card Affiliates or on their behalf to FDR pursuant to
this Article 12.
12.11 TRAILING ACTIVITY. If Customer terminates this Agreement or if
Customer or any of Customer's Transaction Card Affiliates ceases to obtain
processing services from FDR under this Agreement in a manner which results in
fees or charges relating to Customer's Accounts continuing to be included as a
part of FDR's net settlement with MasterCard or VISA, FDR may obtain daily
payment from the Settlement Account established under Section 12.1 or, if the
Settlement Account no longer exists, Customer will provide FDR immediately upon
notice with access to an account of Customer's funds, not requiring signature,
which FDR may draw upon in order to receive payment for such fees and charges.
FDR will provide Customer with documentation for all fees and charges paid on
behalf of Customer.
ARTICLE 13
GENERAL
13.1 ASSIGNMENT. Except as otherwise provided herein, the rights and
obligations of Customer and Customer's Transaction Card Affiliates, on the one
hand, and FDR on the other hand, under this Agreement are personal and not
assignable by either party, either voluntarily or by operation of law, without
the prior written consent of the other party, which consent shall not be
unreasonably withheld. Subject to the foregoing, all provisions contained in
this Agreement shall extend to and be binding upon the parties hereto or their
respective successors and permitted assigns.
13.2 RELATIONSHIP OF PARTIES. Nothing contained in this Agreement
shall be deemed or construed by the parties, or by any third party, to create
the relationship of partnership or joint venture between the parties hereto, it
being understood and agreed that neither the method of computing compensation
nor any other provision contained herein shall be deemed to create any
relationship between the parties hereto other than the relationship of
independent parties contracting for services and, for purposes of Interchange
Settlement only, the relationship of
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principal and agent as set forth in Section 12.6. Neither Customer or FDR has,
and shall not hold itself out as having, any authority to enter into any
contract or create any obligation or liability on behalf of, in the name of, or
binding upon the other except as specifically provided in connection with the
Interchange Settlement.
13.3 BUSINESS CONTINUITY PLAN. FDR has created a business continuity
plan (the "Business Continuity Plan"). FDR shall provide Customer with a written
summary of such Business Continuity Plan upon the written request of Customer.
Despite the foregoing, FDR reserves the right to change such Business Continuity
Plan from time to time during the Term of this Agreement. At any time, upon
Customer's request, FDR shall explain all changes made to the Business
Continuity Plan. Any such change shall not degrade the quality of the Business
Continuity Plan in a manner which has a material, adverse impact on the services
provided hereunder. FDR will undertake and make certain revisions to its
Business Continuity Plan which will meet or exceed regulatory agency contingency
planning criteria. FDR's Business Continuity Plan includes a time frame schedule
for recovering critical business functions.
13.4 STATE LAW. Except as provided for in Section 13.16, this
Agreement shall be governed by the laws of the State of New York as to all
matters including validity, construction, effect, performance and remedies
without giving effect to the principles of choice of law thereof. For purposes
of any suit, action or proceeding Customer agrees that any process to be served
in connection therewith shall, if delivered, sent or mailed in accordance with
Section 13.5, constitute good, proper and sufficient service thereof.
13.5 NOTICE. All notices which either party may be required or desire
to give to the other party shall be in writing and shall be given by personal
service, telecopy, registered mail or certified mail (or its equivalent), or
overnight courier to the other party at its respective address or telecopy
telephone number set forth below. Mailed notices and notices by overnight
courier shall be deemed to be given upon actual receipt by the party to be
notified. Notices delivered by telecopy shall be confirmed in writing by
overnight courier and shall be deemed to be given upon actual receipt by the
party to be notified.
If to FDR:
First Data Resources Inc.
10825 Farnam Drive
Omaha, Nebraska 68154
Attn: President
Telecopy Number: 402-222-7334
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With a copy to:
First Data Resources Inc.
10825 Farnam Drive
Omaha, Nebraska 68154
Attn: Counsel
Telecopy Number: 402-222-7700
If to Customer:
Internet Access Financial Corporation
595 Market Street
Suite 2250
San Francisco, California 94105
A party may change its address or addresses set forth above by giving the other
party notice of the change in accordance with the provisions of this section. In
the event FDR provides notice hereunder to Customer of any default by Customer
in the performance of the provisions of this Agreement, which default could
result in the termination of this Agreement, FDR may, at its option, deliver a
copy of the notice to any of Customer's Transaction Card Affiliates receiving
services under this Agreement.
13.6 HEADINGS. The section headings in this Agreement are solely for
convenience and shall not be considered in its interpretation. The recitals set
forth on the first page of this Agreement are incorporated into the body of the
Agreement. The Exhibits referred to throughout this Agreement are attached to
this Agreement and are incorporated into this Agreement. Unless the context
clearly indicates, words used in the singular include the plural, words in the
plural include the singular and the word "including" means "including but not
limited to".
13.7 WAIVER. The failure of either party at any time to require
performance by the other party of any provision of this Agreement shall not
affect in any way the full right to require the performance at any subsequent
time. The waiver by either party of a breach of any provision of this Agreement
shall not be taken or held to be a waiver of the provision itself. Any course of
performance shall not be deemed to amend or limit any provision of this
Agreement.
13.8 FORCE MAJEURE AND RESTRICTED PERFORMANCE. If performance by
either FDR or Customer of any service or obligation under this Agreement,
including Start-Up or Deconversion, is prevented, restricted, delayed or
interfered with by reason of labor disputes, strikes, acts of God, floods,
lightning, severe weather, shortages of materials, rationing, utility or
communication failures, failure of MasterCard or VISA, failure or delay in
receiving electronic data, earthquakes, war, revolution, civil commotion, acts
of public enemies, blockade, embargo, or any law, order, proclamation,
regulation, ordinance, demand or requirement having legal effect of any
government or any judicial authority or representative of any such government,
or any other act or omission whatsoever, whether similar or dissimilar to those
referred to in this clause, which are beyond the reasonable control of either
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FDR or Customer, as the case may be, then either FDR or Customer, as the case
may be shall be excused from the performance to the extent of the prevention,
restriction, delay or interference. As a condition to continuing to perform
embossing services for card issuing members of VISA U.S.A. Inc., FDR was
required to enter into a VISA Card Personalization Agreement dated May 1, 1993,
(the "VISA Agreement"). Under certain circumstances VISA is permitted, pursuant
to the VISA Agreement, to temporarily or permanently prevent or restrict FDR's
right to perform embossing services for card issuing members of VISA U.S.A. Inc.
Customer and Customer's Transaction Card Affiliates hereby agree that if, as a
result of VISA exercising its rights under the VISA Agreement, FDR is prevented
or restricted by VISA from performing embossing services for Customer or
Customer's Transaction Card Affiliates, then FDR shall be excused from the
performance of such embossing services to the extent of such prevention or
restriction by VISA.
13.9 SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable for any reason, the invalidity shall not affect the validity of
the remaining provisions of this Agreement, and the parties shall substitute for
the invalid provisions a valid provision which most closely approximates the
intent and economic effect of the invalid provision.
13.10 AUDIT. From time to time during the Term of this Agreement, FDR
will allow a third party, selected by FDR, to perform an audit of the electronic
data processing environment maintained by FDR to provide the services
contemplated under this Agreement. FDR shall provide Customer or Customer's
Transaction Card Affiliate with a copy of the results of the audit if Customer
or Customer's Transaction Card Affiliate request a copy in writing.
13.11 RISK OF LOSS. Customer shall be responsible for any and all risk
of loss to any tangible item (a) provided by FDR for Customer (including without
limitation statements and embossed cards) upon the delivery of such items to the
U.S. Postal Service or such other courier as Customer may select, and (b)
provided by Customer to FDR until actual receipt of such items by FDR. It is
expressly understood that the U.S. Postal Service and any courier selected by
Customer are the agents of Customer and not FDR.
13.12 EQUAL EMPLOYMENT OPPORTUNITY. FDR will not discriminate against
any employee or applicant for employment because of race, color, religion, sex,
national origin, disability, age or veteran status as ordered by the Secretary
of Labor pursuant to Section 202 of Executive Order 11246, Section 503 of the
Rehabilitation Act of 1973, and Section 402 of the Vietnam Era Veterans
Readjustment Assistance Act of 1974.
13.13 INFORMAL DISPUTE RESOLUTION. Any controversy or claim between
FDR, on the one hand, and Customer on the other hand, arising from or in
connection with this Agreement or the relationship of the parties under this
Agreement whether based on contract, tort, common law, equity, statute,
regulation, order or otherwise, ("Dispute") shall be resolved as follows:
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(a) Upon written request of either FDR, on the one hand, or
Customer, on the other hand, the parties will appoint a designated
representative whose task it will be to meet for the purpose of
endeavoring to resolve such Dispute.
(b) The designated representatives shall meet as often as
the parties reasonably deem necessary to discuss the problem in an
effort to resolve the Dispute without the necessity of any formal
proceeding.
(c) Formal proceedings for the resolution of a Dispute may
not be commenced until the earlier of:
(i) the designated representatives concluding in
good faith that amicable resolution through
continued negotiation of the matter does not
appear likely; or
(ii) the expiration of the thirty (30) day period
immediately following the initial request to
negotiate the Dispute;
provided, however, that this Section 13.13 will not be construed to prevent a
party from instituting formal proceedings earlier to avoid the expiration of any
applicable limitations period, to preserve a superior position with respect to
other creditors or to seek temporary or preliminary injunctive relief pursuant
to Section 10.7.
13.14 ARBITRATION.
(a) If the parties are unable to resolve any Dispute as
contemplated by Section 13.13, such Dispute shall be submitted to
mandatory and binding arbitration at the election of either FDR, on the
one hand, and Customer, on the other hand (the "Disputing Party").
Except as otherwise provided in this Section 13.14, the arbitration
shall be pursuant to the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA").
(b) To initiate the arbitration, the Disputing Party shall
notify the other party in writing (the "Arbitration Demand"), which
shall (i) describe in reasonable detail the nature of the Dispute, (ii)
state the amount of the claim, (iii) specify the requested relief and
(iv) name an arbitrator who (A) has been licensed to practice law in the
U.S. for at least ten years, (B) is not then an employee of Customer or
FDR or an employee of an Affiliate of either Customer or FDR, and (C) is
experienced in representing clients in connection with commercial
agreements (the "Basic Qualifications"). Within fifteen (15) days after
the other party's receipt of the Arbitration Demand, such other party
shall file, and serve on the Disputing Party, a written statement (i)
answering the claims set forth in the Arbitration Demand and including
any affirmative defenses of such party; (ii) asserting any counterclaim,
which shall (A) describe in reasonable detail the nature of the Dispute
relating to the counterclaim, (B) state the amount of the counterclaim,
and (C) sped the
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requested relief; and (iii) naming a second arbitrator satisfying the
Basic Qualifications. Promptly, but in any event within fifteen (15)
days thereafter, the two arbitrators so named will select a third
neutral arbitrator from a list provided by the AAA of potential
arbitrators who satisfy the Basic Qualifications and who have no past or
present relationships with the parties or their counsel, except as
otherwise disclosed in writing to and approved by the parties. The
arbitration will be heard by a panel of the three arbitrators so chosen
(the "Arbitration Panel"), with the third arbitrator so chosen serving
as the chairperson of the Arbitration Panel. Decisions of a majority of
the members of the Arbitration Panel shall be determinative.
(c) The arbitration hearing shall be held in such neutral
location as the parties may mutually agree. The Arbitration Panel is
specifically authorized to render partial or full summary judgment as
provided for in the Federal Rules of Civil Procedure. In the event
summary judgment or partial summary judgment is granted, the
non-prevailing party may not raise as a basis for a motion to vacate an
award that the Arbitration Panel failed or refused to consider evidence
bearing on the dismissed claim(s) or issue(s). The Federal Rules of
Evidence shall apply to the arbitration hearing. The party bringing a
particular claim or asserting an affirmative defense will have the
burden of proof with respect thereto. The arbitration proceedings and
all testimony, filings, documents and information relating to or
presented during the arbitration proceedings shall be deemed to be
information subject to the confidentiality provisions of this Agreement.
The Arbitration Panel will have no power or authority, under the
Commercial Arbitration Rules of the AAA or otherwise, to relieve the
parties from their agreement hereunder to arbitrate or otherwise to
amend or disregard any provision of this Agreement, including, without
limitation, the provisions of this Section 13.14.
(d) Should an arbitrator refuse or be unable to proceed with
arbitration proceedings as called for by this Section 13.14, the
arbitrator shall be replaced by the party who selected such arbitrator,
or if such arbitrator was selected by the two party appointed
arbitrators, by such two party-appointed arbitrators selecting a new
third arbitrator in accordance with Section 13.14(b). Each such
replacement arbitrator shall satisfy the Basic Qualifications. If an
arbitrator is replaced pursuant to this Section 13.14(d) after the
arbitration hearing has commence, then a rehearing shall take place in
accordance with the provisions of this Section 13.14 and the Commercial
Arbitration Rules of the AAA.
(e) At the time of granting or denying a motion for summary
judgment as provided for in (c) and within fifteen (15) days after the
closing of the arbitration hearing, the Arbitration Panel shall prepare
and distribute to the parties a writing setting forth the Arbitration
Panel's finding of facts and conclusions of law relating to the Dispute,
including the reasons for the giving or denial of any award. The
findings and conclusions and the award, if any, shall be deemed to be
information subject to the confidentiality provisions of this Agreement.
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(f) The Arbitration Panel is instructed to schedule promptly
all discovery and other procedural steps and otherwise to assume case
management initiative and control to effect an efficient and expeditious
resolution of the Dispute. The Arbitration Panel is authorized to issue
monetary sanctions against either party if, upon a showing of good
cause, such party is unreasonably delaying the proceeding.
(g) Any award rendered by the Arbitration Panel will be
final, conclusive and binding upon the parties and any judgment hereon
may be entered and enforced in any court of competent jurisdiction.
(h) Each party will bear a pro rata share of all fees, costs
and expenses of the arbitrators, and notwithstanding any law to the
contrary, each party will bear all the fees, costs and expenses of its
own attorneys, experts and witnesses; provided, however, that in
connection with any judicial proceeding to compel arbitration pursuant
to this Agreement or to confirm, vacate or enforce any award rendered by
the Arbitration Panel, the prevailing party in such a proceeding will be
entitled to recover reasonable attorneys' fees and expenses incurred in
connection with such proceeding, in addition to any other relief to
which it may be entitled.
13.15 JUDICIAL PROCEDURE. Nothing in Sections 13.13 or 13.14 shall be
construed to prevent any party from seeking from a court a temporary restraining
order or other temporary or preliminary relief pending final resolution of a
Dispute pursuant to Section 13.13 or 13.14.
13.16 FEDERAL ARBITRATION ACT. The parties acknowledge and agree that
performance of the obligations under this contract necessitates the use of
instrumentalities of interstate commerce and, notwithstanding other general
choice of law provisions in this Agreement, the parties agree that the Federal
Arbitration Act shall govern and control with respect to relevant provisions of
Sections 13.13 and 13.14.
13.17 INSURANCE. FDR agrees that during the Term of this Agreement it
will obtain and maintain commercially reasonable levels of insurance covering
various types of liabilities, including but not limited to comprehensive crime
and employee fidelity bond coverage, which FDR, in its reasonable business
judgment, determines is appropriate to cover the potential exposure that FDR and
its customers could experience. FDR shall provide certificates or other suitable
evidence of such insurance upon Customer's request; provided, however, that FDR,
at its sole election, shall be permitted to make any modification, change,
reduction or increase in the types of coverage or the amount of coverage which
FDR, in its reasonable judgment, determines is appropriate. The certificates of
evidence of insurance shall provide that the insurance carrier will use
reasonable efforts to endeavor to provide Customer with written notice when FDR
or the insurance carrier makes any changes in the types or levels of insurance
maintained by FDR.
13.18 ENTIRE AGREEMENT. This Agreement, including Exhibits and the
executed Affiliate Agreements, if any, sets forth all of the promises,
agreements, conditions and understandings
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between the parties respecting the subject matter hereof and supersedes all
negotiations, conversations, discussions, correspondence, memorandums and
agreements between the parties concerning the subject matter. This Agreement may
not be modified except by a writing signed by authorized representatives of both
parties to this Agreement. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties to this agreement have caused it to be
executed by their duly authorize officers as of the day and year first written
above.
FIRST DATA RESOURCES INC.
By: /s/ JOHN THIELEN
-------------------------------------------
Name: JOHN THIELEN
-----------------------------------------
Title: SENIOR VICE PRESIDENT
----------------------------------------
INTERNET ACCESS FINANCIAL CORPORATION
By: /s/ JEREMY LENT
-------------------------------------------
Name: JEREMY LENT
-----------------------------------------
Title: CHIEF EXECUTIVE OFFICER
----------------------------------------
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EXHIBIT "A"
SERVICES
I. THE FOLLOWING DOCUMENTS SPECIFICALLY DESCRIBE THE SERVICES REFERRED TO IN
SECTION II:
User Manuals:
Adjustments
Application Controls
Applications
Authorizations
Authorization Only
Cardholder Account Maintenance
Cardholder Billing
Cardholder New Accounts
Cardholder Non-Monetary Transactions
Cardholder Plastics
Cardholder Select
Cardholder System Features
Chargeback Message Codes
Chargebacks
Client-Defined Screens
Collections
Company Cards
Credit
Customer Inquiry Management System
Customer Inquiry System
Equasion Correspondence
Monetary Entry
PIN Management
Plastics Related Formats
Product Control File
Product Control File Utilities
Reference Manual
Reports Management System
Retrievals
Security
Settlement
Strategy Management
System Administration
System Overview
<PAGE> 41
Customer bulletins issued by FDR
II. SERVICES
A. FDR will provide Customer with an on-line terminal facility (not
the terminals themselves), on-line access to Transaction Card
processing software, adequate computer time and other mechanical
Transaction Card services as more specifically described in the
documents referred to in Section I.
B. Reports will be made available to Customer in accordance with FDR's
Reports Management System (RMS): (i) on hardcopy which shall be
express mailed (overnight delivery) to Customer from FDR, (ii) via
remote job entry (RJE) or Network Data Mover (NDM) transmission
from FDR, (iii) on-line from FDR, (iv) via Microfiche and/or (v) on
CD-ROM disk, based upon Customer's needs. Other pertinent documents
shall also be made available to Customer on hardcopy.
C. Issuer's Clearinghouse Services (ICS): The system whereby FDR
processes and submits to the Issuer's Clearinghouse Service (ICS),
on behalf of Customer, information concerning potential and
existing Cardholders in accordance with the operating regulations
of MasterCard and VISA. Inquiries into FDR's ICS on-line files
utilizing FDR's ICS on-line transactions by an employee of Customer
via Customers's CRT terminals will be counted as a non-monetary
transaction. Anything in this Agreement to the contrary
notwithstanding, it is understood and agreed that FDR's sole
responsibility under the ICS services is to provide electronic data
processing services to Customer in connection with Customer's use
of the ICS. FDR shall not be responsible for and assumes no
responsibility for: (i) any damages, losses or liabilities
whatsoever arising out of the use by Customer of the ICS data
bases, including any liability or obligation of Customer arising
out of or related to its compliance with the Fair Credit Reporting
Act or any other applicable federal, state or local law or
ordinance; (ii) the accuracy of any information supplied by
Customer to the ICS or for any verification of such information
based upon reports provided to Customer through the ICS; and (iii)
Customer's compliance with the operating regulations of MasterCard
and VISA with respect to the ICS service. IN ADDITION, CUSTOMER
UNDERSTANDS THAT FDR DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE
USE AND OPERATION OF THE ICS, BOTH EXPRESS AND IMPLIED, INCLUDING
BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE.
D. FDR shall provide Customer and Customer's Transaction Card
Affiliates with PC Remote Access Services as described in Section
III of this Exhibit "A". In order for Customer and Customer's
Transaction Card Affiliates to have access to the PC Remote Access
Services, Customer and Customer's Transaction Card Affiliates
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shall be responsible, at their expense, for all computer equipment
and PC software at Customer's and Customer's Transaction Card
Affiliates' locations necessary to so access the services, as such
hardware and software requirements are specified by FDR. All
communication charges associated with accessing the FDR computers
and equipment used to provide the PC Remote Access Services shall
be paid by Customer.
E. Specific Services are defined in Section IV.
III. ANCILLARY SERVICES
A. InfoSight Services FDR agrees to update on a monthly basis certain
selected fields of the master files of Customer. Such files may be selected at
the system and/or system principal level of the FDR System. FDR agrees to
provide Customer with dial-up access to such files each business day of each
week. The hours of access during such business days shall be 7:00 a.m. to 7:00
p.m. Central Standard or Central Daylight Time, as appropriate. FDR agrees to
provide customer service support to Customer in its use of such services
provided by FDR. The amount and type of customer service support shall be that
which FDR determines is reasonably necessary in its exercise of good faith
business judgment. In order for Customer and Customer's Transaction Card
Affiliates to obtain InfoSight Services as described in this section, FDR shall
permit Customer and Customer's Transaction Card Affiliates to access Customer's
data base pursuant to the use of certain software which FDR licensed from Oracle
Corporation ("Oracle") pursuant to a Software License and Services Agreement
dated November 20, 1992 (the "InfoSight Software").
(1) Customer and Customer's Transaction Card Affiliates represent
and warrant to FDR that each will permit the InfoSight
Services to be utilized or accessed in its internal business
only by its own personnel. Customer and Customer's Transaction
Card Affiliates shall not copy the InfoSight Software.
Customer and Customer's Transaction Card Affiliates will not
reverse assemble or reverse compile the InfoSight Software
program, nor transfer, sublicense, rent, lease or assign the
InfoSight Software.
(2) The provisions set forth in this section only grant Customer
and Customer's Transaction Card Affiliates the right to use
the InfoSight Software and do not grant any rights of
ownership to Customer or Customer's Transaction Card
Affiliates. Customer and Customer's Transaction Card
Affiliates shall not publish any results of any benchmark
tests run on the InfoSight Software.
(3) If FDR's right to license the use of the InfoSight Software to
Customer and Customer's Transaction Card Affiliates is
terminated because the InfoSight Software infringes upon the
copyright, patent, or other proprietary rights
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of any party or for any other reason, FDR shall have the right
to terminate the provision of the InfoSight Services upon
thirty (30) days notice to Customer and Customer's Transaction
Card Affiliates, or such shorter period of notice as coincides
with the termination of FDR's right to license the use of the
InfoSight Software, and FDR shall have no further liability to
Customer and Customer's Transaction Card Affiliates with
respect to the terminated services.
(4) Within thirty (30) days after the termination of this
Agreement, or the earlier termination of Customer's and
Customer's Transaction Card Affiliates' license to use the
InfoSight Software, Customer and Customer's Transaction Card
Affiliates shall deliver to FDR all copies of the
documentation, together with all separate informational
materials provided with respect to the InfoSight Services or
the InfoSight Software, in Customer's or Customer's
Transaction Card Affiliates' possession, custody or control
or, at Customer's or Customer's Transaction Card Affiliates'
discretion, shall destroy the same, as directed by FDR.
(5) Customer and Customer's Transaction Card Affiliates agree to
indemnify and hold harmless Oracle, its subsidiaries,
Affiliates, officers, directors, employees and agents from and
against any and all claims, demands, liability, loss, cost,
damage or expense, including attorneys' fees and costs of
settlement, resulting from or arising out of (i) the failure
of Customer or Customer's Transaction Card Affiliates to
observe any covenant or condition set forth in this section,
(ii) the violation by Customer or Customer's Transaction Card
Affiliates of any applicable statute, law or regulation
associated with the InfoSight Software, or (iii) Customer's or
Customer's Transaction Card Affiliates' use of the InfoSight
Services in a manner not provided for in this section.
(6) Customer and Customer's Transaction Card Affiliates
acknowledge that the InfoSight Software product is subject to
restrictions and controls imposed under the U.S. Export
Administration Act. Customer and Customer's Transaction Card
Affiliates each certify that neither the InfoSight Software
nor any direct product thereof is being or will be acquired,
shipped, transferred or reexported, directly or indirectly,
into any country prohibited under the Act.
(7) NEITHER FDR NOR ORACLE MAKES ANY WARRANTIES, WHETHER ORAL OR
WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS OR
SERVICES TO BE PROVIDED HEREUNDER, INCLUDING WITHOUT
LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
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PARTICULAR PURPOSE. ORACLE DOES NOT WARRANT THAT THE FUNCTIONS
CONTAINED IN THE INFOSIGHT SOFTWARE WILL MEET CUSTOMER'S OR
CUSTOMER'S TRANSACTION CARD AFFILIATES' REQUIREMENTS OR THAT
THE OPERATION OF THE INFOSIGHT SOFTWARE WILL BE ERROR FREE, OR
THAT DEFECTS IN THE SOFTWARE WILL BE CORRECTED. IN NO EVENT
WILL CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES HAVE
ANY CAUSE OF ACTION AGAINST ORACLE, NOR WILL ORACLE BE LIABLE
TO CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES FOR ANY
LOSSES, DAMAGES OR ANY ECONOMIC CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS OR SAVINGS), INCIDENTAL DAMAGES OR
PUNITIVE DAMAGES INCURRED OR SUFFERED BY CUSTOMER OR
CUSTOMER'S TRANSACTION CARD AFFILIATES EVEN IF ORACLE IS
INFORMED OF THEIR POSSIBILITY.
B. FDR LinkUp Services FDR agrees to provide to Customer and Customer's
Transaction Card Affiliates electronic mail services consisting of a system
whereby Customer or Customer's Transaction Card Affiliates may create, edit,
transmit, store and retrieve data, in the form of textual messages and binary
files, utilizing Customer's telephone communication lines to FDR and certain
data storage facilities residing on Customer's computer equipment ("Mailboxes").
FDR shall assign to Customer a number of Mailboxes, which may be increased or
decreased by Customer at any time following at least thirty (30) days written
notice to FDR, provided that Customer shall be required to maintain at least one
(1) Mailbox at all times. In order for Customer and Customer's Transaction Card
Affiliates to obtain FDR LinkUp Services as described in this section, FDR shall
distribute to Customer and Customer's Transaction Card Affiliates cc:Mail
Software and related documentation (collectively, the "cc:Mail Software").
(1) Customer and Customer's Transaction Card Affiliates represent
and warrant to FDR that each will permit the FDR LinkUp
Services to be utilized or accessed in its internal business
only by its own personnel. Each copy of the cc:Mail Software
provided to Customer and Customer's Transaction Card
Affiliates may be used by Customer or Customer's Transaction
Card Affiliate on a single computer only, and in no event may
Customer or Customer's Transaction Card Affiliates install any
cc:Mail product given to Customer or Customer's Transaction
Card Affiliates by FDR on a network server. Neither Customer
nor Customer's Transaction Card Affiliates shall copy the
cc:Mail Software except that Customer and Customer's
Transaction Card Affiliates may make archival copies of the
cc:Mail Software for the sole purpose of having a backup copy.
Customer and Customer's Transaction Card Affiliates each agree
that it will not reverse assemble or reverse compile the
cc:Mail Software program, nor transfer, sublicense, rent,
lease or assign the cc:Mail Software. The
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cc:Mail Software is owned by cc:Mail, Inc., a division of
Lotus Development Corporation ("Lotus") and is protected by
United States copyright laws and international treaty
provisions.
(2) Customer and Customer's Transaction Card Affiliates shall be
responsible, at their expense, for all computer equipment at
Customer's or Customer's Transaction Card Affiliates'
locations necessary to use the cc:Mail Software. All
communication charges associated with accessing the FDR
computers and equipment used to provide FDR LinkUp Services
shall be paid by Customer.
(3) If FDR's right to distribute the cc:Mail Software is
terminated because the software infringes upon the copyright,
patent, or other proprietary rights of any party or for any
other reason, FDR shall have the right to terminate the
provision of FDR LinkUp Services upon thirty (30) days notice
to Customer, or such shorter period of notice as coincides
with the termination of FDR's right to distribute the
software, and FDR shall have no further liability to Customer
or Customer's Transaction Card Affiliates with respect to the
terminated services.
(4) Within thirty (30) days after the termination of this
Agreement, or the earlier termination of Customer's and
Customer's Transaction Card Affiliates' right to use the
cc:Mail Software, Customer and Customer's Transaction Card
Affiliates shall deliver to FDR all copies of the relevant
software and associated documentation, together with all
separate informational materials provided with respect to the
services or the software, in their possession, custody or
control or shall destroy the same, as directed by FDR. In
addition, an officer of Customer shall certify in writing to
FDR that use of the relevant software has been discontinued
and all items have been returned or destroyed as required in
this section.
(5) Customer and Customer's Transaction Card Affiliates agree to
indemnify and hold harmless Lotus, its subsidiaries,
affiliates, officers, directors, employees and agents from and
against any and all claims, demands, liability, loss, cost,
damage or expense, including attorneys' fees and costs of
settlement, resulting from or arising out of (i) the failure
of Customer or Customer's Transaction Card Affiliates to
observe any covenant or condition set forth in this Section,
(ii) the violation by Customer or Customer's Transaction Card
Affiliates of any applicable statute, law or regulation, or
(iii) Customer's or Customer's Transaction Card Affiliates'
use of the FDR LinkUp Services.
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(6) Customer and Customer's Transaction Card Affiliates
acknowledge that the cc:Mail Software product is subject to
restrictions and controls imposed under the U.S. Export
Administration Act. Customer and Customer's Transaction Card
Affiliates certify that neither the cc:Mail Software nor any
direct product thereof is being or will be acquired, shipped,
transferred or reexported, directly or indirectly, into any
country prohibited under the Act. RESTRICTED RIGHTS LEGEND.
Use, duplication or disclosure by the U.S. Government is
subject to restrictions as set forth in subparagraph
(c)(1)(ii) of the Rights in Technical Data and Computer
Software clause at DFARS 52.227-7013. cc:Mail, Inc., 2141
Landings Drive, Mountain View, CA 94043.
(7) NEITHER FDR NOR LOTUS MAKES ANY WARRANTIES, WHETHER ORAL OR
WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS OR
SERVICES TO BE PROVIDED HEREUNDER, INCLUDING WITHOUT
LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. LOTUS DOES NOT WARRANT THAT THE FUNCTIONS
CONTAINED IN THE CC:MAIL SOFTWARE WILL MEET CUSTOMER'S OR
CUSTOMER'S TRANSACTION CARD AFFILIATES' REQUIREMENTS OR THAT
THE OPERATION OF THE SOFTWARE WILL BE ERROR FREE, OR THAT
DEFECTS IN THE SOFTWARE WILL BE CORRECTED. IN NO EVENT WILL
CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES HAVE ANY
CAUSE OF ACTION AGAINST LOTUS, NOR WILL LOTUS BE LIABLE TO
CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES FOR ANY
LOSSES, DAMAGES OR ANY ECONOMIC CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS OR SAVINGS), INCIDENTAL DAMAGES OR
PUNITIVE DAMAGES INCURRED OR SUFFERED BY CUSTOMER OR
CUSTOMER'S TRANSACTION CARD AFFILIATES EVEN IF LOTUS IS
INFORMED OF THEIR POSSIBILITY.
C. Equasion APS Services FDR shall make available to and perform for
Customer and Customer's Transaction Card Affiliates Application Processing
Services and On-Line Credit Bureau Report Request Services using the Equasion(R)
Automated Credit Application Processing System/Bureau Link(R) ("Equasion APS")
in accordance with the description of services set forth in Section IV of this
Exhibit "A". Customer shall indemnify and hold harmless FDR and its employees
from and against all claims, damages, losses and expenses arising out of FDR's
performance of Application Processing Services and On-Line Credit Bureau Report
Request Services under this Agreement, to the extent that such claim, damage,
loss or expense is caused by any error, omission or negligence of Customer,
employees of Customer or of any other persons or Entities who are directly or
indirectly associated with Customer or who directly or
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indirectly participate with Customer in connection with its operations of a
Transaction Card program as Affiliates, Agent Banks or otherwise. Customer shall
have no obligation to indemnify FDR against any liability, loss or damage FDR
might suffer arising solely out of FDR's negligent performance of Application
Processing Services and On-Line Credit Bureau Report Request Services called for
by this Agreement. FDR will use due diligence in processing the application
materials received from Customer, and the performance by FDR of the Application
Processing Services and the On-Line Credit Bureau Report Request Services called
for in this Agreement shall be consistent with industry standards. Customer
acknowledges that the supplier of Equasion APS to FDR is a third party
beneficiary to this Agreement. Equasion is a registered trademark of First Data
Resources Inc. Bureau Link is a registered trademark of American Management
Systems, Incorporated.
D. Recovery 1 Services In order for Customer and Customer's Transaction
Card Affiliates to obtain Recovery 1 Services as described in this Exhibit "A",
FDR shall permit Customer to access FDR's data base and to use the Recovery 1
Shared Services System software and all human readable user documentation
including additions, updates, revisions, corrections and modifications to the
foregoing delivered to Customer or Customer's Transaction Card Affiliates from
time to time (collectively, the "Recovery 1 Software") in accordance with the
terms and conditions contained herein.
(1) Customer and Customer's Transaction Card Affiliates represent
and warrant to FDR that the Recovery 1 Software will be
accessed and utilized only in conjunction with their
respective internal businesses and only by their own
personnel. Neither Customer nor Customer's Transaction Card
Affiliates shall copy, decompile, reverse compile or reverse
assemble the Recovery 1 Software nor transfer, sublicense,
rent, lease or assign the same. The provisions set forth in
this section only grant to Customer and Customer's Transaction
Card Affiliates a right to use the Recovery I Software and in
no way grant or convey any rights of ownership.
(2) If FDR's right to license the use of the Recovery 1 Software
to Customer and Customer's Transaction Card Affiliates is
terminated because the Recovery I Software infringes upon the
copyright, patent or other proprietary rights of any party or
for any other reason, FDR shall have the right to terminate
the provision of Recovery 1 Services and Customer's and
Customer's Transaction Card Affiliates' license to the
Recovery 1 Software upon thirty (30) days' written notice and
FDR shall have no further liability to Customer or Customer's
Transaction Card Affiliates with respect to such Services or
Software.
(3) Within thirty (30) days after the termination of this
Agreement, or the earlier termination of Customer's license to
use the Recovery I Software, Customer shall deliver to FDR all
copies of the documentation, together
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with all separate informational materials provided with
respect to the Recovery 1 Services or the Recovery 1 Software,
in Customer's possession, custody or control or, at Customer's
discretion, shall destroy the same, as directed by FDR. In
addition, an officer of Customer shall certify in writing to
FDR that, to the best of its knowledge, use of the Recovery 1
Software has been discontinued and all items have been
returned or destroyed as required in this section.
(4) Customer agrees to indemnify and hold harmless FDR, its
subsidiaries, Affiliates, officers, directors, employees and
agents from and against any and all claims, demands,
liability, loss, cost, damage or expense, including attorneys'
fees and costs of settlement, resulting from or arising out of
(i) the failure of Customer or Customer's Transaction Card
Affiliates to observe any covenant or condition set forth in
this section, (ii) the violation by Customer or Customer's
Transaction Card Affiliates of any applicable statute, law or
regulation associated with the Recovery 1 Software, or (iii)
Customer's or Customer's Transaction Card Affiliates' use of
the Recovery 1 Services or the Recovery 1 Software in a manner
not provided for in this section.
(5) Customer acknowledges that the Recovery 1 Software product is
subject to restrictions and controls imposed under the U.S.
Export Administration Act. Customer certifies that neither the
Recovery 1 Software nor any direct product thereof is being or
will be acquired, shipped, transferred or reexported, directly
or indirectly, into any country prohibited under the Act.
(6) FDR MAKES NO WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR
IMPLIED, WITH RESPECT TO THE PRODUCTS OR SERVICES TO BE
PROVIDED UNDER THIS SECTION, INCLUDING WITHOUT LIMITATION, ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. FDR DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN
THE RECOVERY 1 SOFTWARE WILL MEET CUSTOMER'S OR CUSTOMER'S
TRANSACTION CARD AFFILIATES' REQUIREMENTS OR THAT THE
OPERATION OF THE RECOVERY 1 SOFTWARE WILL BE ERROR FREE, OR
THAT DEFECTS IN THE SOFTWARE WILL BE CORRECTED. IN NO EVENT
WILL CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES HAVE
ANY CAUSE OF ACTION AGAINST FDR, NOR WILL FDR BE LIABLE TO
CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES FOR ANY
LOSSES, DAMAGES OR ANY ECONOMIC. CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS OR
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SAVINGS), INCIDENTAL DAMAGES OR PUNITIVE DAMAGES INCURRED OR
SUFFERED BY CUSTOMER OR CUSTOMER'S TRANSACTION CARD AFFILIATES
IN CONNECTION WITH THE RECOVERY 1 SERVICES OR SOFTWARE EVEN IF
FDR IS INFORMED OF THEIR POSSIBILITY.
E. FRAUD MANAGEMENT/FRAUD DETECTION (FALCON) SERVICES FDR shall provide
Customer and Customer's Transaction Card Affiliates (hereinafter referred to as
"Customer") with Credit Card Fraud Management/Fraud Detection Services in
conjunction with HNC, Inc., and its Falcon(TM) software (hereinafter referred to
as the "HNC Software"), which services shall consist of those services set forth
in this section.
(1) FDR shall provide Customer with Credit Card Fraud
Management/Fraud Detection Services by utilizing the output of
the Falcon Neural Engine computational model (designed to
detect credit card fraud) which encompasses or contains the
Falcon Credit neural network-based system, as such same
software is licensed to FDR by HNC and is commonly known as
the Falcon Credit Card Fraud Detection Model (hereinafter
referred to as the 'Credit Card Output Access') solely for the
purpose of assisting Customer in detecting possible fraudulent
transaction account activity on the credit card accounts of
Customer and for no other purpose. Except as expressly
provided in this section, no right or license under any
patent, copyright, trade secret, trademark or other
intellectual property of FDR or other person is granted or is
to be inferred from this section. Customer agrees that FDR's
providing of Credit Card Fraud Management/Fraud Detection
Services does not confer upon Customer any license in or to
the Credit Card Computational Model.
(2) The parties acknowledge that the HNC Software, from which the
Credit Card Output Access is generated, is licensed to FDR
pursuant to a license agreement (the "HNC License Agreement").
FDR shall use commercially reasonable efforts to extend or
renew the initial or any renewal terms, as the case may be, of
the HNC License Agreement and if the HNC License Agreement
expires or is terminated, FDR shall promptly notify Customer
of such termination or expiration. FDR shall use commercially
reasonable efforts to substitute for HNC one or more software
vendors from whom FDR shall license, on commercially
reasonable terms, one or more software packages that will
generate output access that provides, in all material
respects, the utility and performance provided by the Credit
Card Output Access generated by the HNC Software.
(3) FDR and Customer shall mutually establish a fraud detection
strategy designed to fulfill Customer's fraud detection
requirements. Customer's
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fraud detection strategy shall be summarized in an
authorization report which shall set forth the variables and
computational parameters which reflect such fraud detection
strategy (the "Strategy Approval Form"). Customer will provide
a single point of contact, prior to beginning of service, to
establish start-up requirements. Customer shall notify FDR in
writing of the contact's identity. Customer's contact person
will be authorized to build and approve the fraud detection
strategy, to determine the fraud score criteria, to approve
product control file changes and to approve the Strategy
Approval Form. FDR shall assist Customer in the establishment
of the processing parameters designed to effectively implement
Customer's fraud detection strategy. Customer shall be solely
responsible for approving the processing parameters set forth
in the Strategy Approval Form, and shall verify that such
parameters effectively satisfy the requirements of Customer's
fraud detection strategy. FDR shall construct, or cause to be
constructed, a computational process which reasonably conforms
to Customer's Strategy Approval Form. In no event, however,
shall FDR be liable to any person for any damages caused by
either the HNC Software, any deficiency in the construction of
the processing parameters or any deficiency in the content of
the approved Strategy Approval Form. Furthermore, Customer
shall be responsible for the accuracy of all Customer data and
fraud control data provided to FDR. If Customer desires to
alter its fraud detection strategy, Customer shall notify FDR
in writing at least 30 days before such changes are to become
effective. Customer shall submit to FDR a modified Strategy
Approval Form setting forth the processing parameter changes
desired.
(4) Together with HNC, FDR will provide Customer with the
following Credit Card Call Processing Services:
(a) FDR will utilize its Fraud Detection WorkCenter, using
the HNC Software, to monitor authorizations queued as a
result of the fraud detection criteria and/or fraud
score.
(b) FDR will initiate outbound telephone calls to the
Cardholders of Customer who have had authorization
activity on their account and appear in a Fraud
Detection WorkCenter Queue Group.
(c) FDR will make up to four attempts to reach the
Cardholder within a 48-hour period. All attempts will be
made within the hours of 8:00 a.m. and 9:00 p.m.
(Central Time Zone).
(d) FDR will attempt all home and business telephone numbers
as provided by Customer's Cardholder masterfile.
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(e) If FDR is unable to contact the Cardholder, a message
for the Cardholder to contact FDR at a to-be-provided
800 number will be delivered to the Cardholder's home
message machine and/or to responsible adults.
(f) When the FDR call results in contact with the
Cardholder, and the Cardholder validates the
authorization activity, FDR will record an on-line
account memo (to the Customer Inquiry System) indicating
the results of the call.
(g) When the FDR call results in contact with the Cardholder
and the Cardholder is unable to validate the activity,
FDR will initiate a Lost/Stolen Report and place a block
on the account. (Standard fees apply for the Lost/Stolen
Report.) FDR will record an on-line account memo (to the
Customer Inquiry System) indicating the results of the
call.
(h) If FDR encounters activity which appears
uncharacteristic or unusual for a Cardholder Account and
FDR is unable to contact successfully the Cardholder,
then FDR may place a block on the Cardholder Account to
prevent further authorization approvals until either the
Cardholder or Customer successfully verifies the
activity. On a daily basis, FDR will fax to Customer a
list of accounts which have been blocked because of
uncharacteristic or unusual account activity. The
account will remain blocked until Customer instructs FDR
in writing via fax to remove such block.
(i) Upon the request of Customer, FDR may at its option,
provide additional services, including the following:
telephone number look-ups, inbound call processing after
the 48-hour period, fraud control services, customized
reporting, etc. These services would be provided at an
additional cost to Customer.
(j) At least annually, HNC shall analyze two separate
month-end reports within the 12-month period being
analyzed produced by the HNC Software that measure the
effectiveness of Customer's existing algorithms,
provided that Customer has over 200,000 Gross Active
Credit Card Accounts. HNC shall then provide Customer
with a written analysis of the reports interpreting the
performance of the existing algorithms and strategies
and written recommendations for changes or updates to
such algorithms or strategies to improve their
performance, provided that Customer promptly provides
HNC with the two necessary month-end reports.
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(k) At Customer's request, HNC shall provide Customer with
up to five hours per month, for the first six months
following the date of commencement of Fraud
Management/Fraud Detection Services (the "Falcon Start
Date"), and three hours per month thereafter, of
strategy design assistance over the telephone at no
additional charge, provided that Customer has over
200,000 Gross Active Credit Card Accounts as of the
Falcon Start Date. This service will include
recommendations on fraud strategy design and results
interpretation. If such service exceeds the hours
permitted for that particular month, HNC will be
entitled to charge Customer for such services. HNC and
Customer shall independently negotiate the terms and
costs of such additional assistance. Customer will be
entitled to on-site strategy design assistance at an
additional charge; provided, however, that Customer will
receive credit against such additional charge for any
unused telephone strategy design assistance it was
eligible to receive from HNC in that month under this
paragraph at the same rate charged for additional
telephone strategy design assistance.
(l) Upon request by Customer, HNC or FDR may, at its option,
provide the following to Customer: custom system
installation, additional training, and fraud user
interface licensing. HNC shall provide the following to
Customer upon request: fraud strategy consulting and
custom fraud models. Customer will contract directly
with HNC for these services, which will be provided at
an additional cost to Customer.
(m) HNC has established a Fraud Control Consortium whereby
users of Credit Card Output Access contribute data for
use by HNC to study fraud patterns, which enables HNC to
improve fraud detection methods. If Customer chooses to
join such Consortium, Customer shall provide data to the
Fraud Control Consortium as required and requested by
HNC within 30 days after the Falcon Start Date and on a
calendar quarterly basis thereafter. If Customer does
not wish to join the Fraud Control Consortium, HNC, upon
request of Customer shall construct a custom fraud model
for Customer, as an additional service, at a cost agreed
upon among FDR, Customer and HNC. Customer acknowledges
that FDR will employ the HNC Software using the Fraud
Control Consortium algorithms to produce Credit Card
Output Access for Customer only if Customer contributes
data to the Fraud Control Consortium.
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(5) Notwithstanding any other Provisions of this Agreement, either
party may terminate the Credit Card Fraud Management/Fraud
Detection Services hereunder upon 30 days written notice to
the other party.
*F. CREDIT PERFORMANCE SERVICES FDR will make available to Customer and
Customer's Transaction Card Affiliates the following Credit Performance
Services:
(1) Credit Performance Services shall consist of those services
described both in this section. FDR shall supply all
equipment, facilities, and personnel necessary to provide the
Credit Performance Services.
(2) In the event FDR determines that performance of Credit
Performance Services in accordance with the terms of this
section in any jurisdiction requires licensing by such
jurisdiction, FDR shall, with notice to Customer, cause the
Credit Performance Services to be performed by an entity which
meets the requirements of such jurisdiction, unless otherwise
directed by Customer to cease performing Credit Performance
Services in such jurisdiction. If no such entity is available
to provide such Services in accordance with the terms of this
Agreement, FDR shall advise Customer, and FDR shall have no
further obligation to provide or cause to be provided the
Credit Performance Services in such jurisdictions.
(3) In order to assist FDR with its performance of the Credit
Performance Services, Customer hereby agrees:
(i) to notify FDR, on a monthly basis, regarding those
Cardholder Accounts On File for which Customer elects to
have FDR perform Credit Performance Services;
(ii) to approve all payment plans and receive all payments
from the Cardholder Accounts On File;
(iii) to make all decisions, in its sole discretion, as to if
and when any Cardholder Accounts On File are to be
turned over to a collection agency;
(iv) that FDR is hereby authorized to contact the Cardholder
Accounts On File, whether in writing or verbally, in
Customer's clients' names;
(v) that FDR is acting as an agent of Customer in providing
the Credit Performance Services; and
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(vi) to establish all parameters regarding the content and
timing of all telephone and letter contact which FDR
will initiate on Customer's behalf with the Cardholder
Accounts On File.
*G. CARDHOLDER SUPPORT SERVICES During the Cardholder Support Services
Terrm (as defined in this section G), FDR will make available to Customer and
Customer's Transaction Card Affiliates the following Cardholder Support
Services.
(1) CUSTOMER SERVICE-CARDHOLDER/BANK
Telephone Customer Service: Includes toll-free 800 number for
direct Cardholder interface for general account inquiries and
problem resolution twenty-four (24) hours per day, seven (7)
days per week. FDR will answer incoming automated call
distribution (ACD) telephone inquiries from Cardholders (in
addition, Voice Response Unit ('VRU') information shall be
provided 24 hours per day, 7 days per week);
Mail Customer Service: Resolution of written inquiries,
notices, and posting of non-monetary changes.
Account Maintenance: Data entry of new account information and
monetary and non-monetary changes.
Exception Item Handling: Research and resolution of unposted
charges, or other maintenance transactions.
(2) DISPUTE/CHARGEBACK CORRESPONDENCE SERVICES (8:00 A.M. THROUGH
5:00 P.M., CTZ, MONDAY THROUGH FRIDAY (EXCLUDING FDR
HOLIDAYS))
FDR shall, for all such inquiries relating cardholder accounts
provided that FDR has access to appropriate backup for such
resolution, provide resolution of customer service inquiries
received via written correspondence, including answering
incoming correspondence from Cardholders of Customer and from
Customer's own personnel via referral of written
correspondence. FDR shall provide on behalf of Customer
Cardholder initiated chargeback processing for disputes
(excluding those items relating to collections and/or fraud
activity), as more specifically defined below.
(a) Dispute/Chargeback Processing: FDR will respond to
incoming mail and phone inquiries regarding charges
posted to Customer's Cardholder Accounts that are not
recognizable to the Cardholder, duplicate charges, or
for which the Cardholder disputes the quality of goods
or services received, non-receipt of goods or services,
or
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otherwise asserts a claim of a billing error. FDR will
provide research of inquiries in accordance with
Regulation Z and MasterCard and VIA rules and
regulations, perform sales draft retrieval requests and
respond to the Cardholders in accordance with the
Procedures Manual (as defined below).
(b) Dispute Processing: FDR will process incoming mail and
phone inquiries, research the inquiries, and fulfill
sales draft retrieval requests, if necessary, and
respond to Cardholder in accordance with the Procedures
Manual.
(c) Dispute Processing (Operational Losses): In the event an
incoming dispute is in an amount less than $30.00, FDR
will work the dispute and write it off in accordance
with the Procedures Manual.
(d) Chargeback Processing (Outgoing): FDR will initiate
outgoing chargebacks in accordance with Regulation Z and
MasterCard and VISA rules, regulations and timeframes.
(e) Chargeback Processing (Representment - Operational
Losses): In the event an incoming chargeback is in an
amount LESS than $45.00, FDR will write it off in
accordance with the Procedures Manual.
(f) Chargeback Processing (Representment - Post Charge to
Cardholder): In the event FDR determines that a disputed
charge is the Cardholder's responsibility, FDR will post
the charges to the Cardholder Account and send a letter
of explanation to the Cardholder, in accordance with the
Procedures Manual.
(g) Chargeback Processing (Representment - Incoming): FDR
will work such chargebacks in accordance with MasterCard
rules and regulations.
(h) Pre-Arbitration Processing: FDR will research and take
action in accordance with MasterCard and VISA rules and
regulations.
(i) Pre-Arbitration Processing (Operational Losses): In the
event an incoming pre-arbitration is in an amount less
than $50.00, FDR will write it off in accordance with
the Procedures Manual.
(j) Pre-Arbitration Processing (Post to Cardholder Account):
If FDR determines that the incoming pre-arbitration is
the Cardholder responsibility, FDR will post the
transaction back to the Cardholder
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Account and send letter of explanation to the
Cardholder, in accordance with the Procedures Manual.
(k) Arbitration Filing: FDR will research and take action in
accordance with Regulation Z and MasterCard and VISA
rules and regulations.
(1) Pre-Compliance Processing: FDR will research and take
action in accordance with Regulation Z and MasterCard
and VISA rules and regulations.
(m) Pre-Compliance Processing (Operational Losses): In the
event an incoming pre-compliance is in an amount less
than $50.00, FDR will work the pre-compliance and write
it off in accordance with the Procedures Manual.
(n) Pre-Compliance Processing (Post to Cardholder Account):
If FDR determines that the incoming pre-compliance is
the Cardholder responsibility, FDR will post the
transaction back to the Cardholder Account and send
letter of explanation to the Cardholder, in accordance
with the Procedures Manual.
(o) Compliance Filing: FDR will research and take action in
accordance with Regulation Z and MasterCard and VISA
rules and regulations.
(p) Collection Letters (Outgoing good faith letter): FDR
will research and send a letter to the acquiring bank to
attempt resolution on Cardholder's behalf in the event
no recourse is available to the Cardholder under
Regulation Z, MasterCard and VISA rules and regulations.
(q) Collection Letters (Incoming from acquiring banks): FDR
will research and attempt to resolve the item by
contacting the Cardholder on behalf of the acquiring
bank. FDR will work with acquiring banks and comply with
acquiring bank's collection policy as published in the
VISA BIN and MasterCard Information Manuals.
(r) File Transfer to Fraud: FDR will re-route fraud
inquiries to Customer's Fraud Department when inquiries
are received in the Chargeback/Dispute Processing
Department.
(s) File Transfer to Customer Service: FDR will re-route
non-dispute inquiries to Customer's Customer Service
Department when inquiries are received in the
Chargeback/Dispute Processing Department.
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(t) Change to Arbitration: FDR will revise a dispute
inquiries status when a dispute or representment of a
dispute results in a prearbitration case.
(u) Change to Compliance: FDR will revise a dispute
inquiries status when a dispute or representment of A
dispute results in a compliance case.
(v) Change to Good Faith: FDR will change a dispute from
'dispute' status to 'good faith' status if it is
discovered the dispute has no recourse available through
Regulation E or MasterCard rules and regulations."
(3) CREDIT SERVICES
FDR will perform or handle the following credit related services on
behalf of Customer from 8:00 a.m. through 5:00 p.m., CTZ, Monday
through Friday, excluding FDR Holidays. For the purpose of this
Section G, FDR Holidays shall mean New Years Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
(a) Inbound/Outbound Servicing via Telephone or Written
Correspondence: FDR will place outbound calls to applicants to
verify application information as requested by Customer.
Additionally, FDR will answer inbound calls from applicants
inquiring about application status and other general credit
inquiries. FDR will provide resolution of written inquiries
received from applicants.
(4) CREDIT ENHANCED SERVICES
FDR will perform the following services on behalf of Customer from
8:00 a.m. through 5:00 p.m., CTZ, Monday through Friday, excluding
FDR Holidays:
(a) FDR will receive transmission of application data from
Customer and provide services to include application loading
into A system that interfaces with the Equasion APS System
("EAPS") which will perform a fraud prescreen check, enter DC
activity code known fraud files, apply approval code and
account set-up code. FDR will transmit a response file back to
Customer for handling.
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(b) FDR will process balance transfer requests in connection with
the Services. The processing of such requests shall include
the preparation and transmission of the balance transfers to a
third party vendor.
(5) TECHNICAL SYSTEMS SUPPORT SERVICES
Set-up: Consists of creating, programming, testing and implementing
program requirements including but not limited to VRU Configuration,
Reports, Mail Tapes, and as mutually agreed upon by Customer and
FDR.
Transaction Routing: Transaction routing within the FDR processing
system of monetary entries, non-monetary entries and applications
that does or doses not require a decision.
Reporting: Client requested reports.
Facsimile Support: Facsimile communication both to and from the
client.
File Processing: File manipulation to include receipt from or
creation and transmission to client.
Programming: Programming support for client requested changes after
initial set-up.
Data Lines/Modems: Installation of client requested data
communication lines and modems.
Quality Call Monitoring: Remote call monitoring by Customer at
location specified by Customer.
Record Filming: Microfilming/imaging of paper records.
(5) During the Cardholder Support Services Term, Customer will provide
FDR with access to Customer's credit card related Cardholder
Accounts as required for FDR to provide the Cardholder Support
Services. Customer will also provide training of FDR personnel with
respect to Customer's Cardholder customer service policies and
procedures sufficient to enable FDR to perform the Cardholder
Support Services. Training will be provided at FDR's Bankcard
Program Services facility at Customer's expense prior to the
commencement of the Cardholder Support Services Term. Customer shall
be responsible and pay for all travel expenses incurred by either
party in connection with such training. In addition, Customer will
designate a
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manager to serve as the interface between Customer and FDR and to
coordinate communication and implementation of customer service
policies to be applied by FDR in connection with the Cardholder
Support Services.
(6) FDR shall provide Customer with the Cardholder Support Services for
a period of twelve (12) months (herein referred to as the
"Cardholder Support Services Term"). The date of commencement of the
Cardholder Support Services shall be mutually agreed upon by the
parties. Upon the conclusion of the initial term, FDR shall continue
to provide the Cardholder Support Services to Customer in six (6)
month increments, unless and until either party gives to the other
party written notice of its desire to terminate FDR's performance of
the Cardholder Support Services. Termination shall be effective
ninety (90) days after receipt of such written notice.
(7) A Policies and Procedures Manual shall be mutually agreed upon by
Customer and FDR on or before sixty (60) days after the date of
execution of this Amendment to Service Agreement with respect to the
Cardholder Support Services, to be known as: Customer Service,
Credit and Chargeback/Dispute Processing (the "Procedures Manual").
Should a mutual agreement with respect to the Procedures Manual not
be reached by the parties on or before sixty (60) days after the
date of execution of this Amendment to Service Agreement, then a
dispute resolution process shall be initiated, as defined in
Sections 13.13 and 13.14 of the Service Agreement. FDR and Customer
agree to review the Procedures Manual periodically and, if necessary
or appropriate, to revise or update the Procedures Manual as
mutually agreed. FDR will implement mutually agreed upon changes to
the Procedures Manual within agreed upon time frames, and, if no
agreement on time frames is reached, within thirty (30) days.
(8) Customer shall provide at least sixty (60) days notice to FDR of the
formatted volumes of incoming cardholder calls and applications.
IV. DEFINITIONS:
ACCD Downloaded
Account Each selected Cardholder Account of Customer
which is transmitted to Customer, or any other
third party acting on Customer's behalf, for
collection purposes in connection with Customer's
Automated Customer Calling Device (ACCD).
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Account-Level Processing
(ALP) - Cardholder
Pricing Account on
File Each account of a Cardholder of Customer using
Account-Level Processing that remains on
Customer's masterfile on the last processing day
of the calendar month as defined on the CD-121
Ledger Activity Report or the equivalent report.
ALP Services-Cardholder Pricing allow Customer
the ability to set, change and monitor pricing
parameters (including but not limited to annual
percentage rate, penalty fees, minimum payment
calculations and annual charges) on a Cardholder
Account automatically at the level of the
individual Account based upon decision tables
built by Customer.
Application Processing
Services An on-line system supporting the data entry,
credit investigation, credit analysis,
decisioning, documentation and booking of credit
applications on the FDR System. Services include
automated credit scoring and credit limit
assignment.
APS Relationship Account
Storage Each storage of a record of Customer depository
accounts on the FDR System. Upon entry of
application data, a search of the deposit file is
executed with matches reported to allow
identification of an existing consumer
relationship. Resulting matches can be queued by
the system for verification.
Auto PIN Change Each call made by a Cardholder of Customer
requesting a change to the Personal
Identification Number (PIN) associated with the
Cardholder's Transaction Card by the use of a
touch-tone telephone.
Automatic Chargeback Each automatic initiation of a chargeback by the
FDR System based upon predefined parameters for
transactions involving an expired account
plastic, an account listed in the Combined
Warning Bulletin, or an account which exceeds
presentment parameters.
Automatic Rush Embossing Each rush servicing of a Customer request for a
Cardholder embossed plastic and/or PIN/Post
Mailers through use of on-line rush program on
the FDR System.
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*Balance Consolidation An online system for the production, processing
and management of balance transfer checks,
including authorization and posting of checks,
creation of a check data file, transmission of
the check data file to a third-party vendor
selected by FDR for printing and mailing of
checks and related letters and inserts and
product management through production of online
balance consolidation reports and generation of a
CIS Memo entry for each balance consolidation
request. The third party vendor selected by FDR
for check print and mail services may be an
Affiliate of FDR. At Customer's option,
reconciliation services and an Official Check
product may be provided through a separate
agreement between Customer and Integrated Payment
Systems (IPS), an Affiliate of FDR.
Reconciliation services include payment of cashed
items, reconciling issues to paids, researching
and processing exception items, processing stop
payments, and microfilming, storage and retrieval
of paid items. Official Checks are centralized
teller checks that receive next-day availability.
If such services are obtained through contract
with IPS, third-party print and mail services
also will be provided through the IPS contract.
FDR shall not be responsible for nonperformance,
negligent performance or default by IPS or its
third-party vendor under such separate written
agreement, or for providing such services in the
event the agreement with IPS expires or is
terminated.
Braille Embossing Each plastic card for which FDR has embossed
Braille characters on the front of the plastic.
Card Activation-ANI Call Each automatic initiation of an on-line
transaction in conjunction with an Automatic
Number Identification (ANI) process via an audio
response unit (ARU), changing the status of a
Cardholder Account associated with certain newly
issued or reissued plastics (as determined by
Customer), from "inactive" (under certain
parameters) to "active" for transaction
authorization purposes.
Card Activation-ARU
Call-FDR Each initiation of an on-line transaction by the
confirmation of Customer requested data captured
from Customer's Cardholder, via an audio response
unit (ARU), changing the status of a Cardholder
Account associated with certain newly issued or
reissued plastics (as determined by Customer),
from "inactive" (under certain parameters) to
"active" for transaction authorization purposes.
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Card Activation-Customer
Processed Each entry of an on-line transaction by Customer
to change the status of a Cardholder Account
associated with certain newly issued or reissued
plastics (as determined by Customer), from
"inactive" (under certain parameters) to "active"
for transaction authorization purposes.
Card Activation-Voice
Call-FDR Each entry of an on-line transaction by FDR, on
behalf of Customer, in conjunction with the
confirmation of Customer requested data obtained
from the Customer's Cardholder via a voice call,
changing the status of a Cardholder Account
associated with certain newly issued or reissued
plastics (as determined by Customer), from
"inactive" (under certain parameters) to "active"
for transaction authorization purposes.
Card Activation Labeling
-General Use Each affixation of a sticker to each embossed
plastic in a Customer Cardholder embossing run;
generic sticker included at no additional charge.
Card Activation Labeling
-Selective Use Each affixation of a sticker to each embossed
plastic selectively identified by Customer;
generic sticker included at no additional charge.
Card Carrier Printing The printing of Customer's Cardholder information
on a Customer-specified card carrier form.
Cardholder Account
on File Each account of a Cardholder of Customer
(including but not limited to charged off,
authorization only and debit accounts) that
remains on Customer's master file at FDR on the
last processing day of the calendar month as
defined on the CD-121 Ledger Activity Report or
the equivalent report.
Cardholder Annual
Activity Summary Each annual summarization of activity associated
with a Transaction Card issued by Customer.
Cardholder Annual Activity
Summary Detail Storage Each Cardholder Account for which annual activity
summary detail is stored in an electronic format.
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Cardholder Authorization
Inquiry Each instance in which the Cardholder
records of Customer are accessed for an
authorization, including but not limited to
personal identification number (PIN)
verification and Cardholder address
verification services, or when the
authorization request is switched to
Customer's location to access the off-site
Cardholder masterfile of Customer.
Cardholder Hot Call Fraud
Referral Each authorization attempt on a Cardholder
Account of Customer statused lost/stolen or
Code 10 authorization transaction where
FDR's Fraud Management Voice Operations
conducts an identification process,
instructs the Merchant on the
authorization's disposition and attempts
recovery of the Transaction Card if the Card
is identified as Lost/Stolen. Additionally,
FDR may instruct the Merchant to recover the
Transaction Card and, at Customer's option
based upon predefined criteria, FDR shall
dispatch the police to Merchant location.
Cardholder Hot Call
Referral Each authorization requiring intervention
because Customer has requested recovery of
the account plastic or positive
identification in order to complete the
authorization transaction.
Cardholder Monetary
Transaction Each posting of a monetary transactio to
Customer's Cardholder Accounts, including but
not limited to sales, returns, cash advances,
payments, reversals, adjustments and annual
charges.
Cardholder Non-Monetary/
On-line Transaction Each entry of non-monetary information
subsequently posted or unposted to a
Cardholder masterfile of Customer, or an
inquiry into the computer records of
Customer and its Cardholders (potential and
existing) by the use of a terminal, through
an ATM, or by tape.
Cardholder Notice Each brief notification to a Cardholder of
Customer prepared by FDR's computer at the
request of Customer based upon Customer's
Product Control File or a CRT entry request
made by an employee of Customer, including
but not limited to delinquency notices,
delinquency statements, overlimit notices and
first activity notices. This service includes
any preparation required for delivery.
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Cardholder Selected PIN
(SMR/SMC) Transaction Each transaction generated in connection with a
Cardholder Account of Customer for which Customer
enters an on-line transaction into the FDR System
from a Solicitation Mailer Response (SMR) screen
or Solicitation Mailer call (SMC) through
Customer's ARU system, to generate a Personal
Identification Number (PIN) which has been
selected by the Cardholder in connection with the
Cardholder Account.
Cardholder Statement Each periodic summarization of activity (whether
printed or otherwise) associated with a
Transaction Card issued by Customer or Customer's
Transaction Card Affiliates, including but not
limited to single statements, dual statements,
and reprints of information from a CIS Statement
currently stored on-line on the FDR System.
Service includes statement messaging on original
statements and preparation required for delivery.
Cardholder Statement Insert Each inserting of advertising or other item of
information not contained on a Cardholder
Statement into an envelope containing a
Cardholder Statement: inserts required by state
or federal law do not apply.
Cardholder Statement Mail
Preparation Each Cardholder Statement which is prepared by
FDR on behalf of Customer for first class mailing
via the United States Postal Service.
Cardholder Support Services The credit, customer service, chargeback
processing and other related services performed
by FDR on behalf of Customer.
Carrier Insert/Meter/Mail Each inserting of a prefolded card carrier,
containing merged Cardholder plastic, into #10
window envelope: a standard envelope is included.
CD-ROM Services The storage, on Compact Disc-Read Only memory
("CD-ROM"), of statements and reports for
purposes of record retention, accessing and
archival purposes. Customer, at its option, may
elect to utilize the CD-ROM Services, Microfiche
Services and/or On-Line Report Services for the
same items. Notwithstanding anything in this
Agreement to the contrary, Customer is
responsible for determining the acceptance of the
CD-ROM Services under state and Federal
regulations, including but not
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limited to obligations to retain information for
a specified period of time, signature
verification and the admissibility of documents
into evidence. It is Customer's responsibility to
keep written or microform records, if such are
required under state and Federal regulations
because of the limited acceptance or
admissibility of the CD-ROM Services or the
technology to be used under this Agreement to
provide the CD-ROM Services.
Check Order Service Daily or monthly downloading of Cardholder data,
via transmission or magnetic tape, to a third
party vendor selected by Customer for the
production of certain items for Cardholders of
Customer including but not limited to convenience
checks and check re-orders based upon an on-line
request made by an employee of Customer or
automatically generated by the FDR System on
behalf of Customer.
CIMS FDR's Customer Inquiry Management System (CIMS)
is an online system which provides the means to
log, assign and track Customer Inquiries. Under
CIMS, a Customer Inquiry shall mean a request for
information received from a customer of Customer
either by mail, phone, walk-in or some other
medium. A Workcase is the basic work unit within
CIMS; it represents a Customer Inquiry. Workcase
Option with Variables ("WOV") Services shall also
be available under CIMS at Customer's option.
CIMS Log-Only Workcase Each Workcase that is entered into CIMS by
Customer for internal reporting purposes only; no
follow-up is required by Customer's personnel.
CIMS Regular Workcase Each Workcase that, for whatever reason, requires
review, task completion and/or follow-up by
Customer's personnel in order to resolve a
Customer Inquiry.
CIMS Regular Workcase
Action Each (i) task which is performed in the
resolution of a Regular Workcase or (ii) brief
communication that contains directive, advisory
or informative matter stored within an Action
Workcase that is entered by Customer's personnel.
CIMS WOV Workcase Each optional Workcase that sends variable
information to a file for downloading to
Customer. Actions may be used to establish the
specific grouping of variables that will be
downloaded to Customer.
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CIS FDR's Customer Inquiry System (CIS) is an on-line
system for storing and accessing Statement,
Detail or Memo information regarding a Cardholder
Account.
CIS Detail Each item of information regarding transactions
that have posted or will post to a Cardholder
Statement such as charges, payments, credits and
authorizations not aged off the Cardholder's
FILE, Cardholder payment history, and real-time
authorizations.
CIS Memo Each summary item, not individually exceeding 65
positions, that is stored with the Customer's
Cardholder Account information and is accessible
by Customer via Customer's CRT terminals.
CIS Statement Each set of statement and detail information
regarding Customer's Cardholder Accounts that is
stored on the FDR system and accessible by
Customer via Customer's CRT terminals. CIS
Statement information includes the information
set forth on a Cardholder Statement such as, but
not limited to, the name, address, account
number, statement date, payment date, cycle days,
annual percentage rates, and monthly periodic
rates.
Company Card Report
Mail Preparation Each set of reports prepared by FDR for mailing
to a company designated by Customer in connection
with company card services. For purposes of this
Agreement, a set of reports shall mean all
reports of a single company which are placed in a
single envelope for mailing.
*Credit Performance
Services The delinquent/overlimit account billing,
skiptracing and related services performed by FDR
on behalf of Customer.
Custom Forms Purchased Any paper materials (including but not limited to
inserts, forms and agreements) ordered and
purchased by FDR on behalf of Customer in
connection with the Cardholder Statement and
Insert services set forth in this Agreement.
CVV/CVC Verification
Generation Each value calculated and generated in connection
with a Transaction Card pursuant to VISA's Card
Verification Value (CVV) or MasterCard's Card
Validation Code (CVC) directives.
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DES PIN Generation Each Data Encryption System (DES) Personal
Identification Number (PIN) created by the FDR
System in connection with a plastic card produced
by FDR on behalf of Customer.
Embossing Set-Up Each change of the type of card, card carrier,
insert and/or envelope during an input processing
run.
Emergency Card or Cash
Replacement Services The capture and processing of information by
FDR's Fraud Management Voice Operations in the
performance of emergency cash authorization
services or for coordinating the creation and
delivery of a replacement card(s) for Customer's
Cardholder.
Enterprise Presentation
Cardholder Statement Each Cardholder Statement produced by FDR on
behalf of Customer utilizing the Enterprise
Presentation feature. Enterprise Presentation is
the system which allows Customer the flexibility
to electronically arrange the statement form
(including payment coupon placement), create and
place logos and graphics and select from numerous
font types and sizes on the Cardholder Statement.
Customer understands and agrees that Enterprise
Presentation Cardholder Statement data may only
be stored for archival use on CD-ROM and
Microfiche.
FDR LinkUp Services The set-up and monthly service charges associated
with the mailboxes utilized by Customer to
receive and send electronic mail from and to FDR.
Fraud Management/Fraud
Detection Services -
Actioned Credit Card
Account Any credit card account routed to the FDR Fraud
Detection WorkCenter queue group that results in
any one or more of the following activities in a
single 48-hour period: outgoing/incoming
Cardholder phone calls with a maximum of 4
attempts within any single 48-hour period, CIS
Memos, Letter generation or account statusing.
Fraud Management/Fraud
Detection Services -
Monthly Gross Active
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Credit Card Account Each credit card Cardholder Account that had a
balance or any monetary posting for the month
billed, as determined by FDR for Customer, as
reduced by any 'Z'-Charge Off accounts.
High Coercivity Each plastic Transaction Card which is encoded
using a high coercivity magnetic stripe.
Hot Stamp Plates/
Logos Purchased Each magnesium plate or logo ordered by FDR on
Customer's behalf.
InfoSight Services The set-up, on-line access, file load and other
management information services performed by FDR
on behalf of Customer.
Interface Services -
Magnetic Tape Handling Each receipt of data by FDR from Customer or a
third party designated by Customer or each
forwarding of data to Customer or a third party
designated by Customer from FDR via mailed or
courier delivered magnetic media including, but
not limited to, diskettes and magnetic tapes.
Interface Services -
RJE/NDM Each receipt of data by FDR from Customer or a
third party designated by Customer or each
forwarding of data to Customer or a third party
designated by Customer from FDR via a central
processing unit to central processing unit
transmission using Remote Job Entry or Network
Data Mover (RJE or NDM).
Interface Services - Tape
to Tape Each receipt of data by FDR from Customer or a
third party designated by Customer or each
forwarding of data to Customer or a third party
designated by Customer from FDR via a central
processing unit to central processing unit
transmission using a tape to tape interface.
IRS Home Equity Form
1098 Each Internal Revenue Service (IRS) Form 1098
prepared by FDR's computer, in accordance with
the Customer's Product Control File settings or
terminal entry made by Customer, printed and
mailed to Customer's Cardholder. Service includes
creation of a tape for Customer's reporting of
Cardholder information to the IRS.
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Issuer Chargeback Each return of a Ticket and receipt of the amount
thereof from an Issuer to an Acquirer as provided
for in the then- current MasterCard and VISA
international rules and regulations, or
applicable domestic regulations. Issuer
Chargebacks subsequently reversed by the Acquirer
will be forwarded by FDR to Customer for
resolution via the On-Line Direct Sell Chargeback
System.
*Letter Each letter prepared by FDR's computer, in
accordance with Customer's Product Control File
settings or CRT entry requests made by employees
of Customer. Each such Letter shall have online
composition and editorial features and options
including signatures, logos, multiple type faces
and additional page letter generation. Service
includes any preparation required for delivery.
*Letter - Additional Page Each printed output on the reverse side of a
Letter (duplex printing) or each side of each
sheet of 8 1/2" by 11" 24 lb. bond stock
accompanying a Letter.
*Letter - Certified Mail
Handling Each Letter, with or without Letter Insert, which
is handled separately from Customer's first class
mailings to provide certified delivery of said
item. This does not include postage.
*Letter - Group Samples Each individual or set of Letters prepared by
FDR's computer, in accordance with Customer's
Product Control File settings or CRT entry
requests made by employees of Customer, which is
printed and mailed to Customer in a draft format
for Customer's review and approval.
*Letter - Insert Each inserting of advertising or other item of
information not contained on a Letter, including
but not limited to generic reply envelopes, into
a windowed envelope containing a Letter.
*Letter - Priority Mailing Each Letter, with or without Letter Insert, which
is handled separately from Customer's first class
mailings to provide next day delivery of said
item.
*Letter - Set-up, Revision
or Deletion Each addition, deletion or change, performed by
FDR on behalf of Customer, of a Customer's Letter
format or inputs including but not limited to
digitized signatures and logos of Customer.
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Lost/Stolen Account
Management and
investigation Investigative services relating to Customer's
Cardholder lost or stolen accounts including but
not limited to lost/stolen account research;
fraudulent activity investigation; Cardholder
interviews; manual adjustments, chargebacks, and
retrievals; and fraud and counterfeit reporting.
Lost/Stolen Account
Processing Automatic actions, relating to the processing of
a Cardholder's Account statused as lost or
stolen, required to prompt Customer
fraud/security representatives, record the
representatives directive(s) and request that a
Cardholder Account number be listed in the
appropriate Combined Warning Bulletin;
automatically report the cardholder's Account
number to Visa and MasterCard's Authorization
Exception System, if applicable; systematically,
based upon Customer's pre-defined parameters,
initiate the set-up of a new Cardholder Account;
reconcile transactions posted but not yet
statemented at the time of the Cardholder's
reporting, including but limited to the transfer
of valid transactions to the Cardholder's
replacement account and identification and
recording of non-valid transactions as
fraudulent; automatically request approved
reissue of account plastic(s) and suspend reissue
of account(s) not approved for review by
Customer; and automatically update the
Cardholder's phone number in the Cardholder
masterfile from the lost/stolen report.
Lost/Stolen Account
Transaction Management
System Each transaction posting to a Cardholder Account
of Customer statused as lost or stolen which is
automatically identified and reported to an
on-line work queue from which Customer may
initiate on-line transactions to produce a
transaction adjustment, a chargeback, or a ticket
retrieval request; issue an affidavit of fraud or
forgery to Customer's Cardholder; and/or report a
fraudulent transaction to Visa or MasterCard.
Lost/Stolen Report - FDR
Entered Each report of a lost or stolen Transaction Card
from the Cardholder of Customer which is
processed by FDR's Fraud Management Voice
Operations. Reports entered on-line immediately
change the external status and block
authorization
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requests on the Cardholder Account. Service
includes lost/stolen reports received via collect
call, telegram and telex.
Merchant Account on File Each account of a Merchant of Customer that
remains on Customer's masterfile at FDR on the
last processing day of the calendar month as
defined on the MM-101 Merchant Profitability
report or an equivalent.
Merchant Ticket -
Remote/Tape Entered Each Ticket from Customer's Merchant that is
transacted by a Cardholder from any Bank
Identification Number (BIN), Interbank Card
Association (ICA) or other Transaction Card
system identification number, and entered
remotely from Customer's terminal(s) or via
magnetic tape or tape transmission to FDR by
Customer or a third party acting on Customer's
behalf.
Microfiche Each page of microfiche provided to Customer by
FDR. Service includes any preparation required
for delivery.
Non-Standard Job Run Each scheduled daily, weekly or monthly
production of a data set on behalf of Customer
that is in addition to the standard data outputs
produced by the FDR System.
On-Line Access and
Retrieval System
(OARS) Services Each page of Reports Management System (RMS)
reports which is stored by FDR for on-line
viewing and printing by Customer's personnel.
Storage of data by FDR shall be for a period of
sixty (60) days. Customer, at its option, may
elect to utilize any or all of the OARS Services,
CD-ROM Services and/or Microfiche Services for
the same RMS reports. Notwithstanding anything in
this Agreement to the contrary, Customer is
responsible for determining the acceptance of the
OARS Services and the technology to be used under
this Agreement to provide the OARS Services under
state and Federal regulations, including but not
limited to signature verification and the
admissibility of documents into evidence. It is
Customer's responsibility to keep written or
microform records, if such are required under
state and Federal regulations because of the
limited acceptance or admissibility of the OARS
Services or the technology to be used under this
Agreement to provide the OARS Services.
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On-Line Credit Bureau
Report Request The transmission or receipt of credit application
or existing account information via video display
terminals at Customer's location to any of the
principal credit bureaus presently interfaced to
FDR with which Customer has established a written
relationship that is in effect at all times
during the term of this Agreement in order to
determine the credit worthiness of an
applicant/account. Anything in this Agreement to
the contrary notwithstanding, in the event that
Customer's relationship(s) with all of the
principal credit bureaus supported pursuant to
this Agreement should be terminated at any time
during the term of this Agreement, then FDR's
obligation to provide Credit Bureau Report
Requests shall automatically be terminated,
without penalty or financial obligation of any
type or kind to FDR, on the effective date of the
termination of Customer's relationship(s) with
such principal credit bureaus.
PCS Remote Access Service Product by which Customer and Customer's
Transaction Card Affiliates may access the FDR
System via a personal computer at Customer's or
the Affiliate's office in order to allow
employees of Customer or the Affiliate to perform
certain terminal functions, including but not
limited to the accessing of Cardholder or
Merchant Account data, the entry of information
concerning Customer's Accounts and the
uploading/downloading of data regarding
Customer's Accounts.
Plasticard Photocard Services (1" x 1" and 2" x 2")
Photo Transfer The affixation of a digitized photographic image
to a plastic Transaction Card.
Photo/Signature
Scanning and
Digitization The process by which FDR (i) scans a photograph
or signature, (ii) cleans/crops the photograph or
signature and (iii) stores such photograph or
signature as a digitized image on a data base for
up to five (5) years.
Photo Image
Handling and
Merge The handling and merging of images with
corresponding data to create an output file.
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Customer and FDR hereby agree that all
photographs sent to FDR by Customer for use by
FDR in the performance of the Plasticard
Photocard Services set forth in this Agreement
shall, prior to delivery to FDR, be reviewed by
Customer for content. Customer acknowledges and
agrees that, with respect to the issuance of
Photocards; to its Cardholders, FDR has no
responsibility and assumes no responsibility
whatsoever for the content of any such
photographs, and that Customer is solely
responsible for interpreting applicable state and
federal laws (including but not limited to laws
governing obscenity, privacy, proprietary
information ownership rights and
copyright/trademark infringement), monitoring
applicable legal developments, determining the
requirements for compliance with all applicable
state and federal laws, and maintaining an
ongoing compliance program in connection with
such services.
PIN/Post Mailer Processing Each Personal Identification Number (PIN), and
associated PIN notice form, or mail verification
form (POST Mailer), related to Customer's
Cardholder. Service includes any preparation
required for delivery including generic PIN form.
PIN/Post Mailer
Production Edits The edit functions performed on a PIN/Post
Mailer before printing. The service includes
Mailer method changes, Mailer address changes,
Mailer mail date changes and Mailer deletions.
PINpoint Inquiry Each transaction selection (more than one
selection may be made during a call) made by a
Cardholder of Customer which accesses the
Cardholder's account records for selected
information by the use of a touch-tone telephone.
Plastic to Carrier
Match/Merge The electronic scanning of the account number on
Customer's card carrier and the account number on
the magnetic stripe (OCR line optional) of
Customer's plastics. Upon verification of match,
insert from 1-4 matched plastic cards into
carrier as per control line specifications and
then burst, trim and fold carrier.
Plasticard Agent/Strategy
Inserting Set-Up Each set-up due to a change in Customer's
Plasticard Insert at the agent/strategy level.
Plasticard Bulk Packaging -
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Basic Sort The separation from the production run of
accounts from individual systems, principals,
agents or grouping of zip codes through the use
of designated mail codes.
Plasticard Expedited
Turnaround Accelerated mailing of all of Customer's daily
issue plastics.
Plasticard Forms Purchased Each item of paper material ordered by FDR on
behalf of Customer including but not limited to
card carriers, inserts and envelopes.
Plasticard Hot Stamping Each plastic card of Customer's Cardholders whose
image is heatpressed from a magnesium plate made
by FDR with camera-ready art furnished by
Customer.
Plasticard Indent Printing Each plastic card of Customer's Cardholders that
FDR has used impact printing on its back.
Plasticard Inserting The inserting of each accompanying
piece of materials into a #10 windowed envelope
along with a pre-folded card carrier containing a
merged Cardholder plastic. Excludes inserts
required by state or Federal law. Customer
supplies inserts.
Plasticard Job Processing Each scheduled daily receipt of a Customer's
off-line Cardholder Account information,
including logging onto the system and setting up
control reports for each input.
Plasticard Mail Assembly The matching of like carriers into one or more
packages.
Plasticard Mail Handling Mail preparation and handling fees associated
with non-first class mailings of Customer's
Cardholder and Merchant plastics.
Plasticard Mail Integration The mixture by FDR of a mail item containing an
embossed plastic with several other types of
mailing items prior to their delivery to the
United States Postal Service for mailing.
Anything in this Agreement to the contrary
notwithstanding, Customer understands and agrees
that, with respect to any embossed plastics for
which FDR provides Plasticard Mail Integration
Services, the normal turnaround for the mailing
of such embossed plastics shall, for purposes of
this Agreement, be delayed by one (1) business
day.
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Plasticard Manual Rush
Emboss - 2 Day Rush servicing (between 24 and 96 hours) of
Customer request for an embossed Cardholder
plastic and/or PIN/POST Mailer received from
hardcopy, fax or mail, reports or requests.
Includes manual embossing, carrier printing, hand
inserting and other services required to prepare
the plastic for delivery, and applies to any
piece handled separately from Customer's Standard
Embossing services.
Plasticard Manual Rush
Emboss - Same Day Rush servicing of Customer request for an
embossed Cardholder plastic received from
hardcopy, fax or mail, reports or requests where
FDR mails or delivers the plastic to a courier
during the same day of the Customer's request.
Includes manual embossing, carrier printing, hand
inserting and other services required to prepare
the plastic for delivery, and applies to any
plastic piece handled separately from Customer's
Standard Embossing services.
Plasticard On-Line Same
Day Rush Each embossed Cardholder plastic where FDR mails
or delivers the plastic to a courier during the
same day of Customer's request via an on-line
screen (requests must be received by 2:00 p.m.
Central Time). This service includes standard
embossing, carrier printing, inserting and other
services required to prepare the plastic for
delivery.
Plasticard Purging Each removal of a card package and/or printed
PIN/POST Mailer from the delivery/mail stream
prior to delivery to Customer or Customer's
Cardholder.
Plastics Purchased Each item of plastic stock ordered by FDR on
behalf of Customer.
Postal Credit Processing Fee The charge associated with providing any postage
discount generating services for Customer's first
class mailings each month.
Potential Chargeback
Queue Each recording and display in an on-line work
queue of transactions posting to a Cardholder
Account of Customer that exceed a Merchant's
floor-limit and cannot be matched to an
authorization record.
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Promotional Letter Services The services performed by FDR in connection with
letters prepared by FDR at the request of
Customer for mailing to Cardholders (or
Merchants) of Customer for promotional purposes.
Recovery 1 Services An on-line system which provides Customer with
the means to perform Transaction Card recovery
services on Customer's charged-off Cardholder
Accounts. Customer shall have on-line access to
certain software and services on the FDR System
which will allow Customer to perform various
collection related functions with respect to such
Accounts.
Referral Queue Each recording and display in an on-line work
queue of a Cardholder Authorization Referral to
which a Merchant has failed to respond.
Return Account Processing
Service The processing of mailed plastics returned by the
United States Postal Service due to undeliverable
address. Each such plastic shall be destroyed by
FDR and reported to Customer.
Returned Account Plastics
Immediately Delivered
(RAPID) For each undeliverable Transaction Card, FDR will
research and attempt to reroute to the
Cardholder's new address. FDR will also enter the
address change on the Cardholder masterfile.
Returned Transaction Cards of Cardholders for
which no new address is available, and those
which Customer elects not to reroute, shall be
destroyed.
RMS Report - Hardcopy Each FDR Reports Management System (RMS) report
provided to Customer by FDR via hardcopy. Service
includes any preparation required for delivery.
RMS Reports - On-Line
View Each FDR Reports Management System (RMS) report
provided to Customer by FDR via the FDR on-line
system.
RMS Reports - RJE/NDM Each FDR Reports Management System (RMS) report
provided to Customer by FDR via remote job entry
(RJE) or Network Data Mover (NDM).
A-37
<PAGE> 77
Standard Embossing
Services Each plastic card for which FDR has mechanically
raised personalized characters prepared at the
request of Customer based upon Customer's Product
Control File or a CRT entry request made by an
employee of Customer, or in response to a receipt
of a magnetic tape or transmission from Customer
of embossing files in a format defined by FDR.
Includes up to three lines of alphanumeric font
and one line of OCR font on a ".030" plastic, the
recording and verifying of data on the
Transaction Card's magnetic stripe, and tipping
the plastic through the placement of a
contrasting color plastic film on the raised
embossed characters
Transaction Level Processing
(TLP) Promotional
Balance on File The monthly charge for each promotional purchase
balance, associated with a Cardholder Account of
Customer (several promotional purchase balances
may exist at the same time for the same
Cardholder Account), which remains on the FDR
System on the last processing day of the calendar
month, as defined on the CD-121 Ledger Activity
Report or the equivalent report (e.g. - the
CD-621 Report).
Transaction Level Rewards
(TLR) Only Transaction Each Cardholder initiated transaction (as
indicated on the CD-864 Report or its
equivalent), specifically targeted by transaction
and Cardholder decision tables, and passed to the
FDR rewards system for processing (transactions
which have already been posted to a TLP
Promotional Balance on File are excluded).
Multiple targeted transactions may post to a
single Cardholder Account in any one month.
Ultragraphics - Front Side Each logo placed on the front of Customer's
Transaction Cards through the use of a thermal
image process.
Ultragraphics - Back Side Each logo placed on the back of Customer's
Transaction Cards through the use of a thermal
image process.
Vault Storage The inventory and storage of plastics procured
through a source other than FDR.
A-38
<PAGE> 78
EXHIBIT "B"
PAYMENT AND TERM
I. PAYMENT
a. PRICE INCREASES. FDR may increase the fees and charges set forth in
this Exhibit "B" by notice to Customer, as follows:
Processing Fees. For each Processing Year during the Term of this
Agreement after Processing Year 1, FDR may increase the Processing
Fees which were in effect for the immediately preceding Processing
Year (the "Old Year") by an amount not to exceed a percentage of the
Processing Fees which were in effect for the Old Year. The percentage
to be used for the applicable Processing Year shall be equal to sixty
percent (60%) of the percentage change in the Consumer Price Index
("CPI") during a period described below; provided, however, that in no
event shall such increase be less than 0%. For purposes of this
paragraph, the CPI shall be the index compiled by the United States
Department of Labor's Bureau of Labor Statistics, Consumer Price Index
for All Urban Consumers (CPI-U) having a base of 100 in 1982-84, using
that portion of the index which appears under the caption "Other Goods
and Services." The percentage change in the CPI shall be calculated,
and notification given to Customer ninety (90) days in advance of the
effective date of said increase, by comparing the CPI using a twelve
(12) month period ending three (3) months prior to notification to
Customer and expressing the increase in said CPI through the twelve
(12) month period as a percentage.
Special Fees. If, at any time while this Agreement is in effect, the
charges are increased or decreased to FDR for items which are included
in the Special Fees including tariff line rates, WATS lines rates,
data circuit charges or other rates charged to FDR by any
communications common carrier, The United States Postal Service, any
courier or other provider of similar services, or if FDR obtains
communication or other services included in the Special Fees by
another method resulting in an increase or decrease in the charges to
FDR for the items or if additional services are added which are to be
included in the Special Fees, FDR shall increase or decrease, as
appropriate and by an equal amount the amount of the Special Fees
Customer is then paying FDR for the items under this Agreement
effective on the effective date of the increase or decrease to FDR or
add the amount for the additional services effective on the beginning
date of the additional service.
Forms Costs. If, at any time while this Agreement is in effect, the
prices charged to FDR for forms associated with first class mailing
should be increased by FDR's then current forms vendor(s), then FDR
shall have the right to increase, by an equal amount, the prices
charged to Customer in this Exhibit "B" which are impacted by such
increase in forms costs, including but not limited to Cardholder and
Merchant Statements, Letters and Notices. Any such increase shall be
effective on the effective date of the increase to FDR.
<PAGE> 79
b. METHOD OF PAYMENT.
(i) To facilitate the payment of Processing Fees, Special Fees,
Liquidated Damages and any other fee, tax, interest payment, charge or
amount due or payable to FDR under this Agreement, FDR will provide
Customer with an invoice setting forth, with reasonable detail, the
number of items processed, the appropriate unit prices, the total fees
associated with such items and any other supporting detail reasonably
required by Customer. Customer shall pay FDR the undisputed portion of
the invoice within ten (10) days of receipt via wire transfer or ACH
transmission from Customer.
c. INTEREST. If FDR is unable to obtain payment of Processing Fees,
Special Fees Liquidated Damages or any other fee, tax, interest
payment, charge or amount due or payable to FDR under this Agreement
at the time provided for payment under this Agreement, the unpaid
amount of any Processing Fees, Special Fees, Liquidated Damages or
other fee, tax, interest payment, charge or amount shall bear interest
at the rate equal to ten percent (10%) per annum, from the date on
which payment should have been available until the date on which FDR
receives the payment.
d. MINIMUM FEES.
(i) In Processing Year 1, Customer will require and Customer shall pay
to FDR for processing services sufficient to generate aggregate
Processing Fees at least equal to one hundred and five thousand
dollars ($105,000.00) ("Year 1 Minimum Processing Fee"). In each
Processing Year after Processing Year 1, Customer will require and
shall pay to FDR for processing services sufficient to generate
aggregate Processing Fees at least equal to the following amounts for
the following Processing Years (the "Minimum Processing Fees"):
<TABLE>
<CAPTION>
Processing Year Minimum Processing Fees
--------------- -----------------------
<S> <C>
2 $ 275,000.00
3 $1,000,000.00
4 $2,500,000.00
5 and each
subsequent Processing Year $3,750,000.00
</TABLE>
FDR shall calculate the total Processing Fees paid by Customer in
respect of services performed during each Processing Year (the "Total
Annual Processing Fees") within ninety (90) days after the end of each
Processing Year and will, after ten (10) days written notice to
Customer, draw upon Customer's account pursuant to paragraph b above
for the amount, if any, by which the Year 1 Minimum Processing Fees or
the Minimum Processing Fees, as applicable, for the Processing Year
exceed the Total Annual Processing Fees for the Processing Year.
(ii) In addition to the provisions of paragraph (i) above, in each
calendar month during which FDR provides Customer with the
Cardholder/Bank Customer Support Services as set forth in Exhibit "A",
Section III-G, Customer will, solely with respect to fees paid in
connection with such
B-2
<PAGE> 80
Cardholder/Bank Customer Support Services, require and pay to FDR for
Cardholder/Bank Customer Support Services sufficient to generate
aggregate Processing Fees at least equal to the following:
<TABLE>
<CAPTION>
December, 1997 No Minimum
<S> <C>
January, 1998 [*]
February, 1998 [*]
March 1998 and each [*]
month thereafter
</TABLE>
e. BILLING DISPUTE RESOLUTION. In the event that Customer should,
following any payment to FDR pursuant to paragraph (b) above, dispute
the accuracy of the volumes, transaction types or prices associated
with all or any portion of an amount (as indicated on the appropriate
invoice) drawn from Customer's account in accordance with the
provisions of paragraph (b) above (hereinafter referred to as the
"Disputed Amount"), then Customer shall promptly, but in any case not
later than sixty (60) days following the date of such invoice, notify
FDR's Accounts Receivable Department of the nature of such dispute
(hereinafter referred to as an "Inquiry"). FDR will make a reasonable
effort to resolve such dispute and to reimburse such amount to
Customer promptly. However, if the dispute is not resolved within five
(5) business days following FDR's receipt of Customer's Inquiry, then
FDR shall temporarily refund to Customer, by the method set forth in
paragraph (b) above, the Disputed Amount until such time as a complete
resolution of such dispute is effected. Within sixty (60) days
following the date on which FDR receives Customer's Inquiry, FDR shall
completely resolve such dispute. FDR agrees to review and consider any
bona fide dispute of an invoiced amount the notice of which is
submitted by Customer more than sixty (60) days following the date of
the applicable invoice; provided, however, that in no event shall FDR
be required to reimburse Customer for the Disputed Amount in
connection with such a dispute prior to the complete resolution of
such dispute.
f. DECONVERSION. Upon the expiration or termination of this Agreement for
any reason other than those set forth in Section 9.2, Customer shall
pay FDR, at FDR's then current rates, for each activity completed by
FDR in order to accomplish the Deconversion and for all costs,
including postage or shipping, of complying with Section 10.1. FDR
shall pay costs of Deconversion if Customer terminates this Agreement
pursuant to Section 9.2.
g. SIGNING BONUS. As soon as practical following the latter to occur of
(i) the execution of this Agreement by Customer and FDR or (ii) the
date on which Customer first issues Transaction Cards to be serviced
by FDR hereunder, FDR agrees to pay to Customer a signing bonus of
five hundred thousand dollars ($500,000) (the "Signing Bonus").
h. GROWTH CREDIT. Upon the conclusion of each Processing Year during the
Term of this Agreement, FDR shall calculate the Total Annual
Processing Fees paid to FDR by Customer during the Processing Year.
If, during a Processing Year, the Total Annual Processing Fees paid to
FDR by Customer exceeds the Year 1 Minimum Processing Fee or Minimum
Processing Fees (whichever is applicable) for the Processing Year by
an amount equal to or greater than twenty percent (20%) of
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.
B-3
<PAGE> 81
the Year 1 Minimum Processing Fee or Minimum Processing Fees
(whichever is applicable) for the Processing Year, then Customer shall
be entitled to a "Growth Credit" for such Processing Year. The amount
of the Growth Credit to be paid to Customer by FDR hereunder for a
qualifying Processing Year shall be equal to (i) the Total Annual
Processing Fees paid to FDR by Customer during the qualifying
Processing Year, multiplied by (ii) the applicable percentage from the
schedule below (the "Percentage of Credit") based upon the percentage
by which the Total Annual Processing Fees for the qualifying
Processing Year exceeds the Year 1 Minimum Processing Fee or the
Minimum Processing Fees (whichever is applicable) for the qualifying
Processing Year (the "Percentage In Excess Of Minimum").
<TABLE>
<CAPTION>
Percentage In
Excess Of Minimum Percentage of Credit
----------------- --------------------
<S> <C>
0% - 19.99% 0
20.00% - 39.99% 1%
40.00% - 59.99% 2%
60.00% - 79.99% 3%
80.00% - 99.99% 4%
100.00% - over 5%
</TABLE>
Any Growth Credit for which Customer qualifies pursuant to this
Exhibit "B", Section I-h shall be paid to Customer by FDR within
ninety (90) days following the conclusion of the qualifying Processing
Year in the form of a credit against Processing Fees due FDR by
Customer pursuant to this Agreement (or, in the event of the
termination or expiration of this Agreement, any applicable Growth
Credit shall be paid via wire transfer from the account of FDR to the
account of Customer.
i. PRICE RENEGOTIATION. If, in any Processing Year during the Term of
this Agreement, the volume of Customer's Cardholder Accounts on File
for any month exceeds [*] then Customer may, following such month,
request that Customer and FDR renegotiate the prices set forth in this
Agreement based upon such volume of Cardholder Accounts on File. In
such event, FDR agrees to negotiate in good faith with Customer based
upon such request of Customer, provided, however, that if the parties
are unable to mutually agree upon new pricing hereunder, the prices
set forth in this Agreement shall continue in effect.
II. TAXES
a. PAYMENT OF TAXES. Customer shall, in addition to the other amounts
payable under this Agreement, pay all taxes, federal, state or
otherwise, or duties, imposts, fees or charges, however designated,
which are levied or imposed by any governmental authority by reason of
the sale or license of any services, communication equipment, software
or other goods and products covered by this Agreement except for
income taxes payable by FDR on amounts earned by FDR. Without limiting
the foregoing, Customer shall promptly pay to FDR an amount equal to
any items actually paid or required to be collected or paid by FDR.
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.
B-4
<PAGE> 82
b. CALCULATION OF TAXES. Customer hereby authorizes FDR to calculate the
total amount of sales taxes due by Customer or Customer's Transaction
Card Affiliates from the monies due FDR and remit the amount of sales
taxes to the appropriate taxing authority on behalf of Customer and
Customer's Transaction Card Affiliates. FDR's remittance of the sales
taxes on behalf of Customer and Customer's Transaction Card Affiliates
shall be computed by FDR on the information available to FDR. In the
event of the under or over calculation of any sales taxes, Customer
shall be responsible for any additional monies due including any
penalties or interest and for collecting any refunds due to Customer
and Customer's Transaction Card Affiliates from the appropriate taxing
authority.
c. TAX INFORMATION. Prior to FDR making the sales tax remittance on
behalf of Customer and Customer's Transaction Card Affiliates provided
in paragraph a above, Customer agrees to supply FDR with any and all
current information necessary for FDR to compute and remit the taxes,
including any tax exempt certificate, any tax exempt claim letter, or
evidence satisfactory to FDR authenticating the exemption.
III. TERM
a. TERM. This Agreement is effective from the date hereof and shall
extend for five (5) Processing Years (the "Original Term"). The first
Processing Year ("Processing Year 1") shall commence on the first day
of the month following the Scheduled Start-Up Date and continue
through the last day of twelve (12) calendar months thereafter. Each
subsequent Processing Year shall mean a twelve (12) month period
commencing on the expiration of the preceding Processing Year.
b. RENEWAL. After the Original Term, this Agreement shall automatically
be renewed for consecutive periods of two (2) Processing Years each (a
"Renewal Term") unless either party gives the other party written
notice at least nine (9) months prior to the termination date of the
Original Term or then current Renewal Term that the Agreement will not
be renewed.
IV. REIMBURSEMENTS AND ASSESSMENTS
a. The communications data circuit, including the reoccurring service
charge, service termination fees and required modem(s) (data sets) at
Customer's location(s) and FDR, terminal(s) and any other directly
associated expenses, shall be at Customer's expense. The data circuit
cost will be no greater than that associated with a point-to-point
digital data circuit(s) based on the tariffs of FDR's primary carrier.
One time costs related to the installation of the circuit, as
specified by such tariffs, will also be paid by Customer. The actual
circuit speed and ensuing cost will be determined by Customer's
communications requirements.
b. Customer shall be responsible for and billed directly for any
MasterCard, VISA or other Transaction Card dues, fees and assessments.
Customer shall reimburse FDR for Base Access Fees incurred by FDR on
behalf of Customer. (IN - 3513)
B-5
<PAGE> 83
c. Customer shall pay all courier expenses associated with the
transportation of reports and documents from Customer to FDR and from
FDR to Customer.
d. FDR agrees to act as an agent on behalf of Customer and Customer shall
reimburse FDR for the purchase on Customer's behalf of the postage
required to mail Cardholder Statements, Merchant Statements,
collection notices, letters and other materials mailed by FDR on
behalf of Customer and Customer's Transaction Card Affiliates. The
amount reimbursed by Customer to FDR for postage while this Agreement
is in effect will be: (i) the then current first class postage rate
for mailings not qualifying for the pre-sorted rebate or (ii) based
upon the monthly rate of mailings of the particular location of FDR
from which the mailings were sent that qualify for the discount
pre-sorted rate and the number of mailings sent on behalf of Customer
from that location during the month, the then current discount
pre-sorted postage rate (currently $___). (IN - 7401, 7671)
e. For any standard services performed by FDR on behalf of Customer in
connection with the Start-Up of present computer Cardholder records
for Customer on the FDR System, there shall be no charge to Customer;
provided, that Customer shall pay FDR at FDR's then current standard
rates for any customized computer programming and related services
performed by FDR on behalf of Customer in connection with such
Start-Up.
f. For each Reward processed by FDR, Customer shall reimburse FDR for the
amount of the Reward payment to the Merchant, plus any additional fees
or charges to which FDR is entitled under applicable MasterCard and
VISA rules and regulations in connection with the processing of such
Reward. A Reward shall mean each monetary payment made to a Merchant
for the recovery of a statused Transaction Card of Customer, which
payment is processed by FDR in accordance with the reward schedule
established by MasterCard and VISA for card pick-up. At the time of
the execution of this Agreement, the amount of such reimbursement is
$15.00 per card. (IN - 7915)
g. Customer shall reimburse FDR for special service set-up/certification
fees and charges, training fees and programming fees including but not
limited to the set up/training charges associated with FDR's Customer
Inquiry Management System (CIMS) Services, PIN Management System
Services, Extended CIS Services, Application Processing Services, PC
Remote Access Services, Account-Level Processing (ALP) Services,
Online Access and Retrieval System (OARS) Services, Acquiring Debit
Services, Transaction Level Processing (TLP)/Transaction Level Rewards
(TLR) Services, ANI Card Activation Services, Commercial Card
Services, Promotional Letter Services, Fraud Management/Fraud
Detection Services (Scoring and Strategy Start-Up and Call
Processing), Auto PIN Change Services, KnowledgeSight Services and
other services requiring special programming or training. Prices for
such services shall be provided by FDR upon Customer's request. At the
time of the execution of this Agreement, FDR's current price for
computer programming is $150.00 per programmer hour.
h. Customer shall reimburse FDR for destroyed forms, product service
selects, network control requests, equipment sales, supplies and
documentation manuals.
B-6
<PAGE> 84
V. SERVICE FEES
a. CARDHOLDER FEES
<TABLE>
<CAPTION>
IN ITEM Per Item Charge
---- ---- ---------------
<S> <C> <C>
7204 Cardholder Account on File $ .0193 /month/account
7260 Account-Level Processing (ALP) - Cardholder
Pricing Account on File .0075 /month/account
on ALP
2836 Transaction Level Processing (TLP) Promotional
Balance on File (monthly) .0720 /promotional balance
7330 Transaction Level Rewards (TLR) Only Transaction .0225 /transaction
7205 Cardholder Statement .1124 /statement
7240 Cardholder Statement Mail Preparation .0850 /statement
7206 Cardholder Statement Insert .0075 /insert
Enterprise Presentation Cardholder Statement (in addition
to the current Cardholder Statement fees)
-Option 1 (Simplex)
7196 For the first printed page .0100
7198 For each subsequent page .0180 /page
-Option 2 (Simplex)
7196 For the first printed page .0100
7198 For each subsequent page .0180 /page
-Option 3 (Duplex)
7196 For the first physical page (front and back) .0100
7198 For each subsequent physical page (front and back) .0180 /page
7207 Letter .1077 /letter
Letter Optional Services:
7208 -Letter Insert .0075 /insert
7209 -Letter Additional Pages .0796 /item
7210 -Letter Priority Mailing .1294 /item
7211 -Letter Certified Mail Handling 1.4925 /item
7212 -Letter Group Samples .0796 /item
7213 -Letter Set-Up, Revision or Deletion
(1/2 hour minimum) 31.2500 /half hour
7214 Cardholder Notice .0600 /item
7242 Promotional Letter .1200 /letter
7215 Cardholder Monetary Transaction .0174 /item
7216 Cardholder Non-Monetary/Online Transaction .0089 /transaction
7311 CIS Statement .0100 /statement stored
</TABLE>
B-7
<PAGE> 85
<TABLE>
<S> <C> <C>
7312 CIS Detail Included per month
7219 CIS Memo Included
7232 CIMS Regular Workcase .0500 /workcase
7233 CIMS WOV Workcase .1100 /workcase
7234 CIMS Log-Only Workcase .0398 /workcase
7255 CIMS Regular Workcase Action .0118 /item
7220 Application Processing Services (APS) .5277 /application entered
7221 APS Relationship Account Storage .0030 /depository account
7222 On-Line Credit Bureau Report Request .2292 /request
3510 Cardholder Authorization Inquiry .0089 /inquiry
7217 Issuer Chargeback .9452 /chargeback
7226 PINpoint Inquiry .2985 /inquiry
7227 Cardholder Annual Activity Summary .2400 /summary
7228 Cardholder Annual Activity Summary Detail Storage .0050 /account
7230 Company Card Report Mail Preparation .3300 /set of reports
7231 IRS Home Equity Form (1098) .9452 /form
7236 ACCD Downloaded Account .0073 /account
7237 Check Order Service .0600 /account
Balance Consolidation Services:
- Creation of check data file and tape
transmission to vendor Quote /check
7258 Auto PIN Change .7900 /call
7262 Cardholder Selected PIN (SMR/SMC) Transaction .1500 /transaction
7600 Embossing Set Up 2.9850 /series of like plastics
7601 Standard Embossing Services .2583 /plastic embossed
7602 Card Carrier Printing Included /carrier
7603 Plastic to Carrier Match/Merge Included /plastic
7604 Carrier Insert/Meter/Mail Included /carrier
7605 Vault Storage .0149 /plastic levied upon
receipt of shipment
7606 Plasticard Mail Handling 1.3444 account plus postage
7608 PIN/Post Mailer Processing .0643 /account
7670 PIN/Post Mailer Production Edits .2500 /edit
7663 DES PIN Generation .0200 /DES PIN generated
7609 Plasticard Manual Rush Emboss - Same Day 10.000 /account
7610 Plasticard Manual Rush Emboss - Two Day 6.6500 /account
7611 Automatic Rush Embossing 9.9500 /account
7640 Plasticard Expedited Turnaround .3900 /plastic
7678 Plasticard On-Line Same Day Rush 9.9500 /plastic
7612 Hot Stamp Plates/Logos Purchased Quote
7613 Plasticard Hot Stamping included
</TABLE>
B-8
<PAGE> 86
<TABLE>
<S> <C> <C>
7614 Ultragraphics -Front Side .0697 /plastic
7639 Ultragraphics -Back Side .0697 /plastic
7615 Plasticard Purging 2.4875 /account
7616 Plasticard Inserting .0200 /insert
7617 Plasticard Mail Integration .0465 /item
7618 Plasticard Job Processing 24.8750 /tape
7619 Plasticard Agent/Strategy Inserting Set-Up 4.4775 /set up
7620 Plasticard Indent Printing .0100 /plastic
7621 Braille Embossing 4.0000 /plastic
7622 Card Activation Labeling-General Use .0457 /plastic
7623 Card Activation Labeling-Selective Use .0550 /plastic
7624 CVV/CVC Generation Verification /calculated value
7625 Plasticard Bulk Packaging - Basic Sort .1616 /account
7686 High Coercivity included
Plasticard. Photocard Services (1" x 1 and 2" x 2"):
7664 -Photo Transfer (1" x 1") 1.2000 /plastic
7667 -Photo Transfer (2" x 2") .6000 /plastic
7665 -Photo/Signature Scanning and Digitization (1" x 1") 2.1500 /plastic
7668 -Photo Scanning and Digitization (2" x 2") 2.1500 /plastic
7666 -Photo Image Handling and Merge (1 " x 1 ") .4300 /plastic
7666 -Photo Image Handling and Merge (2" x 2") .8500 /plastic
7626 Plasticard Mail Assembly .3896 /item
7627 Plasticard Purchased Quote
7628 Plastics Purchased Quote
7900 Lost/Stolen Account Processing .4516 /account processed
7901 Lost/Stolen Report - FDR Entered 4.8250 /report
7902 Cardholder Hot Call Referral 4.4775 /referral
7904 Cardholder Hot Call Fraud Referral 7.8454 /referral
7905 Emergency Card or Cash Replacement Services .0025 /account on file
7906 Returned Account Plastics Immediately
Delivered (RAPID) 2.3880 /plastic
Return Account Processing Service 1.4000 /account
7907 Automatic Chargeback 1.7500 /chargeback initiated
7908 Lost/Stolen Account Management and Investigation 20.0000 /accounts reported
lost or stolen
7909 Lost/Stolen Account Transaction Management System .3000 /transaction
7910 Potential Chargeback Queue .0258 /account in queue
per day
7911 Referral Queue .0597 /account in queue
per day
7912 Card Activation-Voice Call-FDR .2440 /transaction
7913 Card Activation-ARU Call-FDR .5075 /transaction
7923 Card Activation-ANI Call-FDR .3800 /transaction
</TABLE>
B-9
<PAGE> 87
<TABLE>
<S> <C> <C>
7914 Card Activation Customer Processed .0600 /transaction
7285 Recovery 1 Monthly Residence Fee (per
charged off account on file upon the
conclusion of a calendar month)
First 5,000 accounts .4000 /account
Next 20,000 accounts (5,001-25,000) .1800 /account
Next 25,000 accounts (25,001-50,000) .0900 /account
Next 50,000 accounts (50,001-100,000) .0700 /account
Next 100,000 accounts (100,001-200,000) .0500 /account
Over 200,000 accounts .0400 /account
7286 Recovery 1 Financial Transaction Fee .0900 /transaction
7287 Recovery 1 Note on File .0010 /note
7288 Recovery 1 Save Executed Quote /run
Fraud Management/Fraud Detection Service Fee (monthly)
Number of Monthly Gross Active
Credit Card Accounts for the Month
0 - 599,999 .0514
600,000 - 999,999 .0479
1,000,000 - 1,999,999 .0459
2,000,000 - 2,999,999 .0439
3,000,000 - 4,999,999 .0419
5,000,000 - above .0409 /monthly gross active
credit card account
Fraud Management/Fraud Detection Call Processing Services 2.8258 /actioned credit card
account
Credit Performance Service Fees:
7295 -Monthly Service Fee per Account in
1 - 59 Day Queue 4.5000 /account
7296 -Monthly Service Fee per Account in
60+ Day Queue 13.5000 /account
7297 -Inbound Delinquent Billing Call 3.0000 /call accepted
7298 -Skiptracing per Account 11.2500 /account
Cardholder Support Service Fees:
-Cardholder/Bank Customer Service (subject
to the Call Volume factors set forth below)
</TABLE>
B-10
<PAGE> 88
<TABLE>
<CAPTION>
Number of Customer's Credit Price Per Credit Card
Card Related Active Cardholder Related Active Cardholder
Accounts on File Upon the Account on File Upon the
Conclusion of a Calendar Month Conclusion of the Calendar Month
------------------------------ --------------------------------
<S> <C>
0 - 50,000 1.05
50,001 - 100,000 .80
100,001 - 150,000 0.70
150,001 - 200,000 0.60
200,001 - 300,000 0.57
300,001 - 450,000 0.55
450,001 - 500,000 0.53
500,001 - Over 0.50
</TABLE>
For purposes of the pricing above, Active Accounts on File shall mean
those of Customer's Cardholder Accounts on File which are defined as
"Gross Active Accounts" on the CD-121 Ledger Activity Report or its
equivalent.
The prices above for Cardholder/Bank Customer Services are based upon
a Monthly Call Volume (as determined herein) of between 0% and 10%.
For each whole Monthly Call Volume percentage in excess of 10% during
a month, the price per Active Cardholder Account on File from the grid
above shall be increased by $.03. For purposes of this paragraph, the
Monthly Call Volume shall be equal to (i) the total number of
representative calls answered by FDR on behalf of Customer during the
calendar month, divided by (ii) the number of Active Cardholder
Accounts on File upon the conclusion of the calendar month, with the
resulting quotient expressed as a percentage.
<TABLE>
<S> <C>
-Dispute/Chargeback Correspondence Services 30.0000 /new dispute
-Credit Services
General Credit Written Inquiries 5.4000 /item
Inbound General Credit Telephonic Inquiries 1.1000 /talk minute
*Outbound Applicant Verification Calls 28.0000 /staffed hour
-Credit Enhanced Services
Approved Application .6500 /application
Declined Application .1500 /application
-Technical Systems Support Services
One-Time Set-up Fee (including but not limited
to programming, scripting, VRU setup,
report setup and mail tape setup) 150.0000 /hour
</TABLE>
B-11
<PAGE> 89
<TABLE>
<S> <C>
Non-Decision Transaction Routing .0750 /transaction
Decision Transaction Routing .3000 /transaction
Reports .1000 /page
Facsimile 1.0000 /page
Balance Transfer .4500 /request plus
third party fee
File Creation
- Transmission 50.0000 /file
- Tape 75.0000 /file
Miscellaneous Programming 150.0000 /hour
Data Lines/Modems (Buyer requested) At Cost
** Quality Call Monitoring 6 hours per calendar month/
no charge
Record Filming .0500 /frame
</TABLE>
After the effective date of this Agreement, Customer shall be
responsible for any other fees and costs incurred by FDR in connection
with the performance of the Cardholder Support Services, including but
not limited to preparation of training and documentation manuals used
by FDR to provide the Cardholder Support Services on behalf of
Customer, voice and data circuit charges, voice usage charges, voice
feature charges, data voice and voice feature charges, data voice and
vocal feature installation/deinstallation charges, materials,
supplies, postage, courier fees, and travel requested by Customer. The
Cardholder Support Service Fees payable hereunder are based on the
specific services FDR has agreed to provide under Exhibit "A", Section
G of this Agreement. Any services required by Customer in addition to,
or different from, those specified in Exhibit "A", Section G will be
provided at FDR's then current rates for such services.
Fees incurred by FDR for initial training of newly hired customer
service representatives ("CSRs") who will provide Cardholder Support
Services will be passed-through to Customer at cost. Additional
training fees incurred by FDR due to required additions to staff due
to anticipated higher call volume will be passed-through to Customer
at the rate of $15.00 per training hour per CSR. Training fees
incurred by FDR for newly hired FDR employees required due to staff
attrition will be absorbed by FDR and will not be passed-through to
Customer.
* Minimum of one full time employee. FDR and Customer shall review
and adjust pricing, if appropriate, after three (3) months.
** Upon the availability of call recording, FDR and Customer shall
mutually agree on alternative pricing for call recorded
monitoring.
b. NON-SPECIFIC FEES
B-12
<PAGE> 90
<TABLE>
<CAPTION>
IN ITEM Per Item Charge
---- ---- ---------------
<S> <C> <C>
7402 Non-Standard Job Run (including Master Files) 50.0000 /data set
7403 RMS Reports-Hardcopy .0400 /page
7404 RMS Reports-RJE/NDM .0183 /page
7405 RMS Reports-On-Line View .0156 /page
Microfiche:
0246 -First Copy .8507 /page
0248 -Each Additional Copy .1483 /page
7413 Online Access and Retrieval System (OARS) Services .0119 /page
4352 CD-ROM Service Pages .0126 /page
7411 Interface Services-RJE/NDM 3.3800 /transmission
7412 Interface Services-Tape to Tape 3.3800 /transmission
7408 Interface Services-Magnetic Tape Handling 25.0000 /tape
7407 PC Remote Access Service (500 minute
per month minimum per user i.d. number)
</TABLE>
<TABLE>
<CAPTION>
Total Minutes of Usage
During a Calendar Month
-----------------------
<S> <C>
500 - 750 .2400
751 - 1,250 .2100
1,251 - 1,500 .1900
1,501 - over .1800 /minute
7637 Custom Forms Purchased Quote
InfoSight Services Quoted Upon Request
4320 FDR Link-Up One-Time Start-Up Fee 100.0000 /mailbox
4321 FDR Link-Up Monthly Service Fee 15.0000 /mailbox
4435 Postal Credit Processing Fee .0249 /item
KnowledgeSight Service Fees:
N/A -Data Warehouse Fee .0060 /100 data elements
stored in the data
warehouse per month
N/A -Data Warehouse Load Fee .0050 /100 data elements
loaded to the data
warehouse per month
</TABLE>
B-13
<PAGE> 91
<TABLE>
<CAPTION>
<S> <C> <C>
N/A -Historical Retention Fee Warehouse
per month
.0010 /1,000 data elements
retained per month
</TABLE>
d. For purposes of the billing of RMS Reports: (i) if Customer's standard
(or default) setting for a particular report is "0", then all pages of
RMS On-Line View, RMS Hardcopy and RMS RJE of such report provided by
FDR to Customer shall be billed to Customer at the prices above, or
(ii) if Customer's standard (or default) setting for a particular
report is a value other than "0", then each page of the RMS On-Line
View of such report provided by FDR to Customer shall be at no charge
and each page of RMS Hardcopy and RMS RJE of such report shall be
billed to Customer at the prices above.
e. FDR will generate embossing information based upon Customer's Product
Control File (or, at Customer's option, receive embossing information
via tape from Customer), use such information to prepare the embossed
plastic and mail the embossed plastic on behalf of Customer to its
Cardholder at the Cardholder's then current address.
f In the event that Customer elects to utilize the Recovery 1 Services
set forth in paragraph a above, then Customer hereby agrees to
continue to utilize such services for a period of not less than twelve
(12) months following the commencement date of such services.
g. For the uploading or downloading of information to or from the FDR
System via the PC Remote Access Services, Customer shall, in addition
to charges set forth above, pay FDR $6.50 for each instance in which
information is made available by FDR for downloading to Customer upon
cycle completion and each upload made by Customer to the FDR System.
h. Customer shall, by initialing the appropriate blank below, indicate
which of the Enterprise Presentation Cardholder Statement service
pricing options (as set forth in paragraph a above) Customer elects to
utilize commencing on the commencement date of such services:
Option 1______________
Option 2______________
Option 3______________
Customer may, at its election during the remaining Term of this
Agreement, switch from the pricing option then currently being
utilized by Customer for Enterprise Presentation
B-14
<PAGE> 92
Cardholder Statement services to another pricing option from the
selections above (subject to any applicable price escalators set forth
in this Agreement). Any such switch in pricing options shall be for a
period of one (1) calendar year effective on January 1, and Customer
agrees to give FDR written notice, on or before September 1 of the
preceding calendar year, of its intention to effect such a switch.
There shall be no charge to Customer for the first such switch in
pricing options. For each such switch in pricing options requested by
Customer in excess of one (1), Customer shall pay FDR, upon receipt of
FDR's written invoice, the amount of $15,000.00.
i. If, during any calendar month, Customer requests that FDR provide
Summary CD-ROM Bundles, then Customer shall pay FDR $475.00 for each
such Summary CD-ROM Bundle. For each duplicate copy of a CD-ROM
Bundle, Customer shall pay FDR $75.00. For any computer programming or
any other technical services performed by FDR on behalf of Customer in
connection with the CD-ROM Services performed by FDR on behalf of
Customer, Customer shall pay FDR at FDR's then current standard rates
for such services. Such rates shall be provided to Customer by FDR
upon request. A CD-ROM Bundle, for purposes of the statements on
CD-ROM Services, consists of three (3) copies, one for Customer, one
for archive and one for Customer's customer service representative. A
CD-ROM Bundle, for purposes of the reports on CD-ROM Services,
consists of two (2) copies, one for Customer, and one for archive. A
Summary CD-ROM Bundle summarizes previously produced CD-ROM Bundles.
Customer shall provide at its expense the minimum personal computer
configuration set forth below:
386/486 Processor with Hard Drive (486 preferred)
8 MB RAM (12 MB preferred)
3.1 Windows
Mouse
14" VGA Color Monitor (SVGA preferred)
CD-ROM Drive (double speed)
Laser Printer
VI. Certain services performed by FDR on behalf of Customer shall be included
in the overall pricing set forth in this Exhibit "B" and shall be provided
to Customer at no additional charge. Such items are set identified by the
word "Included" in this Exhibit "B".
VII. Commencing on the effective date of this Agreement, Customer shall pay FDR
for each annual volume-sensitive service ("Service") at the rate indicated
by "**". Upon the expiration of each Processing Year, FDR shall calculate
the actual volume of each item of Service during such Processing Year and
then determine the appropriate price per item of each Service. Based upon
such calculation, FDR shall then calculate the total amount of processing
fees owed by Customer to FDR during such Processing Year. If, during any
Processing Year, Customer shall have paid FDR more or less than the amount
owed to FDR based upon the above calculations, then FDR shall issue a
credit to Customer for any amounts due Customer under this Section or
invoice Customer
B-15
<PAGE> 93
for any amounts due FDR, as appropriate. The fees charged for each
item of Service during each subsequent Processing Year shall be based
upon the previous Processing Year's volumes.
VIII. For purposes of this Exhibit "B": (i) "IN" means the item number for such
service or product and (ii) "Quote" means this Agreement does not
contemplate the use of this service or product, but FDR shall, on the
request of the Customer, provide a price for such service or product.
IX. For any services performed by FDR at Customer's direction which are
neither set forth in this Exhibit nor covered by a separate agreement,
Customer shall pay FDR for such services at FDR!s then current standard
rates.
B-16
<PAGE> 94
EXHIBIT "C"
CUSTOMER TRANSACTION CARD AFFILIATE AGREEMENT
This Customer Transaction Card Affiliate Agreement (the "Agreement") is
entered into this ____ day of ________, 1997, (the "Effective Date") among First
Data Resources Inc., 7302 Pacific Street, Omaha, Nebraska ("FDR") Internet
Access Financial Corporation, 595 Market Street, Suite 2250, San Francisco,
California ("Customer") and Customer's Transaction Card Affiliate, Heritage
Bank, of Commerce, 150 Almaden Boulevard, San Jose, California ("Affiliate").
WHEREAS, FDR and Customer have entered into a Service Agreement (the
"Service Agreement") setting forth certain ongoing rights, duties and
obligations relating to the origination and servicing of Transaction Card
accounts; and
WHEREAS, Customer and Affiliate have entered into a Customer Credit
Card Program Agreement (the "Heritage Agreement") whereby Customer has agreed to
originate and service Transaction Card accounts for the benefit of Affiliate,
with account processing to be provided by FDR; and
WHEREAS, in order to extend to Affiliate certain of the benefits of the
Service Agreement, it is necessary that Affiliate become bound by certain of
the obligations of the Service Agreement, including but not limited to the
payment obligations with respect to transaction settlements and account
processing.
NOW, THEREFORE, the parties agree as follows:
1. Affiliate acknowledges receipt of a copy of the Service Agreement
including but not limited to all Exhibits and attachments thereto. With respect
to Customer Accounts of Affiliate, arising out of the "Heritage Agreement"
Affiliate agrees to be bound by all of the terms and conditions of the Service
Agreement, including the payment obligations arising under Exhibit B. Affiliate
shall not be responsible for any obligations set forth in the Service Agreement
which expressly belong to Customer, and not of Affiliate, including, without
limitation, the payment obligations relating to Minimum Processing Fees and
Liquidated Damages. This Agreement shall remain in effect until the earlier of:
(a) expiration or termination of the Service Agreement, or (b) Affiliate no
longer being associated with Customer.
2. Affiliate specifically agrees to comply with the rules, procedures,
manuals and instructions of MasterCard, VISA, FDR and Customer as applicable to
Affiliate and as in effect from time to time.
3. Customer shall act as the agent of Affiliate and have full authority
to represent Affiliate and to act fully on Affiliate's behalf in connection with
the Service Agreement and/or this
C-1
<PAGE> 95
Customer Transaction Card Affiliate Agreement, including the negotiating with
FDR of any amendments, extensions of the term or revisions of the Service
Agreement and/or this Customer Transaction Card Affiliate Agreement, the
asserting, negotiating and resolving of any controversy, dispute or claim under
the Service Agreement and/or this Customer Transaction Card Affiliate Agreement
and the execution or delivery of any documents; provided, however, that Customer
shall give prompt notice to Affiliate of any amendment to the Service Agreement
or this Customer Transaction Card Affiliate Agreement pursuant to Section 11,
below.
4. Affiliate agrees that, with respect to Customer Accounts of
Affiliate and except as otherwise set forth in this Customer Transaction Card
Affiliate Agreement, Affiliate and Customer shall be severally liable to FDR for
all other obligations of Affiliate which are to be paid by Customer pursuant to
the Service Agreement. If Customer shall fail to pay any amounts due under the
Service Agreement, including but not limited to any Processing Fees, the Daily
Amount (if applicable), or other fees, taxes, interest payments, charges or
amounts due or payable by Customer with respect to accounts owned by Affiliate,
Affiliate shall pay FDR on demand the portion of the amounts due from Customer
to FDR for services performed by FDR for or on behalf of Affiliate, as
reasonably determined by FDR, which equals the percentage that the Processing
Fees for the period relating to processing for Affiliate are of the total
Processing Fees due under the Service Agreement for such period.
5. This Customer Transaction Card Affiliate Agreement is being executed
for the benefit of FDR and that FDR has relied upon the existence of this
Customer Transaction Card Affiliate Agreement and the terms and conditions
contained in it in electing to enter into the Service Agreement and FDR would
not have elected to execute the Service Agreement in the absence of the
existence of this Customer Transaction Card Affiliate Agreement.
6. In all circumstances in which Affiliate shares responsibility of any
of Customer's obligations under the Service Agreement, Affiliate:
(a) agrees that separate action or actions may be brought against
Affiliate, whether action is brought against Customer or
whether Customer is joined in any such action or actions;
(b) authorizes FDR, without notice or demand and without
affecting Affiliate's liability hereunder, from time to time,
to (a) take and hold security for the performance of
Customer's obligations and exchange, enforce, waive and
release any such security, (b) apply any such security and
direct the order or manner of sale thereof (whether by
judicial or nonjudicial sale or otherwise as FDR in its
discretion may determine), and (c) release or substitute any
one or more of any endorsers or guarantors of such
obligations;
C-2
<PAGE> 96
(c) waives any right to require FDR to (a) proceed against
Customer, (b) proceed against or exhaust any security held
from Customer, or (c) pursue any other remedy in FDR's power
whatsoever; and
(d) waives any defense arising by reason of any disability or
other defense of Customer or by reason of the cessation from
any cause whatsoever or the liability of Customer.
7. Upon any termination of this Customer Transaction Card Affiliate
Agreement, Affiliate agrees to open or to leave open for 6 months following such
termination an account through which Customer and/or FDR can draw drafts or ACH
for reimbursement of lingering charges incurred on behalf of Affiliate.
8. This Customer Transaction Card Affiliate Agreement, and all rights
and obligations of the parties with respect to matters in connection herewith,
arising hereunder or related hereto, shall be governed by and construed in
accordance with the laws of the State of New York, and any claim, suit or
proceeding shall be subject to the provisions of Section 13.4 of the Service
Agreement.
9. Affiliate acknowledges and agrees that it may not transfer or assign
its rights under this Customer Transaction Card Affiliate Agreement without the
prior written consent of FDR as provided in Section 13.1 of the Service
Agreement.
10. Each capitalized term used in this Customer Transaction Card
Affiliate Agreement and not defined herein shall have the definition provided
for such term in the Service Agreement.
11. Any notice to Affiliate shall be given by Customer and shall be
given as provided for in Section 13.5 of the Service Agreement, and shall be
given to the following address:
Affiliate:______________________________________________
Address:________________________________________________
________________________________________________
Attention:______________________________________________
Telecopy Number:________________________________________
Any notice to FDR shall be given as provided in Section 13.5 of the Service
Agreement. A party may change its address or addresses set forth above by giving
the other party notice of the change in accordance with the provision of this
section. In the event FDR provides notice hereunder to Customer of any default
by Customer in the performance of the provisions of the Customer Transaction
Card Affiliate Agreement, which default could result in the termination of this
Customer Transaction Card Affiliate Agreement, FDR will deliver a copy of the
notice to Affiliate receiving services under this Customer Transaction Card
Affiliate Agreement.
C-3
<PAGE> 97
12. This Customer Transaction Card Affiliate Agreement, along with the
Service Agreement, as such may be amended from time to time, sets forth the
entire understanding of the parties with respect to the subject matter hereof
and supersedes all prior agreements or understandings among the parties with
respect to the subject matter hereof. This Customer Transaction Card Affiliate
Agreement may not be amended except in a writing signed by an authorized officer
or representative of each of the parties hereto. This Customer Transaction Card
Affiliate Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
13. Despite anything to the contrary in the Service Agreement, or this
Customer Transaction Card Affiliate Agreement, FDR, at its option, may terminate
this Customer Transaction Card Affiliate Agreement under the following
circumstances:
(a) Immediately, without notice, upon the termination of
Affiliate's membership in VISA and MasterCard or both of their
successors in interest, if after such termination, Affiliate does not
maintain a status that permits FDR to continue to perform its services
on behalf of Affiliate;
(b) If Affiliate fails to pay any Daily Amount when required
under Section 14 of this Customer Transaction Card Affiliate Agreement
(if applicable) and does not cure the failure within four (4) hours
after written notice to Customer of the failure or immediately without
notice if FDR has the right more than three times in any twelve month
period to give notice under this Section 13 whether or not the notice
is given; and
(c) Upon twenty-four (24) hours notice by FDR if FDR has
terminated Interchange Settlement of transactions on behalf of
Affiliate pursuant to Section 14 (if applicable) for more than ten (10)
consecutive days or for more than twenty (20) days in any Processing
Year.
14. Interchange Settlement
(a) In order for FDR to provide its settlement services to
Affiliate pursuant to this Agreement, it is necessary for FDR
to handle and settle Interchange Settlement for Affiliate
through the international Interchange networks of MasterCard
and VISA. It shall be the responsibility of Affiliate to
provide ICA and BIN numbers from MasterCard and VISA,
respectively, for use by FDR in the settlement of
transactions for Affiliate. Affiliate understands that FDR
handles the Interchange Settlement with MasterCard and VISA
for its clients including Affiliate on a net settlement basis
(the "Settlement System"). To facilitate the Settlement
System, FDR has established, will establish or will direct
Affiliate to establish and may in the future establish or
direct Affiliate to establish one or more interchange
settlement Central
C-4
<PAGE> 98
Clearing Accounts (collectively the "Settlement Account") at
one or more banks.
(b) FDR shall calculate and FDR or Customer shall inform
Affiliate on each business day of the amount of funds to be
transferred (the "Daily Amount") as the result of (i) current
transaction processing, and (ii) funding required for
incoming transactions of Affiliate. If the Daily Amount is
negative, Affiliate must transfer to the Settlement Account
immediately available funds in an amount equal to the Daily
Amount or have available in the Settlement Account, prior to
noon, Central Time Zone, on the business day, funds in an
amount equal to the Daily Amount. If the Daily Amount is
positive, FDR will transfer to Affiliate, or will cause
MasterCard or VISA to transfer to Affiliate, immediately
available funds equal to the Daily Amount prior to the close
of business of the Federal Reserve System in New York on such
date.
(c) The Daily Amount shall equal:
(i) The Net Settlement Amount for Affiliate, plus
(ii) The amount necessary to fund incoming Interchange
transactions not yet processed, determined in accordance with
the FDR Settlement Rules, minus
(iii) The amount previously advanced by Affiliate with
respect to prior incoming Interchange transactions for which
processing is complete.
(d) In the event of the failure of Affiliate on any business day
when required by the terms of this Agreement or the FDR
Settlement Rules, to transfer the Daily Amount to the
Settlement Account, or to make available the Daily Amount in
the Settlement Account for FDR to draw upon, as applicable,
FDR may refuse, without incurring any liability to Affiliate,
to act as Affiliate's agent in discharging any VISA or
MasterCard Interchange obligations of Affiliate and shall
have the right to immediately notify MasterCard and VISA that
it will no longer cause the MasterCard or VISA Interchange
obligations of Affiliate to be discharged. In addition to the
foregoing, FDR may take such actions with respect to
Affiliate's obligations under the Settlement System as FDR
deems reasonable to protect FDR or its customers from any
loss arising from Affiliate's non-payment of the Daily
Amount. If Affiliate, within two (2) business days after
written notice from FDR pays FDR the Daily Amount which
Affiliate had failed to transfer to the Settlement Account
together with late payment fees as set forth in Section 14(e)
of this Affiliate Agreement, then FDR shall continue to act
as
C-5
<PAGE> 99
Affiliate's agent in discharging Affiliate's VISA or
MasterCard Interchange Settlement obligations.
(e) In addition to any other provisions in this Agreement, in the
event of Affiliate's failure to transfer or make available
the Daily Amount for any business day, Affiliate shall pay to
FDR a late payment fee (the "Settlement Late Payment Fee")
which shall be equal to the amount Affiliate would have been
required to pay as a late payment fee under MasterCard and
VISA rules. The amount shall be calculated in accordance with
the rules and shall continue to accrue until FDR shall have
received the Daily Amount from Affiliate. Settlement Late
Payment Fees shall be paid to FDR based upon the rules even
though FDR may have elected to make settlement with
MasterCard or VISA in a timely manner on behalf of Affiliate.
If FDR has received funds from VISA and/or MasterCard as a
result of Interchange Settlement on behalf of Affiliate and
fails to make available the Daily Amount to Affiliate, FDR
shall pay to Affiliate a late payment fee based on the Daily
Amount calculated in the same manner as the Settlement Late
Payment Fee.
(f) The obligation of FDR to discharge any VISA or MasterCard
Interchange obligations of Affiliate shall be solely as an
agent of Affiliate in accordance with the terms and
provisions of this Agreement and the FDR Settlement Rules.
FDR shall have no independent obligation with respect to the
discharge of the Interchange obligations of Affiliate.
(g) In the event that MasterCard or VISA shall notify FDR of any
violation of the rules and regulations of MasterCard or VISA,
relating to Affiliate or transactions processed for
Affiliate, FDR shall have the right, without liability to
Affiliate, to terminate Interchange Settlement of
transactions on behalf of Affiliate under this Agreement
until the time as FDR shall have been notified by MasterCard
or VISA that the violation has been corrected.
(h) Affiliate acknowledges that performance of Interchange
Settlement involves the settlement of certain of Affiliate's
transactions jointly and on a combined net basis with the
settlement of transactions of other customers of FDR.
Accordingly, the payment or receipt by FDR of settlement
monies on behalf of Affiliate may be dependent on equivalent
payments or receipts being received or made by or for other
customers of FDR and in respect of transactions involving
Transaction Cards issued by such other customers. FDR and
Affiliate will cooperate and use all reasonable resources to
identify the reason for any settlement failure and shall
attempt to work to its resolution.
C-6
<PAGE> 100
(i) FDR shall be entitled without further inquiry to execute or
otherwise act upon (i) instructions or information or
purported instructions or information received through the
MasterCard and VISA payment systems and instructions or
information, or (ii) purported instructions or information
received in accordance with the MasterCard and VISA rules or
settlement manuals otherwise than through the payment systems
or in accordance with the FDR Settlement Rules
notwithstanding that it may afterwards be discovered that the
instructions or information were not genuine or were not
initiated by Affiliate. Such execution or action shall
constitute a good discharge to FDR, and FDR shall not be
liable for any liability, damage, expense, claim or loss
(including loss of business, loss of profit or exemplary,
punitive, special, indirect or consequential damages of any
kind) whatsoever arising in whatever manner, directly or
indirectly, from or as a result of the execution or action.
(j) Affiliate agrees to discharge their Interchange Settlement
obligations to FDR under this Section 14 in full and on first
written demand waiving any defense, setoff or right of
counterclaim (without prejudice to the ability of Affiliate
to pursue these independently) and notwithstanding any act or
omission or alleged act or omission or any insufficiency or
deficiency that there is or has been or that may be alleged
in the performance by FDR of its obligations under this
Agreement or otherwise. FDR agrees, however, that it shall
not setoff against any payment to be made by it to Affiliate
or on their behalf pursuant to this Section 14 any amount due
and payable by Affiliate to FDR (without prejudice to the
ability of FDR to pursue these independently) other than
amounts due and payable by Affiliate or on their behalf to
FDR pursuant to this Section 14.
(k) If Affiliate terminates this Agreement or if Affiliate ceases
to obtain processing services from FDR under this Agreement
in a manner which results in fees or charges relating to
Affiliate's Accounts continuing to be included as a part of
FDR's net settlement with MasterCard or VISA, FDR may obtain
daily payment from the Settlement Account established under
Section 14(a) or Affiliate will provide FDR immediately upon
notice with access to an account of Affiliate's funds, not
requiring signature, which FDR may draw upon in order to
receive payment for such fees and charges. FDR will provide
Affiliate with documentation for all fees and charges paid on
behalf of Affiliate.
C-7
<PAGE> 101
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be
executed by their duly authorized signature as of the day and year first written
above.
HERITAGE BANK OF COMMERCE
- --------------------------------------
Name of Affiliate:
By: /s/ KEN SILVEIRA
-----------------------------------
Name: Ken Silveira
---------------------------------
Title: E.V.P
---------------------------------
Date: 12/22/97
---------------------------------
INTERNET ACCESS FINANCIAL CORPORATION
By: /s/ JEREMY LENT
-----------------------------------
Name: Jeremy Lent
---------------------------------
Title: CHIEF EXECUTIVE OFFICER
---------------------------------
Date: 12/22/97
---------------------------------
ACCEPTED AND AGREED TO:
FIRST DATA RESOURCES INC.
By: /s/ JOHN THIELEN
-----------------------------------
Name: JOHN THIELEN
---------------------------------
Title: SENIOR VICE PRESIDENT
---------------------------------
Date: 12/22/97
---------------------------------
C-8
<PAGE> 102
EXHIBIT "D"
PERFORMANCE GUIDELINES
1. AUTHORIZATION SYSTEM AVAILABILITY - ISSUER
The issuer authorization on-line will be available via primary or
backup to respond to cardholder authorization inquiries 24 hours per
day, 7 days per week for 99% of the total minutes in the month.
2. EMBOSSING ORDERS -- NEW ACCOUNTS PLASTICS
Cardholder embossing orders entered electronically will be mailed
within three business days following cycle for 95% of each month's
volume and within five business days following cycle for 100% of each
month's volume. Plastic holds and plastic destruction requests by
Customer are excluded from this standard.
3. EMBOSSING ORDERS -- REISSUED ACCOUNTS
Cardholder reissued account plastics produced as a result of FDR's
monthly reissue programs will be mailed ten days prior to the last day
of the month for 100% of each month's volume. Plastic holds and
plastic destruction requests by Customer are excluded from this
standard.
4. LETTERS -- CARDHOLDER
Cardholder letters will be mailed by the end of the third business day
following input for 100% of each month's volume.
5. ON-LINE AVAILABILITY
The production on-line system will be available for inquiry 98.5% of
the time during the hours of 7 a.m. Central Time Zone (CTZ) to 11 p.m.
CTZ, seven days per week. This excludes CIS files on Sunday unless
Customer signs up for 24-hour CIS.
6. ON-LINE SYSTEM UPDATED
The production on-line system will be updated and current for monetary
and non-monetary entry by 7 a.m. CTZ each processing day for 90% of
that month's processing days. This includes the "common" on-line
files.
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<PAGE> 103
7. POSTINGS, MONETARY/NON-MONETARY
Monetary and/or non-monetary files received in the Omaha Data Center
by 5 p.m. CTZ will be processed in that night's production processing
cycle for 90% of the production cycles for the month and by the next
night's production processing cycle for 100% of the production cycles
for the month.
8. REPORTS -- DAILY ON-LINE
On-line reports are made available by the end of the fifth business
day following cycle.
9. REPORTS -- MONTHLY ON-LINE
On-line reports are made available by the end of the fifth business
day following cycle.
10. SETTLEMENT SCREENS
The final settlement wire transfer figure will be available to the
client by 12 p.m. CTZ 90% of the time and by 12:30 p.m. CTZ 100% of
the time.
11. STATEMENTS -- CARDHOLDER
Cardholder statements will be mailed by the end of the third business
day following cycle for 80% of each month's volume and by the end of
the fifth business day following cycle for 100% of each month's
volume.
D-2
<PAGE> 1
EXHIBIT 10.22
EXECUTION COPY
ACCOUNT ORIGINATION AGREEMENT
This ACCOUNT ORIGINATION AGREEMENT ("Agreement") is made as of this 29th
day of December, 1998, by and between NEXTCARD, INC., a California corporation
("NextCard"), NEXTCARD FUNDING CORP., a Delaware corporation ("Funding"), and
HERITAGE BANK OF COMMERCE, a California state-chartered bank (the "Bank").
W I T N E S S E T H:
WHEREAS, the Bank is a licensed member of Visa, U.S.A., Inc. ("Visa")
and authorized to issue credit cards; and
WHEREAS, NextCard desires to originate credit cards to be issued by the
Bank; and
WHEREAS, Funding desires to purchase the receivables generated under
such credit cards;
NOW, THEREFORE, in consideration of the premises and mutual covenants
included in this Agreement and for other goods and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, NextCard, Funding and
the Bank agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. Capitalized terms have the meanings indicated below.
"ACCOUNT" means an open-end, revolving Visa account opened by the Bank
pursuant to the Program on and after November 16, 1998, pursuant to which one or
more Credit Cards are issued to a Cardholder, including any and all rights,
remedies, benefits, interests and entitlements with respect thereto.
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"ADMINISTRATIVE AGENT" means Credit Suisse First Boston and any
successor Administrative Agent under the Loan Agreement.
"BANK MARKS" has the meaning specified in Section 3.1(c).
"CARDHOLDER" means an individual in whose name an Account is
established.
"CARDHOLDER AGREEMENT" means an agreement between the Bank and a
Cardholder for the extension of credit in connection with an Account.
"CARDHOLDER-SPECIFIC INFORMATION" means Cardholder names, postal and
electronic mail addresses, telephone numbers and Cardholder-specific transaction
information.
"CONFIDENTIAL INFORMATION" has the meaning specified in Section 3.4.
"CREDIT CARD" or "CARD" means each Visa card issued by the Bank pursuant
to this Agreement.
"CREDIT CARD GUIDELINES" means the Credit Card Guidelines attached
hereto as Exhibit A, as amended from time to time with the prior approval of
NextCard, the Administrative Agent and the Bank.
"EVENT OF DEFAULT" has the meaning specified in Section 6.2(a).
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including any
such successor, "H.15(519)") for such day, and if none is set forth for such
day, the rate set forth for the preceding Business Day, in each case opposite
the caption "Federal Funds (Effective)".
"EXTENSION FEE" has the meaning specified in Section 6.1(a).
"INDEMNIFIED PARTY" has the meaning specified in Section 7.4.
"INDEMNIFYING PARTY" has the meaning specified in Section 7.4.
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"INITIAL AGREEMENT" means that certain Consumer Credit Card Program
Agreement dated November 25, 1997 between NextCard and the Bank.
"INITIAL TERM" has the meaning specified in Section 6.1.
"LOAN AGREEMENT" means that certain Loan Agreement dated as of December
29, 1998 by and among Funding, the lenders party thereto from time to time (the
"Lenders") and the Administrative Agent, as arranger and administrative agent.
"LOSSES" has the meaning specified in Section 7.3.
"NEXTCARD MARKS" has the meaning specified in Section 3.1(a).
"POOLING AND SERVICING AGREEMENT" means the Pooling and Servicing
Agreement dated as of December 1, 1998 by and among NextCard, Inc., as servicer,
NextCard Funding Corp., as transferor, and The Bank of New York, as trustee, as
amended by the Supplement No. 1 thereto dated as of December 1, 1998.
"PROGRAM" means the credit card program conducted pursuant to the terms
of this Agreement and specifically excludes the program conducted pursuant to
the Initial Agreement.
"PROGRAM INFORMATION" means all information, other than
Cardholder-Specific Information, acquired through the operation of this
Agreement or concerning the Accounts. Program Information includes
Cardholder-Specific Information to the extent that the Cardholder-Specific
Information is redacted to mask any correlation between the Cardholder-Specific
Information and the identity of any specific Cardholder.
"PROGRAM MATERIALS" means any applications, marketing materials,
advertising, Web sites and content, disclosures, Account agreements, Account
statements, billing and collection notices used in connection with the Program,
as developed by NextCard from time to time.
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"PURCHASE PRICE" means, as of any day with respect to any Receivables,
(a) the sum of [ * ], if any, minus (b) any credits and payments to the related
Accounts.
"RECEIVABLES" means all amounts owing to the Bank on the Accounts
including, without limitation, principal balances from outstanding purchases,
balance transfers and cash advances, accrued finance charges, late charges,
returned check charges, interchange income and any other charges and fees,
whether or not billed, as of the close of business on a given day.
"SETTLEMENT AMOUNT" means, as of any day with respect to any
Receivables, (a) the Purchase Price of such Receivables minus (b) the amount of
any fees, charges or other income, including amounts payable to Funding pursuant
to Section 2.11, paid by other parties with respect to the Receivables, all of
which are payable to Funding hereunder, to the extent not previously netted out
of a Settlement Amount.
"SETTLEMENT DATE" shall have the meaning specified in Section 4.1(a).
"THIRD PARTY PROCESSOR" means any third party providing any data
processing services with respect to the Accounts or the Receivables.
1.2 Construction. Unless the context otherwise clearly indicates, words
used in the singular include the plural and words used in the plural include the
singular.
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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ARTICLE II
ESTABLISHMENT OF ACCOUNTS
2.1 Solicitation of Accounts.
(a) NextCard shall have the sole and exclusive right to solicit
applications for Credit Cards on behalf of the Bank.
(b) NextCard will use the Internet to solicit potential
applicants to submit applications to open Accounts. NextCard's Internet
marketing activities may include, in NextCard's discretion, targeted e-mail
solicitations, banner advertising, hyperlinks and agreements with other sites
and companies on the Internet. The Accounts and Cards will include
Internet-enhanced features, including online approval, online balance transfers
and online customer service. NextCard may from time to time implement additional
Internet-enhanced features.
(c) All advertising and marketing materials will indicate that
the Bank is the issuer of Cards and the party with whom the Accounts are
maintained.
(d) NextCard does not warrant or guarantee that it will generate
any particular number of Accounts or amount of Receivables.
2.2 Applications.
(a) NextCard shall ensure that the form of the application for a
Credit Card and all other Program Materials, including without limitation
solicitation materials, are in compliance with all material applicable laws and
regulations.
(b) In the event that an applicant for a Card does not satisfy
the requirements of the Credit Card Guidelines, NextCard shall notify the
applicant in accordance with applicable laws and regulations.
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2.3 Issuance of Credit Cards. So long as no Event of Default shall have
occurred, the Bank shall issue Credit Cards to each applicant for a Card who
qualifies for such type of Card under the Credit Card Guidelines subject to
Section 6.4 hereof, the Bank shall extend credit with respect to such Credit
Cards in accordance with the Credit Card Guidelines. NextCard shall design and
provide the Credit Cards in forms consistent with Visa guidelines. NextCard, on
behalf of the Bank, shall automatically issue a renewal card to each qualified
Cardholder at each scheduled Credit Card renewal date.
2.4 Establishment of Accounts.
(a) Upon approval of an application, the Bank shall establish an
Account for the applicant.
(b) NextCard shall prepare and provide, or cause to be provided
to each Cardholder a Cardholder Agreement and disclosure statement and such
other notices or documents related to such Cardholder's Account as are required
from time to time under applicable laws and regulations.
2.5 Account Terms. Certain terms and conditions for the Credit Cards
applicable to the Accounts are set out in the Credit Card Guidelines. NextCard
shall ensure that the Credit Card Guidelines and the other terms and conditions
for the Credit Cards (including, without limitation, the interest rates, fees,
charges and disclosures) are in compliance with all material applicable laws and
regulations.
2.6 Servicing. NextCard or any successor servicer under the Pooling and
Servicing Agreement shall be responsible for servicing and maintaining the
Accounts, processing payments thereon and collections efforts with respect
thereto, either by itself or through Third Party Processors. Such servicing
shall include maintaining a customer service website, maintaining all
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communications with Cardholders and modifying the terms and conditions of any
Account. All costs relating to servicing the Accounts shall be paid by NextCard.
2.7 Other Bank Obligations
(a) Visa Membership. The Bank shall maintain its membership in
Visa. The Bank shall be responsible for making all reports to Visa which may be
required by its membership therein and shall comply with the operating rules and
regulations of Visa in connection with the Program. Any termination of the
Bank's membership in Visa shall be grounds for termination of this Agreement
pursuant to Section 6.2(b).
(b) Board Approval. This Agreement and all sales of Receivables
and Accounts pursuant to this Agreement shall be approved by the Board of
Directors of the Bank and such approval is or will be reflected in the minutes
of the Board of Directors. The Bank shall provide copies of such resolutions of
the Board of Directors, certified by the Secretary or other officer of the Bank,
as may be reasonably requested by NextCard. The Bank shall maintain such
resolutions in its permanent official records continuously from the time of
their adoption.
(c) Other Requirements. The Bank shall comply with all regulatory
and administrative requirements applicable to it, and shall be solely
responsible for its Community Reinvestment Act compliance requirements as they
relate to the Program.
(d) Opinion. Prior to the effectiveness of this Agreement, the
Bank shall deliver to Funding, NextCard and the Administrative Agent an opinion
of counsel substantially in the form set forth on Exhibit B.
(e) Recordkeeping. The Bank shall maintain adequate and
sufficient records so that at all times it is possible to distinguish the
Accounts from any other credit card accounts owned or serviced by the Bank.
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(f) UCC-1 Financing Statement. The Bank shall execute and deliver
to Funding for filing with the California Secretary of State a UCC-1 financing
statement evidencing the sale of Receivables to Funding pursuant to this
Agreement.
2.8 Reports, Information and Materials.
(a) NextCard shall provide to the Bank periodic reports (through
Third Party Processors or otherwise) as the Bank may reasonably request from
time to time.
(b) NextCard shall furnish to the Bank all information concerning
the Accounts as may be required by law or necessary to enable to the Bank to
satisfy its obligations under this Agreement. NextCard will cooperate with the
Bank in connection with any regulatory examination or audit of the Program.
(c) NextCard shall not change the Credit Card Guidelines or the
Program Materials without the prior written consent of the Administrative Agent
and the Bank.
2.9 Expenses. NextCard agrees to reimburse the Bank for (a)
out-of-pocket expenses incurred in the start-up and maintenance of the Program,
including, if the Bank is not already a member of Visa, the costs associated
with the Bank becoming and maintaining a membership in Visa, (b) any taxes
payable by the Bank resulting from the sale of Receivables other than income
taxes, (c) the funding costs relating to the Receivables prior to their purchase
pursuant to this Agreement at the Federal Funds Rate or such other rate as may
be agreed to by NextCard and the Bank and (d) reasonable legal fees not to
exceed $12,500.
2.10 Origination Fees. NextCard shall pay to the Bank on a monthly basis
a one-time fee of [ * ] for each Account that is (a) booked on the system of
the Third Party Processor that books Accounts and (b) sold on NextCard's system
on or after January 1, 1999. Such payments shall be made no later than the
fifteenth day of each calendar month for all Accounts opened
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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during the preceding calendar month. If by September 30, 1999 NextCard has not
paid the Bank at least [ * ] pursuant to this Section 2.10, NextCard shall
pay to the Bank the difference between [ * ] and the actual amount paid by
NextCard to the Bank pursuant to this Section 2.10. This obligation will survive
any earlier termination of this Agreement pursuant to Section 6.2(d).
2.11 Visa Revenues. Any rebates, marketing fees, revenues or other fees
or discounts that are paid or granted by Visa to the Bank with respect to the
Accounts shall be paid over to Funding upon receipt by the Bank on a daily basis
as additional consideration under this Agreement.
2.12 Nature of Arrangement. During the term of this Agreement NextCard
shall be the exclusive fee-for-origination credit card originator for the Bank.
NextCard may enter into other fee-for-origination agreements with other
financial institutions.
2.13 Minimum Account Allocation. If between the period from February 1,
1999 and September 30, 1999 NextCard enters into other fee-for-origination
agreements with other financial institutions, NextCard shall nonetheless ensure
that at least [ * ] of the Accounts originated on a monthly basis through a
NextCard program during such period are established by the Bank; provided,
however, that this Section 2.13 shall not be applicable to any Accounts
established by a wholly-owned subsidiary of NextCard. Furthermore, the Bank will
be the exclusive originator of NextCard accounts during the period from January
1, 1999 to and including January 31, 1999.
2.14 Clearing Accounts. The Bank shall maintain cash clearing accounts
necessary to settle amounts paid and received on the Accounts prior to their
posting on the system of the
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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Third Party Processor. NextCard shall reimburse the Bank for its reasonable
costs relating to such cash clearing accounts.
2.15 Loan Agreement Notices. Funding shall provide to the Bank such
notices as it is required to deliver to, and any notices relating to defaults
that it receives from, the Administrative Agent pursuant to the Loan Agreement
as the Bank shall reasonably request.
2.16 Marketing to Cardholders. NextCard may from time to time solicit
Cardholders for goods and services and place solicitation or promotional
materials in communications to Cardholders, and any income and fees resulting
from the foregoing solicitations and promotions shall be paid directly to
NextCard. The Bank shall not solicit Cardholders, other than any Cardholder that
was a customer of the Bank prior to the date of this Agreement or a Cardholder
that has a relationship with the Bank that develops or was developed
independently of the Program, for any purpose.
ARTICLE III
INTELLECTUAL PROPERTY
3.1 Trademarks.
(a) The Bank acknowledges that, as between NextCard and the Bank,
NextCard owns and will own the service marks "NextBank," "NextCard," "Credit
Choice," and derivatives of the foregoing, and any other presently existing or
future trademarks, service marks, trade names, rights in packaging, rights of
publicity, merchandising rights, advertising rights, and similar rights by which
the Program is or becomes known or with which the Program is or becomes
associated, other than the mark "Heritage" and derivatives thereof
(collectively, the "NextCard Marks").
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(b) The Bank acknowledges that, as between NextCard and the Bank,
NextCard owns all rights in the URL addresses used in conjunction with the
Program, including without limitation "nextcard.com," "NextBank.com," and
"creditchoice.com."
(c) NextCard acknowledges that, as between NextCard and the Bank,
the Bank owns the service mark "Heritage" and derivatives thereof (collectively,
the "Bank Marks").
(d) All goodwill that is or becomes associated with the
above-referenced marks as a result of the use of such marks in association with
the Program will accrue solely to the benefit of the respective owner of such
marks. After termination of this Agreement, any party may use its marks free of
any claim whatsoever of ownership or interest by the other party.
(e) The Bank hereby licenses to NextCard during the term of this
Agreement the use of the "Heritage" mark solely in connection with the
performance of its marketing and other obligations hereunder. Specifically for
purposes of identifying the Visa card issuer, NextCard may use the "Heritage"
mark in any marketing or advertising materials relating to the Program. NextCard
will follow the Bank's instructions regarding the appearance, use and display of
such mark, subject to any requirements of Visa and any regulatory requirements.
(f) NextCard hereby licenses to the Bank during the term of this
Agreement the use of the Program Materials and the mark "NextCard" to identify
the Card and the Program. The Bank will follow NextCard's instructions regarding
the appearance, use, and display of such mark, subject to any requirements of
Visa and any regulatory requirements.
3.2 Copyright. NextCard will own all copyrights in all Program Materials
and derivative works thereof.
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3.3 Ownership and Use of Information.
(a) Cardholder-Specific Information will be owned by Heritage.
Heritage hereby grants to NextCard a perpetual unrestricted license (i) during
the term of this Agreement, to use the Cardholder-Specific Information for
Program purposes, including but not limited to the servicing of the Accounts,
and (ii) following the termination of this Agreement, unless NextCard purchases
the Cardholder-Specific Information pursuant to Section 4.2(b) hereof, to use
the Cardholder-Specific Information only for statistical and analytic purposes.
(b) NextCard and Heritage will own jointly the Program
Information, and each party may use the Program Information for its own
purposes; provided, that each party will treat any Program Information in its
possession at any time as Confidential Information.
(c) Heritage and NextCard (i) acknowledge that the Program
Information will be used by each of them to create certain analyses and
statistical models that may have predictive value beyond the Program, and (ii)
agree that such analyses and statistical models will be the sole and exclusive
property of the party creating such analyses and statistical models and will be
treated as Confidential Information. NextCard represents and warrants to
Heritage that no such analyses or statistical models will include information
that is identified with any specifically identifiable Cardholder.
3.4 Confidential Information. All material and information supplied by
one party to the other party in the course of the negotiation of this Agreement
and its performance hereunder, including, but not limited to, information
concerning any party's marketing plans, technological developments, objectives
and results and financial results are confidential and proprietary to the
disclosing party ("Confidential Information"). Confidential Information does not
include any information that was (a) known to the receiving party at the time of
disclosure or developed
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independently by such party without violating the terms herein; (b) in the
public domain at the time of disclosure or enters the public domain following
disclosure through no fault of the receiving party; or (c) disclosed to the
receiving party by a third party that is not prohibited by law or agreement from
disclosing the same. In particular, the Cardholder-Specific Information and the
Program Information shall be deemed Confidential Information owned by NextCard.
3.5 Protection of Confidential Information. Confidential Information
shall be used by each party solely in the performance of its obligations
pursuant to this Agreement. Each party shall receive Confidential Information in
confidence and not disclose Confidential Information to any third party, except
as may be necessary to perform its obligations pursuant to this Agreement, the
Pooling and Servicing Agreement and the Loan Agreement and except as may be
required by law or agreed upon in writing by the other party; provided, however,
that no party may disclose Confidential Information in violation of any
confidentiality or privacy guidelines or regulations imposed by federal or state
authorities. Each party shall take all reasonable steps to safeguard
Confidential Information disclosed to it so as to ensure that no unauthorized
person shall have access to any Confidential Information. Each party shall,
among other safeguards which it may consider necessary, require its employees,
agents, and subcontractors having access to Confidential Information to enter
into appropriate confidentiality agreements containing such terms as are
necessary to satisfy its obligation herein. Each party shall promptly report to
the other party any unauthorized disclosure or use of any Confidential
Information of that party of which it becomes aware. Upon request or upon
termination of this Agreement, each party shall return to the other party all
Confidential Information in its possession or control. No disclosure by a party
hereto of Confidential Information of such party shall constitute a grant to the
other party of any interest or right whatsoever in such Confidential
Information, which shall remain the
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property solely of the disclosing party. Nothing contained herein shall limit a
party's rights to use its Confidential Information in any manner whatsoever.
3.6 Survival. The terms of this Article 3 shall survive the termination
of this Agreement; provided, however, that upon the termination of this
Agreement each party will discontinue immediately the use of any trade or
service marks licensed from the other except to the extent necessary to satisfy
their respective obligations under Section 6.4 hereof following the termination
of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF RECEIVABLES AND ACCOUNTS
4.1 Purchase and Sale of Receivables.
(a) Funding hereby purchases from the Bank, and the Bank hereby
sells to Funding, all of the Receivables, whether now in existence or hereafter
arising, for the Purchase Price. The Receivables shall be transferred to Funding
on a daily basis or such other frequency as may be agreed to by the Bank and
Funding. On each day when Receivables are transferred to Funding pursuant to
this Agreement (the "Settlement Date"), Funding shall notify the Bank of the
Settlement Amount for such day and shall pay to the Bank such Settlement Amount.
After the Settlement Date for any Receivables, the Bank shall have no further
economic interest in such Receivables. NextCard shall provide Funding and the
Bank with a report setting forth the calculation of the Settlement Amount on
each Settlement Date.
(b) No later than 10:00 a.m., California time, on each Settlement
Date, NextCard shall notify Funding and the Bank of the Settlement Amount due to
or owed by Funding or the Bank for such day. Payments due for any day shall be
made by the appropriate
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party by wire transfer no later than 1:00 p.m., California time, unless NextCard
is late in providing notice of the Settlement Amount due for any day, in which
case the appropriate party shall use all reasonable efforts to send the wire
transfer as soon thereafter as possible.
(c) In the event that the Bank has reason to dispute the accuracy
of the Settlement Amount reported by NextCard, the Bank shall promptly so notify
NextCard. In the event it is determined that either party shall not have
remitted to the other party the proper Settlement Amount, such party shall
promptly remit to the other party any additional amount due the other party,
together with interest at the Federal Funds Rate.
(d) Subject to Section 6.4 hereof, the Bank shall remain the
owner of all Accounts, notwithstanding any sale of any Receivables to Funding
under this Section 4.1. Funding shall not be deemed to have assumed any
obligations of the Bank with respect to the Accounts by virtue of any purchase
of Receivables hereunder.
(e) Subject to Section 6.4(b) hereof, the Bank shall not sell any
Receivables or any interest therein to any third party without the prior written
consent of Funding and the Administrative Agent.
(f) The sale of Receivables contemplated herein shall occur upon
settlement therefor by or on behalf of Funding and no additional documents shall
be required by the parties to effect any such sale. Notwithstanding the
foregoing, if, in the reasonable judgment of either party, in connection with
any such purchase and sale, any additional instrument, document, or certificate
is required to further evidence such purchase and sale, the other party shall
execute and deliver any such document.
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4.2 Sale of Accounts.
(a) Subject to Section 6.4, the Bank shall not sell or transfer
any Account created under the Program, or any interest therein, to any third
party without the prior written consent of Funding and the Administrative Agent.
(b) At any time or from time to time, Funding or its assignee
shall have the right, exercisable by providing written notice to the Bank at
least thirty (30) business days prior to the settlement date for such purchase,
to purchase all of the Accounts and the Cardholder-Specific Information relating
thereto then owned by the Bank or to arrange for said purchase by another party.
The purchase price for the Accounts shall be ten cents per Account and the
purchase price for the Cardholder-Specific Information shall be a total of $50.
4.3 Covenants of the Bank. Except as contemplated by this Agreement, the
Bank (a) shall not create or suffer to exist any lien, pledge, security interest
or other encumbrance on any of the Receivables or Accounts, (b) shall not take
any action, or fail to take any action, that could result in the Bank no longer
being the exclusive owner of the Accounts and Receivables and (c) shall not take
any action, or fail to take any action, that could prevent the Bank from having
the absolute right and authority to sell the Accounts and Receivables.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of the Bank. The Bank hereby
represents and warrants to NextCard and Funding as follows:
(a) Organization. The Bank is a bank duly organized, validly
existing and in good standing under the laws of the State of California.
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(b) Capacity; Authority; Validity. The Bank has all necessary
corporate power and authority to enter into this Agreement and to perform all of
the obligations to be performed by it under this Agreement. This Agreement and
the consummation by the Bank of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of the Bank, and
this Agreement has been duly executed and delivered by the Bank and constitutes
the valid and binding obligation of the Bank and is enforceable in accordance
with its terms (except as such enforceability may be limited by equitable
limitations on the availability of equitable remedies and by bankruptcy and
other laws affecting the rights of creditors generally).
(c) Conflicts; No Defaults. Neither the execution and delivery of
this Agreement by the Bank nor the consummation of the transactions contemplated
herein by the Bank will (i) conflict with, result in the breach of, constitute a
default under, or accelerate the terms of any contract, instrument or commitment
to which the Bank is a party or by which the Bank is bound, (ii) violate the
articles of incorporation or bylaws, or any other equivalent organizational
document, of the Bank, (iii) result in the creation of any lien, charge or
encumbrance upon any of the Accounts or the Receivables (except pursuant to the
terms hereof), or (iv) require the consent or approval of any other party to any
contract, instrument or commitment to which the Bank is a party or by which it
is bound. The Bank is not subject to any agreement with any regulatory authority
that would prevent the consummation by the Bank of the transactions contemplated
by this Agreement.
(d) Litigation. There is no claim, litigation, proceeding,
arbitration, investigation or material controversy pending before any
governmental agency to which the Bank is a party that adversely affects the
ability of the Bank to consummate the transactions
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contemplated hereby, and, to the best of the Bank's knowledge, no such claim,
litigation, proceeding, arbitration, investigation or controversy has been
threatened or is contemplated.
(e) No Consent, Etc. No consent of any person (including without
limitation, any stockholder or creditor of the Bank) and no consent, license,
permit or approval or authorization or exemption by notice or report to, or
registration, filing or declaration with, any governmental authority is required
(other than those previously obtained and delivered to NextCard) in connection
with the execution or delivery of this Agreement by the Bank, the validity of
this Agreement with respect to the Bank, the enforceability of this Agreement
against the Bank, the consummation by the Bank of the transactions contemplated
hereby, or the performance by the Bank of its obligations hereunder; provided,
however, that the Bank makes no representation as to whether any consent from
Visa is required.
(f) Memberships. The Bank is, and at all times during the term
hereof will remain, a member of the Federal Deposit Insurance Corporation and
the Visa system.
(g) Commercial Matters. (i) This Agreement was undertaken in the
ordinary course of business, not in contemplation of insolvency of the Bank, and
with no intent to hinder, delay, or defraud the Bank or its creditors; (ii) this
Agreement represents a bona fide and arm's length transaction; (iii) Funding is
not an insider or affiliate of the Bank; (iv) this Agreement was entered into in
return for adequate consideration; and (v) this Agreement was entered into
before the first transfer of Receivables will be effected pursuant to this
Agreement.
5.2 Representations and Warranties of NextCard. NextCard hereby
represents and warrants to the Bank and Funding as follows:
(a) Organization. NextCard is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
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(b) Capacity; Authority; Validity. NextCard has all necessary
corporate power and authority to enter into this Agreement and to perform all of
the obligations to be performed by it under this Agreement. This Agreement and
the consummation by NextCard of the transactions contemplated hereby have been
duly and validly authorized by all necessary action on the part of NextCard, and
this Agreement has been duly executed and delivered by NextCard and constitutes
the valid and binding obligation of NextCard and is enforceable in accordance
with its terms (except as such enforceability may be limited by equitable
limitations on the availability of equitable remedies and by bankruptcy and
other laws affecting the rights of creditors generally).
(c) Conflicts; No Defaults. Neither the execution and delivery of
this Agreement by NextCard nor the consummation of the transactions contemplated
herein by NextCard will (i) conflict with, result in the breach of, constitute a
default under, or accelerate the performance of the terms of any contract,
instrument or commitment to which NextCard is a party or by which it is bound,
(ii) violate the articles of incorporation or bylaws of NextCard or (iii)
require the consent or approval of any other party to any contract, instrument
or commitment to which NextCard is a party or by which it is bound. NextCard is
not subject to any agreement with any regulatory authority that would prevent
the consummation by NextCard of the transactions contemplated by this Agreement.
(d) Litigation. There is no claim, litigation, proceeding,
arbitration, investigation or material controversy pending before any
governmental authority to which NextCard is a party that adversely affects
NextCard's ability to consummate the transactions contemplated hereby and, to
the best of NextCard's knowledge, no such claim, litigation, proceeding,
arbitration, investigation or controversy has been threatened or is
contemplated.
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(e) No Consent, Etc. No consent of any person or entity
(including without limitation, Visa and any stockholder or creditor of NextCard)
and no consent, license, permit or approval or authorization or exemption by
notice or report to, or registration, filing or declaration with, any
governmental authority is required in connection with the execution or delivery
of this Agreement by NextCard, the validity or enforceability of this Agreement
against NextCard, the consummation of the transactions contemplated thereby, or
the performance by NextCard of its obligations hereunder.
(f) Compliance. All terms of the Accounts and the Cardholder
Agreements and all Program Materials comply in all material respects with
applicable law and regulations.
(g) Commercial Matters. (i) This Agreement was undertaken in the
ordinary course of business, not in contemplation of insolvency of the Bank, and
with no intent to hinder, delay, or defraud the Bank or its creditors; (ii) this
Agreement represents a bona fide and arm's length transaction; (iii) this
Agreement was entered into in return for adequate consideration; and (iv) this
Agreement was entered into before the first transfer of Receivables will be
effected pursuant to this Agreement.
5.3 Representations and Warranties of Funding. Funding hereby represents
and warrants to the Bank and NextCard as follows:
(a) Organization. Funding is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
(b) Capacity; Authority; Validity. Funding has all necessary
corporate power and authority to enter into this Agreement and to perform all of
the obligations to be performed by it under this Agreement. This Agreement and
the consummation by Funding of the transactions contemplated hereby have been
duly and validly authorized by all necessary action
20
<PAGE> 21
on the part of Funding, and this Agreement has been duly executed and delivered
by Funding and constitutes the valid and binding obligation of Funding and is
enforceable in accordance with its terms (except as such enforceability may be
limited by equitable limitations on the availability of equitable remedies and
by bankruptcy and other laws affecting the rights of creditors generally).
(c) Conflicts; No Defaults. Neither the execution and delivery of
this Agreement by Funding nor the consummation of the transactions contemplated
herein by Funding will (i) conflict with, result in the breach of, constitute a
default under, or accelerate the performance of the terms of any contract,
instrument or commitment to which Funding is a party or by which it is bound,
(ii) violate the articles of incorporation or bylaws of Funding or (iii) require
the consent or approval of any other party to any contract, instrument or
commitment to which Funding is a party or by which it is bound. Funding is not
subject to any agreement with any regulatory authority that would prevent the
consummation by Funding of the transactions contemplated by this Agreement.
(d) Litigation. There is no claim, litigation, proceeding,
arbitration, investigation or controversy pending before any governmental
authority to which Funding is a party that adversely affects Funding's ability
to consummate the transactions contemplated hereby and, to the best of Funding's
knowledge, no such claim, litigation, proceeding, arbitration, investigation or
controversy has been threatened or is contemplated.
(e) No Consent, Etc. No consent of any person (including without
limitation, any stockholder or creditor of Funding) and no consent, license,
permit or approval or authorization or exemption by notice or report to, or
registration, filing or declaration with, any governmental authority is required
in connection with the execution or delivery of this Agreement by Funding, the
validity or enforceability of this Agreement against Funding, the
21
<PAGE> 22
consummation of the transactions contemplated thereby, or the performance by
Funding of its obligations hereunder.
(f) Ability to Finance Purchases. Funding shall at all times
maintain a credit facility sufficient to finance its obligation to purchase
Receivables hereunder.
(g) Commercial Matters. (i) This Agreement was undertaken in the
ordinary course of business, not in contemplation of insolvency of the Bank, and
with no intent to hinder, delay, or defraud the Bank or its creditors; (ii) this
Agreement represents a bona fide and arm's length transaction; (iii) Funding is
not an insider or affiliate of the Bank; (iv) this Agreement was entered into in
return for adequate consideration; and (v) this Agreement was entered into
before the first transfer of Receivables will be effected pursuant to this
Agreement.
(h) Manner of Foreclosure. Funding will not attempt to foreclose
on the Receivables or the proceeds thereof after the appointment of the Federal
Deposit Insurance Corporation (the "FDIC") as conservator or receiver for the
Bank (i) in a manner that is not commercially reasonable, (ii) in a manner that
requires the involvement of the FDIC, (iii) in a manner that requires judicial
action, (iv) without the existence of an event of default other than the
appointment of a conservator or receiver for the Bank or the insolvency of the
Bank, or (v) in a manner that does not comply with any applicable law (not
including the receivership and conservatorship provisions of the Federal Deposit
Insurance Act, as amended).
ARTICLE VI
TERM AND TERMINATION
6.1 Term. This Agreement shall commence on the date first above written
and, unless otherwise terminated as provided in Section 6.2 herein, shall
continue in full force and effect
22
<PAGE> 23
until December 31, 1999 (the "Initial Term"), provided, however, that the Bank's
obligation to establish new Accounts and the related obligation of NextCard to
solicit new Accounts shall terminate on September 30, 1999. After the Initial
Term, subject to Section 6.4, this Agreement may be extended at the written
request of Funding for one month periods until December 31, 2001 upon the
payment by Funding of an extension fee equal to $33,000 per month (the
"Extension Fee"). The Extension Fee for each month shall be payable upon the
first day of such month. In addition, Funding shall pay the Bank a fee of
$33,000 per month for each calendar month this Agreement is in effect during the
period from October 1, 1999 through and including December 31, 1999. The
termination of this Agreement shall not terminate, affect or impair any rights,
obligations or liabilities of any party hereto that may accrue prior to such
termination or that, under the terms of this Agreement, continue after the
termination or otherwise affect the rights and obligations of the parties
hereunder except as provided in this Article VI.
6.2 Termination. Subject to Section 6.4, any party to this Agreement may
terminate this Agreement, reserving all other remedies and rights hereunder in
whole or in part, under the following conditions:
(a) Event of Default. Subject to Section 6.4, upon the occurrence
of an Event of Default, a nondefaulting party may terminate this Agreement by
giving fifteen (15) days' written notice to the defaulting party of its intent
to terminate this Agreement. For purposes of this Agreement, an "Event of
Default" hereunder shall occur (i) upon the occurrence of an Event of Default
under the Loan Agreement or the Demand Note (as defined in the Loan Agreement)
or (ii) in the event any party defaults in the performance of any of its
material duties or obligations under this Agreement and fails to correct the
default, to the reasonable satisfaction of the other party, within a thirty (30)
day cure period commencing upon receipt of notice from the other
23
<PAGE> 24
party; provided, however, that no Event of Default shall be deemed to occur as a
result of any failure by a lender to fund a loan pursuant to the Loan Agreement.
(b) Bankruptcy. Subject to Section 6.4, any party may terminate
this Agreement, at any time upon notice to the other parties, after the filing
by any other party of any petition in bankruptcy or for reorganization or debt
consolidation under the federal bankruptcy laws or under any comparable law, or
upon any other party's making of an assignment of its assets for the benefit of
creditors, or upon the application of any other party for the appointment of a
receiver or trustee of its assets.
(c) Changes in Laws or Regulations. This Agreement may be
terminated by any party on or after the ninetieth (90th) day following the
giving of notice by such party that such party's performance is rendered
(through no act or omission of such party) illegal or impermissible for that
party due to changes in laws or regulations applicable to the terminating party
or a determination by a governmental authority having jurisdiction over such
party.
(d) Accounts Purchased. This Agreement may be terminated
immediately upon the purchase by NextCard, Funding or any assignee of all the
Accounts pursuant to Article IV.
6.3 Duties After Termination. Upon termination of this Agreement, in
order to preserve the goodwill of Cardholders, both parties shall cooperate in
order to ensure a smooth and orderly termination of their relationship and a
transition of Accounts. The Bank shall transfer to NextCard or any successor or
assignee all books and records relating to the Accounts and Receivables in its
possession, subject to any regulatory obligations relating to retaining
duplicate books and records, and each party shall return all property belonging
to the other party that is in its possession or control at the time of
termination and shall discontinue the use of and
24
<PAGE> 25
return to the other party, or at the request of the other party destroy, all
written and printed materials bearing the other party's name and logo. In
connection with any termination of this Agreement, the Bank agrees to make
reasonable efforts to assist Funding in the orderly transition of the Accounts
and Receivables acquired by Funding, including sending to Funding any payments
on Accounts that may be received by the Bank after the purchase date.
6.4 Right to Purchase Accounts and Receivables Continues; Duties Upon
Termination.
(a) NextCard, Funding and their assignees shall have the
exclusive right to purchase all Accounts, Cardholder-Specific Information and
Receivables pursuant to Article IV hereof for a period of one year from the
termination of this Agreement, but not later than December 31, 2001 (the
"Exercise Period").
(b) During the Exercise Period, subject to the next sentence, the
Bank will fund, and Funding or its assignees will purchase, additional
Receivables generated under Accounts originated prior to the Exercise Period in
compliance with the terms of this Agreement. If the Extension Fee is not paid
when due or if Funding or its assigness fail to purchase Receivables on any day,
after five days' prior written notice by the Bank to the Administrative Agent,
the Bank may, subject to compliance with applicable law, (1) cease originating
additional Receivables under existing Accounts; (2) reduce outstanding credit
limits under the Accounts to the then current balance of the Receivables; (3)
close Accounts with zero balances; and/or (4) sell the Accounts, together with
the related Receivables for a purchase price of not less than all outstanding
amounts due and owing under the Loan Agreement . In addition, if (i) the cash on
hand available to Funding is less than [ * ] million, (ii) the Bank reasonably
believes that Funding will not have the ability to purchase the Receivables and
(iii) the Administrative Agent
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.
25
<PAGE> 26
does not, within fifteen business days after the Bank has notified the
Administrative Agent that the Bank reasonably believes that Funding will not
have the ability to purchase the Receivables, provide assurances satisfactory to
the Bank that it will purchase, or cause to be purchased, the Receivables, the
Bank may take any or all of the following actions, subject to compliance with
applicable law; (w) close Accounts with zero balances; (x) cease originating
additional Receivables under existing Accounts; (y) reduce outstanding credit
limits under the Accounts to the then current balance of the Receivables; and/or
(z) sell the Accounts, together with the related Receivables, for a purchase
price of not less than all outstanding amounts due and owing under the Loan
Agreement. In the event the Bank exercises its rights under clause (z) above,
NextCard and Funding shall cooperate in effecting all such sale. Except as
otherwise provided in this Section 6.4(b), the obligations of NextCard, Funding
and the Bank, as the case may be, under Article IV, Section 6.3, this Section
6.4, Article VIII and any other provisions of this Agreement that by its terms
extends beyond the termination of this Agreement shall remain in full force and
effect following the termination of this Agreement. Nothing contained in this
paragraph (b) shall terminate the rights of the Administrative Agent from
exercising its rights under Section 8.9 hereof (including the sale of the
Accounts) prior to the exercise by the Bank of its rights under clause (z) of
the preceding sentence.
ARTICLE VII
INDEMNIFICATION
7.1 NextCard Indemnification. Except to the extent of any Losses that
arise from the willful misconduct or gross negligence of the Bank or its
directors, officers, employees, agents or affiliates, NextCard shall indemnify
and hold harmless the Bank and its respective directors, officers, employees and
agents from and against any and all Losses resulting from (a) any failure
26
<PAGE> 27
of NextCard to comply with any of the terms and conditions of this Agreement,
(b) any inaccuracy of a representation or warranty made by NextCard herein, (c)
any infringement or alleged infringement of any of the NextCard Marks, or the
use thereof hereunder, on the rights of any third party, (d) any failure of
NextCard to comply, in respect of its obligations in connection with the Program
hereunder, with any applicable laws or regulations, including without limitation
any consumer lending law or regulation, or (e) any failure of any Program
Materials to comply with any applicable laws, including without limitation any
consumer lending law or regulation.
7.2 Bank Indemnification. Except to the extent of any Losses that arise
from the acts or omissions of NextCard, Funding or their directors, officers,
employees, agents or affiliates, the Bank shall indemnify and hold harmless
NextCard, Funding and their respective directors, officers, employees, agents
and assigns from and against any and all Losses resulting from (a) any failure
of the Bank to comply with any of the terms and conditions of this Agreement,
(b) the inaccuracy of any representation or warranty made by the Bank herein,
(c) any infringement or alleged infringement of any of the Bank Credit Card
Marks, or the use thereof hereunder, on the rights of any third party, or (d)
any failure of the Bank to comply, in respect of its obligations in connection
with the Program hereunder, with any applicable laws or regulations.
7.3 Definition of Losses. For the purposes of this Agreement, the term
"Losses" shall mean all out-of-pocket costs, damages, losses, fines, penalties,
judgments, settlements, and expenses whatsoever, including, without limitation,
outside attorneys' fees and disbursements and court costs reasonably incurred by
the Indemnified Party.
27
<PAGE> 28
7.4 Procedures for Indemnification.
(a) Notice of Claims. In the event any claim is made or any suit
or action is commenced as to which a party (the "Indemnified Party") intends to
seek indemnification, the Indemnified Party shall give notice to the party from
whom indemnification is sought (the "Indemnifying Party") as promptly as
practicable, but, in the case of lawsuit, in no event later than the time
necessary to enable the Indemnifying Party to file a timely answer to the
complaint. The Indemnified Party shall make available to the Indemnifying Party
and its counsel and accountants at reasonable times and for reasonable periods,
during normal business hours, all books and records of the Indemnified Party
relating to any such possible claim for indemnification, and each party
hereunder will render to the other such assistance as it may reasonably require
of the other in order to insure prompt and adequate defense of any suit, claim
or proceeding based upon a state of facts which may give rise to a right of
indemnification hereunder.
(b) Defense and Counsel. Subject to the terms hereof, the
Indemnifying Party shall have the right to defend any suit, claim or proceeding.
The Indemnifying Party shall notify the Indemnified Party via facsimile
transmission, within ten (10) days of having been notified pursuant to Section
7.4(a) if the Indemnifying Party elects to employ counsel and assume the defense
of any such claim, suit or action. The Indemnifying Party shall institute and
maintain any such defense diligently and reasonably and shall keep the
Indemnified Party fully advised of the status thereof. The Indemnified Party
shall have the right to employ its own counsel if the Indemnified Party so
elects to assume such defense, but the fees and expense of such counsel shall be
at the Indemnified Party's expense.
28
<PAGE> 29
(c) Settlement of Claims. The Indemnifying Party shall have the
right to compromise and settle any suit, claim or proceeding in the name of the
Indemnified Party. The Indemnifying Party shall be subrogated to any claims or
rights of the Indemnified Party as against any other Persons with respect to any
amount paid by the Indemnifying Party under this Section 7.4.
(d) Indemnification Payments. Amounts owing under Section 7.4
shall be paid promptly upon written demand for indemnification containing in
reasonable detail the facts giving rise to such liability, provided, however,
that if the Indemnifying Party notifies the Indemnified Party within thirty (30)
days of receipt of such demand that it disputes its obligation to indemnify and
the parties are not otherwise able to reach agreement, the controversy shall be
settled by final judgment entered by a court of competent jurisdiction.
7.5 Survival. The terms of this Article VII shall survive the
termination of this Agreement for a period of five years.
ARTICLE VIII
MISCELLANEOUS
8.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its
conflict of laws rules.
8.2 Press Releases. No party hereto shall issue a press release or make
a public announcement or any disclosure to any third party related to the terms
of this Agreement without the prior consent of the other parties hereto unless
any such release, announcement or disclosure is required by any applicable law
or regulatory authority.
8.3 Relationship of the Parties. The Bank, Funding and NextCard agree
that in performing their responsibilities pursuant to this Agreement they are in
the position of
29
<PAGE> 30
independent contractors. This Agreement is not intended to create, nor does it
create and shall not be construed to create, a relationship of partners or joint
ventures or any association for profit among the Bank, Funding and NextCard.
8.4 Force Majeure. In the event that any party fails to perform its
obligations under this Agreement in whole or in part as a consequence of events
beyond its reasonable control (including, without limitation, acts of God, fire,
explosion, public utility failure, accident, floods, embargoes, epidemics, war,
nuclear disaster or riot), such failure to perform shall not be considered a
breach of this Agreement during the period of such disability. In the event of
any force majeure occurrence as set forth in this Section, the disabled party
shall use its best effort to meet its obligations as set forth in this
Agreement. The disabled party shall promptly and in writing advise the other
party if it is unable to perform due to a force majeure event, the expected
duration of such inability to perform and of any developments (or changes
therein) that appear likely to affect the ability of that party to perform any
of its obligations hereunder a whole or in part.
8.5 Books and Records. Each party shall maintain books of account and
records, in accordance with standard accounting practices and procedures, of all
financial transactions arising in connection with its obligations pursuant to
this Agreement for a period of not less than five years from the date last
recorded or created, and after such time the other party will be offered a
reasonable opportunity to take possession of such records at its expense prior
to their destruction. In addition to and notwithstanding the foregoing, to the
extent any party has sole possession of any records required to be maintained by
the other party pursuant to applicable state or federal laws or regulations, the
party with possession shall maintain such records in such form and for such time
periods as are provided for in such laws and regulations.
30
<PAGE> 31
8.6 Notices. All notices, requests and approvals required by this
Agreement shall be in writing and shall be deemed to have been given upon
delivery thereof at the addresses of the parties as follows, or such other
address as any party may specify in writing:
To Bank: 150 Almaden Blvd.
San Jose, CA 95113
Attn: Kenneth B. Silveira, Executive Vice President
To NextCard: 595 Market Street, Suite 950
San Francisco, CA 94105
Attn: John Hashman, Chief Financial Officer
With a copy to Robert Linderman, Esq., General Counsel
To Funding: 595 Market Street, Suite 2250
San Francisco, CA 94105
Attn: John Hashman, Chief Financial Officer
With a copy to Robert Linderman, Esq., General Counsel
8.7 Modification and Changes. This Agreement constitutes the entire
agreement among the parties relating to the subject matter herein. This
Agreement may only be amended by a written document signed by all parties.
8.8 Assignment. This Agreement and the rights and obligations created
under it shall be binding upon and inure solely to the benefit of the parties
hereto and their respective successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. Except as
otherwise provided herein, this Agreement shall not be assigned by any party
except with the written consent of each other party hereto.
8.9 Security Interest; Exercise of Rights by Administrative Agent. The
Bank hereby acknowledges that (a) NextCard will grant to Funding a security
interest in all of its rights and obligations under this Agreement to secure
NextCard's obligations under the Demand Note
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<PAGE> 32
issued to Funding and (b) Funding will grant to the Administrative Agent a
security interest in all of its rights and obligations under this Agreement to
secure Funding's obligations under the Loan Agreement. The Bank agrees that if
the Administrative Agent exercises its rights under the Borrower Pledge and
Security Agreement (as defined in the Loan Agreement), the Administrative Agent
on behalf of the Lenders and their successors and assigns shall succeed to all
of the rights and obligations of Funding under this Agreement as if it were a
party hereto, and the Administrative Agent may assign such rights and
obligations without the consent of the Bank. The Bank further agrees that if the
Administrative Agent exercises its rights and forecloses under the Borrower
Pledge and Security Agreement and the Parent Security Agreement (as defined in
the Loan Agreement) the Administrative Agent on behalf of the Lenders and their
successors and assigns shall succeed to all of the rights and obligations of
NextCard under this Agreement as if it were a party hereto, and the
Administrative Agent may assign such rights and obligations without the consent
of the Bank.
8.10 Third Party Beneficiary. The Administrative Agent is an intended
third party beneficiary of this Agreement, and this Agreement shall be binding
upon and inure to the benefit of the Administrative Agent and its successors and
assigns for so long as any obligations are outstanding under the Loan Agreement.
8.11 Waivers. None of the parties shall be deemed to have waived any of
its rights, powers or remedies hereunder unless such waiver is approved in
writing by the waiving party.
8.12 Severability. If any provision of this Agreement or portion thereof
is held invalid, illegal, void or unenforceable by reason of any rule of law,
administrative or judicial provision or public policy, all other provisions of
this Agreement shall nevertheless remain in full force and effect.
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8.13 Headings. The headings contained herein are for convenience of
reference only and are not intended to define, limit, expand or describe the
scope or intent of any provision of this Agreement.
8.14 Non-petition Agreement by Bank. The Bank hereby agrees not to
institute against, or join with any other person in instituting against, Funding
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceeding under any federal or state bankruptcy or similar law until at least
one year after any indebtedness of Funding under the Loan Agreement has been
paid in full.
8.15 Integration. This Agreement states the entire agreement between the
parties with respect to the subject matter hereof, and all prior or
contemporaneous written or oral agreements and understandings other than the
Initial Agreement are merged herein and superseded hereby. The parties
acknowledge that the Initial Agreement remains in full force and effect.
8.16 No Set-Off. The Bank agrees not to set off the obligations of
NextCard under the Initial Agreement against any payments required to be made to
NextCard or Funding under this Agreement.
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<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
HERITAGE BANK OF COMMERCE NEXTCARD INC.
By: ____________________________ By: ____________________________________
Title: _________________________ Title: _________________________________
NEXTCARD FUNDING CORP.
By: ____________________________
Title: _________________________
[Signature Page to Account Origination Agreement]
<PAGE> 35
EXHIBIT A - CREDIT CARD GUIDELINES
I. UNDERWRITING APPROVALS FOR ELIGIBLE RECEIVABLES
A. CURRENT PROCESS
1. Application Information Decline Criteria
a. The following information must be completed to
form a valid application:
o First name and last name;
o Valid home address including number,
street, city, state and zip code [ * ];
o Valid social security number;
o Date of birth;
o [ * ]; and
o Valid home phone number and a second
phone number (either a work number or a
phone number where the customer can be
reached separate from the home number).
b. Once NextCard receives a valid application
(pre-bureau application stage), we will review
the data for the following declines:
o Applicants [ * ]; and
o [ * ].
2. Duplicate Applications or Accounts per Customer and/or
Household Policy
a. Book only [ * ] per customer;
b. Decline any customer who has [ * ]; and
c. Decline any customer who has [ * ].
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.
A-1
<PAGE> 36
3. Credit Bureau Authentication Review
a. Suffixes Review
A generation suffix (Jr., Sr., III, etc.)
provided by either the applicant on the
application or by any credit bureau, will be
[ * ].
b. Authentication Declines
Applicant will be declined if NextCard is unable
to receive at [ * ].
If NextCard receives any alert messages
regarding the validity of the bureau match,
based on the different types of the messages
received, NextCard will either approve the
applicant, route the applicant to a review queue
or decline the application.
4. Credit Bureau Underwriting Criteria
If the applicant passes application information,
duplicate application, and bureau authentication review,
NextCard will then underwrite the applicant against the
following credit bureau scoring and discrete criteria
provided below in TABLE 1.
TABLE 1. CREDIT BUREAU UNDERWRITING CRITERIA
<TABLE>
<CAPTION>
CRITERIA DECLINE IF VALUE...
- -------------------------------------------- -------------------
<S> <C>
[ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
[ * ]
[ * ] [ * ]
</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.
A-2
<PAGE> 37
<TABLE>
<CAPTION>
CRITERIA DECLINE IF VALUE...
- -------------------------------------------- -------------------
<S> <C>
[ * ]
- -------------------------------------------- -------------------
[ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
[ * ]
[ * ] [ * ]
</TABLE>
Attachment 1 provides the line of credit assignment table for approvals on the
system.
B. CHANGES IN UNDERWRITING APPROVAL FOR ELIGIBLE RECEIVABLES
1. Underwriting Criteria
Changes to the underwriting criteria in Table 1 above
may be made only [ * ].
2. Credit Line Assignment
a. For Accounts that have [ * ], credit line
assignments may be changed only [ * ] without
the consent of the Bank or the Administrative
Agent if in NextCard's reasonable business
judgment such changes [ * ]. NextCard shall
provide to the Bank and the Administrative Agent
an analysis that supports such a judgment.
b. For Accounts that have [ * ], the credit line
assignments may not be changed without the
consent of the Bank and the Administrative
Agent.
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.
A-3
<PAGE> 38
II. PRICING OF ELIGIBLE RECEIVABLES
A. CURRENT PRICING STRUCTURE FOR ELIGIBLE RECEIVABLES
<TABLE>
<S> <C>
Teaser rate: [ * ]
Teaser period: [ * ]
Ongoing rate: [ * ]
</TABLE>
B. CHANGES IN PRICING STRUCTURE FOR ELIGIBLE RECEIVABLES
1. No consent of the Bank or the Administrative Agent will be
required for NextCard to test an alternate pricing
structure involving [ * ] of the outstanding principal
balance of the Loans outstanding under the Loan Agreement.
2. Any other changes must receive the prior written approval
of the Administrative Agent and the Bank.
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.
A-4
<PAGE> 39
EXHIBIT B - Form of Opinion of Counsel to Heritage Bank
OPINION OF COUNSEL TO HERITAGE BANK
1. Heritage Bank is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has corporate power and authority to enter into and perform
its obligations under the Account Origination Agreement. Heritage Bank is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the character of the business transacted by it
requires such qualification and in which the failure so to qualify would have a
material adverse effect on the business, properties, assets or condition
(financial or other) of Heritage Bank or on the ability of Heritage Bank to
perform its obligations under the Account Origination Agreement.
2. The Account Origination Agreement has been duly authorized,
executed and delivered by Heritage Bank, and constitutes a valid and legally
binding obligation of Heritage Bank enforceable against Heritage Bank in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights generally and to general equity principles.
3. No consent, approval, authorization or order of any state or
federal court or government agency or body is required to be obtained by
Heritage Bank for the consummation of the transactions contemplated by the
Account Origination Agreement or the performance of its obligations thereunder.
4. The consummation of any of the transactions contemplated by
the Account Origination Agreement will not conflict with, result in a breach of,
or constitute a default under the articles of incorporation or bylaws (or other
comparable constitutive documents) of Heritage Bank or the terms of any
indenture or other agreement or instrument as to which Heritage Bank is party or
bound, or any order applicable to Heritage Bank or any regulation applicable to
Heritage Bank, of any state or federal court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over Heritage Bank.
5. There is no pending or threatened action, suit or proceeding
before any court or governmental agency, authority or body or any arbitrator
involving Heritage Bank or relating to the transactions contemplated by the
Account Origination Agreement which, if adversely determined, may have a
material adverse effect on the business, properties, assets or condition
(financial or other) of Heritage Bank or on the ability of Heritage Bank to
perform its obligations under the Account Origination Agreement.
B-1
<PAGE> 1
EXHIBIT 23.2
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, and Note 11, as
to which the date is May XX, 1999 in the Registration Statement (Form S-1 No.
333-74755) and related Prospectus of NextCard, Inc. and subsidiary for the
registration of 5,000,000 shares of its common stock.
San Francisco, California
May XX, 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon completion of the
restatement of capital accounts as described in Note 11 to the consolidated
financial statements.
/s/ ERNST & YOUNG LLP
San Francisco, California
May 10, 1999
