SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the fiscal year ended December 31, 1997.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
For the transition period from ____________ to ____________.
Commission File No. 1-13300
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1719854
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2980 Fairview Park Drive, Suite 1300
Falls Church, Virginia 22042-4525
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 205-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Stock New York Stock Exchange
Purchase Rights*
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* Attached to each share of Common Stock is a Right to acquire 1/100th of a
share of the Registrant's Cumulative Participating Preferred Stock, par value
$.01 per share, which Rights are not presently exercisable.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on February 27, 1998.
Common Stock, $.01 Par Value -- $4,346,943,962*
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* In determining this figure, the registrant assumed that the executive
officers of the registrant and the registrant's directors are affiliates of
the registrant. Such assumption shall not be deemed to be conclusive for any
other purpose.
The number of shares outstanding of the registrant's common stock as of the
close of business on February 27, 1998:
Common Stock, $.01 Par Value - 65,453,614
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to stockholders for the year ended December 31,
1997 are incorporated by reference into Parts I, II and IV.
2. Portions of the Proxy Statement for the annual meeting of stockholders to
be held on April 23, 1998 are incorporated by reference into Part III.
2
CAPITAL ONE FINANCIAL CORPORATION
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
ITEM 1. BUSINESS.....................................................................4
Overview..........................................................................4
Lines of Business.................................................................5
Competition.......................................................................8
Employees.........................................................................8
Supervision and Regulation........................................................9
Cautionary Statements............................................................12
Statistical Information..........................................................16
ITEM 2. PROPERTIES..................................................................16
ITEM 3. LEGAL PROCEEDINGS...........................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................17
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........17
ITEM 6. SELECTED FINANCIAL DATA.....................................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............................18
ITEM 11. EXECUTIVE COMPENSATION.....................................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................18
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............19
3
PART I
ITEM 1. BUSINESS.
Overview
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Capital One Financial Corporation (the "Corporation") is a holding company,
incorporated in Delaware on July 21, 1994, whose subsidiaries provide a variety
of products and services to consumers. The Corporation's principal subsidiary,
Capital One Bank (the "Bank"), a limited purpose Virginia state chartered credit
card bank, offers credit card products. Capital One, F.S.B. (the "Savings
Bank"), a federally chartered savings bank, provides certain consumer lending
and deposit services. Capital One Services, Inc., another subsidiary of the
Corporation, provides various operating, administrative and other services to
the Corporation and its subsidiaries. Unless indicated otherwise, the term
"Company" refers to the Corporation and its consolidated subsidiaries and for
periods prior to the Separation (as defined herein), Signet Bank's credit card
division. The Company's common stock is listed on the New York Stock Exchange
under the symbol COF. The Company's principal executive office is located at
2980 Fairview Park Drive, Suite 1300, Falls Church, Virginia 22042-4525
(telephone number (703) 205-1000).
The Company is one of the oldest continually operating bank card issuers in
the United States having commenced operations in 1953, the same year as the
formation of what is now MasterCard International. The Company is among the ten
largest issuers of Visa and MasterCard credit cards in the U.S. based on
managed credit card loans outstanding as of December 31, 1997. The growth in
the Company's managed credit card loans and accounts was due largely to credit
card industry dynamics and the success of the Company's proprietary information-
based strategy ("IBS") initiated in 1988.
The Bank offers two brands of credit cards, Visa and MasterCard, and within
each brand, premium ("platinum" and "gold") cards and unsecured and secured
standard credit card products. Prior to November 22, 1994, the Bank conducted
its operations as a division of Signet Bank, a wholly-owned subsidiary of Signet
Banking Corporation ("Signet")./1/ Pursuant to the terms of an agreement among
Signet, Signet Bank and the Corporation, Signet Bank contributed designated
assets and liabilities of its credit card division into the Bank, initially
established as a subsidiary of Signet Bank (the "Separation"). Signet Bank
immediately distributed the capital stock of the Bank to Signet, which then
contributed such stock to the Corporation. Concurrently with the Separation,
the Corporation issued 7,125,000 shares of the Corporation's common stock, par
value $.01 ("Common Stock") in an initial public offering. On February 28,
1995, Signet distributed all of the remaining shares of the Common Stock held by
it to Signet shareholders of record as of February 10, 1995.
In June 1996, the Company established the Savings Bank to expand the
Company's product offerings and its relationship with its cardmembers. The
Savings Bank currently offers Visa and MasterCard credit cards and installment
loans, in each case, both unsecured and secured. The Savings Bank expects to
offer multiple financial products and services to existing cardmembers and other
households using the Company's IBS and existing information technology systems.
Information-Based Strategy
The Company's IBS is designed to allow the Company to differentiate among
customers based on credit risk, usage and other characteristics and to match
customer characteristics with appropriate product offerings. IBS involves
developing sophisticated models, information systems, well-trained personnel and
a flexible culture to create credit card or other products and services that
address the demands of changing consumer and competitive markets. By using
sophisticated statistical modeling techniques, the Company segments its
potential customer lists based upon the integrated use of credit scores,
demographics, customer behavioral characteristics and other criteria. By
actively testing a wide variety of product and service features, marketing
channels and other aspects of its offerings, the Company designs and targets
customized solicitations at various customer segments, thereby enhancing
customer response levels and maximizing returns on investment within given
underwriting parameters.
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/1/ Signet Bank and Signet Banking Corporation have since been acquired by
First Union National Bank and First Union Corporation, respectively, as of
November 30, 1997.
4
Continued integrated testing and model development builds on information gained
from earlier phases and is intended to improve the quality, performance and
profitability of the Company's solicitation and account management initiatives.
The Company applies IBS to all areas of its business, including solicitations,
account management, credit line management, pricing strategies, usage
stimulation, collections, recoveries and account and balance retention.
Lines of Business
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Products
The Company offers an array of Visa and MasterCard credit card products to
consumers throughout the United States and in Canada and the United Kingdom.
Products consist of varying annual percentage rates ("APRs"), finance charges
and fee combinations (annual membership, past-due, overlimit, returned check,
cash advance and other fees), credit limits and other special features or
services, depending on the risk profile and other characteristics of the
targeted consumer segment. The Company offers platinum and gold cards, which
generally have higher lines of credit and additional ancillary benefits, and
unsecured and secured standard card products. The Company uses information
derived from proprietary statistical models and targets consumers with carefully
matched combinations of pricing, credit analysis and packaging. The Company's
pricing philosophy reflects a risk-based approach where consumers with better
credit qualifications generally merit more favorable pricing. The Company
continually tests new product offerings and pricing combinations targeted to
different consumer segments.
The Company refers to its product offerings and services by generations.
In the early 1990's, the Company initially targeted its offerings to experienced
users of general purpose credit card products offering low introductory interest
rate products with accounts repricing to higher rates after six to 16 months
from the date of origination, "First Generation Products." After the
introductory period, the accounts may be repriced upwards based on individual
customer performance. First Generation Products permit cardholders to use
Company issued credit line checks for cash or purchases or, under balance
transfer programs, to pay down other card balances. The Company manages the
repricing of these First Generation Products to maximize return on investment at
the consumer level, taking into consideration the risk and expected performance
of these products.
Faced with increased competition for First Generation Products, since the
middle 1990's, the Company began to test a number of other markets and product
offerings, resulting in the development of "Second Generation Products." Second
Generation Products consist of secured card products and other customized credit
card products including affinity and co-branded, college student and other
accounts. Many Second Generation Products are offered to consumers with limited
credit history, which historically have not been solicited by lenders to the
same extent as more experienced, affluent credit users. The Company provides
credit to these underserved markets by utilizing its IBS to better evaluate the
credit risk of these consumers and to apply a risk-based pricing strategy to
optimize profitability within the context of acceptable risks. As a result,
Second Generation Products are generally designed to have lower credit lines and
higher APRs and fees, including annual membership fees. Second Generation
Products also tend to have balances that build over time, less attrition, higher
operational costs, and, in some cases, higher delinquencies and consequently
higher past-due and overlimit fee income as a percentage of total receivables
outstanding than First Generation Products. See "Cautionary Statements" herein.
Additionally, the Company has been applying, and expects to continue
applying, its IBS to other financial and non-financial products and services,
including the reselling of telecommunication services, "Third Generation
Products." The Company has also expanded its existing credit card operations
outside of the United States, with an initial focus on the United Kingdom and
Canada. The Company has established the Savings Bank, the U.K. branch of the
Bank and several non-bank operating subsidiaries to identify and expand these
opportunities and is in various stages of developing and test marketing a number
of new products and services.
The significant growth to date of the Company's consumer accounts and
managed loan balances initially was due largely to credit card industry dynamics
and the success of the Company's IBS in generating the First Generation
Products. More recently, Second Generation Products significantly contribute to
the growth in number of the Company's consumer accounts but do not have an
immediate impact on managed loan balances, as these products have lower balances
that build over time. The Company's product mix at any time may vary as the
5
Company intends to remain flexible in allocation of marketing investment spent
on specific products to take advantage of market opportunities as they arise.
Geographic Diversity
Loan portfolio concentration within a specific geographic region or
demographic portion of the population may be regarded as positive or negative
based upon the current and expected credit characteristics and performance of
the portfolio. The Company's consumer loan portfolio is geographically diverse.
See Note N to Consolidated Financial Statements on page 54 of the Company's
Annual Report to its stockholders for the year ended December 31, 1997 (the
"Annual Report"), which is incorporated herein by reference.
Origination and Risk Management
The Company's primary method of account acquisition is direct mail
solicitation. Since the introduction of IBS in 1988, the Company has steadily
increased its marketing efforts and has developed a sophisticated screening
process to target potential consumers. The Company tracks and periodically
reviews the results of each solicitation. Management information systems and
processes enable management to monitor the effectiveness of prescreening and
underwriting criteria, and such criteria are modified based on the results
obtained from this process.
The Company employs a comprehensive risk management process that integrates
all aspects of an account's life cycle, from origination to closure. Marketing
and credit policy decisions are made by a credit policy group consisting of
senior management representatives from the credit operations, risk management
and marketing and analysis units. This group originates credit policy from the
viewpoints of both profitability and credit risk, based on prescreening
criteria, proprietary model development and usage, as well as reviews of test
programs and test results. Significant test results are reviewed before the
widespread introduction of a tested policy or product.
The Company uses various credit risk scores, generated by both third party
providers of scoring models and by proprietary models. These scores are used,
together with other criteria, in multiple screening reviews at both the
prescreening stage and the credit application stage. Score usage continues after
the account has been established and throughout its life cycle to adjust credit
lines, pricing and collection policies.
Account Management
Management has found that active account management is necessary in order
to respond to the changing economic environment and cardholder risk, usage and
payment patterns. The Company applies new credit scores to each account several
times a year and new behavioral scores for open accounts each month. This
information is used in account management strategies relating to credit lines,
pricing, usage stimulation, retention and collection. For creditworthy and
profitable accounts, such periodic review may result in more favorable pricing,
higher credit lines or other enhancements which, based on testing, are likely to
increase account usage or the overall profitability of an account. Conversely,
for delinquent or other accounts with significant credit risk, periodic review
may result in an account being reassigned to a higher risk category and hence
not being eligible for credit line increases or, in certain circumstances,
having pricing adjusted upward or the credit line reduced.
The IBS approach has allowed the Company to develop customized collections
and pricing strategies based on cardholder behavior. Similarly, IBS has been
used in developing the Company's retention strategies. The Company has developed
integrated systems which evaluate account profitability and risk, test various
strategies for cost and effectiveness in retaining cardholders and assist
service representatives in negotiating potential pricing alternatives. Certain
of the Company's products, including the introductory interest rate program and
balance transfer program, have a repricing feature after an initial period. The
Company has developed methodologies for retaining these accounts and the
balances in these accounts after the expiration of the initial period.
Credit Operations
The Company's credit extension process is actively managed by senior
management and is designed to bring consistency in credit practices and
operating efficiencies. The Company's scoring technology and verification
procedures are highly automated with limited judgmental review. The credit
evaluation process is based on proprietary models using, among other things,
scores developed by nationally recognized scoring firms and tailored
6
to individual programs. These scores are validated, monitored and maintained by
the Company as part of IBS. The scores provide a statistically measurable way to
make decisions about applications, to evaluate risk and to modify credit
extension policies.
For pre-approved account solicitations, which constitute one of the
primary methods of marketing, the Company's current process generally begins
with a prescreening review which identifies consumers who are likely to be
approved for a credit card account. In the prescreening process, the Company
provides a set of credit history and other criteria to credit reporting
agencies, which generate lists with desired attributes. The Company further
refines this list by applying additional sets of underwriting criteria resulting
in a new list which represents the consumers who receive direct mail
solicitations. The Company also employs additional underwriting criteria that
are based upon proprietary models designed to predict the relative credit risk
of potential account holders. Those persons who receive marketing packages
generally must fill out acceptance certificates which are used to initiate a
back-end verification process in which an applicant's credit information is
reviewed a second time, updated and verified against criteria established by
lending guidelines. Once the acceptance certificates are returned and sorted
and current credit reporting agency reports are obtained, the acceptance
certificates are processed through the Company's underwriting criteria. Each
approved applicant is offered a line of credit commensurate with the results of
the back-end credit verification.
The Company manually reviews applications that are rejected by the
Company's credit scoring system because of inconsistencies in application
information, inquiry from a rejected applicant or for other reasons. Credit
analysts then have the ability to override decisions made by the system upon the
receipt of additional information from an applicant or otherwise.
For non-pre-approved solicitations, the Company acquires names of
prospective customers from a variety of sources and then edits the list
utilizing internal and external sources. The prospective customers on the final
list are mailed solicitations. Prospective customers who respond to a
solicitation are approved or declined based on the characteristics drawn from
both the application submitted and a credit reporting agency.
Collection Procedures
The Company generally considers an account delinquent if a minimum payment
due thereunder is not received by the Company by the cardholder's payment date.
Delinquent accounts are first directed to the pre-collection system, where
appropriate early collection actions are taken. Early contact with delinquent
cardholders may include payment reminders by telephone, by billing statement and
by mail. In most cases, an account is restricted and privileges are suspended
depending on the riskiness of the account between four and 105 days after the
account enters the Company's collections department. The Company may also, at
its discretion, enter into arrangements with delinquent account holders to
extend or otherwise change payment schedules. Efforts to collect delinquent
credit card accounts are generally made by the Company's regular collections
group, but may also be made by third-party collection agents.
The focus of the Company's response to an early stage delinquency is
rehabilitation and identification of the causes for delinquency. The Company's
policies and procedures are designed to encourage cardholders to pay delinquent
amounts; for example, once a delinquent account has re-established a payment
pattern with three consecutive minimum monthly payments, it can be re-aged as
current. An account can generally be re-aged once in the life of the account.
During the fourth quarter of 1997, the Company modified its methodology for
charging off credit card loans. The Company now charges off as uncollectible an
account (net of collateral) at 180 days past-due versus the prior practice of
charging off the account in the next billing cycle after becoming 180 days past-
due. In connection with a secured card account, except as set forth below,
funds deposited as collateral will generally be applied to payment on the
account shortly before the account is charged off as uncollectible. With respect
to bankrupt customers, the Company generally charges off the account within 30
days after the Company receives the bankruptcy petition and, with respect to
secured credit card accounts, funds deposited as collateral will be applied in
satisfaction of the account only after the bankruptcy automatic stay is lifted.
The Company charges off accounts of deceased customers within 60 days of
receiving proper notice if no estate exists against which a proof of claim can
be filed, no other party remits payments or no other responsible party is
available. The Company's credit
7
evaluation, servicing and charge off policies and collection practices may
change over time in accordance with the business judgment of the Company,
applicable law and guidelines established by applicable regulatory authorities.
Technology/Systems
A key part of the Company's strategic focus is the development of flexible,
high-volume systems capable of handling the Company's growth and changes in
marketing and account management strategies. Management believes that the
continued development and integration of these systems is important to its
efforts to reduce its operating costs and maintain a competitive advantage.
The Company has developed proprietary integrated systems which allow
employees to manage the large volumes of data collected through the IBS process
and to utilize such data in the Company's account solicitations, application
processing, account management and retention strategies. The Company maintains a
data warehouse that holds basic information on 120 million households, detailed
data on nearly 12 million customers and performance/ profitability information
on more than 4,000 product, pricing and feature combinations. The Company uses
this information to predict consumer behavior and then matches prospects to
credit cards with various terms and fees. These systems also allow the
Company's customer service representatives to access account specific
information when responding to customer inquiries.
Funding
The Company's primary methods of funding include loan securitizations,
issuing certificates of deposit, senior notes, deposit notes and other
borrowings and fed funds purchased from financial institutions. For a
discussion of the Company's funding program, see pages 19-20 and pages 29-31 of
the Annual Report under the respective headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Managed Consumer
Loan Portfolio" and "-- Funding," which are incorporated herein by reference.
Competition
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As a marketer of credit card products, the Company faces intense and
increasing competition in all aspects of its business from numerous bank and
non-bank providers of financial services. Many of these companies are
substantially larger and have more resources than the Company. The Company
competes with national, regional and local issuers of Visa and MasterCard credit
cards. In addition, American Express, Discover Card, Diner's Club and, to a
certain extent, smart cards and debit cards, represent additional competition in
the general purpose credit card market. In general, customers are attracted to
credit card issuers largely on the basis of price, credit limit and other
product features and customer loyalty is often limited. The Company believes
that IBS, together with its strategy of pursuing Second Generation Products,
will allow it to more effectively compete in this and new markets. There can be
no assurance, however, that the Company's ability to market its services
successfully or to obtain adequate yield on its loans will not be impacted by
the nature of the competition that now exists or may later develop.
In addition, the Company faces competition in seeking public funding from
banks, savings banks, money market funds and a wide variety of other entities
that take deposits and/or sell debt securities, some of which are publicly
traded. Many of these companies are substantially larger, have more capital and
other resources and have better financial ratings than the Company.
Accordingly, there can be no assurance that competition from these other
borrowers will not increase the Company's cost of funds.
Employees
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As of December 31, 1997, the Company employed 5,724 full-time and 189 part-
time employees. A central part of the Company's philosophy is to attract and
maintain a highly capable staff. The Company views current employee relations
to be satisfactory. None of the Company's employees are covered under
collective bargaining agreements.
8
Supervision and Regulation
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General
The Bank is a banking corporation chartered under Virginia law and a member
of the Federal Reserve System, the deposits of which are insured by the Bank
Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank is subject to comprehensive regulation and periodic
examination by the Bureau of Financial Institutions of the Virginia State
Corporation Commission (the "Bureau of Financial Institutions"), the Federal
Reserve Board and the FDIC. The Bank is not a "bank" under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), because it (i) engages only in
credit card operations, (ii) does not accept demand deposits or deposits that
the depositor may withdraw by check or similar means for payment to third
parties or others, (iii) does not accept any savings or time deposit of less
than $100,000, other than as permitted as collateral for extensions of credit,
(iv) maintains only one office that accepts deposits and (v) does not engage in
the business of making commercial loans. Due to the Bank's status as a limited
purpose credit card bank, any non-credit card operations which may be conducted
by the Company must be conducted in other operating subsidiaries of the Company.
The Savings Bank is a federal savings bank chartered by the Office of
Thrift Supervision (the "OTS") and is a member of the Federal Home Loan Bank
System. Its deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. Pursuant to recent legislation recapitalizing the SAIF,
insurance premiums currently paid by SAIF-insured institutions are equivalent to
the rates paid by BIF-insured institutions. The Savings Bank is subject to
comprehensive regulation and periodic examination by the OTS and the FDIC.
The Corporation is not a bank holding company under the BHCA as a result of
the Corporation's ownership of the Bank because the Bank is not a "bank" as
defined under the BHCA. If the Bank failed to meet the credit card bank
exemption criteria described above, the Bank's status as an insured depository
institution would make the Corporation subject to the provisions of the BHCA,
including certain restrictions as to the types of business activities in which a
bank holding company and its affiliates may engage. Becoming a bank holding
company under the BHCA would affect the Corporation's ability to engage in
certain non-banking businesses. In addition, for purposes of the BHCA, if the
Bank failed to qualify for the credit card bank exemption, any entity that
acquired direct or indirect control of the Bank and also engaged in activities
not permitted for bank holding companies could be required either to discontinue
the impermissible activities or to divest itself of control of the Bank.
As a result of the Corporation's ownership of the Savings Bank, the
Corporation is a unitary savings and loan holding company subject to regulation
by the OTS and the provisions of the Savings and Loan Holding Company Act. As
a unitary savings and loan holding company, the Corporation generally is not
restricted under existing laws as to the types of business activities in which
it may engage so long as the Savings Bank continues to meet the qualified thrift
lender test (the "QTL Test"). If the Corporation ceased to be a unitary savings
and loan holding company as a result of its acquisition of an additional savings
institution or as a result of the failure of the Savings Bank to meet the QTL
Test, the types of activities that the Corporation and its non-savings
association subsidiaries would be able to engage in would generally be limited
to those eligible for bank holding companies.
The Corporation is also registered as a financial institution holding
company under Virginia law and as such is subject to periodic examination by the
Bureau of Financial Institutions.
Dividends and Transfers of Funds
The principal source of funds for the Corporation to pay dividends on
stock, make payments on debt securities and meet other obligations is dividends
from its direct and indirect subsidiaries. There are various federal and
Virginia law limitations on the extent to which the Bank and the Savings Bank
can finance or otherwise supply funds to the Corporation through dividends,
loans or otherwise. These limitations include minimum regulatory capital
requirements, Federal Reserve Board, OTS and Virginia law requirements
concerning the payment of dividends out of net profits or surplus, Sections 23A
and 23B of the Federal Reserve Act governing transactions between an insured
depository institution and its affiliates and general federal and Virginia
regulatory oversight to prevent unsafe or unsound practices. In general, federal
banking laws prohibit an insured depository institution, such as the Bank and
the Savings Bank, from making dividend distributions if such distributions are
not paid out of
9
available earnings or would cause the institution to fail to meet applicable
capital adequacy standards. In addition, the Savings Bank is required to give
the OTS at least 30 days' advance notice of any proposed dividend. Under OTS
regulations, other limitations apply to the Savings Bank's ability to pay
dividends, the magnitude of which depends upon the extent to which the Savings
Bank meets its regulatory capital requirements. In addition, under Virginia law,
the Bureau of Financial Institutions may limit the payment of dividends by the
Bank if the Bureau of Financial Institutions determines that such a limitation
would be in the public interest and necessary for the Bank's safety and
soundness.
Capital Adequacy
The Bank and the Savings Bank are currently subject to capital adequacy
guidelines adopted by the Federal Reserve Board and the OTS, respectively. For
a further discussion of the capital adequacy guidelines, see pages 31-32 of the
Annual Report under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Adequacy" and page 52
in Note J to Consolidated Financial Statements, which are incorporated herein by
reference.
FDICIA
Among other things, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") requires federal bank regulatory authorities to take
"prompt corrective action" in respect of insured depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital ratio
levels: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Under
applicable regulations, an insured depository institution is considered to be
well capitalized if it maintains a Tier 1 risk-based capital ratio (or core
capital to risk-adjusted assets in the case of the Savings Bank) of at least
6.00%, a total risk-based capital ratio of at least 10.00% and a Tier 1 leverage
capital ratio (or core capital ratio in the case of the Savings Bank) of at
least 5.00%, and is not otherwise in a "troubled condition" as specified by its
appropriate federal regulatory agency. An insured depository institution is
considered to be adequately capitalized if it maintains a Tier 1 risk-based
capital ratio (or core capital to risk-adjusted assets in the case of the
Savings Bank) of at least 4.00%, a total risk-based capital ratio of at least
8.00% and a Tier 1 leverage capital ratio (or core capital ratio in the case of
the Savings Bank) of at least 4.00% (3.00% for certain highly rated
institutions), and does not otherwise meet the well capitalized definition. The
three undercapitalized categories are based upon the amount by which the insured
depository institution falls below the ratios applicable to adequately
capitalized institutions. The capital categories are determined solely for the
purposes of applying FDICIA's prompt corrective action ("PCA") provisions, as
discussed below, and such capital categories may not constitute an accurate
representation of the overall financial condition or prospects of the Bank or
the Savings Bank.
As of December 31, 1997, each of the Bank and the Savings Bank met the
requirements for a "well capitalized" institution. A "well capitalized"
classification should not necessarily be viewed as describing the condition or
future prospects of a depository institution, including the Bank and the Savings
Bank.
Under FDICIA's PCA system, an insured depository institution in the
"undercapitalized category" must submit a capital restoration plan guaranteed by
its parent company. The liability of the parent company under any such
guarantee is limited to the lesser of 5.00% of the insured depository
institution's assets at the time it became undercapitalized, or the amount
needed to comply with the plan. An insured depository institution in the
undercapitalized category also is subject to limitations in numerous areas
including, but not limited to, asset growth, acquisitions, branching, new
business lines, acceptance of brokered deposits and borrowings from the Federal
Reserve. Progressively more burdensome restrictions are applied to insured
depository institutions in the undercapitalized category that fail to submit or
implement a capital plan and to insured depository institutions that are in the
significantly undercapitalized or critically undercapitalized categories. In
addition, an insured depository institution's primary federal banking agency is
authorized to downgrade the institution's capital category to the next lower
category upon a determination that the institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice. An unsafe or unsound
practice can include receipt by the institution of a less than satisfactory
rating on its most recent examination with respect to its capital, asset
quality, management, earnings or liquidity.
"Critically undercapitalized" insured depository institutions (which are
defined to include institutions that still have a positive net worth) may not,
beginning 60 days after becoming "critically undercapitalized," make any
10
payment of principal or interest on their subordinated debt (subject to certain
limited exceptions). Thus, in the event an institution became "critically
undercapitalized," it would generally be prohibited from making payments on its
subordinated debt securities. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator.
FDICIA requires the federal banking agencies to review the risk-based
capital standards to ensure that they adequately address interest-rate risk,
concentration of credit risk and risks from non-traditional activities. The OTS
amended its risk-based capital rules to incorporate interest rate risk
requirements under which a savings bank must hold additional capital if it
projects an excessive decline in "net portfolio value" in the event interest
rates increase or decrease by two percentage points. These standards are not
yet in effect.
FDICIA also requires the FDIC to implement a system of risk-based premiums
for deposit insurance pursuant to which the premiums paid by a depository
institution will be based on the probability that the FDIC will incur a loss in
respect of such institution. The FDIC has since adopted a system that imposes
insurance premiums based upon a matrix that takes into account an institution's
capital level and supervisory rating.
The Bank and the Savings Bank may accept brokered deposits as part of their
funding. Under FDICIA, only "well capitalized" and "adequately capitalized"
institutions may accept brokered deposits. "Adequately capitalized"
institutions, however, must first obtain a waiver from the FDIC before accepting
brokered deposits, and such deposits may not pay rates that significantly exceed
the rates paid on deposits of similar maturity from the institution's normal
market area or the national rate on deposits of comparable maturity, as
determined by the FDIC, for deposits from outside the institution's normal
market area.
Liability for Commonly-Controlled Institutions
Under the "cross-guarantee" provision of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), insured depository institutions
such as the Bank and the Savings Bank may be liable to the FDIC in respect of
any loss or reasonably anticipated loss incurred by the FDIC resulting from the
default of, or FDIC assistance to, any commonly controlled insured depository
institution. The Bank and the Savings Bank are commonly controlled within the
meaning of the FIRREA cross guarantee provision.
Investment Limitation and Qualified Thrift Lender Test
Federally-chartered savings banks such as the Savings Bank are subject to
certain investment limitations. For example, federal savings banks are not
permitted to make consumer loans (i.e., certain open-end or closed-end loans for
personal, family or household purposes, excluding credit card loans) in excess
of 35% of the savings bank's assets. Federal savings banks are also required to
meet the QTL Test, which generally requires a savings bank to maintain at least
65% "portfolio assets" (total assets less (i) specified liquid assets up to 20%
of total assets, (ii) intangibles, including goodwill and (iii) property used to
conduct business) in certain "qualified thrift investments" (residential
mortgages and related investments, including certain mortgage-backed and
mortgage-related investments, small business related securities, certain state
and federal housing investments, education loans and credit card loans) on a
monthly basis in nine out of every 12 months. Failure to qualify under the QTL
Test could subject the Savings Bank to substantial restrictions on its
activities and to certain other penalties, and could subject the Company to the
provisions of the BHCA, including the activity restrictions that apply generally
to bank holding companies and their affiliates. The Savings Bank has been
granted a two-year exception from the QTL Test, but must be in full compliance
with the test by June 30, 1998. As of December 31, 1997, 93.68% of the Savings
Bank's portfolio assets were held in qualified thrift investments, and the
Savings Bank was in compliance with the QTL Test.
Lending Activities
The activities of the Bank and the Savings Bank as consumer lenders are
also subject to extensive regulation under various federal laws including the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Community Reinvestment Act and the Soldiers' and Sailors'
Civil Relief Act, as well as to various state laws. Regulators are authorized
to impose penalties for violations of these statutes and, in certain cases, to
order the Bank and the Savings Bank to pay restitution to injured borrowers.
Borrowers may also bring actions for certain violations. Federal bankruptcy and
state debtor relief and collection laws also affect the ability of
11
the Bank and the Savings Bank to collect outstanding balances owed by borrowers
who seek relief under these statutes.
Legislation
From time to time legislation has been proposed in Congress to limit
interest rates and fees that could be charged on credit card accounts or
otherwise restrict practices of credit card issuers. Various bills have also
been introduced that eliminate a separate savings bank charter possibly
requiring that existing savings banks become banks and repeal in some respects
the provisions of the Glass-Steagall Act prohibiting certain banking
organizations from engaging in certain securities activities and the provisions
of the BHCA prohibiting affiliations between banking organizations and non-
banking organizations. Legislation has also been proposed to change existing
federal bankruptcy laws. It is unclear at this time whether and in what form
any such legislation will be adopted or, if adopted, what its impact on the
Bank, the Savings Bank or the Company would be. Congress may in the future
consider other legislation that would materially affect the banking or credit
card industries.
Investment in the Corporation, the Bank and the Savings Bank
Certain acquisitions of capital stock may be subject to regulatory approval
or notice under federal or Virginia law. Investors are responsible for insuring
that they do not, directly or indirectly, acquire shares of capital stock of the
Company in excess of the amount which can be acquired without regulatory
approval.
The Bank and the Savings Bank are each "insured depository institutions"
within the meaning of the Change in Bank Control Act. Consequently, federal law
and regulations prohibit any person or company from acquiring control of the
Company without, in most cases, prior written approval of the Federal Reserve
Board or the OTS, as applicable. Control is conclusively presumed if, among
other things, a person or company acquires more than 25% of any class of voting
stock of the Corporation. A rebuttable presumption of control arises if a
person or company acquires more than 10% of any class of voting stock and is
subject to any of a number of specified "control factors" as set forth in the
applicable regulations.
Although the Bank is not a "bank" within the meaning of Virginia's
reciprocal interstate banking legislation (Chapter 15 of Title 6.1 of the Code
of Virginia), it is a "bank" within the meaning of Chapter 13 of Title 6.1 of
the Code of Virginia governing the acquisition of interests in Virginia
financial institutions (the "Financial Institution Holding Company Act"). The
Financial Institution Holding Company Act prohibits any person or entity from
acquiring, or making any public offer to acquire, control of a Virginia
financial institution or its holding company without making application to, and
receiving prior approval from, the Bureau of Financial Institutions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve Board approval, to acquire
banks located in states other than the holding company's home state without
regard to whether the transaction is prohibited under state law. In addition, as
of June 1, 1997, national and state banks with different home states are
permitted to merge across state lines, with approval of the appropriate federal
banking agency, unless the home state of a participating bank passed legislation
prior to this date expressly prohibiting interstate bank mergers. Virginia has
not passed such legislation but has elected to permit such interstate bank
mergers.
Interstate Taxation
Several states have passed legislation which attempts to tax the income
from interstate financial activities, including credit cards, derived from
accounts held by local state residents. Based on the volume of its business in
these states and the nature of the legislation passed to date, the Company
currently believes that this development will not materially affect the
financial condition of the Bank, the Savings Bank or the Company.
Cautionary Statements
- ---------------------
Information or statements provided by the Company from time to time may
contain certain "forward-looking information," including information relating to
growth in diluted earnings per share, returns on equity,
12
growth in managed loans outstanding and consumer accounts, net interest margins,
funding costs, operations costs and employment growth, marketing expense,
delinquencies and charge offs. Such forward-looking statements may be identified
by the use of terminology such as "may," "will," "expect," "anticipate," "goal,"
"target," "forecast," "project," "continue" or comparable terminology and may
involve certain risks or uncertainties and are qualified in their entirety by
the cautionary statements provided below. The cautionary statements are being
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995 (the "Act") and with the intention of obtaining the benefits of the
"safe harbor" provisions of the Act for any such forward-looking information.
Many of the cautionary factors discussed below, as well as other factors,
have also been discussed in the Company's prior public filings. Though the
Company has attempted to list comprehensively all important factors, the Company
wishes to caution investors that other factors in the future may prove to be
important in affecting the Company's results of operations. New factors may
emerge from time to time and it is not possible for management to predict all of
such factors, nor can it assess the impact of each such factor on the business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
The Company cautions investors not to place undue reliance on any forward-
looking statements, as they speak only of the Company's views as of the date the
statement was made. The Company further cautions readers that any forward-
looking information provided by the Company is not a guarantee of future
performance and that actual results could differ materially from those in the
forward-looking information as a result of various factors, including, but not
limited to, the following:
Competition
The Company faces intense and increasing competition from numerous
providers of credit cards and other financial products and services who may
employ various competitive strategies. The Company faces competition from
national, regional and local issuers of bank cards in each of its markets.
Additionally, the Company competes with other general purpose credit card
providers and, to a certain extent, smart card or debit card providers. Many of
these companies are substantially larger and have more capital and other
resources than the Company. Additionally, many of the Company's competitors are
pricing credit card products at attractive interest rates at or below those
currently charged by the Company.
In the past, the Company has faced intense competition primarily with its
First Generation Products. Management, however, expects that, in the future,
competitive pressures will increase for Second and Third Generation Products,
including competition for its products and services in markets outside of the
United States.
Accounts and Loan Balances
The Company's aggregate accounts or loan balances and the growth rate
thereof are affected by a number of internal and external factors. Because the
Company's product mix significantly influences account and loan balance growth,
the allocation of Company marketing investment among different products will
cause fluctuations in the aggregate number of accounts and in outstanding loan
balances. Moreover, as IBS is designed to take advantage of market
opportunities, difficulties exist in forecasting the allocation of marketing
investment and projections of account and loan balance growth and accompanying
Company results will vary from time to time. In addition, external factors such
as attrition of accounts and loan balances to competing card issuers and general
economic conditions and other factors beyond the control of the Company could
vary results. Consumers are attracted to credit card issuers largely on the
basis of price, credit limit and other product features and, once an account is
originated, customer loyalty may be limited.
Ability to Sustain and Manage Growth
The Company's strategy for future growth has been, and is expected to
continue to be, to apply its proprietary IBS to its credit card business, as
well as to other businesses, both financial and non-financial, to identify new
business opportunities and to make informed investment decisions about its
existing products and services. Management believes that, through continued
application of its IBS, the Company can develop new product and service
offerings necessary to sustain growth. However, there are a number of factors
that can impact the Company's ability to sustain growth. As mentioned throughout
this section, continued growth of the
13
Company's credit card portfolio will depend on a number of factors, including
(i) the Company's ability to attract new consumers and retain existing
consumers; (ii) growth of existing and new account balances; (iii) levels of
delinquencies and charge offs; (iv) the availability of funding on favorable
terms; (v) the amount of marketing expenditures used to solicit new consumers
and (vi) general economic and other factors.
Continued growth through expansion and product diversification will depend
on additional factors. The Company's development of new products and services
will be affected by the ability of the Company to internally build or to acquire
the operational and organizational infrastructure necessary to engage in new
businesses and to recruit experienced personnel to assist in the management and
operations of these businesses and the availability of capital necessary to fund
these new businesses. Additionally, difficulties or delays in the development,
production, testing and marketing of products or services, including, but not
limited to, a failure to implement new product or service programs when
anticipated, the failure of customers to accept these products or services when
planned, losses associated with the testing of new products or services or
financial, legal or other difficulties as may arise in the course of such
implementation, will affect the success of any new product or business. In
addition, as the Company attempts to diversify and expand its offerings beyond
credit cards, and more particularly beyond financial services, there can be no
assurance that the historical financial results achieved from the Company's
credit card business will necessarily be reflective of the results from other
products and services.
Availability of Financing and Funding Costs
The Company's primary source of funding is the securitization of consumer
loans, and to date, the Company has completed securitization transactions on
terms that it believes are favorable. Difficulties or delays in the
securitization of the Company's receivables, or changes in credit enhancement
rates, impact the cost and availability of securitization funding. Such
difficulties, delays or changes may result from adverse developments in the
availability of credit enhancement for securitizations or in the performance of
the securitized assets or from changes in the current legal, regulatory,
accounting and tax environment governing securitizations. There can be no
assurance that the securitization market will continue to offer the Company an
attractive funding alternative, and the Company could have to seek other more
expensive funding sources.
More generally, the amount, type and cost of any financing available to the
Company to fund its operations, and any changes to that financing, including
changes resulting from within the Company's organization or the activities of
parties with which the Company has agreements or understandings, including any
activities affecting any investment, may impact Company results. The Company
faces competition in seeking funding from banks, savings banks, money market
funds and a wide variety of other entities that take deposits and/or sell debt
securities, some of which are publicly traded. Many of these companies are
substantially larger, have more capital and other resources and have better
financial ratings than the Company. Accordingly, there can be no assurance that
competition from these other borrowers will not increase the Company's cost of
funds.
Credit Quality
The costs of an increase in delinquencies and credit losses could have a
material adverse effect on the Company's financial performance and the
performance of the Company's securitized loan trusts. Delinquencies and credit
losses are influenced by a number of external and internal factors. First, a
national or regional economic slowdown or recession increases the risk of
defaults and credit losses. Costs associated with an increase in the number of
customers seeking protection under the bankruptcy laws, resulting in accounts
being charged off as uncollectible, and the effects of fraud by third parties or
customers are additional factors. "Seasoning" of accounts (increases in the
average age of a credit card issuer's portfolio) affects the Company's level of
delinquencies and losses which may require higher loan loss provisions (and
reserves). A decrease in account originations or balances and the attrition of
such accounts or balances could significantly impact the seasoning of the
overall portfolio, resulting in increases in the overall percentage of
delinquencies and losses.
In addition, the Company markets many of its Second Generation Products to
consumers with limited credit histories. As a result, in some cases, in
addition to the higher delinquency and credit loss rates associated with this
market, there is little historical experience with respect to credit risk and
performance of these underserved markets. Accordingly, although the Company
believes that by utilizing its IBS it can effectively price these products in
relation to their relative risk, there can be no assurance that the Company's
risk-based pricing system will offset the negative impact of the expected higher
delinquency and loss rates.
14
General Economic Conditions
Delinquencies and credit losses in the credit card industry generally
increase during periods of an economic downturn or recession. Such periods also
may be accompanied by decreased consumer demand for consumer loans, thereby
affecting the Company's ability to sustain its growth. Although the Company
believes that its underwriting criteria and product design enable it to manage
the risks inherent in the consumer loans it makes, no assurance can be given
that such criteria and design will afford adequate protection in a sustained
period of economic downturn or recession.
Interest Rate Risks
Interest rate fluctuations affect the Company's net interest margin and the
value of its assets and liabilities. The continued legal or commercial
availability of techniques (including interest rate swaps and similar financial
instruments, loan repricing, hedging and other techniques) used by the Company
to manage the risk of such fluctuations and the continuing operational viability
of those techniques will influence Company results.
The impact of repricing accounts and the overall product mix of accounts,
including the actual amount of accounts (and related loan balances) repriced and
the level and type of account originations at that time and the ability of the
Company to use account management techniques to retain repriced accounts and the
related loan balances, affects the Company's net interest margin.
Regulation and Legislation
The effects of, and changes in, monetary and fiscal policies, laws and
regulations (including financial, consumer regulatory or otherwise), other
activities of governments, agencies and similar organizations and social and
economic conditions, such as inflation and changes in taxation of the Company's
earnings influence Company goals and projections. For example, from time to
time Congress has proposed legislation to limit interest rates and fees that
could be charged on credit card accounts or to otherwise restrict practices of
credit card issuers. If this or similar legislation was adopted, the Company's
ability to collect on account balances or maintain previous levels of periodic
rate finance charges and other fees and charges could be adversely affected.
Failure by the Company to comply with any such requirements also could adversely
affect the Company's ability to enforce the receivables. Additionally, changes
have been proposed to the federal bankruptcy laws. Changes in federal
bankruptcy laws and any changes to state debtor relief and collection laws could
adversely affect the Company if such changes result in, among other things,
accounts being charged off as uncollectible and additional administrative
expenses. It is unclear at this time whether and in what form any legislation
will be adopted or, if adopted, what its impact on the Company would be.
Congress may in the future consider other legislation that would materially
affect the banking or credit card industries.
Expenses and Other Costs
The amount and rate of growth in the Company's expenses (including employee
and marketing expenses) as the Company's business develops or changes and
expands into new market areas; the acquisition of assets (variable, fixed or
other) and the impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, asset valuations and organizational
structures will all impact Company results. Additionally, other factors include
the costs and other effects of legal and administrative cases and proceedings,
settlements and investigations, claims and changes in those items, developments
or assertions by or against the Company, adoptions of new, or changes in
existing, accounting policies and practices and the application of such policies
and practices.
Technology
System delays, malfunctions and errors in the proprietary and third party
systems and networks used by the Company for payment processing, collections and
other services and operations may lead to delays, additional costs to the
Company, and, if not corrected in a timely fashion, customer dissatisfaction
which could ultimately affect the Company's customer base and the level of
service it is able to provide to its customers. The Year 2000 compliance issue
may result in such system delays or malfunctions. The Company has formed a Year
2000 project team to identify software systems and computer-related devices that
require modification, and the project team has
15
developed a plan to address any system issues and is making and testing all
required modifications within the plan time frame. Although the Company expects
to have all of its system modifications complete by the end of 1998, allowing a
sufficient amount of time to test systems in 1999, unforeseen problems could
arise in the year 2000 giving rise to delays and malfunctions which may impact
Company results. In addition, the Company is in discussions with outside third
party providers of services or systems and networks, to determine whether the
Company's outside vendors have addressed their Year 2000 systems issues.
Although the Company is taking certain precautionary measures to assure that it
is not vulnerable to the failure by its third party vendors to make necessary
system modifications, there can be no assurance that the Company's third party
vendors will successfully address all Year 2000 issues.
Statistical Information
- -----------------------
The statistical information required by Item 1 is in the Annual Report, and
is incorporated herein by reference, as follows:
Page in the Company's Annual
Report to its Stockholders for
Guide 3 Disclosure the Year Ended December 31, 1997
------------------ --------------------------------
I. Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential 22-24
II. Investment Portfolio 46
III. Loan Portfolio 19-20, 26-29, 32-34, 54
IV. Summary of Loan Loss Experience 26-29, 47
V. Deposits 23, 29
VI. Return on Equity and Assets 17
VII. Other Borrowings 29-31
ITEM 2. PROPERTIES.
The Company leases its principal executive office at 2980 Fairview Park
Drive, Suite 1300, Falls Church, Virginia, consisting of approximately 43,400
square feet. The lease commenced January 1, 1995 and expires February 29, 2000.
The Company has the right to extend the lease until February 28, 2005.
The Company owns administrative offices and credit card facilities in
Richmond, Virginia, consisting of approximately 470,000 square feet from which
it conducts its credit, collections, customer service and other operations. The
Company also leases additional facilities consisting of an aggregate of
approximately 1,467,000 square feet (excluding the principal executive office)
from which credit, collections, customer service and other operations are
conducted in Virginia, Florida and Texas. The Company recently purchased a
facility in Nottingham, Great Britain, consisting of approximately 267,000
square feet. The Company also expects to lease additional facilities in Florida
and Virginia consisting of an aggregate of approximately 186,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
During 1995, the Company and the Bank became involved in a purported class
action suit relating to certain collection practices engaged in by Signet Bank
and, subsequently, by the Bank. The complaint in this case alleges that Signet
Bank and/or the Bank violated a variety of California state statutes and
constitutional and common law duties by filing collection lawsuits, obtaining
judgements and pursuing garnishment proceedings in the Virginia state courts
against defaulted credit card customers who were not residents of Virginia.
This case was filed in the Superior Court of California in the County of
Alameda, Southern Division, on behalf of a class of California
16
residents. The complaint seeks unspecified statutory damages, compensatory
damages, punitive damages, restitution, attorneys' fees and costs, a permanent
injunction and other equitable relief.
In February 1997, the California court entered judgement in favor of the
Bank on all of the plaintiff's claims. The plaintiffs have appealed the ruling
to the California Court of Appeal, First Appellate District Division 4, and the
appeal is pending.
Because no specific measure of damages is demanded in the complaint for the
California case and the trial court entered judgement in favor of the Bank
before the parties completed any significant discovery, an informed assessment
of the ultimate outcome of this case cannot be made at this time. Management
believes, however, that there are meritorious defenses to this lawsuit and
intends to defend it vigorously.
The Company is commonly subject to various other pending and threatened
legal actions arising from the conduct of its normal business activities. In
the opinion of management, the ultimate aggregate liability, if any, arising out
of any pending or threatened action will not have a material adverse effect on
the consolidated financial condition of the Company. At the present time,
however, management is not in a position to determine whether the resolution of
any pending or threatened litigation will have a material adverse effect on the
Company's results of operations in any future reporting period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the Company's fiscal year ending December 31,
1997, no matters were submitted to a vote of the stockholders of the Company.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The information required by Item 5 is included under "Supervision and
Regulation -- Dividends and Transfers of Funds" herein and in the Annual Report
on pages 29-32 under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Funding" and "-- Capital
Adequacy," on page 37 under the heading "Selected Quarterly Financial Data" and
on page 52 in Note J to Consolidated Financial Statements, and is incorporated
herein by reference and filed as part of Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is included in the Annual Report on page
17 under the heading "Selected Financial and Operating Data," and is
incorporated herein by reference and filed as part of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required by Item 7 is included in the Annual Report on
pages 18-36 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is incorporated herein by reference
and filed as part of Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The information required by Item 7A is included in the Annual Report on
pages 32-34 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Interest Rate Sensitivity," and is
incorporated herein by reference and filed as part of Exhibit 13.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included in the Annual Report on page
39 under the heading "Report of Independent Auditors," on pages 40-55 under the
headings "Consolidated Balance Sheets," "Consolidated Statements of Income,"
"Consolidated Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and
on page 37 under the heading "Selected Quarterly Financial Data," and is
incorporated herein by reference and filed as part of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by Item 10 is included in the Company's 1997 Proxy
Statement (the "Proxy Statement") on pages 5-9 under the heading "Information
About Our Directors and Executive Officers" and on page 4 under the heading
"Information About Capital One's Common Stock Ownership - Section 16(a)
Beneficial Ownership Reporting Compliance," and is incorporated herein by
reference. The Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days of the Corporation's 1997
fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included in the Proxy Statement on
pages 8-9 under the heading "Information About Our Directors and Executive
Officers -- Compensation of the Board" and on pages 10-15 under the heading
"Compensation of Executive Officers," and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is included in the Proxy Statement on
pages 3-4 under the heading "Information About Capital One's Common Stock
Ownership," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included in the Proxy Statement on
page 9 under the heading "Information About Our Directors and Executive Officers
- -- Related Party Transactions with Directors," and is incorporated herein by
reference.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) (1) The following consolidated financial statements of Capital One
Financial Corporation, included in the Annual Report, are
incorporated herein by reference in Item 8:
Report of Independent Auditors, Ernst & Young LLP
Consolidated Balance Sheets - As of December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data - As of and for the Years ended
December 31, 1997 and 1996
(2) All schedules are omitted since the required information is
either not applicable, not deemed material, or is shown in the
respective financial statements or in notes thereto.
(3) Exhibits:
The following exhibits are incorporated by reference or filed
herewith. References to (i) the "1994 Form 10-K" are to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994; (ii) the "1995 Form
10-K" are to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and (iii) the "1996 Form 10-K" are the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of Capital One Financial
Corporation (incorporated by reference to Exhibit 3.1 of the
1994 Form 10-K).
3.2 Restated Bylaws of Capital One Financial Corporation (as amended
January 24, 1995) (incorporated by reference to Exhibit 3.2 of
the 1994 Form 10-K).
4.1 Specimen certificate representing the Common Stock.
4.2 Rights Agreement dated as of November 16, 1995 between Capital
One Financial Corporation and Mellon Bank, N.A. (incorporated by
reference to Exhibit 4.1 of the Company's Report on Form 8-K,
filed November 16, 1995).
4.3 Amended and Restated Issuing and Paying Agency Agreement dated as
of April 30, 1996 between Capital One Bank and Chemical Bank
(including exhibits A-1, A-2, A-3 and A-4 thereto) (incorporated
by reference to Exhibit 4.1 of
19
the Company's quarterly report on
Form 10-Q for the period ending June 30, 1996).
4.4 Issuing and Paying Agency Agreement dated as of April 30, 1996
between Capital One Bank and Chemical Bank (including exhibits
A-1 and A-2 thereto) (incorporated by reference to Exhibit 4.2
of the Company's quarterly report on Form 10-Q for the period
ending June 30, 1996).
4.5.1 Senior Indenture and Form T-1 dated as of November 1, 1996
among the Company and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 4.1 of the Company's
Report on Form 8-K, filed November 13, 1996).
4.5.2 Copy of 7.25% Notes Due 2003 (incorporated by reference to
Exhibit 4.5.2 of the 1996 Form 10-K).
4.6.1 Declaration of Trust, dated as of January 28, 1997, between the
Bank and The First National Bank of Chicago, as trustee
(including the Certificate of Trust executed by First Chicago
Delaware Inc., as Delaware trustee) (incorporated by reference
to Exhibit 4.6.1 of the 1996 Form 10-K).
4.6.2 Copies of Certificates Evidencing Capital Securities
(incorporated by reference to Exhibit 4.6.2 of the 1996
Form 10-K).
4.6.3 Amended and Restated Declaration of Trust, dated as of January
31, 1997, by and among the Bank, The First National Bank of
Chicago and First Chicago Delaware Inc. (incorporated by
reference to Exhibit 4.6.3 of the 1996 Form 10-K).
4.7 Indenture, dated as of January 31, 1997, between the Bank and
The First National Bank of Chicago (incorporated by reference
to Exhibit 4.7 of the 1996 Form 10-K).
10.1 Amended and Restated Distribution Agreement dated April 30,
1996 among Capital One Bank and the agents named therein
(incorporated by reference to Exhibit 10.1 of the Company's
quarterly report on Form 10-Q for period ending June 30, 1996).
10.2 Distribution Agreement dated April 30, 1996, among Capital One
Bank and the agents named therein (incorporated by reference to
Exhibit 10.2 of the Company's quarterly report on Form 10-Q for
period ending June 30, 1996).
10.3.1 Change of Control Employment Agreement dated as of November 1,
1994 between Capital One Financial Corporation and Richard D.
Fairbank (incorporated by reference to Exhibit 10.12 of the
1994 Form 10-K).
10.3.2 Amendment to the Change of Control Agreement between Capital
One Financial Corporation and Richard D. Fairbank dated as of
September 15, 1995 (incorporated by reference to Exhibit
10.12.1 of the 1995 Form 10-K).
20
10.3.3 Amended and Restated Change of Control Employment Agreement
dated as of December 18, 1997 between Capital One Financial
Corporation and Richard D. Fairbank.
10.4.1 Change of Control Employment Agreement dated as of November
1, 1994 between Capital One Financial Corporation and Nigel
W. Morris (incorporated by reference to Exhibit 10.13 of the
1994 Form 10-K).
10.4.2 Amendment to the Change of Control Agreement between Capital
One Financial Corporation and Nigel W. Morris dated as of
September 15, 1995 (incorporated by reference to Exhibit
10.13.1 of the 1995 Form 10-K).
10.4.3 Amended and Restated Change of Control Employment Agreement
dated as of December 18, 1997 between Capital One Financial
Corporation and Nigel W. Morris.
10.5.1 Change of Control Employment Agreement dated as of November
1, 1994 between Capital One Financial Corporation and James
M. Zinn (incorporated by reference to Exhibit 10.14 of the
1994 Form 10-K).
10.5.2 Amendment to Change of Control Employment Agreement dated as
of December 18, 1997 between Capital One Financial
Corporation and James M. Zinn.
10.6.1 Change of Control Employment Agreement dated as of November
1, 1994, between Capital One Financial Corporation and John
G. Finneran, Jr. (incorporated by reference to Exhibit 10.15
of the 1994 Form 10-K).
10.6.2 Amendment to Change of Control Employment Agreement dated as
of December 18, 1997 between Capital One Financial
Corporation and John G. Finneran, Jr.
10.7 Capital One Financial Corporation 1994 Stock Incentive Plan,
as amended (incorporated by reference to Exhibit 10.9 of the
1996 Form 10-K).
10.8 Capital One Financial Corporation Senior Executive Short-Term
Cash Incentive Plan (terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.17 of the 1994 Form
10-K).
10.9 Capital One Financial Corporation Senior Executive Long-Term
Cash Incentive Plan (terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.18 of the 1994 Form
10-K).
10.10 Capital One Financial Corporation Executive Employee
Supplemental Retirement Plan (terminated effective November
16, 1995) (incorporated by reference to Exhibit 10.19 of the
1994 Form 10-K).
21
10.11 Capital One Financial Corporation Excess Savings Plan, as
amended (incorporated by reference to Exhibit 10.20 of the
1995 Form 10-K).
10.12 Capital One Financial Corporation Excess Benefit Cash Balance
Plan, as amended (incorporated by reference to Exhibit 10.21
of the 1995 Form 10-K).
10.13 Capital One Financial Corporation 1994 Deferred Compensation
Plan, as amended (incorporated by reference to Exhibit 10.22
of the 1995 Form 10-K).
10.14 1995 Non-Employee Directors Stock Incentive Plan,
(incorporated by reference to Registrant's Registration
Statement on Form S-8 Commission File No. 33-91790, filed May
1, 1995).
10.15 Capital One Financial Corporation Severance Pay Plan
(terminated effective October 23, 1997) (incorporated by
reference to Exhibit 10.26 of the 1994 Form 10-K).
10.16 Consulting Agreement dated as of April 5, 1995, by and
between Capital One Financial Corporation and American
Management Systems, Inc. (incorporated by reference to
Exhibit 10.33 of the 1995 Form 10-K).
10.17.1 Participation Agreement dated as of January 5, 1996, among
Capital One Bank, as construction agent and as lessee, First
Security Bank of Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, NationsBank of Texas, N.A., as
administrative agent and the holders and lenders named
therein (incorporated by reference to Exhibit 10.34.1 of the
1995 Form 10-K).
10.17.2 First Amendment to Operative Documents dated as of June 5,
1996, among Capital One Bank, as construction agent and as
lessee, First Security Bank of Utah, N.A., as owner/trustee
for the COB Real Estate Trust 1995-1, NationsBank of Texas,
N.A., as administrative agent, initial lender and initial
holder named therein (incorporated by reference to Exhibit
10.3 of the Company's quarterly report on Form 10-Q for
period ending June 30, 1996).
10.17.3 Second Amendment to Operative Agreements dated as of October
11, 1996, among Capital One Bank, as construction agent and
as lessee, First Security Bank of Utah, N.A., as
owner/trustee for the COB Real Estate Trust 1995-1,
NationsBank of Texas, N.A., as administrative agent, initial
lender and initial holder named therein (incorporated by
reference to Exhibit 10.20.3 of the 1996 Form 10-K).
10.17.4 Assignment, Consent and Third Amendment to Operative
Agreement dated November 8, 1996, by and among Capital One
Bank, Capital One Realty, Inc., First Security Bank of Utah,
N.A., as owner/trustee for the COB Real Estate Trust 1995-1,
and NationsBank of Texas, N.A., as administrative
22
agent (incorporated by reference to Exhibit 10.20.4 of the
1996 Form 10-K).
10.17.5 Lease Agreement dated as of January 5, 1996, between First
Security Bank of Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, as lessor and Capital One Bank, as
lessee (incorporated by reference to Exhibit 10.34.2 of the
1995 Form 10-K).
10.17.6 Credit Agreement dated as of January 5, 1996, among First
Security Bank of Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, as borrower, the lenders named
therein and NationsBank of Texas, N.A., as administrative
agent (incorporated by reference to Exhibit 10.34.3 of the
1995 Form 10-K).
10.17.7 Fourth Amendment to Operative Agreements dated as of April
10, 1997 by and among Capital One Bank, Capital One Realty,
Inc., First Security Bank of Utah, N.A., as owner/trustee for
the COB Real Estate Trust 1995-1, and NationsBank of Texas,
N.A., as administrative agent.
10.18 Amended and Restated Credit Agreement, dated as of November
25, 1996, among Capital One Financial Corporation, Capital
One Bank, Capital One, F.S.B. and The Chase Manhattan Bank,
as administrative agent (incorporated by reference to Exhibit
10.21 of the 1996 Form 10-K).
10.18.1 Change of Control Employment Agreement dated as of May 14,
1996 between Capital One Financial Corporation and James P.
Donehey.
10.18.2 Amendment to Change of Control Employment Agreement dated as
of December 18, 1997 between Capital One Financial
Corporation and James P. Donehey.
10.19 Revolving Credit Facility Agreement dated as of August 29,
1997 by and among Capital One Finance Company and Capital One
Inc., as original borrowers, Capital One Financial
Corporation, as original guarantor, and the agents and
lenders named therein.
13 The portions of the Company's 1997 Annual Report to
Stockholders which are incorporated by reference herein.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 22,
1997, Commission File No. 1-13300, announcing 1997 and 1998 Earnings
Expectations and a New Compensation Program.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL ONE FINANCIAL CORPORATION
Date: March 18, 1998 By /s/ James M. Zinn
---------------------------------
James M. Zinn
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 18th day of March, 1998.
SIGNATURES TITLE
---------- -----
/s/ Richard D. Fairbank Director, Chairman and Chief Executive
- ----------------------------- Officer
Richard D. Fairbank (Principal Executive Officer)
/s/ Nigel W. Morris Director, President and Chief Operating
- ----------------------------- Officer
Nigel W. Morris
/s/ James M. Zinn Senior Vice President and
- ----------------------------- Chief Financial Officer
James M. Zinn (Principal Accounting and Financial
Officer)
/s/ W. Ronald Dietz Director
- -----------------------------
W. Ronald Dietz
/s/ James A. Flick, Jr. Director
- -----------------------------
James A. Flick, Jr.
/s/ Patrick W. Gross Director
- -----------------------------
Patrick W. Gross
24
/s/ James V. Kimsey Director
- -----------------------------
James V. Kimsey
/s/ Stanley I. Westreich Director
- -----------------------------
Stanley I. Westreich
25
EXHIBITS TO CAPITAL ONE FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
DATED DECEMBER 31, 1997
COMMISSION FILE NO. 1-13300
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of Capital
One Financial Corporation (incorporated by
reference to Exhibit 3.1 of the 1994
Form 10-K).
3.2 Restated Bylaws of Capital One Financial
Corporation (as amended January 24, 1995)
(incorporated by reference to Exhibit 3.2 of
the 1994 Form 10-K).
4.1 Specimen certificate representing the
Common Stock.
4.2 Rights Agreement dated as of November 16, 1995
between Capital One Financial Corporation and
Mellon Bank, N.A. (incorporated by reference
to Exhibit 4.1 of the Company's Report on
Form 8-K, filed November 16, 1995).
4.3 Amended and Restated Issuing and Paying Agency
Agreement dated as of April 30, 1996 between
Capital One Bank and Chemical Bank (including
exhibits A-1, A-2, A-3 and A-4 thereto)
(incorporated by reference to Exhibit 4.1 of
the Company's quarterly report on Form 10-Q
for the period ending June 30, 1996).
4.4 Issuing and Paying Agency Agreement dated as of
April 30, 1996 between Capital One Bank and
Chemical Bank (including exhibits A-1 and A-2
thereto) (incorporated by reference to
Exhibit 4.2 of the Company's quarterly report
on Form 10-Q for the period ending June 30, 1996).
4.5.1 Senior Indenture and Form T-1 dated as of
November 1, 1996 among the Company and Harris
Trust and Savings Bank (incorporated by
reference to Exhibit 4.1 of the Company's Report
on Form 8-K, filed November 13, 1996).
4.5.2 Copy of 7.25% Notes Due 2003 (incorporated by
reference to Exhibit 4.5.2 of the 1996 Form 10-K).
4.6.1 Declaration of Trust, dated as of January 28,
1997, between the Bank and The First National Bank
of Chicago, as trustee (including the Certificate
of Trust executed by First Chicago Delaware Inc.,
as Delaware trustee) (incorporated by reference
to Exhibit 4.6.1 of the 1996 Form 10-K).
4.6.2 Copies of Certificates Evidencing Capital
Securities (incorporated by reference to
Exhibit 4.6.2 of the 1996 Form 10-K).
4.6.3 Amended and Restated Declaration of Trust,
dated as of January 31, 1997, by and among
the Bank, The First National
Exhibit
Number Description
------ -----------
Bank of Chicago and First Chicago Delaware Inc.
(incorporated by reference to Exhibit 4.6.3 of
the 1996 Form 10-K).
4.7 Indenture, dated as of January 31, 1997, between
the Bank and The First National Bank of Chicago
(incorporated by reference to Exhibit 4.7 of the
1996 Form 10-K).
10.1 Amended and Restated Distribution Agreement dated
April 30, 1996 among Capital One Bank and the
agents named therein (incorporated by reference
to Exhibit 10.1 of the Company's quarterly report
on Form 10-Q for period ending June 30, 1996).
10.2 Distribution Agreement dated April 30, 1996,
among Capital One Bank and the agents named
therein (incorporated by reference to
Exhibit 10.2 of the Company's quarterly report
on Form 10-Q for period ending June 30, 1996).
10.3.1 Change of Control Employment Agreement dated
as of November 1, 1994 between Capital One
Financial Corporation and Richard D. Fairbank
(incorporated by reference to Exhibit 10.12
of the 1994 Form 10-K).
10.3.2 Amendment to the Change of Control Agreement
between Capital One Financial Corporation and
Richard D. Fairbank dated as of September 15,
1995 (incorporated by reference to
Exhibit 10.12.1 of the 1995 Form 10-K).
10.3.3 Amended and Restated Change of Control
Employment Agreement dated as of December 18,
1997 between Capital One Financial Corporation
and Richard D. Fairbank.
10.4.1 Change of Control Employment Agreement dated
as of November 1, 1994 between Capital One
Financial Corporation and Nigel W. Morris
(incorporated by reference to Exhibit 10.13
of the 1994 Form 10-K).
10.4.2 Amendment to the Change of Control Agreement
between Capital One Financial Corporation and
Nigel W. Morris dated as of September 15, 1995
(incorporated by reference to Exhibit 10.13.1
of the 1995 Form 10-K).
10.4.3 Amended and Restated Change of Control
Employment Agreement dated as of December 18,
1997 between Capital One Financial Corporation
and Nigel W. Morris.
10.5.1 Change of Control Employment Agreement dated
as of November 1, 1994 between Capital One
Financial Corporation and James M. Zinn
(incorporated by reference to Exhibit 10.14
of the 1994 Form 10-K).
10.5.2 Amendment to Change of Control Employment
Agreement dated as of December 18, 1997
between Capital One Financial Corporation
and James M. Zinn.
- 2 -
Exhibit
Number Description
------ -----------
10.6.1 Change of Control Employment Agreement dated
as of November 1, 1994, between Capital One
Financial Corporation and John G. Finneran, Jr.
(incorporated by reference to Exhibit 10.15
of the 1994 Form 10-K).
10.6.2 Amendment to Change of Control Employment
Agreement dated as of December 18, 1997
between Capital One Financial Corporation
and John G. Finneran, Jr.
10.7 Capital One Financial Corporation 1994 Stock
Incentive Plan, as amended (incorporated by
reference to Exhibit 10.9 of the 1996 Form 10-K).
10.8 Capital One Financial Corporation Senior
Executive Short-Term Cash Incentive Plan
(terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.17
of the 1994 Form 10-K).
10.9 Capital One Financial Corporation Senior
Executive Long-Term Cash Incentive Plan
(terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.18
of the 1994 Form 10-K).
10.10 Capital One Financial Corporation Executive
Employee Supplemental Retirement Plan
(terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.19
of the 1994 Form 10-K).
10.11 Capital One Financial Corporation Excess
Savings Plan, as amended (incorporated by
reference to Exhibit 10.20 of the 1995
Form 10-K).
10.12 Capital One Financial Corporation Excess
Benefit Cash Balance Plan, as amended
(incorporated by reference to Exhibit 10.21
of the 1995 Form 10-K).
10.13 Capital One Financial Corporation 1994
Deferred Compensation Plan, as amended
(incorporated by reference to Exhibit 10.22
of the 1995 Form 10-K).
10.14 1995 Non-Employee Directors Stock Incentive
Plan, (incorporated by reference to Registrant's
Registration Statement on Form S-8 Commission
File No. 33-91790, filed May 1, 1995).
10.15 Capital One Financial Corporation Severance
Pay Plan (terminated effective October 23, 1997)
(incorporated by reference to Exhibit 10.26
of the 1994 Form 10-K).
10.16 Consulting Agreement dated as of April 5, 1995,
by and between Capital One Financial Corporation
and American Management Systems, Inc.
(incorporated by reference to Exhibit 10.33
of the 1995 Form 10-K).
-3-
Exhibit
Number Description
------ -----------
10.17.1 Participation Agreement dated as of January 5,
1996, among Capital One Bank, as construction
agent and as lessee, First Security Bank of
Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, NationsBank of
Texas, N.A., as administrative agent and
the holders and lenders named therein
(incorporated by reference to Exhibit 10.34.1
of the 1995 Form 10-K).
10.17.2 First Amendment to Operative Documents dated
as of June 5, 1996, among One Bank, as
construction agent and as lessee, First
Security Bank of Utah, N.A., as owner/trustee
for the COB Real Estate Trust 1995-1,
NationsBank of Texas, N.A., as administrative
agent, initial lender and initial holder named
therein (incorporated by reference to
Exhibit 10.3 of the Company's quarterly report
on Form 10-Q for period ending June 30, 1996).
10.17.3 Second Amendment to Operative Agreements dated
as of October 11, 1996, among Capital One Bank,
as construction agent and as lessee, First
Security Bank of Utah, N.A., as owner/trustee
for the COB Real Estate Trust 1995-1,
NationsBank of Texas, N.A., as administrative
agent, initial lender and initial holder
named therein (incorporated by reference to
Exhibit 10.20.3 of the 1996 Form 10-K).
10.17.4 Assignment, Consent and Third Amendment to
Operative Agreement dated November 8, 1996,
by and among Capital One Bank, Capital One
Realty, Inc., First Security Bank of Utah,
N.A., as owner/trustee for the COB Real
Estate Trust 1995-1, and NationsBank of
Texas, N.A., as administrative agent
(incorporated by reference to Exhibit 10.20.4
of the 1996 Form 10-K).
10.17.5 Lease Agreement dated as of January 5, 1996,
between First Security Bank of Utah, N.A.,
as owner/trustee for the COB Real Estate
Trust 1995-1, as lessor and Capital One Bank,
as lessee (incorporated by reference to
Exhibit 10.34.2 of the 1995 Form 10-K).
10.17.6 Credit Agreement dated as of January 5, 1996,
among First Security Bank of Utah, N.A.,
as owner/trustee for the COB Real Estate
Trust 1995-1, as borrower, the lenders named
therein and NationsBank of Texas, N.A.,
as administrative agent (incorporated by
reference to Exhibit 10.34.3 of the 1995
Form 10-K).
10.17.7 Fourth Amendment to Operative Agreements
dated as of April 10, 1997 by and among
Capital One Bank, Capital One Realty, Inc.,
First Security Bank of Utah, N.A., as
owner/trustee for the COB Real Estate Trust
1995-1, and NationsBank of Texas, N.A., as
administrative agent.
10.18 Amended and Restated Credit Agreement,
dated as of November 25, 1996, among
Capital One Financial Corporation, Capital
One Bank, Capital One, F.S.B. and The
-4-
Exhibit
Number Description
------ -----------
Chase Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.21
of the 1996 Form 10-K).
10.18.1 Change of Control Employment Agreement dated
as of May 14, 1996 between Capital One
Financial Corporation and James P. Donehey.
10.18.2 Amendment to Change of Control Employment
Agreement dated as of December 18, 1997
between Capital One Financial Corporation
and James P. Donehey.
10.19 Revolving Credit Facility Agreement dated
as of August 29, 1997 by and among Capital
One Finance Company and Capital One Inc.,
as original borrowers, Capital One Financial
Corporation, as original guarantor, and the
agents and lenders named therein.
13 The portions of the Company's 1997 Annual
Report to Stockholders which are incorporated
by reference herein.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
-5-
Exhibit 4.1
- --------------------------------------------------------------------------------
---NUMBER--- [PICTURE APPEARS HERE] ---SHARES---
CO
------------ ------------
COMMON STOCK COMMON STOCK
THIS CERTIFICATE
IS TRANSFERABLE IN
NEW YORK, N.Y. AND
SEE REVERSE INCORPORATED UNDER THE LAWS RIDGEFIELD PARK,
FOR CERTAIN OF THE STATE OF DELAWARE N.J.
DEFINITIONS
[LOGO OF CAPITAL ONE APPEARS HERE] CUSIP 14040H 10 5
CAPITAL ONE FINANCIAL CORPORATION
----------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
----------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Capital One Financial Corporation transferable on the books of the Corpor-
ation in person or by duly authorized Attorney upon surrender of this
Certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated
CERTIFICATE OF STOCK
/s/ John G. Finneran, Jr. [SEAL OF CAPITAL /s/ Richard D. Fairbank
ONE APPEARS HERE]
CORPORATE SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
FIRST CHICAGO TRUST COMPANY
OF NEW YORK
TRANSFER AGENT AND REGISTRAR,
BY
AUTHORIZED SIGNATURE
(C)UNITED STATES BANKNOTE CORPORATION AMERICAN BANK NOTE COMPANY
- --------------------------------------------------------------------------------
CAPITAL ONE FINANCIAL CORPORATION
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Any such request should be addressed to the
Corporate Secretary of the Corporation or to the Transfer Agent named on the
face of this certificate.
----------
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION
TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
----------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
TEN ENT -- as tenants by the entireties ------------- -----------------
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
--------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
____________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING
ZIP CODE, OF ASSIGNEE)
____________________________________________________________
____________________________________________________________
____________________________________________________ shares
of the capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
_____________________________________________________ Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated
--------------------------------
- ----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURES(S) GUARANTEED
By
--------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION,
(Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM PURSUANT
TO S.E.C. RULE 17Ad-15.
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Rights Agreement between Capital One Financial Corporation and
First Chicago Trust Company of New York, dated as of November 16, 1995, as it
may from time to time be supplemented or amended pursuant to its terms (the
"Rights Agreement"), the terms of which are hereby incorporated by reference and
a copy of which is on file at the principal executive offices of Capital One
Financial Corporation. Under certain circumstances as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. Capital One Financial Corporation will
mail to the registered holder of this certificate a copy of the Rights Agreement
without charge promptly after receipt of a written request therefor. Under
certain circumstances provided for in the Rights Agreement, Rights issued to, or
beneficially owned by any Person who is an Acquiring Person or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement) or any
subsequent holder of such Rights shall become null and void.
Exhibit 10.3.3
Change of Control
CAPITAL ONE FINANCIAL CORPORATION
---------------------------------
RICHARD D. FAIRBANK
-------------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
AGREEMENT by and between CAPITAL ONE FINANCIAL CORPORATION, a Delaware
corporation (the "Company") and Richard D. Fairbank (the "Executive"), dated as
of the 18/th/ day of December 1997.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
-------------------
(a) The "Effective Date" shall be the first date during the "Change of
Control Period" (as defined in Section 1(b)) on which a Change of Control
occurs. Anything in this Agreement to the contrary notwithstanding, if the
Executive's employment with the Company is terminated or the Executive ceases to
be an officer of the Company prior to the date on which a Change of Control
occurs, and it is reasonably demonstrated that such termination of employment
(i) was at the request of a third party who has taken steps reasonably
calculated to effect the Change of Control or (ii) otherwise arose in connection
with or anticipation of the Change of Control, then for all purposes of this
Agreement the "Effective Date" shall mean the date immediately prior to the date
of such termination of employment.
(b) The "Change of Control Period" is the period commencing on the
date hereof and ending on the third anniversary of such date; provided, however,
that commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof is
hereinafter referred to as the "Renewal Date"), the Change of Control Period
shall be automatically extended so as to terminate three years from such Renewal
Date, unless at least 60 days prior to the Renewal Date the Company shall give
notice to the Executive that the Change of Control Period shall not be so
extended.
2. Change of Control. For the purpose of this Agreement, and except as
-----------------
hereinafter provided in (e) and (f), a "Change of Control" shall mean:
(a) The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act
-2-
of 1934, as amended (the "Exchange Act")) of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Company
Voting Securities"), provided, however, that any acquisition by (x) the
-------- -------
Company or any of its subsidiaries, or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its
subsidiaries or (y) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Company Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Company Common
Stock and Company Voting Securities, as the case may be, shall not
constitute a Change of Control; or
(b) Individuals who constitute the Board prior to, or at the time of
consummation of, the distribution of the Company's common stock to
shareholders of the Company's parent corporation (the "Distribution") (the
"Incumbent Board") cease for any
-3-
reason to constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the date of Distribution whose
election or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act); or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all of the individuals and entities
who were the respective beneficial owners of the Outstanding Company Common
Stock and Company Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially own,
directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination in substantially the same proportion as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and Company Voting Securities, as the case
may be; or
-4-
(d) (i) a complete liquidation or dissolution of the Company or (ii)
sale or other disposition of all or substantially all of the assets of the
Company other than to a corporation with respect to which, following such
sale or disposition, more than 60% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Company
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Company Common Stock and Company Voting Securities, as the case may be,
immediately prior to such sale or disposition.
(e) Neither the sale of Company common stock in an initial public
offering, nor the distribution of Company common stock by the Company's
parent corporation to its shareholders in a transaction to which Section
355 of the Internal Revenue Code applies, nor any restructuring of the
Company or its Board of Directors in contemplation of or as the result of
either of such events, shall constitute a Change of Control.
(f) Notwithstanding the foregoing, a Change of Control shall not
occur with respect to the Executive by reason of any event which would
otherwise constitute a Change of Control if, immediately after the
occurrence of such event, individuals including such Executive who were
executive officers of the Company immediately prior to the occurrence of
such event, own, directly or indirectly, on a fully diluted basis,
-5-
(i) 15% or more of the then outstanding shares of common stock of the
Company or any acquiror or successor to substantially all of the business
of the Company or (ii) 15% or more of the combined voting power of the then
outstanding voting securities of the Company or any acquiror or successor
to substantially all of the business of the Company entitled to vote
generally in the election of directors.
3. Employment Period. The Company hereby agrees to continue the Executive
-----------------
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, for the period commencing on the Effective Date and ending on the third
anniversary of such date (the "Employment Period").
4. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate
in all material respects with the most significant of those held,
exercised and assigned at any time during the 90-day period
immediately preceding the Effective Date and (B) the Executive's
services shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or any office or
location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote
-6-
reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to
use the Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it
shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees, (B)
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be
deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
------------
(i) Base Salary. No annual base salary shall be payable to the
-----------
Executive with respect to any portion of the Employment Period
occurring before January 1, 2001. During any portion of the
Employment Period occurring on or after January 1, 2001, the Executive
shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times
-7-
the highest monthly base salary paid or payable to the Executive by
the Company and its affiliated companies in respect of the twelve-
month period immediately preceding the month in which the Effective
Date occurs; provided that, if the Effective Date occurs before
January 1, 2001, such monthly base salary shall be deemed to equal the
amount most recently established by the Board for this purpose before
the Effective Date. During any portion of the Employment Period
occurring on or after January 1, 2001, the Annual Base Salary shall be
reviewed at least annually and shall be increased at any time and from
time to time as shall be substantially consistent with increases in
base salary awarded in the ordinary course of business to other peer
executives of the Company and its affiliated companies. Any increase
in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary
shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary
as so increased. As used in this Agreement, the term "affiliated
companies" includes any company controlled by, controlling or under
common control with the Company.
(ii) Annual Bonus. In addition to any Annual Base Salary payable as
------------
hereinabove provided, the Executive shall be awarded, for each fiscal
year that both (A) begins after December 31, 1999, and (B) begins or
ends during the Employment Period, an annual bonus (the "Annual
Bonus") in cash at least equal to the sum of the target award under
the Company's Executive Annual Cash Incentive Plan and
-8-
any other target awards under any other similar annual incentive plans
(or if no such target award is designated under the Company's
Executive Annual Cash Incentive Plan or any similar plan, the midpoint
between the high and low bonus payable to the Executive under such
plan); provided, however, that such target or midpoint, as the case
-------- -------
may be, shall not be less than such target or midpoint under such
plans in the year immediately preceding the Change of Control (the
"Recent Annual Bonus"). Each such Annual Bonus shall be paid no later
than the end of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. In addition to any
---------------------------------------
Annual Base Salary and Annual Bonus payable as hereinabove provided,
the Executive shall be entitled to participate during the Employment
Period in all incentive, profit-sharing, savings and retirement plans,
practices, policies and programs applicable generally to other peer
executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the
Executive with incentive, savings and retirement benefit
opportunities, in each case, less favorable, in the aggregate, except
as required to comply with statutory requirements of general
application which limit the level of benefit opportunity, than (A) the
most favorable of those provided by the Company and its affiliated
companies for the Executive under such plans, practices, policies and
programs as in effect at any time
-9-
during the 90-day period immediately preceding the Effective Date or
(B) if more favorable to the Executive, those provided at any time
after the Effective Date to other peer executives of the Company and
its affiliated companies; provided that no award shall be granted with
respect to any fiscal year beginning before January 1, 2000 under any
incentive or bonus plan of the Company; and provided further that any
effect on the Executive's participation or benefit level resulting
from the Executive's not receiving an Annual Base Salary prior to
January 1, 2001, shall be governed by the terms of those plans,
practices, policies and programs of general applicability.
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by
the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life, split-dollar life insurance,
accidental death and travel accident insurance plans and programs) to
the extent generally applicable to other peer executives of the
Company and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the Executive with
benefits which are less favorable, in the aggregate, than (x) the most
favorable of such plans, practices, policies and programs in effect
for the Executive at any time during the 90-day period immediately
preceding the
-10-
Effective Date or (y) if more favorable to the Executive, those
provided at any time after the Effective Date generally to other peer
executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
--------
be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most
favorable policies, practices and procedures of the Company and its
affiliated companies in effect for the Executive at any time during
the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to fringe benefits in accordance with the most
favorable plans, practices, programs and policies of the Company and
its affiliated companies in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
------------------------
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal
secretarial and other assistance, at least equal to the most favorable
of the foregoing provided to the Executive by the
-11-
Company and its affiliated companies at any time during the 90-day
period immediately preceding the Effective Date or, if more favorable
to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated
companies.
(viii) Vacation. During the Employment Period, the Executive shall
--------
be entitled to vacation (paid vacation on and after January 1, 2001)
in accordance with the most favorable plans, policies, programs and
practices of the Company and its affiliated companies as in effect at
any time during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 13(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For
-12-
purposes of this Agreement, "Disability" means the absence of the Executive from
the Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) Cause. The Company may terminate the Executive's employment
-----
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
means (i) an action taken by the Executive involving willful and wanton
malfeasance involving specifically a wholly wrongful and unlawful act, or (ii)
the Executive being convicted of a felony.
(c) Good Reason. The Executive's employment may be terminated during
-----------
the Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" means
(i) The assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
-13-
(ii) Any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) The Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B)
hereof;
(iv) Any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) Any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Agreement, any good faith determination of Good
Reason made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 13(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the
-14-
Executive's employment under the provision so indicated and (iii) if the Date of
Termination (as defined below) is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than fifteen days
after the giving of such notice). In the case of a termination of the
Executive's employment for Cause, a Notice of Termination shall include a copy
of a resolution duly adopted by the affirmative vote of not less than two-thirds
of the entire membership of the Board at a meeting of the Board called and held
for the purpose (after reasonable notice to the Executive and reasonable
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board prior to such vote), finding that in the good faith
opinion of the Board the Executive was guilty of conduct constituting Cause. No
purported termination of the Executive's employment for Cause shall be effective
without a Notice of Termination. The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason shall not waive any right of the Executive hereunder or
preclude the Executive from asserting such fact or circumstance in enforcing the
Executive's rights hereunder.
(e) Date of Termination. "Date of Termination" means the date of
-------------------
receipt of the Notice of Termination or any later date specified therein, as the
case may be; provided, however, that (i) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (ii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
-15-
6. Obligations of the Company upon Termination.
-------------------------------------------
(a) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than the following obligations: (i) solely with
respect to any portion of the Employment Period occurring on or after January 1,
2001, payment of the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid, (ii) solely with respect to
fiscal years beginning after December 31, 1999, payment of the product of (x)
the greater of (A) the Annual Bonus paid or payable, including by reason of
deferral, (and annualized for any fiscal year consisting of less than twelve
full months or for which the Executive has been employed for less than twelve
full months) for the most recently completed fiscal year during the Employment
Period, if any, and (B) the Recent Annual Bonus (such greater amount hereafter
referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of
which is the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and (iii) payment of any
compensation previously deferred by the Executive (together with any accrued
interest thereon) and not yet paid by the Company and any accrued vacation pay
not yet paid by the Company (the amounts described in paragraphs (i), (ii) and
(iii) are hereafter referred to as "Accrued Obligations"). All Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination. In
addition, the Executive's estate or designated beneficiaries shall be entitled
to receive the
-16-
Executive's Annual Base Salary for the balance of any portion of the Employment
Period that occurs on or after January 1, 2001; provided that such payments of
Annual Base Salary shall be reduced by any survivor benefits paid to the
Executive's estate or designated beneficiary under the Company's Cash Balance
Pension Plan (the "Pension Plan"). Anything in this Agreement to the contrary
notwithstanding, the Executive's estate and family shall be entitled to receive
benefits at least equal to the most favorable benefits provided generally by the
Company and any of its affiliated companies to the estates and surviving
families of peer executives of the Company and such affiliated companies under
such plans, programs, practices and policies relating to death benefits, if any,
as in effect generally with respect to other peer executives and their estates
and families at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect on the date of the Executive's death generally with respect
to other peer executives of the Company and its affiliated companies and their
families; provided that this sentence shall not apply to benefits under any
incentive or bonus plan with respect to fiscal years beginning before January 1,
2000.
(b) Disability. If the Executive's employment is terminated by
----------
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for Accrued Obligations. All Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination. In
addition, the Executive shall be entitled to receive the Executive's Annual Base
Salary for the balance of any portion of the Employment Period occurring on or
after January 1, 2001; provided that such payments of Annual Base Salary shall
be reduced by any benefits paid to
-17-
the Executive under the Company's disability plans. Anything in this Agreement
to the contrary notwithstanding, the Executive shall be entitled after the
Disability Effective Date to receive disability and other benefits at least
equal to the most favorable of those generally provided by the Company and its
affiliated companies to disabled executives and/or their families in accordance
with such plans, programs, practices and policies relating to disability, if
any, as in effect generally with respect to other peer executives and their
families at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect at any time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and their families;
provided that this sentence shall not apply to benefits under any incentive or
bonus plan with respect to fiscal years beginning before January 1, 2000.
(c) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (i) with respect to any portion of the Employment Period
that occurs on or after January 1, 2001, Annual Base Salary through the Date of
Termination, plus (ii) the amount of any compensation previously deferred by the
Executive, in each case to the extent theretofore unpaid. If the Executive
terminates employment during the Employment Period other than for Good Reason,
this Agreement shall terminate without further obligations to the Executive,
other than for Accrued Obligations. In such case, all Accrued Obligations shall
be paid to the Executive in a lump sum in cash within 30 days of the Date of
Termination.
-18-
(d) Good Reason; Other Than for Cause or Disability. If, during the
-----------------------------------------------
Employment Period, the Company shall terminate the Executive's employment other
than for Cause or Disability, or if the Executive shall terminate employment
under this Agreement for Good Reason:
(i) The Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the
following amounts:
(A) All Accrued Obligations; and
(B) The product of (x) three and (y) the sum of (i) Annual
Base Salary and (ii) the Highest Annual Bonus; provided that if
Annual Base Salary described in clause (i), above, equals $0
because of the restrictions set forth in Section 4(b)(i) on
Annual Base Salary for periods occurring before January 1, 2001,
for purposes of this Section 6(d)(i)(B), Annual Base Salary shall
equal the amount most recently established by the Board for this
purpose before the Effective Date; and provided further that if
the Highest Annual Bonus described in clause (ii), above, equals
$0 because of the restrictions set forth in Section 4(b)(ii) on
bonuses for fiscal years beginning before January 1, 2000, for
purposes of this Section 6(d)(i)(B), the Highest Annual Bonus
shall equal 75% of the Executive's Annual Base Salary (determined
after taking into account the preceding proviso); and provided
further that the amount taken into account under clauses (i) and
(ii), above,
-19-
shall be multiplied by a fraction, not exceeding 1, the numerator
of which is the number of full calendar months that both (1) fall
in the 36-month period immediately following the Date of
Termination and (2) (a) with respect to clause (i), begin on or
after January 1, 2001, and (b) with respect to clause (ii), begin
on or after January 1, 2000, and the denominator of which is 36;
and
(C) A lump sum retirement benefit equal to the difference
between (1) the actuarial equivalent of the benefit under the
Pension Plan and any supplemental and/or excess retirement plan
providing benefits for the Executive which the Executive would
receive if the Executive's employment continued at the
compensation levels provided for in this Agreement for the
remainder of the Employment Period, assuming for this purpose
that all accrued benefits are fully vested, and (2) the actuarial
equivalent of the Executive's actual benefit (paid or payable),
if any, under the Pension Plan; for purposes of determining the
amount payable pursuant to this Section 6(d)(i)(C) the accrual
formulas and actuarial assumptions utilized shall be no less
favorable than those in effect with respect to the Pension Plan
and the SERP during the 90-day period immediately prior to the
Effective Date; and
(ii) For the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the
Company shall continue
-20-
benefits to the Executive and/or the Executive's family at least equal
to those which would have been provided to them in accordance with the
plans, programs, practices and policies described in Section 4(b)(iv)
of this Agreement if the Executive's employment had not been
terminated in accordance with the most favorable plans, practices,
programs or policies of the Company and its affiliated companies
applicable generally to other peer executives and their families
during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies and their families. For purposes of
determining eligibility of the Executive for retiree benefits pursuant
to such plans, practices, programs and policies, the Executive shall
be considered to have remained employed until the end of the
Employment Period and to have retired on the last day of such period.
In lieu of the benefits provided for in this Section 6(d)(ii), the
Executive may elect within 60 days of the Date of Termination to be
paid an amount in cash equal to the present value of such benefits on
an after-tax basis. In determining present value, a discount rate
equal to the federal mid-term rate under Section 1274(d) of the
Internal Revenue Code of 1986, as amended (the "Code") shall be
utilized. The right to continued benefits granted to the Executive
and/or his family pursuant to this Section 6(d)(ii) shall be in
addition to any right of continued coverage under any of the plans,
programs, practices and policies described in Section 4(b)(iv) of the
-21-
Agreement which the Executive and/or his family may be entitled to
under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") upon any loss of coverage under such plans, programs,
practices and policies.
7. Non-exclusivity of Rights. Except as otherwise specifically provided
-------------------------
in this Agreement, nothing in this Agreement shall prevent or limit the
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans, programs, policies or practices, provided by the Company or any
of its affiliated companies and for which the Executive may qualify, nor shall
anything herein limit or otherwise affect such rights as the Executive may have
under any other agreements with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program except as
explicitly modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement. The Company
agrees to pay, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or
-22-
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to
Section 9 of this Agreement), plus in each case interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code.
9. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
used in arriving at such determinations, shall be made by the Company's
certified public accounting firm immediately prior to the Effective
-23-
Date (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within fifteen business days
of the Date of Termination, if applicable, or such earlier time as is requested
by the Company. All fees and expenses of the Accounting Firm shall be borne
solely by the Company. The initial Gross-Up Payment, if any, as determined
pursuant to this Section 9(b), shall be paid by the Company to the Executive
within five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts its
remedies pursuant to Section 9(c) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten
-24-
business days after the Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such notice
to the Company (or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the Company notifies the Executive
in writing prior to the expiration of such period that it desires to contest
such claim, the Executive shall:
(i) Give the Company any information reasonably requested by the
Company relating to such claim,
(ii) Take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) Cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) Permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such
-25-
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto,
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with
-26-
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 9(c)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
------------------------
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 10 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.
-27-
11. Successors.
----------
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
12. Effectiveness of Amended and Restated Agreement. This Amended and
------------------------------------------------
Restated Agreement is subject to Shareholder Approval as defined in the Non-
Statutory Stock Option Agreement by and between the Company and the Executive
dated as of December 18, 1997. If Shareholder Approval is not obtained, (i)
this Amended and Restated Agreement and the amendments set forth in this
Agreement shall be null and void; (ii) the Company and the Executive shall be
bound by the terms of the Agreement by and between the Company and the Executive
dated as of November 1, 1994 and the Amendment to Agreement by and between the
-28-
Company and the Executive dated as of September 15, 1995 (together the "Existing
Agreement") as in effective immediately before the execution of this Amended and
Restated Agreement; and (iii) the Company shall pay to the Executive the amount
of any compensation that, but for the execution of this Amended and Restated
Agreement, would have been paid to the Executive under the terms of the Existing
Agreement as in effect immediately before the execution of this Amended and
Restated Agreement, with interest accruing from the date the compensation
otherwise would have been paid to the Executive until the actual date of
payment, at an annual interest rate of 5.68%.
13. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
--------------------
To the address shown on the Company's records for tax reporting
purposes.
-29-
If to the Company:
-----------------
Capital One Financial Corporation
2980 Fairview Park Drive
Falls Church, Virginia 22042
Attention: Officer-in-Charge,
Human Resources Division
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any
provision hereof or the failure to assert any right the Executive may have
hereunder, including, without limitation, the right to terminate employment for
Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed to be a waiver
of such provision or right or any other provision or right thereof.
-30-
(f) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof and supercedes in
its entirety the Existing Agreement. Until the Effective Date, subject to the
terms of any other employment agreement between the Executive and the Company,
the Executive shall continue to be an "employee at will".
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
------------------------------
Richard D. Fairbank
CAPITAL ONE FINANCIAL CORPORATION
By
----------------------------
Stanley I. Westreich
Chairman, Compensation Committee
-31-
Exhibit 10.4.3
Change of Control
CAPITAL ONE FINANCIAL CORPORATION
---------------------------------
NIGEL W. MORRIS
---------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
AGREEMENT by and between CAPITAL ONE FINANCIAL CORPORATION, a Delaware
corporation (the "Company") and Nigel W. Morris (the "Executive"), dated as of
the 18th day of December 1997.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
-------------------
(a) The "Effective Date" shall be the first date during the "Change of
Control Period" (as defined in Section 1(b)) on which a Change of Control
occurs. Anything in this Agreement to the contrary notwithstanding, if the
Executive's employment with the Company is terminated or the Executive ceases to
be an officer of the Company prior to the date on which a Change of Control
occurs, and it is reasonably demonstrated that such termination of employment
(i) was at the request of a third party who has taken steps reasonably
calculated to effect the Change of Control or (ii) otherwise arose in connection
with or anticipation of the Change of Control, then for all purposes of this
Agreement the "Effective Date" shall mean the date immediately prior to the date
of such termination of employment.
(b) The "Change of Control Period" is the period commencing on the
date hereof and ending on the third anniversary of such date; provided, however,
that commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof is
hereinafter referred to as the "Renewal Date"), the Change of Control Period
shall be automatically extended so as to terminate three years from such Renewal
Date, unless at least 60 days prior to the Renewal Date the Company shall give
notice to the Executive that the Change of Control Period shall not be so
extended.
2. Change of Control. For the purpose of this Agreement, and except as
-----------------
hereinafter provided in (e) and (f), a "Change of Control" shall mean:
(a) The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act
-2-
of 1934, as amended (the "Exchange Act")) of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Company
Voting Securities"), provided, however, that any acquisition by (x) the
-------- -------
Company or any of its subsidiaries, or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its
subsidiaries or (y) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Company Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Company Common
Stock and Company Voting Securities, as the case may be, shall not
constitute a Change of Control; or
(b) Individuals who constitute the Board prior to, or at the time of
consummation of, the distribution of the Company's common stock to
shareholders of the Company's parent corporation (the "Distribution") (the
"Incumbent Board") cease for any
-3-
reason to constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the date of Distribution whose
election or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act); or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all of the individuals and entities
who were the respective beneficial owners of the Outstanding Company Common
Stock and Company Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially own,
directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination in substantially the same proportion as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and Company Voting Securities, as the case
may be; or
-4-
(d) (i) a complete liquidation or dissolution of the Company or (ii)
sale or other disposition of all or substantially all of the assets of the
Company other than to a corporation with respect to which, following such
sale or disposition, more than 60% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Company
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Company Common Stock and Company Voting Securities, as the case may be,
immediately prior to such sale or disposition.
(e) Neither the sale of Company common stock in an initial public
offering, nor the distribution of Company common stock by the Company's
parent corporation to its shareholders in a transaction to which Section
355 of the Internal Revenue Code applies, nor any restructuring of the
Company or its Board of Directors in contemplation of or as the result of
either of such events, shall constitute a Change of Control.
(f) Notwithstanding the foregoing, a Change of Control shall not
occur with respect to the Executive by reason of any event which would
otherwise constitute a Change of Control if, immediately after the
occurrence of such event, individuals including such Executive who were
executive officers of the Company immediately prior to the occurrence of
such event, own, directly or indirectly, on a fully diluted basis,
-5-
(i) 15% or more of the then outstanding shares of common stock of the
Company or any acquiror or successor to substantially all of the business
of the Company or (ii) 15% or more of the combined voting power of the then
outstanding voting securities of the Company or any acquiror or successor
to substantially all of the business of the Company entitled to vote
generally in the election of directors.
3. Employment Period. The Company hereby agrees to continue the Executive
-----------------
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, for the period commencing on the Effective Date and ending on the third
anniversary of such date (the "Employment Period").
4. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate
in all material respects with the most significant of those held,
exercised and assigned at any time during the 90-day period
immediately preceding the Effective Date and (B) the Executive's
services shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or any office or
location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote
-6-
reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to
use the Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it
shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees, (B)
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be
deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
------------
(i) Base Salary. No annual base salary shall be payable to the
-----------
Executive with respect to any portion of the Employment Period
occurring before January 1, 2001. During any portion of the
Employment Period occurring on or after January 1, 2001, the Executive
shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times
-7-
the highest monthly base salary paid or payable to the Executive by
the Company and its affiliated companies in respect of the twelve-
month period immediately preceding the month in which the Effective
Date occurs; provided that, if the Effective Date occurs before
January 1, 2001, such monthly base salary shall be deemed to equal the
amount most recently established by the Board for this purpose before
the Effective Date. During any portion of the Employment Period
occurring on or after January 1, 2001, the Annual Base Salary shall be
reviewed at least annually and shall be increased at any time and from
time to time as shall be substantially consistent with increases in
base salary awarded in the ordinary course of business to other peer
executives of the Company and its affiliated companies. Any increase
in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary
shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary
as so increased. As used in this Agreement, the term "affiliated
companies" includes any company controlled by, controlling or under
common control with the Company.
(ii) Annual Bonus. In addition to any Annual Base Salary payable as
------------
hereinabove provided, the Executive shall be awarded, for each fiscal
year that both (A) begins after December 31, 1999, and (B) begins or
ends during the Employment Period, an annual bonus (the "Annual
Bonus") in cash at least equal to the sum of the target award under
the Company's Executive Annual Cash Incentive Plan and
-8-
any other target awards under any other similar annual incentive plans
(or if no such target award is designated under the Company's
Executive Annual Cash Incentive Plan or any similar plan, the midpoint
between the high and low bonus payable to the Executive under such
plan); provided, however, that such target or midpoint, as the case
-------- -------
may be, shall not be less than such target or midpoint under such
plans in the year immediately preceding the Change of Control (the
"Recent Annual Bonus"). Each such Annual Bonus shall be paid no later
than the end of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. In addition to any
---------------------------------------
Annual Base Salary and Annual Bonus payable as hereinabove provided,
the Executive shall be entitled to participate during the Employment
Period in all incentive, profit-sharing, savings and retirement plans,
practices, policies and programs applicable generally to other peer
executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the
Executive with incentive, savings and retirement benefit
opportunities, in each case, less favorable, in the aggregate, except
as required to comply with statutory requirements of general
application which limit the level of benefit opportunity, than (A) the
most favorable of those provided by the Company and its affiliated
companies for the Executive under such plans, practices, policies and
programs as in effect at any time
-9-
during the 90-day period immediately preceding the Effective Date or
(B) if more favorable to the Executive, those provided at any time
after the Effective Date to other peer executives of the Company and
its affiliated companies; provided that no award shall be granted with
respect to any fiscal year beginning before January 1, 2000 under any
incentive or bonus plan of the Company; and provided further that any
effect on the Executive's participation or benefit level resulting
from the Executive's not receiving an Annual Base Salary prior to
January 1, 2001, shall be governed by the terms of those plans,
practices, policies and programs of general applicability.
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by
the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life, split-dollar life insurance,
accidental death and travel accident insurance plans and programs) to
the extent generally applicable to other peer executives of the
Company and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the Executive with
benefits which are less favorable, in the aggregate, than (x) the most
favorable of such plans, practices, policies and programs in effect
for the Executive at any time during the 90-day period immediately
preceding the
-10-
Effective Date or (y) if more favorable to the Executive, those
provided at any time after the Effective Date generally to other peer
executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
--------
be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most
favorable policies, practices and procedures of the Company and its
affiliated companies in effect for the Executive at any time during
the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to fringe benefits in accordance with the most
favorable plans, practices, programs and policies of the Company and
its affiliated companies in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
------------------------
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal
secretarial and other assistance, at least equal to the most favorable
of the foregoing provided to the Executive by the
-11-
Company and its affiliated companies at any time during the 90-day
period immediately preceding the Effective Date or, if more favorable
to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated
companies.
(viii) Vacation. During the Employment Period, the Executive shall
--------
be entitled to vacation (paid vacation on and after January 1, 2001)
in accordance with the most favorable plans, policies, programs and
practices of the Company and its affiliated companies as in effect at
any time during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 13(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For
-12-
purposes of this Agreement, "Disability" means the absence of the Executive from
the Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) Cause. The Company may terminate the Executive's employment
-----
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
means (i) an action taken by the Executive involving willful and wanton
malfeasance involving specifically a wholly wrongful and unlawful act, or (ii)
the Executive being convicted of a felony.
(c) Good Reason. The Executive's employment may be terminated during
-----------
the Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" means
(i) The assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
-13-
(ii) Any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) The Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B)
hereof;
(iv) Any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) Any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Agreement, any good faith determination of Good
Reason made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 13(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the
-14-
Executive's employment under the provision so indicated and (iii) if the Date of
Termination (as defined below) is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than fifteen days
after the giving of such notice). In the case of a termination of the
Executive's employment for Cause, a Notice of Termination shall include a copy
of a resolution duly adopted by the affirmative vote of not less than two-thirds
of the entire membership of the Board at a meeting of the Board called and held
for the purpose (after reasonable notice to the Executive and reasonable
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board prior to such vote), finding that in the good faith
opinion of the Board the Executive was guilty of conduct constituting Cause. No
purported termination of the Executive's employment for Cause shall be effective
without a Notice of Termination. The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason shall not waive any right of the Executive hereunder or
preclude the Executive from asserting such fact or circumstance in enforcing the
Executive's rights hereunder.
(e) Date of Termination. "Date of Termination" means the date of
-------------------
receipt of the Notice of Termination or any later date specified therein, as the
case may be; provided, however, that (i) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (ii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
-15-
6. Obligations of the Company upon Termination.
-------------------------------------------
(a) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than the following obligations: (i) solely with
respect to any portion of the Employment Period occurring on or after January 1,
2001, payment of the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid, (ii) solely with respect to
fiscal years beginning after December 31, 1999, payment of the product of (x)
the greater of (A) the Annual Bonus paid or payable, including by reason of
deferral, (and annualized for any fiscal year consisting of less than twelve
full months or for which the Executive has been employed for less than twelve
full months) for the most recently completed fiscal year during the Employment
Period, if any, and (B) the Recent Annual Bonus (such greater amount hereafter
referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of
which is the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and (iii) payment of any
compensation previously deferred by the Executive (together with any accrued
interest thereon) and not yet paid by the Company and any accrued vacation pay
not yet paid by the Company (the amounts described in paragraphs (i), (ii) and
(iii) are hereafter referred to as "Accrued Obligations"). All Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination. In
addition, the Executive's estate or designated beneficiaries shall be entitled
to receive the
-16-
Executive's Annual Base Salary for the balance of any portion of the Employment
Period that occurs on or after January 1, 2001; provided that such payments of
Annual Base Salary shall be reduced by any survivor benefits paid to the
Executive's estate or designated beneficiary under the Company's Cash Balance
Pension Plan (the "Pension Plan"). Anything in this Agreement to the contrary
notwithstanding, the Executive's estate and family shall be entitled to receive
benefits at least equal to the most favorable benefits provided generally by the
Company and any of its affiliated companies to the estates and surviving
families of peer executives of the Company and such affiliated companies under
such plans, programs, practices and policies relating to death benefits, if any,
as in effect generally with respect to other peer executives and their estates
and families at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect on the date of the Executive's death generally with respect
to other peer executives of the Company and its affiliated companies and their
families; provided that this sentence shall not apply to benefits under any
incentive or bonus plan with respect to fiscal years beginning before January 1,
2000.
(b) Disability. If the Executive's employment is terminated by reason
----------
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for Accrued
Obligations. All Accrued Obligations shall be paid to the Executive in a lump
sum in cash within 30 days of the Date of Termination. In addition, the
Executive shall be entitled to receive the Executive's Annual Base Salary for
the balance of any portion of the Employment Period occurring on or after
January 1, 2001; provided that such payments of Annual Base Salary shall be
reduced by any benefits paid to
-17-
the Executive under the Company's disability plans. Anything in this Agreement
to the contrary notwithstanding, the Executive shall be entitled after the
Disability Effective Date to receive disability and other benefits at least
equal to the most favorable of those generally provided by the Company and its
affiliated companies to disabled executives and/or their families in accordance
with such plans, programs, practices and policies relating to disability, if
any, as in effect generally with respect to other peer executives and their
families at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect at any time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and their families;
provided that this sentence shall not apply to benefits under any incentive or
bonus plan with respect to fiscal years beginning before January 1, 2000.
(c) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (i) with respect to any portion of the Employment Period
that occurs on or after January 1, 2001, Annual Base Salary through the Date of
Termination, plus (ii) the amount of any compensation previously deferred by the
Executive, in each case to the extent theretofore unpaid. If the Executive
terminates employment during the Employment Period other than for Good Reason,
this Agreement shall terminate without further obligations to the Executive,
other than for Accrued Obligations. In such case, all Accrued Obligations shall
be paid to the Executive in a lump sum in cash within 30 days of the Date of
Termination.
-18-
(d) Good Reason; Other Than for Cause or Disability. If, during the
-----------------------------------------------
Employment Period, the Company shall terminate the Executive's employment other
than for Cause or Disability, or if the Executive shall terminate employment
under this Agreement for Good Reason:
(i) The Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the
following amounts:
(A) All Accrued Obligations; and
(B) The product of (x) three and (y) the sum of (i) Annual
Base Salary and (ii) the Highest Annual Bonus; provided that if
Annual Base Salary described in clause (i), above, equals $0
because of the restrictions set forth in Section 4(b)(i) on
Annual Base Salary for periods occurring before January 1, 2001,
for purposes of this Section 6(d)(i)(B), Annual Base Salary shall
equal the amount most recently established by the Board for this
purpose before the Effective Date; and provided further that if
the Highest Annual Bonus described in clause (ii), above, equals
$0 because of the restrictions set forth in Section 4(b)(ii) on
bonuses for fiscal years beginning before January 1, 2000, for
purposes of this Section 6(d)(i)(B), the Highest Annual Bonus
shall equal 75% of the Executive's Annual Base Salary (determined
after taking into account the preceding proviso); and provided
further that the amount taken into account under clauses (i) and
(ii), above,
-19-
shall be multiplied by a fraction, not exceeding 1, the numerator of
which is the number of full calendar months that both (1) fall in the
36-month period immediately following the Date of Termination and (2)
(a) with respect to clause (i), begin on or after January 1, 2001, and
(b) with respect to clause (ii), begin on or after January 1, 2000, and
the denominator of which is 36; and
(C) A lump sum retirement benefit equal to the difference between
(1) the actuarial equivalent of the benefit under the Pension Plan and
any supplemental and/or excess retirement plan providing benefits for
the Executive which the Executive would receive if the Executive's
employment continued at the compensation levels provided for in this
Agreement for the remainder of the Employment Period, assuming for this
purpose that all accrued benefits are fully vested, and (2) the
actuarial equivalent of the Executive's actual benefit (paid or
payable), if any, under the Pension Plan; for purposes of determining
the amount payable pursuant to this Section 6(d)(i)(C) the accrual
formulas and actuarial assumptions utilized shall be no less favorable
than those in effect with respect to the Pension Plan and the SERP
during the 90-day period immediately prior to the Effective Date; and
(ii) For the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the
Company shall continue
-20-
benefits to the Executive and/or the Executive's family at least equal
to those which would have been provided to them in accordance with the
plans, programs, practices and policies described in Section 4(b)(iv)
of this Agreement if the Executive's employment had not been
terminated in accordance with the most favorable plans, practices,
programs or policies of the Company and its affiliated companies
applicable generally to other peer executives and their families
during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies and their families. For purposes of
determining eligibility of the Executive for retiree benefits pursuant
to such plans, practices, programs and policies, the Executive shall
be considered to have remained employed until the end of the
Employment Period and to have retired on the last day of such period.
In lieu of the benefits provided for in this Section 6(d)(ii), the
Executive may elect within 60 days of the Date of Termination to be
paid an amount in cash equal to the present value of such benefits on
an after-tax basis. In determining present value, a discount rate
equal to the federal mid-term rate under Section 1274(d) of the
Internal Revenue Code of 1986, as amended (the "Code") shall be
utilized. The right to continued benefits granted to the Executive
and/or his family pursuant to this Section 6(d)(ii) shall be in
addition to any right of continued coverage under any of the plans,
programs, practices and policies described in Section 4(b)(iv) of the
-21-
Agreement which the Executive and/or his family may be entitled to
under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") upon any loss of coverage under such plans, programs,
practices and policies.
7. Non-exclusivity of Rights. Except as otherwise specifically provided
-------------------------
in this Agreement, nothing in this Agreement shall prevent or limit the
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans, programs, policies or practices, provided by the Company or any
of its affiliated companies and for which the Executive may qualify, nor shall
anything herein limit or otherwise affect such rights as the Executive may have
under any other agreements with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program except as
explicitly modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement. The Company
agrees to pay, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or
-22-
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to
Section 9 of this Agreement), plus in each case interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code.
9. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
used in arriving at such determinations, shall be made by the Company's
certified public accounting firm immediately prior to the Effective
-23-
Date (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within fifteen business days
of the Date of Termination, if applicable, or such earlier time as is requested
by the Company. All fees and expenses of the Accounting Firm shall be borne
solely by the Company. The initial Gross-Up Payment, if any, as determined
pursuant to this Section 9(b), shall be paid by the Company to the Executive
within five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts its
remedies pursuant to Section 9(c) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten
-24-
business days after the Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such notice
to the Company (or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the Company notifies the Executive
in writing prior to the expiration of such period that it desires to contest
such claim, the Executive shall:
(i) Give the Company any information reasonably requested by the
Company relating to such claim,
(ii) Take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) Cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) Permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such
-25-
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto,
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with
-26-
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 9(c)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
------------------------
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 10 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.
-27-
11. Successors.
----------
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
12. Effectiveness of Amended and Restated Agreement. This Amended and
------------------------------------------------
Restated Agreement is subject to Shareholder Approval as defined in the Non-
Statutory Stock Option Agreement by and between the Company and the Executive
dated as of December 18, 1997. If Shareholder Approval is not obtained, (i)
this Amended and Restated Agreement and the amendments set forth in this
Agreement shall be null and void; (ii) the Company and the Executive shall be
bound by the terms of the Agreement by and between the Company and the Executive
dated as of November 1, 1994 and the Amendment to Agreement by and between the
-28-
Company and the Executive dated as of September 15, 1995 (together the "Existing
Agreement") as in effective immediately before the execution of this Amended and
Restated Agreement; and (iii) the Company shall pay to the Executive the amount
of any compensation that, but for the execution of this Amended and Restated
Agreement, would have been paid to the Executive under the terms of the Existing
Agreement as in effect immediately before the execution of this Amended and
Restated Agreement, with interest accruing from the date the compensation
otherwise would have been paid to the Executive until the actual date of
payment, at an annual interest rate of 5.68%.
13. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
--------------------
To the address shown on the Company's records for tax reporting
purposes.
-29-
If to the Company:
-----------------
Capital One Financial Corporation
2980 Fairview Park Drive
Falls Church, Virginia 22042
Attention: Officer-in-Charge,
Human Resources Division
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any
provision hereof or the failure to assert any right the Executive may have
hereunder, including, without limitation, the right to terminate employment for
Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed to be a waiver
of such provision or right or any other provision or right thereof.
-30-
(f) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof and supercedes in
its entirety the Existing Agreement. Until the Effective Date, subject to the
terms of any other employment agreement between the Executive and the Company,
the Executive shall continue to be an "employee at will".
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
------------------------------
Nigel W. Morris
CAPITAL ONE FINANCIAL CORPORATION
By
----------------------------
Stanley I. Westreich
Chairman, Compensation Committee
-31-
Exhibit 10.5.2
CAPITAL ONE FINANCIAL CORPORATION
FIRST AMENDMENT TO THE CHANGE OF CONTROL AGREEMENT BETWEEN
CAPITAL ONE FINANCIAL CORPORATION AND JAMES M. ZINN
- --------------------------------------------------------------------------------
THIS AMENDMENT OF AGREEMENT by and between Capital One Financial
Corporation (the "Company") and James M. Zinn (the "Executive"), dated as of
December 18, 1997.
WHEREAS, the Company entered into an Employment Agreement with the
Executive dated as of November 1, 1994 (the "Agreement"), providing the
Executive with compensation and benefit arrangements upon a Change of Control,
as defined therein;
WHEREAS, Section 12(a) of the Agreement provides that the Agreement
may be modified by a written agreement executed by the Company and the
Executive;
WHEREAS, the Company and the Executive have as of the date of this
Amendment of Agreement (the "Amendment") entered into a Nonstatutory Stock
Option Agreement in the form of the Nonstatutory Stock Option Agreement attached
as an exhibit to this Amendment (the "Stock Option Agreement"); and
WHEREAS, the Company and the Executive now wish to amend the Agreement
as provided in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the agreements
contained herein, the Company and the Executive agree that the Agreement shall
be modified as follows, effective November 1, 1994:
1. Effective as of the date of this Amendment, the Agreement shall be modified
as follows:
(a) The initial phrase of Section 2 of the Agreement is amended to read in
its entirety as follows:
Change of Control. For the purpose of this Agreement, and except as
-----------------
hereinafter provided in (e) and (f), a "Change of Control" shall mean:
(b) Section 2 is further amended by adding a new paragraph (f) at the end
of such section which shall read in its entirety as follows
Notwithstanding the foregoing, a Change of Control shall not occur with
respect to the Executive by reason of any event which would otherwise
constitute a Change of Control if, immediately after the occurrence of such
event, individuals including such Executive who were executive officers of
the Company immediately prior to the occurrence of such event, own,
directly or indirectly, on a fully diluted basis, (i) 15% or more of the
then
outstanding shares of common stock of the Company or any acquiror or
successor to substantially all of the business of the Company or (ii) 15%
or more of the combined voting power of the then outstanding voting
securities of the Company or any acquiror or successor to substantially all
of the business of the Company entitled to vote generally in the election
of directors.
(c) Section 4(b)(ii) of the Agreement is amended to read in its entirety as
follows:
In addition to Annual Base Salary, the Executive shall be awarded, for each
fiscal year beginning or ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the sum of the target
award under the Company's Executive Annual Cash Incentive Plan and any
other target awards under any other similar annual incentive plans (or, if
no such target award is designated under the Company's Executive Annual
Cash Incentive Plan or any similar plan, the midpoint below the high and
low bonus payable to the Executive under such plan); provided, however,
-------- -------
that such target or midpoint, as the case may be, shall not be less than
such target or midpoint under such plans in the year immediately preceding
the Change of Control (the "Recent Annual Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year
next following the fiscal year for which the Annual Bonus is awarded,
unless the Executive shall elect to defer the receipt of such Annual Bonus.
Any payment of the Executive's Annual Bonus made under this Section
4(b)(ii) shall be reduced to the extent provided in an election made by the
Executive to forgo any or all bonus amounts otherwise payable in exchange
for the receipt of stock options from the Company. The Company shall
maintain an account (the "Stock Option Purchase Account"), the balance of
which, as of any date, shall be equal to the aggregate dollar amount of
bonuses that the Executive has agreed to forgo in exchange for the receipt
of such stock options, less the amount of such bonuses or other
compensation (including amounts payable upon termination of employment)
actually forgone.
(d) Section 6(a) of the Agreement is amended to read in its entirety as
follows:
If the Executive's employment is terminated by reason of the Executive's
death during the Employment Period, this Agreement shall terminate without
further obligations to the Executive's legal representatives under this
Agreement, other than the following obligations: (i) payment of the
Executive's Annual Base Salary through the Date of Termination to the
extent not theretofore paid, (ii) payment of the product of (x) the greater
of (A) the Annual Bonus paid or payable, including by reason of deferral
and before any reduction for the amount of such bonus which the Executive
may have agreed to forgo in consideration for the receipt of stock options,
(and annualized for any fiscal year consisting of less than twelve full
months or for which the Executive has been employed for less than twelve
full months) for the
-2-
most recently completed fiscal year during the Employment Period, if any,
and (B) the Recent Annual Bonus (such greater amount hereafter referred to
as the "Highest Annual Bonus") and (y) a fraction, the numerator of which
is the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and (iii) payment of any
compensation previously deferred by the Executive (together with any
accrued interest thereon) and not yet paid by the Company and any accrued
vacation pay not yet paid by the Company (the amounts described in
paragraphs (i), (ii) and (iii) are hereafter referred to as "Accrued
Obligations"). The amount of the Company's payment obligations under
paragraph (ii) of the Accrued Obligations shall be reduced by the amount of
any such Annual Bonus that the Executive had elected to forgo in
consideration of the grant of stock options (the "Net Accrued
Obligations"). All Net Accrued Obligations shall be paid to the Executive's
estate or beneficiary, as applicable, in a lump sum in cash within 30 days
of the Date of Termination. In addition, the Executive's estate or
designated beneficiaries shall be entitled to receive the Executive's
Annual Base Salary for the balance of the Employment Period; provided,
--------
however, that such payments of Annual Base Salary shall be reduced by any
-------
survivor benefits paid to the Executive's estate or designated beneficiary
under the Company's Cash Balance Pension Plan (the "Pension Plan").
Anything in this Agreement to the contrary notwithstanding, the Executive's
estate and family shall be entitled to receive benefits at least equal to
the most favorable benefits provided generally by the Company and any of
its affiliated companies to the estates and surviving families of peer
executives of the Company and such affiliated companies under such plans,
programs, practices and policies relating to death benefits, if any, as in
effect generally with respect to other peer executives and their estates
and families at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the
Executive's family, as in effect on the date of the Executive's death
generally with respect to other peer executives of the Company and its
affiliated companies and their families.
(e) Section 6(b) of the Agreement is amended to read in its entirety as
follows:
If the Executive's employment is terminated by reason of the Executive's
Disability during the Employment Period, this Agreement shall terminate
without further obligations to the Executive, other than for Net Accrued
Obligations. All Net Accrued Obligations shall be paid to the Executive in
a lump sum in cash within 30 days of the Date of Termination. In addition,
the Executive shall be entitled to receive the Executive's Annual Base
Salary for the balance of the Employment Period; provided, however, that
-------- -------
such payments of Annual Base Salary shall be reduced by any benefits paid
to the Executive under the Company's disability plans.
Anything in this Agreement to the contrary notwithstanding, the Executive
shall be entitled after the Disability Effective Date to receive disability
and other benefits at least equal to the most favorable of those generally
provided by the Company and
-3-
its affiliated companies to disabled executives and/or their families in
accordance with such plans, programs, practices and policies relating to
disability, if any, as in effect generally with respect to other peer
executives and their families at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the
Executive and/or the Executive's family, as in effect at any time
thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(f) Section 6(c) of the Agreement is amended to read in its entirety as
follows:
If the Executive's employment shall be terminated for Cause during the
Employment Period, this Agreement shall terminate without further
obligations to the Executive other than the obligation to pay to the
Executive Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each
case to the extent theretofore unpaid. If the Executive terminates
employment during the Employment Period other than for Good Reason, this
Agreement shall terminate without further obligations to the Executive,
other than for Net Accrued Obligations. In such case, all Net Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30
days of the Date of Termination.
(g) Section 6(d)(i)(A) of the Agreement is amended by substituting the
term "Net Accrued Obligations" for the term "Accrued Obligations" therein.
(h) Section 6(d)(ii) is amended by adding the following at the end
thereof:
The right to continued benefits granted to the Executive and/or his family
pursuant to this Section 6(d)(ii) shall be in addition to any right of
continued coverage under any of the plans, programs, practices and policies
described in Section 4(b)(iv) of this Agreement which the Executive and/or
his family may be entitled to under the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") upon any loss of coverage under such
plans, programs, practices and policies.
(i) Section 6(d) of the Agreement is amended by adding the following as a
new flush sentence at the end thereof:
The amount payable by the Company to the Executive pursuant to Section
6(d)(i)(B) above will be reduced by any remaining balance in the Stock
Option Purchase Account.
2. The amendments to the Agreement set forth in paragraph 1 of this
Amendment, above, are subject to Shareholder Approval as defined in the Stock
Option Agreement. If Shareholder Approval is not obtained, (i) this Amendment
and the amendments set forth in this Amendment
-4-
shall be null and void; and (ii) the Company and the Executive shall be bound by
the terms of the Agreement as in effect immediately before the execution of this
Amendment.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Amendment as of the date first above written.
CAPITAL ONE FINANCIAL CORPORATION
By:
----------------------------------------
Richard D. Fairbank
-----------------------------------------
James M. Zinn
-5-
Exhibit 10.6.2
CAPITAL ONE FINANCIAL CORPORATION
FIRST AMENDMENT TO THE CHANGE OF CONTROL AGREEMENT BETWEEN
CAPITAL ONE FINANCIAL CORPORATION AND JOHN G. FINNERAN, JR.
- --------------------------------------------------------------------------------
THIS AMENDMENT OF AGREEMENT by and between Capital One Financial
Corporation (the "Company") and John G. Finneran, Jr. (the "Executive"), dated
as of December 18, 1997.
WHEREAS, the Company entered into an Employment Agreement with the
Executive dated as of November 1, 1994 (the "Agreement"), providing the
Executive with compensation and benefit arrangements upon a Change of Control,
as defined therein;
WHEREAS, Section 12(a) of the Agreement provides that the Agreement
may be modified by a written agreement executed by the Company and the
Executive;
WHEREAS, the Company and the Executive have as of the date of this
Amendment of Agreement (the "Amendment") entered into a Nonstatutory Stock
Option Agreement in the form of the Nonstatutory Stock Option Agreement attached
as an exhibit to this Amendment (the "Stock Option Agreement"); and
WHEREAS, the Company and the Executive now wish to amend the Agreement
as provided in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the agreements
contained herein, the Company and the Executive agree that the Agreement shall
be modified as follows, effective November 1, 1994:
1. Effective as of the date of this Amendment, the Agreement shall be modified
as follows:
(a) The initial phrase of Section 2 of the Agreement is amended to read in
its as follows:
Change of Control. For the purpose of this Agreement, and except as
-----------------
hereinafter provided in (e) and (f), a "Change of Control" shall mean:
(b) Section 2 is further amended by adding a new paragraph (f) at the end
of such section which shall read in its entirety as follows
Notwithstanding the foregoing, a Change of Control shall not occur with
respect to the Executive by reason of any event which would otherwise
constitute a Change of Control if, immediately after the occurrence of such
event, individuals including such Executive who were executive officers of
the Company immediately prior to the occurrence of such event, own,
directly or indirectly, on a fully diluted basis, (i) 15% or more of the
then
outstanding shares of common stock of the Company or any acquiror or
successor to substantially all of the business of the Company or (ii) 15%
or more of the combined voting power of the then outstanding voting
securities of the Company or any acquiror or successor to substantially all
of the business of the Company entitled to vote generally in the election
of directors.
(c) Section 4(b)(ii) of the Agreement is amended to read in its entirety
as follows:
In addition to Annual Base Salary, the Executive shall be awarded, for each
fiscal year beginning or ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the sum of the target
award under the Company's Executive Annual Cash Incentive Plan and any
other target awards under any other similar annual incentive plans (or, if
no such target award is designated under the Company's Executive Annual
Cash Incentive Plan or any similar plan, the midpoint below the high and
low bonus payable to the Executive under such plan); provided, however,
-------- -------
that such target or midpoint, as the case may be, shall not be less than
such target or midpoint under such plans in the year immediately preceding
the Change of Control (the "Recent Annual Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year
next following the fiscal year for which the Annual Bonus is awarded,
unless the Executive shall elect to defer the receipt of such Annual Bonus.
Any payment of the Executive's Annual Bonus made under this Section
4(b)(ii) shall be reduced to the extent provided in an election made by the
Executive to forgo any or all bonus amounts otherwise payable in exchange
for the receipt of stock options from the Company. The Company shall
maintain an account (the "Stock Option Purchase Account"), the balance of
which, as of any date, shall be equal to the aggregate dollar amount of
bonuses that the Executive has agreed to forgo in exchange for the receipt
of such stock options, less the amount of such bonuses or other
compensation (including amounts payable upon termination of employment)
actually forgone.
(d) Section 6(a) of the Agreement is amended to read in its entirety as
follows:
If the Executive's employment is terminated by reason of the Executive's
death during the Employment Period, this Agreement shall terminate without
further obligations to the Executive's legal representatives under this
Agreement, other than the following obligations: (i) payment of the
Executive's Annual Base Salary through the Date of Termination to the
extent not theretofore paid, (ii) payment of the product of (x) the greater
of (A) the Annual Bonus paid or payable, including by reason of deferral
and before any reduction for the amount of such bonus which the Executive
may have agreed to forgo in consideration for the receipt of stock options,
(and annualized for any fiscal year consisting of less than twelve full
months or for which the Executive has been employed for less than twelve
full months) for the
-2-
most recently completed fiscal year during the Employment Period, if any,
and (B) the Recent Annual Bonus (such greater amount hereafter referred to
as the "Highest Annual Bonus") and (y) a fraction, the numerator of which
is the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and (iii) payment of any
compensation previously deferred by the Executive (together with any
accrued interest thereon) and not yet paid by the Company and any accrued
vacation pay not yet paid by the Company (the amounts described in
paragraphs (i), (ii) and (iii) are hereafter referred to as "Accrued
Obligations"). The amount of the Company's payment obligations under
paragraph (ii) of the Accrued Obligations shall be reduced by the amount of
any such Annual Bonus that the Executive had elected to forgo in
consideration of the grant of stock options (the "Net Accrued
Obligations"). All Net Accrued Obligations shall be paid to the Executive's
estate or beneficiary, as applicable, in a lump sum in cash within 30 days
of the Date of Termination. In addition, the Executive's estate or
designated beneficiaries shall be entitled to receive the Executive's
Annual Base Salary for the balance of the Employment Period; provided,
--------
however, that such payments of Annual Base Salary shall be reduced by any
-------
survivor benefits paid to the Executive's estate or designated beneficiary
under the Company's Cash Balance Pension Plan (the "Pension Plan").
Anything in this Agreement to the contrary notwithstanding, the Executive's
estate and family shall be entitled to receive benefits at least equal to
the most favorable benefits provided generally by the Company and any of
its affiliated companies to the estates and surviving families of peer
executives of the Company and such affiliated companies under such plans,
programs, practices and policies relating to death benefits, if any, as in
effect generally with respect to other peer executives and their estates
and families at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the
Executive's family, as in effect on the date of the Executive's death
generally with respect to other peer executives of the Company and its
affiliated companies and their families.
(e) Section 6(b) of the Agreement is amended to read in its entirety as
follows:
If the Executive's employment is terminated by reason of the Executive's
Disability during the Employment Period, this Agreement shall terminate
without further obligations to the Executive, other than for Net Accrued
Obligations. All Net Accrued Obligations shall be paid to the Executive in
a lump sum in cash within 30 days of the Date of Termination. In addition,
the Executive shall be entitled to receive the Executive's Annual Base
Salary for the balance of the Employment Period; provided, however, that
-------- -------
such payments of Annual Base Salary shall be reduced by any benefits paid
to the Executive under the Company's disability plans. Anything in this
Agreement to the contrary notwithstanding, the Executive shall be entitled
after the Disability Effective Date to receive disability and other
benefits at least equal to the most favorable of those generally provided
by the Company and
-3-
its affiliated companies to disabled executives and/or their families in
accordance with such plans, programs, practices and policies relating to
disability, if any, as in effect generally with respect to other peer
executives and their families at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the
Executive and/or the Executive's family, as in effect at any time
thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(f) Section 6(c) of the Agreement is amended to read in its entirety as
follows:
If the Executive's employment shall be terminated for Cause during the
Employment Period, this Agreement shall terminate without further
obligations to the Executive other than the obligation to pay to the
Executive Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each
case to the extent theretofore unpaid. If the Executive terminates
employment during the Employment Period other than for Good Reason, this
Agreement shall terminate without further obligations to the Executive,
other than for Net Accrued Obligations. In such case, all Net Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30
days of the Date of Termination.
(g) Section 6(d)(i)(A) of the Agreement is amended by substituting the
term "Net Accrued Obligations" for the term "Accrued Obligations" therein.
(h) Section 6(d)(ii) is amended by adding the following at the end
thereof:
The right to continued benefits granted to the Executive and/or his family
pursuant to this Section 6(d)(ii) shall be in addition to any right of
continued coverage under any of the plans, programs, practices and policies
described in Section 4(b)(iv) of this Agreement which the Executive and/or
his family may be entitled to under the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") upon any loss of coverage under such
plans, programs, practices and policies.
(i) Section 6(d) of the Agreement is amended by adding the following as a
new flush sentence at the end thereof:
The amount payable by the Company to the Executive pursuant to Section
6(d)(i)(B) above will be reduced by any remaining balance in the Stock
Option Purchase Account.
2. The amendments to the Agreement set forth in paragraph 1 of this
Amendment, above, are subject to Shareholder Approval as defined in the Stock
Option Agreement. If Shareholder Approval is not obtained, (i) this Amendment
and the amendments set forth in this Amendment
-4-
shall be null and void; and (ii) the Company and the Executive shall be bound by
the terms of the Agreement as in effect immediately before the execution of this
Amendment.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Amendment as of the date first above written.
CAPITAL ONE FINANCIAL CORPORATION
By:
-----------------------------------------
Richard D. Fairbank
-----------------------------------------
John G. Finneran, Jr.
-5-
Exhibit 10.17.7
FOURTH AMENDMENT TO OPERATIVE AGREEMENTS
THIS FOURTH AMENDMENT TO OPERATIVE AGREEMENTS dated as of April 10, 1997 (this
"Fourth Amendment") is by and among CAPITAL ONE BANK, a Virginia banking
----------------
corporation ("COB"), CAPITAL ONE REALTY, INC., a Delaware corporation ("CORI"),
--- ----
FIRST SECURITY BANK, NATIONAL ASSOCIATION (f/k/a First Security Bank of Utah,
N.A.), a national banking association, not individually but solely as Owner
Trustee under the COB Real Estate Trust 1995-1 (the "Owner Trustee", the
-------------
"Borrower" or the "Lessor", as appropriate), NATIONSBANK OF TEXAS, N.A., a
-------- ------
national banking association, as Administrative Agent for the Lenders (in such
capacity, the "Agent"), as a Lender (together with the other Lenders party to
-----
the Credit Agreement, the "Lenders") and as a Holder, and the other Lenders and
-------
Holders set forth on the signature pages hereto.
All defined terms used herein but not otherwise defined shall have the meaning
set forth in Appendix A to the Participation Agreement dated as of January 5,
----------
1996 by and among COB, CORI, the Owner Trustee, the Agent, the Lenders and the
Holders (as amended pursuant to the First Amendment to Operative Agreements
dated as of June 21, 1996 (the "First Amendment"), the Second Amendment to
---------------
Operative Agreements dated as of October 11, 1996 (the "Second Amendment"), the
----------------
Assignment, Consent and Third Amendment to Operative Agreements dated as of
November 8, 1996 (the "Third Amendment"), and as the same is amended hereby, the
---------------
"Participation Agreement").
-----------------------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, COB, CORI, the Owner Trustee, the Agent, the Lenders and the Holders
are parties to the Participation Agreement.
WHEREAS, the Owner Trustee and CORI are parties to (a) the Lease Agreement
(Tax Retention Operating Lease) dated as of January 5, 1996 (as amended pursuant
to the First Amendment, the Second Amendment, the Third Amendment and as amended
hereby, the "Lease Agreement") between the Owner Trustee, as lessor, and CORI,
---------------
as lessee and (b) the Agency Agreement dated as of January 5, 1996 (as amended
or modified from time to time, the "Agency Agreement") between the Owner
----------------
Trustee, as lessor, and CORI, as construction agent.
WHEREAS, CORI and COB have requested that certain amendments and modifications
be made to the Operative Agreements;
WHEREAS, the Lessor, the Agent, the Lenders and the Holders have agreed to
such requested amendments and modifications based on the terms and conditions
herein set forth.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
A. Participation Agreement. The Participation Agreement is hereby amended and
-----------------------
modified in the following respects:
1. The terms set forth below and defined in Appendix A to the
----------
Participation Agreement shall be amended to read as follows:
"Approved State" means Virginia, Florida and Texas.
"Completion Date" shall mean, with respect to a Property, the earlier of
(a) the date on which Completion for such Property has occurred or (b) June 1,
1999.
"Construction Period Termination Date" shall mean the earlier of (a) the
date that the Commitments have been terminated in their entirety in accordance
with the terms of Section 5(a) of the Credit Agreement or (b) June 1, 1999.
"Election Notice" shall have the meaning set fort in Section 20.2 of the
Lease.
"Marketing Period" shall mean, if the Lessee has given a Sale Notice in
accordance with Section 20.2 of the Lease, the period commencing on the date
such Sale Notice is given and ending on the Expiration Date.
"Permitted Facility" means each real property location used by the Lessee
and/or the Guarantor to support customer service operations, data processing
operations and related credit card servicing facilities on behalf of Capital
One Bank.
"Purchase Option" shall have the meaning given to such term in Section
20.2 of the Lease.
"Sale Option" shall have the meaning given to such term in Section 20.2 of
the Lease.
2. Section 5.3(t) is hereby amended to read as follows:
"(t) in their sole and absolute discretion, the Lenders and the Holders
shall have agreed to accept, and to fund the respective Loans and Holder
Advances regarding, the particular property then under consideration as a
Property; and"
3. Section 5.3(u) is hereby added to read as follows:
2
"(u) the Property Cost for any property under consideration as a
Property shall have a minimum projected value of $10,000,000 upon Completion."
B. Lease Agreement. The Lease Agreement is hereby amended and modified in
---------------
the following respects:
1. Section 10.2 of the Lease Agreement is hereby amended to change
the reference to "Section 20.1" contained therein to "Section 20.2."
2. Section 15.2 of the Lease Agreement is hereby amended to change
the reference to "Section 20.1" contained therein to "Section 20.2."
3. Section 19.1 of the Lease Agreement is hereby deleted in its
entirety and replaced with the following:
"19.1 Provisions Relating to Lessee's Purchase of the Properties.
----------------------------------------------------------
Subject to Section 19.2, in connection with (a) any termination of this Lease
with respect to the Property pursuant to the terms of Section 16.2, or (b)
Lessee's exercise of its Purchase Option under Section 20.2, or (c) Lessee's
exercise of an option to purchase one or more Properties pursuant to the terms
of Section 20.1, or (d) Lessor's exercise of its option to transfer the
Properties subject to this Lease to the Lessee pursuant to the terms of
Section 20.3, then, upon the date on which this Lease is to terminate with
respect to the Property, and upon tender by Lessee of the amounts set forth in
Sections 16.2(b), 20.1, 20.2 or 20.3, as applicable, Lessor shall execute and
deliver to Lessee (or to Lessee's designee), at Lessee's cost and expense,
each of the following: (i) a special or limited warranty Deed conveying the
Property (to the extent it is real property) to Lessee free and clear of the
Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens;
(ii) a Bill of Sale conveying the Property (to the extent it is personal
property) to Lessee free and clear of the Lien of this Lease, the Lien of the
Credit Documents and any Lessor Liens; (iii) any real estate tax affidavit or
other document required by law to be executed and filed in order to record the
Deed; and (iv) a FIRPTA affidavit. The applicable Property shall be conveyed
to Lessee "AS-IS" "WHERE IS" and in then present physical condition."
4. Article XX is hereby deleted in its entirety and replaced with
the following:
"ARTICLE XX
20.1 Purchase Option on a Scheduled Interest Payment Date.
----------------------------------------------------
Provided that the Election Notice referred to in Section 20.2 has not
been delivered, Lessee shall have the option, exercisable at any time and from
time to time, by giving Lessor and the Agent no more than sixty (60) days and
no less than thirty (30) days irrevocable written notice of Lessee's election
to exercise such option, to either (a) purchase one or more (but not all) of
the Properties on the Scheduled Interest Payment Date identified in such
3
written notice, at a price equal to the Termination Value for such Property or
Properties (which the parties do not intend to be a "bargain" purchase price);
provided, however, that the option referred to in this subclause (a) may not
be exercised by the Lessee (i) if, after giving effect to such exercise, the
aggregate Property Cost of all Properties then subject to the Lease would be
less than $20,000,000 or (ii) if any Lease Default of the types specified in
Sections 17.1(a), 17.1(b) 17.1(i) or any Lease Event of Default shall have
occurred and be continuing; or (b) purchase all of the Properties on any
Scheduled Interest Payment Date as identified in such written notice, at a
price equal to the Termination Value for all of the Properties (which the
parties do not intend to be a "bargain" purchase) and upon such payment this
Lease shall terminate, the Available Loan Commitment and the Available Holder
Commitment shall be reduced to zero and the outstanding Loans and Holder
Amount shall be paid in full.
20.2 Expiration Date Purchase or Sale Option.
---------------------------------------
(a) Not less than 120 days and no more than 180 days prior to the
Expiration Date, Lessee may give Lessor and Agent irrevocable written notice
(the "Election Notice") that Lessee is electing to exercise either (a) the
---------------
option to purchase all of the Properties on the Expiration Date specified in
the Election Notice (the "Purchase Option") or (b) the option to remarket the
---------------
Properties and cause a sale of the Properties to occur on the Expiration Date
pursuant to the terms of Section 22.1 (the "Sale Option"). If Lessee does not
-----------
give an Election Notice indicating the Sale Option at least 120 days and not
more than 180 days prior to the then Expiration Date, then Lessee shall be
deemed to have elected the Purchase Option. If Lessee shall either (i) elect
(or be deemed to elect) to exercise the Purchase Option or (ii) elect the Sale
Option and fail to cause all of the Properties to be sold in accordance with
the terms of Section 22.1 on the Expiration Date, then in either case, Lessee
shall pay to Lessor on the date on which such purchase or sale is to occur an
amount equal to the Termination Value for all the Properties (which the
parties do not intend to be a "bargain" purchase) and, upon receipt of such
amount, Lessor shall transfer to Lessee all of Lessor's right, title and
interest in and to the Properties in accordance with Section 19.1.
(b) If any Property is the subject of remediation efforts respecting
Hazardous Substances at the Expiration Date which could materially and
adversely impact the Fair Market Sales Value of such Property, then Lessee
shall be obligated to repurchase each such Property pursuant to Section
20.2(a).
20.3 Third Party Sale Option.
-----------------------
(a) Provided no Default or Event of Default shall have occurred and
be continuing and provided that the Election Notice has been appropriately
given specifying the Sale Option, Lessee shall undertake to cause a sale of
the Properties on the Expiration Date (all as specified in the Election
Notice) in accordance with the provisions of Section 22.1 hereof.
(b) In the event the Lessee exercises the Sale Option then, as soon
as practicable and in all events prior to the Expiration Date, the Lessee, at
its expense, shall cause to be
4
delivered to Lessor an environmental site assessment for each of the
Properties recently prepared (no later than 30 days old) by an independent
recognized professional reasonably acceptable to Lessor and the Agent and in
form, scope and content satisfactory to Lessor and the Agent. In the event
that Lessor and the Agent shall not have received such environmental
assessment by the Expiration Date or in the event that such environmental
assessment shall reveal the existence of any material violation of
Environmental Laws, other material Environmental Violation or potential
material Environmental Violation (with materiality determined in each case in
Lessor's sole discretion acting reasonably), then Lessee on the Expiration
Date shall pay to Lessor an amount equal to the Termination Value for all of
the Properties and any and all other amounts due and owing hereunder. Upon
receipt of such payment and all other amounts due under the Lease, Lessor
shall transfer to Lessee all of Lessor's right, title and interest in and to
the Properties in accordance with Section 19.1."
5. Section 22.1(a) is hereby amended by changing the reference to
"Section 20.1" contained in the third full paragraph of such subsection to
"Section 20.2."
C. Credit Agreement. The Credit Agreement is hereby amended and
----------------
modified in the following respects:
1. Section 2.1(a) of the Credit Agreement is hereby amended by
deleting the last sentence of such subsection (a) and replacing it with the
following:
"Any prepayment of the Loans, whether mandatory or at Borrower's
election, shall be subject to reborrowing in accordance with the provisions of
this Section 2."
2. Section 2.3(a) of the Credit Agreement is hereby amended by
deleting the last sentence of such subsection (a) and replacing it with the
following:
"Loans repaid or prepaid by the Borrower may be reborrowed
hereunder."
3. Section 2.6(a) of the Credit Agreement is hereby amended by
deleting the last sentence of such subsection (a) and replacing it with the
following:
"Amounts prepaid may be reborrowed in accordance with the provisions
of this Section 2."
D. Trust Agreement. The Trust Agreement is hereby amended and modified
---------------
in the following respects:
1. Section 3.4(a) of the Trust Agreement is hereby amended by
adding the following sentence to the end of such subsection:
5
"The Owner Trustee may request that Holder Advances prepaid pursuant
to this Section be re-advanced in accordance with the provisions of Section
3.1 of this Trust Agreement."
E. Security Agreement. The Security Agreement is hereby amended and
------------------
modified in the following respects:
1. Section 21 of the Security Agreement is hereby deleted in its
entirety and replaced with the following:
"21. Partial Release; Full Release. The Administrative Agent may
-----------------------------
release for such consideration as it may require any portion of the Trust
Property without (as to the remainder of the Trust Property) in any way
impairing or affecting the Lien, security interest and priority herein
provided for the Administrative Agent compared to any other Lien holder or
secured party. Further, upon receipt by the Borrower of the Termination
Value with respect to one or more Properties and payment to the Lenders of
principal and interest due on the Loan (corresponding to the Termination
Value payment) and all other Obligations with respect to such Property
encumbered by this Security Agreement, the Administrative Agent shall
execute and deliver to the Borrower such documents and instruments as may
be required to release the Lien and security interest created by this
Security Agreement with respect to the applicable Property or Properties,
as the case may be."
F. Each of the parties hereto hereby represent and warrant that as of the
date hereof (i) the representations and warranties of such party contained in
Section 7 and Section 8 of the Participation Agreement are true and correct in
all material respects and (ii) no Default or Event of Default currently exists
and is continuing with respect to any such party.
G. The effectiveness of this Fourth Amendment is contingent upon the
receipt by the Agent of the following items, each in form and substance
satisfactory to the Agent: (i) this Fourth Amendment duly executed by the
parties hereto; (ii) a legal opinion of counsel to COB and CORI in form and
substance satisfactory to the Agent; and (iii) such other certificates,
resolutions and opinions as deemed necessary or advisable by the Agent.
H. This Fourth Amendment may be executed in any number of counterparts,
each of which when executed and delivered shall be deemed to be an original and
it shall not be necessary in making proof of this Fourth Amendment to produce or
account for more than one such counterpart.
I. Except as modified hereby, all of the terms and conditions of the
Operative Agreements shall remain in full force and effect.
J. This Fourth Amendment shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Virginia.
6
IN WITNESS WHEREOF, each of the parties hereto has caused this Fourth
Amendment to be duly executed and delivered as of the date first above written.
CAPITAL ONE REALTY, INC.
as Construction Agent and as Lessee
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
ACKNOWLEDGED AND AGREED TO AS A SIGNATORY TO THE PARTICIPATION AGREEMENT AND AS
THE GUARANTOR:
CAPITAL ONE BANK,
as Guarantor
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
FIRST SECURITY BANK, NATIONAL ASSOCIATION
(f/k/a First Security Bank of Utah,
N.A.), not individually, except as
expressly stated herein, but solely
as Owner Trustee under the COB Real
Estate Trust 1995-1
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
NATIONSBANK OF TEXAS, N.A.,
as Holder, as a Lender and as Administrative Agent
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
FIRST UNION NATIONAL BANK OF VIRGINIA, as a Lender
and a Holder
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO, as a Lender
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
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BANK OF TOKYO - MITSUBISHI TRUST COMPANY, as a
Lender
By:
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Name:
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Title:
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UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as a
Lender
By:
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Name:
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Title:
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By:
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Name:
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Title:
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BARCLAYS BANK PLC, as a Lender
By:
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Name:
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Title:
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BANK OF MONTREAL, as a Lender and a Holder
By:
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Name:
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Title:
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KREDIETBANK N.V., as a Lender
By:
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Name:
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Title:
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By:
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Name:
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Title:
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Exhibit 10.18.1
CAPITAL ONE FINANCIAL CORPORATION
---------------------------------
JAMES P. DONEHEY
----------------
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between CAPITAL ONE FINANCIAL CORPORATION, a Delaware
corporation (the "Company"), and James P. Donehey (the "Executive"), dated as of
the 14th day of May 1996.
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
-------------------
(a) The "Effective Date" shall be the first date during the "Change of
Control Period" (as defined in Section 1(b)) on which a Change of Control
occurs. Anything in this Agreement to the contrary notwithstanding, if the
Executive's employment with the Company is terminated or the terms and
conditions of the Executive's employment are adversely changed in a manner which
would constitute grounds for a termination of employment by the Executive for
Good Reason prior to the date on which a Change of Control occurs, and it is
reasonably demonstrated that such termination of employment or adverse change
(i) was at the request of a third party who has taken steps reasonably
calculated to effect the Change of Control or (ii) otherwise arose within six
months of and in connection with or anticipation of the Change of Control, then
for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment or adverse
change.
(b) The "Change of Control Period" is the period commencing on the
date hereof and ending on the third anniversary of such date; provided, however,
that commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof is
hereinafter referred to as the "Renewal Date"), the Change of Control Period
shall be automatically extended so as to terminate three years from such Renewal
Date, unless at least 60 days prior to the Renewal Date the Company shall give
notice to the Executive that the Change of Control Period shall not be so
extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
-----------------
Control"
-2-
shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% (or, if
such shares are purchased from the Company, 40%) or more of either (i) the
then outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Company Voting Securities"), provided,
--------
however, that any acquisition by (x) the Company or any of its
-------
subsidiaries, or any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its subsidiaries or (y) any corporation
with respect to which, immediately following such acquisition, more than
60% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, in the
aggregate by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Company Voting Securities immediately prior to such acquisition
in substantially the same proportion as their ownership, immediately prior
to such acquisition, of the Outstanding Company Common Stock and Company
Voting Securities, as the case may be, shall not constitute a Change of
Control; or
-3-
(b) Individuals who constitute the Board as of September 1, 1995 (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board, provided that any individual becoming a director subsequent
to September 1, 1995 whose appointment to fill a vacancy or to fill a new
Board position or whose nomination for election by the Company's
shareholders was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the Directors of the Company (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act); or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all of the individuals and entities
who were the respective beneficial owners of the Outstanding Company Common
Stock and Company Voting Securities immediately prior to such Business
Combination do not in the aggregate, immediately following such Business
Combination, beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination in substantially the
same proportion as their ownership immediately prior to
-4-
such Business Combination of the Outstanding Company Common Stock and
Company Voting Securities, as the case may be; or
(d) (i) a complete liquidation or dissolution of the Company or (ii)
sale or other disposition of all or substantially all of the assets of the
Company other than to a corporation with respect to which, immediately
following such sale or disposition, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly,
in the aggregate by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Company Voting Securities immediately prior to
such sale or disposition in substantially the same proportion as their
ownership of the Outstanding Company Common Stock and Company Voting
Securities, as the case may be, immediately prior to such sale or
disposition.
(e) Notwithstanding the foregoing, a Change of Control shall not occur
with respect to the Executive by reason of any event which would otherwise
constitute a Change of Control if, immediately after the occurrence of such
event, individuals including such Executive who were executive officers of
the Company immediately prior to the occurrence of such event, own,
directly or indirectly, on a fully diluted basis, (i) 15% or more of the
then outstanding shares of common stock of the Company or any acquiror or
successor to substantially all of the business of the Company or (ii) 15%
or more of the combined voting power of the then outstanding voting
securities of the
-5-
Company or any acquiror or successor to substantially all of the business
of the Company entitled to vote generally in the election of directors.
3. Employment Period. The Company hereby agrees to continue the Executive
-----------------
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, for the period commencing on the Effective Date and ending on the
second anniversary of such date (the "Employment Period").
4. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate
in all material respects with the most significant of those held,
exercised and assigned at any time during the 90-day period
immediately preceding the Effective Date and (B) the Executive's
services shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or any office or
location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation, sabbatical and sick or similar leave to which the Executive
is entitled, the Executive agrees to devote reasonable attention and
time during normal business hours to the business and affairs of the
Company and, to the extent necessary to discharge the responsibilities
assigned to the Executive hereunder, to use the
-6-
Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it
shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees, (B)
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be
deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
------------
(i) Base Salary. During the Employment Period, the Executive
-----------
shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the
highest monthly base salary paid or payable, including by reason of
deferral and before any reduction for the amount of such annual base
salary which the Executive may have agreed to forgo in consideration
for the receipt of stock options, to the Executive by the Company and
its affiliated companies in respect of the twelve-month period
immediately
-7-
preceding the month in which the Effective Date occurs. During the
Employment Period, the Annual Base Salary shall be reviewed at least
annually and shall be increased at any time and from time to time as
shall be substantially consistent with increases in base salary
awarded in the ordinary course of business to other peer executives of
the Company and its affiliated companies. Any increase in Annual Base
Salary shall not serve to limit or reduce any other obligation to the
Executive under this Agreement. Annual Base Salary shall not be
reduced after any such increase and the term Annual Base Salary as
utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies"
includes any company controlled by, controlling or under common
control with the Company. Any payments of an Executive's Annual Base
Salary made under this Section 4(b)(i) may be reduced to the extent
provided in an election made by an Executive to forgo any or all base
salary otherwise payable in exchange for the receipt of stock options
from the Company. The Company shall maintain an account (the "Stock
Option Purchase Account"), the balance of which, as of any date, shall
be equal to the aggregate dollar amount of base salary and bonuses
that the Executive has agreed to forgo in exchange for the receipt of
such stock options, less the amount of such base salary or bonuses or
other compensation (including amounts payable upon termination of
employment) actually forgone.
(ii) Annual Bonus. In addition to Annual Base Salary, the
------------
Executive
-8-
shall be awarded, for each fiscal year beginning or ending during the
Employment Period, an annual bonus (the "Annual Bonus") in cash at
least equal to the sum of the target award under the Company's
Executive Annual Cash Incentive Plan and any other target awards under
any other similar annual incentive plans (or, if no such target award
is designated under the Company's Executive Annual Cash Incentive Plan
or any similar plan, the midpoint between the high and low bonus
payable to the Executive under such plan); provided, however, that
-------- -------
such target or midpoint, as the case may be, shall not be less than
such target or midpoint under such plans in the year immediately
preceding the Change of Control (the "Recent Annual Bonus"). Each
such Annual Bonus shall be paid no later than the end of the third
month of the fiscal year next following the fiscal year for which the
Annual Bonus is awarded, unless the Executive shall elect to defer the
receipt of such Annual Bonus. Any payments of an Executive's Annual
Bonus made under this Section 4(b)(ii) may be reduced to the extent
provided in an election made by an Executive to forgo any or all bonus
amounts otherwise payable in exchange for the receipt of stock options
from the Company.
(iii) Incentive, Savings and Retirement Plans. In addition to
---------------------------------------
Annual Base Salary and Annual Bonus payable as hereinabove provided,
the Executive shall be entitled to participate during the Employment
Period in all incentive, profit-sharing, savings and retirement plans,
practices, policies and programs (including any stock-based plans)
applicable generally to other peer executives of the
-9-
Company and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the Executive with
incentive, savings and retirement benefit opportunities (including
under any stock-based plans), in each case, less favorable, in the
aggregate, except as required to comply with statutory requirements of
general application which limit the level of benefit opportunity, than
(x) the most favorable of those provided by the Company and its
affiliated companies for the Executive under such plans, practices,
policies and programs as in effect at any time during the 90-day
period immediately preceding the Effective Date or (y) if more
favorable to the Executive, those provided at any time after the
Effective Date to other peer executives of the Company and its
affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by
the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life, split-dollar life insurance,
accidental death and travel accident insurance plans and programs) to
the extent generally applicable to other peer executives of the
Company and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the Executive with
benefits which are less favorable, in the aggregate, than (x) the
-10-
most favorable of such plans, practices, policies and programs in
effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or (y) if more favorable to
the Executive, those provided at any time after the Effective Date
generally to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most
favorable policies, practices and procedures of the Company and its
affiliated companies in effect for the Executive at any time during
the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the
---------------
Executive shall be entitled to fringe benefits in accordance with the
most favorable plans, practices, programs and policies of the Company
and its affiliated companies in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vii) Office and Support Staff. During the Employment Period,
------------------------
the Executive shall be entitled to an office or offices of a size and
with furnishings and other
-11-
appointments, and to personal secretarial and other assistance, at
least equal to the most favorable of the foregoing provided to the
Executive by the Company and its affiliated companies at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(viii) Vacation and Other Paid Leave. During the Employment
-----------------------------
Period, the Executive shall be entitled to paid vacation and other
paid leave in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as
in effect at any time during the 90-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
5. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 13(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive
-12-
(the "Disability Effective Date"), provided that, within the 30 days after such
receipt, the Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" means the
absence of the Executive from the Executive's duties with the Company on a full-
time basis for 180 consecutive business days as a result of incapacity due to
mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative (such agreement as to
acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment
-----
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
means (i) an action taken by the Executive involving willful and wanton
malfeasance involving specifically a wholly wrongful and unlawful act, or (ii)
the Executive being convicted of a felony.
(c) Good Reason. The Executive's employment may be terminated during
-----------
the Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" means
(i) The assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and
-13-
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) Any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) The Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B)
hereof;
(iv) Any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) Any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 13(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than
fifteen days after the giving of such notice). In the case of a
-14-
termination of the Executive's employment for Cause, a Notice of Termination
shall include a copy of a resolution duly adopted by the affirmative vote of not
less than two-thirds of the entire membership of the Board at a meeting of the
Board called and held for the purpose (after reasonable notice to the Executive
and reasonable opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board prior to such vote), finding that in the
good faith opinion of the Board the Executive was guilty of conduct constituting
Cause. No purported termination of the Executive's employment for Cause shall be
effective without a Notice of Termination. The failure by the Executive to set
forth in the Notice of Termination any fact or circumstance which contributes to
a showing of Good Reason shall not waive any right of the Executive hereunder or
preclude the Executive from asserting such fact or circumstance in enforcing the
Executive's rights hereunder.
(e) Date of Termination. "Date of Termination" means the date of
-------------------
receipt of the Notice of Termination or any later date specified therein, as the
case may be; provided, however, that (i) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (ii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
(f) Transition Period. "Transition Period" means the period
-----------------
commencing on the Date of Termination and ending on the twenty-four month
anniversary of the Date of Termination.
-15-
6. Obligations of the Company upon Termination.
-------------------------------------------
(a) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than the following obligations: (i) payment of the
Executive's Annual Base Salary through the Date of Termination to the extent not
theretofore paid, (ii) payment of the product of (x) the greater of (A) the
annual bonus paid or payable, including by reason of deferral and before any
reduction for the amount of such bonus which the Executive may have agreed to
forgo in consideration for the receipt of stock options, (and annualized for any
fiscal year consisting of less than twelve full months or for which the
Executive has been employed for less than twelve full months) for the most
recently completed fiscal year and (B) the Recent Annual Bonus (such greater
amount hereafter referred to as the "Highest Annual Bonus") and (y) a fraction,
the numerator of which is the number of days in the current fiscal year through
the Date of Termination, and the denominator of which is 365 and (iii) payment
of any compensation previously deferred by the Executive (together with any
accrued interest thereon) and not yet paid by the Company and any pay for
vacation and sabbatical earned but not yet taken (the amounts described in
paragraphs (i), (ii) and (iii) are hereafter referred to as "Accrued
Obligations"). The amount of the Company's payment obligations under paragraphs
(i) and (ii) of the Accrued Obligations shall be reduced by the amount of any
such Annual Base Salary or Annual Bonus, respectively, that the Executive had
elected to forgo in consideration of the grant of stock options (the "Net
Accrued Obligations"). All Net Accrued Obligations shall be paid to the
Executive's estate or beneficiary,
-16-
as applicable, in a lump sum in cash within 30 days of the Date of Termination.
Anything in this Agreement to the contrary notwithstanding, the Executive's
estate and family shall be entitled to receive benefits at least equal to the
most favorable benefits provided generally by the Company and any of its
affiliated companies to the estates and surviving families of peer executives of
the Company and such affiliated companies under such plans, programs, practices
and policies relating to death benefits, if any, as in effect generally with
respect to other peer executives and their estates and families at any time
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect on the
date of the Executive's death generally with respect to other peer executives of
the Company and its affiliated companies and their families.
(b) Disability. If the Executive's employment is terminated by
----------
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for Net Accrued Obligations. All Net Accrued Obligations shall be paid to
the Executive in a lump sum in cash within 30 days of the Date of Termination.
Anything in this Agreement to the contrary notwithstanding, the Executive shall
be entitled after the Disability Effective Date to receive disability and other
benefits at least equal to the most favorable of those generally provided by the
Company and its affiliated companies to disabled executives and/or their
families in accordance with such plans, programs, practices and policies
relating to disability, if any, as in effect generally with respect to other
peer executives and their families at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive
and/or the Executive's family, as in effect at any time
-17-
thereafter generally with respect to other peer executives of the Company and
its affiliated companies and their families.
(c) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive Annual Base Salary through the Date of Termination plus
the amount of any compensation previously deferred by the Executive, in each
case to the extent theretofore unpaid. The amount of the Company's payment of
such Annual Base Salary shall be reduced by the amount of any such Annual Base
Salary that the Executive had elected to forgo in consideration of the grant of
stock options. If the Executive terminates employment during the Employment
Period other than for Good Reason, this Agreement shall terminate without
further obligations to the Executive, other than for Net Accrued Obligations.
In such case, all Net Accrued Obligations shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination.
(d) Good Reason; Other Than for Cause or Disability. If, during the
-----------------------------------------------
Employment Period, the Company shall terminate the Executive's employment other
than for Cause or Disability, or if the Executive shall terminate employment
under this Agreement for Good Reason:
(i) The Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the
following amounts:
(A) All Net Accrued Obligations; and
-18-
(B) The product of (x) two and (y) the sum of (i) Annual
Base Salary and (ii) the Highest Annual Bonus; and
(C) an amount equal to any unvested account balance in any
defined contribution plan, and any supplemental and excess
retirement plans with respect thereto, that would have vested had
the Executive's employment with the Company continued for the
duration of the Transition Period;
(D) an amount equal to the contributions and accrued
earnings that would have been made under any defined contribution
plan, and any supplemental and excess retirement plans with
respect thereto, had the Executive's employment with the Company
continued for the duration of the Transition Period and had the
Executive contributed to such plans at the highest rate permitted
by such plans, calculated assuming that the terms of such plans
are no less favorable than those in effect during the 90-day
period immediately prior to the Effective Date, or if more
favorable to the Executive, those in effect generally at any time
thereafter with respect to such plans for other peer executives
of the Company and its affiliated companies; and
(ii) For the duration of the Transition Period, or such longer
period as any plan, program, practice or policy may provide, the
Company shall continue benefits to the Executive and/or the Executive's
family at least equal to those
-19-
which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(iv) of this
Agreement if the Executive's employment had not been terminated in
accordance with the most favorable plans, practices, programs or
policies of the Company and its affiliated companies applicable
generally to other peer executives and their families during the 90-day
period immediately preceding the Effective Date or, if more favorable
to the Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affiliated
companies and their families. For purposes of determining eligibility
of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed for the duration of the Transition Period and to
have retired on the last day of such period. In lieu of the benefits
provided for in this Section 6(d)(ii), the Executive may elect within
60 days of the Date of Termination to be paid an amount in cash equal
to the present value of such benefits on an after-tax basis. In
determining present value, a discount rate equal to the federal mid-
term rate under Section 1274(d) of the Internal Revenue Code of 1986,
as amended (the "Code") shall be utilized. The right to continued
benefits granted to Executive and/or his family pursuant to this
Section 6(d)(ii) shall be in addition to any right of continued
coverage under any of the plans, programs, practices and policies
described in Section 4(b)(iv) of this Agreement which Executive and/or
his family may be entitled to under the Consolidated
-20-
Omnibus Budget Reconciliation Act of 1985 ("COBRA") upon any loss of
coverage under such plans, programs, practices and policies; and
(iii) The Company shall provide the Executive with outplacement
services (including office support and secretarial services), from a
vendor determined by the Company, at a cost not to exceed $30,000.
The amount payable by the Company to the Executive pursuant to Section
6(d)(i)(B) above will be reduced by any remaining balance in the Stock Option
Purchase Account.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plans, programs, policies or practices, provided by the
Company or any of its affiliated companies and for which the Executive may
qualify, nor shall anything herein limit or otherwise affect such rights as the
Executive may have under any other agreements with the Company or any of its
affiliated companies. Amounts which are vested benefits or which the Executive
is otherwise entitled to receive under any plan, policy, practice or program of
the Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program except as explicitly modified by this Agreement. Notwithstanding the
foregoing, payment of amounts pursuant to Section 6 of this Agreement shall be
in lieu of any severance benefits which would otherwise be paid or payable to
the Executive under the Capital One Financial Corporation Severance Pay Plan or
any successor thereto.
8. Full Settlement. The Company's obligation to make the payments
---------------
provided for in
-21-
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of, and no amounts earned by the Executive at
such other employment or otherwise shall reduce, the amounts payable to the
Executive under any of the provisions of this Agreement. The Company agrees to
pay, to the full extent permitted by law, all legal fees and expenses which the
Executive may reasonably incur as a result of any contest in which there is a
reasonable basis for the claims or defenses asserted by the Executive and such
claims and defenses are asserted by the Executive in good faith (regardless of
the outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to Section 9 of this
Agreement), plus in each case interest at the applicable federal rate provided
for in Section 7872(f)(2) of the Code; provided, however, that the Company shall
not be obligated to pay any such fees and expenses, and the Executive shall be
obligated to return any such fees and expenses that were advanced, if a court of
competent jurisdiction determines that the Executive was terminated for Cause.
9. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding, in the
event the Executive's employment is terminated during the Employment Period by
the Company without Cause or by the Executive for Good Reason and it shall be
determined that any payment
-22-
or distribution by the Company to or for the benefit of the Executive, whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to elect (i) to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes and
Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payments or (ii)
to have the Company reduce any such Payments due hereunder to the extent and
only to the extent necessary to avoid the assessment of such Excise Tax (a
"Payment Reduction"). If any Payment Reduction is elected, the Payments shall be
reduced in the order specified by the Executive to the extent necessary to
satisfy the requirements of the preceding sentence.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether a Gross-Up Payment
or a Payment Reduction is required and the amount of such Gross-Up Payment or
Payment Reduction and the assumptions to be used in arriving at such
determinations, shall be made by the Company's certified public accounting firm
immediately prior to the Effective Date (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and the Executive
within fifteen business days of the Date of Termination, if applicable, or such
earlier time as is requested by the
-23-
Company. All fees and expenses of the Accounting Firm shall be borne solely by
the Company. The initial Gross-Up Payment or Payment Reduction, if any, as
determined pursuant to this Section 9(b), shall be made by the Company within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments or Payment Reductions which will not have been
made by the Company should have been made ("Underpayment" or, respectively,
"Overpayment"), consistent with the calculations required to be made hereunder.
If it is determined that any Overpayment has been made by the Company to the
Executive, the Executive shall be entitled to elect either to have the Company
make a further Payment Reduction or, in the event that the Company exhausts its
remedies pursuant to Section 9(c) and the Executive thereafter is required to
make a payment of any Excise Tax, to have the Company make a Gross-Up Payment
with regard to any Excise Tax incurred due to the original Overpayment. If it is
determined that any Underpayment has been made by the Company to the Executive,
in the event that the Company exhausts its remedies pursuant to Section 9(c) and
the Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
-24-
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of a Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) Give the Company any information reasonably requested by
the Company relating to such claim,
(ii) Take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) Cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) Permit the Company to participate in any proceedings
relating to such claim;
-25-
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income
tax, including interest or penalties with respect thereto, imposed with respect
to such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and
-26-
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(e) Payments or distributions by the Company to or for the benefit of
the Executive pursuant to (i) any grants made under any performance-based plan
of the Company on or after the first meeting of the Company's shareholders after
September 16, 1995 or (ii) any "incentive stock options" (within the meaning of
Section 422 of the Code) granted to the Executive prior to September 16, 1995
shall be "Excluded Payments." In the event that Payments which include Excluded
Payments are subject to Excise Tax, the determinations made pursuant to Section
9(b) above shall be calculated with respect to all Payments (including any
Excluded Payments), but any resulting Gross-Up Payment required to be made by
the Company
-27-
shall be reduced by the product of the Gross-Up Payment multiplied by a fraction
the numerator of which is the Excluded Payments and the denominator of which is
all Payments (including the Excluded Payments).
10. Confidential Information. The Executive shall hold in a fiduciary
------------------------
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 10 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement. The obligations of this Section 10 are in addition to and do not
supersede any other confidentiality obligations of the Executive to the Company.
11. Successors.
----------
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
-28-
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
12. Funding. This Agreement constitutes an unfunded, unsecured obligation
-------
of the Company and any payments made hereunder shall be made from the general
assets of the Company. However, the Company either has established or will
establish within 90 days of the date hereof a trust pursuant to a trust
agreement in substantially the form of trust agreement attached hereto and shall
make contributions to such trust in accordance with the terms and conditions of
such trust agreement for the purpose of assisting the Company in meeting its
payment obligations under this Agreement.
13. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement
-29-
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
--------------------
To the address shown on the Company's records for tax reporting
purposes.
If to the Company:
-----------------
Capital One Financial Corporation
2980 Fairview Park Drive
Falls Church, Virginia 22042
Attention: Officer-in-Charge,
Human Resources Division
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any
provision hereof or the failure to assert any right the Executive may have
hereunder, including, without limitation, the right to terminate employment for
Good Reason pursuant to Section 5(c)(i)-(v),
-30-
shall not be deemed to be a waiver of such provision or right or any other
provision or right thereof.
(f) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof. Until the
Effective Date, subject to the terms of any other employment agreement between
the Executive and the Company, the Executive shall continue to be an "employee
at will".
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
----------------------------
James P. Donehey
CAPITAL ONE FINANCIAL CORPORATION
By:
----------------------------
Richard D. Fairbank
Chief Executive Officer
-31-
Exhibit 10.18.2
CAPITAL ONE FINANCIAL CORPORATION
FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT BETWEEN
CAPITAL ONE FINANCIAL CORPORATION AND JAMES P. DONEHEY
- --------------------------------------------------------------------------------
This Amendment of Agreement is by and between Capital One Financial
Corporation (the "Company") and James P. Donehey (the "Executive") dated as of
December 18, 1997.
WHEREAS, the Company entered into an Employment Agreement with the
Executive dated as of May 14, 1996 (the "Agreement"), providing the Executive
with compensation and benefit arrangements upon a Change of Control (as defined
therein);
WHEREAS, the Company and the Executive have as of the date of this
Amendment of Agreement (the "Amendment") entered into a Nonstatutory Stock
Option Agreement (the "Stock Option Agreement"); and
WHEREAS, the Company and the Executive now wish to amend the Agreement, as
provided in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the agreements
contained herein, the Company and the Executive agree that the Agreement shall
be modified as follows, effective as of December 18, 1997:
1. The first sentence of Section 9 (e) of the Agreement is amended to
read in its entirety as follows:
Payments or distributions by the Company to or for the benefit of
the Executive pursuant to any "incentive stock options" (within the
meaning of Section 422 of the Code) granted to the Executive prior
to September 16, 1995 shall be "Excluded Payments."
2. The amendment to the Agreement set forth in paragraph 1 of this
Amendment, is subject to Shareholder Approval as defined in the Stock
Option Agreement. If Shareholder Approval is not obtained, (i) this
Amendment and the amendment set forth in this Amendment shall be null
and void; and (ii) the Company and the Executive shall be bound by the
terms of the Agreement as in effect immediately before the execution of
this Amendment.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Amendment as of the date first written above.
CAPITAL ONE FINANCIAL CORPORATION
By:
-------------------------------------
John G. Finneran, Jr.
Senior Vice President and
General Counsel
By:
-------------------------------------
Name:
-----------------------------------
2
Exhibit 10.19
CONFORMED COPY
(Pound)156,457,500.00
and
(Canadian)$139,608,700
REVOLVING CREDIT FACILITY AGREEMENT
between
CAPITAL ONE FINANCE COMPANY CAPITAL ONE INC.
as original borrowers
CAPITAL ONE FINANCIAL CORPORATION
as original guarantor
BANK OF MONTREAL
BZW
CHASE MANHATTAN plc
DEUTSCHE BANK AG LONDON
as arrangers
BARCLAYS BANK PLC
as Facility Agent
BARCLAYS BANK PLC
as Sterling Agent
BANK OF MONTREAL
as Canadian Dollar Agent
and
OTHERS
Clifford Chance
London
CONTENTS
Clause Page No.
Part 1
INTERPRETATION
1. Interpretation............................................................1
Part 2
THE FACILITIES
2. The Facilities...........................................................20
3. Purpose..................................................................22
4. Conditions Precedent.....................................................22
5. Nature of Banks' Obligations.............................................22
Part 3
UTILISATION OF FACILITY A AND FACILITY B
6. Utilisation of Facility A and Facility B.................................23
Part 4
BILLS
7. Acceptance of Bills by the Canadian Dollar Agent........................28
8. Bills...................................................................28
9. Payment on Maturity of Bills............................................29
10. Commission on Bills.....................................................30
11. Canadian Dollar Agent's Responsibility in respect of Bills..............31
Part 5
THE ADVANCES
12. Making of Advances under Facility A and Facility B......................32
13. Payment of Interest.....................................................32
14. Calculation of Interest.................................................32
15. Repayment of Advances...................................................33
Part 6
CANCELLATION
16. Cancellation............................................................34
17. Prepayment..............................................................34
Part 7
CHANGES IN CIRCUMSTANCES
18. Taxes...................................................................35
19. Tax Receipts............................................................37
20. Tax Undertaking by Banks and Tax Refunds................................38
21. Increased Costs.........................................................38
22. Illegality..............................................................40
23. Market Disruption.......................................................41
24. Mitigation..............................................................42
Part 8
REPRESENTATIONS, COVENANTS AND EVENTS OF DEFAULT
25. Representations.........................................................44
26. Financial Information...................................................47
27. Financial Condition.....................................................48
28. Covenants...............................................................53
29. Events of Default.......................................................54
Part 9
DEFAULT INTEREST AND INDEMNITY
30. Default Interest and Indemnity..........................................58
Part 10
PAYMENTS
31. Currency of Account and Payment.........................................61
32. Payments................................................................62
33. Set-Off.................................................................64
34. Redistribution of Payments..............................................65
Part 11
FEES, COSTS AND EXPENSES
35. Fees....................................................................68
36. Costs and Expenses......................................................69
Part 12
AGENCY PROVISIONS
37. The Facility Agent, the Sterling Agent, the Canadian Dollar Agent,
the Arrangers and the Banks...........................................71
Part 13
ASSIGNMENT'S AND TRANSFERS
38. Benefit of Agreement....................................................76
39. Assignments and Transfers by the Obligors...............................76
40. Assignments and Transfers by Banks......................................76
41. Disclosure of Information...............................................78
Part 14
MISCELLANEOUS
42. Acceding Borrowers and Transferee Borrowers.............................79
43. Calculations and Evidence of Debt.......................................80
44. Amendments and Waivers..................................................82
45. Remedies and Waivers....................................................83
46. Partial Invalidity......................................................84
47. Notices.................................................................84
48. Counterparts............................................................84
49. European Monetary Union.................................................85
Part 15
LAW AND JURISDICTION
50. Law.....................................................................88
51. Jurisdiction............................................................88
THIS AGREEMENT is made the 29th day of August 1997
BETWEEN
(1) CAPITAL ONE FINANCE COMPANY ("COFC") and CAPITAL ONE INC. ("COI") (together
the "Original Borrowers");
(2) CAPITAL ONE FINANCIAL CORPORATION as guarantor (the "Original Guarantor");
(3) BANK OF MONTREAL, BZW, CHASE MANHATTAN plc and DEUTSCHE BANK AG LONDON (the
"Arrangers");
(4) BARCLAYS BANK PLC (the "Facility Agent");
(5) BARCLAYS BANK PLC (the "Sterling Agent");
(6) BANK OF MONTREAL (the "Canadian Dollar Agent"); and
(7) THE FINANCIAL INSTITUTIONS named in Part I and/or Part 2 of the First
Schedule (the "Banks").
NOW IT IS HEREBY AGREED as follows:
Part 1
INTERPRETATION
1. Interpretation
1.1 Definitions In this Agreement:
"Acceding Bank" has the meaning ascribed to such term in Clause 6.12 (Increase
of Commitments);
"Acceding Borrower" means any company carrying on business in England and Wales
or, as the case may be, Canada which has executed and delivered a Borrower
Accession Memorandum pursuant to Clause 42 (Acceding Borrowers);
"Acceding Guarantor" means any company which has executed and delivered a New
Guarantee;
1
"Advance" means, save as otherwise provided herein, any Tranche A Advance or
Tranche B Advance made or to be made pursuant to the terms hereof;
"Affected Bank" has the meaning ascribed to such term in Clause 2.3 (Transfers
of Part of Total A1 Commitments);
"Affiliate" means any person which, directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
another person or any Subsidiary of such other person. The term "control"
(including the terms "controlled by" or "under common control with") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through
ownership of voting securities or by contract or otherwise;
"Agents" means the Facility Agent, the Sterling Agent and the Canadian Dollar
Agent (and "Agent" means any of them);
"Associated Costs Rate" means, in relation to any Tranche A Advance or unpaid
sum denominated in sterling, the rate determined in accordance with the Sixth
Schedule (Associated Costs Rate);
"Available Tranche A Commitment" means, in relation to a Tranche A Bank at any
time and save as otherwise provided herein, its Tranche A Commitment less its
share of the Outstandings in respect of Facility A at such time, and in the case
of a proposed Tranche A Utilisation only, adjusted to take into account:
(i) any reduction in the Tranche A Commitment of a Tranche A Bank which
will occur prior to the commencement of the Term relating to the
proposed Tranche A Utilisation consequent upon a cancellation of the
whole or any part of the Tranche A Commitment of such Tranche A Bank
pursuant to the terms hereof,
(ii) the Sterling Amount of any Tranche A Advance to be made pursuant to
any other Tranche A Utilisation, which such Tranche A Bank is then
obliged to make on or before the proposed Utilisation Date relating
to such proposed Tranche A Utilisation; and
(iii) the Sterling Amount of any Tranche A Advance which was made by such
Tranche A Bank pursuant hereto and which is due to be repaid on or
before the proposed Utilisation Date relating to such Tranche A
Utilisation;
2
"Available Tranche B Commitment" means, in relation to a Tranche B Bank at any
time and save as otherwise provided herein, its Tranche B Commitment less its
share of the Outstandings in respect of Facility B at such time and in the case
of a proposed Tranche B Utilisation only, adjusted to take into account:
(i) any reduction in the Tranche B Commitment of a Tranche B Bank which
will occur prior to the commencement of the Term or Tenor relating to
the proposed Tranche B Utilisation consequent upon a cancellation of
the whole or any part of the Tranche B Commitment of such Tranche B
Bank pursuant to the terms hereof;
(ii) the Canadian Dollar Amount of any Tranche B Advance to be made and
any Bill to be accepted by the Canadian Dollar Agent, pursuant to any
other Tranche B Utilisation, which such Tranche B Bank is then
obliged to make, or as the case may be, reimburse the Canadian Dollar
Agent in respect of under Clause 9 (Payment on Maturity of Bills) on
or before the proposed Utilisation Date relating to such proposed
Tranche B Utilisation; and
(iii) the Canadian Dollar Amount of any Tranche B Advance and any Bill
which was made or accepted (or, as the case may be, in respect of
which such Tranche B Bank is obliged to reimburse the Canadian Dollar
Agent) and which is due to be repaid (or, as the case may be, mature)
on or before the proposed Utilisation Date relating to such Tranche B
Utilisation;
"Available Tranche A Facility" means, at any time, the aggregate amount of the
Available Tranche A Commitments;
"Available Tranche B Facility" means at any time, the aggregate amount of the
Available Tranche B Commitments;
"Beneficiaries" means the Facility Agent, the Sterling Agent, the Canadian
Dollar Agent, the Arrangers and the Banks and "Beneficiary" means any one of
them;
"Bill" means a Canadian Dollar draft or bill of exchange drawn by a Borrower and
accepted or to be accepted by the Canadian Dollar Agent under Facility B;
"Borrower Accession Memorandum" means a memorandum to be delivered pursuant to
Clause 42 (Acceding Borrowers) by the Borrowers to the Facility Agent
substantially in the form set out in Part I of the Seventh Schedule (Form of
Borrower Accession Memorandum and Borrower Transfer Certificate);
3
"Borrowers" means each of the Original Borrowers, any Acceding Borrower and any
Borrower Transferee but excluding any Borrower Transferor to the extent it has
assigned and transferred any of its rights and obligations to a Borrower
Transferee in accordance with Clause 42.5 (Transfers by Borrowers) and
"Borrower" means any one of them;
"Borrower Transfer Certificate" means a certificate substantially in the form
set out in Part II of the Seventh Schedule (Form of Borrower Accession
Memorandum and Borrower Transfer Certificate) signed by a Borrower and a
Borrower Transferee whereby:
(i) such Borrower seeks to procure the transfer to such Borrower
Transferee of all or a part of such Borrower's rights and obligations
hereunder upon and subject to the terms and conditions set out in
Clause 42 (Acceding Borrowers); and
(ii) such Borrower Transferee undertakes to perform the obligations it will
assume as a result of delivery of such certificate to the Facility
Agent as is contemplated in Clause 42.5 (Transfers by Borrowers);
"Borrower Transferee" means a Subsidiary of the Original Guarantor to which a
Borrower seeks to transfer or, as the case may be, has transferred all or part
of such Borrower's rights and obligations hereunder;
"Borrower Transferor" means a Borrower that has transferred and assigned any of
its rights and obligations in accordance with Clause 42.5 (Transfers by
Borrowers);
"Canadian Dollar Amount" means:
(i) in relation to any proposed Tranche B Advance, made or to be made on
any Utilisation Date, the principal Canadian Dollar amount thereof;
and
(ii) in relation to any Bill under Facility B, the face amount of such
Bill,
and the Canadian Dollar Amount of any Utilisation Request issued under Facility
B shall be determined accordingly;
"Canadian Dollar Bankers' Acceptance Discount Rate" means, in respect of any
Bills and any date, the average of the rates notified to the Canadian Dollar
Agent by each of the Canadian Reference Banks as being the rate at which it is
offering at or about 10.00 a.m. (Toronto time) on such date to purchase a Bill
with an equivalent amount and tenor to the face amount and Tenor of the Bills to
be accepted on such date;
4
"Canadian Prime Rate" means, in relation to any Tranche B Advance or unpaid sum
denominated in Canadian Dollars and any date, the higher of (i) the rate
announced from time to time by the Canadian Dollar Agent as its reference prime
lending rate on such date for Canadian Dollar denominated commercial loans made
in Canada and in force on such date and (ii) the Canadian Dollar Bankers'
Acceptance Discount Rate on such date in respect of a Bill with a Tenor of a
period of 30 days plus 0.75 per cent;
"Canadian Qualified Lender" shall have the meaning ascribed to it in Clause 18.1
(Tax Gross-Up);
"Canadian Reference Banks" means the principal Toronto offices of Bank of
Montreal and Deutsche Bank Canada;
"Commitment" means, in relation to a Bank at any time and save as otherwise
provided herein its Tranche A Commitment and its Tranche B Commitment;
"Commitment Increase Date" has the meaning ascribed to such term in Clause 6.13
(Increase Effective);
"Commitment Increase Letter" means a letter substantially in the form set out in
the Eleventh Schedule (Form of Commitment Increase Letter);
"Compliance Certificate" means a certificate demonstrating compliance with the
covenants set forth in Clause 27 (Financial Condition) as of the date specified
in such certificate, substantially in the form set out in the Ninth Schedule
(Form of Compliance Certificate);
"Event of Default" means any of those events specified in Clause 29 (Events of
Default);
"Facility" means each of Facility A and Facility B granted to the Borrowers in
this Agreement;
"Facility A" means the sterling revolving cash advance facility granted to the
Tranche A Borrowers hereunder;
"Facility B" means the Canadian Dollar revolving cash advance and acceptance
credit facility granted to the Tranche B Borrowers hereunder;
"Facility Office" means, in respect of Facility A and any Tranche A Bank, the
office in the United Kingdom identified with the relevant Tranche A Bank's
signature below (or, in the case of a Transferee, at the end of the Transfer
Certificate to which it is a party as Transferee) or such other office in the
United Kingdom as it may from time to time notify to the Facility Agent and the
Sterling Agent, and in relation to Facility B and any Tranche B Bank, the office
5
in Canada identified with the relevant Tranche B Bank's signature below (or, in
the case of a Transferee, at the end of the Transfer Certificate to which it is
a party as Transferee) or such other office in Canada as it may from time to
time notify to the Facility Agent and the Canadian Dollar Agent;
"Final Maturity Date" means, the day which is thirty-six months after the date
hereof or such later day, if any, as may be agreed in accordance with the
provisions of Clause 6. 10 (Optional Increase of Final Maturity Date) Provided
that if the Final Maturity Date determined as aforesaid would fall on a day
which is not a business day, it shall be the immediately following business day
which is a business day in London and a business day in Toronto;
"Finance Documents" means each of this Agreement, the Guarantee, the Bills, any
Borrower Accession Memorandum, any New Guarantee, any fee letter entered into by
any Obligor pursuant to any of the terms hereof or thereof, any Compliance
Certificate, any notice delivered in connection herewith or therewith and any
other agreement or document designated as such by the Facility Agent and the
Original Guarantor;
"Group" means, at any time, the Original Guarantor and each of its Subsidiaries
at such time;
"Guarantee" means the guarantee of even date herewith to be given by the
Original Guarantor in favour of the Beneficiaries in substantially the form set
out in the Twelfth Schedule (Form of Guarantee);
"Guarantors" means each of the Original Guarantor and any Acceding Guarantor and
"Guarantor" means any one of them;
"Information Memorandum" means the document concerning the Original Obligors
which, was prepared in relation to this transaction and distributed by the
Arrangers to selected banks during July 1997;
"Instructing Group" means:
(i) whilst no Advances or Bills are outstanding hereunder, a group of
Banks for whom the aggregate of their Tranche A Commitments and the
Sterling Amount (on the date of the request to the Banks) of the
aggregate of their Tranche B Commitments amount (or, if each Bank's
Commitment has been reduced to zero, did immediately before such
reduction to zero, amount) in aggregate to more than sixty six and
two-thirds per cent. of the aggregate of the Tranche A Commitments and
the Sterling Amount (on the date of the request to the Banks) of the
aggregate of the Tranche B Commitments; and
6
(ii) whilst at least one Advance or Bill is outstanding hereunder, a group
of Banks to whom in aggregate more than sixty six and two-thirds per
cent. of the Outstandings is owed;
"LIBOR" means, in relation to any amount owed by an Obligor hereunder on which
interest for a given period is to accrue, the rate per annum equal to the
offered quotation which appears on the relevant page (as defined in Clause 1.7
(Screen Rates)) for such period at or about 11.00 a.m. on the Quotation Date for
such period;
"Margin" means, at any time, the rate set out in the table below under the
heading which sets out the Relevant Ratings at such time of the Original
Guarantor, any Acceding Guarantors and the relevant Borrower to which any
Tranche A Advance in relation to which such margin is being calculated is being
or has been made:
===================================================================
Relevant Ratings A- BBB+ BBB BBB- BB+ Less-than BB+
and and and and and and
A3 Baa1 Baa2 Baa3 Ba1 Ba1
- -------------------------------------------------------------------
Margin (per 0.25 0.30 0.35 0.40 0.575 1.10
cent. per annum)
===================================================================
"Material Adverse Effect" means with respect to an Obligor, a material adverse
effect on (a) the property, business, operations, financial condition, prospects
or capitalisation of such Obligor and its Subsidiaries taken as a whole, (b) the
ability of such Obligor to perform its obligations under the Finance Documents
to which it is a party, (c) the validity or enforceability of the obligations of
such Obligor under the Finance Documents to which it is a party, (d) the rights
and remedies of the Beneficiaries against such Obligor or (e) the timely payment
of the principal of or interest on or in connection with any Advance or Bill or
other amounts payable by such Obligor in connection therewith;
"Maturity Date" means, in relation to any Bill, the last day of the Tenor
thereof;
"New Guarantee" means a guarantee to be given by any Acceding Guarantor in
favour of the Beneficiaries in the agreed form;
"Obligors" means, at any time, the Borrowers and the Guarantors at such time;
"Original Financial Statements" means:
(i) in relation to the Original Guarantor, its audited consolidated
financial statements for its financial year ended 31 December 1996
together with its consolidated management accounts for its financial
period ended 30 June 1997;
7
(ii) in relation to COFC, a statement of such financial information
concerning COFC included in the consolidated financial statements for
the year ended 31 December 1996 supplied pursuant to paragraph (i) so
certified by an officer of the Original Guarantor together with its
consolidated management accounts for its financial period ended 30
June 1997;
(iii) in relation to COI, a statement of such financial information
concerning COI included in the consolidated financial statements for
the year ended 31 December 1996 supplied pursuant to paragraph (i) so
certified by an officer of the Original Guarantor together with its
consolidated management accounts for its financial period ended 30
June 1997;
(iv) in relation to any Acceding Borrower, its consolidated management
accounts delivered pursuant to the requirement set out in the Eighth
Schedule (Documents to Accompany Borrower Accession Memorandum and
Borrower Transfer Certificate); and
(v) in relation to any Acceding Guarantor, its audited financial
statements delivered pursuant to the requirement set out in the
Schedule to the Guarantee;
"Original Obligors" means the Original Guarantor and the Original Borrowers;
"Outstandings" means the total of:
(i) in relation to Facility A, at any time, the aggregate of each
outstanding Tranche A Advance at such time; and
(ii) in relation to Facility B, at any time, the aggregate:
(a) each outstanding Tranche B Advance; and
(b) each outstanding Bill accepted by the Canadian Dollar Agent
under Facility B;
"Permitted Disposal" means any of the following:-
(i) the merger or consolidation of any Subsidiary of any Obligor with or
into, or the transfer by such Subsidiary of all or substantially all
of its business or property to (x) such Obligor if such Obligor is
the continuing, surviving or transferee corporation or (y) any other
Subsidiary of such Obligor;
8
(ii) the conveyance, sale, lease, transfer or other disposal by any
Obligor of, by one or more transactions or series of transactions
(whether related or not), all or substantially all its revenues or
its assets other than any Managed Receivables (as defined in Clause
27 (Financial Condition);
(iii) the merger or consolidation of any Obligor with or into, or the
transfer by such Obligor (other than the Original Guarantor) of all
or substantially all of its business or property to any other
Obligor;
(iv) the merger or consolidation of any Subsidiary of any Obligor with or
into, or the transfer by any such person of all or substantially all
of its business or property to any other person so long as (x) the
continuing, surviving or transferee corporation is a Subsidiary of
such Obligor and (y) no Event of Default has occurred and is
continuing immediately prior to such merger, consolidation or
transfer or would result therefrom; and
(v) the sale by any Obligor or any of its Subsidiaries of credit card
loans and other finance receivables pursuant to securitisations;
"Permitted Encumbrances" means:
(i) any encumbrance existing on any property of any corporation at the
time such corporation becomes a Subsidiary of a Borrower and not
created in contemplation of such event;
(ii) any encumbrance on any property securing indebtedness incurred or
assumed for the purpose of financing all or any part of the cost of
acquiring such property, provided that such encumbrance attaches to
such property concurrently with or within 90 days after the
acquisition thereof;
(iii) any encumbrance on any property of any corporation existing at the
time such corporation is merged or consolidated with or into the
Original Guarantor or any of its Subsidiaries and not created in
contemplation of such event;
(iv) any encumbrance existing on any property prior to the acquisition
thereof by the Original Guarantor or any of its Subsidiaries and not
created in contemplation of such acquisition-,
(v) any encumbrance arising out of the refinancing, extension, renewal or
refunding of any indebtedness secured by any encumbrance permitted by
paragraphs (i), (ii), (iii) or (iv) above provided that such
indebtedness is not increased and is not secured by any additional
property;
9
(vi) encumbrances for taxes not yet due or encumbrances for taxes being
contested in good faith by appropriate proceedings for which
adequate reserves (in the good faith judgment of the management of
the relevant Borrower) have been established;
(vii) encumbrances in respect of property of the Original Guarantor or any
of its Subsidiaries imposed by law:
(a) which are incurred in the ordinary course of business and (x)
which do not in the aggregate materially detract from the value
of such property or materially impair the use thereof in the
operation of the business of the Original Guarantor or any of
its Subsidiaries or (y) which are being contested in good faith
by appropriate proceedings, which proceedings have the effect
of preventing the forfeiture or sale of the property subject to
such encumbrance; or
(b) which do not relate to material liabilities of the Original
Guarantor and its Subsidiaries and do not in the aggregate
materially detract from the value of the property of the
Original Guarantor and its Subsidiaries taken as a whole;
provided that no encumbrance permitted under this paragraph
(vii) may secure any obligation in an amount exceeding
$10,000,000;
(viii) encumbrances arising in the ordinary course of business in
connection with securitisations of credit cards and other finance
receivables by the Original Guarantor or any of its Subsidiaries;
(ix) encumbrances on cash and readily marketable securities securing
obligations in respect of swap agreements in an amount not to exceed
the (a) net mark to market exposure of the counterparty thereunder
(subject to customary minimum transfer thresholds and periodic
valuations) plus (b) any additional amounts requested by
counterparties in accordance with their general internal credit
guidelines or policies with respect to particular types of swap
agreements; and
(x) encumbrances on property of a Borrower and its Subsidiaries not
otherwise permitted by the above paragraphs (i) to (ix) securing
indebtedness of such Borrower or any of its Subsidiaries in an
aggregate principal or face amount not to exceed 10% of Tangible Net
Worth with respect to such Borrower;
"Permitted Transfer Amount" means:
(a) with respect to the Tranche A1 Banks and any transfer under Clause
2.3 (Transfers of Part of Total A1 Commitments) an amount such that
the Total A1
10
Commitments shall not, at the effective time of the relevant
transfer, be reduced to less than the original Total A1 Commitments
as at the date hereof less (Pounds)34,573,600.00; and
(b) with respect to the Tranche B1 Banks and any transfer under Clause
2.7 (Transfers of Part of Total B1 Commitments) an amount such that
the Total B1 Commitments shall not, at the effective time of the
relevant transfer, be reduced to less than the original Total B1
Commitments as at the date hereof less C$76,910,200.00;
"Potential Event of Default" means any event that with notice or lapse of time
or both would become an Event of Default;
"Proportion" means, in relation to a Bank:
(i) whilst no Advances or Bills are outstanding hereunder, the
proportion borne by the Sterling Amount of its Commitment to the
Sterling Amount of Total Commitments (or, if the Total Commitments
are then zero, by its Commitment to the Total Commitments
immediately prior to their reduction to zero); or
(ii) whilst at least one Advance or Bill is outstanding hereunder, the
proportion borne by its share of the Outstandings to the
Outstandings;
"Quotation Date" means, in relation to any period for which an interest rate is
to be determined under Facility A, the day on which quotations would ordinarily
be given by prime banks in the London Interbank Market for deposits in sterling
for delivery on the first day of that period Provided that, if, for any such
period, quotations would ordinarily be given on more than one date, the
Quotation Date for that period shall be the last of those dates;
"Reference Banks" means the principal London offices of Bank of Montreal,
Barclays Bank PLC, The Chase Manhattan Bank and Deutsche Bank AG London or such
other bank or banks as may from time to time be agreed between the Original
Guarantor and the Facility Agent;
"Relevant Ratings" means, in relation to any relevant group of Obligors and in
relation to any table set out in this Agreement for the calculation of
commitment commission, Margin or Stamping Fee Rate, the highest combined rating
of any Obligor in such group by Standard & Poor's Rating Services and Moody's
Investors Service, Inc. provided that where one of the ratings making up such
highest combined rating corresponds to a rating in one of the headings in the
relevant table but the other rating is lower than the second rating in such
heading, the Relevant Ratings shall be the ratings in the heading of the next
column of such table where such second rating is listed and for the avoidance of
doubt a "relevant group of Obligors" shall mean the group of Obligors specified
in the relevant definition or provision in respect of which the Relevant Ratings
are being ascertained;
11
"Repayment Date" means, in relation to any Advance, the last day of the Term
thereof or, if such day is not a business day, the next business day following;
"Requested Amount" means, in relation to any Utilisation Request, the aggregate
principal amount of the Advance(s) or, as the case may be, the aggregate face
amount of the Bill(s) therein requested;
"Schedule I Bank" means a banking entity which is named in Schedule I of the
Bank Act (Canada) S.C. 1991 C. 46, as such schedule may be amended from time to
time;
"Schedule II Bank" means a Canadian Subsidiary of a non-resident banking entity,
which Subsidiary is named in Schedule II of the Bank Act (Canada) S.C. 1991
C.46, as such schedule may be amended from time to time;
"Stamping Fee Rate" means, at any time, the rate set out in the table below
under the heading which sets out the Relevant Ratings at such time of the
Original Guarantor, any Acceding Guarantors and the relevant Borrower which has
drawn the Bill(s) in relation to which such stamping fee is being calculated:
================================================================================
Relevant Ratings A- BBB+ BBB BBB- BB+ less than BB+
and and and and and and
A3 Baa1 Baa2 Baa3 Ba1 Ba1
- --------------------------------------------------------------------------------
Stamping (per 0.25 0.30 0.35 0.40 0.575 1.10
cent. per annum)
================================================================================
"Sterling Amount" means:
(i) at any time, in relation to any Tranche B Commitment, the sterling
equivalent of the Canadian Dollar amount of such Tranche B
Commitment at such time;
(ii) in relation to any Tranche A Advance, the principal amount thereof
at the date of the Utilisation Request in respect of such Advance;
(iii) at any time, in relation to any Tranche B Advance, the sterling
equivalent of the Canadian Dollar principal amount of such Advance
at such time; and
(iv) at any time, in relation to any Bill accepted by the Canadian Dollar
Agent under Facility B, the sterling equivalent of the Canadian
Dollar face amount of such Bill at such time,
and the Sterling Amount of a Requested Amount shall be determined accordingly;
12
"Subsidiary" of any corporation (the "Parent") means any other corporation of
which more than 50% of the outstanding capital stock having ordinary voting
power to elect a majority of the board of directors of such other corporation
(irrespective of whether or not at the time capital stock of any other class or
classes of such corporation shall or might have voting power upon the occurrence
of any contingency) is at the time directly or indirectly owned by the Parent or
by the Parent and/or one or more Subsidiaries of the Parent, and shall include
any corporation that is a direct or indirect Subsidiary of any such first
mentioned Subsidiary;
"Tenor" means, in relation to any Bill, the period from the Utilisation Date on
which it is accepted until its maturity as specified in the Utilisation Request
relating thereto;
"Term" means in relation to any Advance, the period for which such Advance is
borrowed as specified in the Utilisation Request relating thereto;
"Termination Date" means the day falling one month prior to the Final Maturity
Date;
"Total A Commitments" means the aggregate for the time being of the Commitments
of the Tranche A Banks;
"Total A1 Commitments" means the aggregate for the time being of the Commitments
of the Tranche A1 Banks;
"Total B Commitments" means the aggregate for the time being of the Commitments
of the Tranche B Banks;
"Total B1 Commitments" means the aggregate for the time being of the Commitments
of the Tranche B1 Banks;
"Total Commitments" means the aggregate for the time being of the Total A
Commitments and the Total B Commitments;
"Tranche A Advance" means, save as otherwise provided herein, a cash advance
made or to be made by the Tranche A Banks under Facility A;
"Tranche A Bank" means each Tranche A1 Bank and each Tranche A2 Bank;
"Tranche A Borrower" means initially COFC and any Acceding Borrower and Borrower
Transferee to Facility A but excluding any Borrower Transferor to Facility A
which has assigned and transferred all of its rights and obligations in respect
of Facility A in accordance with Clause 42.5 (Transfer by Borrowers);
13
"Tranche A1 Bank" means a Bank whose name is set out in part A of Part I and
part A of Part 2 of the First Schedule (The Banks) or whose name is set out in
part A of Part 1 and is an Affiliate of a Bank whose name is set out in part A
of Part 2 of the First Schedule (The Banks) and whose Tranche A Commitment and
Tranche B Commitment have not been cancelled or reduced to zero pursuant to the
provisions of this Agreement and any bank or other financial institution which
becomes a "Tranche A1 Bank" party to this Agreement pursuant to the terms
hereof;
"Tranche A2 Bank" means a Bank whose name is set out in part B of Part 1 of the
First Schedule (The Banks) but not in Part A of Part 1 of the First Schedule
(The Banks) and whose Tranche A Commitment has not been cancelled or reduced to
zero pursuant to the provisions of this Agreement and any bank or other
financial institution which becomes a "Tranche A2 Bank" party to this Agreement
pursuant to the terms hereof;
"Tranche A Commitment" means, in relation to a Bank at any time and save as
otherwise provided herein, the aggregate of the amounts set opposite its name in
part A and part B of Part I of the First Schedule (The Banks) under the heading
"Tranche A Banks";
"Tranche A1 Commitment" means, in relation to a Tranche A1 Bank, the Tranche A
Commitment in respect of such Tranche A1 Bank;
"Tranche A Utilisation" means a utilisation of Facility A hereunder;
"Tranche B Advance" means, save as otherwise provided herein, an advance in
Canadian Dollars, bearing interest based on the Canadian Prime Rate made or to
be made by the Tranche B Banks under Facility B including deemed Tranche B
Advances as provided for in Clause 9.3 (Deemed Requests for Advances);
"Tranche B Bank" means each Tranche B1 Bank and each Tranche B2 Bank;
"Tranche B1 Bank" means a Bank whose name is set out in part A of Part 2 and
part A of Part I of the First Schedule (The Banks) or whose name is set out in
part A of Part 2 and is an Affiliate of a Bank whose name is set out in part A
of Part 1 of the First Schedule (The Banks) and whose Tranche B Commitment and
Tranche A Commitment have not been cancelled or reduced to zero pursuant to the
provisions of this Agreement and any bank or other financial institution which
becomes a "Tranche B1 Bank" party to this Agreement pursuant to the terms
hereof;
"Tranche B2 Bank" means a Bank whose name is set out in part B of Part 2 of the
First Schedule (The Banks) but not in part A of Part 2 of the First Schedule
(The Banks) and whose Tranche B Commitment has not been cancelled or reduced to
zero pursuant to the provisions of this Agreement and any bank or other
financial institution which becomes a "Tranche B2
14
Bank" party to this Agreement pursuant to the terms hereof;
"Tranche B Borrower" means initially COI and any Acceding Borrower and Borrower
Transferee to Facility B but excluding any Borrower Transferor to Facility B
which has assigned and transferred all of its rights and obligations in respect
of Facility B in accordance with Clause 42.5 (Transfers by Borrowers);
"Tranche B Commitment" means, in relation to a Bank at any time and save as
otherwise provided herein, the aggregate of the amounts set opposite its name in
part A and part B of Part 2 of the First Schedule (The Banks) under the heading
"Tranche B Banks";
"Tranche B1 Commitment" means, in relation to a Tranche B1 Bank, the Tranche B
Commitment in respect of such Tranche B1 Bank;
"Tranche B Utilisation" means a utilisation of Facility B hereunder;
"Transfer Certificate" means a certificate substantially in the form set out in
the Second Schedule (Form of Transfer Certificate) signed by a Bank and a
Transferee whereby:
(i) such Bank seeks to procure the transfer to such Transferee of all or a
part of such Bank's rights and obligations hereunder upon and subject
to the terms and conditions set out in Clause 40 (Assignments and
Transfers by Banks); and
(ii) such Transferee undertakes to perform the obligations it will assume
as a result of delivery of such certificate to the Facility Agent as
is contemplated in Clause 40.3 (Transfers by Banks);
"Transfer Date" means, in relation to any Transfer Certificate, the date for the
making of the transfer as specified in the schedule to such Transfer
Certificate;
"Transferee" means a bank or other financial institution to which a Bank seeks
to transfer or, as the case may be, has transferred all or part of such Bank's
rights and obligations hereunder;
"UK Qualifying Lender" shall have the meaning ascribed to it in Clause 18.1 (Tax
Gross-Up);
"Utilisation" means a utilisation of either Facility hereunder;
"Utilisation Date" means the date of a Tranche A Utilisation or a Tranche B
Utilisation, being the date on which the Advances in respect thereof are to be
made or the Bills in respect thereof are to be accepted; and
15
"Utilisation Request" means a notice given to the relevant Agent pursuant to
Clause 6.1 (Delivery of a Utilisation Request) in the form set out in the Fourth
Schedule (Utilisation Request).
1.2 Interpretation. Any reference in this Agreement to:
any "Agent" or any "Bank" shall be construed so as to include its and any
subsequent successors, permitted Transferees and permitted assigns in accordance
with their respective interests;
a document is in an "agreed form" when it has been initialled by or on behalf of
the Original Borrowers, the Original Guarantor and the Facility Agent;
a "business day" shall be construed as a reference to a day (other than a
Saturday or Sunday) on which banks are generally open for business in London in
relation to Facility A or in Toronto in relation to Facility B and in each case
a day on which banks are generally open for business in the commonwealth of
Virginia, United States of America;
"BZW" is a reference to BZW - the investment banking division of Barclays Bank
PLC;
a "Clause" shall, subject to any contrary indication, be construed as a
reference to a clause hereof;
an "encumbrance" shall be construed as a reference to a mortgage, charge,
pledge, hypothecation, security interest, lien or other encumbrance securing any
obligation of any person or any other type of preferential arrangement
(including, without limitation, title transfer and retention arrangements)
having the effect of creating a security interest;
the "equivalent" on any given date in one currency (the "first currency") of an
amount denominated in another currency (the "second currency") is a reference to
the amount of the first currency which could be purchased with the amount of the
second currency at the spot rate of exchange quoted by the relevant Agent at or
about 9.15 a.m. on such date for the purchase of the first currency with the
second currency;
"financial indebtedness" shall be construed, with respect to any person, as a
reference to any indebtedness of such person for or in respect of:
(i) obligations created, issued or incurred by such person for borrowed
money (whether by loan, the issuance and sale of debt securities or
the sale of property to another person subject to an understanding or
agreement, contingent or otherwise, to repurchase such property from
such person);
16
(ii) obligations of such person to pay the deferred purchase or
acquisition price of property or services, other than trade
accounts payable (other than for borrowed money) arising, and
accrued expenses incurred, in the ordinary course of business so
long as such trade accounts payable are payable within 90 days of
the date the respective goods are delivered or the respective
services are rendered;
(iii) indebtedness of others secured by an encumbrance on the property
of such person, whether or not the respective indebtedness so
secured has been assumed by such person;
(iv) non-contingent obligations of such person (and, for the purposes
of the definition of "Permitted Encumbrance" and Clause 29.2
(Cross Default), all contingent obligations of such person) in
respect of letters of credit, bankers' acceptances or similar
instruments issued or accepted by banks and other financial
institutions for account of such person;
(v) capital lease obligations of such person (being all obligations of
such person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) property to the extent
such obligations are required to be classified and accounted for
as a capital lease on a balance sheet of such person under GAAP
(as defined in Clause 27.3 (Definition of Financial Terms) or in
any similar or equivalent manner under the relevant generally
accepted accounting principles applicable to the preparation of
such person's financial statements if these are other than GAAP)
and, for the purposes of this Agreement, the amount of such
obligations shall be the capitalised amount thereof, determined in
accordance with GAAP (as so defined); and
(vi) financial indebtedness of others guaranteed by such person;
a "holding company" of a person shall be construed as a reference to any person
of which the first-mentioned person is a Subsidiary;
"indebtedness" shall be construed so as to include any obligation (whether
incurred as principal or as surety) for the payment or repayment of money,
whether present or future, actual or contingent;
a "month" is a reference to a period starting on one day in a calendar month and
ending on the numerically corresponding day in the next succeeding calendar
month save that, where any such period would otherwise end on a day which is not
a business day, it shall end on the next succeeding business day, unless that
day falls in the calendar month succeeding that in which it would otherwise have
ended, in which case it shall end on the immediately preceding business day
Provided that, if a period starts on the last business day in a calendar month
or if there is no numerically corresponding day in the month in which that
period ends, that period shall end
17
on the last business day in that later month (and references to "months" shall
be construed accordingly);
a "Part" shall, subject to any contrary indication, be construed as a reference
to a part hereof;
a "person" shall be construed as a reference to any person, firm, company,
corporation, government, state or province or agency of a state or province or
any association or partnership (whether or not having separate legal
personality) of two or more of the foregoing;
a "Schedule" shall, subject to any contrary indication, be construed as a
reference to a schedule hereto;
"tax" shall be construed so as to include any tax, levy, impost, duty or other
charge of a similar nature (including, without limitation, any penalty or
interest payable in connection with any failure to pay or any delay in paying
any of the same);
"VAT" shall be construed as a reference to value added tax under English law,
any goods and services tax under Canadian law and any other similar tax under
any other jurisdiction, including, in each case, similar tax which may be
imposed in place thereof from time to time;
a "wholly-owned subsidiary" of a person shall be construed as a reference to any
person which has no other members or shareholders except that other person and
that other person's wholly-owned Subsidiaries or persons acting on behalf of
that other person or its wholly-owned Subsidiaries; and
the "winding-up", "dissolution" or "administration" of a company or corporation
shall be construed so as to include any equivalent or analogous proceedings
under the law of the jurisdiction in which such company or corporation is
incorporated or any jurisdiction in which such company or corporation carries on
business including, without limitation, being subject to or the seeking of
liquidation, bankruptcy, winding-up, reorganisation, dissolution,
administration, arrangement, adjustment, protection or relief of debtors or
compromise, arrangement or proposals with creditors.
1.3 Currency ("Pound") and "sterling" denote the lawful currency of the United
Kingdom from time to time; "C$" and "Canadian Dollars" denote the lawful
currency of Canada from time to time; "US$" and "$" denotes the lawful currency
of the United States of America from time to time.
1.4 References save where the contrary is indicated, any reference in this
Agreement to:
18
(i) this Agreement or any other agreement or document shall be
construed as a reference to this Agreement or, as the case may be,
such other agreement or document as the same may have been, or may
from time to time be, amended, restated, varied, novated or
supplemented;
(ii) a statute shall be construed as a reference to such statute as the
same may have been, or may from time to time be, amended or re-
enacted;
(iii) a time of day shall be construed as a reference to London time;
and
(iv) a person, shall mean that person's successor, permitted transferee
or assignee.
1.5 Headings Clause, Part and Schedule headings are for ease of reference
only.
1.6 Timetables There are set out in the Fifth Schedule (Timetables) timetables
of certain of the procedures provided for in this Agreement. For the purpose of
construction, any reference herein to a specified time shall be construed as a
reference to the relevant time set forth in the relevant timetable.
1.7 Screen Rates For the purposes of the definition of "LIBOR":
(a) "relevant page" means page "3750" of the Telerate screen which
displays an average British Bankers Association Interest
Settlement Rate for sterling (or, if such page or such service
shall cease to be available, such other page or such other service
(as the case may be) for the purpose of displaying an average
British Bankers Association Interest Settlement Rate for sterling
as the Sterling Agent, after consultation with the Banks and the
Original Guarantor, shall select); or
(b) if no quotation for sterling and the relevant period is displayed
and the Sterling Agent has not selected an alternative service on
which a quotation is displayed, "LIBOR" shall mean the arithmetic
mean (rounded upwards, if not already such a multiple, to the
nearest whole multiple of one-sixteenth of one per cent.) of the
rates (as notified to the Sterling Agent) at which each of the
Reference Banks was offering to prime banks in the London
Interbank Market deposits in sterling and for such period at or
about 11.00 a.m. on the Quotation Date for such period.
19
Part 2
THE FACILITIES
2. The Facilities
2.1 Grant of Facility A The Tranche A Banks grant to the Tranche A Borrowers
upon the terms and subject to the conditions hereof, a sterling revolving cash
advance facility, in a total aggregate amount of (Pounds)156,457,500.00 of
which; (Pounds)42,465,300 shall be made available by the Tranche A1 Banks and
(Pounds)113,992,200.00 shall be made available by the Tranche A2 Banks.
2.2 Grant of Facility B The Tranche B Banks grant to the Tranche B Borrowers
upon the terms and subject to the conditions hereof, a Canadian Dollar revolving
cash advance and acceptance credit facility, in a total aggregate amount of
C$139,608,700.00 of which C$76,910,200.00 shall be made available by the Tranche
BI Banks and C$62,698,500.00 shall be made available by the Tranche B2 Banks.
2.3 Transfers of Part of Total A1 Commitments Not less than fifteen nor more
than thirty days prior to the last day of any month, the Borrowers may by notice
(to be delivered by the Original Guarantor only on behalf of each of the
Borrowers) to the Facility Agent notify the Tranche A1 Banks to cancel
temporarily the whole or, in their pro rata portions, any part (being a minimum
amount of (Pounds)5,000,000 and a maximum amount of no more than the Permitted
Transfer Amount) of the Total A1 Commitments and increase the Total BI
Commitments by an equivalent amount (determined on the last day of such month)
in Canadian Dollars (rounded to the nearest one hundred Canadian Dollars).
2.4 Facility Agent to Notify Banks of Request Following the receipt of a
request from the Borrowers pursuant to Clause 2.3 (Transfer of Part of Total A1
Commitments), the Facility Agent shall promptly notify each Bank of such request
and the amount by which the Available Tranche A1 Commitment of each Tranche A1
Bank will be reduced and the Available Tranche B1 Commitment will be increased.
2.5 Effect of Notification Subject to:
(a) each to the representations which are to be deemed repeated at any
time after the date hereof in accordance with Clause 25.15 (Repetition
of Representations) being true and correct on and as of the date on
which such reduction and increase is to be effective by reference to
the facts and circumstances existing at the time (or, if any such
representation is expressly stated to have been made as of a specific
date, as of such specific date), except to any extent waived pursuant
to Clause 44 (Amendments and Waivers); and
20
(b) no Event of Default or Potential Event of Default having occurred and
being continuing as at such date
then with effect from the last day of the relevant month such cancellation and
increase shall take effect in the amounts notified.
2.6 Effect of any such Cancellation and Increase Each such cancellation of the
Tranche A1 Commitments shall reduce the Tranche A1 Commitment of each Tranche A1
Bank rateably and shall increase the Tranche B1 Commitment of each Tranche B1
Bank rateably.
2.7 Transfers of Part of Total B1 Commitments Not less than fifteen nor more
than thirty days prior to the last day of any month, the Borrowers may by notice
(to be delivered by the Original Guarantor only on behalf of each of the
Borrowers) to the Facility Agent notify the Tranche B1 Banks to cancel
temporarily the whole or, in their pro rata proportions, any part (being a
minimum amount of C$5,000,000 and a maximum amount of no more than the Permitted
Transfer Amount) of the Total B1 Commitments and increase the Total A1
Commitments by an equivalent amount (determined on the last day of such month)
in sterling (rounded to the nearest one hundred sterling).
2.8 Facility Agent to Notify Banks of Request Following the receipt of a
request from the Borrowers pursuant to Clause 2.7 (Transfers of Part of Total B1
Commitments), the Facility Agent shall promptly notify each Bank of such request
and the amount by which the Available Tranche B1 Commitment of each Tranche B1
Bank will be reduced and the Available Tranche A1 Commitment will be increased.
2.9 Effect of Notification Subject to:
(a) each of the representations which are to be deemed repeated at any
time after the date hereof in accordance with Clause 25.15 (Repetition
of Representations) being true and correct on and as of the date on
which such reduction and increase is to be effective by reference to
the facts and circumstances existing at the time (or, if any such
representation is expressly stated to have been made as of a specific
date, as of such specific date), except to any extent waived pursuant
to Clause 44 (Amendments and Waivers); and
(b) no Event of Default or Potential Event of Default having occurred and
being continuing as at such date
then, with effect from the last day of the relevant month such cancellation and
increase shall take effect in the amount notified.
21
2.10 Effect of any such Cancellation and Increase Each such cancellation of the
Tranche B1 Commitments shall reduce the Tranche B1 Commitment of each Tranche B1
Bank rateably and shall increase the Tranche A1 Commitment of each Tranche A1
Bank rateably.
2.11 Limitation on Requests The Borrowers may not make more than two requests
(in aggregate) for a transfer of Commitments pursuant to the above provisions in
any year.
3. Purpose
3.1 Purpose Facility A is intended to finance the expansion of the loan book
of COFC in the United Kingdom and for the general corporate purposes of the
Tranche A Borrowers and Facility B is intended to finance the expansion of the
loan book of COI in Canada and for the general corporate purposes of the Tranche
B Borrowers and, accordingly, each of the Borrowers shall apply all amounts
raised by it hereunder in or towards satisfaction of such purposes.
3.2 Application Without prejudice to the obligations of the Borrowers under
Clause 3.1 (Purpose), neither the Facility Agent, the Sterling Agent, the
Canadian Dollar Agent, the Arrangers and the Banks nor any of them shall be
obliged to concern themselves with the application of amounts raised by any of
the Borrowers hereunder.
4. Conditions Precedent
4.1 Save as the Banks may otherwise agree none of the Banks shall be under any
obligation hereunder unless the Facility Agent has confirmed to the Borrowers
and the Banks that it has received (or waived receipt of) all of the documents
listed in the Third Schedule (Conditions Precedent Documents) and that each is,
in form and substance, satisfactory to the Facility Agent.
4.2 The Facility Agent shall, on request by an Original Borrower, certify in
writing whether or not it has received or waived receipt of any of the documents
listed in the Third Schedule (Condition Precedent Documents) and whether each is
in form and substance satisfactory to it.
5. Nature of Banks' Obligations
The obligations of each Bank hereunder are several and the failure by a
Bank to perform its obligations hereunder shall not affect the obligations of
COFC, COI, any of the other Borrowers or any of the Guarantors towards any other
party hereto nor shall any other party be liable for the failure by such Bank to
perform its obligations hereunder nor shall the failure by any Bank to perform
its obligations hereunder affect the obligations of any other Bank towards any
Borrower hereunder.
22
Part 3
UTILISATION OF FACILITY A AND FACILITY B
6. Utilisation of Facility A and Facility B
6.1 Delivery of a Utilisation Request Save as otherwise provided herein, and
if there would not, immediately after such Utilisation, be more than twenty
Utilisations outstanding in relation to each of Facility A or, as the case may
be, Facility B, any Borrower may from time to time utilise any such Facility by
delivering to the Sterling Agent and the Facility Agent in the case of Facility
A and the Canadian Dollar Agent and the Facility Agent in the case of Facility
B, by no later than the time specified in the applicable part of the Fifth
Schedule, a duly completed Utilisation Request.
6.2 Utilisation Request Each Utilisation Request delivered to the relevant
Agent pursuant to Clause 6.1 (Delivery of a Utilisation Request) shall be
irrevocable and shall specify:
(i) the Facility under which the requested Utilisation is to be made;
(ii) in the case of Facility B, whether the Utilisation is to be by means
of Advances or Bills;
(iii) the proposed Utilisation Date which shall be a business day falling
one month or more (or such later date as is agreed between the
relevant Borrower and the relevant Agent under paragraph (v) below
in respect of a Term or Tenor of less than 1 month) before the Final
Maturity Date;
(iv) the Requested Amount (to be determined in accordance with Clause 6.3
(Requested Amount));
(v) the Term or Tenor in question, being:
(a) in respect of Advances, a period of one, two, three or six
months (or such other period as may be agreed between the
relevant Borrower and the relevant Agent (acting on the
instructions of all the Tranche A Banks or, as the case may be,
the Tranche B Banks)); and
(b) in respect of Bills a period of 30, 60, 90 or 180 days (or such
other period as may be agreed between the Canadian Dollar Agent
on the instructions of all the Tranche B Banks and the relevant
Borrower);
23
which will begin on the proposed Utilisation Date and end on a
business day which is or precedes the Final Maturity Date; and
(vi) the account to which the proceeds of the proposed Utilisation are to
be paid.
6.3 Requested Amount The Requested Amount to be specified in a Utilisation
Request delivered pursuant to Clause 6.1 (Delivery of a Utilisation Request)
shall be:
(i) in the case of a Tranche A Utilisation, a Sterling Amount which does
not exceed the Available Tranche A Facility for such Utilisation and
which, if less than the Available Tranche A Facility, is a minimum
amount of (Pounds)5,000,000 and an integral multiple of
(Pounds)1,000,000; and
(ii) in the case of a Tranche B Utilisation by means of Tranche B Advances
or Bills, a Canadian Dollar Amount which does not exceed the Available
Tranche B Facility for such Utilisation and which, if less than the
Available Tranche B Facility, is a minimum amount of C$5,000,000 and
an integral multiple of C$1,000,000.
6.4 Allocation in relation to Tranche A Utilisations If and whenever, on the
occasion of a Tranche A Utilisation, Banks are required to make Tranche A
Advances pursuant hereto, the aggregate principal Sterling Amount of such
Advances to be made shall be allocated to, and apportioned among, the Tranche A
Banks rateably to their respective Available Tranche A Commitments for such
Utilisation Provided that no amount shall be allocated to any Bank in respect of
any Tranche A Utilisation if such Bank's Tranche A Commitment is to be reduced
to zero pursuant to the terms hereof prior to or during the Term of the proposed
Tranche A Advances.
6.5 Allocation in relation to Tranche B Utilisations If and whenever, on the
occasion of a Tranche B Utilisation, Banks are required to make Tranche B
Advances or reimburse the Canadian Dollar Agent in respect of Bills, the
aggregate principal Canadian Dollar Amount of such Advances to be made or, as
the case may be, such reimbursement obligations in respect of Bills shall be
allocated to, and apportioned among, the Tranche B Banks rateably to their
respective Available Tranche B Commitments for such Utilisation Provided that no
amount shall be allocated to any Bank in respect of any Tranche B Utilisation if
such Bank's Tranche B Commitment is to be reduced to zero pursuant to the terms
hereof prior to or during the Term of the proposed Tranche B Advance or, as the
case may be, the Tenor of the proposed Bills.
6.6 Obligation of Tranche A Banks Each Tranche A Bank shall, subject to the
terms hereof, be obliged, through its Facility Office, to make a Tranche A
Advance on the proposed Tranche A Utilisation Date in a principal amount equal
to the amount allocated to it pursuant to Clause 6.4 (Allocation in relation to
Tranche A Utilisations).
24
6.7 Obligation of Tranche B Banks Each Tranche B Bank shall, subject to the
terms hereof, be obliged, through its Facility Office, to make a Tranche B
Advance in a principal amount equal to the amount allocated to that Tranche B
Bank pursuant to Clause 6.5 (Allocation in relation to Tranche B Utilisations)
and the Canadian Dollar Agent shall, subject to the terms hereof, be obliged,
through its Facility Office in Canada to accept a Bill on the proposed Tranche B
Utilisation Date.
6.8 Agents to notify Banks of Allocation The Sterling Agent shall not later
than the time specified in the applicable part of the Fifth Schedule, notify
each Tranche A Bank of the principal amount allocated to it in respect of
Advances to be denominated in sterling pursuant to this Clause 6. The Canadian
Dollar Agent shall not later than the time specified in the applicable part of
the Fifth Schedule, notify each Tranche B Bank of the principal amount or, as
the case may be, the face amount allocated to it in respect of Bills or Advances
to be denominated in Canadian Dollars pursuant to this Clause 6.
6.9 Reduction of Available Tranche Commitment If a Bank's Tranche A Commitment
and/or its Tranche B Commitment is reduced, in accordance with the terms hereof,
after the relevant Agent has received a Utilisation Request or made an
allocation hereunder then such part of the proposed Utilisation as is
attributable to that Bank and exceeds its Available Tranche A Commitment or its
Available Tranche B Commitment (as so reduced) shall not be made and the amount
of such Utilisation shall be reduced accordingly.
6.10 Optional Extension of Final Maturity Date Not less than 60 nor more than
90 days prior to any anniversary of the date hereof, each Borrower and the
Original Guarantor acting jointly, may by notice to the Facility Agent request
the Banks to agree that the Final Maturity Date shall thereafter be the day
falling twelve months after the then current Final Maturity Date (the "Existing
Final Maturity Date"). The Facility Agent shall notify the Banks of receipt of
any such request as soon as reasonably practicable thereafter, and the Banks
shall respond thereto within 30 days of receipt of such request. If (i) whilst
no Advances or Bills are outstanding hereunder, a group of Banks for whom the
aggregate of their Tranche A Commitments and the sterling equivalent (on the
date of the request to the Banks) of the aggregate of their Tranche B
Commitments amount (or, if each Bank's Commitment has been reduced to zero, did
immediately before such reduction to zero, amount) in aggregate to more than
fifty per cent. of the aggregate of the Tranche A Commitments and the sterling
equivalent (on the date of the request to the Banks) of the aggregate of the
Tranche B Commitments; and (ii) whilst at least one Advance or Bill is
outstanding hereunder, a group of Banks to whom in aggregate more than fifty per
cent. of the Outstandings is owed agrees and subject to:
(a) each of the representations which are to be deemed repeated at any
time after the date hereof in accordance with Clause 25.15 (Repetition
of Representations) being true and correct on and as of the date on
which such extension of the Existing Final Maturity Date is to be
effective by reference to the facts and
25
circumstances existing at the time (or. if any such representation is
expressly stated to have been made as of a specific date, as of such
specific date), except to any extent waived pursuant to Clause 44
(Amendments and Waivers); and
(b) no Event of Default or Potential Event of Default having occurred and
being continuing as at such date,
then the Existing Final Maturity Date shall thereafter, save as otherwise
provided herein, for the purposes of this Agreement be amended as so requested
Provided always that the Final Maturity Date may not be extended beyond the day
falling 60 months after the date hereof.
6.11 No Obligation on a Bank to Agree to Extend the Final Maturity Date No Bank
shall at any time be obliged to agree to a request to extend the Final Maturity
Date and where a Bank does not so agree then, after the date falling one month
before the Existing Final Maturity Date (or such later date in relation to any
Term or Tenor of less than 1 month) such Bank shall not thereafter be obliged to
participate in the making of any Advances or assume any new obligations on
account of any Bill and the Borrowers and the Original Guarantor shall have the
right at any time thereafter but prior to the Existing Final Maturity Date to
locate a new lender to which all the rights and obligations of such Bank
hereunder may be transferred. If by the Existing Final Maturity Date such new
lender has been located then such Bank and such new lender shall execute and
deliver a Transfer Certificate pursuant to which all of the rights and
obligations of such Bank hereunder shall be transferred to such new lender with
effect from the Existing Final Maturity Date and subject to the Final Maturity
Date thereafter to apply in relation to all such rights and obligations being
the Final Maturity Date as then amended pursuant to Clause 6.10 (Optional
Extension of Final Maturity Date). If by the Existing Final Maturity Date no
such new lender has been located then the amount of such Bank's Commitment shall
be reduced to zero on the Existing Final Maturity Date and the relevant Borrower
or Borrowers shall on such date as the Sterling Agent or, as the case may be,
Canadian Dollar Agent on behalf of such Bank shall have specified (which shall
be on the Existing Final Maturity Date or, if earlier, at the end of the
relevant Term or Tenor) repay such Bank's share of each outstanding Advance
together with accrued interest thereon and all other amounts owing to such Bank
and comply with its obligations under Clause 9.1 (Face Amount) in respect of any
Bills accepted by the Canadian Dollar Agent to the extent of that Bank's share
of such Bill.
6.12 Increase of Commitments At any time on or after the first anniversary of
the date hereof, the Borrowers acting jointly, may by notice to the Facility
Agent request the Banks to agree to increase the aggregate amount of the Tranche
A Commitments or, as the case may be, the Tranche B Commitments hereunder to an
amount not to exceed the equivalent at such time of US$400,000,000 by having one
or more banks or other financial institutions become a "Bank" under this
Agreement (an "Acceding Bank") or (in the case of a Bank already party to this
Agreement) by an increase in the Commitment of all or any of the existing Banks;
provided that the Commitment of an Acceding Bank and any increase in the amount
of the
26
Commitment of any existing Bank, shall be in an amount equal to an integral
multiple of (Pounds)1,000,000 and not less than the equivalent of
(Pounds)5,000,000.
6.13 Increases Effective Any increase in the amount of the Commitments pursuant
to Clause 6.12 (Increase of Commitments) hereof shall be effective only upon the
execution of a Commitment Increase Letter not less than five business days prior
to the date such increase is to become effective (the "Commitment Increase
Date") and shall specify (i) the amount of the Commitment (and the Facility) of
the Acceding Bank or the amount of any increase in the amount of the Commitment
under any Facility of any existing Bank and (ii) the Commitment Increase Date.
6.14 Conditions to Effectiveness Any increase in the aggregate amount of the
Commitments pursuant to Clause 6.12 (Increase of Commitments) shall not be
effective unless:
(i) no Event of Default or Potential Event of Default shall have
occurred and be continuing on the Commitment Increase Date;
(ii) each of the representations which are to be deemed repeated at any
time after the date hereof in accordance with Clause 25.15
(Repetition of Representations) shall be true and correct in all
material respects on and as of the Commitment Increase Date with the
same force and effect as if made on and as of such date by reference
to the facts and circumstances existing at the time (or, if any such
representation is expressly stated to have been made as of a
specific date, as of such specific date) except to any extent waived
pursuant to Clause 44 (Amendments and Waivers);
(iii) immediately after giving effect to such increase in the amount of
the Commitments, no Bank would hold a Commitment in an aggregate
amount exceeding 33 1/3% of the Total Commitments of all the Banks
at such time; and
(iv) the Sterling Agent or, as the case may be, the Canadian Dollar Agent
shall have received (with sufficient copies for each of the Tranche
A Banks or, as the case may be, the Tranche B Banks) each of (x) a
certificate of a duly authorised officer of each of the Borrowers as
to the taking of any corporate action necessary in connection with
such increase and (y) an opinion or opinions of counsel to each of
the Borrowers as to their corporate power and authority to borrow
hereunder after giving effect to such increase.
6.15 No Obligation on a Bank to Agree to Increase its Commitment No Bank shall
at any time be obliged to agree to a request of the Borrowers to increase its
Commitment or obligations hereunder and where an existing Bank does not so
agree, its Commitment shall not be increased and its Available Tranche A
Commitment and its Available Tranche B Commitment shall each be calculated on
the basis of its existing Commitment.
27
Part 4
BILLS
7. Acceptance of Bills by the Canadian Dollar Agent
The Canadian Dollar Agent hereby agrees to accept Bills (in amounts not less
than C$100,000) from time to time and each Tranche B Bank agrees to assume
rateably in the proportion borne by its Available Tranche B Commitment to the
Available Tranche B Facility at such time, on each occasion that the Canadian
Dollar Agent accepts a Bill, the obligations of the relevant Borrower to pay or
reimburse the Canadian Dollar Agent for all monies paid by the Canadian Dollar
Agent on account of such Bill. Each occasion on which the Canadian Dollar Agent
accepts a Bill as provided herein shall be deemed to constitute a Tranche B
Utilisation equal to the face amount of such Bill.
8. Bills
8.1 Supply of Bills The Canadian Dollar Agent will provide each Tranche B
Borrower with a supply of serially numbered Bills used by it from time to time
in the normal course of the Canadian Dollar Agent's business, which, in turn,
the relevant Borrower shall properly execute in blank and furnish from time to
time to the Canadian Dollar Agent which shall hold such Bills (subject to Clause
11 (Canadian Dollar Agent's Responsibility in Respect of Bills) hereof) until
delivered as hereafter provided. The receipt by the Canadian Dollar Agent of a
Utilisation Request for Bills shall be sufficient authority for the Canadian
Dollar Agent to complete the Bills and the Canadian Dollar Agent shall, subject
to the terms and conditions of this Agreement, complete the pre-signed Bills in
accordance with such Utilisation Request and the drafts so completed shall
thereupon be deemed to have been presented for acceptance.
8.2 Execution of Bills A Tranche B Borrower may, at its option execute any
Bill provided to it by the Canadian Dollar Agent by the mechanically reproduced
facsimile signatures of any two designated signing officers of such Borrower and
the Canadian Dollar Agent is hereby authorised to accept as provided herein or
pay, as the case may be, any Bill of such Borrower which purports to bear such
facsimile signatures notwithstanding that any such individual has ceased to be a
designated signing officer of such Borrower and any such Bill shall be valid as
if such individual were a designated signing officer of such Borrower at the
date of issue of such Bill. Any such Bill may be dealt with by the Canadian
Dollar Agent as provided herein to all intents and purposes and shall bind such
Borrower as if duly signed in the signing officer's own handwriting and issued
by such Borrower and such Borrower will and hereby does undertake to hold the
Canadian Dollar Agent harmless and indemnified against all loss, costs, damages
and expenses arising out of the payment or negotiation of any such Bill on which
a facsimile signature has been wrongly affixed. The Canadian Dollar Agent shall
not be liable for its failure to accept a Bill as required hereunder if the
cause of such failure is, in the
28
whole or in part, due to the failure of such Borrower to provide executed Bills
to the Canadian Dollar Agent on a timely basis.
8.3 Canadian Dollar Agent to Give Notice The Canadian Dollar Agent shall give
prompt notice to the Facility Agent and each of the Tranche B Banks of any
Utilisation Request given by a Tranche B Borrower in respect of Bills and the
Canadian Dollar Agent shall determine and specify to each Tranche B Bank its
proportionate share of the liabilities of the Canadian Dollar Agent to be
incurred pursuant to the acceptance of Bills by the Canadian Dollar Agent. Each
Tranche B Bank's contingent liability shall be in proportion borne by its
Available Tranche B Commitment to the Available Tranche B Facility immediately
prior to the acceptance of such Bills by the Canadian Dollar Agent.
8.4 Acceptance of Bills If on the proposed Utilisation Date relating to any
Bills:
(i) each of the representations which are to be deemed repeated at any
time after the date hereof in accordance with Clause 25.15 (Repetition
of Representations) are true and correct on and as of such Utilisation
Date by reference to the facts and circumstances existing at the time
(or, if any such representation is expressly stated to have been made
as of a specific date, as of such specific date), except to any extent
waived pursuant to Clause 44 (Amendments and Waivers); and
(ii) no Event of Default or Potential Event of Default has occurred and has
not been remedied or waived pursuant to Clause 44 (Amendments and
Waivers),
the Canadian Dollar Agent shall accept the Bills and credit the account of the
relevant Borrower specified in the relevant Utilisation Request by no later than
the time specified in the applicable part of the Fifth Schedule with an amount
equal to the face amount of each such Bill less the aggregate of (a) the amount
to the discount, which shall be calculated as the Canadian Dollar Bankers'
Acceptance Discount Rate quoted by the Canadian Dollar Agent on the Utilisation
Date requested by the relevant Borrower and (b) the applicable stamping fee
payable pursuant to Clause 10 (Commission on Bills) if not otherwise satisfied.
9. Payment on Maturity of Bills
9.1 Face Amount Subject to Clause 9.3 (Deemed Requests for Advances), the
Borrower whose Bills have been accepted by the Canadian Dollar Agent shall pay
to the Canadian Dollar Agent on the Maturity Date of each Bill the face amount
thereof. Such obligation is absolute, unconditional and irrevocable, subject to
the account of the relevant Borrower having been credited as provided in Clause
8.4 (Acceptance of Bills). If a Bill is not so paid by the relevant Borrower
upon its maturity each Tranche B Bank, acting through its Facility Office shall
be obliged on such Maturity Date (subject to having received notice from the
Canadian Dollar Agent to pay the same as specified in Clause 9.2 (Obligations of
Tranche B Banks)) to
29
pay to the Canadian Dollar Agent in order to reimburse the Canadian Dollar Agent
in respect of payments made under such Bills, such Tranche B Bank's
proportionate share (as determined in accordance with Clause 7 (Acceptance of
Bills by the Canadian Dollar Agent)) of the face amount of such Bills.
9.2 Obligations of Tranche B Banks The obligation of each Tranche B Bank to
the Canadian Dollar Agent in respect of amounts paid by the Canadian Dollar
Agent under a matured Bill shall be absolute, unconditional and irrevocable,
shall be due on the date notice of the same is received from the Canadian Dollar
Agent (provided that it is given not later than 12 noon (Toronto time) or, if
given later, shall be due on the immediately succeeding business day) and shall
bear interest payable on demand at the Canadian Prime Rate calculated daily from
and including the Maturity Date of the relevant Bill up to but excluding the
date of payment thereof on the basis of the actual number of days elapsed and
compounded monthly.
9.3 Deemed Requests for Advances Notwithstanding the foregoing provisions of
this Clause 9, unless the relevant Borrower has notified the Canadian Dollar
Agent by 10.00 a.m. (Toronto time) on the first business day prior to the
Maturity Date of any Bill that it intends to comply with the provisions of
Clause 9.1 (Face Amount), then it shall be deemed to have given a Utilisation
Request for a Tranche B Advance in an amount equal to the face value of the
maturing Bill, with a proposed Utilisation Date which is the same as the
Maturity Date of such Bill and with an initial Term of one month. In such
event, the Canadian Dollar Agent shall promptly notify the Tranche B Banks
accordingly and subject to the provisions of Clause 6 (Utilisation of Facility A
and Facility B) relating to Tranche B Advances, the Tranche B Banks shall on
such Maturity Date make such Tranche B Advance in accordance with Part 5 and the
making of such Tranche B Advance shall pro tanto satisfy the relevant Borrower's
obligations under Clause 9.1 (Face Amount).
9.4 The relevant Borrower hereby renounces, and shall not claim from the
Canadian Dollar Agent, any days of grace for the payment at maturity of any Bill
and hereby waives any defence to payment which might otherwise exist if for any
reason a Bill shall be held by the Canadian Dollar Agent in its own right at the
maturity thereof.
10. Commission on Bills
The Borrower whose Bills are being accepted by the Canadian Dollar Agent will
pay to the Canadian Dollar Agent for account of the Tranche B Banks in the
proportions specified in Clause 8.3 (Agent to Give Notice), in Canadian Dollars,
on acceptance of each Bill a stamping fee at the Stamping Fee Rate on the face
amount thereof from and including the date of acceptance by the Canadian Dollar
Agent up to but excluding the Maturity Date of the Bill. Such stamping fee
shall be payable by deduction in accordance with Clause 8.4 (Acceptance of
Bills).
30
11. Canadian Dollar Agent's Responsibility in respect of Bills
11.1 The Obligors agree that the responsibility of the Canadian Dollar Agent in
respect of safekeeping the executed blank draft forms of Bills which are
delivered to the Canadian Dollar Agent under this Agreement shall be limited to
the exercise of the same degree of care which the Canadian Dollar Agent gives to
its own property of a like nature, provided that the Canadian Dollar Agent shall
not be deemed to be an insurer thereof. The Obligors agree that the Canadian
Dollar Agent may complete such draft forms in accordance with its instructions
without incurring liability to the relevant Borrower other than as provided
herein. Upon termination of this Agreement, the Canadian Dollar Agent shall
deliver back to the relevant Borrower all Bill draft forms executed in blank
then held by the Canadian Dollar Agent and not accepted as provided herein.
Notwithstanding such termination, all drafts of the relevant Borrower accepted
by the Canadian Dollar Agent as provided herein prior to the receipt of written
notice requiring return of such forms shall be valid obligations of the relevant
Borrower and the provisions hereof shall continue to apply to the same.
11.2 Subject to the account of the relevant Borrower having been credited as
provided in Clause 8.4 (Acceptance of Bills) the obligations of the relevant
Borrower with respect to Bills under this Agreement shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including, without limitation, the following
circumstances:
(i) any lack of validity or enforceability of any draft accepted as
provided herein by the Canadian Dollar Agent or any Bank as a Bill; or
(ii) the existence of any claim, set-off, defence or other right which the
relevant Borrower may have at any time against the holder of the Bill,
the Canadian Dollar Agent, a Bank or any other person or entity,
whether in connection with this Agreement or otherwise.
31
Part 5
THE ADVANCES
12. Making of Advances under Facility A and Facility B
If the Sterling Agent or, as the case may be, the Canadian Dollar Agent notifies
any Tranche A Bank or, as the case may be, any Tranche B Bank in accordance with
Clause 6 (Utilisation of Facility A and Facility B) that it is to make a Tranche
A Advance or a Tranche B Advance, (including, without limitation, a deemed
Tranche B Advance under Clause 9.3 (Deemed Requests for Advances)), and if on
the proposed Utilisation Date relating to such an Advance:
(i) no Event of Default or Potential Event of Default has occurred and has
not been remedied or waived pursuant to Clause 44 (Amendments and
Waivers); and
(ii) each of the representations which are to be deemed repeated at any
time after the date hereof in accordance with Clause 25.15 (Repetition
of Representations) are true and correct on and as of such Utilisation
Date by reference to the facts and circumstances existing at the time
(or, if any such representation is expressly stated to have been made
as of a specific date, as of such specific date), except to any extent
waived pursuant to Clause 44 (Amendments and Waivers),
then, on such Utilisation Date, such Bank shall, subject to all the terms of
this Agreement and, in particular, Clause 23 (Market Disruption) make such
Advance through its Facility Office to the Borrower who requested or is deemed
to have requested such Advance.
13. Payment of Interest
On the Repayment Date relating to each Advance (and, in the case of a Tranche A
Advance, if the period of the Term of such Advance exceeds six months, on the
expiry of each period of six months during such Term and, in the case of a
Tranche B Advance, if the period of the Term of such Advance exceeds three
months, on the expiry of each period of three months during such Term) the
Borrower to whom such Advance has been made shall pay to the Sterling Agent, in
the case of a Tranche A Advance, or to the Canadian Dollar Agent, in the case of
a Tranche B Advance unpaid accrued interest on that Advance.
14. Calculation of Interest
14.1 Interest Applicable to Tranche A Advances The rate of interest applicable
to a Tranche A Advance from time to time during the Term of such Tranche A
Advance shall be the rate per annum determined by the Sterling Agent to be the
sum of:
32
(i) LIBOR on the Quotation Date for such Advance;
(ii) the Margin from time to time; and
(iii) the Associated Costs Rate applicable thereto.
14.2 Sterling Agent to Notify The Sterling Agent shall not later than the time
specified in the applicable part of the Fifth Schedule notify the relevant
Borrower and the Tranche A Banks of each determination of the rate of interest
made by it pursuant to Clause 14.1 (Interest Applicable to Tranche A Advances).
14.3 Interest Applicable to Tranche B Advances The rate of interest applicable
on any day to a Tranche B Advance shall be the rate per annum determined by the
Canadian Dollar Agent to be the Canadian Prime Rate for that day.
14.4 Canadian Dollar Agent to Notify The Canadian Dollar Agent shall promptly
notify (and in any event no later than one business day prior to the time such
interest is required to be paid) the relevant Borrower and the Tranche B Banks
of each determination of the Canadian Prime Rate made by it pursuant to Clause
14.3 (Interest Applicable to Tranche B Advances). Notwithstanding the time of
such notification, the Canadian Prime Rate shall be the rate as so determined
and not the rate at the time of such notification, if different.
15. Repayment of Advances
Except as otherwise provided herein, each Borrower shall repay each Advance
made to it in full on the Repayment Date relating thereto and no Borrower shall
repay or prepay all or any part of any Advance outstanding hereunder except at
the times and in the manner expressly provided herein.
33
Part 6
CANCELLATION
16. Cancellation
16.1 Cancellation Prior to the day falling one month before the Final Maturity
Date, in respect of Facility A, the Tranche A Borrowers may, and in respect of
Facility B, the Tranche B Borrowers may, in each case by giving to the Facility
Agent not less than 15 days' prior notice to that effect, cancel the whole or
any part (being a minimum amount of ,5,000,000 in the case of Facility A and a
minimum amount of C$5,000,000 in respect of Facility B, or equal to the amount
of the Available Tranche A Facility or the Available Tranche B Facility, as the
case may be, if less) of the Total A Commitments or, as the case may be, the
Total B Commitments. Any such cancellation of the Tranche A Commitments shall
reduce the Tranche A Commitment of each Tranche A Bank rateably, and any such
cancellation of the Tranche B Commitments shall reduce the Tranche B Commitment
of each Tranche B Bank rateably.
16.2 Notice of Cancellation Any notice of cancellation given by any Borrower
pursuant to Clause 16.1 (Cancellation) shall be irrevocable and shall specify
the date upon which such cancellation is to be made and the amount of such
cancellation.
17. Prepayment
A Borrower may, on any business day, prepay all (or any part thereof being in
aggregate at least ,5,000,000 and an integral multiple of ,1,000,000) of any
Tranche A Advance made to it without premium or penalty but without prejudice to
such Borrower's obligations under Clause 30.4 (Broken Periods), by giving to the
Sterling Agent not less than 10 days' notice of the date of the prepayment. Any
such notice shall be irrevocable and shall oblige the relevant Borrower to make
the prepayment on the date therein stated. The Sterling Agent shall promptly
notify the Facility Agent and each Tranche A Bank of the details of such notice
and each Tranche A Bank shall, as soon as is practicable, compute and inform the
Sterling Agent (which shall promptly notify the relevant Borrower) of all
amounts payable under Clause 30.4 (Broken Periods). Any such prepayment shall
be applied rateably between the Tranche A Banks.
34
Part 7
CHANGES IN CIRCUMSTANCES
18. Taxes
18.1 Tax Gross-up All payments to be made by any of the Obligors to any person
under any Finance Document shall be made free and clear of and without deduction
for or on account of tax unless such Obligor is required to make such a payment
subject to the deduction or withholding of tax, in which case the sum payable by
such Obligor in respect of which such deduction or withholding is required to be
made shall be increased to the extent necessary to ensure that, after the making
of the required deduction or withholding, such person receives and retains (free
from any liability in respect of any such deduction or withholding) a net sum
equal to the sum which it would have received and so retained had no such
deduction or withholding been made or required to be made, Provided however if:
(A) on the due date of an interest payment to a Tranche A Bank on a Tranche A
Advance, that Bank is not a UK Qualifying Lender and as a result the relevant
Obligor is required to deduct or withhold United Kingdom income tax from that
payment of interest, the relevant Obligor shall not be so required to pay an
additional amount in respect of that deduction or withholding unless it results
from the introduction of or any change in, or in the interpretation or
application of, any relevant law or any relevant published practice of the
Inland Revenue, as the case may be, after this Agreement is entered into or such
Obligor would have been required to make a deduction or withholding on account
irrespective of whether such Bank is or is not a UK Qualifying Lender; or
(B) (i) on the due date of an interest payment to a Tranche B Bank on a
Tranche B Advance, that Bank is not a Canadian Qualified Lender; and
(ii) as a result the relevant Obligor is required to deduct or withhold
Canadian withholding tax pursuant to Part XIII of the Income Tax Act
(Canada) from that payment of interest,
the relevant Obligor shall not be so required to pay an additional amount in
respect of that deduction or withholding unless it results from the introduction
of or change in, or in the interpretation or application of, any relevant law or
any relevant practice of a Canadian taxing authority after this Agreement is
entered into or such Obligor would have been required to make a deduction or
withholding on account irrespective of whether such Bank is or is not a Canadian
Qualified Lender.
35
For the purposes of this Clause, "UK Qualifying Lender" means any of the
following:
(a) any person which is a bank for the purposes of Section 349 of the Income
and Corporation Taxes Act 1988 and beneficially entitled to interest
payable by a Borrower to it under this Agreement and within the charge to
UK corporation tax in respect thereof; or
(b) any Bank which is an assignee of a Bank falling within (a) and is
beneficially entitled to the interest payable by the relevant Borrower and
within the charge to UK corporation tax in respect thereof; or
(c) any Bank which, pursuant to the terms of a double tax treaty is entitled to
an exemption from any UK taxation in respect of interest and which at the
time of the relevant interest payment has validly made all appropriate
filings and declarations in order to obtain the benefit of such
entitlement; and
"Canadian Qualified Lender" means a Schedule I Bank or a Schedule II Bank or
other person not being a "non-resident person" for the purposes of Section 212
of the Income Tax Act (Canada) except that, if any of those statutory provisions
are repealed, modified, extended or re-enacted, the Facility Agent may at any
time and from time to time amend the relevant definition in such manner as it
may determine to be appropriate by giving notice of the amended definition or
definitions to the Borrowers and the Banks.
18.2 US Tax Forms Any Tranche A Bank that is not a US Person (as such term is
defined in Section 7701(a)(30) of the United States Internal Revenue Code of
1986, as amended) shall, to the extent that it is able to do so, provide a valid
and completed Internal Revenue Service Form 1001 or 4224 or such other or
successor form as may be required to claim such exemption and if such forms are
not provided to the extent such Bank is able to do so, the provisions of Clause
18.1 (Tax Gross-Up) and Clause 18.3 (Tax Indemnity) shall not be applicable in
relation to payments of interest to such Tranche A Bank.
18.3 Tax Indemnity Without prejudice to the provisions of Clause 18.1 (Tax
Gross-Up), if any person or an Agent on its behalf is required to make any
payment on account of tax (not being a tax imposed on the overall net income
including profits and gains of its Facility Office by the jurisdiction in which
it is incorporated or in which its Facility Office is located) or otherwise on
or in relation to any sum received or receivable under any Finance Document by
such person or such Agent on its behalf (including, without limitation, any sum
received or receivable under this Clause 18) or any liability in respect of any
such payment is asserted, imposed, levied or assessed against such person or
such Agent on its behalf, the Obligor by whom such sum is paid or payable shall,
upon demand of such Agent, promptly indemnify such person against such payment
or liability, together with any interest, penalties and
36
reasonable expenses payable or incurred in connection therewith but not to the
extent that such liability, interest, penalties and reasonable expenses have
arisen as a result of undue delay in all the circumstances by any person or any
agent on its behalf in the filing or the submission of tax returns, computations
or claims or the default of any person or any agent on its behalf in doing any
thing contemplated by the Finance Documents.
18.4 Notification A Beneficiary will notify the relevant Obligor through the
relevant Agent as soon as it is reasonably practicable of any circumstances
arising as a result of which it is reasonably likely that it will be making a
claim under Clause 18.3 (Tax Indemnity) and if it intends to make a claim under
such Clause it shall notify the relevant Obligor of the event by reason of which
it is entitled to do so and shall deliver to the relevant Obligor through the
relevant Agent a certificate to that effect setting out in reasonable detail the
basis and computation of such claim Provided that nothing herein shall require
such Beneficiary to disclose any confidential information relating to the
organisation of its affairs.
18.5 Double Taxation Relief If, and to the extent that, the effect of Clause
18.1 (Tax Gross-up) or Clause 18.3 (Tax Indemnity) can be mitigated by virtue of
the provisions of any applicable double tax Convention entered into between the
United Kingdom, the United States of America or Canada, as the case may be, and
the relevant Bank's jurisdiction of incorporation (whether by a claim to
repayment of any taxes referred to in Clause 18.1 (Tax Gross-up) or Clause 18.3
(Tax Indemnity) or otherwise) each Bank agrees to co-operate with the Borrowers
with a view to filing or providing any tax claims, forms, affidavits,
declarations or other like documents which the relevant Borrower has requested
and which are required for the purpose of ensuring the application of such
double tax convention so far as relevant. To the extent that the effect of
Clause 18.1 and Clause 18.3 can be mitigated and any Bank fails to co-operate to
the extent required hereby to so mitigate the effect of such clauses, the
provisions of clause 18.1 and clause 18.3 shall not be applicable in relation to
payments of interest to such Bank.
19. Tax Receipts
19.1 Notification of Requirement to Deduct Tax If, at any time, any of the
Obligors is required by law to make any deduction or withholding from any sum
payable by it under any Finance Document (or if thereafter there is any change
in the rates at which or the manner in which such deductions or withholdings are
calculated), such Obligor shall as soon as reasonably practicable after becoming
aware of the same, notify the Facility Agent.
19.2 Evidence of Payment of Tax If any of the Obligors makes any payment under
any Finance Document in respect of which it is required to make any deduction or
withholding, it shall pay or otherwise account for the full amount required to
be deducted or withheld to the relevant taxation or other authority within the
time allowed for such payment under applicable law and shall deliver to the
Facility Agent for each relevant Beneficiary, within thirty days after the due
date of such payment, withholding or deduction, evidence satisfactory to the
37
Facility Agent, or as the case may be, the relevant Beneficiary of that
deduction, withholding or payment and (where remittance is required) of the
remittance thereof to the relevant taxing or other authority.
20. Tax Undertaking by Banks and Tax Refunds
20.1 Tranche A Bank Undertaking Each Tranche A Bank undertakes, promptly upon
its Facility Office becoming aware of the same, to notify (through the Facility
Agent) each Tranche A Borrower if it shall cease to be a UK Qualifying Lender.
20.2 Tranche B Bank Undertaking Each Tranche B Bank undertakes, promptly upon
its Facility Office becoming aware of the same, to notify (through the Facility
Agent) each Tranche B Borrower if it shall cease to be a Canadian Qualified
Lender.
20.3 Tax Credit Clawback If:
(1) an Obligor makes a payment under Clause 18.1 (Tax Gross-Up) (a "Tax
Payment") in respect of a payment to a Beneficiary under this
Agreement; and
(2) that Beneficiary determines in its absolute discretion and in good
faith that it has obtained a refund of tax or obtained and used a
credit against tax on its overall net income (a "Tax Credit") which
that Beneficiary in its absolute discretion and in good faith is able
to identify as attributable to that Tax Payment
then, if in its absolute discretion and in good faith it can do so without
prejudicing the amount of any Tax Credit for that Beneficiary, that Beneficiary
shall reimburse the relevant Obligor such amount as that Beneficiary in its
absolute discretion determines, but in good faith, to be such proportion of that
Tax Credit as will leave that Beneficiary (after that reimbursement) in no
better or worse position than it would have been in if no Tax Payment had been
required. A Beneficiary shall not be obliged to arrange its business or tax
affairs in any particular way in order to be eligible for a Tax Credit (and, if
it does make a claim, shall have absolute discretion as to the extent, order and
manner in which it does so) and whether any amount is due from it under this
Clause 20.3 (and, if so, what amount and when). No Beneficiary shall be obliged
to disclose any information regarding its tax affairs and computations.
21. Increased Costs
21.1 Changes in Circumstances If, by reason of (i) any change in law in any
jurisdiction or in its interpretation or administration and/or (ii) compliance
with any request from or requirement of any central bank or other fiscal,
monetary or other authority (including, without limitation, a request or
requirement (x) which affects the manner in which a Beneficiary or any holding
company of such Beneficiary is required to or does maintain capital resources
having regard to such Beneficiary's obligations under any Finance Document and
to
38
amounts owing to it under any Finance Document but excluding the implementation,
as contemplated on the signing of this Agreement, of any of the matters set out
in the July 1988 report of the Basle Committee on Banking Regulations and
Supervisory Practices entitled "International Convergence of Capital Measurement
and Capital Standards" (the "Cooke Report"), (y) which implements any change
after the signing of this Agreement in, or in the interpretation or application
of, such matters or any increase in the requirements of the Cooke Report after
the date hereof; or (z) relating to the adoption of the euro (as defined under
Clause 49 (European Monetary Union)):
(a) a Beneficiary or any holding company of such Beneficiary incurs a cost
as a result of such Beneficiary's having entered into and/or
performing its obligations under any Finance Document and/or assuming
or maintaining a commitment under any Finance Document and/or its
having accepted one or more Bills and/or making one or more Advances;
(b) a Beneficiary or any holding company of such Beneficiary suffers a
reduction in the rate to return on its overall capital (not being a
reduction by reason of the imposition of, or increase in the rates of
tax payable on its overall profits or net income) as a result of a
change in the manner in which such Beneficiary is required to allocate
resources to its obligations under any Finance Document;
(c) there is any increase in the cost to a Beneficiary or any holding
company of such Beneficiary of funding or maintaining all or any of
the advances comprised in a class of advances formed by or including
the Advances made or to be made by such Beneficiary hereunder or
accepting or discounting any Bills hereunder; or
(d) a Beneficiary or any holding company of such Beneficiary becomes
liable to make any payment on account of tax or otherwise (not being a
tax imposed on the net income of such Beneficiary's Facility Office by
the jurisdiction in which it is incorporated or in which its Facility
Office is located) on or calculated by reference to the amount of the
Advances made or to be made by such Beneficiary hereunder and/or the
amount of Bills accepted or to be accepted by it hereunder and/or to
any sum received or receivable by it hereunder,
then the Borrowers shall, provided that the Facility Agent has notified the
Borrowers of such claim pursuant to Clause 21.2 (Increased Costs Claim), within
10 business days of receipt of a demand of the Facility Agent, pay to the
Facility Agent for the account of that Beneficiary amounts sufficient to
indemnify that Beneficiary or any such holding company against, as the case may
be, (1) such cost, (2) such reduction in such rate of return (or such proportion
of such reduction as is, in the opinion of that Beneficiary, attributable to its
obligations hereunder), (3) such increased cost (or such proportion of such
increased cost as is, in the opinion of that Beneficiary, attributable to its
funding or maintaining Advances or accepting or
39
discounting Bills) or (4) such liability (save and to the extent that such
Beneficiary has been compensated for such liability pursuant to Clause 18
(Taxes)).
21.2 Increased Costs Claim A Beneficiary intending to make a claim pursuant to
Clause 21.1 (Changes in Circumstances) shall notify the Facility Agent of the
event by reason of which it is entitled to do so within 90 days after becoming
aware of the circumstances giving rise to the claim, whereupon the Facility
Agent shall notify the Borrowers thereof by delivery of a certificate setting
out in reasonable detail the basis and computation of such claim Provided that
nothing herein shall require such Beneficiary to disclose any confidential
information relating to the organisation of its affairs.
21.3 Option to repay in relation to increased costs claim If any Borrower is
required to pay any amount to a Bank under Clause 21.1 (Changes in
Circumstances), then subject to that Borrower giving the Facility Agent and that
Bank not less than 10 days prior notice:
(i) such Borrower may prepay all, but not part, of that Bank's share in
the Advances and the Bills together with accrued interest on the
amount prepaid. On any such prepayment the relevant Commitment of the
relevant Bank shall be automatically cancelled; and/or
(ii) such Borrower shall have the right at any time thereafter to locate a
new lender to which all the rights and obligations of such Bank
hereunder may be transferred. If such new lender has been located
then such Bank and such new lender shall execute and deliver a
Transfer Certificate pursuant to which all of the rights and
obligations of such Bank hereunder shall be transferred to such new
lender with effect from the Transfer Date specified in such Transfer
Certificate.
22. Illegality
If, at any time, it is unlawful for a Beneficiary to make, fund or allow to
remain outstanding all or any of the Advances made or to be made by it hereunder
or for it or, in the case of Facility B for the Canadian Dollar Agent, to accept
or allow to remain outstanding all or any of the Bills accepted or to be
accepted by it or the Canadian Dollar Agent hereunder, then that Beneficiary
shall, promptly after becoming aware of the same, deliver to the Original
Guarantor through the Facility Agent a certificate to that effect and, unless
such illegality is avoided in accordance with Clause 24 (Mitigation), to the
extent of such illegality:
(i) such Beneficiary shall not thereafter be obliged to participate in the
making of such Advances or assume any new obligations on account of
such Bill and the amount of its Commitment shall be immediately
reduced accordingly; and
40
(ii) if the Facility Agent on behalf of such Beneficiary so requires, the
relevant Borrower or Borrowers shall on such date as the Facility
Agent shall have specified as being necessary to comply with the
relevant law:
(a) repay such Beneficiary's share of such Advance together with
accrued interest thereon and all other amounts owing to such
Beneficiary; and/or
(b) comply prematurely with its obligations under Clause 9.1 (Face
Value) in respect of such Bills accepted by the Facility Agent.
23. Market Disruption
23.1 Market Disruption in relation to Tranche A Advances If, in relation to any
Tranche A Utilisation by way of Tranche A Advances:
(i) LIBOR is to be calculated pursuant to Clause 1.7(b) (Screen Rates) and
the Sterling Agent determines that at 11.00 a.m. on the Quotation Date
in respect of such Tranche A Advances none or only one of the
Reference Banks was offering to prime banks in the London Interbank
Market deposits in Sterling for the proposed duration of such Term; or
(ii) before 11.30 a.m. on the Quotation Date for such Term the Sterling
Agent has been notified by two or more Tranche A Banks whose Tranche A
Advances under that Utilisation would amount to at least 40% of the
amount of that Utilisation, that the rate at which such deposits were
being so offered does not accurately reflect the cost to it of
obtaining such deposits,
then, notwithstanding the provisions of Clause 12 (Making of Advances under
Facility A and Facility B):
(a) the Sterling Agent shall promptly notify the other parties hereto of
such event;
(b) such Advances shall not be made; and
(c) if the relevant Borrower so requires, the Sterling Agent and the
relevant Borrower shall enter into negotiations with a view to agreeing
a substitute basis for determining the rate of interest which may be
applicable to Tranche A Advances in the future and any such substitute
basis that is agreed by the relevant Borrower and all Tranche A Banks
shall take effect in accordance with its terms and be binding on each
party hereto.
23.2 Market Disruption in relation to Bills If, in relation to any Tranche B
Utilisation by way of Bills:
41
(i) the Canadian Dollar Agent determines that at 10.00 a.m. (Toronto
time) on any date none of the Canadian Reference Banks was offering
to prime banks in the Toronto Interbank Market to purchase Bills
with a face amount of C$5,000,000 and a Tenor equivalent to the
Bills to be accepted on such date; or
(ii) before 10.30 a.m. (Toronto time) on such date the Canadian Dollar
Agent determines that the rate being so offered by the Canadian
Reference Banks does not accurately reflect the cost to it of
accepting those Bills,
then, notwithstanding the provisions of Clause 12 (Making of Advances under
Facility A and Facility B):
(a) the Canadian Dollar Agent shall promptly notify the other parties
hereto of such event;
(b) such Bills shall not be accepted; and
(c) if the relevant Borrower so requires, the Canadian Dollar Agent and
the relevant Borrower shall enter into negotiations with a view to
agreeing a substitute basis for determining the acceptance discount
rate which may be applicable to Tranche B Advances by way of Bills
in the future and any such substitute basis that is agreed by the
relevant Borrower and all Tranche B Banks shall take effect in
accordance with its terms and be binding on each party hereto.
24. Mitigation
If, in respect of any Bank, circumstances arise which would, or would upon the
giving of notice, result in:
(i) the reduction of its Commitment to zero pursuant to Clause 22
(Illegality);
(ii) an increase in the amount of any payment to be made to it or for its
account pursuant to Clause 18.1 (Tax Gross-Up); or
(iii) a claim for indemnification pursuant to Clause 18.3 (Tax Indemnity)
or 21.1 (Changes in Circumstances).
then, without in any way limiting, reducing or otherwise qualifying the
obligations of the Borrower under any of the Clauses referred to in (i), (ii) or
(iii) above, such Bank shall notify the Facility Agent thereof as provided in
Clause 18.3 (Tax Indemnity), 21.1 (Changes in Circumstances) or 22 (Illegality),
as the case may be, and, in consultation with the Facility
42
Agent and the relevant Borrower, take such reasonable steps as such Bank acting
in good faith considers appropriate to mitigate the effects of such
circumstances including the transfer of its Facility Office to another
jurisdiction or the transfer of its rights and obligations hereunder to another
financial institution acceptable to the Borrowers willing to participate in the
Facility Provided that such Bank shall be under no obligation to take any such
action if, in the bona fide opinion of such Bank, to do so would or might have
an adverse effect upon its business, operations or financial condition.
43
Part 8
REPRESENTATIONS, COVENANTS AND EVENTS OF DEFAULT
25. Representations
Each of the Obligors makes the representations and warranties in respect of
itself only set out in Clause 25.1 to Clause 25.14 and acknowledges that the
Facility Agent, the Sterling Agent, the Canadian Dollar Agent, the Arrangers and
the Banks have entered into this Agreement in reliance on those representations
and warranties.
25.1 Status and Due Authorisation It is a corporation duly organised, validly
existing and in good standing under the laws of:
(i) in the case of COFC, Delaware;
(ii) in the case of COI, Canada;
(iii) in the case of any Acceding Borrower, the country of its
incorporation;
(iv) in the case of the Original Guarantor, Delaware; or
(v) in the case of any Acceding Guarantor, the country of its
incorporation
with all requisite corporate or other power to execute and deliver the Finance
Documents to which it is a party and to exercise its rights and perform its
obligations thereunder and all corporate and other action required to authorise
its execution and delivery of the Finance Documents to which it is a party and
its performance of its obligations thereunder has been duly taken.
25.2 Validity and Admissibility in Evidence All acts, conditions and things
required to be done, fulfilled and performed in order (a) to enable it lawfully
to enter into, exercise its rights under and perform and comply with the
obligations expressed to be assumed by it in each of the Finance Documents to
which it is a party, (b) to ensure that the obligations expressed to be assumed
by it in each of the Finance Documents to which it is a party are legal, valid
and binding and (c) to make each Finance Document to which it is a party
admissible in evidence in its jurisdiction of incorporation have been done,
fulfilled and performed and all material governmental licences, authorisations,
consents and approvals including any such thing requested pursuant to the
Consumer Credit Act 1974 and the Data Protection Act 1984 or under any similar
or analogous statutory requirement under the laws of any jurisdiction necessary
to own its assets and carry on its business as now being or as proposed to be
conducted have been obtained.
44
25.3 Most Recent Audited Financial Statements The most recent financial
statements of the Original Guarantor, each of the Borrowers and each of the
other Guarantors delivered in accordance with the terms of this Agreement were
prepared in accordance with accounting principles generally accepted in the
relevant jurisdiction of incorporation and consistently applied and in the case
of the audited financial statements of the Original Guarantor and any Acceding
Guarantor give (in conjunction with the notes thereto) a true and fair view of
the financial condition of such Guarantor and its Subsidiaries, and in the case
of the financial statements of the other Obligors delivered in accordance with
the terms of this Agreement, show with reasonable accuracy the financial
condition of the relevant Obligor in each case, at the date as of which they
were prepared and the results of each such Borrower's, each such Guarantor's or,
as the case may be, the Group's operations during the financial year then ended.
25.4 No Material Adverse Change Since publication of the Original Financial
Statements of any Obligor, there has been no material adverse change in the
property, business, operations, financial condition, prospects or capitalisation
of such Obligor or, in the case of the Original Financial Statements of the
Original Guarantor, there has been no material adverse change in the property,
business, operations, financial condition, prospects or capitalisation of the
Group taken as a whole.
25.5 No Undisclosed Liabilities As at the date as of which the most recent
financial statements of each Obligor were prepared such Obligor had no, or, in
the case of the Original Guarantor, no member of the Group had any, liabilities
(contingent or otherwise) which were not disclosed thereby (or by notes thereto)
or reserved against therein nor any unrealised or anticipated losses arising
from commitments entered into by it which were not so disclosed or reserved
against, in each case, as required under GAAP (as defined in Clause 27.3
(Definitions of Financial Terms)).
25.6 Litigation Other than as disclosed to the Facility Agent prior to the date
hereof, there are no legal or arbitral proceedings, or any proceedings by or
before any governmental or regulatory authority or agency, now pending or (to
the knowledge of any Obligor) threatened against or affecting the Original
Guarantor or any of its Subsidiaries as to which there is a reasonable
possibility of an adverse determination that could (either individually or in
the aggregate) have a Material Adverse Effect.
25.7 Execution of the Finance Documents Its execution and delivery of the
Finance Documents to which it is a party and its exercise of its rights and
performance of its obligations thereunder do not and will not:
(i) conflict with any agreement, mortgage, bond or other instrument or
treaty to which it is a party or which is binding upon it or any of
its assets;
45
(ii) conflict with its charter, by-laws or any other constitutive
documents and rules and regulations; or
(iii) conflict with any applicable law, regulation or official or judicial
order, writ, injunction or decree,
which, is each case, is reasonably likely to have a Material Adverse Effect and
could subject any Beneficiary to liability.
25.8 Full Disclosure The statements of fact contained in the Information
Memorandum and all of the other written information supplied by any member of
the Group to the Facility Agent, the Sterling Agent, the Canadian Dollar Agent,
the Arrangers and the Banks in connection herewith were true, and accurate in
all material respects, when taken as a whole, at the date of the Information
Memorandum. However, no representation is made with respect to the information
in Appendices C or D of the Information Memorandum or any forward looking or
competitors information.
25.9 Claims Pari Passu Under the laws of its jurisdiction of incorporation in
force at the date hereof (or, in the case of an Acceding Borrower or Acceding
Guarantor, the date on which such Acceding Borrower or, as the case may be,
Acceding Guarantor becomes a party hereto), the claims of the Facility Agent,
the Sterling Agent, the Canadian Dollar Agent, the Arrangers and the Banks
against it under the Finance Documents will rank at least pari passu with the
claims of all its other unsecured creditors save those whose claims are
preferred solely by any bankruptcy, insolvency, liquidation or other similar
laws of general application.
25.10 No Immunity In the case of any Obligor incorporated in Canada, in any
proceedings taken in Canada in relation to any of the Finance Documents, it will
not be entitled to claim for itself or any of its assets immunity from suit,
execution, attachment or other legal process.
25.11 No Winding-up No Obligor has taken any corporate action nor have any
other steps been taken or legal proceedings been started or (to the best of its
knowledge and belief) threatened against any Obligor for its winding-up,
dissolution, administration or re-organisation or for the appointment of a
receiver, administrator, administrative receiver, trustee or similar officer of
it or of any or all of its assets or revenues.
25.12 Encumbrances Save as permitted by Clause 28.5 (Negative Pledge), no
encumbrance exists over all or any of the present or future revenues or assets
of any Obligor.
25.13 No Obligation to Create Security Its execution and delivery of the
Finance Documents to which it is a party and its exercise of its rights and
performance of its obligations thereunder will not result in the existence of
nor oblige any Obligor to create any encumbrance over all or any of its present
or future revenues or assets.
46
25.14 Ownership of each of the Borrowers Each Borrower is a wholly-owned
Subsidiary of the Original Guarantor or Capital One, F.S.B. or Capital One Bank
save to the extent otherwise required by law, rule or regulation and COFC has a
branch office which conducts business in the United Kingdom.
25.15 Repetition of Representations The representations contained in this
Clause 25 (other than those made under Clauses 25.4, 25.5, 25.6, 25.8, 25.10,
25.11, 25.12 and 25.13) by any Obligor shall be deemed to be repeated by such
Obligor on each date upon which an Advance is made (other than where the
proposed Utilisation Date of such Advance is the same as the last day of the
Term of one or more existing Advances and the aggregate principal amount of such
Advance and any other Advance to be made on such Utilisation Date does not
exceed the aggregate outstanding principal amount of all existing Advances whose
Term ends on that Utilisation Date) by reference to the facts and circumstances
then existing.
26. Financial Information
26.1 Annual Statements Each of the Obligors shall as soon as the same become
available, but in any event within 120 days after the end of each of its
financial years, deliver to the Facility Agent in sufficient copies for the
Banks its financial statements (or, in the case of the Original Guarantor, the
consolidated financial statements of the Group) for such financial year.
26.2 Semi-annual Statements Each of the Obligors shall as soon as the same
become available, but in any event within 90 days after the end of the half of
each of its financial years ending six months after the end of each of its
financial years, deliver to the Facility Agent in sufficient copies for the
Banks its unaudited financial statements (or, in the case of the Original
Guarantor, the consolidated unaudited financial statements of the Group) for
such period.
26.3 Other Financial Information Each of the Obligors shall from time to time
on the request of the Facility Agent, furnish the Facility Agent with such
information about the business and financial condition of the Group as the
Facility Agent may reasonably require.
26.4 Requirements as to Financial Statements Each of the Obligors shall
ensure that:
(i) each set of financial statements delivered by it pursuant to this
Clause 26 is prepared on the same basis as was used in the
preparation of its Original Financial Statements and in accordance
with accounting principles generally accepted in its jurisdiction of
incorporation and consistently applied;
(ii) each set of financial statements delivered by it pursuant to Clause
26.1 is certified by a duly authorised officer of such Obligor as
giving a true and fair view of its financial condition (or, in the
case of financial statements of the Original Guarantor, the
financial condition of the Group) as at the end of the
47
period to which those financial statements relate and of the results
of its (or, as the case may be, the Group's) operations during such
period;
(iii) in respect of the Original Guarantor and each Acceding Guarantor
each set of financial statements delivered by the Original Guarantor
and each Acceding Guarantor pursuant to Clause 26.1 (Annual
Statements) has been audited by an internationally recognised firm
of independent auditors licensed to practise in its jurisdiction of
incorporation; and
(iv) each set of consolidated financial statements and accounts delivered
to the Facility Agent pursuant to Clause 26.1 (Annual Statements) or
Clause 26.2 (Semi-annual Statements) shall be accompanied by a
compliance certificate signed by a duly authorised officer of the
Original Guarantor, substantially in the form set out in the Ninth
Schedule (Form of Compliance Certificate), together with any other
information required to determine whether or not the financial
condition of the Group satisfies the provisions of Clause 27
(Financial Condition).
27. Financial Condition
27.1 Financial Condition of the Borrowers The Original Guarantor shall procure
that, and each of the Borrowers from time to time shall ensure in relation to
itself that, as evidenced by the most recent set of financial statements
delivered by each Tranche A Borrower or, as the case may be, each Tranche B
Borrower pursuant to Clause 26 (Financial Information):
(i) Minimum Net Worth
In the case of each Tranche A Borrower, its Tangible Net Worth shall
not on any date be less than ,5,000,000 and, in the case of each
Tranche B Borrower, its Tangible Net Worth shall not on any date be
less than C$5,000,000.
(ii) Maximum Debt to Total Capital
The ratio of its Debt to Total Capital shall not on any date be more
than 9 to 1.
(iii) Minimum Equity to Total Assets
The ratio of its Equity to Total Assets shall not on any date be
less than 7.5%.
(iv) Minimum Eligible Assets to Debt
The ratio of its Eligible Assets to Debt shall not on any date be
less than 1.10 to 1.
27.2 Financial Condition of the Original Guarantor The Original Guarantor shall
ensure that, as evidenced by the most recent set of financial statements
delivered by it pursuant to Clause 26 (Financial Information):
48
(i) Maximum Delinquency Ratio
Its Delinquency Ratio shall not on the last day of any calendar
month be more than 5.5%.
(ii) Minimum Tier 1 Capital to Managed Receivables Ratio
The ratio of its Tier 1 Capital to Managed Receivables shall not on
any date be less than 4.0 % and remain so for more than 90 days and
the ratio of its Tier 1 Capital to Managed Receivables shall not on
any date be less than 3.5%.
(iii) Minimum Tangible Net Worth
The Tangible Net Worth of the Original Guarantor shall not on any
date be less than US$500,000,000 plus 40% of Cumulative Net Income
as of the last day of the fiscal quarter of the Original Guarantor
most recently ended plus 40% of Cumulative Equity Proceeds as of
such date of determination.
(iv) Leverage Ratio
Its Leverage Ratio shall not on any date exceed 10.0 to 1.
(v) Double Leverage Ratio
Its Double Leverage Ratio shall not on any date exceed 1.25 to 1.
27.3 Definitions of Financial Terms In this Agreement:
"Cumulative Equity Proceeds" shall mean, as of any date of determination, the
aggregate amount of all cash received on or prior to such date of determination
by the Original Guarantor and its Subsidiaries in respect of any Equity Issuance
effected after 30 June 1997, net of reasonable expenses incurred by the Original
Guarantor and its Subsidiaries in connection therewith.
"Cumulative Net Income" shall mean, as of any date of determination, the
consolidated net income of the Original Guarantor and its consolidated
Subsidiaries (determined on a consolidated basis without duplication in
accordance with GAAP) for each fiscal quarter of the Original Guarantor (a)
commencing with the fiscal quarter ended 30 September 1997 and (b) ending with
the fiscal quarter most recently ended on or prior to such date of
determination; provided that the Original Guarantor's Cumulative Net Income
shall be determined exclusive of any fiscal quarter of the Original Guarantor
for which the consolidated net income of the Original Guarantor and its
consolidated Subsidiaries (determined on a consolidated basis without
duplication in accordance with GAAP) is less than zero.
"Debt" means at any time and in relation to any person, indebtedness of such
person owed to the Banks under any Finance Document and any indebtedness of such
person owed to any person which is not Subordinated Indebtedness, not including
securitisation liability
49
"Delinquency Ratio" shall mean, on any date and with respect to the Original
Guarantor, the ratio of (a) all Past Due Receivables with respect to the
Original Guarantor on such date to (b) the aggregate amount of all Managed
Receivables with respect to the Original Guarantor on such date.
"Double Leverage Ratio" shall mean, on any date, the ratio of (a) the sum of the
Original Guarantor's Intangibles calculated on an unconsolidated basis on such
date plus the amount of the aggregate investment of the Original Guarantor in
the capital stock of its Subsidiaries to (b) the Original Guarantor's Net Worth
on such date.
"Eligible Assets" means the consolidated cash, cash equivalents and marketable
securities of each Borrower which are unrestricted or unpledged plus reported
----
loan receivables of each Borrower less any a) Past Due Receivables or b)
reported loan receivables that are restricted, pledged or subordinated.
"Equity" means on any date and with respect to any person, the aggregate at such
time of such person's called up share capital, any credit balance on such
person's share premium account or consolidated profit and loss account and such
person's consolidated reserves less any debit balance on the consolidated profit
and loss account of such person.
"Equity Issuance" shall mean (a) any issuance or sale by the Original Guarantor
or any of its Subsidiaries of (i) any of its capital stock, (ii) any warrants or
options exercisable in respect of its capital stock (other than any warrants or
options issued to directors, officers or employees of the Original Guarantor or
any of its Subsidiaries pursuant to employee benefit plans established in the
ordinary course of business and any capital stock of the Original Guarantor
issued upon the exercise of such warrants or options) or (iii) any other
security or instrument representing an equity interest (or the right to obtain
any equity interest) in the Original Guarantor or any of its Subsidiaries or (b)
the receipt by the Original Guarantor or any of its Subsidiaries from any person
not a shareholder of the Original Guarantor of any capital contribution (whether
or not evidenced by any equity security issued by the recipient of such
contribution); provided that Equity Issuance shall not include (i) any such
issuance or sale by any Subsidiary of the Original Guarantor to the Original
Guarantor or any wholly owned Subsidiary of the Original Guarantor or (ii) any
capital contribution by the Original Guarantor or any wholly owned Subsidiary of
the Original Guarantor to any Subsidiary of the Original Guarantor.
"GAAP" shall mean on any date and with respect to any person, generally accepted
accounting principles in the United States of America applied on a consistent
basis with those used in the preparation of the latest annual or quarterly
financial statements furnished by on behalf of such person to the Facility Agent
pursuant hereto.
"Intangibles" means as at any date and with respect to any person, the aggregate
amount (to the extent reflected in determining the consolidated stockholders'
equity of such person and its
50
consolidated Subsidiaries) of (a) all write-ups (other than write-ups resulting
from foreign currency translations and write-ups of assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to 30 June 1997 in the book value of any asset by any such person or
any of its consolidated Subsidiaries, (b) all Investments in unconsolidated
Subsidiaries and all equity investments in persons that are not Subsidiaries and
(c) all unamortised debt discount and expense, unamortised deferred charges,
goodwill, patents, trademarks, service marks, trade names, anticipated future
benefit of tax loss carry-forwards, copyrights, organisation or developmental
expense and other intangible assets.
"Investments" means for any person (a) the acquisition (whether for cash,
Property, services or securities or otherwise) of capital stock, bonds, notes,
debentures, partnership or other ownership interests or other securities of any
other person or any agreement to make any such acquisition (including, without
limitation, any "short sale" or any sale of any securities at a time when such
securities are not owned by the person entering into such sale); (b) the making
of any deposit with, or advance, loan or other extension of credit to, any other
person (including the purchase of Property from another person subject to an
understanding or agreement, contingent or otherwise, to resell such Property to
such person), but excluding any such advance, loan or extension of credit having
a term not exceeding 90 days arising in connection with the sale of inventory or
supplies by such person in the ordinary course of business; or (c) the entering
into of any guarantee of, or other contingent obligation with respect to,
indebtedness or other liability of any other person and (without duplication)
any amount committed to be advance, lent or extended to such person.
"Leverage Ratio" means on any date, the ratio of (A) the indebtedness (as
determined on a consolidated basis without duplication in accordance with GAAP)
of the Original Guarantor with respect to the Original Guarantor and its
consolidated Subsidiaries at such date minus the aggregate amount of all on-
balance sheet loans held for securitisation at such date to (B) the Original
Guarantor's Tangible Net Worth at such date.
"Managed Receivables" means on any date and with respect to any person, the sum
for such person and its consolidated Subsidiaries (determined on a consolidated
basis without duplication in accordance with GAAP) of (a) all on-balance sheet
credit card loans and other finance receivables plus (b) all on balance sheet
credit card loans and other finance receivables held for securitisation plus (c)
all securitised credit card loans and other finance receivables of such person;
provided that, as the term "Managed Receivables" is used in the Tier 1 Capital
to Managed Receivables Ratio Calculation, clauses (a), (b) and (c) above shall
be determined exclusive of securitised, non-revolving finance receivables.
"Net Worth" means on any date the consolidated stockholders' equity of the
Original Guarantor and its consolidated Subsidiaries, all determined as of such
date on a consolidated basis without duplication in accordance with GAAP.
51
"Past Due Receivables" means on any date and with respect to any person, (i)
with respect to the definition of Delinquency Ratio, Managed Receivables and
(ii) with respect to the definition of Eligible Assets, reported loan
receivables, in each case contractually past due 90 days or more plus all other
non performing assets Provided however that receivables which are loans, whether
or not contractually past due 90 days or more, shall not constitute Past Due
Receivables to the extent of any cash balance of the account debtor on such loan
on deposit with the creditor (but only to the extent such creditor is entitled
under an agreement governing such loan to set-off such cash balances against the
obligations of the account debtor under such loan and to the extent such cash
balances are not subject to any other set-off or deduction by such creditor or
any of its affiliates against a matured obligation owing by such debtor).
"Property" shall mean any right or interest in or to property of any kind
whatsoever, whether real, personal or mixed and whether tangible or intangible.
"Subordinated Indebtedness" means at any time and in relation to any person,
indebtedness of such person fully subordinated to the indebtedness of the
Borrowers under any Finance Document by a subordination agreement in form and
substance satisfactory to the Facility Agent or if the lender of such
indebtedness is an Affiliate of any Borrower in a form which includes provisions
providing for the relevant subordination in an agreed form.
"Tangible Net Worth" means on any date and with respect to any person, the
consolidated stockholders' equity of such person and its consolidated
Subsidiaries less Intangibles of such person and its consolidated Subsidiaries,
all determined as of such date on a consolidated basis without duplication in
accordance with GAAP.
"Tier 1 Capital" means on any date and with respect to any person, the amount,
for such person and its consolidated Subsidiaries (determined on a consolidated
basis) on such date of "Tier 1 Capital", within the meaning given to such term
in the Capital Adequacy Guidelines for State Member Banks published by the Board
of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A, as
amended, modified and supplemented, and in effect from time to time and any
replacement thereof).
"Total Assets" means on any date and with respect to any person the amount, for
such person, and its consolidated Subsidiaries (determined on a consolidated
basis) of "average total consolidated assets" within the meaning given to such
term in the Capital Adequacy Guidelines for State Member Banks published by the
Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix
A, as amended, modified and supplemented, and in effect from time to time and
any replacement thereof).
"Total Capital" means on any date and with respect to any person, the Equity of
such person plus Subordinated Indebtedness of such person.
52
27.4 Accounting Terms All accounting expressions which are not otherwise
defined herein shall be construed in accordance with generally accepted
accounting principles in the United States of America.
28. Covenants
28.1 Litigation Each Obligor shall promptly give to the Facility Agent notice
of all legal or arbitral proceedings, and of all investigations or proceedings
by or before any governmental or regulatory authority or agency, and any
material development in respect of such legal or other proceedings, against or
affecting such Obligor or any of its Subsidiaries, except investigations or
proceedings (a) as to which there is no reasonable possibility of an adverse
determination or (b) that, if adversely determined, would not (either
individually or in the aggregate) have a Material Adverse Effect.
28.2 Maintenance of Legal Validity Each of the Obligors shall obtain, comply
with the terms of and do all that is necessary to maintain in full force and
effect all authorisations, approvals, licences and consents required in or by
the laws and regulations of its jurisdiction of incorporation to enable it
lawfully to enter into and perform its obligations under each of the Finance
Documents to which it is a party and to ensure the legality, validity,
enforceability or admissibility in evidence in its jurisdiction of incorporation
of each of the Finance Documents to which it is a party.
28.3 Insurance The Original Guarantor shall procure that each Obligor maintains
insurances on and in relation to its business and assets with reputable
underwriters or insurance companies against such risks and to such extent as is
usual for companies carrying on a business such as that carried on by such
Obligor.
28.4 Disposals The Original Guarantor shall ensure that no Obligor shall,
without the prior written consent of an Instructing Group, enter into any
transaction of merger or consolidation or amalgamation or liquidate, wind-up or
dissolve itself or convey, sell, lease, transfer or otherwise dispose of, by one
or more transactions or series of transactions (whether related or not), all or
substantially all of its revenues or its assets other than by way of a Permitted
Disposal.
28.5 Negative Pledge The Original Guarantor shall ensure that no Obligor shall,
without the prior written consent of an Instructing Group, create or permit to
subsist any encumbrance over all or any of its present or future revenues or
assets other than a Permitted Encumbrance.
28.6 Claims Pari Passu Each of the Obligors shall, ensure that at all times the
claims of the Facility Agent, the Sterling Agent, the Canadian Dollar Agent, the
Arrangers and the Banks against it under each of the Finance Documents rank at
least pari passu with the claims of all its other unsecured creditors save those
whose claims are preferred by any bankruptcy, insolvency, liquidation or other
similar laws of general application.
53
28.7 Notification of Events of Default Each of the Obligors shall promptly
after becoming aware of the same inform the Facility Agent of the occurrence of
any Event of Default or Potential Event of Default and upon receipt of a written
request to that effect from the Facility Agent acting reasonably in
circumstances which give reasonable grounds for belief that an Event of Default
or Potential Event of Default may have occurred, confirm to the Facility Agent
that, save as previously notified to the Facility Agent or as notified in such
confirmation, no Event of Default or Potential Event of Default has occurred.
28.8 Acceding Guarantors The Original Guarantor shall procure that there is
delivered to the Facility Agent, within thirty days of any company which is a
wholly-owned Subsidiary (or would be a wholly-owned Subsidiary but for the
operation of any applicable law, rule or regulation) of Capital One, F.S.B. or
Capital One Bank, becoming a Borrower hereunder pursuant to Clause 42 (Acceding
Borrowers) a New Guarantee duly executed by Capital One, F.S.B. or Capital One
Bank, as the case may be, together, in each case, with the documents required to
accompany any such New Guarantee as specified in the New Guarantee all in a form
and substance satisfactory to the Facility Agent.
29. Events of Default
Each of Clause 29.1 to Clause 29.16 describes circumstances which constitute an
Event of Default for the purposes of this Agreement. Clause 29.17 and Clause
29.18 deal with the rights of the Agents and the Banks after the occurrence of
an Event of Default.
29.1 Failure to Pay Any of the Obligors fails to pay any sum due from it under
any Finance Document at the time, in the currency and in the manner specified
therein and such failure is not remedied within five days.
29.2 Cross Default Any financial indebtedness of any member of the Group in
excess of an aggregate of US$35,000,000 (or its equivalent in any other
currency) is not paid when due, any such financial indebtedness of any member of
the Group is declared to be or other-wise becomes due and payable prior to its
specified maturity, any commitment for, or underwriting of, any such financial
indebtedness of any member of the Group is cancelled or suspended or any
creditor or creditors of any member of the Group become entitled to declare any
such financial indebtedness of any member of the Group due and payable prior to
its specified maturity.
29.3 Misrepresentation Any representation or statement made or deemed to be
made by any of the Obligors in any of the Finance Documents to which it is a
party or in any notice or other document, certificate or statement delivered by
it pursuant hereto is or proves to have been incorrect or misleading in any
material respect when made or deemed to be made.
54
29.4 Specific Covenants Any of the Obligors fails duly to perform or comply
with any of the obligations expressed to be assumed by it in Clause 26
(Financial Information) or Clause 28 (Covenants) and, if such breach is capable
of remedy, such breach has not been remedied within 30 days after notice of such
breach has been given by the Facility Agent to the relevant Obligor.
29.5 Financial Condition At any time any of the requirements of Clause 27
(Financial Condition) is not satisfied.
29.6 Other Obligations Any of the Obligors fails duly to perform or comply with
any other obligation expressed to be assumed by it in any Finance Document and
such failure, if capable of remedy, is not remedied within thirty days after the
Facility Agent has given notice thereof to such Obligor.
29.7 Insolvency and Rescheduling Any Obligor is unable to pay its debts as they
fall due, commences negotiations with any one or more of its creditors with a
view to the general readjustment or rescheduling of its indebtedness or makes a
general assignment for the benefit of or a composition with its creditors.
29.8 Winding-up Any Obligor takes any corporate action or other steps are taken
or legal proceedings are started for its winding-up, dissolution, administration
or re-organisation or for the appointment of a liquidator, receiver,
administrator, administrative receiver, conservator, custodian, trustee or
similar officer of it or of all or substantially all of its revenues and assets
other than (a) in connection with a solvent reconstruction, the terms of which
have been previously approved by the Facility Agent acting on the instructions
of an Instructing Group, or (b) a winding up petition which is proved to the
satisfaction of the Facility Agent to be frivolous or vexatious and which is, in
any event, discharged within 21 days of its presentation.
29.9 Analogous Events Any event occurs which under the laws of any jurisdiction
has a similar or analogous effect to any of those events mentioned in Clause
29.7 (Insolvency and Rescheduling), Clause 29.8 (Winding-up) or Clause 29.16
(Judgement Defaults).
29.10 Governmental Intervention By or under the authority of any government,
(a) the management of the Original Guarantor is wholly or partially displaced or
the authority of the Original Guarantor in the conduct of its business is wholly
or partially curtailed which is likely to have a Material Adverse Effect or (b)
all or a majority of the issued shares of the Original Guarantor or the whole or
any part (the book value of which is twenty per cent. or more of the book value
of the whole) of its revenues or assets is seized, nationalised, expropriated or
compulsorily acquired which is likely to have a Material Adverse Effect.
55
29.11 Ownership of the Original Guarantor Any person or group of persons
(within the meaning of Section 13 or 14 of the Exchange Act as amended) shall
have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated
by the SEC under the Exchange Act) of 20% or more of the issued and outstanding
shares of voting common stock issued by the Original Guarantor or the Original
Guarantor shall at any time fail to own and control, beneficially and of record
(free and clear of all encumbrances), at least 95% of the issued and outstanding
shares of capital stock of each class of voting securities issued by Capital One
Bank or the Original Guarantor shall at any time fail to own and control,
beneficially and of record (free and clear of all encumbrances), at least 95% of
the issued and outstanding shares of capital stock of each class of voting
securities issued by Capital One, F.S.B.
29.12 The Group's Business Any Obligor (i) ceases to carry on the business it
carries on at the date hereof the cession of which is likely to have a Material
Adverse Effect or (ii) enters into any unrelated business the entry into which
is likely to have a Material Adverse Effect.
29.13 Repudiation Any of the Obligors repudiates any Finance Document.
29.14 Illegality At any time it is or becomes unlawful for any of the Obligors
to perform or comply with any or all of its obligations under any of the Finance
Documents or any of the obligations of any of the Obligors under any of the
Finance Documents are not or cease to be legal, valid and binding.
29.15 Performance of Obligations Any Obligor becomes unable to perform any of
its obligations under any of the Finance Documents and such inability has a
material adverse effect on the ability of any Borrower to perform its payment
obligations under any of the Finance Documents.
29.16 Judgement Defaults A final judgment or judgments for the payment of
money of US$35,000,000 (or its equivalent in any other currency or currencies)
or more in the aggregate shall be rendered by one or more courts, administrative
tribunals or other bodies having jurisdiction against any Borrower or any of its
Subsidiaries and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be procured,
within 30 days from the date of entry thereof and the relevant Borrower or
Subsidiary shall not, within said period of 30 days, or such longer period
during which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal.
29.17 Acceleration and Cancellation Upon the occurrence of an Event of Default
and at any time thereafter, the Facility Agent shall if so instructed by an
Instructing Group by written notice to the Borrowers:
(i) declare the Advances to be immediately due and payable (whereupon
the same shall become so payable together with accrued interest
thereon and any other
56
sums then owed by the relevant Borrower or Borrowers hereunder) or
declare the Advances to be due and payable on demand of the
Facility Agent; and/or
(ii) require payment of an amount equal to the aggregate face amount of
all outstanding Bills on such date as it may specify in such notice
(whereupon the same shall become due and payable on such date) or
require the Borrowers to procure that the obligations of each of
the Beneficiaries under or in relation to each Bill are promptly
reduced to zero or provide 100% cash security in respect thereof;
and/or
(iii) declare that the Facility shall be cancelled, whereupon the same
shall be cancelled and the Commitment of each Bank shall be reduced
to zero.
29.18 Advances Due on Demand If, pursuant to Clause 29.17 (Acceleration and
Cancellation), the Facility Agent declares the Advances to be due and payable on
demand of the Facility Agent, then, and at any time thereafter, the Facility
Agent may (and, if so instructed by an Instructing Group, shall) by written
notice to the Borrowers require repayment of the Advances on such date as it may
specify in such notice (whereupon the same shall become due and payable on such
date together with accrued interest thereon and any other sums then owed by the
relevant Borrower or Borrowers hereunder) or withdraw its declaration with
effect from such date as it may specify in such notice.
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Part 9
DEFAULT INTEREST AND INDEMNITY
30. Default Interest and Indemnity
30.1 Default Interest Period If any sum due and payable by any of the Obligors
under any Finance Document to which it is a party is not paid on the due date
therefor in accordance with the provisions of Clause 32 (Payments) or if any sum
due and payable by any of the Obligors under any judgment of any court in
connection herewith is not paid on the date of such judgment, the period
beginning on such due date or, as the case may be, the date of such judgment and
ending on the date upon which the obligation of such Obligor to pay such sum
(the balance thereof for the time being unpaid being herein referred to as an
"unpaid sum") is discharged shall be divided into successive periods, each of
which (other than the first) shall start on the last day of the preceding such
period and the duration of each of which shall (except as otherwise provided in
this Clause 30) be selected by the Sterling Agent or, as the case may be, the
Canadian Dollar Agent.
30.2 Default Interest During each such period relating thereto as is mentioned
in Clause 30.1 (Default Interest Period) an unpaid sum shall bear interest at
the rate per annum which is:
(i) in respect of any sum denominated in Canadian Dollars the sum from
time to time of one per cent. and the Canadian Prime Rate; or
(ii) in the case of any sum denominated in sterling or any other currency
the sum from time to time of one per cent., the Margin (and, in the
case of any such sum denominated in sterling, the Associated Costs
Rate in respect thereof at such time) and LIBOR on the Quotation Date
therefor Provided that:
(a) if, for any such period, LIBOR cannot be determined, the rate of
interest applicable to such unpaid sum shall be the sum from time
to time of one per cent. per annum, the Margin (and, in the case
of any such sum denominated in sterling, the Associated Costs
Rate in respect thereof at such time) and the rate per annum
determined by the Sterling Agent to be the arithmetic mean
(rounded upwards, if not already such a multiple, to the nearest
whole multiple of one-sixteenth of one per cent.) of the rates
notified by each Reference Bank to the Sterling Agent before the
last day of such period to be those which express as a percentage
rate per annum the cost to it of funding from whatever source it
may select its portion of such unpaid sum for such period; and
(b) if such unpaid sum is all or part of an Advance which became due
and payable on a day other than the last day of the Term thereof,
the first
58
such period applicable thereto shall be of a duration equal to
the unexpired portion of that Term and the rate of interest
applicable thereto from time to time during such period shall be
that which exceeds by one per cent. per annum the rate which
would have been applicable to it had it not so fallen due.
30.3 Payment of Default Interest Any interest which shall have accrued under
Clause 30.2 (Default Interest) in respect of an unpaid sum shall be due and
payable and shall be paid by the Obligor owing such unpaid sum at the end of the
period by reference to which it is calculated or on such other date or dates as
the relevant Agent may specify by written notice to such Obligor.
30.4 Broken Periods If any Bank or any Agent on its behalf receives or recovers
all or any part of an Advance made by such Bank otherwise than on the last day
of the Term thereof, the Borrower to whom such Advance was made shall pay to the
relevant Agent on demand for account of such Bank an amount equal to the amount
(if any) by which (i) the additional interest which would have been payable on
the amount so received or recovered had it been received or recovered on the
last day of the Term thereof exceeds (ii) the amount of interest which in the
opinion of the relevant Agent would have been payable to the relevant Agent on
the last day of the Term thereof in respect of a deposit in the currency of the
amount so received or recovered equal to the amount so received or recovered
placed by it with a prime bank in London or Toronto, as the case may be, for a
period starting on the first business day following the date of such receipt or
recovery and ending on the last day of the Term thereof.
30.5 Indemnities The Original Guarantor and each Borrower undertakes to
indemnify:
(i) each of the Facility Agent, the Sterling Agent, the Canadian Dollar
Agent, the Arrangers and the Banks and each of their respective
officers, directors, employees, agents, and delegates against any
cost, claim, loss, expense (including legal fees) or liability (other
than any cost, claim, loss, expense or liability incurred as a result
of such Agent, Arranger or Bank's own wilful misconduct or gross
negligence) together with any VAT thereon, which any of them may
reasonably sustain or incur as a consequence of the occurrence of any
Event of Default or any default by any of the Obligors in the
performance of any of the obligations expressed to be assumed by it in
the Finance Documents (or any of them); and
(ii) each Bank against any loss (other than any loss incurred as a result
of such Bank's own wilful misconduct or gross negligence) it may
suffer as a result of its funding an Advance requested by any of the
Borrowers hereunder but not made by reason of the operation of any one
or more of the provisions hereof.
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30.5 Unpaid Sums or Advances Any unpaid sum shall (for the purposes of this
Clause 30, Clause 21.1 (Changes in Circumstances) and the Sixth Schedule
(Associated Costs Rate)) be treated as an advance and accordingly in this Clause
30, Clause 21.1 (Changes in Circumstances) and the Sixth Schedule (Associated
Costs Rate) the term "Advance" includes any unpaid sum and "Term", in relation
to an unpaid sum, includes each such period relating thereto as is mentioned in
Clause 30.1 (Default Interest Periods).
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Part 10
PAYMENTS
31. Currency of Account and Payment
31.1 Currency of Account Sterling is the currency of account and payment in
respect of Facility A and Canadian Dollars is the currency of account and
payment in respect of Facility B, for each and every sum at any time due from
any of the Obligors under each respective Facility and, in connection therewith,
in the other Finance Documents Provided that:
(i) each repayment of an Advance or a part thereof shall be made in the
currency in which such Advance is denominated at the time of that
repayment;
(ii) each payment of interest shall be made in the currency in which the
sum in respect of which such interest is payable is denominated;
(iii) each payment in respect of costs and expenses shall be made in the
currency in which the same were incurred;
(iv) each payment pursuant to Clause 18.3 (Tax Indemnity) or Clause 21.1
(Changes in Circumstances) shall be made in the currency specified
by the party acting reasonably and claiming thereunder; and
(v) any amount expressed to be payable in a currency other than sterling
and Canadian Dollar shall be paid in that other currency.
31.2 Currency Indemnity If any sum due from any of the Obligors under the
Finance Documents or any order or judgment given or made in relation thereto has
to be converted from the currency (the "first currency") in which the same is
payable thereunder or under such order or judgment into another currency (the
"second currency") for the purpose of (i) making or filing a claim or proof
against such Obligor, (ii) obtaining an order or judgment in any court or other
tribunal or (iii) enforcing any order or judgment given or made in relation
thereto, the Original Guarantor shall indemnify and hold harmless each of the
persons to whom such sum is due from and against any loss suffered as a result
of any discrepancy between (a) the rate of exchange used for such purpose to
convert the sum in question from the first currency into the second currency and
(b) the rate or rates of exchange at which such person may in the ordinary
course of business purchase the first currency with the second currency upon
receipt of a sum paid to it in satisfaction, in whole or in part, of any such
order, judgment, claim or proof.
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32. Payments
32.1 Payments to the Sterling Agent On each date on which any Finance Document
requires an amount to be paid by any of the Obligors or any of the Banks under
any of the Finance Documents (other than in respect of Facility B or otherwise
to the Canadian Dollar Agent), such Obligor or, as the case may be, such Bank
shall make the same available to the Sterling Agent:
(i) where such amount is denominated in sterling, by payment in sterling
and in immediately available, freely transferable, cleared funds by
CHAPS code 20-00-34 to the Sterling Agent's account number 18291241
with Barclays Bank PLC, London Account CLAD re: Capital One Finance
Company (or such other account or bank as the Sterling Agent may have
specified for this purpose);
(ii) where such amount is denominated in any other currency, by payment in
such currency for value on the day in question to the Sterling Agent's
account number specified for such purpose.
32.2 Payments to the Canadian Dollar Agent On each date on which any Finance
Document requires an amount to be paid by any of the Obligors or any of the
Banks under any of the Finance Documents in respect of Facility B or otherwise
to the Canadian Dollar Agent, such Obligor or, as the case may be, such Bank
shall make the same available to the Canadian Dollar Agent:
(i) where such amount is denominated in Canadian Dollars, by payment in
Canadian Dollars for value on the day in question to the Canadian
Dollar Agent's account number 1283 - 935 Transit 002 with Toronto Main
Branch of Bank of Montreal, First Canadian Place; F/0 Loan
Agency/Capital One Inc., Canada (or such other account or bank as the
Canadian Dollar Agent may have specified for this purpose);
(ii) where such amount is denominated in any other currency, by payment in
such currency for value on the day in question to the Canadian Dollar
Agent's account number specified for such purpose.
32.3 Alternative Payment Arrangements If, at any time, it shall become
impracticable (by reason of any action of any governmental authority or any
change in law, exchange control regulations or any similar event) for any or all
of the Obligors to make any payments hereunder in the manner specified in Clause
32.1 (Payments to the Sterling Agent) or Clause 32.2 (Payments to the Canadian
Dollar Agent), then such Obligor may agree with each or any of the Banks
alternative arrangements for the payment direct to such Bank of amounts due to
such Bank hereunder Provided that, in the absence of any such agreement with any
Bank, such
62
Obligor shall be obliged to make all payments due to such Bank in the manner
specified herein. Upon reaching such agreement such Obligor and such Bank shall
immediately notify the relevant Agent thereof and shall thereafter promptly
notify the relevant Agent of all payments made directly to such Bank.
32.4 Payments by the Sterling Agent and the Canadian Dollar Agent Save as
otherwise provided herein, each payment received by the Sterling Agent for the
account of another person pursuant to Clause 32.1 (Payments to the Sterling
Agent) or, as the case may be, by the Canadian Dollar Agent for the account of
another person pursuant to Clause 32.2 (Payments to the Canadian Dollar Agent)
shall:
(i) in the case of a payment received for the account of any Borrower, be
made available by the relevant Agent to such Borrower by no later than
the time specified in the applicable part of the Fifth Schedule by
application:
(a) first, in or towards payment (on the date, and in the currency
and funds, of receipt) of any amount then due from such Borrower
hereunder to the person from whom the amount was so received or
in or towards the purchase at such Agent's spot rate then
prevailing of any amount of any currency to be so applied; and
(b) secondly, in or towards payment for value the same day to such
account with such bank in the principal financial centre of the
country of the currency of such payment as such Borrower shall
have previously notified to such Agent for this purpose,
but nothing in this Clause 32.4(i) shall constitute an encumbrance, and
(ii) in the case of any other payment, be made available by the relevant
Agent to the person for whose account such payment was received (in
the case of a Bank, for the account of the Facility Office) for value
the same day by transfer to such account of such person with such bank
in the principal financial centre of the country of the currency of
such payment as such person shall have previously notified to such
Agent.
32.5 No Set-off All payments required to be made by any of the Obligors under
the Finance Documents shall be calculated without reference to any set-off or
counterclaim and shall be made free and clear of and without any deduction for
or on account of any set-off or counterclaim.
32.6 Interest Act (Canada) For the purposes of the Interest Act (Canada) and
disclosure thereunder, whenever interest to be paid hereunder or in connection
herewith is to be calculated on the basis of a year of 365 days or any other
period of time that is less than a
63
calendar year, the yearly rate of interest to which the rate determined pursuant
to such calculation is equivalent is the rate so determined multiplied by the
actual number of days in the calendar year in which the same is to be
ascertained and divided by either 365 or such other period of time, as the case
may be. The rates of interest under this Agreement are nominal rates, and not
effective rates or yields. The principal of deemed reinvestment of interest does
not apply to any Interest calculation under this Agreement.
32.7 Suspense Accounts Where and for so long as reasonably deemed necessary by
the Sterling Agent or, as the case may be, the Canadian Dollar Agent or any Bank
for the purpose of maximising its recoveries in any winding-up, dissolution or
administration then taking place or reasonably likely to occur, all moneys
received, recovered or realised by a Bank by virtue of the Guarantee may, in
that Bank's discretion, be credited to a suspense or impersonal account and may
be held in such account for so long as such Bank thinks reasonably fit pending
the application from time to time (as such Bank may think fit) of such moneys in
or towards the payment and discharge of any amounts owing by any of the Obligors
to such Bank hereunder.
32.8 Clawback Where a sum is to be paid hereunder to the Sterling Agent or, as
the case may be, the Canadian Dollar Agent for account of another person, such
Agent shall not be obliged to make the same available to that other person or to
enter into or perform any exchange contract in connection therewith until it has
been able to establish to its satisfaction that it has actually received such
sum, but if it does make such payment and it proves to be the case that it had
not actually received such sum, then the person to whom such sum or the proceeds
of such exchange contract was so made available shall on request refund the same
to such Agent together with an amount sufficient to indemnify such Agent against
any cost or loss (other than any cost or loss incurred as a result of such
Agent's own wilful misconduct or gross negligence) it may have suffered or
incurred by reason of its having paid out such sum or the proceeds of such
exchange contract prior to its having received such sum. The relevant Agent may
not request any Borrower to refund any sum made available to it by such Agent
except to the extent that such Agent has still not received that sum from the
Bank(s) in question by close of business in the principal financial centre of
the country of the currency to be paid (or, if there is more than one such
centre, one of those centres as reasonably selected by such Agent) on the second
business day after the date on which such Agent made that sum available to such
Borrower.
32.9 Non-Business Days In the event that any payment required to be made under
any Finance Document falls to be made on a day which is not a business day it
shall be made on the next business day.
33. Set-Off
Each of the Obligors authorises each Bank to apply any credit balance to which
such Obligor is entitled on any account of such Obligor with that Bank in
satisfaction of any sum due and
64
payable from such Obligor to such Bank hereunder but unpaid; for this purpose,
each Bank is authorised to purchase with the moneys standing to the credit of
any such account such other currencies as may be necessary to effect such
application. No Bank shall be obliged to exercise any right given to it by this
Clause 33. Nothing in this Clause 33 shall constitute an encumbrance.
34. Redistribution of Payments
34.1 Sharing Subject to Clause 34.3 (Recoveries through Legal Proceedings), if,
at any time, the proportion which any Bank (a "Recovering Bank") has received or
recovered, determined by reference to the Sterling Amount thereof on the date of
receipt or recovery, (whether by payment, the exercise of a right of set-off or
combination of accounts or otherwise) in respect of its portion of the Sterling
Amount (determined on the due date therefor) of any payment (a "relevant
payment") to be made under any Finance Document by any of the Obligors for
account of such Recovering Bank and one or more other Banks in relation to the
same Facility is greater (the portion of such receipt or recovery giving rise to
such excess proportion being herein called an "excess amount") than the
proportion thereof so received or recovered by the Bank or Banks so receiving or
recovering the smallest proportion thereof, then:
(i) such Recovering Bank shall pay to the Sterling Agent an amount equal
to such excess amount;
(ii) there shall thereupon fall due from such Obligor to such Recovering
Bank an amount equal to the amount paid out by such Recovering Bank
pursuant to paragraph (i) above, the amount so due being, for the
purposes hereof, treated as if it were an unpaid part of such
Recovering Bank's portion of such relevant payment; and
(iii) the Sterling Agent shall treat the amount received by it from such
Recovering Bank pursuant to paragraph (i) above as if such amount had
been received by it from such Obligor in respect of such relevant
payment and shall pay the same to the persons entitled thereto
(including such Recovering Bank) pro rata to their respective
entitlements thereto in relation to the same Facility,
Provided that to the extent that any excess amount is attributable to a payment
to a Bank pursuant to Clause 32.4(i)(a) (Payments by the Sterling Agent and the
Canadian Dollar Agent) such portion of such excess amount as is so attributable
shall not be required to be shared pursuant hereto.
34.2 Repayable Recoveries If any sum (a "relevant sum") received or recovered
by a Recovering Bank in respect of any amount owing to it by any of the Obligors
becomes repayable and is repaid by such Recovering Bank, then:
65
(i) each Bank which has received a share of such relevant sum by reason of
the implementation of Clause 34.1 (Sharing) shall, upon request of the
Sterling Agent, pay to the Sterling Agent for account of such
Recovering Bank an amount equal to its share of such relevant sum; and
(ii) there shall thereupon fall due from such Obligor to each such Bank an
amount equal to the amount paid out by it pursuant to paragraph (i)
above, the amount so due being, for the purposes hereof, treated as if
it were the sum payable to such Bank against which such Bank's share
of such relevant sum was applied.
34.3 Recoveries through Legal Proceedings If any Bank shall commence any action
or proceeding in any court to enforce its rights hereunder after consultation
with the other Banks and with the consent of an Instructing Group (such consent
not to be unreasonably withheld) and, as a result thereof or in connection
therewith, shall receive any excess amount (as defined in Clause 34.1
(Sharing)), then such Bank shall not be required to share any portion of such
excess amount with any Bank which has the legal right to, but does not, join in
such action or proceeding or commence and diligently prosecute a separate action
or proceeding to enforce its rights in another court.
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Part 11
FEES, COSTS AND EXPENSES
35. Fees
35.1 Commitment Commission COFC shall pay to the Sterling Agent for account of
each Tranche A Bank a commitment commission on the amount of such Bank's
Available Tranche A Commitment, and COI shall pay to the Canadian Dollar Agent
for account of each Tranche B Bank a commitment commission on the amount of such
Bank's Available Tranche B Commitment, from day to day during the period
beginning on the date hereof and ending on the Termination Date, such commitment
commission to be calculated at the rate to be determined in accordance with
Clause 35.2 (Determination of Rate of Commitment Commission) and payable in
arrear on 29 September 1997 and thereafter on the last day of each successive
period of three months the first of which starts on 30 September 1997 and each
of which ends during such period and on the Termination Date.
35.2 Determination of Rate of Commitment Commission At any time when a
commitment commission is to be calculated pursuant to Clause 35.1 (Commitment
Commission), the rate at which such commission is to be calculated shall be the
rate set out in the table below under the heading which sets out the Relevant
Ratings at such time of the Original Guarantor, any Acceding Guarantors and the
Borrowers party hereto at such time:
================================================================================
Relevant Ratings A- BBB+ BBB BBB- BB+ Less-than BB+
and and and and and and
A3 Baa1 Baa2 Baa3 Ba1 Ba1
- --------------------------------------------------------------------------------
commitment commission 0.10 0.125 0.15 0.175 0.225 0.35
(per cent. per annum)
================================================================================
35.3 Agency Fees COFC shall pay to the Sterling Agent and COI shall pay to the
Canadian Dollar Agent, each for its own account, the agency fees specified in
the letter of even date herewith from the relevant Agent to COFC or, as the case
may be, COI at the times, and in the amounts, specified in such letter.
35.4 Arrangement Fee The Original Borrowers shall pay to Chase Manhattan plc
the arrangement fee specified in the letter of even date herewith from Chase
Manhattan plc to the Original Borrowers at the times, and in the amounts,
specified in such letter.
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35.5 Underwriting Fees The Original Borrowers shall pay to the Sterling Agent
for the account of Bank of Montreal, BZW and Deutsche Bank AG London (the
"Specified Arrangers") the underwriting fees specified in the letter of even
date herewith from the Specified Arrangers to the Original Borrowers at the
times, and the amounts, specified in that letter.
35.6 Participation Fees COFC and COI shall pay to the Facility Agent, in each
case for its own account and for the account of the Banks, the participation
fees specified in the letter of even date herewith from the Facility Agent to
the Original Borrowers at the times, and in the amounts, specified in such
letter.
36. Costs and Expenses
36.1 Costs and Expenses The Borrowers shall, from time to time on demand of the
Facility Agent, reimburse each of the Facility Agent, the Sterling Agent, the
Canadian Dollar Agent, and each of the Arrangers for all reasonable out-of-
pocket costs and expenses (including legal fees) together with any VAT thereon
incurred by it in connection with the negotiation, preparation and execution of
the Finance Documents and the completion of the transactions therein
contemplated except, for the avoidance of doubt, in relation to any transfer or
assignment by any Bank of its rights or obligations hereunder.
36.2 Preservations and Enforcement of Rights The Borrowers shall, from time to
time on demand of the Facility Agent, reimburse the Facility Agent, the Sterling
Agent, the Canadian Dollar Agent, the Arrangers and the Banks for all costs and
expenses (including legal fees) together with any VAT thereon reasonably
incurred in or in connection with the preservation and/or enforcement of any of
their rights under any of the Finance Documents except, for the avoidance of
doubt, in relation to any transfer or assignment by any Bank or its rights or
obligations hereunder.
36.3 Stamp Tares The Borrowers shall pay all stamp, registration and other
taxes to which any of the Finance Documents or any judgment given in connection
therewith is or at any time may be subject and shall, from time to time on
demand of the Facility Agent, indemnify the Facility Agent, the Sterling Agent,
the Canadian Dollar Agent, the Arrangers and the Banks against any liabilities,
costs, claims and expenses resulting from any failure to pay or any delay in
paying any such tax.
36.4 Banks' Liabilities for Costs If any Borrower fails to perform any of its
obligations under this Clause 36, each Bank shall, in its Proportion, indemnify
the Facility Agent, the Sterling Agent, the Canadian Dollar Agent and the
Arrangers against any loss incurred by any of them as a result of such failure,
and the Original Guarantor shall forthwith reimburse each Bank for any payment
made by it pursuant to this Clause 36.4.
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36.5 Waivers and Consents The Borrowers shall, from time to time on demand of
the Facility Agent (and without prejudice to the provisions of Clause 36.2
(Preservations and Enforcements of Rights) and Clause 44.2 (Amendment Costs)
compensate the Facility Agent for all reasonable costs, and expenses (including
telephone, fax, copying and travel costs) incurred by the Facility Agent in
connection with its taking such action as it may deem appropriate in complying
with any instructions from an Instructing Group or any request by any Obligor in
connection with:
(a) the granting or proposed granting of any waiver or consent requested
hereunder by any Obligor;
(b) any actual breach by any Obligor of its obligations hereunder;
(c) the occurrence of any event which is an Event of Default or a
Potential Event of Default; or
(d) any amendment or proposed amendment hereto requested by any Obligor.
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Part 12
AGENCY PROVISIONS
37. The Facility Agent, the Sterling Agent, the Canadian Dollar Agent, the
Arrangers and the Banks
37.1 Appointment of Agents Each Arranger and each Bank hereby appoints each of
the Facility Agent, the Sterling Agent and the Canadian Dollar Agent to act as
their agent in connection with the Finance Documents and authorises each such
Agent to exercise such rights, powers, authorities and, discretions as are
specifically delegated to each such Agent by the terms of any of the Finance
Documents together with all such rights, powers, authorities and discretions as
are reasonably incidental thereto.
37.2 Agents' Discretions Each Agent may:
(i) assume that:
(a) any representation made by any of the Obligors in connection
with any of the Finance Documents is true;
(b) no Event of Default or Potential Event of Default has occurred;
(c) none of the Obligors is in breach of or default under its
obligations under any of the Finance Documents; and
(d) any right, power, authority or discretion vested in any of the
Finance Documents upon an Instructing Group, the Banks or any
other person or group of persons has not been exercised,
unless it has, in its capacity as agent for the Banks, received
notice to the contrary from any other party hereto;
(ii) assume that the Facility Office of each Tranche A Bank and each
Tranche B Bank is that identified with its signature below (or, in
the case of a Transferee, at the end of the Transfer Certificate to
which it is a party as Transferee) until it has received from such
Bank a notice designating some other office of such Bank to replace
its Facility Office and act upon any such notice until the same is
superseded by a further such notice;
(iii) engage and pay for the advice or services of any lawyers,
accountants, surveyors or other experts whose advice or services may
to it seem necessary, expedient or desirable and rely upon any advice
so obtained;
70
(iv) rely as to any matters of fact which might reasonably be expected to
be within the knowledge of any of the Obligors upon a certificate
signed by or on behalf of such Obligor;
(v) rely upon any communication or document believed by it to be genuine;
(vi) refrain from exercising any right, power or discretion vested in it
as agent under any of the Finance Documents unless and until
instructed by an Instructing Group as to whether or not such right,
power or discretion is to be exercised and, if it is to be exercised,
as to the manner in which it should be exercised; and
(vii) refrain from acting in accordance with any instructions of an
Instructing Group to begin any legal action or proceeding arising out
of or in connection with any of the Finance Documents until it shall
have received such security as it may require (whether by way of
payment in advance or otherwise) for all costs, claims, losses,
expenses (including legal fees) and liabilities together with any VAT
thereon which it will or may expend or incur in complying with such
instructions.
37.3 Agents' Obligations Each Agent shall:
(i) promptly inform each Bank of the contents of any notice or document
received by it in its capacity as agent from any of the Obligors
hereunder;
(ii) promptly notify each Bank of the occurrence of any Event of Default
or any default by any of the Obligors in the due performance of or
compliance with its obligations under any of the Finance Documents of
which such Agent has notice from any other party hereto;
(iii) save as otherwise provided herein, act in accordance with any
instructions given to it by an Instructing Group, which instructions
shall be binding on all of the Arrangers, the Agents and the Banks;
and
(iv) if so instructed by an Instructing Group, refrain from exercising any
right, power or discretion vested in it as Agent under any of the
Finance Documents.
37.4 Excluded Obligations Notwithstanding anything to the contrary expressed or
implied herein, no Agent nor any of the Arrangers shall:
(i) be bound to enquire as to:
71
(a) whether or not any representation made by any of the Obligors in
connection with any of the Finance Documents is true;
(b) the occurrence or otherwise of any Event of Default or Potential
Event of Default;
(c) the performance by any of the Obligors of its obligations under
any of the Finance Documents; or
(d) any breach of or default by any of the Obligors of or under its
obligations under any Finance Document;
(ii) be bound to account to any Bank for any sum or the profit element of
any sum received by it for its own account;
(iii) be bound to disclose to any other person any information relating to
any member of the Group if such disclosure would or might in its
opinion constitute a breach of any law or regulation or be otherwise
actionable at the suit of any person; or
(iv) be under any fiduciary duty towards any Bank or a Borrower or an
Obligor or under any obligations other than those for which express
provision is made in any of the Finance Documents.
37.5 Indemnification Each Bank shall, in its Proportion, from time to time on
demand by any Agent, indemnify such Agent, against any and all costs, claims,
losses, expenses (including legal fees) and liabilities together with any VAT
thereon which such Agent may incur, otherwise than by reason of its own
negligence or wilful misconduct, in acting in its capacity as agent under the
Finance Documents.
37.6 Exclusion of Liabilities Neither the Agents and the Arrangers nor any of
them accepts any responsibility for the accuracy and/or completeness of the
Information Memorandum or any other information supplied by any of the Obligors
in connection herewith or for the legality, validity, effectiveness, adequacy or
enforceability of any of the Finance Documents and neither the Agents and the
Arrangers nor any of them shall be under any liability as a result of taking or
omitting to take any action in relation to any of the Finance Documents, save in
the case of negligence or wilful misconduct.
37.7 No Actions Each of the Banks agrees that it will not assert or seek to
assert against any director, officer or employee of any Agent or any Arranger
any claim it might have against any of them in respect of the matters referred
to in Clause 37.6 (Exclusion of Liabilities).
72
37.8 Business with the Group Each of the Agents and each of the Arrangers may
accept deposits from, lend money to and generally engage in any kind of banking
or other business with any member of the Group.
37.9 Resignation Any Agent may resign its appointment hereunder at any time
without assigning any reason therefor by giving not less than thirty days' prior
written notice to that effect to each of the other parties hereto Provided that
no such resignation shall be effective until a successor for such Agent is
appointed in accordance with the succeeding provisions of this Clause 37.
37.10 Successor Agent If any Agent gives notice of its resignation pursuant to
Clause 37.9 (Resignation), then any reputable and experienced bank or other
financial institution (approved by an Instructing Group and the Original
Guarantor) in the same jurisdiction may be appointed as a successor to such
Agent by an Instructing Group during the period of such notice but, if no such
successor is so appointed, such Agent may itself appoint such a successor
approved by the Original Guarantor.
37.11 Rights and Obligations If a successor to any Agent is appointed under
the provisions of Clause 37. 10 (Successor Agent), then (i) the retiring Agent
shall be discharged from any further obligation hereunder but shall remain
entitled to the benefit of the provisions of this Clause 37 and (ii) its
successor and each of the other parties hereto shall have the same rights and
obligations amongst themselves as they would have had if such successor had been
a party hereto.
37.12 Own Responsibility It is understood and agreed by each Bank that it has
itself been, and will continue to be, solely responsible for making its own
independent appraisal of and investigations into the financial condition,
creditworthiness, condition, affairs, status and nature of each member of the
Group and, accordingly, each Bank warrants to each of the Agents and the
Arrangers that it has not relied on and will not hereafter rely on the Agents
and the Arrangers nor any of them:
(i) to check or enquire on its behalf into the adequacy, accuracy or
completeness of any information provided by any of the Obligors in
connection with any of the Finance Documents or the transactions
herein contemplated (whether or not such information has been or is
hereafter circulated to such Bank by the Agents and the Arrangers or
any of them); or
(ii) to assess or keep under review on its behalf the financial
condition, creditworthiness, condition, affairs, status or nature of
any member of the Group.
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37.13 Agency Division Separate In acting as Agent and/or Arranger for the
Banks, the agency division of each Agent and each Arranger shall be treated as a
separate entity from any other of its divisions or departments and,
notwithstanding the foregoing provisions of this Clause 37, in the event that
any Agent or, as the case may be, any Arranger should act for any member of the
Group in any capacity in relation to any other matter, any information given by
such member of the Group to such Agent or, as the case may be, such Arranger in
such other capacity may be treated as confidential by such Agent or, as the case
may be, such Arranger.
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Part 13
ASSIGNMENT'S AND TRANSFERS
38. Benefit of Agreement
This Agreement shall be binding upon and enure to the benefit of each party
hereto and its or any subsequent successors and permitted Transferees and
assigns.
39. Assignments and Transfers by the Obligors
None of the Obligors shall be entitled to assign or transfer all or any of its
rights, benefits and obligations hereunder except in accordance with Clause 42
(Acceding Borrowers).
40. Assignments and Transfers by Banks
40.1 Assignments and Transfers Any Bank may assign all or any of its rights and
benefits hereunder or transfer in accordance with Clause 40.3 (Transfers by
Banks) all or any of its rights, benefits and obligations hereunder or transfer
its Facility Office Provided that:
(i) (save in the case of an assignment of rights and benefits to any
Affiliate of such Bank) no such assignment or transfer may be of an
amount of less than ,3,000,000 (in the case of transfers or
assignments in relation to Tranche A) or C$5,000,000 (in the case of
transfers or assignments in relation to Tranche B) or may be made
without the prior written consent of the Borrowers such consent not
to be unreasonably withheld or delayed (and, for the avoidance of
doubt, it shall not be unreasonable for the Borrowers to withhold or
delay their consent in the case of an assignment of rights and
benefits to any proposed assignee whose long-term debt obligations
are then rated below Baa3 by Moody's Investors Service, Inc. or below
BBB- by Standard & Poor's Ratings Services); and
(ii) any Tranche A1 Bank which has agreed pursuant to Clause 2 (The
Facilities) to an increase in its Available Tranche B1 Commitments in
its capacity as Tranche B1 Bank and any Tranche B1 Bank which has
agreed pursuant to Clause 2 (The Facilities) to an increase in its
Available Tranche A1 Commitments in its capacity as Tranche A1 Bank
must, at the same time as it transfers all or any portion of its
Tranche A1 Commitment or, as the case may be, its Tranche B1
Commitment transfer a pro rata portion of its Tranche B1 Commitment
or, as the case may be, its Tranche A1 Commitment, in each case to
the same transferee. Notwithstanding the foregoing, no consent from
any Obligor shall be required with respect to any such assignment or
transfer at any time after any
75
notice has been delivered pursuant to Clause 29.17 (Acceleration and
Cancellation).
40.2 Assignments by Banks If any Bank assigns all or any of its rights and
benefits hereunder in accordance with Clause 40.1 (Assignments and Transfers),
then, unless and until the assignee has agreed with the Facility Agent, the
Sterling Agent, the Canadian Dollar Agent, the Arrangers and the other Banks
that it shall be under the same obligations towards each of them as it would
have been under if it had been an original party hereto as a Bank, the Facility
Agent, the Sterling Agent, the Canadian Dollar Agent, the Arrangers and the
other Banks shall not be obliged to recognise such assignee as having the rights
against each of them which it would have had if it had been such a party hereto.
40.3 Transfers by Banks If any Bank wishes to transfer all or any of its
rights, benefits and/or obligations hereunder as contemplated in Clause 40.1
(Assignments and Transfers), then such transfer may be effected by the delivery
to the Facility Agent of a duly completed and duly executed Transfer Certificate
in which event, on the later of the Transfer Date specified in such Transfer
Certificate and the fifth business day after (or such earlier business day
endorsed by the Facility Agent on such Transfer Certificate falling on or after)
the date of delivery of such Transfer Certificate to the Facility Agent:
(i) to the extent that in such Transfer Certificate the Bank party
thereto seeks to transfer its rights, benefits and obligations
hereunder, each of the Obligors and such Bank shall be released from
further obligations towards one another hereunder and their
respective rights against one another shall be cancelled (such
rights, benefits and obligations being referred to in this Clause
40.3 as "discharged rights and obligations");
(ii) each of the Obligors and the Transferee party thereto shall assume
obligations towards one another and/or acquire rights against one
another which differ from such discharged rights and obligations only
insofar as such Obligor and such Transferee have assumed and/or
acquired the same in place of such Obligor and such Bank; and
(iii) the Facility Agent, the Sterling Agent, the Canadian Dollar Agent,
the Arrangers, such Transferee and the other Banks shall acquire the
same rights and benefits and assume the same obligations between
themselves as they would have acquired and assumed had such
Transferee been an original party hereto as a Bank with the rights,
benefits and/or obligations acquired or assumed by it as a result of
such transfer.
40.4 Transfer Fees On the date upon which a transfer takes effect pursuant to
Clause 40.3 (Transfers by Banks), the Transferee in respect of such transfer
shall pay to the Facility Agent for its own account a transfer fee of
(Pounds)750.
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41. Disclosure of Information
Any Bank may, disclose to any actual or potential assignee or Transferee or to
any sub-participant in relation to any of the Finance Documents such information
about the Obligors and the Group as such Bank shall consider appropriate
Provided that, prior to the disclosure of such information it has obtained a
duly completed confidentiality undertaking (substantially in the form set out in
the Tenth Schedule (Form of Confidentiality Undertaking)) from such potential
assignee, Transferee or sub-participant.
77
Part 14
MISCELLANEOUS
42. Acceding Borrowers and Transferee Borrowers
42.1 Delivery of Borrower Accession Memorandum If the Facility Agent has
confirmed to the Borrowers that the conditions set forth in the Third Schedule
(Condition Precedent Documents) have been satisfied and no Event of Default or
Potential Event of Default has occurred (which has not been remedied or waived
pursuant to Clause 44 (Amendments and Waivers)) the Borrowers may request that
any Subsidiary of the Original Guarantor become an Acceding Borrower for the
purposes of utilising the Facility by delivering, or procuring the delivery to,
the Facility Agent of a Borrower Accession Memorandum duly executed by the
Original Guarantor and such Subsidiary.
42.2 Conditions to Becoming a Borrower Upon delivery of a Borrower Accession
Memorandum, the Acceding Borrower shall, subject to the terms and conditions of
this Agreement, acquire all the rights and assume all the obligations of a
Borrower hereunder Provided that:
(i) in the case of any such Borrower which is not Capital One, F.S.B. or
Capital One Bank or a wholly-owned Subsidiary of Capital One, F.S.B.
or Capital One Bank, the Facility Agent (acting on the instructions of
an Instructing Group) has notified the Original Guarantor that it
agrees to the choice of such Borrower; and
(ii) the Facility Agent has confirmed to the Original Guarantor that it has
received, in a form satisfactory to it, all the documents set out in
the Eighth Schedule (Documents to Accompany Borrower Accession
Memorandum and Borrower Transfer Certificate).
42.3 Assignments and Transfers Subject to the terms and conditions of this
Agreement and to the provisos set out in Clause 42.2(i) and (ii) (Conditions to
Becoming a Borrower) any Borrower may assign all or any of its rights and
benefits hereunder or transfer in accordance with Clause 42.5 (Transfers by
Borrowers) all or any of its rights, benefits and obligations hereunder to any
Subsidiary of the Original Guarantor.
42.4 Assignments by Borrowers If any Borrower assigns all or any of its rights
and benefits hereunder in accordance with Clause 42.3 (Assignments and
Transfers), then, unless and until the assignee has agreed with the Facility
Agent, the Sterling Agent, the Canadian Dollar Agent, the Arrangers, the Banks
and the other Obligors that it shall be under the same obligations towards each
of them as it would have been under if it had been an original party
78
hereto as a Borrower and if the conditions in Clause 42.3 (Assignments and
Transfers) are satisfied, the Facility Agent, the Sterling Agent, the Canadian
Dollar Agent, the Arrangers, the Banks and the other Borrowers shall not be
obliged to recognise such assignee as having the rights against each of them
which it would have had if it had been such a party hereto.
42.5 Transfers by Borrowers If any Borrower wishes to transfer all or any of
its rights, benefits and/or obligations hereunder as contemplated in Clause 42.3
(Assignments and Transfers), then such transfer may be effected by the delivery
to the Facility Agent of a duly completed and duly executed Borrower Transfer
Certificate in which event, on the Transfer Date specified in such Borrower
Transfer Certificate and if the conditions in Clause 42.3 (Assignments and
Transfers) are satisfied, then
(a) to the extent that in such Borrower Transfer Certificate the Borrower
party thereto seeks to transfer its rights, benefits and obligations
hereunder, each of the Beneficiaries and such Obligor shall be
released from further obligations towards one another hereunder and
their respective rights against one another shall be cancelled (such
rights, benefits and obligations being referred to in this Clause 42.5
as "discharged lights and obligations");
(b) each of the Beneficiaries and the Borrower Transferee party thereto
shall assume obligations towards one another and/or acquire rights
against one another which differ from such discharged rights and
obligations only insofar as such Beneficiaries and such Borrower
Transferee have assumed and/or acquired the same in place of such
Beneficiaries and such Borrower; and
(c) the Facility Agent, the Sterling Agent, the Canadian Dollar Agent, the
Arrangers, such Borrower Transferee, the Banks and the other Borrowers
shall acquire the same rights and benefits and assume the same
obligations between themselves as they would have acquired and assumed
had such Borrower Transferee been an original party hereto as a
Borrower with the rights, benefits and/or obligations acquired or
assumed by it as a result of such transfer.
43. Calculations and Evidence of Debt
43.1 Basis of Accrual Subject to Clause 32.6 (Interest Act (Canada)), interest
and commitment commission shall accrue from day to day and shall be calculated
on the basis of a year of 365 days (or, in any case where market practice
differs, in accordance with market practice) and the actual number of days
elapsed. The stamping fee in respect of any Bill shall be calculated on the
basis of a year of 365 days and the actual number of days in the Tenor thereof.
Each rate of interest stipulated as an annual rate of interest pursuant to any
Finance Document which is calculated with reference to a period (the "deemed
interest period") that is less than the actual number of days in the calendar
year of calculation is, for the purposes of disclosure required pursuant to the
Interest Act (Canada), equivalent to such annual rate
79
multiplied by the actual number of days in the calendar year of calculation and
divided by the number of days in the deemed interest period,
43.2 Quotations If on any occasion a Reference Bank or Bank fails to supply an
Agent with a quotation required of it under the foregoing provisions of this
Agreement, the rate for which such quotation was required shall be determined
from those quotations which are supplied to such Agent.
43.3 Evidence of Debt Each Bank shall maintain in accordance with its usual
practice accounts evidencing the amounts from time to time lent by and owing to
it hereunder.
43.4 Control Accounts The Facility Agent shall maintain on its books a control
account or accounts in which shall be recorded (i) the amount of any Advance
made or arising hereunder and the face amount of any Bill accepted and, in each
case, the name of the Bank to which such sum relates, (ii) the amount of all
principal, interest and other sums due or to become due from any of the Obligors
to any of the Banks hereunder and each Bank's share therein and (iii) the amount
of any sum received or recovered by the Facility Agent hereunder and each Bank's
share therein.
43.5 Prima Facie Evidence In any legal action or proceeding arising out of or
in connection with any of the Finance Documents, the entries made in the
accounts maintained pursuant to Clauses 43.3 (Evidence of Debt) and 43.4
(Control Account) shall be prima facie evidence of the existence and amounts of
the obligations of the Obligors therein recorded.
43.6 Certificates of Banks A certificate of a Bank as to (i) the amount by
which a sum payable to it hereunder is to be increased under Clause 18.1 (Tax
Gross-Up) or (ii) the amount for the time being required to indemnify it against
any such cost, payment or liability as is mentioned in Clause 18.3 (Tax
Indemnity) or 21.1 (Changes in Circumstances) shall, in the absence of manifest
error, be conclusive for the purposes of any of the Finance Documents and prima
facie evidence in any legal action or proceeding arising out of or in connection
with any of the Finance Documents.
43.7 Agents' Certificates A certificate of an Agent as to the amount at any
time due from any Borrower hereunder or the amount which, but for any of the
obligations of any Borrower hereunder being or becoming void, voidable,
unenforceable or ineffective, at any time would have been due from such Borrower
hereunder shall, in the absence of manifest error, be conclusive for the
purposes of any of the Finance Documents.
44. Amendments and Waivers
44.1 Amendments and Waivers Save as otherwise provided herein, any provision of
any of the Finance Documents may be amended or supplemented only if the
Borrowers, the Original Guarantor and an Instructing Group so agree in writing
and any Event of Default, Potential
80
Event of Default, provision or breach of any provision of any of the Finance
Documents may be waived by an Instructing Group before or after it occurs but:
Provided that:
(i) no such waiver or amendment shall subject any party hereto to any new
or additional obligations without the consent of such party;
(ii) without the prior written consent of all the Banks, no such amendment
or waiver shall:
(a) amend or waive any provision of Clause 34 (Redistribution of
Proceeds) or this Clause 44;
(b) reduce the proportion of any amount received or recovered
(whether by way of set-off, combination of accounts or otherwise)
in respect of any amount due from any of the Obligors under any
of the Finance Documents to which any Beneficiary is entitled;
(c) change the principal amount of or currency of any Advance, or
defer the term of the Facility or the Term of any Advance or the
Tenor of any Bill;
(d) change the Margin, Stamping Fee Rate, change the amount or
currency or defer the date for any payment of interest,
commitment commission, fees or any other amount payable hereunder
to all or any of the Facility Agent, the Sterling Agent, the
Canadian Dollar Agent, the Arrangers and the Banks under any of
the Finance Documents;
(e) amend the definition of Instructing Group, Event of Default,
Permitted Encumbrance, Potential Event of Default, Termination
Date, encumbrance or financial indebtedness;
(f) amend or waive any of the provisions of Clause 27 (Financial
Condition);
81
(g) waive, in relation to any Utilisation Request, the conditions
set out in Clause 8.4(ii) (Acceptance of Bills) and Clause
12(ii) (Making of Advances under Facility A and Facility B) if
(i) an Event of Default or Potential Event of Default which
related to Clause 25 (Representations), Clause 27 (Financial
Condition) or Clause 28.5 (Negative Pledge) has occurred and is
continuing (ii) and the Outstandings (or any Bank's portion of
the Outstandings) hereunder would increase as a result of such
Utilisation;
(h) amend or waive any provision which contemplates the need for the
consent or approval of all the Banks; or
(i) release the Guarantee or amend or waive any material provision
of the Guarantee; and
(iii) notwithstanding any other provisions hereof, the Facility Agent
shall not be obliged to agree to any such amendment or waiver if the
same would:
(a) amend or waive any provision of this Clause 44, Clause 36 (Costs
and Expenses) or Part 12 (Agency Provisions); or
(b) otherwise amend or waive any of the Facility Agent's rights
under any of the Finance Documents or subject the Facility
Agent, the Sterling Agent, the Canadian Dollar Agent or the
Arrangers to any additional obligations thereunder.
44.2 Amendment Costs If any Obligor requests any amendment, supplement,
modification or waiver in accordance with Clause 44.1 (Amendments and Waivers)
then that Obligor shall within five business days of demand of the Facility
Agent, reimburse the Facility Agent for all reasonable costs and expenses
(including legal fees) together with any VAT thereon incurred by the Facility
Agent in the negotiation, preparation and execution of any written instrument
contemplated by Clause 44.1 (Amendments and Waivers).
45. Remedies and Waivers
No failure to exercise, nor any delay in exercising, on the part of the Facility
Agent, the Sterling Agent, the Canadian Dollar Agent, the Arrangers and the
Banks or any of them, any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right or remedy prevent
any further or other exercise thereof or the exercise of any other right or
remedy. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
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46. Partial Invalidity
If, at any time, any provision of any Finance Document is or becomes illegal,
invalid or unenforceable in any respect under the law of any jurisdiction,
neither the legality, validity or enforceability of the remaining provisions of
the Finance Documents nor the legality, validity or enforceability of such
provision under the law of any other jurisdiction shall in any way be affected
or impaired thereby.
47. Notices
47.1 Communications in writing Each communication to be made under any Finance
Document shall, unless otherwise stated, be made in writing but, unless
otherwise stated, may be made by fax, telex or letter.
47.2 Delivery Any communication or document to be made or delivered by one
person to another pursuant to any of the Finance Documents shall (unless that
other person has by fifteen days' written notice to the Facility Agent specified
another address) be made or delivered to that other person at the address
identified with its signature below (or, in the case of a Transferee, at the end
of the Transfer Certificate to which it is a party as Transferee) (or, in the
case of an Acceding Borrower or an Acceding Guarantor, in the Borrower Accession
Memorandum or, as the case may be, the New Guarantee to which it is a party) and
shall be deemed to have been made or delivered when despatched and the
appropriate answerback received (in the case of any communication made by telex)
or (in the case of any communication made by letter) when left at that address
or (as the case may be) ten days after being deposited in the post postage
prepaid in an envelope addressed to it at that address or (in the case of any
communication made by fax) transmission has been completed and, in the case of
an Agent, when received by the department or officer identified with such
Agent's signature below (or such other department or officer as such Agent shall
from time to time specify for this purpose).
47.3 English language Each communication and document made or delivered by one
party to another pursuant to any of the Finance Documents shall be in the
English language or accompanied by a translation thereof into English certified
(by an officer of the person making or delivering the same) as being a true and
accurate translation thereof.
47.4 Notices Effective Each communication or document to be made or delivered
to any Obligor hereunder shall be effective if made or delivered to the Original
Guarantor.
48. Counterparts
This Agreement may be executed in any number of counterparts and by different
parties hereto on separate counterparts each of which, when executed and
delivered, shall constitute an original, but all the counterparts shall together
constitute but one and the same instrument.
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49. European Monetary Union
49.1 Definitions In this Clause 49:
"commencement of the third stage of EMU" means commencement of the third stage
of EMU or circumstances which (in the opinion of an Instructing Group) have
substantially the same effect and result in substantially the same consequences
as the third stage of EMU as contemplated by the Treaty establishing the
European Community;
"EMU" means Economic and Monetary Union as contemplated in the Treaty
establishing the European Community;
"EMU legislation" means any legislative measures of the European Council for the
introduction of, changeover to or operation of a single currency (whether known
as the euro or otherwise), being in part the implementation of the third stage
of EMU;
"euro" means the single currency of participating member states;
"euro unit" means the unit of the single currency of participating member
states;
"national currency unit" means the unit of the currency (other than the euro
unit) of a participating member state;
"participating member state" means each state which adopts the single currency
in accordance with the Treaty establishing the European Community; and
"Treaty establishing the European Community" means the Treaty of Rome of 25
March 1957, as amended by the Single European Act 1986 and the Maastricht
Treaty, as amended from time to time.
49.2 Alternative Currencies during Transition Period If and to the extent that
any EMU legislation provides that following the commencement of the third stage
of EMU an amount denominated either in the euro or in the national currency unit
of a participating member state and payable within that participating member
state by crediting an account of the creditor can be paid by the debtor either
in the euro unit or in that national currency unit, any Borrower otherwise
required by the terms hereof to pay or repay an amount under any of the Finance
Documents in such national currency unit shall be entitled under this Agreement
to pay or repay any such amount either in the euro unit or in such national
currency unit.
49.3 Advances during Transition Period If any Advance made (or to be made) on
or after the commencement of the third stage of EMU would, but for this
provision, be capable of
84
being made either in the euro unit or in a national currency unit, such Advance
shall be made in the euro unit.
49.4 Business Days With effect on and from the commencement of the third stage
of EMU, the definition of business day in Clause 1.2 (Interpretation) shall be
amended by the addition thereto (at the end) of the following:
"and (iii) if such reference relates to a date for the payment or
purchase of a sum denominated in the euro unit or in a national
currency unit, (1) such clearing or settlement system as is determined
by the Facility Agent to be suitable for clearing or settlement of the
euro is open for business and (2) banks are generally open for
business in such financial centre as is determined by the Facility
Agent to be suitable for clearing or settlement of such national
currency unit;".
49.5 Payments to the Facility Agent With effect on and from the commencement of
the third stage of EMU, Clause 32.1 (Payments to the Sterling Agent) shall be
amended by the deletion of the full stop at the end of paragraph (ii) thereof
and the addition thereto of the following:
";or (iii) where such amount is denominated in the euro unit and
payment thereof is to be made in the euro unit, by payment in the euro
unit and in immediately available, freely transferable, cleared funds
to such account with such bank in such principal financial centre as
the Facility Agent shall have specified for this purpose."
and Clause 32.4 (Payments by the Sterling Agent and the Canadian Dollar Agent)
shall be amended by the deletion of paragraph (b) thereof and the inclusion in
its place of the following:
"(b) secondly, in or towards payment (on the date, and in the currency
and funds, of receipt) to such account with such bank in the principal
financial centre of the country of the currency of such payment or, in
the case of any amount denominated in the euro unit, by payment to
such account of such Borrower in such principal financial centre as in
each case such Borrower shall have previously notified to such Agent
for this purpose,".
49.6 Rounding and Other Consequential Charges With effect on and from the
commencement of the third stage of EMU:
(a) each reference in this Agreement to a fixed amount or fixed
amounts in a national currency unit to be paid to or by the
Facility Agent shall be replaced by a reference to such
comparable and convenient fixed amount
85
or fixed amounts in the euro unit as the Facility Agent may from
time to time specify; and
(b) save as expressly provided in this Clause 49, each provision of
this Agreement shall be subject to such changes of construction
as the Facility Agent may from time to time reasonably specify to
be necessary to reflect any change of conventions applicable in
the euro currency market by reason of the changeover to the euro
in participating member states.
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Part 15
LAW AND JURISDICTION
50. Law
This Agreement shall be governed by, and shall be construed in accordance with,
English law.
51. Jurisdiction
51.1 English Courts Each of the parties hereto irrevocably agrees for the
benefit of each of the Agents, the Arrangers and the Banks that the courts of
England shall have jurisdiction to hear and determine any suit, action or
proceeding, and to settle any disputes, which may arise out of or in connection
with the Finance Documents (respectively "Proceedings" and "Disputes") and, for
such purposes, irrevocably submits to the jurisdiction of such courts.
51.2 Appropriate Forum Each of the Obligors irrevocably waives any objection
which it might now or hereafter have to the courts referred to in Clause 51.1
(English Courts) being nominated as the forum to hear and determine any
Proceedings and to settle any Disputes and agrees not to claim that any such
court is not a convenient or appropriate forum.
51.3 Service of Process Each of the Obligors agrees that the process by which
any Proceedings are begun may be served on it by being delivered in connection
with any Proceedings in England, to COFC at 18 Hanover Square, Third Floor,
London W1R 9DA or other its principal place of business in England for the time
being. If the appointment of the person mentioned in this Clause 51.3 ceases to
be effective in respect of any or all of the Obligors, such Obligor or Obligors
shall immediately appoint a further person in England to accept service of
process on its behalf in England and, failing such appointment within 15 days,
the Facility Agent shall be entitled to appoint such a person by notice to such
Obligor or Obligors. Nothing contained herein shall affect the right to serve
process in any other manner permitted by law.
51.4 Non-exclusive Submissions The submission to the jurisdiction of the courts
referred to in Clause 51.1 (English Courts) shall not (and shall not be
construed so as to) limit the right of the Agents, the Arrangers and the Banks
or any of them to take Proceedings against any of the Obligors in any other
court of competent jurisdiction nor shall the taking of Proceedings in any one
or more jurisdictions preclude the taking of Proceedings in any other
jurisdiction (whether concurrently or not) if and to the extent permitted by
applicable law,
51.5 Consent to Enforcement Each of the Obligors hereby consents generally in
respect of any Proceedings to the giving of any relief or the issue of any
process in connection with such Proceedings including, without limitation, the
making, enforcement or execution against any
87
property whatsoever (irrespective of its use or intended use) of any order or
judgment which may be made or given in such Proceedings.
51.6 Waiver of Immunity To the extent that any of the Obligors may in any
jurisdiction claim for itself or its assets immunity from suit, execution,
attachment (whether in aid of execution, before judgment or otherwise) or other
legal process and to the extent that in any such jurisdiction there may be
attributed to itself or its assets such immunity (whether or not claimed), such
Obligor hereby irrevocably agrees not to claim and hereby irrevocably waives
such immunity to the full extent permitted by the laws of such jurisdiction and,
in particular, to the intent that in any Proceedings taken in New York the
foregoing waiver of immunity shall have effect under and be construed in
accordance with the United States Foreign Sovereign Immunities Act of 1976.
AS WITNESS the hands of the duly authorised representatives of the parties
hereto the day and year first before written.
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Exhibit 13
SELECTED FINANCIAL AND OPERATING DATA
Year Ended December 31
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FIVE-YEAR
(Dollars in Thousands, COMPOUND
Except Per Share Data) 1997 1996 1995 1994/(1)/ 1993/(1)/ 1992/(1)/ GROWTH RATE
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INCOME STATEMENT DATA:
Interest income $ 717,985 $ 660,483 $ 457,409 $ 258,672 $ 259,857 $ 120,630 42.87%
Interest expense 334,847 294,999 249,396 93,695 67,994 29,888 62.13
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Net interest income 383,138 365,484 208,013 164,977 191,863 90,742 33.39
Provision for loan losses 262,837 167,246 65,895 30,727 34,030 55,012 36.72
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Net interest income after
provision for loan losses 120,301 198,238 142,118 134,250 157,833 35,730 27.48
Non-interest income 1,069,130 763,424 553,043 396,902 194,825 121,642 54.45
Non-interest expense/(2)/ 883,978 713,182 497,430 384,325 181,804 108,508 52.12
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Income before income taxes 305,453 248,480 197,731 146,827 170,854 48,864 44.27
Income taxes 116,072 93,213 71,220 51,564 60,369 16,614 47.52
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Net income $ 189,381 $ 155,267 $ 126,511 $ 95,263 $ 110,485 $ 32,250 42.48
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Dividend payout ratio 10.90% 13.24% 12.55%
PER COMMON SHARE:
Basic earnings/(3)(4)/ $ 2.87 $ 2.34 $ 1.93 $ 1.44 $ 1.67 $ .49
Diluted earnings/(3)(4)/ 2.80 2.32 1.91 1.44 1.67 .49
Dividends .32 .32 .24
Book value as of year-end 13.66 11.16 9.05 7.18
Average common shares 66,069,897 66,227,631 65,690,838 66,067,250
Average common and common
equivalent shares 67,650,864 67,025,233 66,392,284 66,067,250
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SELECTED AVERAGE
BALANCES:
Securities $ 1,650,961 $ 1,147,079 $ 962,624 $ 62,626
Allowance for loan losses (132,728) (83,573) (69,939) (66,434) $ (59,754) $ (43,767) 24.84%
Total assets 6,568,937 5,568,960 4,436,055 2,629,920 2,289,043 827,093 51.35
Deposits 958,885 1,046,122 769,688 36,248
Other borrowings 4,350,864 3,623,104 2,952,162 2,287,474 2,148,155 762,762 41.66
Preferred beneficial interests 89,529
Stockholders'/Division equity/(5)/ 824,077 676,759 543,364 239,616 113,815 51,454 74.14
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SELECTED YEAR-END
BALANCES:
Securities $ 1,475,354 $ 1,358,103 $ 1,244,195 $ 425,570
Consumer loans 4,861,687 4,343,902 2,921,679 2,228,455 $ 1,862,744 $1,304,560
Allowance for loan losses (183,000) (118,500) (72,000) (68,516) (63,516) (55,993)
Total assets 7,078,279 6,467,445 4,759,321 3,091,980 1,991,207 1,351,802
Deposits 1,313,654 943,022 696,037 452,201
Other borrowings 4,428,886 4,525,216 3,301,672 2,062,688 1,791,464 1,266,507
Preferred beneficial interests 97,664
Stockholders'/Division equity/(5)/ 893,259 740,391 599,191 474,557 168,879 69,294
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MANAGED CONSUMER
LOAN DATA:
Average reported loans $ 4,103,036 $ 3,651,908 $ 2,940,208 $ 2,286,684 $ 2,213,378 $ 772,742 39.64%
Average securitized loans 8,904,146 7,616,553 6,149,070 3,910,739 1,052,187 680,000 67.27
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Average total managed loans 13,007,182 11,268,461 9,089,278 6,197,423 3,265,565 1,452,742 55.02
Interest income 2,045,967 1,662,990 1,192,100 733,659 432,521 249,082 52.37
Year-end total managed loans 14,231,015 12,803,969 10,445,480 7,378,455 4,832,400 1,984,560 48.29
Year-end total accounts (000s) 11,747 8,586 6,149 5,049 3,118 1,672 47.69
Yield 15.73% 14.76% 13.12% 11.84% 13.24% 17.15%
Net interest margin 8.86 8.16 6.27 6.90 9.55 12.63
Delinquency rate 6.20 6.24 4.20 2.95 2.39 5.30
Net charge-off rate 6.59 4.24 2.25 1.48 2.09 5.18
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OPERATING RATIOS:
Return on average assets 2.88% 2.79% 2.85% 3.62% 4.83% 3.90%
Return on average equity 22.98 22.94 23.28 39.76 97.07 62.68
Equity to assets (average) 12.55 12.15 12.25 9.11 4.97 6.22
Allowance for loan losses to loans
as of year-end/(6)/ 3.76 2.73 2.85 3.07 3.41 4.29
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(1) The Company's results prior to November 22, 1994, reflect operations as a
division of Signet Bank. Prior to November 22, 1994, Signet Banking
Corporation, the parent of Signet Bank, had provided significant financial
and operational support to the Company.
(2) Non-interest expense includes a $49.0 million ($31.9 million after-tax)
nonrecurring charge for computer services termination expense in 1994.
(3) Assumes 66,067,250 shares outstanding prior to November 22, 1994.
(4) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the
impact of Statement 128, see the Notes to Consolidated Financial
Statements.
(5) Division equity reflects an allocation of capital to Capital One Bank as a
division for purposes of preparation of the financial statements of the
Company. Such allocation is not subject to regulatory minimums.
(6) Excludes consumer loans held for securitization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Capital One Financial Corporation (the "Corporation") is a holding company whose
subsidiaries provide a variety of products and services to consumers. The
principal subsidiaries are Capital One Bank (the "Bank"), which offers credit
card products, and Capital One, F.S.B. (the "Savings Bank"), which provides
certain consumer lending and deposit services. The Corporation and its
subsidiaries are collectively referred to as the "Company." As of December 31,
1997, the Company had 11.7 million customers and $14.2 billion in managed
consumer loans outstanding and was one of the largest providers of MasterCard
and Visa credit cards in the world.
The Company's profitability is affected by the net interest margin and
non-interest income earned on earning assets, consumer usage patterns, credit
quality, the level of marketing expense and operating efficiency. The Company's
revenues consist primarily of interest income on consumer loans and securities,
and non-interest income consisting of gains on securitization of loans,
servicing income and fees (such as annual membership, cash advance, cross-sell,
interchange, overlimit, past-due and other fee income, collectively "fees"). The
Company's primary expenses are the costs of funding assets, credit losses,
operating expenses (including salaries and associate benefits), marketing
expense, processing expenses and income taxes.
Significant marketing expenses (e.g., advertising, printing, credit
bureau costs and postage) to implement the Company's new product strategies are
incurred and expensed prior to the acquisition of new accounts while the
resulting revenues are recognized over the life of the acquired accounts.
Revenues recognized are a function of the response rate of the initial marketing
program, usage and attrition patterns, credit quality of accounts, product
pricing and effectiveness of account management programs.
Earnings Summary
The following discussion provides a summary of 1997 results compared to 1996
results and 1996 results compared to 1995 results. Each component is discussed
in further detail in subsequent sections of this analysis.
[graph omitted]
Year Ended December 31, 1997 Compared to Year ended December 31, 1996
Net income of $189.4 million for the year ended December 31, 1997
increased $34.1 million, or 22%, over net income of $155.3 million in 1996. The
increase in net income is primarily the result of an increase in asset and
account volumes, offset by a decrease in net interest margin. Net interest
income increased $17.7 million, or 5%, as average earning assets increased 20%,
offset by a decrease in the net interest margin to 6.66% from 7.62%. The
provision for loan losses increased $95.6 million, or 57%, as average reported
loans (on-balance sheet loans and loans held for securitization, collectively
"reported" loans) increased 12% and the reported charge-off rate increased to
4.83% in 1997 from 3.63% in 1996, as a result of an increase in the average age
of the accounts (generally referred to as "seasoning") and general economic
trends in consumer credit performance. Non-interest income increased $305.7
million, or 40%, primarily as a result of the increase in average managed
accounts of 33%, a 17% increase in average securitized loans, a shift to more
fee-based accounts, a change in the timing and amount ("terms") of certain fees
charged and the incremental impact of securitization accounting. Increases in
salaries and benefits expense of $74.2 million, or 34%, and other non-interest
expenses of $96.6 million, or 19%, primarily reflected the incremental cost of
operations to manage the growth in the Company's accounts. Average managed
consumer loans grew 15% for the year ended December 31, 1997, to $13.0 billion
from $11.3 billion for the year ended December 31, 1996, and average managed
accounts grew 33% for the same period to 9.9 million from 7.5 million as a
result of the continued success of the Company's marketing and account
management strategies.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net income of $155.3 million for the year ended December 31, 1996
increased $28.8 million, or 23%, over net income of $126.5 million in 1995. The
increase in net income is primarily a result of an increase in both asset
volumes and rates. Net interest income increased $157.5 million, or 76%, as
average
earning assets increased 23% and the net interest margin increased to
7.62% from 5.35%. The provision for loan losses increased $101.4 million, or
154%, as average reported consumer loans increased 24% and the reported net
charge-off rate increased to 3.63% in 1996 from 2.03% in 1995, the result of
seasoning. Non-interest income increased $210.4 million, or 38%, primarily due
to the increase in average managed consumer loans and a shift to more
fee-intensive products. Increases in marketing costs of $59.8 million, or 41%,
and other non-interest expenses of $155.9 million, or 44%, reflect the increase
in marketing investment in existing and new product opportunities and the cost
of operations to build infrastructure and manage the growth in accounts. Average
managed consumer loans grew 24% for the year ended December 31, 1996, to $11.3
billion from $9.1 billion for the year ended December 31, 1995, and average
managed accounts grew 30% for the same period to 7.5 million from 5.7 million as
a result of the continued success of the Company's marketing and account
management strategies.
Managed Consumer Loan Portfolio
The Company analyzes its financial performance on a managed consumer loan
portfolio basis. Managed consumer loan data adjusts the balance sheet and income
statement to add back the effect of securitizing consumer loans. The Company
also evaluates its interest rate exposure on a managed portfolio basis.
The Company's managed consumer loan portfolio is comprised of reported
and securitized loans. Securitized loans are not assets of the Company and,
therefore, are not shown on the balance sheet.
Table 1 summarizes the Company's managed consumer loan portfolio.
Table 1: Managed Consumer Loan Portfolio
Year Ended December 31
-------------------------------------------------------
(In Thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Year-End Balances:
Consumer loans held for securitization $ 400,000
On-balance sheet consumer loans $ 4,861,687 $ 4,343,902 2,521,679 $2,228,455 $1,862,744
Securitized consumer loans 9,369,328 8,460,067 7,523,801 5,150,000 2,969,656
--------------------------------------------------------------------------------
Total managed consumer loan portfolio $14,231,015 $12,803,969 $10,445,480 $7,378,455 $4,832,400
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Consumer loans held for securitization $ 98,838 $ 699,044 $ 402,602 $ 432,581 $ 393,835
On-balance sheet consumer loans 4,004,198 2,952,864 2,537,606 1,854,103 1,819,543
Securitized consumer loans 8,904,146 7,616,553 6,149,070 3,910,739 1,052,187
--------------------------------------------------------------------------------
Total managed consumer loan portfolio $13,007,182 $11,268,461 $ 9,089,278 $6,197,423 $3,265,565
- -------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997, the managed consumer loan portfolio consisted
of 62% fixed and 38% variable interest rate loans. The Company's reported
consumer loan portfolio as of December 31, 1997 consisted of 58% fixed and 42%
variable interest rate loans.
Since 1990, the Company has actively engaged in consumer loan
securitization transactions. In June 1996, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which was effective January 1,
1997. Under SFAS 125, the Company records gains or losses on the securitization
of consumer loan receivables based on the estimated fair value of assets
obtained and liabilities incurred in the sale. Gains represent the present value
of estimated cash flows the Company has retained over the estimated outstanding
period of the receivables. This excess cash flow essentially represents an
"interest only" ("I/O") strip, consisting of the excess of finance charges and
past-due fees over the sum of the return paid to certificateholders, estimated
contractual servicing fees and credit losses. However, exposure to credit losses
on the securitized loans is contractually limited to these excess cash flows.
The incremental effect of applying the new requirements, was to increase
servicing and securitizations income in 1997 by $32.0 million ($19.8 million net
of tax). Certain estimates inherent in the determination of the fair value of
the I/O strip are influenced by factors outside the Company's control, and as a
result, such estimates could materially change in the near term.
Any future gains that will be recognized in accordance with SFAS 125 will be
dependent on the timing and amount of future securitizations. The Company will
continuously assess the performance of new and existing securitization
transactions as estimates of future cash flows change.
[graph omitted]
For securitized loans prior to 1997, interest income, interest expense,
service charges and provision for loan losses are included in non-interest
income as servicing and securitizations income.
A securitization generally involves the transfer by the Company of the
receivables generated by a pool of consumer loan accounts to an entity created
for the securitization, generally a trust or other special purpose entity ("the
trusts"). Certificates issued ($9.4 billion outstanding as of December 31, 1997)
by the trusts represent undivided ownership interests in those receivables
transferred into the trusts. The credit quality of the receivables is supported
by credit enhancement, which may be in various forms including a letter of
credit, a cash collateral guaranty or account, or a subordinated interest in the
receivables in the pool. The securitization results in the removal of the
receivables, other than the Company's retained interest ("seller's interest"),
from the Company's balance sheet for financial and regulatory accounting
purposes.
The receivables transferred to a securitization pool include those
outstanding in the selected accounts at the time the trusts are formed and those
arising under the accounts until the termination of the trusts. The Company also
transfers to the trusts the cash collected in payment of principal, interest and
fees received and the Company's interest in any collateral.
Certificates representing participation interests in the pool are sold
to the public through an underwritten offering or to private investors in
private placement transactions. The Company receives the proceeds of the sale.
The amount of receivables transferred to the trusts exceeds the initial
principal amount of the certificates issued by the trusts to investors. The
Company retains an interest in the trusts equal to the amount of the receivables
in excess of the principal balance of the certificates. The Company's interest
in the trusts varies as the amount of the excess receivables in the trusts
fluctuates as the accountholders make principal payments and incur new charges
on the selected accounts.
The Company acts as a servicing agent and receives loan servicing fees
ranging from .75% to 2.0% per annum of the securitized receivables. As a
servicing agent, the Company continues to provide customer service, to collect
past-due accounts and to provide all other services typically performed for its
customers. Accordingly, its relationship with its customers is not affected by
the securitization.
The certificateholders are entitled to receive periodic interest
payments at a fixed rate or a floating rate. In general, the Company's floating
rate issuances are based on the London InterBank Offered Rate ("LIBOR"). Amounts
collected in excess of that needed to pay the rate of interest are used to pay
the credit enhancement fee and servicing fee and are available to absorb the
investors' share of credit losses.
Certificateholders in the Company's securitization program are
generally entitled to receive principal payments either through monthly payments
during an amortization period or in one lump sum after an accumulation period.
Amortization may begin sooner in certain circumstances, including if the
annualized portfolio yield (consisting, generally, of interest and fees) for a
three-month period drops below the sum of the certificate rate payable to
investors, loan servicing fees and net credit losses during the period or if
certain other events occur.
Prior to the commencement of the amortization or accumulation period,
all principal payments received on the trusts' receivables are reinvested in new
receivables of the selected accounts for the benefit of the trusts. During the
amortization period, the investors' share of principal payments is paid to the
certificateholders until they are paid in full. During the accumulation period,
the investors' share of principal payments is paid into a principal funding
account designed to accumulate amounts so that the certificates can be paid in
full on the expected final payment date. The trusts continue in existence until
all amounts required to be paid to certificateholders of all series are repaid,
at which time any remaining receivables and funds held in the trusts will be
reassigned to the Company.
Table 2 indicates the impact of the consumer loan securitizations on
average earning assets, net interest margin and loan yield for the periods
presented. The Company intends to continue to securitize consumer loans.
Table 2: Operating Data and Ratios
Year Ended December 31
-------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
-------------------------------------------------
Reported:
Average earning assets $ 5,753,997 $ 4,798,987 $ 3,902,832
Net interest margin(1) 6.66% 7.62% 5.33%
Loan yield 15.11 16.21 13.52
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Managed:
Average earning assets $14,658,143 $12,415,540 $10,051,902
Net interest margin(1) 8.86% 8.16% 6.27%
Loan yield 15.73 14.76 13.12
(1) Net interest margin is equal to net interest income divided by average
earning assets.
Risk Adjusted Revenue and Margin
In originating its consumer loan portfolio since the early 1990's, the Company
has pursued a low introductory interest rate strategy with accounts repricing to
higher rates after six to sixteen months from the date of origination ("first
generation products"). The amount of repricing is actively managed in an effort
to maximize return at the consumer level, reflecting the risk and expected
performance of the account. Separately, accounts also may be repriced upwards or
downwards based on individual consumer performance. Many of the Company's first
generation products have a balance transfer feature under which consumers can
transfer balances from their other obligations to the Company. The Company's
historic managed loan growth has been principally the result of this balance
transfer feature. Industry competitors have continuously solicited the Company's
customers with similar low introductory interest rate strategies. Management
believes that the competition has put, and will continue to put, additional
pressure on low introductory interest rate strategies.
In applying its information-based strategies ("IBS") and in response to
competitive pressures during late 1994, the Company began to shift a significant
amount of its marketing expense to second generation product opportunities.
Second generation products consist of secured card products and other customized
card products including affinity and co-branded cards, college student cards and
other cards targeted to certain markets that were underserved by the Company's
competitors. These products do not have the immediate impact on managed loan
balances of the first generation products but typically consist of lower credit
limit accounts and balances that build over time. The terms of the second
generation products tend to include annual membership fees and higher annual
finance charge rates. The profile of the consumers targeted for the second
generation products, in some cases, may also tend to result in higher
delinquency and consequently higher past-due and overlimit fees as a percentage
of loan receivables outstanding than the first generation products.
Although these second generation products have differing
characteristics than first generation products, both meet the Company's
objective of maximizing revenue for the level of risk undertaken. Management
believes that comparable measures for external analysis are the risk adjusted
revenue and risk adjusted margin of the portfolio. Risk adjusted revenue is
defined as net interest income and non-interest income (exclusive of the impact
resulting from the implementation of SFAS 125) less net charge-offs. Risk
adjusted margin measures risk adjusted revenue as a percentage of average
managed earning assets. It considers not only the loan yield and net interest
margin, but also the fee income associated with these products. By deducting net
charge-offs, consideration is given to the risk inherent in these differing
products.
In the fourth quarter of 1997, the Company modified its methodology for
charging off credit card loans (net of any collateral) to 180 days past-due from
the prior practice of charging off loans during the next billing cycle after
becoming 180 days past-due. As a result, managed net interest income was reduced
by $15.1 million and managed non-interest income was reduced by $8.0 million for
[graph omitted]
the reversal of previously accrued finance charges and fee income. In addition,
this modification increased managed net charge-offs by $47.4 million. Also, in
the fourth quarter of 1997, the Company recognized the estimated uncollectible
portion of finance charge and fee income receivables which decreased loans by
$50.2 million, managed net interest income by $19.8 million and managed
non-interest income by $30.4 million. Risk adjusted revenue and risk adjusted
margin, without these modifications, would have been $1.3 billion and 8.92%,
respectively, in 1997.
Table 3 provides income statement data and ratios for the Company's
managed consumer loan portfolio. The causes of increases and decreases in the
various components of risk adjusted revenue are discussed in further detail in
subsequent sections of this analysis.
Table 3: Managed Risk Adjusted Revenue
Year Ended December 31
(Dollars in Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Managed Income Statement:
Net interest income $1,299,317 $1,013,557 $ 629,996
Non-interest income(1) 743,516 460,492 276,269
Net charge-offs (856,704) (477,732) (204,828)
- ------------------------------------------------------------------------------------------
Risk adjusted revenue $1,186,129 $996,317 $ 701,437
- ------------------------------------------------------------------------------------------
Ratios(2):
Net interest margin 8.86% 8.16% 6.27%
Non-interest income 5.07 3.71 2.75
Net charge-offs (5.84) (3.85) (2.04)
- ------------------------------------------------------------------------------------------
Risk adjusted margin 8.09% 8.02% 6.98%
- ------------------------------------------------------------------------------------------
(1) Excludes the $32 million pre-tax incremental impact on credit card
securitizations income resulting from the implementation of SFAS 125 in
1997.
(2) As a percentage of average managed earning assets.
[graph omitted]
Net Interest Income
Net interest income is interest and past-due fees earned from the Company's
consumer loans and securities less interest expense on borrowings, which include
interest-bearing deposits, other borrowings and borrowings from senior and
deposit notes.
Net interest income for the year ended December 31, 1997 was $383.1
million, compared to $365.5 million for 1996, representing an increase of $17.6
million, or 5%. Average earning assets increased 20% to $5.8 billion for the
year ended December 31, 1997 from $4.8 billion in 1996. The reported net
interest margin decreased to 6.66% in 1997 from 7.62% in 1996 and was primarily
attributable to a 110 basis point decrease in the yield on consumer loans to
15.11% for the year ended December 31, 1997 from 16.21% for 1996. The yield on
consumer loans decreased due to the securitization and, as a result, removal
from the balance sheet of higher yielding second generation products during the
fourth quarter of 1996 and a $24.4 million reduction in reported consumer loan
income as a result of modifications in the charge-off policy and finance charge
and fee income recognition previously discussed. These decreases were offset by
an increase in the amount of past-due fees charged from both a change in terms
and an increase in the delinquency rate as compared to 1996.
The managed net interest margin for the year ended December 31, 1997
increased to 8.86% from 8.16% for the year ended December 31, 1996. This
increase was primarily the result of a 97 basis point increase in consumer loan
yield for the year ended December 31, 1997 offset by an 11 basis point increase
in borrowing costs for the same period, as compared to 1996. The increase in
consumer loan yield to 15.73% for the year ended December 31, 1997 from 14.76%
in 1996 principally reflected the 1997
repricing of introductory rate loans, changes in product mix and the increase in
past-due fees charged on delinquent accounts noted above. The average rate paid
on borrowed funds increased slightly to 5.95% for the year ended December 31,
1997 from 5.84% in 1996 primarily reflecting a relatively steady short-term
interest rate environment during 1997 and 1996.
Net interest income for the year ended December 31, 1996 was $365.5
million compared to $208.0 million for 1995, representing an increase of $157.5
million, or 76%. Net interest income increased as a result of growth in earning
assets and an increase in the net interest margin. Average earning assets
increased 23% for the year ended December 31, 1996 to $4.8 billion from $3.9
billion for the year ended December 31, 1995. The reported net interest margin
increased to 7.62% in 1996 from 5.35% in 1995 primarily attributable to a 269
basis point increase in the yield on consumer loans and a 38 basis point
decrease in the cost of funds. The yield on consumer loans increased to 16.21%
for the year ended December 31, 1996 from 13.52% for the year ended December 31,
1995. The yield increase was impacted by the repricing of introductory rate
loans to higher rates in accordance with their respective terms, changes in
product mix to higher yielding, second generation products and the increase in
the amount of past-due fees from both a change in terms and an increase in the
delinquency rate. The average rate paid on borrowed funds decreased to 6.32% for
the year ended December 31, 1996 from 6.70% in 1995 primarily reflecting
decreases in short-term market rates from year to year.
The managed net interest margin for the year ended December 31, 1996
increased to 8.16% from 6.27% for the year ended December 31, 1995. This
increase was primarily the result of a 164 basis point increase in consumer loan
yield for the year ended December 31, 1996 and a reduction of 46 basis points in
borrowing costs for the same period, as compared to 1995. The increase in
consumer loan yield to 14.76% for the year ended December 31, 1996 from 13.12%
in 1995 principally reflected the 1996 repricing of introductory rate loans,
changes in product mix and the increase in past-due fees charged on delinquent
accounts as noted above. Additionally, the decrease in the average rate paid on
managed interest-bearing liabilities to 5.84% for the year ended December 31,
1996 versus 6.30% for the year ended December 31, 1995, reflected decreases in
short-term market rates from year to year.
Table 4 provides average balance sheet data, an analysis of net
interest income, net interest spread (the difference between the yield on
earning assets and the cost of interest-bearing liabilities) and net interest
margin for each of the years ended December 31, 1997, 1996 and 1995.
Table 4: Statements of Average Balances, Income and Expense, Yields and
Rates
Year Ended December 31
-------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Assets:
Earning assets
Consumer loans/(1)/ $4,103,036 $619,785 15.11% $3,651,908 $592,088 16.21% $2,940,208 $397,654 13.52%
Federal funds sold and
resale agreements 293,119 16,423 5.60 394,939 21,293 5.39 453,797 26,832 5.91
Other 1,357,842 81,777 6.02 752,140 47,102 6.26 508,827 32,923 6.47
-------------------------------------------------------------------------------------------------
Total earning assets 5,753,997 $717,985 12.48% 4,798,987 $660,483 13.76% 3,902,832 $457,409 11.72%
-------------------------------------------------------------------------------------------------
Cash and due from banks (2,636) 40,698 9,309
Allowance for loan losses (132,728) (83,573) (69,939)
Premises and equipment, net 181,610 156,441 123,472
Other assets 768,694 656,407 470,381
-------------------------------------------------------------------------------------------------
Total assets $6,568,937 $5,568,960 $4,436,055
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
Interest-bearing liabilities
Deposits $ 958,885 $ 41,932 4.37% $1,046,122 $56,272 5.38% $769,688 $49,547 6.44%
Other borrowings 631,876 39,066 6.18 454,899 28,509 6.27 1,028,075 66,214 6.44
Senior and deposit notes 3,718,988 253,849 6.83 3,168,205 210,218 6.64 1,924,087 133,635 6.95
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 5,309,749 $334,847 6.31% 4,669,226 $294,999 6.32% 3,721,850 $249,396 6.70%
Other liabilities 345,582 222,975 170,841
-------------------------------------------------------------------------------------------------
Total liabilities 5,655,331 4,892,201 3,892,691
Preferred beneficial interests 89,529
Equity 824,077 676,759 543,364
-------------------------------------------------------------------------------------------------
Total liabilities and equity $6,568,937 $5,568,960 $4,436,055
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 6.17% 7.44% 5.02%
-------------------------------------------------------------------------------------------------
Interest income to average
earning assets 12.48 13.76 11.72
Interest expense to average
earning assets 5.82 6.14 6.39
-------------------------------------------------------------------------------------------------
Net interest margin 6.66% 7.62% 5.33%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Interest income includes past-due fees on loans of approximately $132,297,
$94,393 and $50,384 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Interest Variance Analysis
Net interest income is affected by changes in the average interest rate earned
on earning assets and the average interest rate paid on interest-bearing
liabilities. In addition, net interest income is affected by changes in the
volume of earning assets and interest-bearing liabilities. Table 5 sets forth
the dollar amount of the increases (decreases) in interest income and interest
expense resulting from changes in the volume of earning assets and
interest-bearing liabilities and from changes in yields and rates.
Table 5: Interest Variance Analysis
Year Ended December 31
-------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------------- --------------------------------------
Increase Change Due to/(1)/ Increase Change Due to/(1)/
(In Thousands) (Decrease) Volume Yield/Rate (Decrease) Volume Yield/Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Consumer loans $27,697 $ 69,924 $(42,227) $194,434 $106,761 $87,673
Federal funds sold and resale agreements (4,870) (5,676) 806 (5,539) (3,297) (2,242)
Other 34,675 36,545 (1,870) 14,179 16,127 (1,948)
-------------------------------------------------------------------------------------
Total interest income 57,502 123,085 (65,583) 203,074 117,398 85,676
-------------------------------------------------------------------------------------
Interest Expense:
Deposits (14,340) (4,422) (9,918) 6,725 15,788 (9,063)
Other borrowings 10,557 10,947 (390) (37,705) (35,967) (1,738)
Senior and deposit notes 43,631 37,446 6,185 76,583 82,799 (6,216)
-------------------------------------------------------------------------------------
Total interest expense 39,848 40,394 (546) 45,603 60,520 (14,917)
-------------------------------------------------------------------------------------
Net interest income/(1)/ $ 17,654 $ 67,129 $(49,475) $157,471 $ 55,920 $101,551
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The change in interest due to both volume and yields/rates has been
allocated in proportion to the relationship of the absolute dollar amounts
of the change in each. The changes in income and expense are calculated
independently for each line in the table. The totals for the volume and
yield/rate columns are not the sum of the individual lines.
Servicing and Securitizations Income
Servicing and securitizations income in 1997 includes gains on sale of consumer
loans recognized under the provisions of SFAS125; the excess of interest and fee
income earned over loan losses and interest paid on investor certificates for
consumer loan balances securitized prior to January 1, 1997 and other fees
earned relating to securitized loans. In absence of new securitization
transactions, once the entire securitized consumer loan portfolio consists of
transfers measured under SFAS 125, the aggregate gains recognized under SFAS 125
will approximate the excess servicing income recognized under the accounting
method used prior to the implementation of SFAS 125. The incremental effect in
1997 of implementing SFAS 125 on servicing and securitizations income was $32.0
million.
The increase in servicing and securitizations income of $222.5 million,
or 48%, to $682.3 million for the year ended December 31, 1997 from $459.8
million for 1996 was due to a number of factors, including the incremental
effect of the implementation of SFAS 125 mentioned above, a 17% increase in
average securitized loans and increases in net interest income and non-interest
income, offset by increased charge-offs on securitized loans. Net interest
income on securitized loans increased $268.1 million, or 41%, for the year ended
December 31, 1997 as compared to the prior year, as a result of loan growth and
an increase in the securitized portfolio's net interest margin to 10.29% for the
year ended December 31, 1997 from 8.51% for 1996. This increase in net interest
margin is the result of an increase in the yield on securitized loans of 196
basis points for the year ended December 31, 1997, which was a result of the
securitization of second generation products and an increase in the amount of
past-due fees charged as a result of both a change in terms and an increase in
the delinquency rate on securitized loans from year to year. Non-interest income
on serviced and securitized loans, excluding the incremental impact of SFAS 125,
increased $199.8 million, or 127%, for the year ended December 31, 1997 from
1996, as a result of loan and account growth, the securitization of second
generation products and changes in the terms of overlimit fees charged.
Charge-offs of securitized loans for the year ended December 31, 1997 increased
$317.7 million, or 92%, compared to 1996 due to the increase in average
securitized loans, continued seasoning of accounts and general economic trends
in consumer credit performance.
Servicing and securitizations income increased $49.9 million, or 12%,
to $459.8 million for the year ended December 31, 1996 from $409.9 million in
1995, primarily due to increases in net interest income on securitized credit
card loans offset by increased charge-offs on such loans. Average securitized
credit card loans increased 24% for the year ended December 31, 1996 compared to
1995. Net interest income on securitized loans increased $226.1 million, or 54%,
to $648.1 million for the year ended December 31, 1996 from $422.0 million for
the year ended December 31, 1995, primarily as a result of loan growth and an
increase in the securitized portfolio's net interest margin to 8.51% in 1996
versus 6.86% in 1995. This increase in net interest margin was the result of an
increase in yield on securitized loans of 114 basis points for the year ended
December 31, 1996, which was a result of repricing introductory rate accounts,
and decreased cost of funds on securitized loans of 51 basis points as
short-term rates declined from the prior year. Charge-offs on securitized loans
for the year ended December 31, 1996 increased $199.9 million, or 138%, compared
to the prior year due to the increase in average securitized loans, worsening
consumer credit and seasoning of the portfolio.
Other Non-Interest Income
Interchange income decreased $2.4 million, or 5%, to $49.0 million for the year
ended December 31, 1997 from $51.4 million in 1996 as a result of the
securitization of a higher percentage of more fee-intensive second generation
products in 1997 compared with 1996.
Other reported non-interest income, excluding interchange, increased to
$337.8 million, or 34%, for the year ended December 31, 1997 compared to $252.2
million for the year ended December 31, 1996. This increase was due to a 33%
increase in the average number of accounts for the year ended December 31, 1997
from 1996 and changes in the terms of overlimit fees charged.
Managed other non-interest income increased $283.0 million, or 61%,
exclusive of the impact resulting from the implementation of SFAS 125, for the
year ended December 31, 1997, primarily due to loan and account growth of second
generation products and changes in the terms of overlimit fees charged.
Other reported non-interest income increased to $303.6 million, or
112%, for the year ended December 31, 1996 compared to $143.1 million for the
year ended December 31, 1995. The increase in other non-interest income was due
to a 30% increase in the average number of accounts for the year ended December
31, 1996 from 1995, an increase in charge volume, a shift to more fee intensive
second generation products and changes in the terms of overlimit fees charged.
Non-Interest Expense
Non-interest expense for the year ended December 31, 1997 increased $170.8
million, or 24%, to $884.0 million from $713.2 million for the year ended
December 31, 1996. Contributing to the increase in non-interest expense was
salaries and associate benefits expense, which increased $74.1 million, or 34%,
to $289.3 million in 1997 compared to $215.2 million in 1996. This increase
reflected additional staff associated with the cost of operations to manage the
growth in accounts and $17.0 million in additional expense associated with the
Company's associate stock plans. Also contributing to the increase in
non-interest expense was marketing expense which increased $18.2 million, or 9%,
to $224.8 million in 1997
from $206.6 million in 1996. Marketing expense represents the cost to select,
print and mail the Company's product offerings to potential and existing
consumers utilizing its IBS and account management techniques. All other non-
interest expenses increased $78.4 million, or 27%, to $369.8 million in 1997
compared to $291.4 million in 1996. The increase in other non-interest expenses
was primarily a result of a 33% increase in the average number of accounts for
the year ended December 31, 1997, which resulted in a corresponding increase in
infrastructure and other operational costs, offset by efficiencies gained from
improved processes and investments in information technology.
[graph omitted]
Non-interest expense for the year ended December 31, 1996 increased
$215.8 million, or 43%, to $713.2 million from $497.4 million for the year ended
December 31, 1995. Contributing to the increase in non-interest expense were
marketing expenses which increased $59.8 million, or 41%, to $206.6 million in
1996 from $146.8 million in 1995. All other non-interest expenses increased
$156.0 million, or 44%, to $506.6 million for the year ended December 31, 1996
from $350.6 million in 1995. The increase in other non-interest expense,
including salaries and associate benefits, was primarily a result of a 30%
increase in the average number of accounts for the year ended December 31, 1996.
Other factors impacting 1996 non-interest expense levels include a product mix
shift to more service-intensive, second generation accounts, additional staff
associated with building infrastructure, an increase in charge volume and an
increase in certain costs associated with information systems enhancements.
The Year 2000 compliance issue, which is common to most companies,
concerns the improper storage and manipulation of date fields within software
applications, systems, databases and hardware. In April 1996, the Company formed
a Year 2000 project team to identify software systems and computer-related
devices that require modification for the Year 2000. A project plan has been
developed, and is well under way, with goals and target dates. The Company
expects to have all systems and applications in place and fully tested by the
end of 1998, allowing time in 1999 for any systems refinements that may be
needed.
The Company could also be affected to the extent that other entities
not affiliated with the Company are impacted by the Year 2000 issue. The Company
has initiated formal communications with its critical third party service
providers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. There is no
guarantee that these other companies will be successful in addressing their Year
2000 issues.
The Company has incurred expenses throughout 1997 and 1996 related to
this project and will continue to incur expenses over the next year. Costs to
modify computer systems have been, and will continue to be, expensed as incurred
and are not expected to have a material impact on the Company's future financial
results or condition.
Income Taxes
The Company's income tax rate was 38% for the year ended December 31, 1997 as
compared to 37.5% for 1996 and includes both state and federal income tax
components.
Asset Quality
The asset quality of a portfolio is generally a function of the initial
underwriting criteria used, seasoning of the accounts, levels of competition,
account management activities and demographic concentration, as well as general
economic conditions. The average age of the accounts is also an important
indicator of the delinquency and loss levels of the portfolio. Accounts tend to
exhibit a rising trend of delinquency and credit losses as they season. As of
December 31, 1997, 53% of managed accounts, representing 43% of the total
managed loan balance, were less than 18 months old. Accordingly, it is likely
that the Company's managed loan portfolio will experience increased levels of
delinquency and credit losses as the average age of the Company's accounts
increases.
Another factor contributing to the expectation of a rising rate of
delinquency and credit losses is a shift in the product mix. As discussed in
"Risk Adjusted Revenue and Margin," certain second generation products have, in
some cases, higher delinquency and higher charge-off rates. In the case of
secured card
loans, collateral, in the form of cash deposits, reduces any ultimate charge-
offs. The costs associated with higher delinquency and charge-off rates are
considered in the pricing of individual products.
During 1997, general economic conditions for consumer credit continued
to worsen as industry levels of charge-offs (including bankruptcies) and
delinquencies both increased. These trends have impacted the Company's 1997
results.
Delinquencies
Table 6 shows the Company's consumer loan delinquency trends for the years
presented as reported for financial statement purposes and on a managed basis.
The entire balance of an account is contractually delinquent if the minimum
payment is not received by the payment due date. However, the Company generally
continues to accrue interest considered to be collectible until the loan is
charged off. Delinquencies not only have the potential to impact earnings if the
account charges off, they also are costly in terms of the personnel and other
resources dedicated to resolving the delinquencies.
The 30-plus day delinquency rate for the reported consumer loan
portfolio decreased to 5.51% as of December 31, 1997, from 6.08% as of December
31, 1996. The decrease in 1997 reported delinquency reflects the modification in
the Company's methodology for charging off credit card loans (net of any
collateral) to 180 days past-due from the prior practice of charging off loans
during the next billing cycle after becoming 180 days past-due. In addition, in
the fourth quarter of 1997, the Company recognized the estimated uncollectible
portion of finance charge and fee income receivables. As of December 31, 1997,
the reported consumer loan portfolio's delinquency rate without these
modifications would have been 6.28%.
The 30-plus day delinquency rate for the managed consumer loan
portfolio was 6.20% as of December 31, 1997, down from 6.24% as of December 31,
1996, while the dollar amount of delinquent managed consumer loans increased
approximately $82.9 million. As of December 31, 1997, the managed consumer loan
portfolio's delinquency rate, without the modifications in charge-off policy and
finance charge and fee income recognition, would have been 6.97%. The managed
consumer loan portfolio's delinquency rate as of December 31, 1997 principally
reflected the continued seasoning of accounts and consumer loan balances, the
increased presence of second generation products, general economic trends in
consumer credit performance and the modifications in charge-off policy and
finance charge and fee income recognition.
Net Charge-Offs
Net charge-offs include the principal amount of losses (excluding accrued and
unpaid finance charges, fees and fraud losses) less current period recoveries.
In the fourth quarter of 1997, the Company
TABLE 6: DELINQUENCIES/(1)/
DECEMBER 31
---------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------
% of % of % of
Total Total Total
(DOLLARS IN THOUSANDS) Loans Loans Loans Loans Loans Loans
- ----------------------------------------------------------------------------------------------
REPORTED:
Loans outstanding $ 4,861,687 100.00% $ 4,343,902 100.00% $ 2,921,679 100.00%
Loans delinquent:
30-59 days 104,216 2.14 96,819 2.23 65,711 2.25
60-89 days 64,217 1.32 55,679 1.28 38,311 1.31
90 or more days 99,667 2.05 111,791 2.57 79,694 2.73
---------------------------------------------------------------------
Total $ 268,100 5.51% $ 264,289 6.08% $ 183,716 6.29%
- ----------------------------------------------------------------------------------------------
MANAGED:
Loans outstanding $14,231,015 100.00% $12,803,969 100.00% $10,445,480 100.00%
Loans delinquent:
30-59 days 327,407 2.30 279,787 2.19 165,306 1.58
60-89 days 213,726 1.50 162,668 1.27 92,665 .89
90 or more days 340,887 2.40 356,700 2.78 181,243 1.73
---------------------------------------------------------------------
Total $ 882,020 6.20% $ 799,155 6.24% $ 439,214 4.20%
- ----------------------------------------------------------------------------------------------
DECEMBER 31
----------------------------------------------
1994 1993
-------------------- -----------------------
% of % of
Total Total
(DOLLARS IN THOUSANDS) Loans Loans Loans Loans
- --------------------------------------------------------------------------
REPORTED:
Loans outstanding $2,228,455 100.00% $1,862,744 100.00%
Loans delinquent:
30-59 days 29,032 1.30 19,186 1.03
60-89 days 14,741 .66 10,618 .57
90 or more days 24,445 1.10 18,255 .98
----------------------------------------------
Total $ 68,218 3.06% $ 48,059 2.58%
- --------------------------------------------------------------------------
MANAGED:
Loans outstanding $7,378,455 100.00% $4,832,400 100.00%
Loans delinquent:
30-59 days 90,733 1.23 46,391 .96
60-89 days 45,277 .61 25,128 .52
90 or more days 81,720 1.11 43,975 .91
----------------------------------------------
Total $ 217,730 2.95% $ 115,494 2.39%
- --------------------------------------------------------------------------
(1)Includes consumer loans held for securitization.
modified its methodology for charging off credit card loans (net of any
collateral) to 180 days past-due from the prior practice of charging off loans
during the next billing cycle after becoming 180 days past-due. The impact of
this modification was to increase reported and managed charge-offs by $11.5
million and $47.4 million, respectively. For the year ended December 31, 1997,
net charge-offs of managed consumer loans increased 79% while average managed
consumer loans grew 15%. The increase in net charge-offs was the result of
continued seasoning of accounts and consumer loan balances, general economic
trends in consumer credit performance and the modification to the charge-off
policy described above. Table 7 shows the Company's net charge-offs for the
years presented on a reported and managed basis.
For the year ended December 31, 1997, the Company's managed net
charge-offs as a percentage of average managed loans was 6.59% and, without the
modification in charge-off policy, would have been 6.22%.The Company's objective
is to optimize the profitability of each account within acceptable risk
characteristics. The Company takes measures as necessary, including requiring
collateral on certain accounts and other marketing and account management
techniques, to maintain the Company's credit quality standards and to manage the
risk of loss on existing accounts. See "Risk Adjusted Revenue and Margin" for
further discussion.
[graph omitted]
TABLE 7: NET CHARGE-OFFS/(1)/
Year Ended December 31
-----------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
REPORTED:
Average loans outstanding $ 4,103,036 $ 3,651,908 $2,940,208 $2,286,684 $2,213,378
Net charge-offs 198,192 132,590 59,618 25,727 26,307
Net charge-offs as a percentage of average loans outstanding 4.83% 3.63% 2.03% 1.13% 1.19%
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGED:
Average loans outstanding $13,007,182 $11,268,461 $9,089,278 $6,197,423 $3,265,565
Net charge-offs 856,704 477,732 204,828 91,648 68,332
Net charge-offs as a percentage of average loans outstanding 6.59% 4.24% 2.25% 1.48% 2.09%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes consumer loans held for securitization.
Provision and Allowance for Loan Losses
The provision for loan losses is the periodic expense of maintaining an adequate
allowance at the amount estimated to be sufficient to absorb possible future
losses, net of recoveries (including recovery of collateral), inherent in the
existing on-balance sheet loan portfolio. In evaluating the adequacy of the
allowance for loan losses, the Company takes into consideration several factors
including economic trends and conditions, overall asset quality, loan seasoning
and trends in delinquencies and expected charge-offs. The Company's primary
guideline is a calculation which uses current delinquency levels and other
measures of asset quality to estimate net charge-offs. Consumer loans are
typically charged off (net of any collateral) at 180 days past-due, although
earlier charge-offs may occur on accounts of bankrupt or deceased consumers.
Bankrupt consumers' accounts are generally charged off within 30 days after
receipt of the bankruptcy petition. Once a loan is charged off, it is the
Company's policy to continue to pursue the collection of principal, interest and
fees for non-bankrupt accounts.
Management believes that the allowance for loan losses is adequate to
cover anticipated losses in the on-balance sheet consumer loan portfolio under
current conditions. There can be no assurance as to future credit losses that
may be incurred in connection with the Company's consumer loan portfolio, nor
can there be any assurance that the loan loss allowance that has been
established by the Company will be sufficient to absorb such future credit
losses. The allowance is a general allowance applicable to the on-balance sheet
consumer loan portfolio. Table 8 sets forth the activity in the allowance for
loan losses for the periods indicated. See "Asset Quality," "Delinquencies" and
"Net Charge-Offs" for a more complete analysis of asset quality.
For the year ended December 31, 1997, the provision for loan losses
increased to $262.8 million, or 57%, from the 1996 provision for loan losses of
$167.2 million. The allowance for loan losses as a
Table 8: Summary of Allowance for Loan Losses
Year Ended December 31
-----------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 118,500 $ 72,000 $ 68,516 $ 63,516 $ 55,993
Provision for loan losses 262,837 167,246 65,895 30,727 34,030
Transfer to loans held for securitization (2,770) (27,887) (11,504) (4,869) (2,902)
Increase from consumer loan purchase 9,000
Charge-offs (223,029) (115,159) (64,260) (31,948) (39,625)
Recoveries 27,462 13,300 13,353 11,090 16,020
-----------------------------------------------------------------
Net charge-offs/(1)/ (195,567) (101,859) (50,907) (20,858) (23,605)
-----------------------------------------------------------------
Balance at end of year $ 183,000 $ 118,500 $ 72,000 $ 68,516 $ 63,516
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to loans at end of year/(1)/ 3.76% 2.73% 2.85% 3.07% 3.41%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Excludes consumer loans held for securitization.
percentage of on-balance sheet consumer loans increased to 3.76% as of December
31, 1997 from 2.73% as of December 31, 1996 primarily due to increases in the
net charge-off rate to 4.83% for 1997 from 3.63% in 1996, resulting from
continued loan seasoning, general economic trends in consumer credit performance
and the modification in charge-off policy described earlier. The provision
increase also reflected the increase in on-balance sheet consumer loans to $4.9
billion as of December 31, 1997, an increase of 12% from December 31, 1996 and
the continued growth of second generation products. In consideration of these
factors, the Company increased the allowance for loan losses by $64.5 million
during 1997.
For the year ended December 31, 1996, the provision for loan losses
increased to $167.2 million, or 154%, from the 1995 provision for loan losses of
$65.9 million. The increase in the provision for loan losses resulted from
increases in average reported consumer loans of 24%, continued loan seasoning, a
shift in the composition of reported consumer loans and general economic trends
in consumer credit performance. Net charge-offs as a percentage of average
reported consumer loans increased to 3.63% for the year ended December 31, 1996
from 2.03% in the prior year. Additionally, growth in second generation
products, which in some cases have modestly higher charge-off rates than first
generation products, increased the amount of provision necessary to absorb
credit losses. In consideration of these factors, the Company increased the
allowance for loan losses by $46.5 million during 1996.
Funding
Table 9 reflects the costs of other borrowings of the Company as of and for each
of the years ended December 31, 1997, 1996 and 1995.
Table 9: Other Borrowings
Maximum
Outstanding as of Outstanding Average Average Year-end
(Dollars In Thousands) Any Month-end as of Year-end Outstanding Interest Rate Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Federal funds purchased and resale agreements $ 999,200 $705,863 $ 503,843 5.54% 5.75%
Other 160,144 90,249 128,033 8.71 7.09
-----------------------------------------------------------
Total $796,112 $ 631,876 6.18% 5.90%
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Federal funds purchased and resale agreements $ 617,303 $445,600 $ 342,354 5.63% 6.26%
Other 207,689 85,383 112,545 8.20 6.43
-----------------------------------------------------------
Total $530,983 $ 454,899 6.27% 6.29%
- ------------------------------------------------------------------------------------------------------------------------------------
1995
Federal funds purchased and resale agreements $1,146,678 $709,803 $ 747,350 6.14% 5.76%
Other 1,000,000 100,000 280,725 7.24 6.03
-----------------------------------------------------------
Total $809,803 $1,028,075 6.44% 5.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Table 10 shows the maturation of certificates of deposit in
denominations of $100,000 or greater (large denomination CDs) as of December 31,
1997.
Table 10: Maturities of Domestic Large Denomination Certificates--$100,000 or
More
December 31, 1997
-----------------------
(Dollars in Thousands) Balance Percent
- -------------------------------------------------------------------
3 months or less $97,363 42.62%
Over 3 through 6 months 43,523 19.06%
Over 6 through 12 months 49,210 21.54%
Over 12 months 38,332 16.78%
-----------------------
Total $228,428 100.00%
In September 1997, the Savings Bank completed the purchase of the
national retail deposit franchise of JCPenney National Bank. Retail deposit
balances acquired under the agreement were approximately $421 million. The chart
on page 31 indicates that during 1997 the Company increased its interest-bearing
deposits to $1.3 billion as of December 31, 1997 from $.9 billion in the prior
year.
In November 1996, the Company entered into a four-year, $1.7 billion
unsecured revolving credit arrangement (the "Credit Facility"). The Credit
Facility is comprised of two tranches: a $1.375 billion Tranche A facility
available to the Bank and the Savings Bank, including an option for up to $225
million in multi-currency availability, and a $325 million Tranche B facility
available to the Corporation, the Bank and the Savings Bank, including an option
for up to $100 million in multi-currency availability. Each tranche under the
facility is structured as a four-year commitment and is available for general
corporate purposes. The borrowings of the Savings Bank are limited to $750
million. All borrowings under the Credit Facility are based on varying terms of
LIBOR. The Bank has irrevocably undertaken to honor any demand by the lenders to
repay any borrowings which are due and payable by the Savings Bank but which
have not been paid. Any borrowings under the Credit Facility will mature on
November 24, 2000; however, the final maturity of each tranche may be extended
for three additional one-year periods. As of December 31, 1997 and 1996, the
Company had no outstandings under the Credit Facility. The unused commitment is
available as funding needs arise.
In August 1997, the Company entered into a three-year, $350 million
equivalent unsecured revolving credit arrangement (the "UK/Canada Facility"),
which will be used to finance the Company's expansion in the United Kingdom and
Canada. The UK/Canada Facility is comprised of two tranches: a Tranche A
facility in the amount of (pound)156.5 million ($249.8 million equivalent based
on the exchange rate at closing) and a Tranche B facility in the amount of
C$139.6 million ($100.2 million equivalent based on the exchange rate at
closing). An amount of (pound)34.6 million or C$76.9 million ($55.2 million
equivalent based on the exchange rates at closing) may be transferred between
the Tranche A facility and the Tranche B facility, respectively, upon the
request of the Company. All borrowings under the UK/Canada Facility are based on
varying terms of LIBOR. Each tranche under the facility is structured as a
three-year commitment and will be available for general corporate purposes. The
Corporation serves as the guarantor of all borrowings under the UK/Canada
Facility. As of December 31, 1997, the Company had no outstandings under the
UK/Canada Facility.
In April 1997, the Bank increased the aggregate amount of bank notes
available under its bank note program. Under the program, the Bank from time to
time may issue up to $7.8 billion of senior bank notes with maturities from
thirty days to thirty years and up to $200 million of subordinated bank notes
(none issued as of December 31, 1997) with maturities from five to thirty years.
As of December 31, 1997, the Company had $3.2 billion in senior bank notes
outstanding, a 10% decrease from $3.6 billion outstanding as of December 31,
1996. As of December 31, 1997, bank notes issued totaling $2.1 billion have
fixed interest rates and mature from one to five years. The Company has entered
into interest rate swap agreements ("swaps") to effectively convert fixed rates
on senior notes to variable rates which match the variable rates earned on
consumer loans (see "Interest Rate Sensitivity").
In October 1997, the Bank established a program for the issuance of
debt instruments to be offered outside of the United States. Under this program,
the Bank from time to time may issue instruments in the aggregate principal
amount of $1.0 billion equivalent outstanding at any one time (none issued as of
December 31, 1997). Instruments under this program may be denominated in any
currency or currencies.
In September 1996, the Corporation filed a $200 million shelf
registration statement ($125 million of senior debt securities issued as of
December 31, 1997) with the Securities and Exchange Commission (the "SEC") under
which the Corporation from time to time may offer and sell (i) senior or
subordinated debt securities consisting of debentures, notes and/or other
unsecured evidences, (ii) preferred stock, which may be issued in the form of
depository shares evidenced by depository receipts and (iii) common stock. The
securities will be limited to $200 million aggregate public offering price or
its equivalent (based on the applicable exchange rate at the time of sale) in
one or more foreign currencies, currency units or composite currencies as shall
be designated by the Corporation.
In April 1996, the Bank established a deposit note program under which
the Bank from time to time may issue up to $2.0 billion of deposit notes with
maturities from thirty days to thirty years. As of December 31, 1997, the
Company had $300 million in deposit notes outstanding.
In January 1997, Capital One Capital I, a subsidiary of the Bank
created as a Delaware statutory business trust, issued $100 million aggregate
amount of Floating Rate Junior Subordinated Capital Income Securities that
mature on February 1, 2027. The securities represent a preferred beneficial
interest in the assets of the trust and qualify as Tier 1 capital at the
Corporation and Tier 2 capital at the Bank. The net proceeds of the offering of
$97.4 million were lent to the Bank for general corporate purposes. As of
December 31, 1997, the interest rate on these securities was 7.30%.
[graph omitted]
The Company's primary source of funding, securitization of consumer
loans, increased to $9.4 billion as of December 31, 1997 from $8.5 billion as of
December 31, 1996. In 1997, the Company securitized $2.1 billion of consumer
loans, consisting predominantly of LIBOR-based, variable-rate deals maturing
from 2001 through 2004.
In January 1996, the Company implemented a dividend reinvestment and
stock purchase plan (the "DRIP") to provide existing stockholders with the
opportunity to purchase additional shares of the Company's common stock by
reinvesting quarterly dividends or making optional cash investments. The Company
uses proceeds from the DRIP for general corporate purposes.
In July 1997, the Company's Board of Directors voted to repurchase up
to two million shares of the Company's common stock over the next two years in
order to mitigate the dilutive impact of shares issuable under its benefit
plans, including its dividend reinvestment and stock purchase plans, associate
stock purchase plan and incentive plans. During 1997, the Company repurchased
1,318,641 shares under this program. Certain treasury shares were reissued in
connection with the Company's benefit plans.
Although the Company expects to reinvest a substantial portion of its
earnings in its business, the Company intends to continue to pay regular
quarterly cash dividends on the Common Stock. The declaration and payment of
dividends, as well as the amount thereof, is subject to the discretion of the
Board of Directors of the Company and will depend upon the Company's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors. Accordingly, there can be no
assurance that the Company will declare and pay any dividends. As a holding
company, the ability of the Company to pay dividends is dependent upon the
receipt of dividends or other payments from its subsidiaries. Banking
regulations applicable to the Bank and the Savings Bank and provisions that may
be contained in borrowing agreements of the Company or its subsidiaries may
restrict the ability of the Company's subsidiaries to pay dividends to the
Company or the ability of the Company to pay dividends to its stockholders.
Capital Adequacy
The Bank and the Savings Bank are subject to capital adequacy guidelines adopted
by the Federal Reserve Board (the "Federal Reserve") and the Office of Thrift
Supervision (the "OTS") (collectively, the "regulators"), respectively. The
capital adequacy guidelines and the regulatory framework for prompt corrective
action require the Bank and the Savings Bank to maintain specific capital levels
based upon quantitative measures of their assets, liabilities and off-balance
sheet items as calculated under Regulatory Accounting Principles. The inability
to meet and maintain minimum capital adequacy levels could result in regulators
taking actions that could have a material effect on the Company's consolidated
financial statements. Additionally, the regulators have broad discretion in
applying higher capital requirements. Regulators consider a range of factors in
determining capital adequacy, such as an institution's size, quality and
stability of earnings, interest rate risk exposure, risk diversification,
management expertise, asset quality, liquidity and internal controls.
As of December 31, 1997 and 1996, notifications from the regulators
categorized the Bank and the Savings Bank as "well-capitalized." To be
categorized as "well-capitalized," the Bank and the Savings Bank must maintain
minimum capital ratios as set forth in the table below. As of December 31, 1997,
there are no conditions or events since the notifications discussed above that
management believes have changed either the Bank or the Savings Bank's capital
category. As of December 31, 1997, the Bank and the Savings Bank's ratios of
capital to managed assets were 5.10% and 8.67%, respectively.
Table 11 shows the Bank and Savings Bank's regulatory capital ratios as
of and for the years ended December 31, 1997 and 1996.
Table 11: Regulatory Capital Ratios
To Be "Well-
Capitalized"
Minimum for Under Prompt
Capital Corrective
Adequacy Action
Ratios Purposes Provisions
- --------------------------------------------------------------------------------
December 31, 1997
Capital One Bank
Tier 1 Capital 10.49% 4.00% 6.00%
Total Capital 13.26 8.00 10.00
Tier 1 Leverage 10.75 4.00 5.00
Capital One, F.S.B.(1)
Tangible Capital 11.26% 1.50% 6.00%
Total Capital 17.91 12.00 10.00
Core Capital 11.26 8.00 5.00
- --------------------------------------------------------------------------------
December 31, 1996
Capital One Bank
Tier 1 Capital 11.61% 4.00% 6.00%
Total Capital 12.87 8.00 10.00
Tier 1 Leverage 9.04 4.00 5.00
Capital One, F.S.B.(1)
Tangible Capital 9.18% 1.50% 6.00%
Total Capital 16.29 12.00 10.00
Core Capital 9.18 8.00 5.00
(1) Until June 30, 1999, the Savings Bank is subject to capital requirements
that exceed minimum capital adequacy requirements, including the requirement
to maintain a minimum Core Capital ratio of 8% and a Total Capital ratio of
12%.
During 1996, the Bank received regulatory approval and established a
branch office in the United Kingdom. In connection with such approval, the
Company committed to the Federal Reserve that, for so long as the Bank maintains
such branch in the United Kingdom, the Company will maintain a minimum Tier 1
Leverage ratio of 3.0%. As of December 31, 1997 and 1996, the Company's Tier 1
Leverage ratio was 13.83% and 11.13%, respectively.
Additionally, certain regulatory restrictions exist which limit the
ability of the Bank and the Savings Bank to transfer funds to the Corporation.
As of December 31, 1997, retained earnings of the Bank and the Savings Bank of
$99.6 million and $24.8 million, respectively, were available for payment of
dividends to the Corpo-
[graph omitted]
ration without prior approval by the regulators. The Savings Bank, however, is
required to give the OTS at least thirty days' advance notice of any proposed
dividend and the OTS, in its discretion, may object to such dividend.
Off-Balance Sheet Risk
The Company is subject to off-balance sheet risk in the normal course of
business including commitments to extend credit, excess servicing income from
securitization transactions and swaps. In order to reduce the interest rate
sensitivity and to match asset and liability repricings, the Company has entered
into swaps which involve elements of credit or interest rate risk in excess of
the amount recognized on the balance sheet. Swaps present the Company with
certain credit, market, legal and operational risks. The Company has established
credit policies for off-balance sheet instruments as it does for on-balance
sheet instruments.
Interest Rate Sensitivity
Interest rate sensitivity refers to the change in earnings that may result from
changes in the level of interest rates. To the extent that managed interest
income and managed interest expense do not respond equally to changes in
interest rates, or that all rates do not change uniformly, earnings could be
affected. The Company's managed net interest income is affected by changes in
short-term interest rates, primarily LIBOR, as a result of its issuance of
interest-bearing deposits, variable rate loans and variable rate
securitizations. However, due to the Company's use of swaps, the effects of
these interest rate changes are mitigated. The Company manages its interest rate
sensitivity through several techniques which include, but are not limited to,
changing the maturity and distribution of assets and liabilities, entering into
swaps and repricing of consumer loans.
The Company measures exposure to its interest rate risk through the use
of a simulation model. The model generates a distribution of possible
twelve-month managed net interest income outcomes based on (i) a set of
plausible interest rate scenarios, as determined by management based upon
historical trends and market expectations, (ii) all existing financial
instruments, including swaps, and (iii) an estimate of ongoing business activity
over the coming twelve months. The Company's asset/liability management policy
requires that based on this distribution there be at least a 95% probability
that managed net interest income achieved over the coming twelve months will be
no more than 4% below the mean managed net interest income of the distribution.
As of December 31, 1997, the Company was in compliance with the policy; more
than 95% of the outcomes generated by the model produced a managed net interest
income of no more than 3.3% below the mean outcome. The interest rate scenarios
evaluated as of December 31, 1997 included scenarios in which short-term
interest rates rose by as much as 450 basis points or fell by as much as 250
basis points over twelve months.
Implementation of this policy represents a change from the
asset/liability management policy in place as of December 31, 1996. At that
time, interest rate sensitivity was assessed on the basis of the percent change
in twelve-month managed net interest income for an instantaneous and sustained
100 basis point rate shock applied to an unchanging balance sheet. As of
December 31, 1996, the Company's policy required that such a rate shock not
result in an adverse change of more than 5% in managed net interest income; the
exposure at the time was 2.1%.
The analysis does not consider the effects of the changed level of
overall economic activity associated with various interest rate scenarios.
Further, in the event of a rate change of large magnitude, management would
likely take actions to further mitigate its exposure to any adverse impact. For
example, management may reprice interest rates on outstanding credit card loans
subject to the right of the consumers in certain states to reject such repricing
by giving timely written notice to the Company and thereby relinquishing
charging privileges. However, the repricing of credit card loans may be limited
by competitive factors as well as certain legal constraints.
Interest rate sensitivity at a point in time can also be analyzed by
measuring the mismatch in balances of earning assets and interest-bearing
liabilities that are subject to repricing in future periods. Table 12 reflects
the interest rate repricing schedule for earning assets and interest-bearing
liabilities as of December 31, 1997.
Table 12: Interest Rate Sensitivity
As of December 31, 1997 Subject to Repricing
--------------------------------------------------------------
greater than greater than
Within 180 Days- 1 Year- Over
(Dollars in Millions) 180 days 1 year 5 Years 5 Years
- --------------------------------------------------------------------------------------------------------------------------
Earning assets:
Federal funds sold $ 174
Interest-bearing deposits at other banks 59
Securities available for sale 438 $ 150 $ 604 $ 51
Consumer loans 2,454 213 2,195
--------------------------------------------------------------
Total earning assets 3,125 363 2,799 51
Interest-bearing liabilities:
Interest-bearing deposits 962 168 184
Other borrowings 561 235
Senior and other deposit notes 1,025 250 2,018 340
--------------------------------------------------------------
Total interest-bearing liabilities 2,548 653 2,202 340
Non-rate related assets (595)
--------------------------------------------------------------
Interest sensitivity gap 577 (290) 597 (884)
Impact of swaps 640 (215) 425
Impact of consumer loan securitizations (4,418) 121 4,297
--------------------------------------------------------------
Interest sensitivity gap adjusted for impact of
securitizations and swaps $(3,201) $ (169) $ 4,679 $(1,309)
Adjusted interest sensitivity gap percentage
of managed assets (19.48)% (1.03)% 28.47% (7.97)%
Cumulative interest sensitivity gap $(3,201) $(3,370) $ 1,309
--------------------------------------------------------------
Adjusted cumulative gap as a percentage of managed assets (19.48)% (20.51)% 7.97% 0.00
- --------------------------------------------------------------------------------------------------------------------------
The Company has entered into swaps to effectively convert certain of
the interest rates on bank notes from fixed to variable. The swaps, which had a
notional amount totaling $450 million as of December 31, 1997, will mature in
1998 and 2000 to coincide with maturities of fixed bank notes. In 1997, the
Company entered into swaps with notional amounts totaling $450 million to
effectively offset the swaps described above with matching maturities and terms
which pay fixed and receive variable rates. As of December 31, 1997, the
variable rate payments on the original and offsetting swaps were matched and
will continue to offset each other through maturity. As of December 31, 1997,
the weighted average fixed rate payment received on the original swaps was
7.39%, and the weighted average fixed rate payment paid on the offsetting swaps
was 6.50%.
The Company has also entered into swaps to reduce the interest rate
sensitivity associated with securitizations. The swaps, which had a notional
amount totaling $591 million as of December 31, 1997, will mature in 1998 and
1999 to coincide with the final payments of a 1995 securitization. In 1997, the
Company entered into swaps with notional amounts totaling $591 million to
effectively offset the swaps described above with matching maturities and terms
which pay fixed and receive variable rates. As of December 31, 1997, the
variable rate payments on the original and offsetting swaps were matched and
will continue to offset each other through maturity. As of December 31, 1997,
the weighted average fixed rate payment received on the original swaps was
7.68%, and the weighted average fixed rate payment paid on the offsetting swaps
was 6.52%.
Liquidity
Liquidity refers to the Company's ability to meet its cash needs. The Company
meets its cash requirements by securitizing assets and through issuing debt. As
discussed in "Managed Consumer Loan Portfolio," a significant source of
liquidity for the Company has been the securitization of consumer loans.
Maturity terms of the existing securitizations vary from 1998 to 2004 and
typically have accumulation periods during which principal payments are
aggregated to make payments to investors. As payments on the loans are
accumulated for the participants in the securitization and are no longer
reinvested in new loans, the Company's funding requirements for such new loans
increase accordingly. The occurrence of certain events may cause the
securitization transactions to amortize earlier than scheduled which would
accelerate the need for funding.
Table 13 shows the amounts of investor principal from securitized
consumer loans that will amortize or be otherwise paid over the periods
indicated based on outstanding securitized consumer loans as of January 1, 1998.
As of December 31, 1997 and 1996, 66% of the Company's total managed loans were
securitized.
As such loans amortize or are otherwise paid, the Company believes that
it can securitize consumer loans, purchase federal funds and establish other
funding sources to fund the amortization or other payment of the securitizations
in the future, although no assurance can be given to that effect. Additionally,
the Company maintains a portfolio of high-quality securities such as U.S.
Treasuries and other U.S. government obligations, commercial paper,
interest-bearing deposits with other banks, federal funds and other cash
equivalents in order to provide adequate liquidity and to meet its ongoing cash
needs. As of December 31, 1997, the Company had $1.5 billion of such securities.
Liability liquidity is measured by the Company's ability to obtain
borrowed funds in the financial markets in adequate amounts and at favorable
rates. As of December 31, 1997, the Company, the Bank and the Savings Bank
collectively had over $2.0 billion in unused commitments under its credit
facilities available for liquidity needs.
Table 13: Securitizations--Scheduled Amortization Table
(Dollars in Thousands) 1998 1999 2000 2001 2002-2004
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 9,369,328 $7,202,549 $ 6,471,428 $ 4,412,078 $ 872,790
Less repayment amounts (2,166,779) (731,121) (2,059,350) (3,539,288) (872,790)
----------------------------------------------------------------------------
Balance at end of year $ 7,202,549 $6,471,428 $ 4,412,078 $ 872,790 $ --
- ---------------------------------------------------------------------------------------------------------------
Business Outlook
This business outlook section summarizes the Company's expectations for earnings
for the year ending December 31, 1998, and its primary goals and strategies for
continued growth. The statements contained in this section are based on
management's current expectations. Certain of the statements are forward looking
statements and, therefore, actual results could differ materially. Factors which
could materially influence results are set forth throughout this section and in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
(Part I, Item 1, Cautionary Statements).
The Company has set an earnings target, dependent on the factors set
forth below, for its diluted earnings per share for the year ending December 31,
1998 to increase by more than 20% over its 1997 diluted earnings per share. As
discussed elsewhere in this report and below, the Company's actual earnings are
a function of its revenues (net interest income and non-interest income on its
earning assets), consumer usage and payment patterns, credit quality of its
earning assets (which affects fees and charge-offs), marketing expense and
operating expenses.
Product and Market Opportunities
The Company's strategy for future growth has been, and is expected to continue
to be, to apply its proprietary IBS to its credit card business as well as to
other businesses, both financial and non-financial, to identify new product
opportunities and to make informed investment decisions regarding its existing
products. Historically, credit card opportunities have included, and are
expected to continue to include, various first generation low-rate balance
transfer products, as well as second generation credit card products. In recent
years, the Company's second generation products have been distinguished by
several characteristics, including better response rates, less adverse
selection, higher margins (including fees), lower credit lines, less attrition
and a greater ability to reprice. However, second generation products have also
involved higher operational costs and, in some cases, higher delinquencies and
credit losses than the Company's traditional low rate balance transfer products.
More importantly, these second generation products continue to have overall
higher and less volatile returns than the traditional balance transfer products
in recent market conditions. Additionally, the Company has been applying, and
expects to continue to apply, its IBS to other financial and non-financial
products ("third generation products"). Third generation products and services
include selected non-card consumer lending products and the reselling of
telecommunication services. The Company has also expanded its existing credit
card operations outside of the United States, with an initial focus on the
United Kingdom and Canada. These second and third generation products are
subject to competitive pressures, which management anticipates will increase as
these markets mature.
The Company continues to apply its IBS in an effort to balance the mix
of first and second generation credit card products together with third
generation products and services, to optimize profitability within the context
of acceptable risk. The Company intends to remain flexible in the allocation of
marketing expenses to take advantage of market opportunities as they emerge
based on then current market conditions. As a result, the Company expects to
continue to offer a variety of first, second and third generation products but
the mix of such products in the Company's portfolio may vary significantly over
time. Management believes that, through the continued application of IBS, the
Company can develop product and service offerings in each of its product
generations to sustain growth and that it has the personnel, financial resources
and business strategy necessary for continued success. However, there can be no
assurance that the Company's historical financial information will necessarily
reflect its results of operations and financial condition in the future.
Marketing Investment
The Company anticipates that its 1998 marketing expenses will exceed such
expenses in 1997, as the Company continues to invest in existing and new first
and second generation products and services, and third generation products and
services. As stated above, the Company intends to continue a flexible approach
in its allocation of marketing expenses. The actual amount of marketing
investment is subject to a variety of external and internal factors, such as
competition in the credit card industry, general economic conditions affecting
consumer credit performance, the asset quality of the Company's portfolio and
market opportunities for third generation products. With competition affecting
the profitability of existing first generation products, the Company has been
allocating and expects to continue to allocate a greater portion of its
marketing expense to second and third generation products.
Moreover, the amount of marketing expense allocated to various product
generations will influence the characteristics of the Company's portfolio
because the various product generations are characterized by different account
growth, loan growth and asset quality characteristics. The Company currently
expects that its growth in consumer accounts and in managed consumer loans will
continue in 1998. Actual growth, however, may vary significantly depending on
the Company's actual product mix and the level of attrition on the Company's
managed portfolio, which is affected by competitive pressures.
Impact of Delinquencies, Charge-off Rates and Attrition
The Company's earnings are particularly sensitive to delinquencies and
charge-offs on the Company's portfolio and on the level of attrition due to
competition in the credit card industry. As delinquency levels fluctuate, the
resulting amount of past-due and overlimit fees, which are significant sources
of revenue for the Company, will also fluctuate. Further, the timing of revenues
from increasing or decreasing delinquencies precedes the related revenue impact
of higher or lower charge-offs that ultimately result from varying levels of
delinquencies. Delinquency and net charge-off rates are not only impacted by
general economic trends in consumer credit performance but also by the continued
seasoning of the Company's portfolio and the product mix. Charge-off rates are
also impacted by bankruptcies. The Company's expectations for 1998 earnings are
based on management's belief in a continued increase in revenues, together with
a moderating level of increases in charge-offs and attrition. Management,
however, cautions that delinquency and charge-off levels are not always
predictable and may vary from projections. In addition, competition in the
credit card industry, as measured by the volume of mail solicitations, remains
very high. Increased competition can affect the Company's earnings by increasing
attrition of the Company's outstanding loans (thereby reducing interest and fee
income) and by making it more difficult to retain and attract more profitable
customers.
Cautionary Factors
The Company's strategies and objectives outlined above and the other forward
looking statements contained in this section involve a number of risks and
uncertainties. The Company cautions readers that any forward looking information
is not a guarantee of future performance and that actual results could differ
materially. In addition to the factors discussed above, among the other factors
that could cause actual results to differ materially are the following:
continued intense competition from numerous providers of products and services
which compete with the Company's businesses; with respect to financial products,
changes in the Company's aggregate accounts or consumer loan balances and the
growth rate thereof, including changes resulting from factors such as shifting
product mix, amount of actual marketing expenses made by the Company and
attrition of accounts and loan balances; an increase in credit losses (including
increases due to a worsening of general economic conditions); difficulties or
delays in the development, production, testing and marketing of new products or
services; losses associated with new products or services; financial, legal,
regulatory or other difficulties that may affect investment in, or the overall
performance of, a product or business, including changes in existing laws to
regulate further the credit card and consumer loan industry and the financial
services industry, in general; the amount of, and rate of growth in, the
Company's expenses (including associate and marketing expenses) as the Company's
business develops or changes or as it expands into new market areas; the
availability of capital necessary to fund the Company's new businesses; the
ability of the Company to build the operational and organizational
infrastructure necessary to engage in new businesses or to expand
internationally; the ability of the Company to recruit experienced personnel to
assist in the management and operations of new products and services; and other
factors listed from time to time in the Company's SEC reports, including, but
not limited to, the Annual Report on Form 10-K for the year ended December 31,
1997 (Part I, Item 1, Cautionary Statements).
SELECTED QUARTERLY FINANCIAL DATA
1997 1996
------------------------------------------- -----------------------------------------
Fourth Third Second First Fourth Third Second First
(Unaudited) Quarter/(1)/ Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
Summary Of Operations:
(In Thousands)
Interest income $203,551 $178,970 $166,870 $168,594 $201,353 $188,235 $137,753 $133,142
Interest expense 89,023 81,816 83,611 80,397 87,784 81,581 63,300 62,334
---------------------------------------------------------------------------------------
Net interest income 114,528 97,154 83,259 88,197 113,569 106,654 74,453 70,808
Provision for loan losses 94,356 72,518 46,776 49,187 63,035 53,933 25,110 25,168
---------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 20,172 24,636 36,483 39,010 50,534 52,721 49,343 45,640
Non-interest income 316,098 280,933 229,042 243,057 214,961 206,716 170,599 171,148
Non-interest expense 242,373 226,003 202,055 213,547 200,575 196,823 159,334 156,450
---------------------------------------------------------------------------------------
Income before income taxes 93,897 79,566 63,470 68,520 64,920 62,614 60,608 60,338
Income taxes 35,680 30,236 24,118 26,038 24,670 23,793 22,425 22,325
---------------------------------------------------------------------------------------
Net income $ 58,217 $ 49,330 $ 39,352 $ 42,482 $ 40,250 $ 38,821 $ 38,183 $ 38,013
=========================================================================================================================
Per Common Share:
Basic earnings/(2)/ $ .89 $ .75 $ .59 $ .64 $ .61 $ .59 $ .58 $ .57
Diluted earnings/(2)/ .86 .73 .58 .63 .60 .58 .57 .57
Dividends .08 .08 .08 .08 .08 .08 .08 .08
Market prices
High 54 3/16 45 3/4 39 7/8 43 5/8 36 5/8 31 7/8 32 1/8 27 7/8
Low 44 1/8 32 13/16 31 3/8 33 1/4 29 7/8 25 7/8 25 21 7/8
=========================================================================================================================
Average common shares (000s) 65,535 66,185 66,428 66,336 66,287 66,250 66,210 66,157
Average common and common
equivalent shares (000s) 67,532 67,574 67,608 67,704 67,275 67,005 66,903 66,726
=========================================================================================================================
Average Balance Sheet Data:
(In Millions)
Consumer loans $ 4,508 $ 3,847 $ 3,997 $ 4,059 $ 4,648 $ 3,955 $ 3,249 $ 2,742
Allowance for loan losses (174) (123) (119) (120) (105) (81) (74) (74)
Securities 1,831 1,690 1,563 1,521 1,164 1,228 933 1,302
Other assets 899 1,143 1,117 939 929 990 793 721
---------------------------------------------------------------------------------------
Total assets $ 7,064 $ 6,557 $ 6,558 $ 6,399 $ 6,636 $ 6,092 $ 4,901 $ 4,691
=========================================================================================================================
Interest-bearing deposits $ 1,172 $ 852 $ 818 $ 993 $ 1,298 $ 1,234 $ 789 $ 859
Other borrowings 823 595 695 411 472 466 349 527
Senior and deposit notes 3,614 3,686 3,769 3,809 3,843 3,435 2,875 2,510
Other liabilities 465 485 380 357 290 259 244 164
Preferred beneficial interests 98 98 98 65
Stockholders' equity 892 841 798 764 733 698 644 631
---------------------------------------------------------------------------------------
Total liabilities and equity $ 7,064 $ 6,557 $ 6,558 $ 6,399 $ 6,636 $ 6,092 $ 4,901 $ 4,691
=========================================================================================================================
The above schedule is a tabulation of the Company's unaudited quarterly results
for the years ended December 31, 1997 and 1996. The Company's common shares are
traded on the New York Stock Exchange under the symbol COF. In addition, shares
may be traded in the over-the-counter stock market. There were 10,585 and
14,562 common stockholders of record as of December 31, 1997 and 1996,
respectively.
(1) Includes the effect of the modifications in charge-off policy and finance
charge and fee income recognition which reduced interest income by $24.4
million and non-interest income by $48.9 million, see Note A to
Consolidated Financial Statements.
(2) The earnings per share amounts for the first three quarters of 1997 and for
1996 have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. For further discussion of
earnings per share and the impact of Statement 128, see Note A to
Consolidated Financial Statements.
Report of Independent Auditors
The Board of Directors and Stockholders
Capital One Financial Corporation
We have audited the accompanying consolidated balance sheets of Capital One
Financial Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Capital One
Financial Corporation at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, in 1997
the Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
/s/ Ernst & Young LLP
Washington, D.C.
January 15, 1998
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
- ---------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 5,039 $ 48,724
Federal funds sold and resale agreements 173,500 450,000
Interest-bearing deposits at other banks 59,184 30,252
---------------------------
Cash and cash equivalents 237,723 528,976
Securities available for sale 1,242,670 877,851
Consumer loans 4,861,687 4,343,902
Less: Allowance for loan losses (183,000) (118,500)
---------------------------
Net loans 4,678,687 4,225,402
Premises and equipment, net 162,726 174,661
Interest receivable 51,883 78,590
Accounts receivable from securitizations 588,781 502,520
Other assets 115,809 79,445
---------------------------
Total assets $ 7,078,279 $ 6,467,445
- ---------------------------------------------------------------------------------------------
LIABILITIES:
Interest-bearing deposits $ 1,313,654 $ 943,022
Other borrowings 796,112 530,983
Senior notes 3,332,778 3,694,237
Deposit notes 299,996 299,996
Interest payable 68,448 80,362
Other liabilities 276,368 178,454
---------------------------
Total liabilities 6,087,356 5,727,054
---------------------------
COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN CAPITAL ONE BANK'S FLOATING RATE
JUNIOR SUBORDINATED CAPITAL INCOME SECURITIES: 97,664
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; authorized
50,000,000 shares, none issued or outstanding
Common stock, par value $.01 per share; authorized
300,000,000 shares, 66,557,230 and 66,325,261
issued as of December 31, 1997 and 1996, respectively 666 663
Paid-in capital, net 513,561 481,383
Retained earnings 427,679 258,345
Less: Treasury stock, at cost; 1,188,134 shares (48,647)
---------------------------
Total stockholders' equity 893,259 740,391
---------------------------
Total liabilities and stockholders' equity $ 7,078,279 $ 6,467,445
- ---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
INTEREST INCOME:
Consumer loans, including fees $ 619,785 $ 592,088 $ 397,654
Federal funds sold and resale agreements 16,423 21,293 26,832
Other 81,777 47,102 32,923
----------------------------------------
Total interest income 717,985 660,483 457,409
----------------------------------------
INTEREST EXPENSE:
Deposits 41,932 56,272 49,547
Other borrowings 39,066 28,509 66,214
Senior and deposit notes 253,849 210,218 133,635
----------------------------------------
Total interest expense 334,847 294,999 249,396
----------------------------------------
Net interest income 383,138 365,484 208,013
Provision for loan losses 262,837 167,246 65,895
----------------------------------------
Net interest income after provision for loan losses 120,301 198,238 142,118
----------------------------------------
NON-INTEREST INCOME:
Servicing and securitizations 682,345 459,833 409,927
Service charges 284,256 218,988 86,029
Interchange 49,030 51,399 33,457
Other 53,499 33,204 23,630
----------------------------------------
Total non-interest income 1,069,130 763,424 553,043
----------------------------------------
NON-INTEREST EXPENSE:
Salaries and associate benefits 289,322 215,155 135,833
Marketing 224,819 206,620 146,810
Communications and data processing 98,135 76,841 61,508
Supplies and equipment 82,874 60,053 42,081
Occupancy 37,548 22,330 13,655
Other 151,280 132,183 97,543
----------------------------------------
Total non-interest expense 883,978 713,182 497,430
----------------------------------------
Income before income taxes 305,453 248,480 197,731
Income taxes 116,072 93,213 71,220
----------------------------------------
Net income $ 189,381 $ 155,267 $ 126,511
- ------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.87 $ 2.34 $ 1.93
- ------------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.80 $ 2.32 $ 1.91
- ------------------------------------------------------------------------------------------------
Dividends paid per share $ .32 $ .32 $ .24
- ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Total
-------------------------- Paid-In Retained Treasury Stockholders'
(Dollars in Thousands, Except Per Share Data) Shares Amount Capital, Net Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 66,067,250 $661 $462,844 $ 11,052 $474,557
Net income 126,511 126,511
Cash dividends-$.24 per share (15,883) (15,883)
Issuances of common stock 65,645 1 1,256 1,257
Exercise of stock options 6,582 132 132
Tax benefit from stock awards 1,578 1,578
Restricted stock, net 35,090 4,020 4,020
Change in unrealized gains on
securities available for sale,
net of income taxes of $3,780 7,019 7,019
----------------------------------------------------------------------------------------
Balance, December 31, 1995 66,174,567 662 469,830 128,699 599,191
Net income 155,267 155,267
Cash dividends-$.32 per share (20,573) (20,573)
Issuances of common stock 139,858 1 3,108 3,109
Exercise of stock options 11,500 186 186
Tax benefit from stock awards 338 338
Restricted stock, net (664) 193 193
Common stock issuable under
incentive plan 7,728 7,728
Foreign currency translation (132) (132)
Change in unrealized gains on
securities available for sale,
net of income taxes of $2,647 (4,916) (4,916)
----------------------------------------------------------------------------------------
Balance, December 31, 1996 66,325,261 663 481,383 258,345 740,391
Net income 189,381 189,381
Cash dividends-$.32 per share (20,638) (20,638)
Purchases of treasury stock 1,552 $(52,314) (50,762)
Issuances of common stock 101,800 1 2,755 2,201 4,957
Exercise of stock options 130,290 2 2,614 1,466 4,082
Tax benefit from stock awards 379 379
Restricted stock, net (121) 106 106
Common stock issuable under
incentive plan 24,772 24,772
Foreign currency translation 59 59
Change in unrealized gains on
securities available for sale,
net of income taxes of $481 532 532
----------------------------------------------------------------------------------------
Balance, December 31, 1997 66,557,230 $666 $513,561 $427,679 $(48,647) $893,259
===================================================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------------
(In Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 189,381 $ 155,267 $ 126,511
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 262,837 167,246 65,895
Depreciation and amortization, net 46,550 41,894 33,424
Stock compensation plans 24,878 7,921 4,020
Decrease (increase) in interest receivable 26,707 (23,017) (40,958)
Increase in accounts receivable from securitizations (86,261) (143,141) (122,364)
Increase in other assets (41,469) (24,795) (11,786)
(Decrease) increase in interest payable (11,914) 6,431 64,667
Increase (decrease) in other liabilities 97,914 89,964 (4,780)
-------------------------------------------
Net cash provided by operating activities 508,623 277,770 114,629
-------------------------------------------
Investing Activities:
Purchases of securities available for sale (1,275,900) (947,478) (400,117)
Proceeds from sales of securities available for sale 483,592 773
Proceeds from maturities of securities available for sale 450,787 490,040 100,000
Proceeds from securitization of consumer loans 2,114,695 2,695,000 3,525,000
Net increase in consumer loans (2,858,279) (4,251,269) (4,293,988)
Recoveries of loans previously charged off 27,462 13,300 13,353
Additions of premises and equipment, net (51,602) (74,871) (61,623)
-------------------------------------------
Net cash used for investing activities (1,109,245) (2,074,505) (1,117,375)
-------------------------------------------
Financing Activities:
Net increase in interest-bearing deposits 370,632 246,985 243,836
Net increase (decrease) in other borrowings 265,129 (278,820) (1,230,885)
Issuances of senior and deposit notes 529,977 2,105,864 2,469,869
Maturities of senior notes (891,436) (603,500)
Issuance of preferred beneficial interests 97,428
Proceeds from exercise of stock options 4,082 186 132
Net proceeds from issuances of common stock 4,957 3,109 1,257
Purchases of treasury stock (50,762)
Dividends paid (20,638) (20,573) (15,883)
-------------------------------------------
Net cash provided by financing activities 309,369 1,453,251 1,468,326
-------------------------------------------
(Decrease) increase in cash and cash equivalents (291,253) (343,484) 465,580
-------------------------------------------
Cash and cash equivalents at beginning of year 528,976 872,460 406,880
-------------------------------------------
Cash and cash equivalents at end of year $ 237,723 $ 528,976 $ 872,460
================================================================================================================
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
(Currencies in Thousands, Except Per Share Data)
Note A: Significant Accounting Policies
Organization and Basis of Presentation
The Consolidated Financial Statements include the accounts of Capital One
Financial Corporation (the "Corporation") and its subsidiaries. The Corporation
is a holding company whose subsidiaries provide a variety of products and
services to consumers. The principal subsidiaries are Capital One Bank (the
"Bank"), which offers credit card products, and Capital One, F.S.B. (the
"Savings Bank"), which provides certain consumer lending and deposit services.
The Corporation and its subsidiaries are collectively referred to as the
"Company."
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") that require
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates. All significant intercompany balances and transactions
have been eliminated. Certain prior years' amounts have been reclassified to
conform to the 1997 presentation.
The following is a summary of the significant accounting policies used in
preparation of the accompanying financial statements.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and due from banks, federal funds sold
and resale agreements and interest-bearing deposits at other banks. Cash paid
for interest for the years ended December 31, 1997, 1996 and 1995, was $346,761,
$288,568 and $184,729, respectively. Cash paid for income taxes for the years
ended December 31, 1997, 1996 and 1995, was $131,052, $107,065 and $82,561,
respectively.
Securities Available for Sale
Debt securities for which the Company does not have the positive intent and
ability to hold to maturity are classified as securities available for sale.
These securities are stated at fair value, with the unrealized gains and losses,
net of tax, reported as a component of retained earnings. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization or accretion is included in other
interest income.
Consumer Loans Held for Securitization
Consumer loans held for securitization are loans which management intends to
securitize, generally within three to six months, and are carried at the lower
of aggregate cost or market value.
Consumer Loans
Interest income is generally recognized until a loan is charged off. The accrued
interest and fee portions of a charged off loan balance are deducted from
current period income with the remaining principal balance charged off against
the allowance for loan losses. In the fourth quarter of 1997, the Company
recognized the estimated uncollectible portion of finance charge and fee income
receivables, which decreased loans and pre-tax income by $50,200. In addition,
in the fourth quarter of 1997, the Company modified its methodology for charging
off credit card loans (net of any collateral) to 180 days past-due, from the
prior practice of charging off loans during the next billing cycle after
becoming 180 days past-due. As a result, pre-tax income was decreased by $23,141
for the reversal of previously accrued finance charges and fee income, and
reported charge-offs were increased by $11,477. Earlier charge-offs may occur on
accounts of bankrupt or deceased consumers. Bankrupt consumers' accounts are
generally charged off within thirty days of receipt of the bankruptcy petition.
Annual membership fees and direct loan origination costs are deferred and
amortized over one year on a straight-line basis. Deferred fees (net of deferred
costs) were $98,619 and $58,059 as of December 31, 1997 and 1996, respectively.
Allowance for Loan Losses
The allowance for loan losses is maintained at the amount estimated to be
sufficient to absorb possible future losses, net of recoveries (including
recovery of collateral), inherent in the existing on-balance sheet loan
portfolio. The provision for loan losses is the periodic cost of maintaining an
adequate allowance. In evaluating the adequacy of the allowance for loan losses,
management takes into consideration several of the following factors: historical
charge-off and recovery activity (noting any particular trend changes over
recent periods); trends in delinquencies; trends in loan volume and size of
credit risks; the degree of risk inherent in the composition of the loan
portfolio; current and anticipated economic conditions; credit evaluations and
underwriting policies.
Securitizations
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"("SFAS
125"), which was effective January 1, 1997. The Company prospectively adopted
the requirements of SFAS 125 for the securitization of consumer loans. The
incremental effect of applying the new requirements, was to increase servicing
and securitizations income in 1997 by $32,000 ($19,840, net of tax). The Company
records gains or losses on the securitization of consumer loan receivables based
on the estimated fair value of assets obtained and liabilities incurred in the
sale. Gains represent the present value of estimated cash flows the Company has
retained over the estimated outstanding period of the receivables. This excess
cash flow essentially represents an "interest only"("I/O") strip, consisting of
the excess of finance charges and past-due fees over the sum of the return paid
to certificateholders, estimated contractual servicing fees and credit losses.
Certain estimates inherent in the determination of the fair value of the I/O
strip are influenced by factors outside the Company's control, and as a result,
such estimates could materially change in the near term. Prior to 1997, no gains
were recorded due to the relatively short average life of the consumer loans
securitized. Excess servicing fee income was recorded over the life of each sale
transaction.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization ($149,215 and $99,104 as of December 31, 1997 and 1996,
respectively). Depreciation and amortization expense are computed generally by
the straight-line method over the estimated useful lives of the assets.
Marketing
The Company expenses marketing costs as incurred.
Credit Card Fraud Losses
The Company experiences fraud losses from the unauthorized use of credit cards.
Transactions suspected of being fraudulent are charged to non-interest expense
after a sixty-day investigation period.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share is based only on the weighted average number of
common shares outstanding, excluding any dilutive effects of options and
restricted stock. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share and is based on the weighted average
number of common and common equivalent shares, including dilutive stock options
and restricted stock outstanding during the year. Earnings per share amounts for
all periods have been restated to conform to SFAS 128 requirements.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements ("swaps") for purposes of
managing its interest rate sensitivity. The Company designates swaps to on-
balance sheet instruments to alter the interest rate characteristics of such
instruments and to modify interest rate sensitivity. The Company also designates
swaps to off-balance sheet items to reduce the interest rate sensitivity
associated with off-balance sheet cash flows (i.e., securitizations).
Swaps involve the periodic exchange of payments over the life of the
agreements. Amounts received or paid on swaps are recorded on an accrual basis
as an adjustment to the related income or expense of the item to which the
agreements are designated. The related amount receivable from counterparties of
$2,771 and $41,548 as of December 31, 1997 and 1996, respectively, was included
in other assets. Changes in the fair value of swaps are not reflected in the
accompanying financial statements, where designated to existing or anticipated
assets or liabilities and where swaps effectively modify or reduce interest rate
sensitivity.
Realized and unrealized gains or losses at the time of maturity,
termination, sale or repayment of a swap or designated item are recorded in a
manner consistent with the original designation of the swap. Amounts are
deferred and amortized as an adjustment to interest expense over the original
period of interest exposure, provided the designated asset or liability
continues to exist or is probable of occurring. Realized and unrealized changes
in fair value of swaps, designated with items that no longer exist or are no
longer probable of occurring, are recorded as a component of the gain or loss
arising from the disposition of the designated item.
The Company's credit exposure on swaps is limited to the value of the swaps
that have become favorable to the Company in the event of nonperformance by the
counterparties. Under the terms of certain swaps, each party may be required to
pledge collateral if the market value of the swaps exceeds an amount set forth
in the agreement or in the event of a change in its credit rating. The Company
actively monitors the credit ratings of counterparties and does not anticipate
nonperformance by the counterparties with which it transacts its swaps.
Note B: Securities Available for Sale
Securities available for sale as of December 31, 1997 and 1996 were
as follows:
Maturity Schedule
------------------------------------------------------------------------------------
Market Amortized
1 Year 1-5 5-10 Over 10 Value Cost
or Less Years Years Years Totals Totals
---------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Commercial paper $187,145 $ 187,145 $ 187,145
U.S. Treasury and other U.S. government
agency obligations 400,929 $589,899 $2,506 993,334 989,707
Collateralized mortgage obligations $18,969 18,969 18,629
Mortgage backed securities 13,278 9,960 23,238 22,966
Other 330 526 19,128 19,984 20,008
------------------------------------------------------------------------------------
$588,074 $603,507 $3,032 $48,057 $1,242,670 $1,238,455
---------------------------------------------------------------------------------------------------------------------------------
December 31, 1996
Commercial paper $ 84,297 $ 84,297 $ 84,297
U.S. Treasury and other U.S. government
agency obligations 393,583 $354,680 748,263 745,174
Collateralized mortgage obligations $20,834 20,834 20,479
Mortgage backed securities 11,607 11,607 11,849
Other 12,850 12,850 12,850
------------------------------------------------------------------------------------
$477,880 $354,680 $45,291 $ 877,851 $ 874,649
---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Yields
-------------------------------------------------------------
1 Year 1-5 5-10 Over 10
or Less Years Years Years
--------------------------------------------------------------------------------------------------------
December 31, 1997
Commercial paper 6.05%
U.S. Treasury and other U.S. government
agency obligations 6.79 6.24% 8.69%
Collateralized mortgage obligations 6.96%
Mortgage backed securities 5.17 7.03
Other 6.03 6.39 6.22
-------------------------------------------------------------
6.55% 6.21% 8.29% 6.70%
--------------------------------------------------------------------------------------------------------
Securities available for sale as of December 31, 1995 consisted of U.S.
government agency obligations with an amortized cost of $402,250.
Note C: Allowance for Loan Losses
The following is a summary of changes in the allowance for loan losses:
Year Ended December 31
1997 1996 1995
- -------------------------------------------------------------------------------
Balance at beginning of year $ 118,500 $ 72,000 $ 68,516
Provision for loan losses 262,837 167,246 65,895
Transfer to loans held for
securitization (2,770) (27,887) (11,504)
Increase from consumer
loan purchase 9,000
Charge-offs (223,029) (115,159) (64,260)
Recoveries 27,462 13,300 13,353
--------------------------------------------
Net charge-offs (195,567) (101,859) (50,907)
--------------------------------------------
Balance at end of year $ 183,000 $ 118,500 $ 72,000
- -------------------------------------------------------------------------------
Note D: Borrowings
Borrowings as of December 31, 1997 and 1996 were as follows:
1997 1996
--------------------- ---------------------
Weighted Weighted
Average Average
Outstanding Rate Outstanding Rate
- ----------------------------------------------------------------------------
Interest-
bearing
deposits $1,313,654 4.49% $ 943,022 4.31%
- ----------------------------------------------------------------------------
Other
borrowings
Federal funds
purchased and
resale agreements $ 705,863 5.75% $ 445,600 6.26%
Other 90,249 7.09 85,383 6.43
- ----------------------------------------------------------------------------
Total $ 796,112 $ 530,983
- ----------------------------------------------------------------------------
Senior notes
Bank--fixed rate $2,793,778 7.03% $3,140,237 7.31%
Bank--variable rate 414,000 6.19 429,000 5.99
Corporation 125,000 7.25 125,000 7.25
Total $3,332,778 $3,694,237
- ----------------------------------------------------------------------------
Deposit notes
Fixed rate $224,996 6.71% $224,996 6.71%
Variable rate 75,000 6.15 75,000 5.86
============================================================================
Total $299,996 $299,996
- ----------------------------------------------------------------------------
As of December 31, 1997, the aggregate amount of interest-bearing
deposits with accounts exceeding $100 was $228,428. In September 1997, the
Savings Bank completed the purchase of the national retail deposit franchise of
JCPenney National Bank. Retail deposit balances acquired under the agreement
were approximately $421,000.
In November 1996, the Company entered into a four-year, $1,700,000
unsecured revolving credit arrangement (the "Credit Facility"). The Credit
Facility is comprised of two tranches: a $1,375,000 Tranche A facility available
to the Bank and the Savings Bank, including an option for up to $225,000 in
multi-currency availability, and a $325,000 Tranche B facility available to the
Corporation, the Bank and the Savings Bank, including an option for up to
$100,000 in multi-currency availability. Each tranche under the facility is
structured as a four-year commitment and is available for general corporate
purposes. The borrowings of the Savings Bank are limited to $750,000. All
borrowings under the Credit Facility are based on varying terms of the London
InterBank Offered Rate ("LIBOR"). The Bank has irrevocably undertaken to honor
any demand by the lenders to repay any borrowings which are due and payable by
the Savings Bank but which have not been paid. Any borrowings under the Credit
Facility will mature on November 24, 2000; however, the final maturity of each
tranche may be extended for three additional one-year periods. As of December
31, 1997 and 1996, the Company had no outstandings under the Credit Facility.
In August 1997, the Company entered into a three-year, $350,000
equivalent unsecured revolving credit arrangement (the "UK/Canada Facility"),
which will be used to finance the Company's expansion in the United Kingdom and
Canada. The UK/Canada Facility is comprised of two tranches: a Tranche A
facility in the amount of (pound)156,458 ($249,800 equivalent based on the
exchange rate at closing) and a Tranche B facility in the amount of C$139,609
($100,200 equivalent based on the exchange rate at closing). An amount of
(pound)34,574 or C$76,910 ($55,200 equivalent based on the exchange rates at
closing) may be transferred between the Tranche A facility and the Tranche B
facility, respectively, upon the request of the Company. Each tranche under the
facility is structured as a three-year commitment and will be available for
general corporate purposes. All borrowings under the UK/Canada Facility are
based on varying terms of LIBOR. The Corporation serves as the guarantor of all
borrowings under the UK/Canada Facility. As of December 31, 1997, the Company
had no outstandings under the UK/Canada Facility.
In April 1997, the Bank increased the aggregate amount of bank notes
available under its bank note program. Under the program, the Bank from time to
time may issue up to $7,800,000 of senior bank notes with maturities from thirty
days to thirty years and up to $200,000 of subordinated bank notes (none issued
as of December 31, 1997 and 1996) with maturities from five to thirty years.
In October 1997, the Bank established a program for the issuance of debt
instruments to be offered outside of the United States. Under this program, the
Bank from time to time may issue instruments in the aggregate principal amount
of $1,000,000 equivalent outstanding at any one time (none issued as of December
31, 1997). Instruments under this program may be denominated in any currency or
currencies.
In September 1996, the Corporation filed a $200,000 shelf registration
statement ($125,000 of senior debt securities issued as of December 31, 1997)
with the Securities and Exchange Commission under which the Corporation from
time to time may offer and sell (i) senior or subordinated debt securities,
consisting of debentures, notes and/or other unsecured evidences, (ii) preferred
stock, which may be issued in the form of depository shares evidenced by
depository receipts and (iii) common stock. The securities will be limited to a
$200,000 aggregate public offering price or its equivalent (based on the
applicable exchange rate at the time of sale) in one or more foreign currencies,
currency units or composite currencies as shall be designated by the
Corporation.
In April 1996, the Bank established a deposit note program under which
the Bank from time to time may issue up to $2,000,000 of deposit notes with
maturities from thirty days to thirty years.
In January 1997, Capital One Capital I, a subsidiary of the Bank created
as a Delaware statutory business trust, issued $100,000 aggregate amount of
Floating Rate Junior Subordinated Capital Income Securities that mature on
February 1, 2027. The securities represent a preferred beneficial interest in
the assets of the trust. The net proceeds of the offering of $97,428 were lent
to the Bank for general corporate purposes. As of December 31, 1997, the
interest rate on these securities was 7.30%.
The Company has entered into swaps to effectively convert certain
interest rates on bank notes from fixed to variable. The swaps, which had a
notional amount totaling $450,000 as of December 31, 1997, will mature in 1998
and 2000 to coincide with maturities of fixed bank notes. In 1997, the Company
entered into swaps with notional amounts totaling $450,000 to effectively offset
the swaps described above with matching maturities and terms which pay fixed and
receive variable rates. As of December 31, 1997, the variable rate payments on
the original and offsetting swaps were matched and will continue to offset each
other through maturity. As of December 31, 1997, the weighted average fixed rate
payment received on the original swaps was 7.39%, and the weighted average fixed
rate payment paid on the offsetting swaps was 6.50%.
As of December 31, 1996, swaps with a notional amount totaling $974,000,
with maturity dates from 1997 through 2000, paid three-month LIBOR at a weighted
average contractual rate of 5.59% and received a weighted average fixed rate of
7.71%. In 1995, the Bank entered into basis swaps (notional amounts totaling
$260,000) to effectively convert bank notes, with a variable rate based on six-
month LIBOR to a variable rate based on three-month LIBOR. These swaps and bank
notes matured in 1996.
Interest-bearing deposits, senior notes and deposit notes as of December
31, 1997, mature as follows (all other borrowings mature in 1998):
Interest-Bearing
Deposits Senior Notes Deposit Notes Total
- -----------------------------------------------------------------------------
1998 $1,129,742 $ 918,166 $299,996 $2,347,904
1999 95,901 789,978 885,879
2000 48,979 649,614 698,593
2001 4,898 523,114 528,012
2002 34,134 112,000 146,134
Thereafter 339,906 339,906
-----------------------------------------------------------------
Total $1,313,654 $3,332,778 $299,996 $4,946,428
- -----------------------------------------------------------------------------
Note E: Associate Benefit Plans
The Company sponsors a contributory Associate Savings Plan in which
substantially all full-time and certain part-time associates are eligible to
participate. The Company matches a portion of associate contributions and makes
discretionary contributions based upon the Company meeting a certain earnings
per share target. The Company's contributions to this plan were $10,264, $9,048
and $2,701 for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1996, the Company is required to make additional
contributions for pay-based credits for eligible associates which were
previously provided under the Cash Balance Pension Plan.
Through December 31, 1995, the Company provided its associate pension
benefits through the Cash Balance Pension Plan and postretirement medical
coverage and life insurance benefits through the Associate Welfare Benefits
Plan. Effective December 31, 1995, the Company amended the Cash Balance Pension
Plan so that no future pay-based credits will accrue. Future pay-based credits
will accrue to the Associate Savings Plan discussed above. Neither the remaining
obligations under the Cash Balance Pension Plan nor the obligations under the
unfunded Associate Welfare Benefits Plan were material to the Company's
financial statements.
Note F: Stock Plans
The Company has three stock-based compensation plans which are described below.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for its stock-based compensation plans. In accordance with APB 25, no
compensation cost has been recognized for the Company's fixed stock options,
since the exercise price equals the market price of the underlying stock on the
measurement date of grant, nor for the stock purchase plan, which is considered
to be noncompensatory.
For the performance-based option plans discussed below, compensation cost is
measured as the difference between the exercise price and the target stock price
required for vesting and is recognized over the estimated vesting period.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires, for companies electing to continue to follow the recognition
provisions of APB 25, pro forma information regarding net income and earnings
per share, as if the recognition provisions of SFAS 123 were adopted for stock
options granted subsequent to December 31, 1994. For purposes of pro forma
disclosure, the fair value of the options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions and is amortized to expense over the options' vesting period.
For the Years Ended December 31
Assumptions 1997 1996 1995
- -----------------------------------------------------------------------------
Dividend yield .82% .90% .90%
Volatility factors of expected
market price of stock 40% 32% 33%
Risk-free interest rate 6.27% 5.90% 6.30%
Expected option lives (in years) 4.5 6.0 4.0
Pro Forma Information
- -----------------------------------------------------------------------------
Net income $186,003 $151,853 $125,296
Basic earnings per share $ 2.82 $ 2.29 $ 1.91
Diluted earnings per share $ 2.74 $ 2.27 $ 1.89
- -----------------------------------------------------------------------------
Under the 1994 Stock Incentive Plan, the Company has reserved 7,370,880
common shares as of December 31, 1997 and 1996 (5,370,880 as of December 31,
1995) for issuance in the form of incentive stock options, nonstatutory stock
options, stock appreciation rights, restricted stock and incentive stock. The
exercise price of each stock option issued to date equals the market price of
the Company's stock on the date of grant. The option's maximum term is ten
years. The number of shares available for future grants was 97,814; 1,508,352
and 2,061,640 as of December 31, 1997, 1996 and 1995, respectively. Other than
the performance-based options discussed below, options generally vest annually
over three to five years and expire beginning November 2004 and all options vest
immediately upon a change in control. The restrictions on restricted stock (of
which 23,215 shares were issued in 1995 at the then fair value of $16.75 per
share) expire annually over three years.
In December 1997, the Company's Board of Directors approved a compensation
program under which senior management was given the opportunity to forego future
cash compensation in exchange for stock options. Under this program, the
Company's Chairman and Chief Executive Officer and its President and Chief
Operating Officer have agreed to forego all salary and any benefits under the
Associate Stock Purchase Plan (the "Purchase Plan"), Associate Savings Plan, and
the Company's unfunded excess savings plan benefits from 1998 through 2000 in
exchange for a one-time option grant. The options granted to these top two
executives are target stock price performance-based options to purchase a total
of 685,755 shares. These options will vest if the fair market value of the
common stock remains at or above $84.00 for at least ten trading days in any
thirty consecutive calendar day period by the third anniversary of the grant
date (December 18, 2000). In the event that these options do not meet this
vesting criteria on or before December 18, 2000, the options will terminate. In
addition, substantially all of the Company's top managers elected to forego a
portion of their annual cash bonuses and Associate Savings Plan benefits for the
next three years in exchange for options. Under this program, certain key
managers received target stock price performance-based options to purchase
457,466 shares with the same vesting provisions as the grant to the Company's
top two executives. In addition, other senior managers received fixed options to
purchase 223,900 shares, which vest in full on the third anniversary of the date
of grant. The above option grants provide for the purchase of common shares at
the December 18, 1997 market price of $48.75 per share. All of these awards are
subject to stockholder approval at the Company's next annual meeting of an
increase in shares available for issuance under the 1994 Stock Incentive Plan in
sufficient number to accommodate these awards.
In April 1996, stockholders approved an increase of 2,000,000 in shares
available for issuance under the 1994 Stock Incentive Plan. With this approval,
a September 15, 1995 grant to the Company's Chairman and Chief Executive Officer
and its President and Chief Operating Officer became effective. This grant was
for target stock price performance-based options to purchase 2,500,000 common
shares at the September 15, 1995 market price of $29.19 per share. Vesting of
the options was dependent on the fair market value of the common stock remaining
at or above specified levels for at least ten trading days in any thirty
consecutive calendar day period. Fifty percent of the options vested in January
1997 when the Company's stock reached $37.50 per share; 25% vested in October
1997 when the stock reached $43.75 per share; the remaining 25% vested in
January 1998 when the stock reached $50.00 per share. The Company recognized
$24,772 and $7,728 of compensation cost for these options for the years ended
December 31, 1997 and 1996, respectively.
In April 1995, the Company adopted the 1995 Non-associate Directors Stock
Incentive Plan. This plan authorizes a maximum of 500,000 shares of the
Company's common stock for the automatic grant of restricted stock and stock
options to eligible members of the Company's Board of Directors. As of December
31, 1997, 1996 and 1995, 382,500; 417,500 and 452,500 shares were available for
grant under this plan, respectively. The options vest after one year and their
maximum term is ten years. Restrictions on the restricted stock (of which 12,500
shares were issued in 1995 at the then fair value of $19.88 per share) expired
in 1996. The exercise price of each option equals the market price of the
Company's stock on the date of grant.
A summary of the status of the Company's options as of December 31, 1997,
1996 and 1995, and changes for the years then ended is presented below
(excluding the December 1997 grants subject to stockholder approval):
1997 1996 1995
------------------------ ------------------------ -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
(000s) Per Share (000s) Per Share (000s) Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,894 $23.92 3,315 $19.67 2,036 $16.00
Granted 1,590 40.88 2,694 29.04 1,361 25.08
Exercised (215) 20.76 (12) 16.40 (6) 16.00
Canceled (144) 30.16 (103) 21.82 (76) 18.25
-----------------------------------------------------------------------------------
Outstanding at end of year 7,125 $27.67 5,894 $23.92 3,315 $19.67
- -----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 3,815 $24.43 1,196 $18.98 454 $16.00
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year $16.03 $11.22 $ 8.19
------ ------ ------
The following table summarizes information about options outstanding as of
December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number Weighted-Average Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Exercise Price Exercisable Exercise Price
Exercise Prices (000s) Contractual Life Per Share (000s) Per Share
- --------------------------------------------------------------------------------------------------------------------------------
$16.00-$24.99 2,240 6.93 years $16.52 1,406 $16.38
$25.00-$33.99 3,352 7.73 29.08 2,409 29.13
$34.00-$47.99 1,533 9.52 40.90
Under the Company's Purchase Plan, associates of the Company are eligible to
purchase common stock through monthly salary deductions of a maximum of 15% and
a minimum of 1% of monthly base pay. The amounts deducted are applied to the
purchase of unissued common or treasury stock of the Company at 85% of the
current market price. An aggregate of 1,000,000 common shares have been
authorized for issuance under the Purchase Plan, of which 682,427; 822,001 and
934,355 shares were available for issuance as of December 31, 1997, 1996 and
1995, respectively.
Pursuant to a Marketing and Management Services Agreement between Signet Bank
(which has since been acquired by First Union Bank on November 30, 1997) and
Fairbank Morris, Inc. ("FMI"), a corporation controlled by members of the
Company's executive management, 464,400 shares of restricted stock, at the then
fair value of $16.00 per share, were awarded to FMI for services rendered for
the period from January 1, 1994 to December 31, 1995. In connection with this
award, $3,715 in compensation cost was recognized in 1995. The restrictions on
this stock expired on November 15, 1995, one year after the grant date.
On November 16, 1995, the Board of Directors of the Company declared a
dividend distribution of one Right for each outstanding share of common stock.
Each Right entitles a registered holder to purchase from the Company one one-
hundredth of a share of the Company's authorized Cumulative Participating Junior
Preferred Stock (the "Junior Preferred Shares") at a price of $150, subject to
adjustment. The Company has reserved 1,000,000 shares of its authorized
preferred stock for the Junior Preferred Shares. Because of the nature of the
Junior Preferred Shares' dividend and liquidation rights, the value of the one
one-hundredth interest in a Junior Preferred Share purchasable upon exercise of
each Right should approximate the value of one share of common stock. Initially,
the Rights are not exercisable and trade automatically with the common stock.
However, the Rights generally become exercisable and separate certificates
representing the Rights will be distributed, if any person or group acquires 15%
or more of the Company's outstanding common stock or a tender offer or exchange
offer is announced for the Company's common stock. The Rights expire on November
29, 2005, unless earlier redeemed by the Company at $0.01 per Right prior to the
time any person or group acquires 15% of the outstanding common stock. Until the
Rights become exercisable, the Rights have no dilutive effect on earnings per
share.
In July 1997, the Company's Board of Directors voted to repurchase up to two
million shares of the Company's common stock over the next two years in order to
mitigate the dilutive impact of shares issuable under its benefit plans,
including its Purchase Plan, dividend reinvestment and stock purchase plans and
other incentive plans. During 1997, the Company repurchased 1,318,641 shares
under this program. Certain treasury shares were reissued in connection with the
Company's benefit plans.
Note G: Other Non-Interest Expense
Year Ended December 31
1997 1996 1995
- --------------------------------------------------------------------------------
Professional services $ 47,671 $ 43,968 $28,787
Collections 23,216 9,783 7,193
Fraud losses 16,749 26,773 27,721
Bankcard association
assessments 16,074 15,045 13,116
Other 47,570 36,614 20,726
---------------------------------
Total $151,280 $132,183 $97,543
- --------------------------------------------------------------------------------
Note H: Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997 and
1996 were as follows:
December 31
1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 60,900 $41,475
Finance charge and fee income receivables 17,570
Stock incentive plan 11,466 2,758
Unearned membership fees 5,600 310
State taxes, net of federal benefit 2,694
Other 11,290 7,232
- --------------------------------------------------------------------------------
Total deferred tax assets 109,520 51,775
Deferred tax liabilities:
Securitizations 26,822
Service charge accrual 10,167 5,368
Deferred issuance and replacement costs 4,442 3,119
Depreciation 4,235 2,546
Other 456 542
--------------------------
Total deferred tax liabilities 46,122 11,575
- --------------------------------------------------------------------------------
Net deferred tax assets before unrealized
gains on securities available for sale 63,398 40,200
Unrealized gains on securities available for sale (1,602) (1,121)
--------------------------
Net deferred tax assets $ 61,796 $39,079
- --------------------------------------------------------------------------------
Significant components of the provision for income taxes attributable to
continuing operations were as follows:
Year Ended December 31
1997 1996 1995
- --------------------------------------------------------------------------------
Federal taxes $138,877 $119,027 $63,162
State taxes 393 1,715 600
Deferred income taxes (23,198) (27,529) 7,458
----------------------------------------
Income taxes $116,072 $ 93,213 $71,220
- --------------------------------------------------------------------------------
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate to income tax expense was:
Year Ended December 31
1997 1996 1995
- --------------------------------------------------------------------------------
Income tax at statutory
federal tax rate 35.00% 35.00% 35.00%
Other, primarily state taxes 3.00 2.50 1.00
----------------------------------
Income taxes 38.00% 37.50% 36.00%
- --------------------------------------------------------------------------------
Note I: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year Ended December 31
(Shares in Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Numerator:
Net income $189,381 $155,267 $126,511
- --------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings
per share--
Weighted-average shares 66,070 66,228 65,691
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 1,578 790 391
Restricted stock 3 8 310
- --------------------------------------------------------------------------------
Dilutive potential
common shares 1,581 798 701
Denominator for diluted
earnings per share--
Adjusted weighted-average shares 67,651 67,026 66,392
------------------------------------------
Basic earnings per share $ 2.87 $ 2.34 $ 1.93
- --------------------------------------------------------------------------------
Diluted earnings per share $ 2.80 $ 2.32 $ 1.91
- --------------------------------------------------------------------------------
For additional disclosures regarding the outstanding stock options and
restricted stock, see Note F.
Options to purchase 949,484; 20,725 and 829,855 shares of common stock
during 1997, 1996 and 1995, respectively, at prices ranging from $23.38 to
$47.94 per share, were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common shares and, therefore, their inclusion would be
antidilutive.
Note J: Regulatory Matters
The Bank and the Savings Bank are subject to capital adequacy guidelines adopted
by the Federal Reserve Board (the "Federal Reserve") and the Office of Thrift
Supervision (the "OTS") (collectively, the "regulators"), respectively. The
capital adequacy guidelines and the regulatory framework for prompt corrective
action require the Bank and the Savings Bank to maintain specific capital levels
based upon quantitative measures of their assets, liabilities and off-balance
sheet items as calculated under Regulatory Accounting Principles. The inability
to meet and maintain minimum capital adequacy levels could result in regulators
taking actions that could have a material effect on the Company's consolidated
financial statements. Additionally, the regulators have broad discretion in
applying higher capital requirements. Regulators consider a range of factors in
determining capital adequacy, such as an institution's size, quality and
stability of earnings, interest rate risk exposure, risk diversification,
management expertise, asset quality, liquidity and internal controls.
As of December 31, 1997 and 1996, notifications from the regulators
categorized the Bank and the Savings Bank as "well-capitalized." To be
categorized as "well-capitalized," the Bank and the Savings Bank must maintain
minimum capital ratios as set forth in the table below. As of December 31, 1997,
there were no conditions or events since the notifications discussed above that
management believes would have changed either the Bank or the Savings Bank's
capital category.
Minimum for To Be "Well-
Capital Capitalized" Under
Adequacy Prompt Corrective
Ratios Purposes Action Provisions
- --------------------------------------------------------------------------------
December 31, 1997
Capital One Bank
Tier 1 Capital 10.49% 4.00% 6.00%
Total Capital 13.26 8.00 10.00
Tier 1 Leverage 10.75 4.00 5.00
Capital One, F.S.B.(1)
Tangible Capital 11.26% 1.50% 6.00%
Total Capital 17.91 12.00 10.00
Core Capital 11.26 8.00 5.00
- --------------------------------------------------------------------------------
December 31, 1996
Capital One Bank
Tier 1 Capital 11.61% 4.00% 6.00%
Total Capital 12.87 8.00 10.00
Tier 1 Leverage 9.04 4.00 5.00
Capital One, F.S.B.(1)
Tangible Capital 9.18% 1.50% 6.00%
Total Capital 16.29 12.00 10.00
Core Capital 9.18 8.00 5.00
- --------------------------------------------------------------------------------
(1) Until June 30, 1999, the Savings Bank is subject to capital requirements
that exceed minimum capital adequacy requirements, including the requirement
to maintain a minimum Core Capital ratio of 8% and a Total Capital ratio of
12%.
During 1996, the Bank received regulatory approval and established a branch
office in the United Kingdom. In connection with such approval, the Company
committed to the Federal Reserve that, for so long as the Bank maintains such
branch in the United Kingdom, the Company will maintain a minimum Tier 1
Leverage ratio of 3.0%. As of December 31, 1997 and 1996, the Company's Tier 1
Leverage ratio was 13.83% and 11.13%, respectively.
Additionally, certain regulatory restrictions exist which limit the ability
of the Bank and the Savings Bank to transfer funds to the Corporation. As of
December 31, 1997, retained earnings of the Bank and the Savings Bank of $99,600
and $24,800, respectively, were available for payment of dividends to the
Corporation without prior approval by the regulators. The Savings Bank, however,
is required to give the OTS at least thirty days' advance notice of any proposed
dividend and the OTS, in its discretion, may object to such dividend.
Note K: Commitments and Contingencies
As of December 31, 1997, the Company had outstanding lines of credit of
approximately $33,800,000 committed to its customers. Of that total commitment,
approximately $19,600,000 was unused. While this amount represented the total
available lines of credit to customers, the Company has not experienced and does
not anticipate that all of its customers will exercise their entire available
line at any given point in time. The Company has the right to increase, reduce,
cancel, alter or amend the terms of these available lines of credit at any time.
Certain premises and equipment are leased under agreements that expire at
various dates through 2006, without taking into consideration available renewal
options. Many of these leases provide for payment by the lessee of property
taxes, insurance premiums, cost of maintenance and other costs. In some cases,
rentals are subject to increase in relation to a cost of living index. Total
rental expense amounted to $13,644, $12,603 and $5,394 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Future minimum rental commitments as of December 31, 1997 for all non-
cancelable operating leases with initial or remaining terms of one year or more
are as follows:
- --------------------------------------------------------------------------------
1998 $15,362
1999 13,881
2000 12,720
2001 8,388
2002 3,298
Thereafter 4,798
---------
Total $58,447
- --------------------------------------------------------------------------------
In connection with the transfer of substantially all of Signet Bank's
credit card business to the Bank in November 1994, the Company and the Bank
agreed to indemnify Signet Bank for certain liabilities incurred in litigation
arising from that business, which may include liabilities, if any, incurred in
the purported class action case described below.
During 1995, the Company and the Bank became involved in a purported class
action suit relating to certain collection practices engaged in by Signet Bank
and, subsequently, by the Bank. The complaint in this case alleges that Signet
Bank and/or the Bank violated a variety of California state statutes and
constitutional and common law duties by filing collection lawsuits, obtaining
judgments and pursuing garnishment proceedings in the Virginia state courts
against defaulted credit card customers who were not residents of Virginia. This
case was filed in the Superior Court of California in the County of Alameda,
Southern Division, on behalf of a class of California residents. The complaint
in this case seeks unspecified statutory damages, compensatory damages, punitive
damages, restitution, attorneys' fees and costs, a permanent injunction and
other equitable relief.
In February 1997, the California court entered judgment in favor of the
Bank on all of the plaintiffs' claims. The plaintiffs have appealed the ruling
to the California Court of Appeal First Appellate District Division 4, and the
appeal is pending.
Because no specific measure of damages is demanded in the complaint of the
California case and the trial court entered judgement in favor of the Bank
before the parties completed any significant discovery, an informed assessment
of the ultimate outcome of this case cannot be made at this time. Management
believes, however, that there are meritorious defenses to this lawsuit and
intends to defend it vigorously.
The Company is commonly subject to various other pending and threatened
legal actions arising from the conduct of its normal business activities. In the
opinion of management, the ultimate aggregate liability, if any, arising out of
any pending or threatened action will not have a material adverse effect on the
consolidated financial condition of the Company. At the present time, however,
management is not in a position to determine whether the resolution of pending
or threatened litigation will have a material effect on the Company's results of
operations in any future reporting period.
Note L: Related Party Transactions
In the ordinary course of business, executive officers and directors of the
Company may have consumer loans issued by the Company. Pursuant to the Company's
policy, such loans are issued on the same terms as those prevailing at the time
for comparable loans to unrelated persons and do not involve more than the
normal risk of collectability.
Note M: Securitizations
The Company securitized $2,114,695, $2,695,000 and $3,525,000 of consumer loan
receivables in 1997, 1996 and 1995, respectively. As of December 31, 1997,
receivables under securitizations outstanding consisted of $1,257,869 of
retained ("seller's") interests and $9,369,328 of investors' undivided
interests, maturing from 1998 to 2004.The gains on securitizations and other
income from securitizations are included in servicing and securitizations
income.
The Company has entered into swaps to reduce the interest rate sensitivity
associated with these securitizations. The swaps, which had a notional amount
totaling $591,000 as of December 31, 1997, will mature in 1998 and 1999 to
coincide with the final payment of a 1995 securitization. In 1997, the Company
entered into swaps with notional amounts totaling $591,000 to effectively offset
the swaps described above with matching maturities and terms which pay fixed and
receive variable rates. As of December 31, 1997, the variable rate payments on
the original and offsetting swaps were matched and will continue to offset each
other through maturity. As of December 31, 1997, the weighted average fixed rate
payment received on the original swaps was 7.68%, and the weighted average fixed
rate payment paid on the offsetting swaps was 6.52%.
As of December 31, 1996, swaps with a notional amount totaling $1,130,000,
with maturity dates from 1997 through 1999, paid three-month LIBOR at a weighted
average contractual rate of 5.55% and received a weighted average fixed rate of
7.23%.
The terms of securitizations require the Company to maintain a certain
level of assets, retained by the trust, to absorb potential credit losses. The
amount available to absorb potential credit losses was included in accounts
receivable from securitization and was $231,809 and $266,813 as of December 31,
1997 and 1996, respectively.
Note N: Significant Concentration of Credit Risk
The Company is active in originating consumer loans primarily in the United
States. The Company reviews each potential customer's credit application and
evaluates the applicant's financial history and ability and willingness to
repay. Loans are made primarily on an unsecured basis; however, certain loans
require collateral in the form of cash deposits. Foreign denominated consumer
loans are included in the "Other" geographic region loan category. The
geographic distribution of the Company's consumer loans was as follows:
Year Ended December 31
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Geographic
Region: Loans % Loans %
- --------------------------------------------------------------------------------
South $ 5,061,414 35.57% $ 4,615,596 36.05%
West 3,361,556 23.62 3,277,717 25.60
Northeast 2,835,256 19.92 2,465,237 19.25
Midwest 2,533,469 17.80 2,386,918 18.64
Other 439,320 3.09 58,501 .46
- --------------------------------------------------------------------------------
14,231,015 100.00% 12,803,969 100.00%
Less securitized
balances (9,369,328) (8,460,067)
-----------------------------------------------------
Total loans $ 4,861,687 $ 4,343,902
- --------------------------------------------------------------------------------
Note O: Disclosures About Fair Value of Financial Instruments
The following discloses the fair value of financial instruments as of December
31, 1997 and 1996, whether or not recognized in the balance sheets, for which it
is practical to estimate fair value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. As required under GAAP, these
disclosures exclude certain financial instruments and all nonfinancial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value as of December 31, 1997 and 1996, for its financial
instruments:
Cash and Cash Equivalents
The carrying amounts of cash and due from banks, federal funds sold and resale
agreements and interest-bearing deposits at other banks approximated fair value.
Securities Available for Sale
The fair value of securities available for sale was determined using current
market prices. See Note B.
Consumer Loans
The net carrying amount of consumer loans, including the Company's seller's
interest in securitized consumer loan receivables, approximated fair value due
to the relatively short average life and variable interest rates on a
substantial number of these loans. This amount excluded any value related to
account relationships.
Interest Receivable
The carrying amount approximated fair value.
Borrowings
The carrying amounts of interest-bearing deposits, other borrowings and deposit
notes approximated fair value. The fair value of senior notes was $3,351,000 and
$3,722,000 as of December 31, 1997 and 1996, respectively, determined based on
quoted market prices.
Interest Payable
The carrying amount approximated fair value.
Swaps
The fair value was the estimated amount that the Company would have received to
terminate the swaps at the respective dates, taking into account the forward
yield curve. As of December 31, 1997 and 1996, the estimated fair value was
$5,800 and $32,700, respectively.
Note P: Capital One Financial Corporation (Parent Company Only) Condensed
Financial Information
December 31
Balance Sheets 1997 1996
- -------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 203 $ 16,073
Investment in subsidiaries 818,518 748,365
Loans to subsidiaries 207,507(1) 105,000
Other 5,001 2,333
-----------------------------
Total assets $1,031,229 $ 871,771
- -------------------------------------------------------------------------------
Liabilities:
Senior notes $ 125,000 $ 125,000
Other 12,970 6,380
- -------------------------------------------------------------------------------
Total liabilities 137,970 131,380
Stockholders' Equity: 893,259 740,391
Total liabilities and stockholders' equity $1,031,229 $ 871,771
- -------------------------------------------------------------------------------
(1) As of December 31, 1997, includes $143,500 of cash invested at the Bank
instead of the open market.
Year Ended December 31
Statements of Income 1997 1996 1995
- -------------------------------------------------------------------------------
Interest from temporary
investments $ 11,352 $ 2,296 $ 560
Interest expense 11,067 3,013
Dividends, principally from
bank subsidiaries 228,000 117,400 11,000
Non-interest income 56
Non-interest expense 409 571 456
- -------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries 227,932 116,112 11,104
Income taxes (25) (490) 37
- -------------------------------------------------------------------------------
227,957 116,602 11,067
Equity in undistributed
earnings of subsidiaries (38,576) 38,665 115,444
-----------------------------------------
Net income $ 189,381 $ 155,267 $ 126,511
- -------------------------------------------------------------------------------
Year Ended December 31
Statements of Cash Flows 1997 1996 1995
- --------------------------------------------------------------------------------
Operating Activities:
Net income $ 189,381 $ 155,267 $ 126,511
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
earnings of subsidiaries 38,576 (38,665) (115,444)
Amortization of deferred
compensation 62 4,020
(Increase) decrease in
other assets (2,183) 2,017 (3,161)
Increase (decrease) in
other liabilities 6,590 6,380 (1,054)
- --------------------------------------------------------------------------------
Net cash provided by
operating activities 232,364 125,061 10,872
Investing Activities:
Increase in investment in
subsidiaries (83,366) (119,502) (2,470)
Increase in loans to
subsidiaries (102,507) (105,000)
- --------------------------------------------------------------------------------
Net cash used for investing
activities (185,873) (224,502) (2,470)
Financing Activities:
Proceeds from issuances of
common stock 4,957 3,109 1,257
Proceeds from exercise of
stock options 4,082 186 132
Issuance of senior notes 125,000
Purchases of treasury stock (50,762)
Dividends paid (20,638) (20,573) (15,883)
-------------------------------------------
Net cash (used for) provided
by financing activities (62,361) 107,722 (14,494)
(Decrease) increase in cash
and cash equivalents (15,870) 8,281 (6,092)
Cash and cash equivalents
at beginning of year 16,073 7,792 13,884
-------------------------------------------
Cash and cash equivalents
at end of year $ 203 $ 16,073 $ 7,792
- --------------------------------------------------------------------------------
Exhibit 21
CAPITAL ONE FINANCIAL CORPORATION
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
1. Capital One Bank -- Incorporated in the Commonwealth of Virginia
2. Capital One, F.S.B. -- Federal Savings Bank
3. Capital One Services, Inc. -- Incorporated in the State of Delaware
4. America One Communications, Inc. -- Incorporated in the State of Delaware
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Capital One Financial Corporation of our report dated January 15, 1998,
included in the 1997 Annual Report to Stockholders of Capital One Financial
Corporation.
We also consent to the incorporation by reference in the following Registration
Statements of our report dated January 15, 1998, with respect to the
consolidated financial statements of Capital One Financial Corporation
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1997:
Registration Statement
Number Form Description
---------------- ----- -------------------------
33-80263 Form S-8 Marketing and Management
Services Agreement
33-86874 Form S-8 Employee Stock Purchase Plan
33-86876 Form S-8 Employee Savings Plan
33-86986 Form S-8 1994 Stock Incentive Plan
33-91790 Form S-8 1995 Non-Employee Directors
Stock Incentive Plan
33-97032 Form S-8 Amendment to 1994 Stock
Incentive Plan
33-99748 Form S-3 Dividend Reinvestment and
Stock Purchase Plan
333-3580 Form S-3 Debt Securities, Preferred
Stock and Common Stock
in the amount of $200
million
333-42853 Form S-8 1994 Stock Incentive Plan
333-45453 Form S-8 Associate Savings Plan
ERNST & YOUNG LLP
Washington, D.C.
March 17, 1998
