EXHIBIT 10.31
SETTLEMENT TERM SHEET
The parties will stipulate to the entry of a modified order, subject to court
approval, for a modified preliminary injunction consistent with the following
terms and conditions, which the parties undertake to cooperatively prepare
forthwith. Capitalized terms used herein and not otherwise defined are given the
same meaning as used in the American Direct Credit Bankcard Program Agreement
(the "Agreement") between Fidelity Federal Bank, A Federal Savings Bank (the
"Bank") and American Direct Credit LLC ("ADC") dated March 5, 1997. The
Agreement, as modified by the modified preliminary injunction and by the
definitive amendment reflecting the terms hereof, will remain in effect.
1. Certain ADC Members will market the Fidelity/ADC credit card receivable
portfolio and Accounts (the "Portfolio") through the end of March 1999.
Representatives of ADC or American Direct Capital ("Capital") are not
authorized to bind or obligate the Bank in any way. No agency,
partnership, joint venture or other legal relationship exists or will be
created hereby.
2. ADC shall have the exclusive right to market and purchase, or cause a
third party to purchase, the Portfolio from the date hereof through
December 31, 1998. The Bank will cooperate in the efforts to sell the
Portfolio as reasonably requested by ADC at ADC's expense and at no
expense to the Bank, but the Bank will only be obligated to sell the
Portfolio to ADC or its bona fide nominee that (i) pays a cash price
equal to at least the gross balance of the receivables (before reserves
and excluding receivable balances of Default Accounts) on the date of
sale discounted by 11% and (ii) consummates such purchase on or before
December 31, 1998. In addition to the cash price to be received by the
Bank from the purchaser, the Bank shall also retain the balances in the
/>Reserve Account and the Settlement Account (i.e., the Bank shall
receive such retention in addition to the purchase price paid by the
purchaser). The Bank shall have unfettered discretion to reject any
proposal to acquire the Portfolio for any price less than that specified
in this paragraph.
3. If the Portfolio is not sold by December 31, 1998, ADC shall have the
right to market and purchase, or cause a third party to purchase, the
Portfolio from January 1, 1999 through March 31, 1999. If the Bank
receives a bona fide offer to acquire the Portfolio (the "Offer") between
January 1, 1999 and March 31, 1999 that the Bank desires to accept, the
Bank shall so notify ADC in a writing setting forth the terms of such
Offer. ADC shall have right (the "Right of First Refusal") to acquire the
Portfolio for a cash price equal to the purchase price set forth in the
Offer, but such right must be exercised in good faith by ADC, and such
purchase by ADC must be consummated, within ten business days of ADC's
receipt from the Bank of the written notice of the Offer. If ADC shall
fail to so exercise the Right of First Refusal and to so consummate such
purchase, the Bank shall be free to sell the Portfolio pursuant to the
Offer. Prior to the earlier of the date on which the Bank notifies ADC of
an Offer or March 31, 1999, the Bank will cooperate in the efforts to
sell the Portfolio as reasonably requested by ADC at ADC's expense and at
no expense to the Bank, but the Bank will only be obligated to sell the
Portfolio to ADC or its bona fide nominee that (i) pays a cash price
equal to at least the gross balance of the receivables (before reserves
and excluding receivable balances of Default Accounts) on the date of
sale discounted by 11% and (ii) consummates such purchase on or before
March 31, 1999. If the Portfolio is sold to ADC or its bona fide nominee
under the terms of this paragraph, the Bank will pay ADC $300,000.
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4. If ADC purchases or obtains a purchaser for the Portfolio, the Bank
agrees, at ADC's expense, to (i) transfer the Bank's Mastercard bank
identification number ("BIN") associated with the Portfolio to the
purchaser or other person as requested by ADC, provided such transfer
complies with all Mastercard regulations, (ii) take any action the Bank
determines is reasonable to attempt to cause Card Management Corporation
to agree to terminate its servicing of the Portfolio without payment by
ADC of an early termination fee, (iii) permit the purchaser of the
Portfolio to use the BIN until such time as a deconversion may be
completed (at ADC's cost), and (iv) take such further actions, at ADC's
expense, as ADC may reasonably request to effect the transfer of the
Portfolio to the purchaser.
5. In any sale of the Portfolio, the Bank's representations and warranties
will be limited to its ownership of the receivables and its corporate
authority to enter into such sales transaction. Specifically, the
Portfolio will be sold without recourse and the Bank will not be required
to make representations and warranties as to the credit quality of the
Portfolio and will not undertake to repurchase any receivables sold. Upon
consummation of such sale or as otherwise provided herein, the Dismissal
(as defined below) shall be filed in the litigation and the Releases (as
defined below) shall become effective.
6. Originations by ADC for the months of November and December shall not
exceed $10 million in November and $8 million in December. ADC shall
immediately cease the origination of any Accounts in the State of Alabama
other than Accounts marketed through Brainstorm U.S.A. Such originations
through Brainstorm U.S.A. shall be limited to $50,000 per month. Each
origination shall be subject to audit by the Bank or its designee (i.e.,
a 100% audit of new Accounts), provided that the Bank shall continue to
use its reasonable efforts to process and approve new Accounts. The Bank
may have an independent auditor monitor the flow of funds into and out of
ADC bank accounts. The Bank, at its sole cost and expense, may maintain
representatives on site at ADC to insure the integrity of ADC's records,
systems, documents and operations.
7. For all new originations, the Bank shall withhold from sales advances all
funds other than those to be remitted to dealers and shall deposit such
withheld amounts into the Reserve Account and such funds shall become
part of the Reserve Fund. Funds to be remitted to dealers will be
transferred to ADC on a daily basis consistent with past practice and
without offset of any kind.
8. With respect to new account applications received by ADC from and after
November 1, 1998, the Bank will not be required to advance funds for any
accounts with a FICO credit score less than 585; and ADC shall not submit
applications to the Bank with FICO credit scores less than 585.
9. Computations of required Reserves and distributions to ADC or
replenishment by ADC of the Reserve Account or Settlement Account,
including existing unsatisfied demands by the Bank for the September 15th
and October 15th settlements and all payments which otherwise would have
been required under the Agreement on November 15th and December 15th,
shall be suspended until December 31, 1998, provided, however, that the
foregoing shall not prohibit the Bank from transferring funds between the
Settlement Account and the Reserve Account pursuant to the terms of the
Agreement. Any Accounts charged off after November 1, 1998 shall be
retained by the Bank. The Bank shall continue to provide ADC with
information concerning all Bank activity related to the Operating
Account, Settlement Account and Reserve Account through December 31,
1998, and shall provide ADC with CMC's monthly NOAH reports through March
31, 1999.
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10. The Bank will allow ADC to withdraw from the Settlement Account or the
Reserve Account up to $800,000 in November 1998 and up to an additional
$800,000 in December 1998 as reimbursement for actual expenses incurred
to originate or service accounts, including without limitation, payroll,
rent and other occupancy costs, and similar operating expenses, provided,
however, that no payment will be made for expenses incurred payable to
affiliated third parties other than reasonable salaries payable in the
ordinary course of business to ADC members who were employees of ADC on
September 30, 1998. Specifically excluded from reimbursement are legal
expenses related to disputes between parties to the Agreement. Bank shall
permit such withdrawals on the third business day following the day on
which ADC provides the Bank with a reasonable description and appropriate
supporting documentation of the expense to be paid with the withdrawn
funds. Bank may monitor the use of such funds as set forth in paragraph
6.
11. If the Bank does not sell the Portfolio on or before December 31, 1998,
the Bank shall retain ADC to provide collection services for the
Portfolio for a servicing fee of $400,000 per month. Upon the earliest to
occur of March 31, 1999, the date the Portfolio is sold or the date as of
which the Bank determines, in its sole and unfettered discretion, that
ADC's servicing performance does not meet performance standards to be set
forth in a definitive document, the Bank's retention of ADC to provide
such servicing shall terminate.
12. ADC shall grant the Bank a first lien on and security interest in any
interest ADC has in the Settlement Account and will create, document and
perfect the same to the Bank's satisfaction. Upon the earlier of the
termination of the Agreement or the sale of the Portfolio, the Bank
agrees to terminate the security interest it has in the System pursuant
to Section 9 of the Agreement and if requested by ADC, shall execute a
UCC termination statement to that effect.
13. Capital and ADC shall be responsible for damages and shall indemnify and
hold harmless the Bank from and against any and all claims, damages and
losses caused by ADC or its members or for which ADC is responsible under
the Agreement and relating to (i) the efforts to market and sell the
Portfolio, (ii) loans generated in violation of FICO minimums, (iii)
fraudulent marketing of cards, (iv) any allegations of lender liability
or successor liability, (v) any allegations of regulatory violations and
(vi) any other wrongful conduct of ADC, Capital and/or their respective
members. Bank may conduct reasonable on-going compliance audits to
monitor ADC's performance.
14. ADC shall immediately execute and deliver to the Bank a dismissal with
prejudice of the pending litigation (the "Dismissal"). ADC and the Bank
each shall execute and deliver mutual general releases (the "Releases").
The form of Releases shall exclude from their effect ADC's and the Bank's
obligations (except to the extent modified hereby) to indemnify each
other pursuant to the Agreement (including, without limitation, ADC's
existing and continuing obligation to indemnify the Bank from any and all
claims flowing from the litigation now pending in the State of Alabama
with respect to irregularities in credit card issuance and from any
further such litigation that has been or may be instituted), which
obligations shall survive any termination of the Agreement. The Dismissal
and Releases shall become effective pursuant to paragraphs 5 and 15. The
Releases shall be held, until effective, by counsel for the parties and
the Dismissal shall be held by counsel for the Bank until filing is
appropriate.
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15. If the sale of the Portfolio is not consummated by December 31, 1998,
then (i) the Bank will be entitled to acquire all of ADC's interest in
the Portfolio including any interest ADC may have in the Reserve Account
and the Settlement Account in exchange for a release by the Bank of ADC
from all claims under the Agreement, (ii) the Agreement will terminate at
11:59 p.m. (Los Angeles time) on such date (except that ADC's and the
Bank's obligations to indemnify each other pursuant to the Agreement
(including, without limitation, ADC's existing and continuing obligation
to indemnify the Bank from any and all claims flowing from the litigation
now pending in the State of Alabama with respect to irregularities in
credit card issuance and from any further such litigation that has been
or may be instituted) shall survive any termination of the Agreement),
(iii) the Dismissal and the Releases shall become effective and the
Dismissal shall be filed in the pending litigation, and (iv) the $300,000
bond shall be forfeited to the Bank.
16. The existing $300,000 bond will remain in effect. Upon the closing of a
sale of the Portfolio to ADC or its nominee prior to December 31, 1998
pursuant to the terms hereof, the $300,000 shall be returned to ADC.
Otherwise, said bond and funds represented thereby shall be forfeited to
the Bank. ADC will not be required to post a bond in the amount of $2
million.
17. In the absence of a breach of the Agreement, as modified hereby, a
violation of the preliminary injunction, as modified, or further order of
Court, the court-mandated arbitration shall be stayed until January 1,
1999. Upon effectiveness of the Releases and entry of the Dismissal, the
requirement for arbitration shall be terminated. ADC shall not contest
the venue for arbitration under the Agreement, which shall be maintained
in Los Angeles, California.
18. For purposes of performance under the Agreement and this agreement prior
to December 31, 1998, ADC shall waive any argument that prior course of
conduct or dealing has in any way modified the Agreement.
19. If ADC or the Bank materially breaches the provisions of the Agreement or
the provisions hereof on or before December 31, 1998, then the
non-breaching party may, at its option, exercisable only or before
December 31, 1998, terminate the foregoing arrangements, whereupon the
Releases and the Dismissal shall be void and of no effect, the original
terms of the preliminary injunction shall be reinstituted, and ADC shall
be required to post all bonds and make all payments to the Bank or the
Reserve Account required by or consistent with such injunction as if the
preliminary injunction had been continuously in effect.
20. The Bank and ADC shall use their best efforts to complete all definitive
documents necessary to implement this agreement by Tuesday, November 3,
1998 and such definitive documents shall be effective on November 3,
1998. In the interim, ADC and the Bank shall act as though this agreement
were fully documented and in full force and effect.
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21. This agreement is subject to OTS approval and/or non-objection and may be
cancelled by the Bank for non- or unsatisfactory performance. When
executed, a copy of this agreement may be delivered to the Court for
purposes of facilitating the entry of the modified preliminary
injunction.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
October 30, 1998.
FIDELITY FEDERAL BANK, A FSB
By: /S/ ▇▇▇▇ ▇. ▇▇▇▇▇
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▇▇▇▇ ▇. ▇▇▇▇▇, Chief Executive Officer
AMERICAN DIRECT CREDIT LLC
By: /S/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
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▇▇▇▇▇ ▇▇▇▇▇▇▇▇, Manager
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