<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________.
0-26019
(Commission File Number)
NEXTCARD, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 68-0384-606
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
595 MARKET STREET, SUITE 1800, SAN FRANCISCO, CALIFORNIA 94105
(Address of Principal Executive Offices) (Zip Code)
(415) 836-9700
(Registrant's Telephone Number, Including Area Code)
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 [ ]
As of October 31, 1999, there were 46,327,458 shares of the registrant's Common
Stock, par value $.001 per share, outstanding, of which 3,660,110 were
nonvoting.
<PAGE> 2
NEXTCARD, INC. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. Financial Statements (unaudited):
Consolidated Balance Sheets ......................... 3
Consolidated Statements of Operations ............... 4
Consolidated Statements of Changes
in Stockholders' Equity ........................... 5
Consolidated Statements of Cash Flows ............... 6
Notes to Condensed Consolidated Financial
Statements ........................................ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 35
Item 2. Changes in Securities and Use of Proceeds ................. 35
Item 3. Defaults Upon Senior Securities Holders ................... 35
Item 4. Submission of Matters to a Vote of Security Holders ....... 35
Item 5. Other Information ......................................... 35
Item 6. Exhibits and Reports on Form 8-K .......................... 35
Signatures ........................................................ 36
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 85,541 $ 40,134
Cash and cash equivalents, restricted 13,993 --
Credit card loans receivable, less allowance for
loan losses of $6,178 at September 30, 1999 261,836 --
Prepaid loan fees 5,145 2,100
Equipment and leasehold improvements, net 6,939 2,102
Prepaid and other assets 15,452 1,206
--------- ---------
Total assets $ 388,906 $ 45,542
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits $ 2,541 $ --
Secured borrowings 229,129 --
Other borrowings 11,879 504
Accounts payable 3,914 3,366
Accrued expenses and other liabilities 16,821 1,735
--------- ---------
Total liabilities 264,284 5,605
--------- ---------
Stockholders' equity
Convertible preferred stock -- 33
Common stock 46 5
Additional paid-in capital 209,918 63,875
Deferred stock compensation (14,935) (6,000)
Notes receivable from stockholders (13) (26)
Accumulated deficit (70,394) (17,950)
--------- ---------
Total stockholders' equity 124,622 39,937
--------- ---------
Total liabilities and stockholders' equity $ 388,906 $ 45,542
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Cash and investments $ 1,400 $ 116 $ 2,585 $ 228
Credit card loans 5,486 -- 7,992 --
-------- -------- -------- --------
Total interest income 6,886 116 10,577 228
Interest expense 3,249 47 5,762 48
-------- -------- -------- --------
Net interest income 3,637 69 4,815 180
Provision for loan losses 3,185 -- 5,227 --
-------- -------- -------- --------
Net interest income (loss) after
provision for loan losses 452 69 (412) 180
-------- -------- -------- --------
Non-interest income:
Servicing and profit-and-loss sharing -- 137 341 301
Interchange fee 717 -- 1,130 --
Credit card fees and other 416 2 618 5
-------- -------- -------- --------
Total non-interest income 1,133 139 2,089 306
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 6,724 2,124 15,322 4,262
Marketing and advertising 8,813 1,056 16,364 2,201
Credit card activation and servicing costs 3,114 880 7,116 1,322
Occupancy and equipment 1,227 326 2,656 602
Professional fees 640 49 1,106 167
Amortization of deferred stock compensation 2,349 468 7,096 867
Amortization of loan structuring fee 655 -- 2,967 --
Other 835 106 1,494 310
-------- -------- -------- --------
Total non-interest expenses 24,357 5,009 54,121 9,731
-------- -------- -------- --------
Loss before income taxes (22,772) (4,801) (52,444) (9,245)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $(22,772) $ (4,801) $(52,444) $ (9,245)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.50) $ (1.44) $ (2.11) $ (3.03)
======== ======== ======== ========
Weighted average common shares used in
net loss per common share calculation 45,408 3,328 24,809 3,050
======== ======== ======== ========
Pro forma basic and diluted net loss per
common share $ (0.50) $ (0.22) $ (1.28) $ (0.54)
======== ======== ======== ========
Weighted average common shares used in
computing pro forma basic and diluted
net loss per common share 45,408 21,550 41,001 17,213
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK SERIES A-D COMMON STOCK ADDITIONAL
------------------------------------ ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 9,110,250 $9 4,894,875 $5 $4,694
Issuance of convertible preferred stock Series C 9,132,660 9 11,662
Return of convertible preferred stock Series A
in settlement of notes receivable (21,096) -- (9)
Issuance of common stock upon exercise of
options 26,249 -- 1
Deferred stock compensation 6,100
Amortization of deferred stock compensation
Net loss
-------------------- --------------- ------------- ------------- ------------
BALANCES AT SEPTEMBER 30, 1998 18,221,814 $18 4,921,124 $5 $22,448
==================== =============== ============= ============= ============
BALANCES AT DECEMBER 31, 1998 32,625,734 $33 4,932,374 $5 $63,875
Issuance of common stock upon exercise of
warrants and options 1,743,409 1 350
Issuance of common stock from IPO, net of
expenses 6,900,000 7 126,969
Issuance of common stock warrants 2,693
Conversion of preferred stock to common stock (32,625,734) (33) 32,625,734 33
Settlement of notes receivable
Deferred stock compensation 16,031
Amortization for deferred stock compensation
Net loss
==================== =============== ============= ============= ============
BALANCES AT SEPTEMBER 30, 1999 -- $-- 46,201,517 $46 $209,918
==================== =============== ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
DEFERRED NOTES TOTAL
STOCK RECEIVABLE FROM ACCUMULATED STOCKHOLDERS'
COMPENSATION STOCKHOLDERS DEFICIT EQUITY
------------------ ------------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 $-- $(35) $(1,886) $2,787
Issuance of convertible preferred stock Series C 11,671
Return of convertible preferred stock Series A
in settlement of notes receivable 9 --
Issuance of common stock upon exercise of
options 1
Deferred stock compensation (6,100) --
Amortization of deferred stock compensation 867 867
Net loss (9,245) (9,245)
------------------ ------------------- -------------- --------------
BALANCES AT SEPTEMBER 30, 1998 $(5,233) ($26) $(11,131) $6,081
================== =================== ============== ==============
BALANCES AT DECEMBER 31, 1998 ($6,000) ($26) ($17,950) $39,937
Issuance of common stock upon exercise of
warrants and options 351
Issuance of common stock from IPO, net of
expenses 126,976
Issuance of common stock warrants 2,693
Conversion of preferred stock to common stock --
Settlement of notes receivable 13 13
Deferred stock compensation (16,031) --
Amortization for deferred stock compensation 7,096 7,096
Net loss (52,444) (52,444)
================== =================== ============== ==============
BALANCES AT SEPTEMBER 30, 1999 $(14,935) $(13) $(70,394) $124,622
================== =================== ============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (52,444) $ (9,245)
Adjustments to net loss to arrive at cash used in
operating activities:
Provision for loan losses 5,227 --
Deprecation and amortization 4,122 139
Amortization of deferred stock 7,096 867
Change in operating assets and liabilities:
Increase in accounts payable 548 1,330
Increase in accrued expenses and other liabilities 15,086 589
(Increase) decrease in prepaid and other assets (9,994) 181
--------- ---------
Net cash used in operating activities (30,359) (6,139)
--------- ---------
INVESTING ACTIVITIES:
Net loans originated or collected (247,540) --
Loan portfolio acquisition (22,240) --
Acquisition of Textron National Bank, net of assumed liabilities (4,459) --
Purchase of equipment and leasehold improvements (5,846) (1,037)
--------- ---------
Net cash used in investing activities (280,085) (1,037)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 2,000 --
Net change in secured borrowings 229,129 --
Proceeds from other borrowings 11,673 539
Payments made on other borrowings (298) --
Proceeds from issuance of convertible preferred stock -- 11,671
Proceeds from issuance of common stock, net 127,327 1
Proceeds from settlement of notes receivable 13 --
--------- ---------
Net cash provided by financing activities 369,844 12,211
--------- ---------
Net increase in cash and cash equivalents 59,400 5,035
Cash and cash equivalents at the beginning of the period 40,134 2,840
--------- ---------
Cash and cash equivalents at the end of the period $ 99,534 $ 7,875
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ 2,688 $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Unearned stock based compensation $ 16,030 $ 6,100
Issuance of preferred stock warrants for loan
structuring/origination fee $ 2,693 --
Return of convertible preferred stock Series A -- $ 9
Issuance of convertible preferred stock Series C -- $ 11,671
</TABLE>
6
<PAGE> 7
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include NextCard, Inc. and its wholly
owned subsidiary, NextBank, N.A. (collectively "the Company"). The Company is an
Internet-based provider of consumer credit.
INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements and related unaudited
financial information in the footnotes have been prepared in accordance with
generally accepted accounting principles and the rules and regulations of the
Securities and Exchange Commission (the "SEC") for interim financial statements.
Such interim financial statements reflect all adjustments consisting of normal
recurring adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Company and the
results of its operations and its cash flows for the interim periods. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto contained in the Form S-1
Registration Statement, as amended, filed with the SEC in connection with the
Company's initial public offering ("IPO"). The nature of the Company's business
is such that the results of any interim period may not be indicative of the
results to be expected for the entire year.
All significant intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to prior year financial statements to
conform to the 1999 presentation.
2. INITIAL PUBLIC OFFERING
On May 19, 1999, the Company completed its IPO in which it sold 6.9 million
shares of its common stock at a price of $20.00 per share, raising $138.0
million in gross proceeds. Offering proceeds to the Company, net of
approximately $9.7 million in aggregate underwriters discounts and commissions
and $1.3 million in related costs, were approximately $127.0 million.
Immediately prior to the closing of the IPO, the Company's stock split 4.5
shares for every one share of common stock then outstanding. Simultaneously with
the closing of the IPO, each outstanding share of the Company's preferred stock
automatically converted into 4.5 shares of common stock. In addition, the
Company reincorporated from California to Delaware. All share and per share data
in the accompanying financial statements have been restated to reflect the
conversion, the stock split and the reincorporation.
7
<PAGE> 8
3. EARNINGS PER SHARE
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128"), for all periods presented. In accordance
with FAS 128, basic and diluted net loss per common share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Shares associated with stock
options and convertible preferred stock are not included because their inclusion
would be antidilutive (i.e., reduce the net loss per share). Pro forma basic and
diluted net loss per common share has been computed as described above, and also
gives effect, under SEC guidance, to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
(Dollars in thousands, except per share data) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss available to common stockholders $(22,772) $ (4,801) $(52,444) $ (9,245)
======== ======== ======== ========
Basic and diluted:
Weighted average shares of common stock outstanding 46,024 4,895 25,703 4,894
Less: Weighted average shares subject to repurchase (616) (1,567) (894) (1,844)
-------- -------- -------- --------
Weighted average shares used in computing basic and diluted net
loss per common shares 45,408 3,328 24,809 3,050
======== ======== ======== ========
Basic and diluted net loss per shares $ (0.50) $ (1.44) $ (2.11) $ (3.03)
======== ======== ======== ========
Pro forma:
Net loss $(22,772) $ (4,801) $(52,444) $ (9,245)
======== ======== ======== ========
Shares used above 45,408 3,328 24,809 3,050
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock -- 18,222 16,192 14,163
-------- -------- -------- --------
Shares used in computing pro forma basic and diluted net loss
per common share 45,408 21,550 41,001 17,213
======== ======== ======== ========
Pro forma basic and diluted net loss per common share $ (0.50) $ (0.22) $ (1.28) $ (0.54)
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
4. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the nine months ended
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999
-------
<S> <C>
Balance at January 1 $ --
Provision for loan losses 5,227
Allowance acquired 1,900
Charge-offs (949)
-------
Balance at September 30 $ 6,178
=======
</TABLE>
5. CREDIT FACILITIES AND SECURED BORROWINGS
Until January 12, 1999, Heritage Bank of Commerce ("Heritage") funded all of the
credit card accounts and loans originated through the Company's website.
Beginning January 1999, the Company began purchasing such credit card
receivables from Heritage. Until May 21, 1999, the Company utilized a $100.0
million secured borrowing facility extended to NextCard Funding Corp., a wholly
owned subsidiary of the Company, by Credit Suisse First Boston ("Credit Suisse")
to fund the majority of those receivables. On May 21, 1999, the Company executed
a $300.0 million commercial paper conduit facility through Barclays Bank PLC and
began utilizing this facility to purchase credit card receivables. Borrowings
under the facility are secured by the purchased receivables. The Company also
used a portion of the Barclays facility to pay off the $87.8 million balance
then outstanding under the Credit Suisse facility. As of September 30, 1999,
$229.1 million was outstanding under this facility.
In addition, on June 23, 1999 and November 12, 1999, the Company entered into
similar facilities with ING Barings (U.S.) Capital Markets and First Union
Securities. These facilities' amounts are $150.0 million and $222.0 million,
respectively, and the Company's borrowings are secured by all credit card
receivables that may be purchased by using funds from these facilities. As of
September 30, 1999, there were no amounts outstanding under the ING Barings or
First Union facility.
In February and May 1999, the Company entered into two $5.0 million lines of
credit with a finance company. Borrowings under the lines of credit accrue
interest at 12.25% per year, are repayable in monthly installments and final
payment is due in May 2000 and April 2002, respectively. These lines are secured
by a subordinated security interests in all tangible and intangible assets.
These lines of credit had an aggregate outstanding balance of $10.0 million at
September 30, 1999.
9
<PAGE> 10
6. PORTFOLIO ACQUISITIONS
On July 15, 1999, the Company exercised its option to purchase all remaining
credit card receivables from Heritage. The acquired credit card portfolio had
$21.3 million in outstanding balances. The Company financed the acquisition with
a combination of proceeds from its secured borrowing facility and operating
cash.
7. BUSINESS COMBINATION
On September 16, 1999, the Company acquired all of the outstanding common stock
of Textron National Bank ("TNB"), a wholly owned, indirect subsidiary of Textron
Corporation, for $7.0 million. TNB had not actively engaged in the banking
business for several years, and on the acquisition date held $2.6 million of
cash and cash-equivalents and a single deposit liability of approximately
$540,000. Immediately prior to the closing of the acquisition, TNB converted
into a national bank limited to credit card operations and changed its name to
"NextBank, National Association" ("NextBank"). The $5.0 million excess purchase
price over the estimated fair value of TNB's net assets represents goodwill and
will be amortized on a straight-line basis over 15 years. In September 1999,
NextBank became a member of the Visa system and in October 1999 commenced the
issuance of NextCard Visa cards.
8. SUBSEQUENT EVENTS
On November 8, 1999, the Company signed a five-year marketing agreement with
Amazon.com whereby the Company and Amazon.com will join to deliver co-branded
credit card accounts originated on a customized website. The Company will pay to
Amazon.com an origination fee for each co-branded credit card account, and will
pay certain additional compensation including per account renewal fees on each
account's anniversary date. Minimum account origination payments of $85.0
million (subject to performance requirements) will be made by the Company to
Amazon.com over the term of the agreement. In addition, based on the number of
credit card accounts originated, the Company could pay up to an additional $17.5
million. Separately, the Company received $22.5 million from Amazon.com in
exchange for a warrant to acquire up to 4.4 million common shares of the
Company. This warrant has an exercise price per share of $39.20, is fully vested
and expires on November 8, 2002.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements include
statements regarding intent, belief or current expectations of the Company and
its management. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. Stockholders and
prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in the forward-looking statements. Among the factors
that could cause actual results to differ materially from those indicated by
such forward-looking statements are those factors discussed below.
OVERVIEW
The Company is a leading Internet-based provider of consumer credit. The Company
was the first to offer an online approval system for a Visa(R) card and to
provide interactive, customized offers for credit card applicants.
The Company combines expertise in consumer credit, an exclusive Internet focus
and sophisticated direct marketing techniques with the aim of attracting
profitable customer segments on the Internet. The Company's product, the
NextCard(R) Visa, which the Company calls the First True Internet Visa, is
marketed to consumers exclusively through its website, www.nextcard.com. The
Company offers credit card customers a unique combination of convenience,
customization, shopping enhancements and online customer service. The NextCard
Visa can be used for both online and offline purchases.
EARNINGS SUMMARY
Net loss for the three months ended September 30, 1999, was $22.8 million, or
$0.50 per share, up 375% from $4.8 million, or $0.22 per pro forma share, for
the third quarter of 1998. The increase in net loss is the result of increases
in interest expense, the provision for loan losses and other operating expenses.
These increases were partially offset by increases in net interest income and
other operating income. These increases are largely attributable to the growth
in average managed loans to $212.7 million for the third quarter 1999 from $20.7
million for the third quarter 1998.
Net loss for the nine months ended September 30, 1999, was $52.4 million, or
$1.28 per pro forma share, up 470% from $9.2 million, or $0.54 per pro forma
share, for the nine months ended September 30, 1998. The increase in net loss is
the result of increases in interest expense, the provision for loan losses and
other operating expenses. These increases were partially offset by increases in
net interest income and other operating
11
<PAGE> 12
income. These increases are largely attributable to the growth in average
managed loans to $142.8 million for the nine months ended September 30, 1999,
from $9.5 million for the same period in 1998.
MANAGED LOAN PORTFOLIO
Until January 12, 1999, Heritage Bank of Commerce ("Heritage") funded and held
all of the credit card accounts and loans originated through the Company's
website pursuant to a Consumer Credit Card Program Agreement (the "First
Heritage Agreement"). Under that agreement, the Company charged Heritage for
origination and servicing of the accounts and shared 50% of the resulting net
profits or losses, as defined.
Beginning January 1999, the Company and Heritage terminated the First Heritage
Agreement and entered into an Account Origination Agreement (the "Second
Heritage Agreement"). Pursuant to the Second Heritage Agreement, the Company
began purchasing credit card receivables utilizing secured lending facilities
extended to its subsidiary, NextCard Funding Corp. Heritage funded newly
originated credit card receivables, which were then purchased on a daily basis
by NextCard Funding using borrowings from its secured lending facilities. The
purchased receivables are pledged as collateral for the secured lending
facilities.
The Company's managed loan portfolio is comprised of all credit card loan
receivables generated under the NextCard Visa and outstanding on Heritage's and
the Company's balance sheets. On July 15, 1999, the Company exercised its option
to purchase all remaining credit card receivables owned by Heritage. The
acquired credit card portfolio had $21.3 million in outstanding balances. The
Company financed the acquisition with a combination of proceeds from its secured
borrowing facility and operating cash. Prior to this purchase, since Heritage
had funded and owned a portion of the managed loan portfolio, that portion of
the credit card loans were not an asset of the Company, and therefore, were not
shown on the Company's consolidated balance sheets. The following table
summarizes the Company's managed loan portfolio:
12
<PAGE> 13
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
(Dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
PERIOD-END BALANCES
Credit card loans:
On-balance sheet $268,014 $ --
Heritage owned -- 35,334
======== ========
Total managed loan portfolio $268,014 $ 35,334
======== ========
AVERAGE BALANCES
Credit card loans:
On-balance sheet $117,060 $ --
Heritage owned 25,780 9,492
-------- --------
Total managed loan portfolio $142,840 $ 9,492
======== ========
</TABLE>
NET INTEREST INCOME
Net interest income consists of interest earned on the Company's credit card
loan portfolio, cash and investment securities less interest expense on
borrowings to fund these earning assets.
Net interest income for the three and nine months ended September 30, 1999, was
$3.6 million and $4.8 million, respectively, compared to $69,000 and $180,000
for the same periods in 1998. These increases were primarily due to $203.7
million and $117.1 million increases in on balance sheet average loans over the
comparable periods in 1998 and $109.0 million and $70.5 million increases in
average cash and investments over the comparable periods in 1998. The annualized
net interest margin on average earning assets for the three months ended
September 30, 1999 was 4.5% compared with 2.5% for the three months ended June
30, 1999. The third quarter net interest margin was favorably impacted by the
introduction of fixed rate credit card products, the repricing of the Company's
credit card loan portfolio due to the expiration of the introductory rate
periods and a lower cost of funds. The third quarter net interest margin was
negatively impacted by $234,000 of loan fee amortization expense related to $2.7
million of warrants paid to a finance company in 1999 in connection with a
financing transaction. This loan fee is being amortized over a three year
period. The annualized net interest spread for the three months ended September
30, 1999 was 1.2% compared with (1.1%) for the three months ended June 30, 1999.
The net interest spread is the annualized yield on average interest-earning
assets minus the annualized funding rate on average interest-bearing
liabilities. The net interest spread is expected to continue to improve as the
Company's loan portfolio seasons; however, their can be no assurances that such
spread will improve.
The following tables provide an analysis of interest income and expense, net
interest spread, net interest margin and average balance sheet data for the
three and nine month periods ended September 30, 1999.
13
<PAGE> 14
STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
-------------------------------------- --------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning assets
Consumer loans $ 203,652 $5,486 10.78% $ 117,060 $7,992 9.10%
Interest-earning cash 118,826 1,400 4.71% 76,618 2,585 4.50%
--------- ------ ------ --------- ------ ------
Total interest-earning assets 322,478 6,886 8.54% 193,678 10,557 7.28%
Allowance for loan losses (4,134) (2,154)
Other assets 19,250 12,570
--------- ---------
Total assets $ 339,287 $ 204,771
========= =========
LIABILITIES AND EQUITY
Interest-bearing liabilities
Borrowings $ 177,754 $3,249 7.31% $ 100,858 $5,762 7.62%
Other liabilities 26,236 17,504
--------- ---------
Total liabilities 203,990 118,362
Equity 135,298 86,408
--------- ---------
Total liabilities and equity $ 339,287 $ 204,771
========= =========
NET INTEREST SPREAD 1.23% (0.34%)
====== ======
Interest income to average
interest-earning assets 8.54% 7.28%
Interest expense to average
interest-earning assets 4.03% 3.97%
------ ------
NET INTEREST MARGIN 4.51% 3.31%
====== ======
</TABLE>
NON-INTEREST INCOME
Interchange and other credit card fees consist of income from the Visa system
for purchases made with the NextCard Visa and fees paid by the Company's
cardholders, such as late fees, overlimit fees and program fees. Such income for
the three and nine months ended September 30, 1999, was $1.1 million and $1.7
million, respectively. Interchange and other credit card fees are expected to
continue to increase in the future as the credit card portfolio grows.
14
<PAGE> 15
On July 15, 1999 the Company exercised its option to purchase all remaining
credit card receivables from Heritage. As such, servicing and profit-and-loss
sharing income, consisting of amounts arising under the First Heritage
Agreement, for the three and nine months ended September 30, 1999 was $0 and
$341,000 respectively, compared to $137,000 and $301,000 for the same periods in
1998.
NON-INTEREST EXPENSE
Total non-interest expense for the three and nine months ended September 30,
1999, increased $19.3 million and $44.4 million, respectively, over the
comparable periods in 1998, primarily due to higher employee compensation,
credit card activation and servicing costs and marketing expenses. Employee
compensation increased due to staffing needs to support the increase in credit
card accounts and other functions. In addition, the amortization of deferred
stock compensation, which represents the difference between the exercise price
of certain stock options grants and the estimated fair value of the Company's
common stock at the time of such grants, for the three and nine months ended
September 30, 1999, was $2.3 million and $7.1 million. The increase in credit
card activation and servicing costs was largely due to the increased number of
credit card accounts, transaction volumes and loan balances. The increase in
other expenses is primarily due to general growth in the business and building
an infrastructure to support the growth.
ASSET QUALITY
The Company's delinquency and net loan charge-off rates reflect, among other
factors, the credit risk of loans, the average age of the Company's credit card
account portfolio, the success of the Company's collection and recovery efforts
and general economic conditions. Additionally, the credit risk of the loans is
impacted by the underwriting criteria utilized by the Company to approve
customers. The average age of the Company's credit card portfolio affects the
level and stability of delinquency and loss rates of the portfolio. The Company
continues to focus its resources on refining its credit underwriting standards
for new accounts, as well as on collections and post charge-off recovery
efforts, to minimize net losses. At September 30, 1999, the majority of the loan
portfolio was less than twelve months old. Accordingly, the Company believes
that its loan portfolio will experience increasing or fluctuating levels of
delinquency and loan losses as the average age of the Company's accounts and
balances increase.
15
<PAGE> 16
For the quarter ended September 30, 1999, the Company's managed net charge-off
ratio was 1.72% compared to 0.29% for the quarter ended September 30, 1998. For
the nine months ended September 30, 1999, the net charge-off ratio stood at
0.80% compared to 0.14% for the nine months ended September 30, 1998. The
Company believes, consistent with its statistical models and other credit
analyses, that this rate will continue to fluctuate but generally rise over the
next year as the portfolio ages and becomes more seasoned.
The Company's primary strategy for managing loan losses is the development of
underwriting criteria and credit scoring algorithms to assess the
creditworthiness of new customers and provide conservative customer credit-line
assignments. In addition, the Company monitors credit lines closely, and has
built a collections department, as well as using outside parties, to pursue
delinquent customers. Under these strategies, interest rates and credit line
assignments are established for each credit card account based on its perceived
risk profile. Individual accounts and their related credit lines are also
continually managed using various marketing, credit and other management
processes in order to continue to maximize the profitability of accounts.
DELINQUENCIES
A credit card account is contractually delinquent if the minimum payment is not
received by the specified date on the cardholder's statement. It is the
Company's policy to continue to accrue interest and fee income on all credit
card accounts, except in limited circumstances, until the account and all
related loans, interest and other fees are reversed. Credit card loans are
generally charged off when the loan becomes contractually past due 180 days,
with the exception of bankrupt accounts, which are charged off no later that the
month after formal notification of bankruptcy. The following table presents the
delinquency trends of the Company's credit card loan portfolio on a managed
portfolio basis:
<TABLE>
<CAPTION>
(Dollars in thousands) SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------- ----------------------
LOANS % OF TOTAL LOANS % OF TOTAL
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Managed loan portfolio $268,014 100.00% $ 35,334 100.00%
Loans delinquent:
31 - 60 days 1,482 0.55% 139 0.39%
61 - 90 days 677 0.25% 38 0.11%
91 or more 938 0.35% 27 0.08%
-------- ------- -------- ------
Total $ 3,097 1.15% $ 204 0.58%
======== ====== ======== ======
</TABLE>
16
<PAGE> 17
NET CHARGE-OFFS
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude finance
charges and fees, which are charged against the related income at the time of
charge-off. Losses from new account fraud and fraudulent cardholder activity are
included in non-interest expense.
The following table presents the Company's net charge-offs for the periods
indicated as reported in the consolidated financial statements and on a managed
portfolio basis:
<TABLE>
<CAPTION>
(Dollars in thousands) THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
--------------------------- ---------------------------
1999 1998 1999 1998
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ON-BALANCE SHEET:
Average loans outstanding $203,652 $ -- $ 117,060 $ --
Net charge-offs 915 -- 949 --
Net charge-offs as a percentage of average loans
outstanding 1.80% 0.00% 1.08% 0.00%
MANAGED:
Average loans outstanding $212,659 $ 20,694 $ 142,840 $ 9,492
Net charge-offs 915 15 1,516 18
Net charge-offs as a percentage of average loans
outstanding 1.72% 0.29% 1.42% 0.25%
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained for on-balance sheet loans.
Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable losses
inherent in the existing on-balance sheet loan portfolio. For loans maintained
on Heritage's balance sheet, anticipated losses and related reserves are
reflected in the calculations of the servicing and profit-and-loss sharing
income from Heritage.
The provision for loan losses for on-balance sheet loans for the three and nine
months ended September 30, 1999, totaled $3.2 million and $5.2 million,
respectively. The Company anticipates that the provision for loan losses will
increase as the credit card loan portfolio continues to increase and season. The
following table presents the change in the Company's allowance for loan losses
for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in thousands) SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Balance at beginning of period $ 2,008 $ --
Provision for loan losses 3,185 5,227
Reserve acquired 1,900 1,900
Charge-offs (915) (949)
------- -------
Balance at end of period $ 6,178 $ 6,178
======= =======
</TABLE>
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company finances the growth of its credit card loan portfolio primarily
through secured bank financings, conduit facilities and equity issuances.
Until January 12, 1999, Heritage funded all of the credit card accounts and
loans originated through the Company's website. Beginning January 1999, the
Company began purchasing such credit card receivables from Heritage. Until May
21, 1999, the Company utilized a $100.0 million secured borrowing facility
extended to NextCard Funding Corp. by Credit Suisse to fund the majority of
those receivable purchases. On May 21, 1999, the Company executed a $300.0
million commercial paper conduit facility through Barclays Bank PLC and began
utilizing this facility to purchase credit card receivables. Borrowings under
this facility are secured by the purchased receivables. The Company also used a
portion of the Barclays facility to pay off the $87.8 million balance then
outstanding under the Credit Suisse facility. As of September 30, 1999, $229.1
million was outstanding under this Barclay's facility.
In addition, on June 23, 1999, the Company entered into similar facilities with
ING Barings (U.S.) Capital Markets LLC and First Union Securities. These
facilities' amounts are $150.0 and $220.0 million, respectively, and the
Company's borrowings are secured by all credit card receivables that may be
purchased by using funds from these facilities. As of September 30, 1999, there
were no amounts outstanding under the ING Barings facility or First Union.
The Company has the ability to fund new receivables during the revolving period
of these structures. After the revolving period, principal collections generated
by the receivables will be used to pay the principal amount owed. The revolving
period ends in February 2003 for the First Union facility. June 2001 for the
Barclays Capital facility and in January 2002 for the ING Barings facility.
In February and May 1999, the Company entered into two $5.0 million lines of
credit with a finance company. Borrowings under the lines of credit accrue
interest at 12.25% per year, are repayable in monthly installments and final
payment is due in May 2000 and April 2002, respectively. These lines are secured
by a subordinated security interests in all tangible and intangible assets.
These lines of credit had an aggregate outstanding balance of $10.0 million at
September 30, 1999.
18
<PAGE> 19
On September 16, 1999, the Company acquired all of the outstanding common stock
of Textron National Bank ("TNB"), a wholly owned, indirect subsidiary of Textron
Corporation, for $7.0 million. TNB had not actively engaged in the banking
business for several years, and on the acquisition date held $2.6 million of
cash and cash-equivalents and a single deposit liability of approximately
$540,000. Immediately prior to the closing of the acquisition, TNB converted
into a national bank limited to credit card operations and changed its name to
"NextBank, National Association" ("NextBank"). In September 1999, NextBank
became a member of the Visa system and in October 1999 commenced the issuance of
NextCard Visa cards.
NextBank is subject to capital adequacy guidelines adopted by the Office of the
Comptroller of the Currency (the "OCC"). The capital adequacy guidelines and the
regulatory framework for prompt corrective action require NextBank to maintain
specific capital levels based upon quantitative measures of its assets,
liabilities and off-balance sheet items. Core capital (Tier 1) consists
principally of stockholders' equity less goodwill. Total risk-based capital
(Tier 1 + Tier 2) includes a portion of the allowance for loan losses. Based on
these classifications, the capital adequacy regulations establish three capital
ratios that are used to measure whether a financial institution is "well
capitalized". As of September 30, 1999, NextBank was "well capitalized" in all
regulatory capital ratio categories, as set forth below:
<TABLE>
<CAPTION>
ACTUAL TO BE "WELL
CAPITAL RATIO RATIO CAPITALIZED"
- ------------- ----- ------------
<S> <C> <C>
Tier 1 Capital 23.3% 6.0%
Total Capital 24.6% 10.0%
Tier 1 Leverage 22.2% 5.0%
</TABLE>
In addition to the above capital ratios, the OCC requires that for the first
three years of operations, NextBank maintain a ratio of stockholders' equity
plus the allowance for loan losses to total managed assets of no less than 6.5%.
As of September 30, 1999, NextBank was in compliance with this capital
requirement.
RECENT DEVELOPMENTS
On November 8, 1999, the Company signed a five-year marketing agreement with
Amazon.com whereby the Company and Amazon.com will join to deliver co-branded
credit card accounts originated on a customized website. The Company will pay
to Amazon.com an origination fee for each co-branded credit card account, and
will pay certain additional compensation including per account renewal fees on
each account's anniversary date. Minimum account origination payments of $85.0
million (subject to performance requirements) will be made by the Company to
Amazon.com over the term of the agreement. In addition, based on the number of
credit card accounts originated, the Company could pay up to an additional $17.5
million. Separately, the Company received $22.5 million from Amazon.com in
exchange for a warrant to acquire up to 4.4 million common shares of the
Company. This warrant has an exercise price per share of $39.20, is fully
vested and expires on November 8, 2002.
19
<PAGE> 20
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. The Company uses internally developed software, as well as computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 phenomenon. For example, the Company is dependent on a service
bureau for account processing and other customer functions. The Company is also
dependent on telecommunications vendors to maintain its network and a third
party that hosts our servers.
As the Company was formed less than four years ago, the Company developed its
systems and technology in light of the year 2000 problem, as opposed to many
older companies that rely on legacy systems designed before this problem was
known. On April 30, 1999, the Company completed its initial review and testing
of year 2000 compliance for all of its internally developed software, which
include substantially all of the systems for the operation of its website, such
as its instant online approval system, customer interaction and transaction
systems and our security, monitoring and back-up capabilities. Based on such
testing, the Company believes its internally developed software and systems are
year 2000 compliant, which means that all date data will process without error,
interruption or loss of functionality of any software or system due to the
change in century.
On April 16, 1999, the Company completed its assessment of the year 2000
readiness of its third-party supplied software and hardware, and of its vendors.
During the assessment phase, eleven vendors were identified as critical to the
Company, all of whom have provided the Company with certifications of year 2000
compliance or a readiness disclosure statement. Accordingly, based on the
results of the responses the Company has received and the availability of
alternate year 2000 compliant vendors, the Company does not believe further
remediation planning is necessary to ensure seamless operation at and after
January 1, 2000.
If a year 2000 problem with one of the Company's vendor's systems causes such
vendor to fail to provide the Company services it had agreed to provide the
Company, the Company would seek to recover from such vendor damages for the
amount it suffered due to such failure. The Company would base its suit on
breach of the vendor's agreement with it and misrepresentation of such vendor's
year 2000 representation to it. However, there can be no assurance that such
agreements and such representations will be enforceable.
Based on the results of its testing, the Company believes its worst-case
scenario would be the failure of the Internet infrastructure due to a year 2000
problem. The year 2000 readiness of the general infrastructure necessary to
support our operations is difficult to assess. For instance, the Company depends
on the general availability of the Internet to provide its services. The Company
also depends on the year 2000 compliance of the
20
<PAGE> 21
computer systems and financial services used by consumers. A significant
disruption in the ability of consumers to reliably access the Internet or
portions of it or to use their credit cards would have an adverse effect on
demand for the Company's services and could have a material adverse effect on
the Company's growth.
To date, the Company has incurred approximately $400,000 of expense relating to
year 2000 analysis, testing and remediation efforts. The Company anticipates
that, when all analysis, testing and remediation efforts are complete, it will
have incurred approximately $450,000 of expenses, all of which will be
recognized in 1999. However such expenses could be significantly higher than
anticipated by the Company.
21
<PAGE> 22
ADDITIONAL FACTORS WHICH MAY AFFECT FUTURE RESULTS
As discussed in the Company's Registration Statement, as filed with the SEC in
connection with the Company's IPO, the following additional risk factors could
materially affect the Company's business, operating results and financial
condition.
RISKS RELATED TO THE COMPANY'S BUSINESS
THE COMPANY'S LIMITED OPERATING HISTORY MAKES EVALUATION OF ITS BUSINESS AND
PROSPECTS DIFFICULT.
The Company was formed in June 1996. The Company introduced the NextCard Visa in
December 1997. The Company has only a limited operating history on which to base
an evaluation of the Company's business and prospects. The Company's business
and prospects must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
the market for Internet products and services.
THE COMPANY HAS A HISTORY OF LOSSES AND IT ANTICIPATES SIGNIFICANT FUTURE
LOSSES.
The Company incurred net losses of $1.9 million for the period from the
Company's inception through December 31, 1997, $16.1 million for the year ended
December 31, 1998 and $52.4 million for the nine months ended September 30,
1999. As of September 30, 1999, the Company had an accumulated deficit of $70.4
million. To date, the Company has not achieved profitability and expects to
incur significant and increasing net losses for the next three years. The
Company intends to continue to invest significantly in marketing, operations,
technology and the development of statistical analyses. As a result, the Company
will need to generate significant revenues to achieve profitability. The Company
cannot be certain that it will be able either to maintain the Company's recent
revenue growth rates or to generate adequate revenues to achieve profitability.
If the Company does achieve profitability, the Company cannot be certain that it
can sustain or increase profitability on a quarterly or annual basis in the
future.
THE COMPANY'S LIMITED OPERATING HISTORY MAKES ITS FINANCIAL FORECASTING
DIFFICULT.
Due to the Company's limited operating history, it cannot forecast operating
expenses based on its historical results. Accordingly, the Company bases its
operating expenses, in part, on future revenue projections. Most of these
expenses are fixed in the short term and the Company may not be able to quickly
reduce spending if it achieves lower than anticipated revenues. The Company's
ability to accurately forecast its revenues is limited. If the Company's
revenues do not meet its internally developed projections, the Company's net
losses will be even greater than anticipated and the Company's business,
operating results and financial condition may be materially and adversely
affected.
22
<PAGE> 23
THE COMPANY'S CREDIT CARD PORTFOLIO MAKES ITS PREDICTION OF DELINQUENCY AND LOSS
LEVELS DIFFICULT.
As of September 30, 1999, over 95% of the Company's credit card accounts had
been generated in the past eighteen months. As a result, the Company cannot
accurately predict the levels of delinquencies and losses that can be expected
from its loan portfolio over time. As the Company's portfolio of accounts
becomes more seasoned, the level of losses may increase. Any material increase
in delinquencies or losses above the Company's expectations could materially and
adversely impact the Company's results of operations and financial condition.
THE COMPANY MAY BE UNABLE TO RETAIN CUSTOMERS WHEN IT INCREASES ITS INTRODUCTORY
INTEREST RATES.
To attract new customers, the Company has offered and may continue to offer, low
introductory interest rates that increase after expiration of the introductory
period. Given the Company's limited operating history, it does not know what
percentage of its customers will continue to use their NextCard Visa after the
end of this period. If fewer customers than it expects continue to use their
NextCard Visa after the expiration of an introductory offer, the Company's
results of operations would be adversely affected.
THE COMPANY MAY ENCOUNTER DIFFICULTIES DUE TO ITS UNTESTED CUSTOMER BASE.
The Company targets its credit card products to Internet users. Lenders
historically have not solicited this market to the same extent as more
traditional market segments. As a result, there is less historical experience
with respect to the credit risk and performance of these consumers. The Company
may not be able to successfully target and evaluate the creditworthiness of such
consumers to manage the expected delinquencies and losses or to appropriately
price the Company's products. In addition, the Company may consider using
additional internally developed criteria to enhance or replace its existing
criteria. The Company has limited experience developing and implementing such
credit criteria. As a result, as compared to issuers targeting traditional
market segments, the Company could experience any or all of the following:
- - a greater number of customer payment defaults or other unfavorable cardholder
payment behavior;
- - an increase in fraud by the Company's cardholders and third parties; and
- - changes in the traditional patterns of cardholder loyalty and usage.
23
<PAGE> 24
In addition, because the Company is targeting a new customer base, the Company
has comparatively little information about the potential size of its target
market, its customer usage patterns and other factors that could significantly
affect the demand for the Company's products and services. Moreover, general
economic factors, such as the rate of inflation, unemployment levels and
interest rates may affect the Company's target market customers more severely
than other market segments.
FLUCTUATIONS IN THE COMPANY'S QUARTERLY REVENUES AND OPERATING RESULTS MAY
AFFECT THE PRICE OF ITS COMMON STOCK.
Quarterly fluctuations in the Company's earnings could adversely affect the
market price of the Company's common stock. The Company's revenue consists of
the finance charges paid by the Company's customers based on their outstanding
balances, the amounts received through the Visa system based upon a percentage
of the Company's customers' purchases and the fees paid by the Company's
customers. As a result, the Company depends substantially on the level of
customer balances, the level of interest rates on the Company's credit card
portfolios and the volume of NextCard Visa purchases. Variations of such factors
could affect the Company's quarterly revenues. Any shortfall in the Company's
revenue would have a direct impact on the Company's operating results for a
particular quarter.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside the Company's control.
These factors include:
- - the volume of credit card loans generated from the Company's products and the
Company's ability to successfully manage its credit card loan portfolio;
- - the announcement or introduction of new websites, services and products by us
or the Company's competitors and the level of price competition for the products
and services we offer;
- - the amount and timing of the Company's operating costs and capital
expenditures relating to the expansion of the Company's business, operations and
infrastructure;
- - technical difficulties, system downtime, Internet service problems and the
Company's ability to expand and upgrade the Company's computer systems to handle
increased traffic;
- - the success of the Company's brand building, advertising and marketing
campaigns; and
- - general economic conditions, including interest rate volatility, and economic
conditions specific to the Internet, online commerce and the credit card
industry.
24
<PAGE> 25
THE COMPANY MAY BE UNABLE TO SATISFACTORILY FUND ITS WORKING CAPITAL
REQUIREMENTS.
If the Company's current funding becomes insufficient to support future
operating requirements, the Company will need to obtain additional funding
either by increasing the Company's lines of credit or by raising additional debt
or equity from the public or private capital markets. There can be no assurance
that such additional funding will be available on terms attractive to the
Company, or at all. Failure by the Company to raise additional funding when
needed could have a material adverse effect on the Company's business, results
of operations and financial condition. If additional funds are raised through
the issuance of equity securities, the ownership percentage of the Company's
then-current stockholders would be reduced. Furthermore, such equity securities
might have rights, preferences or privileges senior to those of the Company's
common stock.
THE COMPANY MAY BE UNABLE TO SATISFACTORILY FUND ITS LOAN PORTFOLIO.
The Company's primary source of funding is the securitization of its credit card
loan portfolio through commercial paper conduit facilities. Securitization
transactions involve the sale of beneficial interests in credit card loan
balances. Until now, the Company has completed securitization transactions on
terms that it believes are favorable. The availability of securitization
funding, however, depends on how difficult and expensive such funding is.
Securitizations can be affected by many factors, such as whether a third party
will be willing to provide credit enhancement and the rates at which
accountholders have repaid their balances in the past. In addition, legal,
regulatory, accounting and tax changes can make securitization funding more
difficult, more expensive or unavailable on any terms. Securitizations may not
always offer the Company attractive funding, and the Company may have to seek
other more expensive funding sources in the future. In general, the amount, type
and cost of the Company's financing affect the Company's financial results.
Changes within the Company's organization and changes in the activities of
parties the Company has agreements or understandings could all make the
financings available to the Company more difficult, more expensive or
unavailable on any terms.
Now that the Company has formed NextBank, its strategy will be to fund a portion
of its loan portfolio through short-term deposits received by NextBank. NextBank
may not be able to attract or retain sufficient deposits at attractive interest
rates to fund its loan portfolio. Moreover, if adequate capital is not
available, NextBank may be subject to an increased level of regulatory
supervision that could have an adverse effect on the Company's operating results
and financial condition. See "Management Discussion and Analysis - Liquidity and
Capital Resources."
25
<PAGE> 26
THE COMPANY'S CUSTOMERS MAY BECOME DISSATISFIED BY SYSTEM DISRUPTIONS.
The Company's website has in the past experienced, and may in the future
experience, slower than normal response times or other problems, such as system
unavailability. Customers may become dissatisfied by any system failure that
interrupts or delays the Company's ability to provide the Company's services to
them. Any interruption or delay in the Company's operations could materially and
adversely affect the Company's business.
If the number of users of the Company's website increases substantially, the
Company will need to significantly expand and upgrade the Company's technology,
transaction processing systems and network infrastructure. The Company's website
must accommodate a high volume of users and deliver frequently updated
information. The number of visitors and credit card applicants to the Company's
website has increased substantially since it introduced the NextCard Visa, and
it anticipates that this traffic will further increase over time. However, it is
difficult to predict the future traffic on the Company's website. Marketing
efforts and other events could cause traffic to strain the site's capacity. The
Company does not know whether it will be able to accurately project the rate or
timing of any traffic increases, or expand and upgrade the Company's systems and
infrastructure to accommodate such increases in a timely manner.
The Company's systems and operations also are vulnerable to damage or
interruption from human error, natural disasters, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, acts of vandalism and similar
events. As the Company currently does not have back-up systems for most aspects
of its operations, a failure of a single aspect of the Company's system could
cause interruption or delay in the Company's entire operations. It does not
carry sufficient business interruption insurance to compensate for losses that
could occur.
THE COMPANY DEPENDS ON A LIMITED NUMBER OF VENDORS FOR ESSENTIAL SERVICES.
The Company relies on a number of services furnished by either a single vendor
or a limited number of vendors.
26
<PAGE> 27
The Company depends, directly and indirectly, on other key third party vendors
to provide essential services. Any interruption, deterioration or termination in
these third-party services could be disruptive to the Company's business. In the
event that any of the Company's agreements with any of these third parties is
terminated, it may not be able to find an alternative source of support on a
timely or commercially reasonable basis, if at all. As a result, any such
interruption, deterioration or termination would have a material adverse effect
on the Company's results of operations and financial condition.
THE COMPANY MAY BE ADVERSELY AFFECTED IF IT FAILS TO ATTRACT AND RETAIN KEY
PERSONNEL.
The Company's success depends largely on the skills, experience and performance
of certain key members of the Company's management. If it loses one or more of
these key employees, particularly Jeremy Lent, the Company's Chairman of the
Board, President and Chief Executive Officer, the Company's business, operating
results and financial condition would be materially adversely affected. The
Company's success also depends on the Company's continued ability to attract,
retain and motivate highly skilled employees. Competition for employees both for
Internet-based businesses and for financial services businesses is intense,
particularly for personnel with technical training and experience. The Company
may be unable to retain its key employees or to attract, assimilate or retain
other highly qualified employees in the future. The Company has from time to
time in the past experienced, and it expects to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
THE COMPANY MAY BE UNABLE TO EFFECTIVELY MANAGE THE RAPID GROWTH IN ITS
OPERATIONS.
Since the introduction of the Company's NextCard Visa product in December 1997,
it has experienced rapid growth in the Company's operations. From December 31,
1997 through September 30, 1999, we grew from approximately 18 to 244 employees,
and the Company's loans under management increased from $0 to $268.0 million.
The Company is planning for continued rapid growth of its operations. This
growth requires the Company to expand its marketing, customer service and
support, credit and technology organizations. There can be no assurance that it
will be able to attract and retain sufficient numbers of personnel to satisfy
the Company's anticipated growth. In particular, as the Company relies heavily
on temporary personnel to satisfy its growing personnel demands, the Company may
be unable to continue to attract and retain a sufficient number of temporary
employees to support its future growth. Rapid growth places a significant strain
on the Company's financial reporting, information and management systems and
resources. The Company's business, results of operations and financial condition
will be materially and adversely affected if it is unable to effectively manage
its expanding operations. For example, if the Company is unable to maintain and
scale the Company's financial reporting and information systems, it may not have
access to adequate, accurate and timely financial information.
27
<PAGE> 28
THE COMPANY MAY NOT SUCCESSFULLY DEVELOP NEXTCARD AS A BRAND.
The dynamics of a brand name have traditionally worked differently in the credit
card market than in many other industries. In the credit card market, consumers
have responded more to the brand name of Visa or MasterCard(R) than to the
identity of the issuer. The Internet may change the underlying market dynamics
for brand recognition as compared to the offline market. Accordingly, the
Company is aggressively implementing its marketing plan to establish brand
recognition with Internet users to persuade customers to switch to the Company's
products and services, particularly because it competes, or expects to compete,
with larger financial institutions that have well-established brand names. The
Company can provide no assurances that it will successfully develop the
Company's brand name. If the brand name of online credit card issuers becomes
important, and if other credit card issuers begin to compete with us for online
brand name recognition, the Company's business, results of operations and
financial condition could be materially adversely affected.
RISKS RELATED TO THE COMPANY'S INDUSTRY
THE COMPANY'S PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET AND INTERNET
COMMERCE.
The Company's future success depends heavily on the overall continued growth and
acceptance of the Internet, including its use in electronic commerce. If
Internet usage or commerce does not continue to grow or grows more slowly than
expected, the Company's business, operating results and financial condition will
be adversely affected. Consumers and businesses may reject the Internet as a
viable medium for a number of reasons. These include potentially inadequate
network infrastructure, slow development of enabling technologies and
insufficient commercial support. The Internet infrastructure may not be able to
support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and procedures required to handle increased levels of Internet
activity, or increased government regulation, could cause the Internet to lose
its viability as a commercial medium. Even if the required infrastructure,
standards, procedures or related products, services and facilities are
developed, we may incur substantial expenses adapting the Company's solutions to
changing or emerging technologies.
28
<PAGE> 29
THE COMPANY'S PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH OF THE FINANCIAL
SERVICES MARKET.
The Company's business would be adversely affected if the growth in Internet
financial products and services does not continue or is slower than expected.
Although the Company believes the Internet has the potential to transform the
delivery of consumer financial products, consumers' acceptance of recently
introduced financial products and services is at an early stage and is subject
to a high level of uncertainty. To date, there exist relatively few proven
online financial institutions. Although the Company's long-term vision is to
redefine the banking experience for the Internet consumer, presently it offers
only a single product, the NextCard Visa, and it has no specific plans for
additional products. In addition, as the online financial services industry
matures, government-imposed regulations could become so stringent that the
Company may be economically precluded from offering online financial products
and services.
INTENSE AND INCREASING COMPETITION IN FINANCIAL SERVICES COULD HARM ITS
BUSINESS.
The financial services market is rapidly evolving and intensely competitive. The
Company operates in this intensely competitive environment with a number of
other companies, many of whom have significantly longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. Some of the Company's
competitors may be able to obtain funding at a more favorable rate than it can
obtain. The Company's business model anticipates that it will derive a large
majority of the Company's revenue from the interest charged on credit card
balances contained in the portfolio of loans it holds. Increased competition
could require the Company to reduce the interest rates it charges on the
Company's customers' balances. This could have a material adverse effect on the
Company's business, results of operations and financial condition.
Other credit card issuers and traditional commercial banks may increasingly
compete in the online credit card market. In addition, existing Internet
providers and new Internet entrants may launch new websites using commercially
available software. While the credit card market traditionally has been very
fragmented, the Internet could change traditional market dynamics and enable new
competitors to rapidly acquire significant market share.
The Company's competitors may respond more quickly than we can to new or
emerging technologies and changes in customer requirements. They may be able to:
- - devote greater resources than the Company can to the development, promotion
and sale of their products and services;
- - replicate the Company's products and services;
- - engage in more extensive research and development;
29
<PAGE> 30
- - undertake farther-reaching marketing campaigns;
- - adopt more aggressive pricing policies;
- - make more attractive offers to existing and potential employees and strategic
partners;
- - more quickly develop new products and services or enhance existing products
and services;
- - bundle consumer products and services in a manner that the Company cannot
provide; and
- - establish cooperative relationships among themselves or with third parties,
including large Internet participants, to increase the ability of their products
and services to address the needs of the Company's prospective customers.
The Company cannot assure that it will be able to compete successfully or that
competitive pressures will not materially and adversely affect the Company's
business, results of operations or financial condition.
OUR OPERATING RESULTS ARE SUBJECT TO INTEREST RATE FLUCTUATIONS.
A majority of the Company's revenues are generated by the interest rates its
charges on outstanding receivable balances. At the same time, the Company's
borrowings costs under the Company's commercial paper conduit facilities are
generally indexed to variable commercial paper rates. Thus, changes in the
prevailing interest rates could materially adversely affect the Company's
results of operations and financial condition. See "Quantitative and Qualitative
Disclosures About Market Risk."
THE COMPANY MAY BE UNABLE TO INTRODUCE NEW SERVICES, FEATURES AND FUNCTIONS.
The Internet and related financial institutions marketplaces are characterized
by rapidly changing technologies, evolving industry standards, frequent new
product and service introductions and changing customer demands. The Company's
future success will depend on the Company's ability to adapt to rapidly changing
technologies and to enhance existing products and services, as well as to
develop and introduce a variety of new products and services to address the
Company's customers' changing demands. The Company may experience difficulties
that delay or prevent the successful design, development, introduction or
marketing of the Company's products and services. In addition, material delays
in introducing new products and services and enhancements may cause customers to
forego purchases of the Company's products and services and purchase instead
those of the Company's competitors.
30
<PAGE> 31
SECURITY BREACHES COULD DAMAGE THE COMPANY'S REPUTATION AND BUSINESS.
The secure transmission of confidential information over the Internet is
essential to maintain consumer and supplier confidence in the NextCard service.
Advances in computer capabilities, new discoveries or other developments could
result in a compromise or breach of the technology used by us to protect
customer transaction data.
A party that is able to circumvent the Company's security systems could steal
proprietary information or cause interruptions in the Company's operations.
Security breaches could damage the Company's reputation and expose us to a risk
of loss or litigation. The Company's insurance policies carry low coverage
limits, which may not be adequate to reimburse us for losses caused by security
breaches. The Company cannot guarantee that its security measures will prevent
security breaches.
Consumers generally are concerned with security and privacy on the Internet and
any publicized security problems could inhibit the growth of the Internet as a
means of conducting commercial transactions. The Company's ability to provide
financial services over the Internet would be severely impeded if consumers
become unwilling to transmit confidential information online. As a result, the
Company's operations and financial condition would be materially adversely
affected.
THE COMPANY MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.
To date, communications and commerce on the Internet have not been highly
regulated. However, Congress has held hearings on whether to regulate providers
of services and transactions in the electronic commerce market. It is possible
that Congress or individual states could enact laws regulating Internet banking
that address issues such as user privacy, pricing and the characteristics and
quality of products and services. Any restrictions on the collection and use of
such consumer information over the Internet could adversely affect the Company's
direct marketing efforts. In addition, several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers in a manner similar to long distance telephone carriers and to impose
access fees on these companies. This could increase the cost of transmitting
data over the Internet. Moreover, it may take years to determine the extent to
which existing laws relating to issues such as property ownership, libel and
personal privacy are applicable to the Internet. Any new laws or regulations
relating to the Internet could adversely affect the Company's business.
31
<PAGE> 32
The Company's business is subject to extensive federal and state regulation,
including regulation under consumer protection laws. NextBank is subject to
regulation under federal and California banking laws as well as regulatory
supervision from the Office of the Comptroller of the Currency, or OCC, and the
Federal Deposit Insurance Corporation (the "FDIC"). As an affiliate of NextBank,
the Company will also be subject to oversight by the OCC. Existing and future
legislation and regulatory supervision could have a material adverse effect on
the Company's business, including the Company's credit and authentication
policies, pricing and products.
NextBank also is subject to minimum capital, funding and leverage requirements
prescribed by federal statute and OCC regulations or orders. If NextBank fails
to meet these regulatory capital requirements, NextBank will be subject to
additional restrictions that could have a material adverse effect on the
Company's ability to conduct normal operations and possibly result in the
seizure of NextBank by government regulators under certain circumstances. The
Company's ability to maintain or increase NextBank's capital levels in the
future will be subject to, among other things, general economic conditions, the
Company's ability to raise new capital and the Company's ability and willingness
to make additional capital contributions to NextBank or a related institution.
THE COMPANY MAY FACE DIFFICULTIES PROTECTING AND ENFORCING ITS INTELLECTUAL
PROPERTY RIGHTS.
The Company's success and ability to compete are substantially dependent on the
Company's proprietary technology and trademarks, which the Company attempts to
protect through a combination of patent, copyright, trade secret and trademark
laws as well as confidentiality procedures and contractual provisions. However,
any steps the Company takes to protect the Company's intellectual property may
be inadequate, time consuming and expensive. Furthermore, despite the Company's
efforts, it may be unable to prevent third parties from infringing upon or
misappropriating the Company's intellectual property. Any such infringement or
misappropriation could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company may
infringe upon the intellectual property rights of third parties, including third
party rights in patents that have not yet been issued. Any such infringement, or
alleged infringement, could have a material adverse effect on the Company's
business, results of operations and financial condition.
32
<PAGE> 33
The Company has filed three patent applications and applied to register several
of the Company's trademarks in the United States and abroad. The Company cannot
assure that the Company's patent applications or trademark registrations will be
approved. Moreover, even if approved, they may not provide the Company with any
competitive advantages or may be challenged by third parties. Legal standards
relating to the validity, enforceability and scope of intellectual property
rights in Internet-related industries are uncertain and still evolving, and the
future viability or value of any of the Company's intellectual property rights
is uncertain. Any litigation surrounding such rights could force the Company to
divert important financial and other resources away from the Company's business
operations.
The Company collects and utilizes data derived from applications on the NextCard
website and through transactions made using the Company's products. Although the
Company believes that it has the right to use such data and compile such data in
the Company's database, it cannot assure that any intellectual property
protection will be available for such information. In addition, third parties
may claim rights to such information.
The Company has licensed, and may license in the future, elements of the
Company's trademarks, trade dress and similar proprietary rights to third
parties. While it attempts to ensure that the quality of the Company's brand is
maintained by such business partners, such partners may take actions that could
materially and adversely affect the value of the Company's proprietary rights or
the Company's reputation. This could, in turn, have a material adverse effect on
the Company's business, results of operations and financial condition.
PROTECTION OF THE COMPANY'S DOMAIN NAME IS UNCERTAIN.
The Company currently holds the domain name "nextcard.com." The regulations
governing the acquisition and maintenance of domain names are subject to change.
Governing bodies could, among other things, modify the requirements for holding
domain names. Accordingly, the Company may be unable to acquire or maintain the
Company's domain name in all jurisdictions in which it would otherwise seek to
do so. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, the Company may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of the Company's domain name, trademarks and other proprietary rights.
33
<PAGE> 34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's principal market risk is due to changes in interest rates. This
affects the Company directly in its lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of the Company's
cardholders.
The majority of the Company's revenues are generated by the interest rates it
charges on outstanding receivable balances in the form of finance charges. The
Company's receivables generally yield either a variable interest rate indexed to
the prime rate, or a fixed interest rate, set independently of market interest
rates. Accordingly, fluctuations in interest rates will affect the Company's
revenues. At the same time, the Company's borrowing costs under the Company's
commercial paper conduit facilities are generally indexed to variable commercial
paper rates, and may also fluctuate based on general interest rate fluctuations.
A rise in the Company's borrowing costs may not be met by a corresponding
increase in revenues generated by finance charges. Likewise, a decrease in
revenues generated by finance charges may not be met by a corresponding decrease
in borrowing costs. Thus, either a rise or a fall in the prevailing interest
rates could materially adversely affect the Company's results of operations and
financial condition.
To manage the Company's direct risk to market interest rates, management
actively monitors the interest rates and the interest sensitive components of
the Company's balance sheet to minimize the impact changes in interest rates
have on the fair value of assets, liabilities, net income and cash flow.
Management seeks to minimize the impact of changes in interest rates on the
Company primarily by matching assets and liability repricings.
The Company's fixed interest rate credit card receivables have no stated
maturity or repricing period. However, the Company generally has the right to
increase rates when the customer fails to comply with the terms of the account
agreement. In addition, the Company's credit card receivables may be repriced by
the Company upon providing the required prior notice to the customer, which is
generally no more that 30 days.
The Company may manage its interest rate risk through interest rate hedging
techniques. However, the Company currently does not use such techniques and it
may not be successful in reducing or eliminating the Company's interest rate
risk in the future.
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<PAGE> 35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any lawsuit that, taken separately or
collectively, if decided adversely would be likely to have a material, adverse
effect on its business, financial prospects or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 + Co-Branded Bankcard Agreement
10.2 Warrant to Purchase Common Stock
27.1 Financial Data Schedule
</TABLE>
+ Portions redacted pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
Not applicable
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements 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.
NEXTCARD, INC.
(Registrant)
Date: November 15, 1999 /s/ Jeremy R. Lent
------------------------------------
Jeremy R. Lent
Chairman of the Board, President and
Chief Executive Officer
Date: November 15, 1999 /s/ John V. Hashman
------------------------------------
John V. Hashman
Chief Financial Officer
36
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 + Co-Branded Bankcard Agreement
10.2 Warrant to Purchase Common Stock
27.1 Financial Data Schedule
</TABLE>
+ Portions redacted pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission.
37
<PAGE> 1
EXHIBIT 10.1
CO-BRANDED BANKCARD AGREEMENT
THIS CO-BRANDED BANKCARD AGREEMENT, incorporating any schedules or
exhibits attached hereto (collectively the "Agreement"), dated as of November 8,
1999, ("Effective Date") is entered into between Amazon.com, L.L.C., a Delaware
limited liability company and an affiliate of Amazon.com, Inc., a Delaware
corporation, with its principal place of business at 1200 Twelfth Avenue South,
Suite 1200, Seattle, Washington ("Amazon.com") and NextCard, Inc. a Delaware
corporation with its principal place of business at 595 Market Street, San
Francisco, California ("NextCard").
RECITALS
Whereas, NextCard presently operates a VISA(R) credit card program under
which bankcards are issued by NextBank, N.A. (the "Issuer"), a member of Visa
International Service Association ("VISA");
Whereas, Amazon.com and its affiliates presently hold all worldwide
right, title, and interest in and to the Amazon.com web site currently located
at www.amazon.com (the "Property") including, but not limited to all worldwide
copyrights therein (the "Amazon.com Copyrights") and trademarks, trade names and
logos relating thereto (the "Amazon.com Marks") and all subsidiary rights
therein and is engaged in the business of operating the Property, and NextCard
presently holds all worldwide right, title, and interest in and to the
Nextcard.com web site currently located at www.nextcard.com and its financial
services operations (the "Business") including, but not limited to all worldwide
copyrights therein (the "NextCard Copyrights") and trademarks, trade names and
logos relating thereto (the "NextCard Marks") and all subsidiary rights therein
and is engaged in the operating the Business;
Whereas, Amazon.com and NextCard (each a "Party" or "party" or
collectively the "Parties" or "parties") desire to market a bankcard issued by
the Issuer and branded with the NextCard Copyrights and Amazon.com Copyrights
(collectively, the "Copyrights") and NextCard Marks and Amazon.com Marks
(collectively, the "Marks") and with the VISA trademarks, trade names and/or
logos (the "VISA Marks") and;
Whereas, this Agreement sets forth the terms and conditions under which
the Parties shall participate in marketing the Co-Branded Card and the
respective rights and obligations with respect to Co-Branded Accounts and to the
individuals to whom Co-Branded Cards are issued.
NOW, THEREFORE, NextCard and Amazon.com agree as follows:
SECTION ONE
DEFINITIONS
1.1. "Account Fee" is defined in Section 1 of Schedule C.
Confidential
<PAGE> 2
1.2. "Amazon.com Competitor" means any Company designated by Amazon.com
on Schedule B hereto, as may be amended from time to time pursuant to Section
3.2.2. By agreement of the parties, Schedule B hereto is intentionally left
blank as of the Effective Date, and will be supplied by Amazon.com to NextCard
not later than six (6) weeks following the Effective Date, at which time it will
be appended hereto and made a part hereof.
1.3. "Amazon.com Customer Information" means information provided to
Amazon.com by an Amazon.com customer for storage and subsequent use by an
Amazon.com customer on the Internet including an Amazon.com customer's identity,
address, credit card number(s), personal information, purchasing preferences or
history, or similar information.
1.4. "Applicable Law" means applicable federal, state and local
statutes, regulations, regulatory guidelines and judicial or administrative
interpretations as well as any rules or requirements established by VISA (or,
should the Parties determine to issue a "MasterCard," those rules or
requirements established by MasterCard).
1.5. "Business Day" means Monday through Friday, excluding Federal
banking holidays.
1.6. "Cardholder Agreement" means the document in substantially the form
included as Schedule D to this Agreement, and as may be amended from time to
time, which governs the Co-Branded Accounts and use of the Co-Branded Cards. By
agreement of the parties, Schedule D hereto is intentionally left blank as of
the Effective Date, and will be drafted by NextCard and mutually approved by the
parties not later than six (6) weeks following the Effective Date, at which time
it will be appended hereto and made a part hereof.
1.7. "Co-Branded Account" means an unsecured, revolving, open-end credit
account provided by NextCard for Amazon.com customers through the Issuer and
established pursuant to this Agreement, which is accessed solely by a Co-Branded
Card, the features and terms of which are further described on Schedule A to
this Agreement.
1.8. "Co-Branded Card" means a bankcard issued pursuant to this
Agreement that bears the Copyrights and Marks and the VISA Marks and that
accesses a Co-Branded Account.
1.9. "Co-Branded Cardholder" means the holder of a Co-Branded Card
issued pursuant to this Agreement.
1.10. "Confidential Information" means the terms of this Agreement, the
Customer Data and all information, materials or reports provided to or in
connection with either Party's performance under this Agreement, including
without limitation, Registered Buyer information or other Amazon.com Customer
Information, all names, address, demographic, behavioral, and credit information
relating to Co-Branded Cardholders or potential Co-Branded Account cardholders,
cardholder communication materials and issuance strategies or methods, business
Confidential
Page 2 of 42
<PAGE> 3
objectives, assets and properties, marketing programs and methods; and
programming techniques and technical, developmental, cost and processing
information.
1.11. "Copyrights" is defined in the third paragraph of the Recitals.
1.12. "Customer Data" means all information, whether personally
identifiable or in aggregate, that is submitted and/or obtained as a result of a
Co-Branded Account relationship or an application (whether or not completed) for
a Co-Branded Account relationship, including without limitation, NextCard
Customer Information, credit information, financial standing and demographic
data, and primary transactional data generated by a Co-Branded Cardholder's use
of the Co-Branded Card (including Transaction Data).
1.13. "Customer Retention Fund" means that pool of monies used to fund
certain retention efforts (other than the Co-Branded Loyalty Program) related to
the Co-Branded Accounts.
1.14. "Fortnight" shall mean a period of fourteen (14) consecutive
calendar days.
1.15. "Marketing Materials" means badges, links, sponsored e-mails,
micro-sites, splash pages, other placements on the web sites, and trade,
broadcast or banner advertisements, press communications, and any printed
physical elements designed to promote the Co-Branded Card or a Party hereto.
"Marketing Materials" shall also include [*] information on value-added products
and services provided directly or indirectly by a marketing partner of NextCard,
and delivered by NextCard to the Co-Branded Cardholders; provided that no [*]
will be sent to any Co-Branded Cardholder who has opted out from the receipt of
such messages.
1.16. "Minimums" is defined in Section 3 of Schedule C.
1.17. "New Co-Branded Account Goals" means those goals that are set
forth in the table in Schedule C.
1.18. "NextCard Customer Information" means information provided by a
NextCard customer to NextCard for storage and subsequent use by a NextCard
customer including a NextCard customer's identity, address, credit card number,
personal information, purchasing preferences or history, or similar information.
1.19. "Registered Buyers" means those visitors to the Property who have
purchased at least one item or service from Amazon.com (not including the
Co-Branded Card) through use of a unique and nonduplicative email address and
for whom Amazon.com has a viable means to contact (either valid email address,
Property visits, physical mailings or other means mutually agreed upon by the
Parties).
1.20. "Shared Customer Data" means and is specifically limited to [*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 3 of 42
<PAGE> 4
[*] "Shared Customer Data" specifically excludes (i) information provided on
application materials, such as social security number, income, debt or other
personal financial information, (ii) credit bureau scores and other credit
report information, and (iii) credit reference information obtained directly
from other creditors or businesses. Notwithstanding the foregoing, "Shared
Customer Data" may include application-level information (other than the
information specifically described in clause (i), above) that the parties
mutually agree to request from applicants, and shall exclude any Customer Data
that NextCard reasonably determines, upon the written advice of outside counsel,
would result in NextCard becoming a consumer reporting agency or, if provided by
NextCard to Amazon.com, would constitute a violation under Applicable Law.
1.21. "Transaction Data" is defined as Merchant Category Code (MCC) as
defined by Visa regulations, transaction amount, merchant description and
transaction date, individually identifiable for each Co-Branded Cardholder
purchase transaction.
SECTION TWO
CO-BRANDED CARD PROGRAM
2.1 Design of Card. The parties shall create mutually acceptable designs
for the front of the Co-Branded Card, which will include the Copyrights and
Marks and the VISA Marks and be subject to Applicable Law. The Amazon.com Mark
will be in a primary position and the NextCard Mark will be in a secondary
position on the front of the Co-Branded Card; provided that, the size of the
NextCard Mark shall be no less than a percentage, expressed as the fraction
"1(divided by)(square root of pi)" (expressed for convenience as fifty-six
percent (56%)) of the size of the Amazon.com Mark.
2.2 MasterCard Program. At Amazon.com's request, NextCard will take all
necessary steps to offer to Co-Branded Account applicants a Co-Branded Card
through MasterCard within twelve (12) months following NextCard's receipt of
such request, under such terms and conditions as mutually upon agreed by the
Parties.
2.3 Features and Terms of Accounts. The features and terms of Co-Branded
Accounts to be offered initially by NextCard are described on Schedule A to this
Agreement. [*] Except for the foregoing requirement, NextCard shall have
complete discretion to change any terms and conditions on existing Co-Branded
Accounts and the terms on which new Co-Branded Accounts are originated, or to
add additional terms and conditions; provided, however, that NextCard shall use
its best efforts to give Amazon.com prior written notice of any material change.
Notwithstanding the above, [*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 4 of 42
<PAGE> 5
measured by Bank Rate Monitor or, if Bank Rate Monitor no longer exists, a
mutually acceptable proxy therefor.
2.4 Co-Branded Account Origination Web Site. No later than fourteen (14)
days prior to the Launch Date, NextCard, at its sole cost and expense, shall
create, and, at all times while this Agreement is in effect, operate, host and
maintain a web site within the "nextcard.com" domain (the "Origination Web
Site"), which may be accessed from any on-line location, for the purpose of
soliciting Co-Branded Card applications, effecting online approvals, customized
Co-Branded Card offers and automated balance transfers. The Origination Web Site
will clearly indicate that NextCard and the Issuer, and not Amazon.com, are the
entities granting credit and that the Issuer is the sole owner of the Co-Branded
Accounts. The parties may mutually agree to add additional fields or pages to
the application process.
2.5 Credit Decisions. NextCard shall have complete discretion to make
all credit decisions regarding the Co-Branded Accounts. Nothing in this
Agreement shall require NextCard to provide a Co-Branded Card to any person who
NextCard determines does not meet NextCard's credit underwriting standards.
Without limiting the foregoing, such discretion shall include decisions relating
to approval of applicants for Co-Branded Accounts, choice of type of Co-Branded
Card to be issued, including Platinum or Classic, credit limit adjustments upon
application from a Co-Branded Cardholder, termination, suspension or
reactivation of credit privileges on Co-Branded Accounts, and collection of
amounts owing on the Co-Branded Accounts. NextCard shall be solely responsible
for taking and reviewing applications for Co-Branded Accounts, issuing plastics,
providing customer service and otherwise administering and operating the
Co-Branded Accounts. NextCard or the Issuer, as the case may be, shall bear all
risk of credit loss and program operating costs for the Co-Branded Accounts and
Amazon.com shall have no responsibility for any such loss or costs.
2.6 Approvals. NextCard will use best efforts to maximize booking rates
for Co-Branded Cards and Accounts by experimenting with various Co-Branded
Account pricing terms.
2.7 Cardholder Agreement. Co-Branded Accounts and use of Co-Branded
Cards will be governed by the terms of the Cardholder Agreement. Such Cardholder
Agreement shall comply with Applicable Law. Notwithstanding any other
limitations contained in this Agreement, NextCard may amend the Cardholder
Agreement at any time to comply with Applicable Law.
[*]
2.9 Ownership and Operation of Accounts. NextCard shall be the sole and
absolute owner of, and Amazon.com shall have no right or title to, or interest
in, the Co-Branded
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 5 of 42
<PAGE> 6
Accounts and the Co-Branded Cards. NextCard shall be responsible for all aspects
of operating and servicing the Co-Branded Accounts and for compliance with
Applicable Laws relating to the solicitation, operation and servicing of the
Co-Branded Accounts.
2.10 Co-Branded Account Customer Service. NextCard will develop, operate
and maintain, at NextCard's sole cost and expense, a full service online
customer service and support web site (the "Customer Service Web Site") for the
servicing of only Co-Branded Accounts. The Customer Service Web Site shall be
hosted by NextCard within the "nextcard.com" domain, shall be operational not
less than fourteen (14) days prior to the Launch Date, and shall be branded and
have a look and feel consistent with the Property no later than March 1, 2000;
provided, that, until the Customer Service Web Site is fully operational,
NextCard shall not display any marketing messages to any Co-Branded Cardholder
other than those allowed by this Agreement. NextCard shall provide Amazon.com
with a test account on the Customer Service Web Site. All users of the Customer
Service Web Site will understand that they are interfacing and doing business
with NextCard and/or the Issuer. In addition to the Customer Service Web Site
and other customer support channels, and at the request of Amazon.com,
Co-Branded Cardholders will have access to all other customer service channels
provided by NextCard to its other cardholders. NextCard will meet or exceed the
performance requirements set forth in Schedule E "Customer Service and Account
Service Performance Requirements."
2.11 Marketing Materials. The Parties shall jointly agree to insert
prominent and persistent Marketing Materials on appropriate Co-Branded customer
materials (as described in Section 2.12). NextCard shall provide an easy process
for Co-Branded Cardholders to opt out of receiving e-mail messages that are not
required by Applicable Law.
2.12 Co-Branded Customer Materials. The parties will jointly review and
approve, all Co-Branded customer materials (with the exception of insignificant
materials as agreed by the Parties) featuring the Marks and Copyrights such as
pages on the Customer Service Web Site or the Origination Web Site, official
Co-Branded communications, and any other Co-Branded customer materials,
regardless of media, that either of the parties reasonably believe constitutes a
significant customer "touch point." All Co-Branded customer materials will have
a look and feel consistent with the Property. The Origination and Customer
Service Web Sites will include back buttons and links to the Property as
appropriate. The parties will cooperate so that all materials relating to the
Co-Branded program are made available with adequate time for advance review and
modification of graphic design and text copy, as well as to ensure error-free
functionality and pre-Launch user testing.
2.13 Customer Data.
2.13.1 Collection and Ownership. NextCard shall collect,
maintain, and be the sole owner of all Customer Data. NextCard may use the
Customer Data in a manner consistent with this Agreement for any legitimate
business purpose, provided that no personally identifiable Customer Data may be
disclosed or transferred to any Amazon.com Competitor or any third party (other
than credit bureaus or as otherwise necessary or appropriate for administration,
servicing and funding of the Co-Branded Accounts), and provided further that
NextCard shall not
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release any portfolio-level Customer Data pertaining to the Co-Branded Accounts
unless required by Applicable Law or for the administration of the Co-Branded
Accounts. Whenever NextCard is required to disclose such portfolio-level
Customer Data it will request confidential treatment from the recipient.
Amazon.com will not disclose or transfer any Shared Customer Data to any third
party.
2.13.2 Opt-out and Data Sharing. The application form for the
Co-Branded Card will contain the provision set forth in Schedule G that will
permit each Co-Branded Account applicant to "opt-out" of having Shared Customer
Data shared with Amazon.com. NextCard shall be solely responsible for tracking
such election and, unless the applicant exercises such opt-out privilege, shall
make available such Shared Customer Data to Amazon.com pursuant to Section
2.13.4. Each Co-Branded Cardholder will have the ability to change their data
sharing option through the Co-Branded Customer Service Web Site. In the event a
Co-Branded Cardholder who has not previously opted out decides to opt-out, that
Co-Branded Cardholder's Shared Customer Data shall no longer be shared with
Amazon.com and Amazon.com will purge all such data from its systems to the
extent required by Applicable Law. [*]
2.13.3 Use by Amazon.com. Subject to Applicable Law, NextCard
will make available to Amazon.com, and Amazon.com will receive and may use the
Shared Customer Data only for the purposes of (i) selling goods and services,
and (ii) for internal analysis of trends and performance. Amazon.com will not
use or distribute the Shared Customer Data in any manner not specifically
provided in the preceding sentence, including using it to screen referrals to
third parties (except this restriction shall not preclude Amazon.com from
marketing or promoting the products or services of a third party based on the
Shared Customer Data in a manner that is otherwise consistent with this
Agreement), using it to determine eligibility for credit, insurance, or
employment, distributing or publishing it, or using it in a manner inconsistent
with Applicable Law.
2.13.4 Within ten (10) Business Days from the Effective Date,
the parties will agree on (i) the manner in which the Shared Customer Data is to
be formatted, (ii) how frequently the Shared Customer Data will be transmitted
from NextCard to Amazon.com. and (iii) a schedule for test transmissions of
Shared Customer Data. At any time during the Term, and at Amazon.com's request
and at its sole expense, NextCard will create and maintain a segregated, secure
database for Shared Customer Data, which Amazon.com will access and download.
2.14 Periodic Statements and Inserts.
2.14.1 The periodic statement will include the Copyrights and
the Marks. The Parties shall agree on all other elements of the periodic
statement for the Co-Branded Accounts, except those required by Applicable Law,
which shall be determined by NextCard.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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2.14.2 At Amazon.com's request, NextCard shall include up to two
marketing inserts per month on or with the periodic statements sent to
Co-Branded Cardholders via U.S. mail in paper form, subject to Applicable Law
and NextCard's right to review and approve such inserts. Amazon.com will pay for
the design and production of such inserts, provided that NextCard will cooperate
with Amazon.com to secure the most favorable design and production cost.
NextCard will pay for all standard insertion and mailing costs. Amazon.com shall
reimburse NextCard for any additional postage or other costs incurred as a
result of including inserts with periodic statements only to the extent such
costs are attributable to Amazon.com inserts. Except as set forth above,
NextCard may impose reasonable limitations on the number or volume of such
marketing inserts, or may delay the inclusion of such materials to accommodate
requirements under Applicable Law. If Amazon.com declines to use such space in a
particular statementing cycle, NextCard may use the space for other collateral
marketing materials consistent with this Agreement.
2.14.3 At Amazon.com's request, any printed materials
distributed to Co-Branded Cardholders pursuant to this Agreement will be printed
in or disseminated from a State or a location as mutually agreed by the Parties.
Amazon.com will pay for all expenses, including reasonable overhead costs,
incurred, directly and indirectly, as a result of Amazon.com's request to
utilize a state other than the one currently used by First Data Resources on
behalf of NextCard.
2.15 Payments. If any Co-Branded Cardholder incorrectly makes a check,
money order, draft or other form of payment for a Co-Branded Account payable to
the order of Amazon.com rather than to the order of NextCard or its agents,
Amazon.com hereby expressly authorizes NextCard to endorse the item on
Amazon.com's behalf and to credit the payment to the appropriate Co-Branded
Account. Amazon.com shall not accept payments from Co-Branded Cardholders for
any Co-Branded Account.
2.16 Launch Date. The Parties shall use their best efforts to have the
Co-Branded Card program operational by the calendar date that is no later than
ten (10) weeks from the Effective Date. The date the Co-Branded Accounts are
first offered shall be the "Launch Date". The Parties may begin joint marketing
efforts prior to the Launch Date with mutual agreement.
2.17 Credit Card Issuer. Subject to Amazon.com's prior approval, which
shall not be unreasonably withheld, NextCard may select which financial
institution shall be the issuer of the Co-Branded Cards and may change such
issuer at any time during this Agreement, provided, however, that any such
issuer shall at all times be a member in good standing of VISA or MasterCard.
SECTION THREE
COMPENSATION, EXCLUSIVITY AND LICENSE
3.1 Compensation Paid by NextCard. During the Term of the Agreement,
NextCard agrees to provide compensation to Amazon.com in the amounts and in the
manner described in Schedule C to this Agreement, contingent upon Amazon.com's
continuing to satisfy, in all
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material respects, its obligations hereunder. All amounts owing to any party
shall be sent via wire transfer to such account(s) as may be specified, in
writing, not later than two (2) business days prior to the date such amounts are
transmitted. NextCard shall pay Amazon.com interest on any late payment (as
defined in Schedule C) at a rate of one and one half percent (1.5%) per month.
3.1.1 All accounting statements shall be sent by NextCard to the
following address:
Amazon.com
Attn: [*]
1200 Twelfth Avenue South, Suite 1200
Seattle, WA 98144-2734
3.1.2 Any promotional payments or amounts, excluding Interchange
fees, that NextCard or Amazon.com receives from VISA or MasterCard specifically
attributable to the Co-Branded Cards or the Co-Branded Accounts will be itemized
separately on the reconciliation statements referred to in the following
paragraph, and, subject to any disbursement instructions from VISA or
MasterCard, allocated [*].
3.1.3 An appropriate reconciliation statement shall accompany each such
payment. The receipt or acceptance by Amazon.com of any statements furnished
pursuant to this Agreement, or the receipt or acceptance of any payments made,
or the fact that Amazon.com has previously audited the periods covered by such
statements, shall not preclude Amazon.com from questioning their accuracy at any
time. If any inconsistencies or mistakes are discovered in such statements or
payments, the parties shall make appropriate adjustments within thirty (30)
days. During the Term and for two (2) years thereafter (or such other period of
time as may be required by Applicable Law), NextCard shall keep full and
accurate books of account and copies of all documents and other material
relating to this Agreement at NextCard's principal office. Amazon.com, by its
duly authorized agents and representatives, shall have the right on reasonable
prior notice and at Amazon.com's sole cost and expense to audit or make copies
of such books, documents, and other material during ordinary business hours. At
Amazon.com's request, NextCard shall provide an authorized employee to assist in
the examination of NextCard's records. If any audit of NextCard's books and
records reveals that NextCard has failed properly to account for and pay amounts
owing to Amazon.com, and the amount of any amounts which NextCard has failed
properly to account for and pay for any quarterly accounting period exceeds, by
ten percent (10%) or more, the amounts actually accounted for and paid to
Amazon.com for such period, NextCard shall, in addition to paying Amazon.com
such past due amounts, reimburse Amazon.com for professional fees and direct
out-of-pocket expenses incurred in conducting such audit, in accordance with
NextCard's normal expense guidelines.
3.2 Exclusivity.
3.2.1 By Amazon.com. During the Term of this Agreement, neither
Amazon.com nor any entity controlled by Amazon.com or in common control with
Amazon.com will on its own or in conjunction with others, directly or indirectly
for any reason whatsoever
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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enter into an agreement to assist in the marketing in the United States or any
of its territories or possessions of any application for any credit, debit or
charge card, except for the Co-Branded Cards, or recommend or endorse the
acquisition of any debit, credit or charge card, except as provided for in this
Agreement. The restrictions set forth in this section shall not apply to
co-branded individual bankcards offered solely to employees of Amazon.com
through a credit union affiliated with Amazon.com. Nothing in this Agreement
shall prevent Amazon.com from offering a private label credit facility (a
"house" charge account) that the parties mutually agree shall not be competitive
with the Co-Branded Card.
3.2.2 By NextCard. Amazon.com shall have the right to designate
up to [*] companies (the "Restricted List") with which NextCard shall be
prohibited from working to promote the sale of products or services to the
Co-Branded Cardholder base. The initial Restricted List will be attached hereto
as Schedule B not later than six (6) weeks from the Effective Date. Amazon.com
shall have the right to substitute up to [*] of the companies on the Restricted
List once every six months from the Effective Date, provided that Amazon.com
must give not less than one month's advance written notice of such substitution;
and provided further, that no company may be substituted in to the Restricted
List that provides debit, credit or charge card-related products or services as
a material part of their business, including facilitating purchasing activity
(other than merchants) and the extension of credit; and provided further that no
company may be added by Amazon.com to the Restricted List if NextCard has a
current relationship, or is in significant discussions, with a company not
primarily involved in the merchandise or consumer goods business to provide a
free non-merchandise product or service to the Co-Branded Cardholders. In
addition, NextCard shall not promote any other debit, credit, secured or other
charge card or account without Amazon.com's prior written consent, nor shall
NextCard promote the products or services of any company on the Restricted List,
to declined Co-Branded Card applicants.
3.3 Ownership and License.
3.3.1 NextCard Marks and NextCard Copyrights. Amazon.com hereby
acknowledges that as between the Parties the NextCard Marks and NextCard
Copyrights shall be the property of NextCard and NextCard hereby grants
Amazon.com a nonexclusive, nontransferable, restricted and royalty-free license
to use the NextCard Marks and NextCard Copyrights only in a manner and at such
times as are expressly authorized by this Agreement, as follows:
3.3.1.1 All materials produced by Amazon.com which
utilize the NextCard Copyrights or the NextCard Marks, including advertising
materials, will be submitted to NextCard not less than five (5) business days
prior to its first intended use for its prior written approval. If NextCard does
not object within the five-day period, NextCard shall be deemed to have
consented to Amazon.com's use of such materials;
3.3.1.2 All NextCard-related materials created by
Amazon.com will, at NextCard's election, contain an appropriate NextCard
copyright or trademark notice and a visible printed reference or hyperlink, as
appropriate, to the Origination Web Site.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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3.3.2 Amazon.com Copyrights and Amazon.com Marks. NextCard
hereby acknowledges that as between the Parties all rights in the Amazon.com
Copyrights and the Amazon.com Marks shall be the property of Amazon.com, and
Amazon.com hereby grants NextCard a nonexclusive, nontransferable, restricted
and royalty-free license to use the Amazon.com Copyrights and Amazon.com Marks
only in a manner and at such times as are expressly authorized by this
Agreement, as follows:
3.3.2.1 All materials produced by NextCard which utilize
the Amazon.com Copyrights or the Amazon.com Marks, including advertising
materials, will be submitted to Amazon.com not less than five (5) business days
prior to its first intended use for its prior written approval. If Amazon.com
does not object within the five-day period, Amazon.com shall be deemed to have
consented to NextCard's use of such materials;
3.3.2.2 All Amazon.com-related materials created by
NextCard will, at Amazon.com's election, contain an appropriate Amazon.com
copyright or trademark notice and a visible printed reference or hyperlink, as
appropriate, to the Origination Web Site and/or the Property;
3.3.2.3 The physical Co-Branded Cards will display the
URL for the Customer Service Web Site; and
3.3.2.4 All non-Internet ads must display the
Origination Web Site URL.
3.3.3 Except as specified in this Agreement, all uses of the
Marks will inure to the benefit of the Parties; provided that nothing in this
Section shall be read to imply that Amazon.com shall have any right, title or
interest in or to any Co-Branded Account receivable generated by any Co-Branded
Account holder.
3.3.4 Each Party grants to the other a nonexclusive,
nontransferable, restricted and royalty-free license: (i) to establish
hyperlinks to its appropriate Internet web sites (in the case of Amazon.com,
NextCard may link only to the Property) and, (ii) in connection with
establishing such links, to use each graphical image file of the Party,
including all Marks, contained therein (each an "Image") in conjunction with the
Co-Branded Card program only as contemplated by this Agreement; provided,
however, that neither Party shall add, subtract or in any way alter or edit any
Image (including, for this purpose, any machine-readable code which may be a
part of any Image) of the other Party, or make any use whatsoever of any Image
of the other Party other than for the purposes of, and as expressly contemplated
by, this Agreement. Each Party represents and warrants that it has the requisite
power to grant such license.
3.3.5 Upon termination or expiration of this Agreement, each
Party shall, except where authorized in writing by the other Party or under this
Agreement, cease the use or reference to the other Party's name, Marks, Images,
Copyrights and hyperlinks in any manner whatsoever, and destroy, at its own
expense, all Marketing Materials or other publications and
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promotional materials bearing the other Party's name, Marks, Images, Copyrights
and hyperlinks in its possession and in the possession of its agents, employees,
and independent contractors.
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SECTION FOUR
CUSTOMER RETENTION PROGRAMS
4.1. Establishment of Co-Branded Loyalty Program. The Co-Branded Card
will include a customer loyalty program (the "Co-Branded Loyalty Program")
designed by NextCard to promote use of the Co-Branded Card. Under the Co-Branded
Loyalty Program, Cardholders will receive points for using the Co-Branded Card
to purchase goods and services which points may be redeemed for rewards provided
through the Co-Branded Loyalty Program. The number of points required to earn
rewards under the Co-Branded Loyalty Program will be no greater than [*] times
the number of points required to earn rewards under the current NextCard loyalty
program. The rules and regulations governing the Co-Branded loyalty program
offered to NextCard's account holders (the "Rules and Regulations") are attached
hereto as Schedule H. By agreement of the parties, Schedule H hereto is
intentionally left blank as of the Effective Date, and will be drafted by
NextCard and mutually approved by the parties not later than six (6) weeks
following the Effective Date, at which time it will be appended hereto and made
a part hereof. Under the Co-Branded Loyalty Program, each Co-Branded Account
holder shall be given an offer that will allow participation in a single-points
reward program with no fees or balance transfers required.
4.2. NextCard's Rights and Responsibilities for the Loyalty Program.
4.2.1. NextCard shall be responsible for managing the Loyalty
Program, and for all administrative costs related thereto. The Loyalty Program
will be funded by NextCard at a rate of not less than [*] basis points [*]
of net Co-Branded Cardholder spending (defined as purchases less returns
and credits).
4.2.1.1. As soon as practicable following the Effective
Date, Amazon.com will contact the third-party provider of the Co-Branded Loyalty
Program rewards, [*], and commence negotiations to permit Amazon.com products to
be offered to Co-Branded Cardholders redeeming points earned under the Loyalty
Program If [*] does not accommodate Amazon.com's reasonable requests to (i)
discontinue the participation of certain vendors of goods and services through
the Co-Branded Loyalty Program that Amazon.com deems competitive to Amazon.com
or, (ii) substitute a vendor of Amazon.com's choosing for vendors currently
participating in the Co-Branded Loyalty Program, then NextCard will suppress
such vendors' participation in the Co-Branded Loyalty Program; provided,
however, that the parties must mutually agree on any Amazon.com suppression
request for any vendor not on the Restricted List.
4.2.1.2. Co-branded Cardholders may be offered
"double-points" for a fee not to exceed the fee charged from time to time by
NextCard to its other account holders.
4.2.2. NextCard may in its sole and complete discretion change
the terms or structure of the Co-Branded Loyalty Program, including the rules
and regulations and the provider of the program, at any time; provided, however,
that it shall give Amazon.com notice of any material change. Amazon.com hereby
acknowledges that it shall have no rights or interests
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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in the relationships and agreements between NextCard and its designated
affiliates or rewards provider. NextCard will provide a monthly report to
Amazon.com detailing all actual expenditures attributable to the Co-Branded
Loyalty Program, exclusive of overhead charges.
4.3. Amazon.com's Loyalty Program Option. Amazon.com may, at its sole
option and expense, develop a loyalty program to be offered to the Co-Branded
Cardholders (the "Amazon Program"). Following the development of the Amazon
Program, the parties will conduct a test, not to exceed four (4) calendar
months, whereunder the Amazon Program will be offered to a mutually agreed upon
percentage of new applicants for a Co-Branded Card. During the test, Amazon.com
will receive [*] basis points of net Co-Branded Cardholder spending for all
Co-Branded Cardholders who elect the Amazon Program. At the conclusion of the
test period, the parties will jointly evaluate the performance of the Amazon
Program, as compared with the Co-Branded Loyalty Program, with the objective of
choosing, in good faith, the program which, in the reasonable judgment of the
parties, is more likely to stimulate balance build and purchase activity.
4.3.1 Funding for the Amazon Program. If the Parties choose to
substitute the Amazon Program for the Co-Branded Loyalty Program, NextCard will
provide to Amazon.com funding for the Amazon Program of [*] basis points [*] of
net Co-Branded Cardholder spending.
4.4. Opportunities for Amazon.com. For Loyalty Programs offered to other
NextCard cardholders in general, NextCard will, subject to the approval of any
third-party operator of the such Loyalty Programs, provide Amazon.com with
opportunities for itself, its affiliates and entities with which it has formed
an alliance to have their goods and/or services included in the incentive
offerings on terms and conditions at least as favorable as those provided to
other vendors that participate in the Loyalty Programs.
4.5. Customer Retention Fund. NextCard shall establish, manage, and
maintain the Customer Retention Fund, to be held by NextCard in a non-commingled
bank account. The Customer Retention Fund shall be funded equally,
dollar-for-dollar, by NextCard and Amazon.com, provided that Amazon.com shall
determine when and in what amount funds shall be deposited, and provided further
that the maximum amount to be contributed in to the Customer Retention Fund
shall not exceed [*] per Co-Branded Account. Funds in the Customer Retention
Fund may only be spent on promotions and activities that the parties shall
mutually agree are designed to encourage Co-Branded Cardholders to retain and
use their Co-Branded Cards.
SECTION FIVE
MARKETING AND PROMOTION
5.1 Reporting. Amazon.com will provide monthly reports to NextCard of
the number of clicks. NextCard will provide monthly reports to Amazon.com of the
number of new Co-Branded Accounts applied for and the number and type of
Co-Branded Accounts accepted and opened. NextCard agrees to provide at least
monthly reports to Amazon.com of the: (i) number
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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of active Co-Branded Cards, (ii) average monthly purchases on Co-Branded Cards,
(iii) all operational reports related to the performance of NextCard's
obligations under Schedule E, (iv) all reports related to the performance of
NextCard's obligations under Schedule C, (v) average yield on the Co-Branded
Account portfolio, (vi) average annual percentage rate charged to Co-Branded
Accounts opened during the reporting period, (vii) percentage of Co-Branded
Account applicants that exercise the "opt-out" privilege described in Schedule
G, and (viii) data on the performance of each marketing tool (such as e-mail,
banner ads, etc.) employed by Amazon.com to promote the Co-Branded Card program.
NextCard will make reasonable efforts to automate such reporting and make it
available to Amazon.com via email.
5.2 Monthly Program Review. At least once per month following the
Effective Date of this Agreement and until termination or expiration of this
Agreement, the Parties shall conduct a monthly Co-Branded Card program review.
At a minimum, such review will include a report on the progress of the
financial, operational and marketing aspects of the Co-Branded Card program and
this Agreement and will review plans designed to achieve the New Co-Branded
Account Goals and the other requirements of this Agreement.
SECTION SIX
CONFIDENTIALITY, PROMOTION AND NONSOLICITATION.
6.1. Confidential Information. Each Party acknowledges that it may
acquire Confidential Information of the other Party in the course of exercising
its rights and carrying out its obligations under this Agreement. Each Party
agrees not to use Confidential Information of the other Party for its own
benefit or to disclose such information to any third party, except as
specifically authorized by this Agreement or reasonably necessary for the Party
to carry out its obligations hereunder. Each Party further agrees that its
employees, agents and independent contractors shall treat the other Party's
Confidential Information in the same manner as such Party is required to treat
such Confidential Information. Each Party to this Agreement shall not disclose
any information about the relationships created by this Agreement or any
information on the operation of the Co-Branded Card program, including but not
limited to, amounts paid and reports and financial information provided pursuant
to this Agreement, to any third party, except to the extent necessary to carry
out the Party's respective obligations under this Agreement, or with the prior
written consent of the other Party. In addition, either Party may disclose
Confidential Information to the extent that, in the reasonable opinion of its
legal counsel, it is legally required to be disclosed. The Party seeking to
disclose the Confidential Information shall notify the other Party a reasonable
time prior to disclosure and allow the other Party a reasonable opportunity to
seek appropriate protective measures.
6.2 Nothing in this Section 6 shall be deemed to prohibit:
6.2.1. Use or disclosure of the Party's Confidential Information
if a Party obtains such information from a source other than pursuant to the
relationship created by this Agreement, or
6.2.2. Disclosure of information required by subpoena, court
order or process, or governmental inquiry, provided that the Party from which
such information is sought provides
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the other Party with notice of the request of such information and a reasonable
opportunity to prevent disclosure of the information or to seek appropriate
protective measures.
6.3 Disposition of Confidential Information. Upon either Party's demand,
or upon the termination or expiration of this Agreement, the Parties shall
comply with each other's reasonable instructions regarding the disposition of
Confidential Information, which may include the return or destruction of any and
all Confidential Information (including any copies, extracts, compilations, or
reproductions thereof). Upon request, such compliance shall be certified in
writing, including a statement that no copies of Confidential Information have
been kept.
6.4 Targeting. Except as specifically provided by this Agreement,
NextCard will not target individuals for solicitation based solely on account of
their Co-Branded Account holder status. Nothing in this Section 6.4 shall
preclude NextCard from marketing products or services to a general population of
potential customers, some of whom may be Registered Buyers or Co-Branded Account
holders but are not targeted as such. NextCard shall not sell, license,
disclose, distribute or transfer to any third party a list consisting of
individuals known to NextCard to be Co-Branded Cardholders or any aggregate
purchasing or demographic information about individuals known to NextCard to be
Co-Branded Cardholders, that identifies the individuals as Co-Branded
Cardholders, either expressly or by direct implication. For a period of [*]
from the Launch Date, NextCard will not market the products and/or services of
any Amazon.com Competitor to that subset of NextCard's general cardholder base
that NextCard determines has purchased such products and/or services from
Amazon.com and no other merchant. Amazon.com shall not sell, license, disclose,
distribute or transfer to any third party a list consisting of individuals known
to Amazon.com to be Co-Branded Cardholders or any aggregate purchasing or
demographic information about individuals known to Amazon.com to be Co-Branded
Cardholders, that identifies the individuals as Co-Branded Cardholders, either
expressly or by direct implication.
6.5 Injunctive Relief. Each Party agrees that any unauthorized use or
disclosure of Confidential Information or a breach of this Section 6 may cause
immediate and irreparable harm to the affected Party for which money damages
shall not constitute an adequate remedy. Therefore, each Party agrees that
injunctive relief, including without limitation Ex Parte relief, without notice
or the posting of bond, shall be warranted in addition to any other remedies the
affected Party may have. In addition, the other Party agrees promptly to advise
the affected Party in writing of any unauthorized misappropriation, disclosure
or use by any person of the Confidential Information which may come to its
attention and to take all steps at its own expense reasonably requested by the
affected Party to limit, stop or otherwise remedy such misappropriation,
disclosure or use.
6.6 Promotion. The parties understand that their participation in this
relationship will be announced in a mutually agreed upon press release or press
event in advance of the Launch Date, and that from time to time additional press
releases will be required or deemed desirable by both parties. Amazon.com and
NextCard will pool their media-relations resources, internal and external, as
appropriate to develop a coordinated media plan and execute the desired or
necessary public relations goals. Both parties will provide advance approval for
inclusion of boilerplate
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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copy and for press releases and other public disclosures related to the
Co-Branded Card program. For inclusion in the main copy section of a release,
each Party's approval will be obtained in writing and not unreasonably withheld,
at least two Business Days in advance of the release date.
6.6.1 If either Amazon.com or NextCard reasonably determines
that the use of Shared Customer Data has resulted in a public protest (including
a lawsuit filed against either party) that, in the reasonable judgment of such
party, is reasonably likely to result in a material adverse effect on the
business, prospects or financial condition of such party, then Amazon.com and
NextCard will work together in good faith to respond to the protest, which may
include the issuance of a mutually acceptable press release discussing [*].
SECTION SEVEN
DURATION AND MODIFICATION OF THE AGREEMENT
7.1 Term. Subject to the provisions of this Section 7, this Agreement
shall be effective as of the Effective Date and shall continue for a term of
five (5) years from and after the Launch Date (the "Initial Term"). Following
the Initial Term, this Agreement shall be renewed for successive renewal terms
of [*] each (each, a "Renewal Term"), unless a Party provides written notice to
the other at least [*] prior to the termination of the Initial Term or each then
current Renewal Term stating that it does not wish to renew this Agreement. The
Initial Term and the Renewal Terms, if any, may be collectively referred to
herein as the "Term."
7.2 Default; Breach. If there is a material breach of any representation
or warranty, or default in the performance of any covenant or obligation of this
Agreement, by either Party, and such breach or default shall continue for a
period of thirty (30) days after receipt by the breaching or defaulting Party of
written notice thereof from the non-breaching or defaulting Party (setting
forth in detail the nature of such default), then this Agreement may terminate
at the option of the non-breaching or -defaulting Party as of the thirty-first
(31st) day following the receipt of such written notice. If, however, the breach
or default cannot be remedied within such thirty (30) day period, such time
period shall be extended for an additional period of not more than a Fortnight,
so long as the breaching or defaulting Party has notified the non breaching or
- -defaulting Party in writing and in detail of its plans to initiate substantive
steps to remedy the breach or default and diligently and continuously thereafter
pursues the same to completion within such additional Fortnight. Notwithstanding
the foregoing, any failure to perform by NextCard, as defined in Schedule E,
constitutes a material default by NextCard of this Agreement, allowing for
immediate termination by Amazon.com upon written notice to NextCard.
7.3 Insolvency. This Agreement shall be deemed immediately terminated,
without the requirement of further action or notice by either Party, in the
event that either Party, or a direct or indirect holding company of either
Party, shall become subject to voluntary or involuntary bankruptcy, insolvency,
receivership, conservatorship or like proceedings (including, but not limited
to, the takeover of such Party by the applicable regulatory agency) pursuant to
Applicable Law.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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7.4 Change in Applicable Law. If there is a modification or other change
in Applicable Law that has a material adverse effect on the ability of either
NextCard or Amazon.com to continue the Co-Branded Card program contemplated by
this Agreement, the parties shall meet or otherwise discuss whether it is
possible to modify this Agreement to continue the Co-Branded Card program. If
the parties are unable to agree to a modification to the Agreement, either Party
may terminate this Agreement upon prior written notice to the other Party. A
"material adverse effect" includes, among other things, any change in Applicable
Law that has a significant impact on the financial or operational burdens or
rewards of either Party under this Agreement. The Parties agree to modify the
Co-Branded Card program as necessary from time to time to comply with all
Applicable Law.
7.5 Change in Control. If either Party enters into any merger,
acquisition, transfer of control, or sale of substantially all of its assets, or
any similar transaction resulting in a change of control (the "Acquired Party"),
then the other Party (the "Non-Acquired Party") shall have the right to
terminate this Agreement without breach or penalty upon [*] days' notice;
provided that, the foregoing provision shall not affect the sale, assignment,
pledge or other hypothecation by the Issuer of any receivable(s), including any
finance charge, fee or other obligation owed to the Issuer by any Co-Branded
Account holder. Notwithstanding the foregoing, if the Non-Acquired Party
exercises its right to terminate this Agreement and (a) the successor to the
Acquired Party is not reasonably construed to be a competitor of the
Non-Acquired Party, or (b) if continuation of this Agreement by the Non-Acquired
Party with the successor to the Acquired Party would not constitute a material
breach by the Non-Acquired Party of any contract existing at the time the
Acquired Party entered into the change of control transaction, then, upon any
purchase of the Co-Branded Account portfolio by Amazon.com, pursuant to Section
8 hereof, (y) if Amazon.com is the Non-Acquired Party, the purchase price for
the Co-Branded Account portfolio shall be [*] of FMV, and (z) if NextCard is the
Non-Acquired Party, the purchase price for the Co-Branded Account portfolio
shall be [*] of FMV, in each case as FMV is defined and [*] calculated pursuant
to Section 8.2 hereof.
7.6 Termination for Convenience. So long as Amazon.com does not exercise
any of its rights under the Warrant (as defined below), Amazon.com shall have
the right to terminate this Agreement without cause, for convenience, at the end
of the [*] from the Launch Date upon delivery of at least [*] prior written
notice to NextCard; provided, that NextCard shall have the right to reject
unilaterally such termination if Amazon.com exercises the Warrant, in whole or
in part, at any time following any notification of termination for convenience.
7.7 Process upon Termination. Upon termination, expiration or breach of
this Agreement, the provisions of Section 8 shall apply and, consistent
therewith:
7.7.1 Amazon.com and NextCard shall work together to ensure an
orderly termination of the Co-Branded Card program; and
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
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7.7.2 Each Party shall promptly return to the other Party any
materials that have been supplied by such Party to the other, if any.
7.8 Warrant In Favor of Amazon.com. As soon as possible after the
Effective Date, NextCard shall issue, execute and deliver a valid warrant,
attached as Schedule F hereto, in favor of Amazon.com entitling Amazon.com to
purchase up to 4,400,000 shares of common stock of NextCard at a purchase price
of equal to one hundred and forty percent (140%) of the closing price of
NextCard common stock on the Business Day preceding the Effective Date, as
reported by the National Association of Securities Dealers Automated Quotation
System (the "Warrant"). In consideration for the Warrant, Amazon.com will pay to
NextCard, by wire transfer, twenty two million, five hundred thousand dollars
($22,500,000). If NextCard fails to issue, execute or deliver the Warrant, then
this Agreement (including the payment obligations of Amazon.com set forth in
this Section 7.8) shall fail of its essential purpose, and shall be null and
void as if never executed by the parties.
SECTION EIGHT
SALE OF ACCOUNTS
8.1 Sale of Accounts. At such time as this Agreement is terminated, for
whatever reason, Amazon.com shall have the option, subject to Applicable Law and
approval from all applicable parties involved in NextCard receivables financing,
as legally required, to purchase all of the Co-Branded Accounts (other than the
intellectual property associated with NextCard's prior use of the Customer Data)
by providing notice to NextCard of a desire to do so within five months prior to
the date fixed for termination of this Agreement. In the event of a termination
of this Agreement due to the breach of either party, then Amazon.com shall have
seven (7) days in which to give notice to NextCard of its intention to purchase
the portfolio.
8.2 Purchase Price; Appraisal Process. The purchase price for the
Co-Branded Account portfolio shall be the fair market value ("FMV") of the
portfolio as determined by appraisal; provided that, in the event of a
termination of this Agreement resulting from a material breach by Amazon.com,
the purchase price for the Co-Branded Account portfolio shall be [*] of the FMV;
and provided further, that in the event of a termination of this Agreement
resulting from (i) a material breach by NextCard or (ii) Amazon.com's
termination for convenience pursuant to Section 7.6, the purchase price for the
Co-Branded Account portfolio shall be FMV minus [*], provided that, if FMV is
less than [*], NextCard shall not be obligated to pay the difference to
Amazon.com. All third-party appraisal costs and expenses incurred during the
appraisal process shall be shared equally by the Parties. The conclusion of the
appraiser(s) shall be binding upon the Parties and conclusive for the purposes
described herein. Any appraiser selected under this Section 8 must be a top tier
United States investment bank with experience in credit card securitization.
8.2.1. If Amazon.com exercises its purchase option, the entire
portfolio of Co-Branded Accounts (including all Co-Branded Accounts in
charge-off or delinquent status) must be purchased and a purchase and sale
agreement shall be executed and shall establish a closing
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
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<PAGE> 20
date that allows NextCard, upon the exercise of its best efforts in regard
thereto, to remove the Co-Branded Accounts and associated balances from any
applicable loan or asset securitization arrangement. The purchase and sale
agreement shall also provide that upon payment of the purchase for the
Co-Branded Accounts to NextCard NextCard's obligation to continue to fund the
Co-Branded Loyalty Program shall cease.
8.2.2 The determination of FMV hereunder shall consider the
value of the portfolio of Co-Branded Accounts as if they had remained serviced
by NextCard, so as to fairly represent the portfolio's value, including customer
servicing, active customer management, cross-selling, and up-selling.
8.2.3 During the term of this Agreement, and subject to
Applicable Law, NextCard will take no action that would prevent the orderly
transfer of the Co-Branded Accounts following any termination of this Agreement.
8.2.4 In the event of a termination of this Agreement due to
either (i) Amazon.com's termination for convenience, or (ii) NextCard's
termination due to Amazon.com's breach, then, as soon as possible following
NextCard's receipt of Amazon.com's election to purchase, NextCard will choose an
appraiser to determine the FMV of the portfolio, which appraisal shall be
completed as soon as commercially reasonable. Should Amazon.com disagree with
the FMV in good faith within seven (7) days of the initial appraisal, then,
within an additional seven (7) days, each party will choose an additional
appraiser (for a total of three appraisers) to determine FMV as soon as might be
commercially reasonable thereafter, and the average of the three appraisals will
be binding. In the event of Amazon.com's termination of this Agreement due to
NextCard's breach, then, as soon as possible following NextCard's receipt of
Amazon.com's election to purchase, Amazon.com will choose an appraiser to
determine the FMV of the portfolio, which appraisal shall be completed as soon
as might be commercially reasonable. Should NextCard disagree with the FMV in
good faith within seven (7) days of the initial appraisal, then, within an
additional seven (7) days, each party will choose an additional appraiser (for a
total of three appraisers) to determine FMV as soon as might be commercially
reasonable thereafter, and the average of the three appraisals will be binding.
In the event of a termination of this Agreement at the end of the Term, then, as
soon as possible following NextCard's receipt of Amazon.com's election to
purchase, NextCard will choose an appraiser to determine the FMV of the
portfolio, which appraisal shall be completed as soon as might be commercially
reasonable. Should Amazon.com disagree with the FMV in good faith within seven
(7) days of the initial appraisal, then, within an additional seven (7) days,
Amazon.com will choose an additional appraiser (for a total of two appraisers)
to determine FMV as soon as might be commercially reasonable thereafter, and the
average of the two appraisals will be binding.
8.3 Termination Assistance. Upon notice of termination of this
Agreement, NextCard will provide to Amazon.com an account file in
industry-standard format for the Co-Branded Account portfolio as soon as
commercially reasonable. In the event of termination, NextCard will assist in
the transfer of the Co-Branded Accounts and Customer Data in a timely manner,
and will, for a period of [*] [*], not target any Co-Branded Cardholder for a
credit
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
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<PAGE> 21
card solicitation solely on the basis of their status as Co-Branded Cardholders.
Upon payment by Amazon.com for the portfolio, NextCard shall provide whatever
reasonable transitional assistance is requested at industry-standard rates for
such assistance.
8.4 Run-off Period. If, five months prior to the end of the Term or, in
the case of a termination for cause, within seven (7) days following NextCard's
receipt of Amazon.com's termination notice, Amazon.com does not choose to
purchase the existing portfolio of Co-Branded Accounts, then NextCard will
immediately discontinue offering new Co-Branded Accounts and will continue
servicing existing Co-Branded Accounts under the terms of this Agreement and any
Loyalty Program until the expiration of each Co-Branded Card or Account. In such
circumstances, replacement Co-Branded Cards will not be issued following their
expiration. For a period of [*] from the end of the Term, Amazon.com will not
target (for example, by use of email or welcome greeting) Co-Branded Cardholders
with an offer for any other bankcard, and, where reasonable, will identify and
exclude Co-Branded Cardholders from any such offer solicitation.
8.4.1 Following any event of termination, the Customer Retention
Fund shall be immediately distributed equally to the parties, after payment of
all outstanding or accrued costs, expense, charges or other liabilities.
SECTION NINE
REPRESENTATIONS, WARRANTIES, COVENANTS, AND INDEMNIFICATION
9.1 Representations, Warranties and Covenants of the Parties
9.1.1 By NextCard. NextCard represents and warrants that: (i) it
is a duly organized, validly existing Delaware corporation and in good standing
under the laws of Delaware; (ii) the execution and delivery by NextCard of this
Agreement, and the performance by NextCard of it obligations contemplated
hereunder, are within NextCard's corporate powers, have been duly authorized by
all necessary corporate action, do not require any consent or other action by or
in respect of, or filing with, any third party or governmental body or agency
(other than informational filings, including approval of card design, as
required by MasterCard or VISA), and do not contravene, violate or conflict
with, or constitute a default under, any provision of Applicable Law, or of the
charter or by-laws of NextCard or of any agreement, judgment, injunction, order,
decree or other instrument binding upon NextCard, or of any applicable VISA or
MasterCard rules or regulations; (iii) it is not currently aware of any claims,
and is not currently involved in any litigation, challenging NextCard's
ownership of NextCard Marks; (iv) all intellectual property used by NextCard
(excluding the intellectual property being provided by Amazon.com) in connection
with its obligations under this Agreement is either owned or properly licensed
by NextCard for the uses contemplated hereby and that such intellectual property
does not infringe the rights of any third parties (except that, as to patents,
this representation is given only as to current knowledge); (v) the services to
be provided by NextCard shall be performed in a diligent and professional manner
in accordance with NextCard's obligations under this Agreement and to
Amazon.com's reasonable satisfaction; (vi) all of NextCard's systems being used
in connection with the services contemplated
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<PAGE> 22
hereunder are year 2000 compliant in that all systems will provide the following
functions: (a) handle date information before, during and after January 1, 2000,
including without limitation, to accepting date input, providing date output and
performing calculations on dates or portions of dates; (b) function accurately
and without interruption before, during and after January 1, 2000, without any
change in operations associated with the advent of the new century and any
subsequent leap years; (c) respond to two-digit year-date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and predetermined
manner; and (d) store and provide output of date information in ways that are
unambiguous as to century; and (vii) NextCard will comply with all Applicable
Laws related to the offering, approving, denying, operating and servicing and
reporting of consumer credit products, services and accounts including the
Co-Branded Accounts and Co-Branded Cards. NextCard covenants that it will not
enter into an agreement with any party related to financing the receivables of
the Co-Branded Account portfolio that would interfere with Amazon.com's ability
to purchase the Co-Branded Account portfolio pursuant to this Agreement.
9.1.2 By Amazon.com. Amazon.com represents and warrants that:
(i) it is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) the execution and delivery by
Amazon.com of this Agreement, and the performance by Amazon.com of the
transactions contemplated hereby, are within Amazon.com's powers, have been duly
authorized by all necessary corporate action, do not require any consent or
other action by or in respect of, filing with, any third party or any
governmental body or agency, and do not contravene, violate or conflict with, or
constitute a default under, any provision of applicable law, court decision,
regulation, or under any governing documents, charter or bylaw, or any
agreement, judgment, injunction, order, decree or other instrument binding on
Amazon.com; (iii) it is not currently aware of any claims, and is not currently
involved in any litigation, challenging Amazon.com's ownership of Amazon.com
Marks, other than Amazon Bookstore Cooperative, Inc. v. Amazon.com; (iv) all
intellectual property used by Amazon.com (excluding the intellectual property
being provided by NextCard) in connection with its obligations under this
Agreement is either owned or properly licensed by Amazon.com for the uses
contemplated hereby and that such intellectual property does not infringe the
rights of any third parties (except that, as to patents, this representation is
given only as to current knowledge); (v) the services to be provided by
Amazon.com shall be performed in a diligent and professional manner in
accordance with Amazon.com's obligations under this Agreement and to NextCard's
reasonable satisfaction; (vi) on or before December 31, 1999, all of
Amazon.com's systems being used in connection with the services contemplated
hereunder will be year 2000 compliant in that all systems will provide the
following functions: (a) handle date information before, during and after
January 1, 2000, including without limitation, to accepting date input,
providing date output and performing calculations on dates or portions of dates;
(b) function accurately and without interruption before, during and after
January 1, 2000, without any change in operations associated with the advent of
the new century and any subsequent leap years; (c) respond to two-digit
year-date input in a way that resolves the ambiguity as to century in a
disclosed, defined, and predetermined manner; and (d) store and provide output
of date information in ways that are unambiguous as to century; and (vii)
Amazon.com will comply with all Applicable Laws related to its obligations
hereunder. Amazon.com represents and warrants
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that it has the right, power and authority to execute this Agreement and act in
accordance herewith.
9.1.3 By Amazon.com, Inc. Amazon.com,Inc. guarantees to NextCard
(but not to any third party) the performance of the obligations hereunder of
Amazon.com, L.L.C. (the "Obligations"); provided, however, that: (a) Amazon.com,
Inc. agrees only to act as a guarantor of the performance of the Obligations,
and not as a party thereto; (b) NextCard will include Amazon.com, Inc. as a
party to receive notice of breach of the Obligations pursuant to Section 7.2 of
the Agreement; and (c) Amazon.com shall have no greater obligation to perform
the Obligations than Amazon.com, L.L.C. with respect thereto.
9.2 Indemnification
9.2.1 NextCard shall not be responsible in any way for any
misrepresentation, negligent act or omission or willful misconduct of
Amazon.com, its affiliates, officers, directors, agents, or employees in
connection with the entry into or performance of any obligation of Amazon.com
under this Agreement. Further, Amazon.com shall indemnify, defend and hold
NextCard harmless from and against all claims, actions, suits or other
proceedings, and any and all losses, judgments, damages, expenses or other costs
(including reasonable counsel fees and disbursements), arising from or in any
way relating to: (i) any actual or alleged violation or inaccuracy of any
representation or warranty of Amazon.com contained in Section 9.1 above, (ii)
any actual or alleged infringement of any trademark, copyright, trade name or
other proprietary ownership interest resulting from the use by NextCard of the
Amazon.com Copyrights and the Amazon.com Marks as contemplated by this
Agreement, (iii) any negligent act or omission or willful misconduct of
Amazon.com or its directors, officers, employees, agents or assigns in
connection with the entry into or performance of this Agreement, and (iv) any
use or disclosure by Amazon.com of the Shared Customer Data in a manner not in
accordance with Applicable Law.
9.2.2 Amazon.com shall not be responsible in any way for any
misrepresentation, negligent act or omission or willful misconduct of NextCard,
its affiliates, officers, directors, agents, subcontractors or employees in
connection with the entry into or performance of any obligation of NextCard
under this Agreement. Further, NextCard shall indemnify, defend and hold
Amazon.com harmless from and against all claims, actions, suits or other
proceedings, and any and all losses, judgments, damages, expenses or other costs
(including reasonable counsel fees and disbursements), arising from or in any
way relating to: (i) any actual or alleged violation or inaccuracy of any
representation, warranty, or obligation of NextCard contained in this Agreement,
(ii) any act or omission of NextCard in connection with the issuance of
Co-Branded Card(s) and/or the administration of Co-Branded Accounts which
constitutes a violation of State of California or federal banking or consumer
credit laws or regulations or applicable VISA or MasterCard rules and
regulations, (iii) any actual or alleged infringement of any trademark,
copyright, trade name or other proprietary ownership interest resulting from the
use by Amazon.com of the NextCard Copyrights and the NextCard Marks as
contemplated by this Agreement, and (iv) any negligent act or omission or
willful misconduct of
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NextCard or its directors, officers, employees, agents or assigns in connection
with the entry into or performance of this Agreement.
SECTION 10
NOTICES
All notices under this Agreement shall be in writing, and shall be deemed given
when personally delivered, when sent by confirmed fax, when sent by confirmed
e-mail, or one business day after being sent by reputable overnight courier to
the address of the party to be notified as set forth in this section, or such
other address as such party last provided to the other by written notice
For NextCard: For Amazon:
[*] [*]
[*] [*]
NextCard, Inc. Amazon.com
595 Market Street, 18th Floor 1200 Twelfth Avenue South, Suite 1200
San Francisco, CA 94105 Seattle, WA 98144-2734
Fax: 415-836-9701 FAX: 206.266.1355
With a copy to: With a copy to:
[*] [*]
[*] [*]
NextCard, Inc. Amazon.com
595 Market Street, 18th Floor 1200 Twelfth Avenue South, Suite 1200
San Francisco, CA 94105 Seattle, WA 98144-2734
Fax: 415-836-9701 FAX: 206.834.7010
SECTION 11
SURVIVAL
Sections 8, 9, 10, 11, and 12 will survive any termination of this Agreement.
SECTION 12
MISCELLANEOUS
12.1 Subject to Applicable Law, neither party may disclose the terms of
this Agreement to any third party other than its financial and legal advisors
without the other party's prior written consent. For all purposes of this
Agreement, each party shall be and act as an independent contractor and not as
partner, joint venturer, or agent of the other and shall not bind nor attempt to
bind the other to any contract.
12.2 Neither party shall have any right or ability to assign, transfer,
or sublicense any obligations or benefit under this Agreement without the
written consent of the other (and any such attempt shall be void), except that a
party may assign and transfer this Agreement and its
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
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rights and obligations hereunder to any third party who succeeds to
substantially all its business or assets, in which case the provisions of this
Agreement shall inure to the benefit of and be binding upon such third party and
the consent of the non-assigning party shall not be required; provided that
nothing herein shall be construed to prohibit the sale, assignment, pledge or
other hypothecation by the Issuer, of any receivable(s), including any finance
charge, fee or other obligation owed to the Issuer by any Co-Branded Account
holder.
12.3 The failure of either party to enforce its rights under this
Agreement at any time for any period shall not be construed as a waiver of such
rights. This Agreement supersedes all proposals, oral or written, any letters of
intent, all negotiations, conversations, or discussions between or among parties
relating to the subject matter of this Agreement and all past dealing or
industry custom. No changes, modifications, or waivers are to be made to this
Agreement unless evidenced in writing and signed for and on behalf of both
parties. In the event that any provision of this Agreement shall be determined
to be illegal or unenforceable, that provision will be limited or eliminated to
the minimum extent necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable.
12.4 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to conflicts of law
provisions thereof. Each party acknowledges that any breach of the provisions of
this Agreement may cause the other party immediate and irreparable harm for
which there are no adequate remedies at law and will entitle such party to seek
immediate injunctive relief, in addition to any other remedies which may be
available. Any litigation pertaining to the interpretation or enforcement of
this Agreement shall be filed in and heard by the United States District Court
for the District of Delaware, and the parties hereby submit to the jurisdiction
of and waive any venue objections against such courts.
12.5 Headings herein are for convenience of reference only and shall in
no way affect interpretation of the Agreement. Unless the context clearly
requires otherwise, (a) the plural and singular members shall each be deemed to
include the other; (b) the masculine, feminine, and neuter genders shall each be
deemed to include the others; (c) "shall," "will," or "agrees" are mandatory,
and "may" is permissive; (d) "or" is not exclusive; (e) "includes" and
"including" are not limiting; and (f) "days" means calendar days unless
specifically provided otherwise. No provision of this Agreement shall inure to
the benefit of any third parties so as to constitute any such person a
third-party beneficiary of this Agreement. This Agreement shall be construed
without regard to any presumption or rule requiring construction against the
drafting party. Each of the individuals executing this Agreement on behalf of a
party individually represents and warrants that he or she has been authorized to
do so and has the power to bind the party for whom he or she is signing. The
parties hereby agree to execute such other documents and perform such other acts
as may be necessary or appropriate to carry out the purposes of this Agreement.
This Agreement may be executed in counterparts, each of which shall be deemed to
be an original but all of which together shall constitute one and the same
instrument. Signatures executing this Agreement may be delivered by facsimile
transmission.
12.6 Each party shall pay its own costs and expenses relating to the
negotiation, execution, delivery and performance of this Agreement.
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12.7 Force Majeure. Neither party will be liable for non-performance
hereunder to the extent such performance is prevented by fire, earthquake,
tornado, flood, explosion, embargo, war, riot, governmental regulation or act,
act of God, act of public enemy, or by reason of any other cause beyond such
party's reasonable control. A party's obligations to perform timely will be
excused to the extent, but only to the extent, that such performance is
prevented by a force majeure event.
12.8 Limitation on Damages. In no event will either party be entitled to
recover special, punitive, incidental or consequential damages, including
damages based on lost profits or lost business opportunities, arising out of a
breach of the other party's obligations hereunder, even if the party in breach
has been advised of the possibility of such damages.
IN WITNESS WHEREOF, NextCard and Amazon.com have caused this Agreement
to be executed by their duly authorized officers as of the date first written
above.
NextCard, Inc.
By:_________________________
Name:_______________________
Title:______________________
Amazon.com, L.L.C.
By:_________________________
Name:_______________________
Title:______________________
Amazon.com, Inc.
By:_________________________
Name:_______________________
Title:______________________
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SCHEDULE A: PRODUCT DESIGN
FEATURES BANKCARD OFFERING
Co-Branded Classic, Classic VISA or MasterCard: unsecured revolving line
Platinum and of credit.
PictureCard
Platinum VISA or MasterCard: Travel accident
insurance, auto rental insurance, medical and legal
referral and assistance, and toll-free access to the
VISA Assistance Center 24 hours a day, 365 days a
year.
PictureCard VISA or MasterCard: Build your own Classic
or Platinum card by uploading a digital image or
choosing from the online photo gallery.
No other types of Co-Branded Cards or Accounts shall
be issued to any applicant who applies for a
NextCard-branded credit card through the Origination
Web Site without Amazon.com's prior written approval,
which it may withhold in its sole discretion.
Credit Line Classic and Platinum: [*]
Interest rate The interest rates offered are based on each
applicant's unique credit profile. Various price
points will be offered including:
Classic and Platinum: Fixed rates (between [*] and
[*]) and low introductory rates (as low as [*])
going to fixed (as low as [*]) or variable (as low
as [*] + [*]).
Fees Classic and Platinum: No annual fee and tiered late
fees (e.g. $7 if five days late, $10 if ten days late
and $15 if fifteen days late); low over-limit charges
(e.g. $10).
Service Charges Service charges for cash advances and returned
items to be charged in accordance with the standard
fees charged by NextCard in its other card programs.
Payment Terms Grace period of 25 days when previous balance is
paid in full; No grace period for balance transfers or
cash advances.
Loyalty Program See Section 4
An asterisk [*] indicates that certain information has been omitted from this
agreement pursuant to a request for confidential treatment and has been filed
separately with the Securities and Exchange Commission.
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SCHEDULE B
AMAZON.COM COMPETITORS
Refer to Section 1.2 for completion requirements for Schedule B
Confidential
Page 28 of 42
<PAGE> 29
SCHEDULE C
COMPENSATION BY NEXTCARD TO AMAZON.COM
1. Account Fee. During the Term, NextCard will pay [*] [*] for each
Co-Branded Account opened during the Term (the "Account Fee"). Account Fees
shall be paid within thirty (30) days after the end of each month during which
the Co-Branded Account was opened.
2. Renewal Fee. During the Term, NextCard shall pay to Amazon.com a
renewal fee of [*] for each existing Co-Branded Account in good standing within
thirty (30) days after each such account's annual anniversary date (the "Renewal
Fee"). For purposes of this paragraph, the term "good standing" shall mean any
Co-Branded Account that on such anniversary date (i) is not [*] or more days
past due, or (ii) has had purchase activity in the preceding [*] days.
3. Guaranteed Minimum Payments. NextCard shall make guaranteed minimum
payments against the Account Fee within thirty (30) days after the end of each
month in the amounts set forth in the table below (the "Minimums"). Of each
Minimum, a dollar amount equal to [*] times the New Co-Branded Account Goal for
the given month shall be paid directly to Amazon.com. If in any given month, the
new Co-Branded Accounts opened exceed that month's New Account Goal, then
NextCard shall pay Amazon.com the Minimum plus the Account Fee for each
Co-Branded Account opened in excess of that month's New Account Goal. Payment of
Minimums, but not the Account Fees, shall cease upon the earlier of (i) the
termination of the Initial Term (unless the Parties agree otherwise), or (ii)
the date on which the cumulative New Co-Branded Account Goals for the Initial
Term are met (and, if such date occurs in the middle of a month during the
Initial Term, a pro-rata Minimum shall apply for such month). No Account Fees
above the monthly minimum shall be paid in any given month if the total of all
payments made in connection with this Agreement by NextCard to Amazon.com
divided by [*] is greater than the total of all Co-Branded Accounts originated
up through the date on which such calculation is performed divided by [*]. As an
example, if the monthly account goals for a four month period were [*] each
month, and the actual accounts achieved were [*] then the payments would be for
[*] accounts respectively. As an additional example, if the monthly account
goals for a four month period were [*] each month, and the actual accounts
achieved were [*] then the payments would be for [*] accounts respectively.
4. Performance. In return for the guaranteed payments received from
NextCard, Amazon.com agrees to deliver new co-branded accounts not to be less
than [*]% of the goal. If the actual number of new accounts achieved is less
than [*]% of the cumulative account goal during four consecutive months,
NextCard may suspend additional guaranteed payments to Amazon.com until the
actual cumulative number of new accounts reaches [*]% of the original goal
level.
5. Notwithstanding any termination for convenience by Amazon.com, on the
business day following the third anniversary of the Launch Date, NextCard will
pay to
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
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<PAGE> 30
Amazon.com a first incentive payment equal to the product of (i) [*] dollars [*]
and (ii) a fraction, the numerator of which shall be [*], and the denominator of
which shall be [*]. For example, if on the third anniversary, NextCard had
booked [*] Co-Branded Accounts but the cumulative Co-Branded Account Goal for
the first three years of the program was [*], Amazon.com would receive a payment
of [*]. Under no circumstances may the first incentive payment by NextCard to
Amazon.com, as calculated pursuant to the preceding formula, be greater than
[*]. Thus, if in the preceding example, NextCard books [*] accounts, the first
incentive payment would be capped at [*].
On the business day following the fifth anniversary of the
Launch Date, NextCard will pay to Amazon.com a second incentive payment equal to
the product of (i) [*] and (ii) a fraction, the numerator of which shall be [*],
and the denominator of which shall be (A) [*] minus (B) [*]. For example, if for
years [*] and [*], NextCard books [*] Co-Branded Accounts but the cumulative
Co-Branded Account Goal for the [*] years of the program was [*], Amazon.com
would receive a payment of [*]. Under no circumstances may the second incentive
payment by NextCard to Amazon.com, as calculated pursuant to the preceding
formula, be greater than [*] dollars [*]. Thus, if in the preceding example,
NextCard books [*] accounts, the second incentive payment would be capped at
[*]. No payment shall be made pursuant to this paragraph if Amazon.com has
exercised its right to terminate this Agreement due to a breach by NextCard, as
set forth in Section 7.2, and elects to purchase the Co-Branded Account
portfolio.
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 30 of 42
<PAGE> 31
New Account Marketing and Payment Schedule
THE FIRST DAY OF MONTH ONE IS CONCURRENT WITH THE "LAUNCH DATE."
<TABLE>
<CAPTION>
YEAR 1 Month 1 2 3 4 5 6
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 2 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 3 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 4 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 5 Month
--------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
</TABLE>
<TABLE>
<CAPTION>
YEAR 1 Month 7 8 9 10 11 12 Total
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 2 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 3 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 4 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
YEAR 5 Month
----------------------------------------------------------------------------------------------------------
Acct Goal
Cum. Goal
Min. Pmt [*]
</TABLE>
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 2 of 42
<PAGE> 32
SCHEDULE D
CARDHOLDER AGREEMENT
Refer to Section 1.6 for completion requirements for Schedule D
Confidential
<PAGE> 33
SCHEDULE E
CUSTOMER SERVICE AND ACCOUNT SERVICE PERFORMANCE STANDARDS
GENERAL REQUIREMENTS:
[*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 2 of 42
<PAGE> 34
[*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 3 of 42
<PAGE> 35
[*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 4 of 42
<PAGE> 36
[*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 5 of 42
<PAGE> 37
[*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 6 of 42
<PAGE> 38
[*]
An asterisk [*] indicates that certain information has been
omitted from this agreement pursuant to a request for
confidential treatment and has been filed separately with
the Securities and Exchange Commission.
Confidential
Page 7 of 42
<PAGE> 39
SCHEDULE F
FORM OF WARRANT
[ATTACHED SEPARATELY]
Confidential
Page 8 of 42
<PAGE> 40
SCHEDULE G
OPT OUT PROVISION
You agree that NextCard will share certain information relating to your
account with Amazon.com. This information will only be shared with Amazon.com
and will not be shared with any other party by either NextCard or Amazon.com
without your express consent, or as otherwise required by law or to administer
your account. Use of this information by Amazon.com will be limited to the
marketing of products and services, and will in no way be used in determining
your credit worthiness or to evaluate you for any extension of credit. You can
opt out of this information sharing by unchecking the checkbox adjacent to this
paragraph. You can also change your election at any time in the future by
visiting the Customer Service Web Site.
Confidential
Page 9 of 42
<PAGE> 41
SCHEDULE H: TERMS AND CONDITIONS OF LOYALTY PROGRAM
Refer to Section 4.1 for completion requirements for Schedule H
Confidential
Page 10 of 42
<PAGE> 1
EXHIBIT 10.2
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS, AND NO
INTEREST MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE
TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING
SAID SECURITIES, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE
HOLDER OF THE SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH
TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES
ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
No. W- __________ WARRANT TO PURCHASE
ISSUED: November 8, 1999 COMMON STOCK
Void After November 8, 2002
NEXTCARD, INC.
WARRANT
THIS IS TO CERTIFY that, for twenty two million five hundred thousand
dollars ($22,500,000.00) and other value received and subject to these terms and
conditions, Amazon.com, Inc., or such person to whom this Warrant is transferred
(the "HOLDER"), is entitled to exercise this Warrant to purchase 4,400,000 fully
paid and nonassessable shares of NextCard, Inc., a Delaware corporation (the
"COMPANY"), $0.001 par value per share, Common Stock (the "WARRANT STOCK") at a
price per share of thirty nine dollars and twenty cents ($39.20) (the "EXERCISE
PRICE") (such number of shares, type of security and the Exercise Price being
subject to adjustment as provided below), subject to the conditions and terms
set forth below. This Warrant is fully vested, non-forfeitable, and immediately
exercisable upon issuance.
<PAGE> 2
1. METHOD OF EXERCISE
1.1 CASH EXERCISE RIGHT
Subject to the terms and conditions set forth herein, this Warrant may
be exercised by the Holder, at any time after the date of issuance, but not
later than November 8, 2002 (the "EXERCISE PERIOD"), in whole or in part, by
delivering to the Company at 595 Market Street, Suite 1800, San Francisco,
California 94105 (or such other office or agency of the Company as it may
designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company) (a) this Warrant agreement, (b) evidence
of a wire transfer to such account as the Company may designate, in the amount
of the Exercise Price multiplied by the number of shares for which this Warrant
is being exercised (the "PURCHASE PRICE"), and (c) the Notice of Cash Exercise
attached as EXHIBIT A duly completed and executed by the Holder. Upon exercise,
the Holder shall be entitled to receive from the Company a stock certificate in
proper form representing the number of shares of Warrant Stock purchased.
1.2 NET ISSUANCE RIGHT
Subject to the terms and conditions set forth in Section 1.3 hereof,
notwithstanding the payment provisions set forth above, the Holder may elect to
convert this Warrant into shares of Warrant Stock by surrendering this Warrant
at the office of the Company at the address set forth in Section 1.1 and
delivering to the Company the Notice of Net Issuance Exercise attached as
EXHIBIT B duly completed and executed by the Holder, in which case the Company
shall issue to the Holder the number of shares of Warrant Stock of the Company
equal to the result obtained by (a) subtracting B from A, (b) multiplying the
difference by C, and (c) dividing the product by A as set forth in the following
equation:
(A - B) x C
X = ----------- where:
A
X = the number of shares of Warrant Stock issuable upon
net issuance exercise pursuant to the provisions of this
Section 1.2.
A = the Fair Market Value (as defined below) of one share
of Warrant Stock on the date of net issuance exercise.
B = the Exercise Price for one share of Warrant Stock
under this Warrant.
C = the number of shares of Warrant Stock as to which this
Warrant is exercisable pursuant to the provisions of
Section 1.1.
-2-
<PAGE> 3
If the foregoing calculation results in a negative number, then no
shares of Warrant Stock shall be issued upon net issuance exercise pursuant to
this Section 1.2.
"FAIR MARKET VALUE" of a share of Warrant Stock shall mean:
(a) if the Company's Common Stock (the "COMMON STOCK") is traded on an
exchange or is quoted on the Nasdaq National Market, the average of the closing
or last sale price reported for the five business days immediately preceding the
date of net issuance exercise;
(b) if the Company's Common Stock is not traded on an exchange or on the
Nasdaq National Market, but is traded in the over-the-counter market, the mean
of the closing bid and asked prices reported for the five market days
immediately preceding the date of net issuance exercise;
(c) if the net issuance exercise is in connection with a transaction
specified in Section 4.1, the value of the consideration (determined, in the
case of noncash consideration, in good faith by the Company's Board of
Directors) to be received pursuant to such transaction by the holder of one
share of Warrant Stock; and
(d) if the Company is no longer traded on an exchange, the Nasdaq
National Market or the over-the-counter market and the net issuance exercise is
not in connection with a transaction specified in Section 4.1, the fair value as
determined in good faith by the Company's Board of Directors.
Upon net issuance exercise in accordance with this Section 1.2, the
Holder shall be entitled to receive from the Company a stock certificate in
proper form representing the number of shares of Warrant Stock determined in
accordance with the foregoing.
2. DELIVERY OF STOCK CERTIFICATES; NO FRACTIONAL SHARES
2.1 Within five days after the payment of the Purchase Price following
the exercise of this Warrant (in whole or in part) or after notice of net
issuance exercise and compliance with Section 1.2, the Company at its expense
shall issue in the name of and deliver to the Holder (a) a certificate or
certificates for the number of fully paid and nonassessable shares of Warrant
Stock to which the Holder shall be entitled upon such exercise, and (b) a new
Warrant of like tenor to purchase up to that number of shares of Warrant Stock,
if any, as to which this Warrant has not been exercised if this Warrant has not
expired. The Holder shall for all purposes be deemed to have become the holder
of record of such shares of Warrant Stock on the date this Warrant was exercised
(the date the Holder has fully complied with the requirements of Section 1.1 or
1.2), irrespective of the date of delivery of the certificate or certificates
representing the Warrant Stock; provided that, if the date such exercise is made
is a date when the stock transfer books of the Company are closed, such person
shall be deemed to have become the holder of record of such shares of Warrant
Stock at the close of business on the next succeeding date on which the stock
transfer books are open.
-3-
<PAGE> 4
2.2 No fractional shares shall be issued upon the exercise of
this Warrant. In lieu of fractional shares, the Company shall pay the Holder a
sum in cash equal to the Fair Market Value of the fractional shares on the date
of exercise.
3. COVENANTS AS TO WARRANT STOCK
The Company covenants that at all times during the Exercise Period there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of Warrant Stock as is necessary for exercise in full of this
Warrant and, from time to time, it will take all steps necessary to amend its
Certificate of Incorporation to provide sufficient reserves of shares of Warrant
Stock. All shares of Warrant Stock issued pursuant to the exercise of this
Warrant will, upon their issuance, be validly issued and outstanding, fully paid
and nonassessable, free and clear of all liens and other encumbrances or
restrictions on sale and free and clear of all preemptive rights, except
restrictions arising under federal and state securities laws, or by agreement
between the Company and the Holder or its successors.
4. ADJUSTMENTS; TERMINATION OF WARRANT UPON CERTAIN EVENTS
4.1 EFFECT OF REORGANIZATION
Upon a merger, consolidation, acquisition of all or substantially all of
the property or stock, liquidation or other reorganization of the Company
(collectively, a "REORGANIZATION") during the Exercise Period, as a result of
which the stockholders of the Company receive cash, stock or other property in
exchange for their shares of stock, lawful provision shall be made so that the
Holder shall thereafter be entitled to receive, upon exercise of this Warrant
during the Exercise Period, the number of shares of securities of the successor
corporation resulting from such Reorganization (and cash and other property) to
which a holder of the Warrant Stock issuable upon exercise of this Warrant would
have been entitled in such Reorganization if this Warrant had been exercised
immediately prior to such Reorganization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Warrant
with respect to the rights and interest of the Holder after the Reorganization
to the end that the provisions of this Warrant (including adjustments of the
Exercise Price and the number and type of securities purchasable pursuant to the
terms of this Warrant) shall be applicable after that event, as near as
reasonably may be, in relation to any shares deliverable after that event upon
the exercise of this Warrant.
4.2 ADJUSTMENTS FOR STOCK SPLITS, DIVIDENDS
If the Company shall issue any shares of the same class as the Warrant
Stock as a stock dividend or subdivide the number of outstanding shares of such
class into a greater number of shares, then, in either such case, the Exercise
Price in effect before such dividend or subdivision shall be proportionately
reduced and the number of shares of Warrant Stock at that time issuable pursuant
to the exercise of this Warrant shall be proportionately increased; and,
conversely, if the Company shall contract the number of outstanding shares of
the same class as the Warrant Stock by combining such shares into a smaller
number of shares, then
-4-
<PAGE> 5
the Exercise Price in effect before such combination shall be proportionately
increased and the number of shares of Warrant Stock at that time issuable
pursuant to the exercise or conversion of this Warrant shall be proportionately
decreased. Each adjustment in the number of shares of Warrant Stock issuable
shall be to the nearest whole share.
5. SECURITIES LAWS RESTRICTIONS; LEGEND ON WARRANT STOCK
5.1 This Warrant and the securities issuable upon exercise have not been
registered under the Securities Act of 1933, as amended, or applicable state
securities laws, and no interest in this Warrant or in the Warrant Stock may be
sold, distributed, assigned, offered, pledged or otherwise transferred to other
than a wholly owned subsidiary of Amazon.com, Inc. unless (a) there is an
effective registration statement under such Act and applicable state securities
laws covering any such transaction involving said securities, (b) the Company
receives an opinion of legal counsel for the holder of the securities
satisfactory to the Company stating that such transaction is exempt from
registration, or (c) the Company otherwise satisfies itself that such
transaction is exempt from registration.
5.2 A legend setting forth or referring to the above restrictions shall
be placed on this Warrant, any replacement and any certificate representing the
Warrant Stock, and a stop transfer order shall be placed on the books of the
Company and with any transfer agent until such securities may be legally sold or
otherwise transferred.
6. REGISTRATION RIGHTS
The Company shall in good faith use commercially reasonable best efforts
to add, within 90 days of the date hereof, the Holder as a party to Third
Amended and Restated Investors' Rights Agreement, dated November 5, 1998,
between the Company and certain investors of the Company (the "Investors' Rights
Agreement"), such that the Warrant Stock shall constitute "Registrable
Securities" and the Holder shall constitute an "Investor" (as such terms are
defined in the Investors' Rights Agreement), provided, however, that Sections 2,
3 and 4 of the Investors' Rights Agreement shall not apply to the Holder. If
after such 90 day period lapses, the Company has been unable to add the Holder
as a party to the Investors' Rights Agreement, the Company shall enter into an
agreement with the Holder to provide Holder with piggy-back rights as set forth
in Section 1.6 of the Investors' Rights Agreement within 45 days of the
expiration of such 90 day period.
7. EXCHANGE OF WARRANT; LOST OR DAMAGED WARRANT CERTIFICATE
Upon receipt by the Company of satisfactory evidence of the loss, theft,
destruction or damage of this Warrant and either (in the case of loss, theft or
destruction) reasonable indemnification or (in the case of damage) the surrender
of this Warrant for cancellation, the Company will execute and deliver to the
Holder, without charge, a new Warrant of like denomination.
-5-
<PAGE> 6
8. NOTICES OF RECORD DATE, ETC.
In the event of
(a) any taking by the Company of a record of the holders of securities
of the same class as the Warrant Stock for the purpose of determining the
holders who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right;
(b) any reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person;
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
(d) any proposed issue or grant by the Company to the holders of
securities of the same class as the Warrant Stock of any shares of stock of any
class or any other securities, or any right or warrant to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities; or
(e) any other event as to which the Company is required to give notice
to any holders of securities of the same class as the Warrant Stock, then and in
each such event the Company will mail to the Holder a notice specifying (i) the
date on which any such record is to be taken, (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as to which the holders of record of securities of the
same class as the Warrant Stock or securities into which the Warrant Stock is
convertible shall be entitled to exchange their shares for securities or other
property deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up, (iii)
the amount and character of any stock or other securities, or rights or
warrants, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made, and (iv) in reasonable detail, the facts, including
the proposed date, concerning any other such event. Such notice shall be
delivered to the Holder at least 7 business days prior to the record date
specified in the notice, unless a different date is proscribed by law.
9. INVESTMENT INTENT
Holder makes the investment representations and warranties set forth on
Exhibit A attached hereto, which exhibit has been signed by Holder.
-6-
<PAGE> 7
10. MISCELLANEOUS
10.1 HOLDER AS OWNER
The Company may deem and treat the holder of record of this Warrant as
the absolute owner for all purposes regardless of any notice to the contrary.
10.2 NO STOCKHOLDER RIGHTS
This Warrant shall not entitle the Holder to any voting rights or any
other rights as a stockholder of the Company or to any other rights except the
rights stated herein; and no dividend or interest shall be payable or shall
accrue in respect of this Warrant or the Warrant Stock, until this Warrant is
exercised.
10.3 NOTICES
Unless otherwise provided, any notice under this Warrant shall be given
in writing and shall be deemed effectively given (a) upon personal delivery to
the party to be notified, (b) upon confirmation of receipt by fax by the party
to be notified, (c) one business day after deposit with a reputable overnight
courier, prepaid for overnight delivery and addressed as set forth in (d), or
(d) three days after deposit with the United States Post Office, postage
prepaid, registered or certified with return receipt requested and addressed to
the party to be notified at the address indicated below, or at such other
address as such party may designate by 10 days' advance written notice to the
other party given in the foregoing manner.
If to the Holder:
To the address last furnished
in writing to the Company by
the Holder
If to the Company:
NextCard, Inc.
Attention: General Counsel
595 Market Street, Suite 1800
San Francisco, California 94105
Facsimile: 415-836-9701
10.4 AMENDMENTS AND WAIVERS
Any term of this Warrant may be amended only with the written consent of
the Company and the Holder and the observance of any term may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only with the written consent of the affected waiving party. Any amendment or
waiver effected in accordance with this Section 9.4 shall be binding on each
future Holder and the Company.
-7-
<PAGE> 8
10.5 GOVERNING LAW; JURISDICTION; VENUE
This Warrant shall be governed by and construed under the laws of the
State of Delaware without regard to principles of conflict of laws. The parties
irrevocably consent to the jurisdiction and venue of the United States District
Court for the District of Delaware in connection with any action relating to
this Warrant.
10.6 SUCCESSORS AND ASSIGNS; TRANSFER
Neither party shall have any right or ability to assign, transfer, or
sublicense any obligations or benefit under this Warrant without the written
consent of the other (and any such attempt shall be void), except that (i) a
party will assign and transfer this Warrant and its rights and obligations
hereunder to any third party who succeeds to substantially all its business or
assets and (ii) the Holder may assign to any direct or indirect wholly-owned
subsidiary of the Holder, in each such case the terms and conditions of this
Warrant shall inure to the benefit of and be binding on such respective
successors and assigns.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the date
first written above.
NEXTCARD, INC.
By _________________________________
Name:_______________________________
Title:______________________________
-8-
<PAGE> 9
EXHIBIT A
NOTICE OF CASH EXERCISE
To: NextCard, Inc.
The undersigned hereby irrevocably elects to purchase ___________ shares
of Common Stock of NextCard, Inc. (the "COMPANY") issuable upon the exercise of
the attached Warrant and requests that certificates for such shares be issued in
the name of and delivered to the address of the undersigned, at the address
stated below and, if said number of shares shall not be all the shares that may
be purchased pursuant to the attached Warrant, that a new Warrant evidencing the
right to purchase the balance of such shares be registered in the name of, and
delivered to, the undersigned at the address stated below. The undersigned
agrees with and represents to the Company that said shares of the Common Stock
of the Company are acquired for the account of the undersigned for investment
and not with a view to, or for sale in connection with, any distribution or
public offering within the meaning of the Securities Act of 1933, as amended.
Payment enclosed in the amount of $___________.
Company Debt canceled in the amount of $__________.
Dated: ________________
Name of Holder of Warrant:______________________________________________
(please print)
Address:________________________________________________________________
Signature:______________________________________________________________
<PAGE> 10
EXHIBIT B
NOTICE OF NET ISSUANCE EXERCISE
To: NextCard, Inc.
The undersigned hereby irrevocably elects to convert the attached
Warrant into such number of shares of common stock of NextCard, Inc. (the
"COMPANY") as is determined pursuant to Section 1.2 of the attached Warrant. The
undersigned requests that certificates for such net issuance shares be issued in
the name of and delivered to the address of the undersigned, at the address
stated below. The undersigned agrees with and represents to the Company that
said shares of Common Stock of the Company are acquired for the account of the
undersigned for investment and not with a view to, or for sale in connection
with, any distribution or public offering within the meaning of the Securities
Act of 1933, as amended.
Dated: ____________________
Name of Holder of Warrant:______________________________________________
(please print)
Address:________________________________________________________________
Signature:______________________________________________________________
<PAGE> 11
ASSIGNMENT
For value received the undersigned sells, assigns and transfers to the
transferee named below the attached Warrant, together with all right, title and
interest, and does irrevocably constitute and appoint the transfer agent of
NextCard, Inc. (the "COMPANY") as the undersigned's attorney, to transfer said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated: __________________________
Name of Holder of Warrant:______________________________________________
(please print)
Address:________________________________________________________________
Signature:______________________________________________________________
Name of transferee:_____________________________________________________
(please print)
Address of transferee:__________________________________________________
<PAGE> 12
EXHIBIT A
Investment Representations
Amazon.com hereby makes the following certifications and representations
with respect to the Warrant.
1. We acknowledge and agree that we will be bound by, and benefit from,
all of the terms and conditions of the Warrant.
2. We are an "accredited investor," as that term is defined in
Regulation D of the Securities Act of 1933, as amended (the "Securities Act");
3. We have acquired the Warrant (and would, upon exercise acquire the
Warrant Stock) solely for our own account for investment purposes and not with a
view to or for the public resale or distribution (within the meaning of the
Securities Act) of the Warrant or Warrant Stock or any part thereof.
4. We understand that the Warrant and the Warrant Stock have not been
registered under the Securities Act, on the basis that no distribution or public
offering of the Warrant or Warrant Stock is to be effected. We realize that the
basis for the exemption may not be present if, notwithstanding my
representations, we have a present intention of selling, granting a
participation in, or otherwise disposing of the same. We have no such intention.
5. We recognize that the Warrant and the Warrant Stock are "restricted
securities" as such term is defined in Rule 144 promulgated under the Securities
Act ("Rule 144"), and must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available. We recognize that the Company has no obligation to comply with any
exemption from such registration.
6. We are aware that the Warrant or the Warrant Stock may not be sold
pursuant to Rule 144 unless certain condition are met.
7. We acknowledge that we have had ample opportunity to review and
analyze all public information, including financial statements, pertaining to
the Company's business.
-2-
<PAGE> 13
8. We understand and agree that all certificates evidencing the Warrant
Stock may bear the following legend:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND HAVE BEEN TAKEN BY THE ISSUEE FOR INVESTMENT
PURPOSES. SAID SHARES MAY NOT BE SOLD OR TRANSFERRED
UNLESS (A) THEY HAVE BEEN REGISTERED UNDER SAID ACT, OR
(B) THE TRANSFER AGENT (OR THE COMPANY IF THEN ACTING AS
ITS OWN TRANSFER AGENT) IS PRESENTED WITH EITHER A
WRITTEN OPTION OF COUNSEL SATISFACTORY TO THE COMPANY OR
A "NO-ACTION" OR INTERPRETIVE LETTER FROM THE S.E.C. TO
THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE CIRCUMSTANCES OF SUCH SALE OR TRANSFER."
By:____________________________
Name:__________________________
Its: __________________________
-3-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NEXTCARD, INC. FOR THE QUARTER ENDED
SEPTEMBER, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 99,534
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 268,014
<ALLOWANCE> 6,178
<TOTAL-ASSETS> 388,906
<DEPOSITS> 2,541
<SHORT-TERM> 229,129
<LIABILITIES-OTHER> 37,556
<LONG-TERM> 11,879
0
0
<COMMON> 46
<OTHER-SE> 124,576
<TOTAL-LIABILITIES-AND-EQUITY> 388,906
<INTEREST-LOAN> 7,992
<INTEREST-INVEST> 2,585
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,577
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 5,762
<INTEREST-INCOME-NET> 4,815
<LOAN-LOSSES> 5,762
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 54,121
<INCOME-PRETAX> (52,444)
<INCOME-PRE-EXTRAORDINARY> (52,444)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,444)
<EPS-BASIC> (2.11)
<EPS-DILUTED> (2.11)
<YIELD-ACTUAL> 7.24
<LOANS-NON> 0
<LOANS-PAST> 938
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 949
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 6,178
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
