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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999
REGISTRATION NO. 333-74755
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEXTCARD, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6141 68-0384-606
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(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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595 MARKET STREET, SUITE 1800
SAN FRANCISCO, CALIFORNIA 94105
(415) 836-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JEREMY R. LENT
CHIEF EXECUTIVE OFFICER
NEXTCARD, INC.
595 MARKET STREET, SUITE 1800
SAN FRANCISCO, CALIFORNIA 94105
(415) 836-9700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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RONALD H. STAR, ESQ. JAY K. HACHIGIAN, ESQ.
PAUL A. REINER, ESQ. BROOKS STOUGH, ESQ.
JOANNE BAL, ESQ. WILLIAM E. GROWNEY, JR., ESQ.
ROLA J. YAMINI, ESQ. KIRIL M. DOBROVOLSKY, ESQ.
BRETT MCDONNELL, ESQ. GUNDERSON DETTMER STOUGH
HOWARD, RICE, NEMEROVSKI, CANADY, VILLENEUVE FRANKLIN & HACHIGIAN, LLP
FALK & RABKIN, A PROFESSIONAL CORPORATION 155 CONSTITUTION DRIVE
THREE EMBARCADERO CENTER, SUITE 700 MENLO PARK, CALIFORNIA 94025
SAN FRANCISCO, CALIFORNIA 94111 (650) 321-2400
(415) 434-1600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
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Common Stock, $.001 par value............................... 109,250,000 $30,371.50
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(1) Estimated solely for the purpose of computing the amount of the registration
fee.
(2) $23,977.50 of the registration fee was previously paid to the SEC.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- MAY 12, 1999.
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PROSPECTUS
, 1999
LOGO
5,000,000 SHARES OF COMMON STOCK
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NEXTCARD, INC.:
- - We are a leading Internet-based provider of consumer credit.
- - Our product, the NextCard Visa(R), is offered through our website,
www.nextcard.com.
- - NextCard, Inc.
595 Market Street, Suite 1800
San Francisco, California 94105
(415) 836-9700
PROPOSED SYMBOL AND MARKET:
- - NXCD/Nasdaq National Market
THE OFFERING:
- - NextCard is offering 5,000,000 shares of its common stock.
- - The underwriters have an option to purchase an additional 750,000 shares from
NextCard to cover over-allotments.
- - We currently estimate that the price of the shares will be between $17 and
$19.
- - This is our initial public offering.
- - We plan to use the proceeds from this offering for working capital, including
financing a portion of the origination and purchase of credit card loan
receivables, and potentially for future capital contributions to NextBank,
N.A., our proposed limited purpose bank subsidiary.
- - Closing: , 1999.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to NextCard:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
[Inside Cover of Prospectus]
[Picture of www.nextcard.com web page]
Apply Now!
<PAGE> 4
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<S> <C> <C>
[Prospectus Gatefold]
[NextCard online [NextCard PictureCard [NextCard Go Shopping!
balance transfer web page] web page]
web page]
My Visa PictureCard Internet Shopping Tools
Transfer balances online
You're Approved!
[Picture of
NextCard Visa
credit cards]
[NextCard customized Double Rew@rds Points
offers web page] [NextCard Reward web page]
Customized upgrade offers
[NextCard account
statement web page]
Manage your
account online
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TABLE OF CONTENTS
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Page
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Prospectus Summary........................ 3
Risk Factors.............................. 6
Special Note Regarding Forward-Looking
Statements.............................. 16
Use of Proceeds........................... 17
Dividend Policy........................... 17
Capitalization............................ 18
Dilution.................................. 19
Selected Consolidated Financial Data...... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
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Page
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Business.................................. 33
Management................................ 48
Certain Transactions...................... 56
Principal Stockholders.................... 58
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 65
Underwriting.............................. 67
Legal Matters............................. 69
Experts................................... 69
Additional Information.................... 70
Index to Consolidated Financial
Statements.............................. F-1
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Our corporate headquarters and business address is 595 Market Street, Suite
1800, San Francisco, California 94105 and our telephone number is (415)
836-9700. Our website is www.nextcard.com. The information on our website is not
incorporated by reference into this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of common stock.
Unless otherwise indicated, all information in this prospectus:
- gives effect to the conversion of all of our outstanding shares of
preferred stock into shares of common stock upon the closing of this
offering;
- assumes no exercise of the underwriters' option to purchase an additional
750,000 shares of common stock;
- gives effect to the 4.5-for-1 stock split to occur prior to the closing
of this offering;
- displays the number of authorized and issued shares of preferred stock on
an as-converted into common stock basis; and
- gives effect to our reincorporation from California to Delaware, to
become effective prior to the closing of this offering.
The shares of common stock we are selling in this offering are voting
shares. We also have a series of nonvoting common stock that will be outstanding
upon the closing of this offering. Except as otherwise indicated, references to
common stock and common shares do not include our nonvoting common stock.
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to each dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to its unsold
allotments or subscriptions.
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NextCard is our registered trademark. This prospectus also contains
trademarks of other companies.
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[INTENTIONALLY LEFT BLANK]
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and the related notes appearing elsewhere
in this prospectus.
NEXTCARD, INC.
OUR BUSINESS
We are a leading Internet-based provider of consumer credit. We were the
first company to offer an online credit approval system for a Visa(R) card and
to provide interactive, customized offers for credit card applicants.
We combine expertise in consumer credit, an exclusive Internet focus and
sophisticated direct marketing techniques with the aim of attracting profitable
customer segments on the Internet. Our product, the NextCard(R) Visa, which we
call the First True Internet Visa, is marketed to consumers exclusively through
our website, www.nextcard.com. The NextCard Visa, which can be used for both
online and offline purchases, offers:
- ONLINE CREDIT APPROVAL WITHIN SECONDS
- ONLINE SELECTION OF CUSTOMIZED OFFERS BASED UPON THE APPLICANT'S CREDIT
PROFILE
- INTERNET SHOPPING ENHANCEMENTS
- INTERNET-BASED ACCOUNT MANAGEMENT
OUR MARKET OPPORTUNITY
Due to the growth of electronic commerce, the ability to target customers
on the Internet and the dynamics of the credit card industry, we believe there
is a significant opportunity to offer credit cards through targeted marketing on
the Internet. NextCard was formed to capitalize on this opportunity.
OUR STRATEGY
Our objective is to enhance our position as a leading Internet-based
provider of customized consumer credit products and services. The key elements
of our strategy are:
- DIRECT MARKETING STRATEGY: Use data analysis techniques to expand our
expertise in Internet direct marketing in order to find and attract the
most profitable customers.
- PRODUCT STRATEGY: Offer customized product choices to our customers,
allowing them to design their own product interactively.
- TECHNOLOGY STRATEGY: Apply Internet innovations as they occur to provide
enhanced customer functionality more rapidly than our competitors.
- BRANDING STRATEGY: Leverage our leadership in Internet consumer
financial services to continue to build brand recognition.
The NextCard Visa has experienced significant consumer demand since its
introduction in December, 1997. As of March 31, 1999, we had received more than
1.7 million applications for the NextCard Visa and had generated over $170.0
million in new loans. We earn most of our revenues from the finance charges paid
by our customers based on their outstanding balances. We also earn revenues from
the amounts paid through the Visa system for purchases made with the NextCard
Visa and from fees paid by our cardholders.
3
<PAGE> 8
THE OFFERING
Common stock offered by NextCard...... 5,000,000 shares
Common stock and nonvoting common
stock to be outstanding after the
offering............................ 42,667,021 shares(1)
Use of proceeds....................... For general corporate purposes,
including working capital, funding of
credit card receivables and potential
future capitalization of NextBank,
N.A., our proposed limited purpose
bank subsidiary. See "Use of
Proceeds."
Dividend policy....................... We do not anticipate paying cash
dividends in the foreseeable future.
Proposed Nasdaq National Market
symbol.............................. NXCD
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(1) Based on the number of shares outstanding as of March 31, 1999. Excludes
12,337,502 shares reserved under our 1997 Stock Plan, of which 8,354,137
shares are subject to outstanding options at a weighted average exercise
price of $1.19 per share and 3,983,365 shares are reserved for future option
grants, and outstanding warrants to purchase 1,308,749 shares at a weighted
average exercise price of $0.88 per share. See "Management -- Employee
Benefit Plans."
4
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
PERIOD FROM YEAR ENDED MARCH 31,
JUNE 5, 1996 (INCEPTION) DECEMBER 31, -------------------------
TO DECEMBER 31, 1997 1998 1998 1999
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Interest income......................... $ 93 $ 502 $ 33 $ 660
Interest expense........................ -- 62 -- 647
------- -------- ------- --------
Net interest income..................... 93 440 33 13
Non-interest income..................... -- 697 34 343
Non-interest expenses................... 1,977 17,199 1,441 10,343
Net loss................................ (1,886) (16,064) (1,374) (10,982)
======= ======== ======= ========
Basic and diluted net loss per share.... $ (1.08) $ (5.07) $ (0.48) $ (2.84)
======= ======== ======= ========
Weighted-average shares of common stock
outstanding used in computing basic
and diluted net loss per share(1)..... 1,747 3,166 2,891 3,867
Pro forma basic and diluted net loss per
share (unaudited)..................... -- -- -- $ (0.30)
========
Shares used in computing pro forma basic
and diluted net loss per share(1)
(unaudited)........................... -- -- -- 36,493
SUPPLEMENTAL OPERATING DATA -- ASSETS
UNDER MANAGEMENT(2):
Total credit card receivables
outstanding........................... -- $ 66,042 $ 1,626 $ 96,293
Total number of open credit card
accounts.............................. -- 40 1 66
Total revenue: finance charges, fees and
interchange income.................... -- $ 1,199 $ 3 $ 1,885
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AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED(3)
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(UNAUDITED) (UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 25,456 $107,950
Credit card loan receivables, net of allowance for loan
losses.................................................... 67,358 67,358
Total assets................................................ 101,271 183,765
Secured borrowings.......................................... 54,069 54,069
Total liabilities........................................... 68,456 68,456
Total stockholders' equity.................................. 32,815 115,309
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(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used in per share computations.
(2) Assets under management represent all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage Bank of Commerce's and
our balance sheet.
(3) Adjusted to reflect our sale of 5,000,000 shares of common stock offered in
this offering at an assumed initial public offering price of $18.00 per
share and after deducting estimated underwriting discounts and commissions
and offering expenses payable by us and the application of our net proceeds
from the offering. See "Capitalization."
5
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RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before making an investment decision.
If any of the following risks occur, our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS AND
PROSPECTS DIFFICULT.
NextCard was formed in June 1996. We introduced the NextCard Visa in
December 1997. We have only a limited operating history on which you can base an
evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as the market
for Internet products and services.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE SIGNIFICANT FUTURE LOSSES.
We incurred net losses of $1.9 million for the period from our inception
through December 31, 1997, $16.1 million for the year ended December 31, 1998
and $11.0 million for the three months ended March 31, 1999. As of March 31,
1999, we had an accumulated deficit of $28.9 million. To date, we have not
achieved profitability and we expect to incur significant and increasing net
losses for the foreseeable future. We intend to continue to invest significantly
in marketing, operations, technology and the development of statistical
analyses. As a result, we will need to generate significant revenues to achieve
profitability. We cannot be certain that we will be able either to maintain our
recent revenue growth rates or to generate adequate revenues to achieve
profitability. If we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR LIMITED OPERATING HISTORY MAKES OUR FINANCIAL FORECASTING DIFFICULT.
Due to our limited operating history, we cannot forecast operating expenses
based on our historical results. Accordingly, we base our operating expenses, in
part, on future revenue projections. Most of these expenses are fixed in the
short term and we may not be able to quickly reduce spending if we achieve lower
than anticipated revenues. Our ability to accurately forecast our revenues is
limited. If our revenues do not meet our projections, our net losses will be
even greater than we anticipate and our business, operating results and
financial condition may be materially and adversely affected.
OUR UNSEASONED CREDIT CARD PORTFOLIO MAKES OUR PREDICTION OF DELINQUENCY
AND LOSS LEVELS DIFFICULT.
As of March 31, 1999, over 70% of our credit card accounts were generated
in the last six months. As a result, we cannot accurately predict the levels of
delinquencies and losses that can be expected from our portfolio over time. As
our portfolio of accounts becomes more seasoned, the level of losses may
increase. Any material increase in delinquencies or losses above our
expectations could materially and adversely impact our results of operations and
financial condition. See "Business -- Underwriting and Credit Management."
6
<PAGE> 11
WE MAY BE UNABLE TO RETAIN CUSTOMERS WHEN WE INCREASE THEIR INTRODUCTORY
INTEREST RATES.
To attract new customers, we generally offer low introductory interest
rates that increase after expiration of the introductory period. Given our
limited operating history, we do not know what percentage of our customers will
continue to use their NextCard Visa after the end of this period. If fewer
customers than we expect continue to use their NextCard Visa after the
expiration of the introductory offer, our results of operations would be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Underwriting and Credit
Management."
WE MAY ENCOUNTER DIFFICULTIES DUE TO OUR UNTESTED CUSTOMER BASE.
We target our credit card products to Internet users. Lenders historically
have not solicited this market to the same extent as more traditional market
segments. As a result, there is less historical experience with respect to the
credit risk and performance of these consumers. We may not be able to
successfully target and evaluate the creditworthiness of such consumers to
manage the expected delinquencies and losses or to appropriately price our
products. In addition, we may consider using additional internally developed
criteria to enhance or replace our existing criteria. We have limited experience
developing and implementing such credit criteria. As a result, as compared to
issuers targeting traditional market segments, we could experience any or all of
the following:
- a greater number of customer payment defaults or other unfavorable
cardholder payment behavior;
- an increase in fraud by our cardholders and third parties; and
- changes in the traditional patterns of cardholder loyalty and usage.
In addition, because we are targeting a new customer base, we have
comparatively little information about the potential size of our target market,
our customer usage patterns and other factors that could significantly affect
the demand for our products and services. Moreover, general economic factors,
such as the rate of inflation, unemployment levels and interest rates may affect
our target market customers more severely than other market segments. See
"Business -- Underwriting and Credit Management."
FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY AFFECT THE
PRICE OF OUR COMMON STOCK.
Quarterly fluctuations in our earnings could adversely affect the market
price of our common stock. Our revenue consists of the finance charges paid by
our customers based on their outstanding balances, the amounts received through
the Visa system based upon a percentage of our customers' purchases and the fees
paid by our customers. As a result, we depend substantially on the level of
customer balances, the level of interest rates on our credit card portfolios and
the volume of NextCard Visa purchases. Variations of such factors could affect
our quarterly revenues. Any shortfall in our revenue would have a direct impact
on our operating results for a particular quarter. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Our quarterly operating results may fluctuate significantly as a result of
a variety of factors, many of which are outside our control. These factors
include:
- the volume of credit card loans generated from our products and our
ability to successfully manage our credit card loan portfolio;
- the announcement or introduction of new websites, services and products
by us or our competitors and the level of price competition for the
products and services we offer;
7
<PAGE> 12
- the amount and timing of our operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure;
- technical difficulties, system downtime, Internet service problems and
our ability to expand and upgrade our computer systems to handle
increased traffic;
- the success of our brand building, advertising and marketing campaigns;
and
- general economic conditions, including interest rate volatility, and
economic conditions specific to the Internet, online commerce and the
credit card industry.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR WORKING CAPITAL REQUIREMENTS.
If our current funding, including the net proceeds generated by this
offering, becomes insufficient to support future operating requirements, we will
need to obtain additional funding either by increasing our lines of credit or by
raising additional debt or equity from the public or private capital markets.
There can be no assurance that such additional funding will be available on
terms attractive to us, or at all. Failure by us to raise additional funding
when needed could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through the
issuance of equity securities, the ownership percentage of our then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to those of our common stock.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR LOAN PORTFOLIO.
We currently fund our loan portfolio through a $100.0 million secured
credit facility arranged by Credit Suisse First Boston, of which approximately
$45.9 million was unutilized as of March 31, 1999. The credit facility is
subject to a number of conditions and terminates on December 29, 1999. We may
not be able to continue to satisfy all of the lending conditions of the credit
facility, to renew the credit facility upon its termination or to obtain
alternate or additional funding on terms favorable to us, if at all.
Our ability to grow our business is limited by the amount of credit we can
extend to our customers and potential customers. Our credit facility is not
sufficient to fund our anticipated growth in our loan portfolio over the next 12
months. Therefore, any loss of funding under this credit facility or failure to
increase or extend the term of the credit facility or to obtain alternative
financing on commercially reasonable terms would have a material adverse effect
on our results of operations and financial condition.
We are in the process of applying for a charter to form a subsidiary,
NextBank, as a limited purpose national bank, which would be limited to
generating and financing credit card loans. If we successfully create NextBank,
our strategy will be to fund a portion of our loan portfolio through short-term
deposits received by NextBank. We may not be able to attract or retain
sufficient deposits at attractive interest rates to fund our loan portfolio
through NextBank. Moreover, if adequate capital is not available, we also may be
subject to an increased level of regulatory supervision that would have an
adverse effect on our operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- NextBank."
OUR CUSTOMERS MAY BECOME DISSATISFIED BY SYSTEM DISRUPTIONS AND FAILURES.
Our website has in the past experienced, and may in the future experience,
slower than normal response times or other problems, such as system
unavailability. Customers may become dissatisfied by any system failure that
interrupts or delays our ability to provide our services to them. Any
interruption or delay in our operations could materially and adversely affect
our business.
8
<PAGE> 13
If the number of users of our website increases substantially, we will need
to significantly expand and upgrade our technology, transaction processing
systems and network infrastructure. Our website must accommodate a high volume
of users and deliver frequently updated information. The number of visitors and
credit card applicants to our website has increased substantially since we
introduced the NextCard Visa, and we anticipate that this traffic will further
increase over time. However, it is difficult to predict the future traffic on
our website. Marketing efforts and other events, such as publicity resulting
from this offering, could cause traffic to strain our site's capacity. We do not
know whether we will be able to accurately project the rate or timing of any
traffic increases, or expand and upgrade our systems and infrastructure to
accommodate such increases in a timely manner.
Our systems and operations also are vulnerable to damage or interruption
from human error, natural disasters, power loss, telecommunication failures,
break-ins, sabotage, computer viruses, acts of vandalism and similar events. As
we currently do not have back-up systems for most aspects of our operations, a
failure of a single aspect of our system could cause interruption or delay in
our entire operations. We do not carry sufficient business interruption
insurance to compensate for losses that could occur.
WE DEPEND ON A LIMITED NUMBER OF VENDORS FOR ESSENTIAL SERVICES.
We rely on a number of services furnished to us by either a single vendor
or a limited number of vendors. For example, all of the NextCard Visa credit
cards generated on our website are issued by Heritage Bank of Commerce in
accordance with an account origination agreement. Under the agreement, Heritage
issues credit cards to each applicant who qualifies under specified credit card
guidelines. Heritage's obligation to establish new credit card accounts
terminates on September 30, 1999. If successfully created, NextBank would
replace Heritage as the issuer of the NextCard Visa. If we are not successful in
creating NextBank on a timely basis, our failure to extend our arrangement with
Heritage or enter into an alternative arrangement would have a material adverse
effect on us.
We also depend, directly and indirectly, on other key third party vendors
to provide essential services. See "Business -- Operations -- Key Outside
Relationships." Any interruption, deterioration or termination in these
third-party services could be disruptive to our business. In the event that any
of our agreements with any of these third parties is terminated, we may not be
able to find an alternative source of support on a timely or commercially
reasonable basis, if at all. As a result, any such interruption, deterioration
or termination would have a material adverse effect on our results of operations
and financial condition.
WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO ATTRACT AND RETAIN KEY
PERSONNEL.
Our success depends largely on the skills, experience and performance of
certain key members of our management. If we lose one or more of these key
employees, particularly Jeremy Lent, our Chairman of the Board, Chief Executive
Officer and President, our business, operating results and financial condition
would be materially adversely affected. Our success also depends on our
continued ability to attract, retain and motivate highly skilled employees.
Competition for employees both for Internet-based businesses and for financial
services businesses is intense, particularly for personnel with technical
training and experience. We may be unable to retain our key employees or to
attract, assimilate or retain other highly qualified employees in the future. We
have from time to time in the past experienced, and we expect to experience in
the future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications.
9
<PAGE> 14
WE MAY BE UNABLE TO EFFECTIVELY MANAGE THE RAPID GROWTH IN OUR OPERATIONS.
Since the introduction of our NextCard Visa product in December 1997, we
have experienced rapid growth in our operations. From December 31, 1997 through
March 31, 1999, we grew from approximately 18 to 135 employees, and our loans
under management increased from $0 to $96.3 million. We are planning for
continued rapid growth of our operations. This growth requires us to expand our
marketing, customer service and support, credit and technology organizations.
There can be no assurance that we will be able to attract and retain sufficient
numbers of personnel to satisfy our anticipated growth. In particular, as we
rely heavily on temporary personnel to satisfy our growing personnel demands, we
may be unable to continue to attract and retain a sufficient number of temporary
employees to support our future growth. Rapid growth places a significant strain
on our financial reporting, information and management systems and resources.
Our business, results of operations and financial condition will be materially
and adversely affected if we are unable to effectively manage our expanding
operations. For example, if we are unable to maintain and scale our financial
reporting and information systems, we may not have access to adequate, accurate
and timely financial information.
WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP NEXTCARD AS A BRAND.
The dynamics of a brand name have traditionally worked differently in the
credit card market than in many other industries. In the credit card market,
consumers have responded more to the brand name of Visa(R) or MasterCard(R) than
to the identity of the issuer. The Internet may change the underlying market
dynamics for brand recognition as compared to the offline market. Accordingly,
we are aggressively implementing our marketing plan to establish brand
recognition with Internet users to persuade customers to switch to our products
and services, particularly because we compete, or expect to compete, with larger
financial institutions that have well-established brand names. We cannot assure
you that we will successfully develop our brand name. If the brand name of
online credit card issuers becomes important, and if other credit card issuers
begin to compete with us for online brand name recognition, our business,
results of operations and financial condition could be materially adversely
affected.
RISKS RELATED TO OUR INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET AND INTERNET
COMMERCE.
Our future success depends heavily on the overall continued growth and
acceptance of the Internet, including its use in electronic commerce. If
Internet usage or commerce does not continue to grow or grows more slowly than
expected, our business, operating results and financial condition will be
adversely affected. Consumers and businesses may reject the Internet as a viable
medium for a number of reasons. These include potentially inadequate network
infrastructure, slow development of enabling technologies and insufficient
commercial support. The Internet infrastructure may not be able to support the
demands placed on it by increased Internet usage and bandwidth requirements. In
addition, delays in the development or adoption of new standards and procedures
required to handle increased levels of Internet activity, or increased
government regulation, could cause the Internet to lose its viability as a
commercial medium. Even if the required infrastructure, standards, procedures or
related products, services and facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH OF THE FINANCIAL
SERVICES MARKET.
Our business would be adversely affected if the growth in Internet
financial products and services does not continue or is slower than expected.
Although we believe the Internet has the potential to transform the delivery of
consumer financial products, consumers' acceptance of recently introduced
10
<PAGE> 15
financial products and services is at an early stage and is subject to a high
level of uncertainty. To date, there exist relatively few proven online
financial institutions. Although our long-term vision is to redefine the banking
experience for the Internet consumer, presently we offer only a single product,
the NextCard Visa, and we have no specific plans for additional products. In
addition, as the online financial services industry matures, government-imposed
regulations could become so stringent that we may be economically precluded from
offering online financial products and services.
INTENSE AND INCREASING COMPETITION IN FINANCIAL SERVICES COULD HARM OUR
BUSINESS.
The financial services market is rapidly evolving and intensely
competitive. We operate in this intensely competitive environment with a number
of other companies, many of whom have significantly longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. Some of our competitors
may be able to obtain funding at a more favorable rate than we can obtain. Our
business model anticipates that we will derive a large majority of our revenue
from the interest charged on credit card balances contained in the portfolio of
loans we hold. Increased competition could require us to reduce the interest
rates we charge on our customers' balances. This could have a material adverse
effect on our business, results of operations and financial condition.
Other credit card issuers and traditional commercial banks may increasingly
compete in the online credit card market. In addition, existing Internet
providers and new Internet entrants may launch new websites using commercially
available software. While the credit card market traditionally has been very
fragmented, the Internet could change traditional market dynamics and enable new
competitors to rapidly acquire significant market share.
Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. They may be able to:
- devote greater resources than we can to the development, promotion and
sale of their products and services;
- replicate our products and services;
- engage in more extensive research and development;
- undertake farther-reaching marketing campaigns;
- adopt more aggressive pricing policies;
- make more attractive offers to existing and potential employees and
strategic partners;
- more quickly develop new products and services or enhance existing
products and services;
- bundle consumer products and services in a manner that we cannot provide;
and
- establish cooperative relationships among themselves or with third
parties, including large Internet participants, to increase the ability
of their products and services to address the needs of our prospective
customers.
We cannot assure you that we will be able to compete successfully or that
competitive pressures will not materially and adversely affect our business,
results of operations or financial condition. See "Business -- Competition."
OUR OPERATING RESULTS ARE SUBJECT TO INTEREST RATE FLUCTUATIONS.
The majority of our revenues are generated by the interest rates we charge
on outstanding balances in the form of finance charges, which are based on
prevailing interest rates. Accordingly, fluctuations in interest rates will
affect our revenues. At the same time, our borrowing costs under our
11
<PAGE> 16
secured lending facility, and the interest we will pay on deposits when, and if,
NextBank is created and begins to accept deposits, may also fluctuate based on
general interest rate fluctuations. A rise in our borrowing costs may not be met
by a corresponding increase in revenues generated by finance charges. Likewise,
a decrease in revenues generated by finance charges may not be met by a
corresponding decrease in borrowing costs. Thus, either a rise or a fall in the
prevailing interest rates could materially adversely affect our results of
operations and financial condition. We may to manage our interest rate risk
through interest rate hedging techniques. However, we currently do not use such
techniques and they may not be successful in reducing or eliminating our
interest rate risk in the future.
WE MAY BE UNABLE TO INTRODUCE NEW SERVICES, FEATURES AND FUNCTIONS.
The Internet and related financial institutions marketplaces are
characterized by rapidly changing technologies, evolving industry standards,
frequent new product and service introductions and changing customer demands.
Our future success will depend on our ability to adapt to rapidly changing
technologies and to enhance existing products and services, as well as to
develop and introduce a variety of new products and services to address our
customers' changing demands. We may experience difficulties that delay or
prevent the successful design, development, introduction or marketing of our
products and services. In addition, material delays in introducing new products
and services and enhancements may cause customers to forego purchases of our
products and services and purchase instead those of our competitors. See
"Business -- Competition."
SECURITY BREACHES COULD DAMAGE OUR REPUTATION AND BUSINESS.
The secure transmission of confidential information over the Internet is
essential to maintain consumer and supplier confidence in the NextCard service.
Advances in computer capabilities, new discoveries or other developments could
result in a compromise or breach of the technology used by us to protect
customer transaction data.
A party that is able to circumvent our security systems could steal
proprietary information or cause interruptions in our operations. Security
breaches could damage our reputation and expose us to a risk of loss or
litigation. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches. We cannot
guarantee that our security measures will prevent security breaches. See
"Business -- Operations."
Consumers generally are concerned with security and privacy on the Internet
and any publicized security problems could inhibit the growth of the Internet as
a means of conducting commercial transactions. Our ability to provide financial
services over the Internet would be severely impeded if consumers become
unwilling to transmit confidential information online. As a result, our
operations and financial condition would be materially adversely affected.
WE MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.
To date, communications and commerce on the Internet have not been highly
regulated. However, Congress has held hearings on whether to regulate providers
of services and transactions in the electronic commerce market. It is possible
that Congress or individual states could enact laws regulating Internet banking
that address issues such as user privacy, pricing and the characteristics and
quality of products and services. Any restrictions on the collection and use of
such consumer information over the Internet could adversely affect our direct
marketing efforts. In addition, several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers in a manner similar to long distance telephone carriers and to impose
access fees on these companies. This could increase the cost of transmitting
data over the Internet. Moreover, it may take years to determine the extent to
which existing laws relating to issues such as
12
<PAGE> 17
property ownership, libel and personal privacy are applicable to the Internet.
Any new laws or regulations relating to the Internet could adversely affect our
business.
Our business is subject to extensive federal and state regulation,
including regulation under consumer protection laws. If we successfully form
NextBank, it would be subject to regulation under federal and California banking
laws as well as regulatory supervision from the Office of the Comptroller of the
Currency, or OCC, and the FDIC. As an affiliate of NextBank, we also will be
subject to oversight by the OCC and FDIC. Existing and future legislation and
regulatory supervision could have a material adverse effect on our business,
including our credit and authentication policies, pricing and products. See
"Business -- Government Regulation."
NextBank also will be subject to minimum capital, funding and leverage
requirements prescribed by federal statute and OCC regulations or orders. If
NextBank fails to meet these regulatory capital requirements, NextBank will be
subject to additional restrictions that could have a material adverse effect on
our ability to conduct normal operations and possibly result in the seizure of
NextBank by government regulators under certain circumstances. Our ability to
maintain or increase NextBank's capital levels in the future will be subject to,
among other things, general economic conditions, our ability to raise new
capital and our ability and willingness to make additional capital contributions
to NextBank or a related institution. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations -- Funding of NextCard
Receivables."
WE MAY FACE DIFFICULTIES PROTECTING AND ENFORCING OUR INTELLECTUAL PROPERTY
RIGHTS.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret and trademark laws as well as
confidentiality procedures and contractual provisions. However, any steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property. Any
such infringement or misappropriation could have a material adverse effect on
our business, results of operations and financial condition. In addition, we may
infringe upon the intellectual property rights of third parties, including third
party rights in patents that have not yet been issued. Any such infringement, or
alleged infringement, could have a material adverse effect on our business,
results of operations and financial condition.
We have filed three patent applications and applied to register several of
our trademarks in the United States. We cannot assure you that our patent
applications or trademark registrations will be approved. Moreover, even if
approved, they may not provide us with any competitive advantages or may be
challenged by third parties. Legal standards relating to the validity,
enforceability and scope of intellectual property rights in Internet-related
industries are uncertain and still evolving, and the future viability or value
of any of our intellectual property rights is uncertain. Any litigation
surrounding such rights could force us to divert important financial and other
resources away from our business operations.
We collect and utilize data derived from applications on the NextCard
website and through transactions made using our products. Although we believe
that we have the right to use such data and compile such data in our database,
we cannot assure you that any intellectual property protection will be available
for such information. In addition, third parties may claim rights to such
information.
We have licensed, and may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. See
"Business -- Marketing." While we attempt to ensure that the quality of our
brand is maintained by such business partners, such partners may take actions
that could materially and adversely affect the value of our proprietary rights
or our reputation. This
13
<PAGE> 18
could, in turn, have a material adverse effect on our business, results of
operations and financial condition.
PROTECTION OF OUR DOMAIN NAME IS UNCERTAIN.
We currently hold the domain name nextcard.com. The regulations governing
the acquisition and maintenance of domain names are subject to change. Governing
bodies could, among other things, modify the requirements for holding domain
names. Accordingly, we may be unable to acquire or maintain our domain name in
all jurisdictions in which we would otherwise seek to do so. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our domain name, trademarks and
other proprietary rights.
WE FACE COMPUTER SYSTEM AND SOFTWARE RISKS RELATED TO THE YEAR 2000.
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
The risks posed by year 2000 issues could adversely affect our business in
a number of significant ways. Our internally developed proprietary software,
which includes substantially all of the systems for the operation of our website
could be adversely affected by year 2000 issues. Our information technology
systems also depend on information technology and services supplied by third
parties. Year 2000 problems experienced by us or any of such third parties could
materially adversely affect our business. Additionally, the Internet could face
serious disruptions arising from the year 2000 problem.
We cannot guarantee that:
- our or our suppliers' systems will be year 2000 compliant in a timely
manner, or that there will not be significant interoperability problems
among information technology systems;
- consumers will be able to visit our website without serious disruptions
arising from the year 2000 problem;
- disruptions in other industries and market segments will not adversely
affect our business; or
- our costs related to year 2000 compliance will be insignificant.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. We negotiated and determined the initial public
offering price with the representatives of the underwriters based on several
factors. This price may vary from the market price of the common stock after
this offering.
14
<PAGE> 19
The market price of the common stock may fluctuate significantly in response to
the following factors, some of which are beyond our control:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of Internet or financial services companies;
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock or termination of stock transfer restrictions; and
- fluctuations in stock market price and volume, which are particularly
common among securities of Internet companies.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation often has been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and our resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Sales of a substantial number of shares of common stock after the offering
could adversely affect the market price of the common stock by potentially
introducing a large number of sellers of our common stock into a market in which
the common stock price is already volatile, thus driving the common stock price
down. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional equity securities. On completion of this
offering, we will have 42,667,021 shares outstanding, or 43,417,021 shares if
the underwriters' option to purchase an additional 750,000 shares of common
stock is exercised in full, and 2,581,237 shares subject to currently
exercisable options and warrants. The 5,000,000 shares sold in this offering, or
5,750,000 shares if the underwriters' option is exercised in full, will be
freely tradable without restriction or further registration under the federal
securities laws unless purchased by "affiliates" of NextCard as that term is
defined in Rule 144 under the Securities Act. The remaining 37,667,021 shares
outstanding on completion of the offering will be "restricted securities" as
that term is defined in Rule 144.
All of our directors, executive officers and substantially all of our
stockholders have executed lock-up agreements that limit their ability to sell
common stock. These stockholders have agreed not to sell or otherwise dispose of
any shares of common stock for a period of at least 180 days after the date of
this prospectus without the prior written approval of Donaldson, Lufkin &
Jenrette Securities Corporation. When the lock-up agreements expire, these
shares and the shares underlying the options will become eligible for sale
subject to the applicable requirements of Rule 144. See "Shares Eligible for
Future Sale."
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.
Upon completion of this offering, our executive officers, directors and 5%
or greater stockholders, and their respective affiliates, could, in the
aggregate, own up to approximately 50% of our outstanding common stock. As a
result, they could act together to control all matters submitted to stockholders
for approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets). In addition,
their large ownership position could enable them to effectively control our
management and affairs. Accordingly, such
15
<PAGE> 20
concentration of ownership may delay, defer or prevent a change in control,
impede a merger, consolidation, takeover or other business combination involving
us or discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us. This could, in turn, have an adverse effect
on the market price of our common stock. See "Management" and "Principal
Stockholders."
CERTAIN ANTI-TAKEOVER PROVISIONS MAY PRODUCE RESULTS DISFAVORED BY OUR
STOCKHOLDERS.
Provisions of our Certificate of Incorporation, our Bylaws and Delaware law
could make it more difficult for a third party to acquire control of us without
the consent of our board of directors, even if such change was favored by our
stockholders. See "Description of Capital Stock."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results
or to change in our expectations.
16
<PAGE> 21
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock offered will be approximately $82.5 million, after deducting
estimated underwriting discounts and commissions and offering expenses. If the
underwriters' option to purchase an additional 750,000 shares of common stock is
exercised in full, we estimate that such net proceeds will be approximately
$95.0 million. We intend to use the balance of the net proceeds of this offering
for working capital, including financing a portion of the origination and
purchase of credit card loan receivables, and potentially for future capital
contributions to NextBank, N.A. The amount that would be utilized to fund
origination and purchase of credit card loan receivables will depend on the
terms of our credit facilities, the amount of credit card loan receivables we
originate and purchase and when, and if, NextBank commences operations. We
anticipate using at least $20 million of the net proceeds to capitalize
NextBank, when, and if, NextBank commences operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- NextBank."
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, our lending facilities contain certain
restrictions on our ability to pay dividends.
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<PAGE> 22
CAPITALIZATION
The following table sets forth our unaudited capitalization as of March 31,
1999: (1) on an actual basis; (2) on a pro forma basis after giving effect to
the conversion of all outstanding shares of preferred stock into common stock
and the filing of our amended and restated certificate of incorporation in
Delaware; and (3) as adjusted to reflect our receipt of the estimated net
proceeds from our sale of 5,000,000 shares of common stock in this offering at
an assumed initial offering price of $18.00 per share (after deducting the
estimated underwriting discounts and commissions and offering expenses) and the
application of our proceeds from this offering:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible preferred stock, 40,603,109 shares
authorized, 32,625,734 shares outstanding actual;
12,567,285 shares authorized, no shares outstanding
pro forma; 12,567,285 shares authorized, no shares
outstanding as adjusted............................ $ 33 $ -- $ --
-------- -------- --------
Common stock and nonvoting common stock, 62,896,892
shares authorized, 5,041,287 shares outstanding
actual; 87,432,175 shares authorized, 37,667,021
shares outstanding pro forma; 87,432,175 shares
authorized, 42,667,021 shares outstanding as
adjusted(1)(2)..................................... 5 38 43
Notes receivable from officers....................... (26) (26) (26)
Additional paid-in capital........................... 77,069 77,069 159,558
Deferred stock compensation.......................... (15,334) (15,334) (15,334)
Accumulated deficit.................................. (28,932) (28,932) (28,932)
-------- -------- --------
Total stockholders' equity......................... 32,815 32,815 115,309
-------- -------- --------
Total capitalization....................... $ 32,815 $ 32,815 $115,309
======== ======== ========
</TABLE>
- ------------
(1) Excludes 8,354,137 shares of common stock issuable upon exercise of options
outstanding on March 31, 1999, with a weighted average exercise price of
$1.19 per share, and 3,983,365 shares of common stock reserved for issuance
of ungranted options under our 1997 Stock Plan. Also excludes 1,308,749
shares of common stock subject to outstanding warrants, with a weighted
average exercise price of $0.88 per share.
(2) In connection with the conversion of preferred stock into common stock,
preferred stockholders will have the right to convert some or all of their
preferred stock into nonvoting common stock, with our consent.
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<PAGE> 23
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $32.8 million, or $0.87 per share of common stock. Net tangible
book value per share represents the amount of total assets less total
liabilities, divided by the number of shares outstanding. After giving effect to
the issuance and sale of the 5,000,000 shares of common stock offered by us at
an assumed initial public offering price of $18, and deducting underwriting
discounts and commissions and estimated offering expenses payable by us, our
adjusted net tangible book value as of March 31, 1999 would have been $115.3
million, or $2.70 per share. This represents an immediate increase in the net
tangible book value of $1.83 per share to the existing stockholders and an
immediate dilution of $15.30 per share to the new public investors purchasing
shares in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $18.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $0.87
Increase per share attributable to new public investors... 1.83
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.70
------
Dilution per share to new investors......................... $15.30
======
</TABLE>
The following table sets forth on a pro forma basis, as of March 31, 1999,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock (including nonvoting common stock) upon completion of
this offering, the differences between the existing stockholders and the
purchasers of shares of common stock in this offering (before deducting
underwriting discounts and commissions and estimated offering expenses) with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 37,667,021 88.3% $ 54,980,246 37.9% $ 1.46
New stockholders........ 5,000,000 11.7 90,000,000 62.1 $18.00
---------- ----- ------------ -----
Total......... 42,667,021 100.0% $144,980,246 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of stock options to
purchase 8,354,137 shares of common stock and warrants to purchase 1,308,749
shares of common stock outstanding as of March 31, 1999, with weighted average
exercise prices of $1.19 and $0.88, respectively. To the extent any of these
options or warrants are exercised, there will be further dilution to new public
investors. See "Capitalization," "Management -- Director Compensation" and Note
2 of notes to Financial Statements.
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<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period from
June 5, 1996 (date of inception) through December 31, 1997 and for, and as of,
the year ended December 31, 1998 are derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this prospectus. The consolidated statement of
operations for the three months ended March 31, 1999 and the consolidated
balance sheet data at March 31, 1999 are derived from our unaudited consolidated
financials statements. The unaudited consolidated financial statements have been
prepared on the same basis as the annual consolidated financial statements and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of our results of operations for such periods
and financial condition at such dates. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year or future periods. The selected consolidated
financial data set forth is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATE:
Interest income:
Cash and investments...................................... $ 93 $ 502 $ 33 $ 280
Credit card loan receivables.............................. -- -- -- 380
------- -------- ------- --------
Total interest income....................................... 93 502 33 660
Interest expense............................................ -- 62 -- 647
------- -------- ------- --------
Net interest income......................................... 93 440 33 13
Provision for loan losses................................... -- -- -- 995
------- -------- ------- --------
Net interest income after provision for loan losses......... 93 440 33 (982)
Non-interest income:
Servicing and profit and loss sharing..................... -- 662 34 204
Interchange fee........................................... -- -- -- 96
Card fees and other....................................... -- 35 -- 43
------- -------- ------- --------
Total non-interest income................................... -- 697 34 343
Non-interest expenses:
Salaries and employee benefits............................ 1,495 6,730 789 3,309
Marketing and advertising................................. 49 4,325 209 2,555
Credit card activation and servicing costs................ 1 2,327 52 1,522
Occupancy and equipment................................... 137 958 115 552
Professional fees......................................... 168 520 41 255
Amortization of deferred compensation..................... -- 1,800 164 1,366
Amortization of loan structuring fee...................... -- -- -- 568
Other..................................................... 127 539 71 216
------- -------- ------- --------
Total non-interest expenses................................. 1,977 17,199 1,441 10,343
Loss before income taxes.................................... (1,885) (16,062) (1,374) (10,982)
Provision for income taxes.................................. 2 2 -- --
------- -------- ------- --------
Net loss.................................................... $(1,886) $(16,064) $(1,374) $(10,982)
======= ======== ======= ========
Basic and diluted net loss per share........................ $ (1.08) $ (5.07) $ (0.48) $ (2.84)
======= ======== ======= ========
Weighted average shares outstanding used in computing basic
and diluted net loss per share(1)......................... 1,747 3,166 2,891 3,867
======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... -- -- -- $ (0.30)
========
Shares used in computing pro forma basic and diluted net
loss per share(1) (unaudited)............................. -- -- -- 36,493
========
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(2):
Total credit card receivables outstanding................... -- $ 66,042 $ 1,626 $ 96,293
Total number of open credit card accounts................... -- 40 1 66
Total revenue: finance charges, fees and interchange
income.................................................... -- $ 1,199 $ 3 $ 1,885
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------ MARCH 31,
1997 1998 1999
-------------- ------------ ---------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,840 $ 40,134 $ 25,456
Credit card loan receivables, net of allowance for loan
losses.................................................... -- -- 67,358
Total assets................................................ 3,688 45,542 101,271
Secured borrowings.......................................... -- -- 54,069
Total liabilities........................................... 901 5,606 68,456
Total stockholders' equity.................................. 2,787 39,937 32,815
</TABLE>
- ---------------
(1) See Note 2 of notes to Consolidated Financial Statements for an explanation
of the number of shares used in per share computations.
(2) Assets under management represent all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage's and our balance
sheets.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto which appear elsewhere
in this prospectus. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
OVERVIEW
We are a leading Internet-based provider of consumer credit. We were the
first company to offer an online approval system for a Visa card and to provide
interactive, customized offers for credit card applicants.
We combine expertise in consumer credit, an exclusive Internet focus and
sophisticated direct marketing techniques with the aim of attracting profitable
customer segments on the Internet. Our product, the NextCard Visa, which we call
the First True Internet Visa, is marketed to consumers exclusively through our
website, www.nextcard.com. We offer credit card customers a unique combination
of convenience, customization, shopping enhancements and online customer
service. The NextCard Visa can be used for both online and offline purchases.
We were incorporated on June 5, 1996. The NextCard Visa was first offered
to the public on December 23, 1997. During the period from our inception through
December 31, 1997 (the "Inception Period"), we had no operating income. Our
operating activities were limited primarily to developing the necessary computer
infrastructure, planning and developing our website, building our operations
capacity and establishing vendor relationships.
Our operating costs have increased significantly since our inception. This
reflects the costs associated with the formation of our company, as well as
increased efforts to promote the NextCard brand, build market awareness, attract
new customers, recruit personnel, build operating infrastructure and develop our
credit card application system and customer servicing infrastructure.
We have grown rapidly since launching our product in December 1997. As of
December 31, 1997, we had 18 employees, and as of March 31, 1999, we had 135
employees. From December 31, 1997 through March 31, 1999, we significantly
increased the new loans generated through our website as well as the total loans
under management. These increases were primarily due to our application process
which allows customers to automatically transfer balances from their other
credit cards to their new NextCard Visa. From December 31, 1997 to March 31,
1999, our loans under management grew from $0 to $96.3 million. As of March 31,
1999, we had over 66,000 open credit card accounts.
As of March 31, 1999, we had received more than 1.7 million applications
for the NextCard Visa and had generated over $170.0 million in new credit card
loans. Due to our underwriting criteria, the number of customer applications we
approve is substantially less than the number of applications we receive.
Since our inception, we have incurred significant losses. As of March 31,
1999, we had an accumulated deficit of $28.9 million. The net losses and
accumulated deficit resulted from the significant infrastructure, marketing,
technology and other costs incurred in the development of our NextCard Visa
product. We expect to incur significant additional losses from operations for
the foreseeable future and expect that the rate and amount at which such losses
will be incurred will increase significantly from current levels. These expected
costs are related to: advertising, marketing
21
<PAGE> 26
and other promotional activities; expansion of our direct marketing, database
and testing capabilities; expansion of our product offerings; and strategic
relationship development.
Until January 12, 1999, Heritage funded all of the credit card accounts and
loans originated on our website pursuant to our Consumer Credit Card Program
Agreement with Heritage. Under that agreement, we charge Heritage for
origination and servicing of the accounts and share 50% of the resulting net
profits or losses.
In January 1999, we began purchasing credit card receivables utilizing a
$100.0 million secured lending facility extended to our subsidiary, NextCard
Funding Corp. Pursuant to the terms of our Account Origination Agreement with
Heritage, Heritage continues to fund newly originated credit card receivables,
which are then purchased on a daily basis by NextCard Funding using borrowings
from Credit Suisse First Boston. The purchased receivables are pledged as
security for the Credit Suisse borrowings. By holding and managing those credit
card receivables, we earn income from:
- finance charges paid by our customers based on their outstanding
balances;
- amounts paid through the Visa system for purchases made with the NextCard
Visa; and
- fees paid by our cardholders, such as late fees, overlimit fees and
program fees.
NEXTBANK
We have taken steps to establish a limited purpose national credit card
bank, which would be our wholly owned subsidiary. NextBank may in the future be
a vehicle for issuing NextCard Visa accounts and funding our NextCard Visa loan
portfolio. See "Business -- NextBank."
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1999 AND 1998
NET INTEREST INCOME
Interest Income on Cash and Investments. Interest income on cash and
investments consists of earnings on our cash and cash equivalents. Interest
income increased $247,000 from $33,000 for the quarter ended March 31, 1998 to
$280,000 for the quarter ended March 31, 1999. The increase was attributable to
higher average cash and cash equivalent balances resulting from the sales of our
preferred stock in November 1998. The amount of interest income we will
recognize on cash and investments in the future will depend on the level of cash
and cash equivalents balances we maintain.
Interest Income on Credit Card Loan Receivables. Interest income on credit
card loan receivables consists of finance charges paid by our customers based on
their outstanding balances. In January 1999, we began purchasing credit card
loan receivables from Heritage. For the quarter ended March 31, 1999, we earned
$380,000 of interest income from these credit card loan receivables. We expect
the amount of interest income on credit card loan receivables to increase in the
future to the extent we continue to purchase credit card loan receivables from
Heritage and potentially originate and fund our own credit card loan receivables
through NextBank. The amount of interest income we recognize depends on:
- the amount of outstanding balances on our credit card loan receivables;
- the percentage of those receivables that are not paid off on a monthly
basis;
- the interest rate we charge on those unpaid receivables; and
- the retention of credit card accounts of customers after expiration of
their low introductory rates.
22
<PAGE> 27
Interest Expense. Interest expense consists of interest we pay associated
with our borrowings. We had no borrowing for the quarter ended March 31, 1998.
For the quarter ended March 31, 1999, we had interest expense of $647,000
primarily attributable to outstanding borrowings under NextCard Funding Corp's.
secured lending facility with Credit Suisse First Boston. Total borrowings under
this facility at March 31, 1999 were $54.1 million. We expect interest expense
to increase as we increase our borrowings under this and other similar
facilities to fund the purchase of credit card receivables from Heritage. In
addition, interest expense may increase if we raise deposits through NextBank to
fund NextBank credit card loan originations.
Net Interest Margin. Our net interest margin for the quarter ended March
31, 1999 was $13,000. Our net interest margin consists of interest income we
recognize on cash and investment securities and credit card loan receivables
less interest we pay on borrowings used to fund these earning assets. Our net
interest margin is, and will continue to be, adversely affected if:
- we do not retain the credit card balances of many of our current
customers whose low introductory rates will expire and reprice to higher
interest rates;
- we do not originate new customers at higher introductory rates; or
- the rate we pay on our borrowings increases.
Provision for Loan Losses and Asset Quality. The provision for loan losses
consists of charges to earnings to maintain the allowance for loan losses at a
level that, in our judgement, is adequate to provide for probable net loan
losses from known and inherent risks in our owned credit card loan portfolio. In
evaluating the adequacy of the allowance for loan losses, we take into
consideration several factors, including:
- our loan portfolio's historical delinquency and loss experience;
- industry delinquency and loan loss experience;
- current economic conditions and the impact such conditions might have on
anticipated losses in our loan portfolio; and
- due to our limited operating history, obtaining and using credit bureau
information about our current customer base, which provides us with
additional information concerning potential loan losses in our portfolio.
Actual loan losses may exceed our allowance for loan losses. For the
quarter ended March 31, 1999, our owned credit card portfolio had no loan
losses. The following table sets forth the activity in the allowance for loan
losses for the quarter ended March 31, 1999:
<TABLE>
<S> <C>
Balance at January 1, 1999.................................. $ 0
Provision for loan losses................................... 995,000
Net credit losses........................................... 0
--------
Balance at March 31, 1999................................... $995,000
========
</TABLE>
23
<PAGE> 28
A customer's account is contractually delinquent if the minimum payment is
not received by the due date printed on the customer's statement. The following
table presents the delinquency information for our owned credit card loan
portfolio as March 31, 1999:
<TABLE>
<CAPTION>
% OF TOTAL
LOANS LOANS
------- ----------
<S> <C> <C>
Credit card loans outstanding.......................... $68,352 100.0%
Loans delinquent:
30 - 59 days......................................... 1,347 2.0%
60 - 89 days......................................... 97 0.1%
90 or more days...................................... 22 0.0%
------- -----
Total.................................................. $ 1,466 2.1%
======= =====
</TABLE>
As our credit card loan portfolio continues to grow and season, delinquency
levels may increase.
NON-INTEREST INCOME
Servicing and Profit and Loss Sharing. Servicing and profit and loss
sharing income consists of amounts arising under the Consumer Credit Card
Program Agreement with Heritage. Such income increased $170,000 from $34,000 for
the quarter ended March 31, 1998 to $204,000 for the quarter ended March 31,
1999. This increase was attributable to more credit card accounts and loans
originated and outstanding under the Consumer Credit Card Program Agreement for
the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998.
However, we anticipate servicing and profit and loss sharing income to decrease
in the future because we are now purchasing all of the new credit card loan
receivables from Heritage under the Account Origination Agreement.
Interchange and Other Credit Card Fees. Interchange and other credit card
fees consist of income from the Visa System for purchases made with the NextCard
Visa and fees paid by our cardholders, such as late fees, overlimit fees and
program fees. In January 1999, we began purchasing credit card receivables from
Heritage. For the quarter ended March 31, 1999, we had $96,000 of interchange
fees and $43,000 of other credit card fees from these credit card loan
receivables. We expect the amount of interchange and other credit card fee
income to increase in the future as we continue to purchase receivables from
Heritage and potentially originate and fund our own receivables through
NextBank.
NON-INTEREST EXPENSES
Salaries and Employee Benefits. Salaries and employee benefits include all
of our employees' salaries and benefit expenses, contract labor expenses,
consulting fees and recruiting fees. Salaries and employee expenses increased
$2.5 million from $789,000 for the quarter ended March 31, 1998 to $3.3 million
for the quarter ended March 31, 1999. This increase was caused by the growth of
employees from 18 as of December 31, 1997 to 135 as of March 31, 1999. We expect
salaries and employee benefit expenses to continue to increase as we expand our
staffing in response to the anticipated growth of our business.
Marketing and Advertising. Marketing and advertising expenses consist
primarily of Internet-based advertising, promotional expenditures and public
relations. Marketing and advertising expenditures increased $2.3 million from
$209,000 for the quarter ended March 31, 1998 to $2.6 million for the quarter
ended March 31, 1999. This increase in marketing and advertising expenditures in
the first quarter of 1999 was primarily attributable to expansion of
Internet-based advertising. We expect our marketing and advertising expenses to
increase significantly as we expand our Internet-based advertising campaigns and
branding activities.
24
<PAGE> 29
Credit Card Activation and Servicing Costs. Credit card activation and
servicing costs consist of all costs associated with processing new credit card
accounts and servicing the NextCard Visa credit card portfolio. These costs
include the payment made for accessing applicants' credit bureau reports,
maintaining the security over our network, the card issuance fees we pay
Heritage as well as the payments we make to First Data and other third-party
vendors who provide selected fulfillment and service functions. Credit card
activation and servicing costs increased $1.4 million from $52,000 for the
quarter ended March 31, 1998 to $1.5 million for the quarter ended March 31,
1999. These costs are expected to increase in the future as we grow our credit
card loan portfolio.
Occupancy and Equipment. Occupancy and equipment expenses include office
lease payments for our office space in both San Francisco and San Ramon, as well
as all utilities and depreciation expenses recognized on all of our furniture
and equipment. Occupancy and equipment expenses increased $437,000 from $115,000
for the quarter ended March 31, 1998 to $552,000 for the quarter ended March 31,
1999. The increase was due to significant increases in both our San Francisco
and San Ramon office space requirements and purchasing additional equipment. We
expect our occupancy and equipment costs to increase as we expand our staffing,
network infrastructure and office space requirements in both San Francisco and
San Ramon locations.
Professional Fees. Professional fees include primarily outside legal and
accounting fees. Professional fees increased $214,000 from $41,000 for the
quarter ended March 31, 1998 to $255,000 for the quarter ended March 31, 1999.
This increase was primarily related to fees paid to outside law firms who are
assisting us in a number of corporate activities including the application and
potential chartering of NextBank and ongoing legal costs incurred in connection
with administering the Credit Suisse First Boston secured borrowing facility. We
anticipate our professional fees to increase due to the additional requirements
of being a public company.
Amortization of Deferred Compensation. A portion of the value of certain
stock options granted in the first quarter of 1999 and in 1998 have been
considered to be compensatory. Deferred compensation associated with such
options amounted to $18.5 million. This amount represents the difference between
the exercise price of certain stock option grants and our estimate of the fair
value of our common stock at the time of such grants. Of this amount, $164,000
was charged to operations for the quarter ended March 31, 1998 and $1.4 million
for the quarter ended March 31, 1999.
Approximately $15.3 million will be amortized using an accelerated method
over the vesting periods of the applicable options through 2003. The remaining
amortization of this deferred compensation will be approximately $6.8 million in
1999, $4.3 million in 2000, $2.1 million in 2001, $1.5 million in 2002 and $0.6
million in 2003.
Amortization of Loan Structuring Fee. As part of the Credit Suisse First
Boston secured borrowing facility, we paid a loan structuring fee of $2.1
million consisting of $725,000 in cash and warrants to purchase 562,500 shares
of preferred stock. The estimated fair market value of the warrant was
$1,375,000. This loan structuring fee has been capitalized and is being
amortized on a straight-line basis over the term of the revolving credit
facility. A portion of this amount has been charged to operations for the
quarter ended March 31, 1999.
Other Expenses. Other expenses include primarily travel, insurance and
general corporate expenses. Other expenses increased $145,000 from $71,000 for
the quarter ended March 31, 1998 to $216,000 for the quarter ended March 31,
1999. We expect other expenses to increase as we anticipate incurring additional
costs related to being a publicly held entity, including director and officers
liability insurance and investor relations programs.
25
<PAGE> 30
INCEPTION PERIOD AND YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME
Interest Income on Cash and Investments. Interest income increased
$409,000 from $93,000 in the Inception Period to $502,000 in 1998. The increase
was attributable to higher average cash and cash equivalent balances resulting
from the sales of our preferred stock during 1998.
Interest Expense. We had no debt during 1997. In 1998, we had interest
expense of $62,000 attributable to our equipment loan.
NON-INTEREST INCOME
Servicing and Profit and Loss Sharing. We did not recognize any
non-interest income during the Inception Period. In 1998, we recognized $662,000
of servicing and profit and loss sharing income under our Consumer Credit Card
Program Agreement.
NON-INTEREST EXPENSES
Salaries and Employee Benefits. Salaries and employee benefit expenses
increased $5.2 million from $1.5 million in the Inception Period to $6.7 million
in 1998. This increase was caused by the growth of employees from 18 as of
December 31, 1997 to 107 as of December 31, 1998.
Marketing and Advertising. Marketing and advertising expenditures
increased $4.2 million from $50,000 in the Inception Period to $4.3 million in
1998. This increase in marketing and advertising expenditures in 1998 was
primarily attributable to the expansion of Internet-based advertising.
Credit Card Activation and Servicing Costs. There were no credit card
activation or servicing costs during the Inception Period. In 1998, these costs
were $2.3 million and are expected to increase as we increase our credit card
loan portfolio.
Occupancy and Equipment. Occupancy and equipment expenses increased
$821,000 from $137,000 in the Inception Period to $958,000 in 1998. The increase
was due to significant increases in both our San Francisco and San Ramon office
space requirements and purchasing additional equipment.
Professional Fees. Professional fees increased $352,000 from $168,000 in
the Inception Period to $520,000 in 1998. The increase was primarily related to
ongoing fees paid to outside law firms who are assisting us in a number of
corporate activities including the application and potential chartering of
NextBank and structuring the Credit Suisse First Boston secured borrowing
facility.
Amortization of Deferred Compensation. A portion of the value of certain
stock options granted in 1998 have been considered to be compensatory. Deferred
compensation associated with such options amounted to $7.8 million. Of this
amount, $1.8 million was charged to operations in 1998.
Other Expenses. Other expenses increased $412,000 from $127,000 in the
Inception Period to $539,000 in 1998. The increase was due to the significant
growth of our company in 1998.
TAXES
Income Taxes. We have had a net loss for each period since inception. As
of December 31, 1998, we had approximately $14.2 million of net operating loss
carryforwards for federal and state income tax purposes. The federal net
operating loss carryforward will start expiring in 2012 and the state net
operating loss carryforward will start expiring in 2005. Because of uncertainty
regarding realizability, we have provided a full valuation allowance on our
deferred tax assets consisting primarily of net operating loss carryforwards.
See Note 9 of notes to the Consolidated Financial Statements.
26
<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operating
data for the eight quarters ended March 31, 1999. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation for the
quarters presented. This information should be read in conjunction with the
Consolidated Financial Statements and accompanying notes. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Interest income:
Cash and investments.................. $ 10 $ 24 $ 49 $ 33 $ 79 $ 116 $ 274 $ 280
Credit card loan receivables.......... -- -- -- -- -- -- -- 380
----- ----- ----- ------- ------- ------- ------- --------
Total interest income................... 10 24 49 33 79 116 274 660
Interest expense........................ -- -- -- -- 1 47 14 647
----- ----- ----- ------- ------- ------- ------- --------
Net interest income 10 24 49 33 78 69 260 13
Provision for loan losses............... -- -- -- -- -- -- -- 995
----- ----- ----- ------- ------- ------- ------- --------
Net interest income after provision for
loan losses........................... 10 24 49 33 78 69 260 (982)
----- ----- ----- ------- ------- ------- ------- --------
Non-interest income:
Servicing and profit and loss
sharing............................. -- -- -- 34 130 137 361 204
Interchange fee....................... -- -- -- -- -- -- -- 96
Credit card fees and other............ -- -- -- -- 3 2 30 43
----- ----- ----- ------- ------- ------- ------- --------
Total non-interest income............... -- -- -- 34 133 139 391 343
----- ----- ----- ------- ------- ------- ------- --------
Non-interest expenses:
Salaries and employee benefits........ 193 363 763 789 1,349 2,124 2,468 3,309
Marketing and advertising............. 6 5 33 209 936 1,056 2,124 2,555
Credit card origination and servicing
costs............................... -- -- 1 51 391 880 1,005 1,522
Occupancy and equipment............... 24 32 62 116 160 326 356 552
Professional fees..................... 23 44 77 41 77 49 353 255
Amortization of deferred
compensation ....................... -- -- -- 164 235 468 933 1,366
Amortization of loan structuring
fee................................. -- -- -- -- -- -- -- 568
Other................................. 17 43 45 71 133 106 229 216
----- ----- ----- ------- ------- ------- ------- --------
Total non-interest expenses............. 263 487 981 1,441 3,281 5,009 7,468 10,343
----- ----- ----- ------- ------- ------- ------- --------
Loss before income taxes................ (253) (463) (932) (1,374) (3,070) (4,801) (6,817) (10,982)
Provision for income taxes.............. -- -- 2 -- -- -- 2 --
----- ----- ----- ------- ------- ------- ------- --------
Net loss................................ $(253) $(463) $(934) $(1,374) $(3,070) $(4,801) $(6,819) $(10,982)
===== ===== ===== ======= ======= ======= ======= ========
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(1):
Total credit card loan receivables
outstanding........................... -- -- -- $ 1,626 $ 9,402 $35,334 $66,042 $ 96,293
Total number of open credit card
accounts at period end................ -- -- -- 1 5 19 40 66
Total revenue: finance charges, fees and
interchange income.................... -- -- -- $ 3 $ 59 $ 292 $ 845 $ 1,885
</TABLE>
- ------------
(1) Assets under management represents all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage's and our
balance sheets.
27
<PAGE> 32
We have a limited operating history and are operating in a new and rapidly
changing environment. Therefore, we believe that quarterly comparisons of our
financial results are not necessarily indicative of our future performance. Our
quarterly operating results may fluctuate significantly as a result of a variety
of factors, many of which are outside of our control. These factors include, but
are not limited to:
- our ability to generate new customer relationships and retain profitable
accounts;
- the volume of credit card loan receivables generated from our products
and our ability to successfully manage our credit card loan portfolio;
- the announcement or introduction of new websites, services and products
by us or our competitors and the level of price competition for the
products and services we offer;
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure;
- technical difficulties, system downtime, Internet service problems and
our ability to expand and upgrade our computer systems to handle
increased traffic;
- the success of our brand building, advertising and marketing campaigns;
- the level of use of the Internet and online financial services;
- our ability to attract and retain high-quality employees;
- regulation by federal, state or local governments; and
- general economic conditions, including interest rate volatility, and
economic conditions specific to the Internet, online commerce and the
credit card industry.
Our future revenue will primarily consist of the finance charges paid by
our customers based on their outstanding balances, the amounts paid through the
Visa system for purchases made with the NextCard, and other fees paid by our
cardholders. As a result, we will depend substantially on the amount of loans
outstanding in our loan portfolio, the level of new loans originated through the
NextCard website, the retention of existing customers and customer purchases
using the NextCard Visa. Therefore, our quarterly revenues and operating results
are likely to be particularly affected by these variables.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Cash and Cash Equivalents. Cash and cash equivalents decreased $14.6
million from $40.1 million at December 31, 1998 to $25.5 million at March 31,
1999. This decrease was primarily attributable to funding current operating
expenditures as well as the purchases of credit card receivables from Heritage
offset by borrowings of $54.1 million under our secured lending facility. Cash
and cash equivalents increased $37.3 million from $2.8 million at December 31,
1997 to $40.1 million at December 31, 1998. This increase was primarily
attributable to private sales of preferred stock in May and November 1998 offset
by ongoing funding of current operating expenditures.
Net Credit Card Loan Receivables and Secured Borrowings. In January 1999,
we began purchasing credit card loan receivables from Heritage utilizing a
$100.0 million secured lending facility extended to our subsidiary, NextCard
Funding Corp. Net credit card loan receivables of $67.4 million at March 31,
1999, represent the amount of outstanding balances our customers owe to us.
Secured borrowings outstanding of $54.1 million at March 31, 1999, represent the
total borrowings we have made under this lending facility to fund these
receivables. These balances will continue to
28
<PAGE> 33
increase as we continue to purchase credit card loan receivables from Heritage
and potentially originate and fund our own credit card receivables through
NextBank.
Stockholders' Equity. Stockholder's equity decreased $7.1 million from
$39.9 million at December 31, 1998 to $32.8 million at March 31, 1999. This
decrease was primarily attributable to our net loss for the quarter ended March
31, 1999 offset by the issuance of warrants to purchase preferred stock for $2.4
million and the amortization of deferred compensation of $1.4 million.
Stockholder's equity increased $37.1 million from $2.8 million at December 31,
1997 to $39.9 million at December 31, 1998. This increase was primarily
attributable to private sales of preferred stock in May and November 1998 offset
by our net loss for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of preferred stock. Net proceeds from these sales from inception to March
31, 1999 have totaled approximately $54.7 million.
Net cash used in operating activities was $1.5 million in the Inception
Period and $11.2 million in 1998. For the quarter ended March 31, 1999, net cash
used in operating activities was $8.3 million. Net cash used in operating
activities in all such periods was primarily attributable to net losses, offset
in part by increases in accounts payable, accrued expenses and amortization of
deferred compensation and, for the quarter ended March 31, 1999, also offset by
the provision for loan losses and the amortization of prepaid loan fees.
Net cash used in investing activities was $309,000 in the Inception Period
and $2.1 million in 1998. Net cash used in investing activities in the Inception
Period and in 1998 was primarily related to the purchase of property and
equipment. For the quarter ended March 31, 1999, net cash used in investing
activities was $66.2 million. For this period, net cash used in investing
activities was primarily related to the purchases of credit card loan
receivables from Heritage and the purchase of equipment and leasehold
improvements.
Net cash provided by financing activities was $4.7 million in the Inception
Period and $50.5 million in 1998. Net cash provided by financing activities in
the Inception Period and in 1998 resulted primarily from the issuance of
preferred stock and the borrowing of $546,000 against an equipment loan from a
financial institution. For the quarter ended March 31, 1999, net cash provided
by financing activities was $59.8 million. For this period, net cash provided by
financing activities resulted primarily from the borrowing of $54.1 million
under our secured borrowing facility and $5.0 million from our line of credit
from a finance company.
At March 31, 1999, our principal source of liquidity was approximately
$25.5 million of cash and cash equivalents. In February 1999, we entered into a
$5.0 million line of credit with a finance company. Borrowings under the line of
credit accrue interest at 12.25% per year and are secured by a secondary
security interest in all of our tangible and intangible assets. This line of
credit had an outstanding balance of $5.0 million at March 31, 1999. In April
1999, we entered into another agreement with the finance company to increase the
line of credit by an additional $5.0 million.
In addition, during 1998, we entered into a $1.3 million equipment loan and
security agreement with a finance company. The loan is secured by a pledge of
all equipment purchased with the proceeds from borrowings under the loan
agreement and bears interest at 7.55% per year. The ability to borrow under the
loan expires on May 31, 1999. The loan had an outstanding balance of $1.2
million at March 31, 1999.
Also during 1998, we entered into a $1.0 million lease/loan financing
arrangement with a finance company. The lease/loan financing arrangement is
secured by a pledge of all equipment leased under
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the arrangement and bears interest at 7.50% per year. The lease/loan financing
arrangement expires on May 22, 2000 and no balance was outstanding at March 31,
1999.
In addition, on December 29, 1998, we executed a $100.0 million secured
borrowing facility with Credit Suisse. The revolving credit facility is secured
by credit card receivables, which may be purchased, from time to time, using the
revolving credit facility's proceeds. The revolving credit facility bears
interest, at our option, at either 2.50% over LIBOR or the prime rate, and
matures on December 29, 1999. This credit facility had an outstanding balance of
$54.1 million at March 31, 1999.
We are in discussions with financial institutions related to establishing
additional borrowing facilities to fund the purchase of credit card loan
receivables. In addition, we are in contact with Credit Suisse related to a
possible increase in our existing borrowing facility. Such new or increased
facilities would increase our capacity to purchase credit card loan receivables
from Heritage or potentially fund a portion of our own credit card loan
receivables originated through NextBank. There are no assurances that any new or
expanded facility will be put in place. If such a facility is put in place and
drawn upon, our aggregate borrowings will increase.
In December 1997, we signed a five-year agreement with First Data for
processing of the credit card portfolio. Under that agreement, we are obligated
to make aggregate minimum servicing payments of $7.5 million over the next five
years.
In connection with our principal executive office lease, in September 1998,
we executed a $450,000 irrevocable standby letter of credit in favor of the
landlord which expires on October 31, 1999. This letter of credit can be drawn
on by our landlord under certain circumstances if we default under our lease
agreement.
We expect that our existing capital resources, including the net proceeds
raised in this offering, will adequately satisfy our working capital
requirements for the next 12 months, except for the funding of our loan
portfolio. Future working capital requirements, however, depend on many factors
including our ability to execute on our business plan. If our current funding,
including the net proceeds generated by this offering, becomes insufficient to
support future operating requirements, we will need to obtain additional funding
either by increasing our lines of credit or by raising additional debt or equity
from the public or private capital markets. Such funding alternatives, if
available at all, may be on terms that are not favorable to us. Failure by us to
raise additional capital or additional funding when needed could have a material
adverse effect on our business, results of operations and financial condition.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or privileges
senior to those of our common stock.
Our ability to grow our business is limited by the amount of credit we can
extend to our customers and potential customers. Although our credit facility is
sufficient to fund our current loan portfolio, it is not sufficient to cover our
anticipated loan portfolio over the next 12 months. Therefore, any loss of
funding under this credit facility or failure to increase or extend the terms of
this credit facility or obtain alternative financing on commercially reasonable
terms would have a material adverse effect on our results of operations and
financial condition.
In the future, if we successfully create NextBank, a bank limited to
generating and financing credit card loans, we will seek to fund our loan
portfolio through short-term deposits raised by NextBank as well as capital
contributed by us. However, we may not be able to attract or retain sufficient
deposits at attractive interest rates to fund our loan portfolio. Moreover, if
adequate capital is not available, we also may be subject to an increased level
of regulatory supervision that could have an adverse affect on our operating
results and financial condition. See "Business -- NextBank."
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which is effective for financial statements for fiscal
years beginning after June 15, 1999. This new standard will require us to record
all derivatives on the balance sheet at fair value. Changes in derivative fair
values will be either recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments, or, for
forecasted transactions, deferred and recorded as a component of comprehensive
income in stockholders' equity until the hedged transactions occurs and are
recognized in earnings. The ineffective portion of a hedging derivative's change
in fair value will be immediately recognized in earnings. While we currently
have no derivative financial instruments and do not currently engage in hedging
activities, we anticipate engaging in derivative and hedging activity in the
future, and therefore expect to be impacted by the pronouncement. The impact of
this new standard on our consolidated financial statements, however, will depend
on a variety of factors, including the level of future hedging activity, the
types of hedging instruments used and the effectiveness of such instruments.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use internally developed software, as well as computer technology and
other services provided to us by third-party vendors that may fail due to the
year 2000 phenomenon. For example, we are dependent on First Data Resources for
account processing and other customer functions. We are also dependent on
telecommunications vendors to maintain our network and a third party that hosts
our servers.
As we started NextCard less than three years ago, we developed our systems
and technology in light of the year 2000 problem, as opposed to many older
companies that rely on legacy systems designed before this problem was known. On
April 30, 1999, we completed our review and testing of year 2000 compliance for
all of our internally developed software, which include substantially all of the
systems for the operation of our website, such as our instant online approval
system, customer interaction and transaction systems and our security,
monitoring and back-up capabilities. Based on such testing, we believe our
internally developed software and systems are year 2000 compliant, which means
that all date data will process without error, interruption or loss of
functionality of any software or system due to the change in century.
On April 16, 1999, we completed our assessment of the year 2000 readiness
of our third-party supplied software and hardware, and of our vendors. Of 142
vendor inquiries made, 141 have provided a year 2000 readiness disclosure
statement certifying year 2000 compliance or representing that they have, and
are following, a year 2000 readiness plan. During the assessment phase, eleven
vendors were identified as critical to us, all of whom have provided us with
certifications of year 2000 compliance or a readiness disclosure statement.
Testing (including leap year testing) of our systems with those of First Data
Resources will not be completed until mid-summer of 1999. However, based on the
results of preliminary testing of all affected systems, we believe that the
systems will be year 2000 compliant. Accordingly, based on the results of the
responses we have received and the availability of alternate
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year 2000 compliant vendors, we do not believe further remediation planning is
necessary to ensure seamless operation at and after January 1, 2000.
If a year 2000 problem with one of our vendor's systems causes such vendor
to fail to provide us services it had agreed to provide us, we would seek to
recover from such vendor damages for the amount we suffered due to such failure.
We would base our suit on breach of the vendor's agreement with us and
misrepresentation of such vendor's year 2000 representation to us. However,
there can be no assurance that such agreements and such representations will be
enforceable.
Based on the results of our testing, we believe our worst case scenario
would be the failure of the Internet infrastructure due to a year 2000 problem.
The year 2000 readiness of the general infrastructure necessary to support our
operations is difficult to assess. For instance, we depend on the integrity and
stability of the Internet to provide our services. We also depend on the year
2000 compliance of the computer systems and financial services used by
consumers. A significant disruption in the ability of consumers to reliably
access the Internet or portions of it or to use their credit cards would have an
adverse effect on demand for our services and would have a material adverse
effect on us.
To date, we have incurred approximately $200,000 of expense relating to
year 2000 analysis, testing and remediation efforts. We anticipate that, when
all analysis, testing and remediation efforts are complete, we will have
incurred approximately $600,000 of expenses, all of which will be recognized in
1999. However such expenses could be significantly higher than we anticipated.
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BUSINESS
OVERVIEW
We are a leading Internet-based provider of consumer credit. We were the
first company to offer an online credit approval system for a Visa card and to
provide interactive, customized offers for credit card applicants.
We combine expertise in consumer credit, an exclusive Internet focus and
sophisticated direct marketing techniques with the aim of attracting profitable
customer segments on the Internet. Our product, the NextCard Visa, which we call
the First True Internet Visa, is marketed to consumers exclusively through our
website, www.nextcard.com. We offer credit card customers a unique combination
of convenience, customization, shopping enhancements and online customer
service. The NextCard Visa, which can be used for both online and offline
purchases, offers the following features:
CUSTOMIZED APPLICATION PROCESS
- online credit approval within seconds of submitting an application;
- online selection of customized offers based upon the applicant's unique
credit profile;
- automated account balance transfers, permitting the customer to transfer
balances from other credit cards using our website; and
- personalization of the look of the NextCard Visa through our My Visa
PictureCard product.
ONLINE SHOPPING ENHANCEMENTS
- GoShopping!, an Internet-based shopping service;
- NextCard Rewards, an Internet-based incentives program allowing customers
to earn NextCard points that can be redeemed for a variety of goods and
services; and
- 100% protection against credit card fraud.
INTERNET-BASED ACCOUNT MANAGEMENT
- online statements;
- the ability to download account activity into personal financial
management software; and
- online customer service functionality.
The NextCard Visa has experienced significant consumer demand since its
introduction in December, 1997. As of March 31, 1999, we had received more than
1.7 million applications for the NextCard Visa and had generated over $170.0
million in new loans. We earn most of our revenues from the finance charges paid
by our customers based on their outstanding balances. We also earn revenues from
the amounts paid through the Visa system for purchases made with the NextCard
Visa and from fees paid by our cardholders.
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INDUSTRY BACKGROUND
Our business lies at the intersection of Internet-based electronic
commerce, sophisticated application of direct marketing and the credit card
industry, as depicted in the following diagram:
LOGO
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation, commonly referred to
as IDC, estimates that there were 97 million Internet users worldwide at the end
of 1998 and anticipates that number will grow to approximately 320 million users
by the end of 2002. In addition, IDC estimates that the worldwide consumer
electronic commerce market is expected to grow from approximately $11 billion in
1998 to approximately $94 billion in 2002. That growth is being driven by a
number of factors, including:
- a growing base of PCs in the home and workplace;
- improvements in network security, infrastructure and bandwidth;
- faster and less expensive Internet access;
- increases in the quantity and quality of content available on the
Internet;
- the overall increased public awareness of the Internet; and
- the convenience, timeliness and reduced costs of electronic commerce.
Over the last few years, consumers have significantly increased their usage
of the Internet and expanded the categories of products and services they
purchase over the Internet. Consumers increasingly are using the Internet to
obtain information, make purchases and manage their personal finances. As a
result, a new class of Internet-based companies has emerged to address these
online opportunities. These companies are focusing on such areas as retail
consumer goods and services, travel, health care and, increasingly, consumer
financial products and services.
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INTERNET DIRECT MARKETING
The Internet provides unique opportunities to apply direct marketing
techniques to target and acquire new customer relationships and enhance existing
customer relationships. This Internet-based approach is relatively new, and
offers significant advantages over the traditional direct marketing techniques
of mass mailing and telemarketing. These advantages include the ability to:
- rapidly evaluate and respond to consumer reactions to marketing programs
and product offerings;
- target the most attractive customer segments and customize advertising to
them across different websites;
- acquire demographic and behavioral data about an individual customer and
quickly customize product offerings for that customer; and
- frequently analyze ongoing purchasing patterns and tailor ongoing product
offerings, thereby strengthening customer relationships and increasing
customer loyalty.
As a result of these factors, we believe the Internet has the potential to
be the most efficient and effective one-to-one direct marketing tool created to
date.
THE CREDIT CARD INDUSTRY
The credit card industry is large and continues to grow. According to The
Nilson Report, the amount of debt owed by U.S. consumers on their Visa and
MasterCard credit cards totaled $413 billion as of December 31, 1998. According
to The Nilson Report, the total charges by U.S. consumers on Visa and MasterCard
credit cards were $678 billion in 1997 and are expected to increase to $896
billion by the year 2000. We believe that the projected growth of the credit
card industry will be driven in part by:
- the shift from more traditional forms of consumer credit (e.g., consumer
installment lending) to credit cards;
- the shift from paper-based payments (e.g., cash and personal checks) to
credit card and other electronic forms of payment; and
- growth in Internet commerce, where credit cards are currently the primary
form of consumer payment.
While the credit card market is very large, it is also highly fragmented.
According to The Nilson Report, there are more than 6,600 financial institutions
in the United States that issue credit cards. Of the total Visa and MasterCard
balances outstanding, no credit card issuer has more than 17%, and only five
have more than 5%, of this market. We believe this market fragmentation is
largely the result of the use of the Visa brand, recognized as one of the more
powerful brands in the world and generally available to any insured depository
institution. Consumers traditionally have focused more on the credit card brand
(e.g., Visa, MasterCard and Discover(R)) than on the issuing bank when choosing
a credit card.
Unlike many industries, in the credit card industry a company can be
profitable without achieving significant market share if its customers have
attractive borrowing and credit profiles. For example, a large credit card
company may be less profitable relative to a small credit card company if the
customers of the large company maintain lower balances or have higher default
rates. As a result, profitability in the credit card industry can be achieved by
targeting specific customers with attractive characteristics, rather than using
mass marketing techniques to achieve large market share.
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Certain credit card companies have achieved success through targeting
strategies utilizing the direct mail and telemarketing channels. However, we
believe these traditional channels are becoming less effective. In particular,
we believe that the direct mail channel has become saturated. According to
BAIGlobal's Mail Monitor, the number of credit card offers communicated through
the mail exceeded 3.4 billion in 1998. Credit card issuers must also wait
several weeks or months to determine the response rate to their offers. This
slows the company's ability to make competitive offers based on marketplace
feedback. We also believe that telemarketing is often perceived as intrusive and
untrustworthy. As a result, we believe that the use of the Internet offers
significant advantages over traditional target marketing approaches.
THE NEXTCARD OPPORTUNITY
Due to the growth of electronic commerce, the ability to target customers
on the Internet and the dynamics of the credit card industry, we believe there
is a significant opportunity to offer credit cards through targeted marketing
over the Internet. NextCard was formed to capitalize on this opportunity.
We believe our exclusive focus on the Internet provides us with a
significant competitive advantage. Our business represents the specialized
application of the multiple skills required for credit card lending -- direct
marketing, credit analysis, fraud detection, regulatory compliance, security,
customer service and operations -- to an exclusively Internet-focused business.
We have developed the first Internet-focused credit card -- the NextCard
Visa. Our products and services include:
CUSTOMIZED APPLICATION PROCESS AND PRODUCT OFFERINGS
- At our website, customers can apply easily and quickly for the NextCard
Visa, receive credit approval within seconds, choose customized upgrades,
automatically transfer balances from other credit cards and personalize
their NextCard Visa. Through the application process, we are able to
gather information we utilize to refine our direct marketing efforts,
thereby increasing the effectiveness of our future targeted marketing
programs and lowering customer acquisition costs. The automated balance
transfer feature enables us to quickly build our loan portfolio.
- By acquiring demographic and credit data about an individual consumer, we
can customize our product offerings for that consumer at the time of the
initial offer. This helps us target offers that we believe are attractive
to the customer.
- Our My Visa PictureCard product enables cardholders to personalize the
look of their NextCard Visa by sending us via the Internet their own
picture or selecting from an online library of artwork. We believe that
personalization increases customer loyalty and card usage.
ONLINE SHOPPING ENHANCEMENTS
- Our Internet-based shopping services, our pledge of 100% protection
against credit card fraud and our NextCard Rewards program may enhance
our customers' tendency to purchase goods and services, especially over
the Internet. By providing these value-added services, we expect to
broaden our relationship with our customers and help build our brand.
Further, by tracking our customers' ongoing purchases, we intend to
target future offers to particular customers that may be attractive to
them and profitable for us.
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ONLINE CUSTOMER SERVICE
- Our customers can access statements online, check recent account
activity, download information to many personal financial management
software programs and communicate with us by e-mail. These customer
support features are available 24 hours a day, seven days a week. These
features should assist us in building customer relationships and
improving customer loyalty.
BUSINESS STRATEGY
Our objective is to enhance our position as a leading Internet-based
provider of customized consumer credit products and services. The key elements
of our strategy are:
Direct Marketing Strategy. We will enhance our data analysis
techniques to expand our expertise in Internet direct marketing in order to
find and attract our target customers. Our exclusive focus on the Internet
consumer allows us to apply the power of Internet direct marketing to a
significant and growing market. We plan to continue to develop and use our
database and data analysis capabilities as a competitive advantage to
refine our marketing programs, lower customer acquisition costs and
increase potential customer profitability.
Product Strategy. We will continue to offer customized product
choices to our customers, allowing them to design their own products
interactively. The Internet allows us to review an applicant's credit and
existing credit card usage in real-time. As a result, we can provide online
offers to particular applicants that are customized to meet their specific
needs. For example, our profile-based pricing capability allows us to use
customer information to offer specific interest rate, credit limit and
NextCard Rewards combinations. Such profile-based pricing improves our
ability to match our products to the credit risk/reward profile of our
applicants. For applicants who become customers, we intend to offer an
array of financial products and services over time based upon the
customer's credit and spending profile.
Technology Strategy. We seek to apply Internet technology innovations
to provide enhanced customer functionality more rapidly than our
competitors. We believe our technology represents one of the most advanced
online credit review and approval systems available. We believe
technological innovations will continue to transform the Internet and that
we must maintain technological superiority in the delivery of our products
and services. Therefore, we plan to lead in the application of new Internet
technologies to offer enhanced product and services and thereby
differentiate ourselves from our competitors.
Branding Strategy. We plan to leverage our leadership in Internet
consumer financial services to continue to build brand recognition.
Branding on the Internet is becoming an increasingly important
differentiating factor for consumers. We believe our exclusive focus on the
Internet has enabled us to begin to establish name recognition among online
consumers of financial products and services. We intend to continue to
expand our marketing activities to enhance our brand awareness. As
competition increases for online financial products and services, we
believe our brand name will provide us with a competitive advantage.
Ultimately, our long-term vision is to redefine the banking experience for
the Internet consumer. We are focusing on consumer credit cards because the
credit card business is a proven direct marketing business, there is significant
consumer demand for applying for credit online and we believe the credit card
business is one of the most profitable businesses in consumer financial
services.
THE NEXTCARD VISA
The NextCard Visa is bundled with a unique combination of Internet-based
functionality, including an automated application process, customized terms,
personalization options and add-on
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services. We believe the features of the NextCard Visa increase potential
customers' desire to obtain our credit card and increase existing customers'
usage of the NextCard Visa.
CUSTOMIZED APPLICATION PROCESS
- INSTANT ONLINE CREDIT APPROVAL. Through our RapidResults system,
applicants can apply for the NextCard Visa quickly and easily on our
website, with a credit decision returned online within seconds of
submitting an application.
- CUSTOMIZED OFFERS. Based upon an applicant's unique credit and spending
profile, we offer each approved applicant up to three customized upgrade
opportunities that vary based on interest rate, NextCard Rewards
opportunities, balance transfer amount, type of card (i.e., Classic, Gold
or Platinum) and credit limit. This allows customers to choose the
offering that best suits their needs and interests.
- AUTOMATED ONLINE BALANCE TRANSFERS. As part of our enrollment process,
customers can elect to transfer balances automatically from their other
credit cards to their new NextCard Visa.
- PERSONALIZATION. Our My Visa PictureCard enables cardholders to
personalize the look of their cards online by scanning in a picture of
choice or choosing from an online library of more than a thousand
pictures.
ONLINE SHOPPING ENHANCEMENTS
- NEXTCARD REWARDS. For each dollar charged, cardholders can earn double
reward points simply by transferring and maintaining a balance on their
NextCard Visa. These points can be used to obtain a variety of goods and
services, including discounts at major retailers as well as miles that
can be redeemed on major airlines. In this way, customers can apply their
points towards offerings of interest to them.
- GOSHOPPING! Our cardholders can use our Internet-based shopping service,
GoShopping!, to search for products and obtain consumer product
information. Our service offers Bargain Finder, to help customers search
for the best prices on specific products, Shopping Guide, which helps
NextCard customers evaluate various Internet merchants based on customer
reviews and ratings, and electronic incentives, which provide discounts
to NextCard customers.
- 100% SAFE FOR INTERNET SHOPPING. We provide our customers with 100%
protection against credit card fraud to assure our customers that the
Internet is a safe medium for making transactions.
INTERNET-BASED ACCOUNT MANAGEMENT
- ONLINE CUSTOMER SUPPORT. At our website, customers can perform most
service and account management functions, including receiving and
downloading statements, checking balances and available credit, viewing
and sorting transaction history and communicating with us through secure
e-mail. Our website is available 24 hours a day, seven days a week,
enabling our customers to access the support they need when most
convenient for them.
FUTURE PRODUCTS AND SERVICES
We intend to add new credit card products and services in the future. Most
of those products and services will be designed to attract and retain targeted
consumer segments on the Internet and stimulate the use of the NextCard Visa,
particularly in electronic commerce. Potential future offerings may include
electronic wallets, targeted sweepstakes programs and special incentive offers.
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MARKETING
We use direct marketing on the Internet both to attract targeted customers
to our website and as a one-to-one marketing channel to provide customized
offers. To attract potential customers to our website, we focus on three
distinct marketing channels:
TARGETED INTERNET-BASED ADVERTISING
We believe the Internet offers a unique opportunity to build a
database-oriented, direct marketing capability. We use advertisements on
websites, primarily banners, and sponsored e-mails to attract potential
customers to our website. Because we offer online application and credit
approval, we automatically receive information that is well suited for targeted
marketing. We make direct placements of advertising on a diversified selection
of websites that provide millions of ad impressions each day.
Diversification is a key driver of our success. To date, no particular site
has accounted for more than 15% of our new customers. As a result, we are not
reliant on any particular website to attract applicants to our website.
We have constructed an Internet Database Marketing system, which we call
IDM, that can monitor the click-path of customers who come to our site. With
this system, we are able to evaluate the success of a particular advertisement
on a particular site. For each banner/site configuration, we are able to
monitor:
- the click-through rate (percent of people who click from the banner to
our site);
- the application rate (percent of those people who then decide to apply
for our product);
- the credit approval rate (percent of those applicants whom we approve for
credit);
- the booking rate (percent of those approvals who order a NextCard Visa);
and
- the balance transfer rate (the average amount of balances transferred by
a customer to us from their other credit card accounts).
AFFILIATE MARKETING
We form relationships with companies that have Internet sites to drive new
account volume and strengthen customer loyalty and retention. Companies meeting
our quality standards can post a NextCard logo, providing a direct link to our
website. These affiliates receive payments from us for each new customer we
acquire through their website link. We have developed an automated affiliate
sign-up process that has resulted in rapid growth of our affiliates. As of March
31, 1999, we had more than 5,200 affiliates and have gained approximately 500
new affiliates each month since September 1998.
CO-BRANDING
In the traditional credit card market, co-branding has been an important
approach to acquiring customers but frequently has failed to promote the brand
of the credit card issuer. Traditionally, a credit card issuer will enter into
an agreement with a consumer branded company to offer credit cards under the
brand of the partner. However, the identity of the credit card issuer generally
is subordinate to the identity of the partner. As a result, these relationships
typically do not allow credit card issuers to build their credit card brands.
As an alternative, we have begun to work with partners to offer the power
of our customization to their customer base, with both brands marketed together.
We believe that the power of two Internet brands can create an important message
to the customer, and promote our brand.
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In addition to the above three marketing channels, we will continue to
build the NextCard brand and leverage it to attract new customers, affiliates
and partners. Through our marketing of the NextCard Visa, we have received over
seven million visits to our website.
UNDERWRITING AND CREDIT MANAGEMENT
One of the most significant drivers of profitability in the credit card
industry is the ability to effectively manage credit card losses. Losses from
consumer defaults vary widely by issuer. We believe that credit card issuers
using more advanced information-based credit risk management techniques have
experienced lower loss rates than the industry average.
Members of our team have significant experience in credit risk management
from operational, marketing and strategic perspectives. We have developed a set
of underwriting criteria based on risk models utilizing industry data as well as
our own internally developed decision rules and analytic techniques. In
addition, we consider the potential profitability of a particular customer prior
to making customized offers. Our policies are designed to balance credit risk
and potential profitability by adjusting the interest rate, credit limit and
required minimum balance transfers offered to a particular customer.
Our credit policies have been written, and are administered, by our credit
committee, comprised of members of our senior management. These policies have
also been reviewed and adopted by Heritage. The credit committee meets regularly
to review actual credit performance as compared to plan assumptions. The
committee reviews proposed changes to credit policies and risk management
procedures with a focus on portfolio profitability. Because we have an
unseasoned credit card portfolio, we may be unable to predict accurately the
level of future credit loss.
CREDIT UNDERWRITING ALGORITHM
Our credit approval process is performed on a fully automated basis.
Although a NextCard Visa applicant receives a credit approval decision within
seconds of applying, during that interval we conduct an automated credit
analysis. We access up to three credit bureau reports on each applicant, and
capture the credit score developed by Fair, Isaac & Company, Inc., a nationally
recognized provider of credit bureau scoring information on each of the credit
reports. The credit score is commonly referred to as a FICO score. We also
analyze an internally developed credit score to augment the FICO score. If the
applicant meets both minimum FICO score criteria and passes all of our
internally developed criteria, the applicant is approved for a NextCard Visa,
subject to authentication of customer information. In instances where an
applicant does not have a FICO score, we will approve the applicant based on a
minimum score from our internally developed criteria. Further, to prevent
customers from obtaining additional accounts and thereby increasing our credit
exposure to them, we automatically verify that the applicant is not already a
NextCard Visa holder and has not submitted a duplicate application. On a
periodic basis, we monitor the effectiveness of our credit algorithm and credit
review process and adjust our procedures as necessary. As we further refine our
credit algorithm and credit process, we may consider using additional internally
developed criteria or scoring algorithms, including a lower minimum FICO score,
to enhance or replace our existing credit approval criteria. We have limited
experience developing and implementing such credit criteria and we may
experience higher credit losses than we had expected using such enhanced or
replaced credit approval criteria.
CREDIT LINE MANAGEMENT
Several objectives are considered in credit line management, including:
increasing potential revenue per customer, reducing potential losses and
reducing contingent liabilities. Using credit bureau information, we review the
balances on other credit cards maintained by the applicant. The
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credit line made available to the applicant is a function of the customer's risk
profile, income and balances maintained on other cards. Our decisions are based
on the probability of future credit loss projected based on the FICO score,
application of our own criteria and the applicant's income level. In addition,
we periodically monitor our customer accounts and in the future we may adjust
credit lines accordingly.
OPERATIONS
Our operations function is organized and designed to support rapid product
introduction and customer growth. We use internal and external resources for
different functions. For outsourced functions, our operations management team
provides procedural and management oversight. We are in the process of moving
certain functions in-house as volumes increase and economies of scale are
achieved. We may experience unexpected interruptions or deterioration in our
operations due to such migration of operations. The key functional components of
our operations function are as follows:
ACCOUNT ORIGINATION SUPPORT
We have developed an innovative application processing approach, leveraging
an automated credit decision process with a multi-step customer authentication
routine. The authentication and new account risk management process is a central
function for the operations group.
Once an applicant has been approved through our credit process, our
operations group performs several customer authentication tests. The
authentication process involves a set of internally developed procedures using
third-party databases and credit bureau information to determine the probability
that an application may involve fraud.
Each application is processed through a series of fraud databases. We also
have developed an internal database of fraud addresses. Based upon the presence
of certain indicators, the customer will either be approved for the card,
declined for the card, sent correspondence requesting additional information or
routed to an operations specialist who has been trained to look for occurrences
of Internet application fraud. After reviewing the account, telephone contact
may be initiated to attempt to verify the identity of the applicant. We plan to
automate further our authentification process during the next several years.
At the conclusion of this process, which typically takes one to three
weeks, the customer is sent their NextCard Visa.
CUSTOMER SERVICE AND SUPPORT
Customer service and support functions are performed by our operations
staff, as well as through an arrangement with First Data. During the second half
of 1999, we expect to move most customer service and support activities to our
San Ramon operations facility.
Customers can access account information on our website or call a customer
service representative 24 hours a day, seven days a week. The quality of our
customer service is reviewed through monitoring of telephone contacts with
customers. In addition, we use call management software to monitor call
abandonment, call length and other call center productivity measurements.
COLLECTIONS
Collections activities currently are performed by First Data under our
direction and policy-making. Accounts are recognized as delinquent one day after
a monthly cycle in which no payment is received for an account that had a
balance in the prior billing cycle. Collection activity involves contacting the
customer and taking other appropriate actions. We review the effectiveness of
the collection efforts and make recommendations for process improvements to
First Data. During the
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second half of 1999, we expect to move a portion of collections activities to
our San Ramon operations facility.
PROCESSING
First Data performs certain core processing services for us. These services
include authorizing customer transactions through the Visa system (including
monitoring for purchase-related fraud), performing billing and settlement
processes, generating and monitoring monthly billing statements, and issuing
credit card plastics and new account agreements.
KEY OUTSIDE RELATIONSHIPS
We rely on third parties to provide essential value-added services:
- Heritage issues the NextCard Visa;
- First Data provides essential fulfillment and customer service functions,
and hosts online customer service capabilities;
- Response Data Corporation provides online balance transfer support to
NextCard customers;
- Exodus Communications provides us technical support and secure facility
for Internet hosting services;
- Three major credit bureaus (TransUnion, Experian and Equifax) furnish the
credit information that we require to process our credit card
applications;
- National Processing Corporation provides collection and lockbox services
for customer payments;
- MyPoints.com furnishes administrative and fulfillment services for our
NextCard Rewards incentive program; and
- Binary Compass Enterprises, Inc. and WebCentric, Inc. provide software
technology underlying our GoShopping! program.
Any interruption, deterioration or termination of these third party
services could have a material adverse effect on our business and reputation. In
addition, as we do not have fully redundant systems in place for most of our key
functions at this time, any interruption of any of our systems could cause a
material interruption or deterioration in our operations.
TECHNOLOGY AND SECURITY
Our business model is based on consumer access to the NextCard website both
to acquire new customers as well as to service existing relationships. As a
result, our development efforts are focused on creating and enhancing
specialized software that enhances our Internet-based customer functionality. In
addition, because we offer a financial product, we seek to offer a high level of
data security to build customer confidence.
Our security infrastructure is designed to protect data from unauthorized
access, both physically and over the Internet. The major components of our
network are located in San Francisco, at our corporate headquarters; San Ramon,
California, in our operations center; and Santa Clara, California, in the Exodus
Data Center. Additionally, we rely upon the security infrastructure of First
Data and Response Data. Each of these key business locations is connected
through private leased lines. In all locations, access to the network servers is
tightly restricted. Internet security is addressed with leading technologies,
vendors and design approaches.
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Our most sensitive data and hardware reside at one of the Exodus Data
Centers in Santa Clara, California. Exodus Communications provides Internet
co-location services for hundreds of Internet businesses in seven locations
nationwide. With redundant connections to the Internet, as well as fault
tolerant power and waterless fire suppression, Exodus Communications provides us
with the benefits of a high-end data center without the excessive cost of
building and maintaining our own data center. Because of our special security
needs, our equipment is located in an Exodus Vault.
Our customer service website was designed and developed in conjunction with
First Data. The site resides on a web server located in their main data center
in Omaha, Nebraska. Security for the system is provided through a multi-tiered
security design, which includes physical and logical components.
FUNDING THE LOAN PORTFOLIO
In the credit card business, it is necessary to fund the resulting credit
card receivables owed by the cardholder. To date, our funding arrangements for
the NextCard Visa have involved relationships with Heritage Bank and Credit
Suisse First Boston.
HISTORICAL ARRANGEMENTS
Heritage Bank issues the NextCard Visa credit cards. From introduction of
the product through January 12, 1999, all credit card receivables associated
with the NextCard Visa program were funded by Heritage. Under that arrangement,
we billed Heritage for the origination and servicing of the accounts and
participated in 50% of the resulting net profits and losses.
As of January 12, 1999, a majority of the funding of NextCard Visa
receivables began to be provided by Credit Suisse, in cooperation with Heritage.
Under the Account Origination Agreement, Heritage continues to issue the
NextCard Visa, and our wholly-owned subsidiary, NextCard Funding Corp.,
purchases the receivables from Heritage on a daily basis. Credit Suisse provides
a $100 million revolving credit facility for this purpose. Our subsidiary has
pledged all of its assets to secure the loans under the Credit Suisse credit
facility, including an $8.0 million demand note we contributed to our
subsidiary. Loans fund 85% of the credit card receivables and bear interest, at
our option, at either 2.50% over LIBOR or Credit Suisse's prime rate. Our
subsidiary is also required to pay a fee of 0.25% per annum on the undrawn
portion of the total available commitment of $100.0 million. We may increase
Credit Suisse's financing to 90% of the credit card receivables upon payment of
additional compensation to Credit Suisse. Our arrangement with Credit Suisse
terminates December 29, 1999.
Heritage's obligation to establish new credit card accounts terminates on
September 30, 1999, and the remaining terms of the agreement (other than certain
indemnification and similar obligations) terminate on December 31, 1999. The
agreement may be extended if certain conditions are satisfied. However, if we
are successful in creating NextBank, our proposed credit card banking
subsidiary, we expect to have NextBank issue the NextCard Visa. If we are not
successful in creating NextBank on a timely basis, our failure to extend our
agreement with Heritage or enter into an alternative arrangement with Heritage
or another credit card issuer would have a material adverse effect on us.
Heritage's compensation under the Account Origination Agreement is primarily an
origination fee for each credit card account. In addition, Heritage is entitled
to reimbursement for certain out-of-pocket expenses.
FUTURE ARRANGEMENTS
Growth of our business depends on our ability to finance the creation of
credit card receivables associated both with new and existing accounts. Our plan
is to continue primarily to employ debt financing to fund credit card
receivables until we successfully establish NextBank. At that point in
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time, we anticipate taking deposits in our NextBank subsidiary to fund a portion
of our credit card loan receivables.
We are seeking to establish an additional new credit card loan receivables
purchase facility or an increase in the size of our current facility. If put in
place, our capacity to purchase credit card loan receivables from Heritage would
increase. In addition, such a facility could be used to fund a portion of credit
card receivables created through NextBank.
NEXTBANK
We have taken initial steps to establish a limited purpose national credit
card bank that may in the future be a vehicle for issuing NextCard Visas and
funding our NextCard Visa loan portfolio. In December 1998, we filed a limited
purpose national bank application with the Office of the Comptroller of the
Currency, or the OCC, to charter NextBank, a nationally chartered bank limited
to generating and financing credit card loans. On May 8, 1999, the OCC granted
preliminary approval of our application to charter NextBank. Final approval of
the OCC is subject to several conditions NextBank must satisfy. There can be no
assurance NextBank will satisfy these conditions and receive final approval from
the OCC. We have also filed, on behalf of NextBank, an application for federal
deposit insurance with the FDIC. If we are successful in obtaining a charter
from the OCC and federal deposit insurance from the FDIC, we intend to begin
originating NextCard accounts through NextBank and partially funding credit card
loan receivables by accepting deposits of $100,000 or more. We anticipate
operating NextBank by interacting with our customers primarily over the
Internet. As a limited purpose national credit card bank, NextBank will be
subject to the following restrictions on its activities:
- it may engage only in credit card operations;
- it may not accept demand deposits or deposits that the depositor may
withdraw by check or similar means;
- it may not accept savings or time deposits of less than $100,000 (except
as security for its loans);
- it may maintain only one office that accepts deposits; and
- it may not engage in the business of making commercial loans.
COMPETITION
The market for consumer credit card products in the United States is highly
competitive. This competition primarily has been focused in the offline areas of
direct mail, telemarketing and traditional bricks-and-mortar branch banking. In
contrast, our strategy focuses on the Internet channel, a rapidly evolving and
intensely competitive arena. Our ability to compete effectively depends on many
factors, both within and beyond our control.
We believe that the principal factors upon which we will compete for
customers include the pricing of our products and services, reliability and
customer support, the features of our products and services, and brand
recognition. In turn, our ability to be an effective competitor against
established and new entrants into the industry will depend on a number of
factors, including our ability to identify and retain attractive customers, the
quality of our credit decisions, the cost of acquiring customers, our ability to
gain technological expertise, the cost of funding our loan portfolio, our
ability to create strategic partnerships with third parties and our ability to
control fraud and delinquencies.
We expect significant additional competition in the future as the Internet
channel grows and many financial institutions become increasingly aware of the
market opportunities available. Many of the current and potential competitors
have greater financial resources and name recognition than we
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have. We currently compete, or anticipate competing, for online consumers,
directly and indirectly, with the following categories of companies:
Traditional Credit Card Companies. Established credit card companies,
such as BancOne and Providian Financial, have historically generated
accounts through direct mail and telemarketing. Our products and services
compete with the offline offerings of these companies, as well as the
online offerings that certain of these companies have begun to make
available. In particular, certain of these companies are entering into
Internet related branding arrangements, as well as significant
arrangements, including exclusive arrangements, with Internet portals to
market their products.
Traditional Banks. Banks, such as Citibank, Wells Fargo and Chase
Manhattan, have historically issued credit cards to consumers through
traditional channels and have begun to provide online credit card services.
As the Internet channel grows, we expect banks to offer more credit card
products and services over the Internet.
Internet-Focused Entrants. We anticipate the addition of new forms of
financial institutions to compete in the online consumer financial services
industry. Several companies, such as TeleBank and Net.B@nk, are
establishing themselves as Internet-based providers of consumer financial
products and services. We also anticipate that established Internet
participants will be attracted into the marketplace, through partnering or
co-branding arrangements with existing financial institutions. For example,
BancOne, in partnership with Yahoo!, has introduced a Yahoo! branded credit
card and promoted that credit card on the Internet.
GOVERNMENT REGULATION
The relationship between an issuer of credit cards and its applicants and
customers is extensively regulated by federal and state consumer protection
laws, most particularly Truth-in-Lending, Equal Credit Opportunity, Fair Credit
Reporting, Telemarketing and Consumer Fraud and Abuse Prevention, Electronic
Funds Transfer and Fair Debt Collection Practices Acts. These statutes, as well
as their enabling regulations, among other things, impose disclosure
requirements when a consumer loan is advertised, when an application is
presented, when an application is processed, when a billing statement is
prepared and when a delinquent account is presented for collection. In addition,
various statutes limit the liability of a credit card holder for unauthorized
use, prohibit discriminatory practices when extending credit, impose limits on
the types and amounts of fees and charges that may be imposed and restrict the
use of consumer credit reports and other account related information.
Changes in any of these laws or regulations, or in their interpretation or
application, could harm our business. Various proposals which could affect our
business have been introduced in Congress in recent years, including, among
others, proposals relating to imposing a statutory cap on credit card interest
rates, substantially revising the laws governing consumer bankruptcy, limiting
the use of social security numbers and other regulatory restructuring proposals.
There have also been proposals in state legislatures in recent years to restrict
telemarketing activities, impose statutory caps on consumer interest rates,
limit the use of social security numbers and expand consumer protection laws. It
is difficult to determine whether any of these proposals will become law and, if
so, what impact they will have on us.
We believe that we are in compliance with all relevant statutes and
regulations in relation to our business. However there can be no assurance that
we will be able to maintain such compliance. The failure to comply with consumer
protection statutes and regulations could have a material adverse effect on our
business, financial condition and results of operations. In addition, due to the
consumer-oriented nature of the credit card industry, there is a risk that we or
other industry participants could
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be named as defendants in class action litigation alleging fraud or violations
of federal or state laws and regulations, including fraud. While we currently
are not a party to any such litigation, a significant judgement against us or
the industry, with respect to any business practice followed by us, could have a
material adverse effect on our business, financial condition and results of
operations or our stock price.
To date, all NextCard Visa accounts have been issued by Heritage, a
California bank. Therefore, all of our current accounts are subject to the
provisions of California law with respect to fees, charges, interest rates and
other restrictions imposed on California-based lenders. Our ability to export
the interest rates charged by California banks into other states, and thereby
preempt the interest rate limits that might otherwise be imposed by those
states, has been recognized by the United States Supreme Court, as well as by
the Depository Institutions Deregulation and Monetary Control Act. However, with
respect to state chartered banks seeking to export interest rates, this act
provided that states could "opt out" of the reciprocity provisions. We have
determined not to offer the NextCard in any opt-out jurisdiction and other
select jurisdictions. We do not currently offer the NextCard in Alabama, Iowa,
Wisconsin and Puerto Rico.
We are not currently a regulated financial institution; however, we have
applied to the OCC for a charter for NextBank, a to-be-organized national bank
limited to credit card operations. In addition, we have applied for insurance of
deposit accounts for NextBank from the FDIC. Following the chartering of
NextBank, NextBank will commence the solicitation of deposits, in amounts of
$100,000 or more, and it, and to a lesser extent, we, will be subject to
regulations under federal and state banking laws and the supervision of the OCC
and the FDIC. These laws and supervision could have a material impact on our
operations including our credit and authentication policies, pricing and
products.
INTELLECTUAL PROPERTY
We rely primarily on a combination of copyrights, trademarks and trade
secrets, as well as certain restrictions on disclosure, to protect our
intellectual property. We have filed three patent applications pending in the
United States to protect certain proprietary systems applications covering the
method and apparatus for credit analysis, application approval or rejection and
the presentation of multiple credit card offers. In addition, we have applied to
register our trademarks in the United States and our United States trademark for
"NextCard" has been issued. We cannot assure you that our patent applications or
trademark registrations will be approved or that they will provide us with any
competitive advantages. We also enter into confidentiality agreements with our
employees and consultants, and seek to control access to and distribution of our
other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use certain intellectual property without authorization.
These precautions may not prevent misappropriation or infringement of our
intellectual property. In addition, we can not assure you that we will not
infringe upon the intellectual property rights of third parties. The costs of
defending our proprietary rights or claims that we infringe third-party
proprietary rights may be high.
EMPLOYEES
As of March 31, 1999, we employed 135 people, of which 20 were in
marketing, 43 were in technology, 45 were in operations, 18 were in finance and
administration and 9 were in decision analytics. All but two of our employees as
of March 31, 1999 were located either in San Francisco or San Ramon, California.
None of our employees are represented by a collective bargaining agreement. We
consider our relations with our employees to be good, and we will continue to
strive to provide a positive working environment for our employees.
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FACILITIES
We have a five year lease on our principal executive offices of
approximately 14,000 square feet in San Francisco, California. That lease
expires in 2003. In addition, we sublease approximately 7,000 square feet of
office space in San Ramon, California, where most of our operations and customer
service activities are located. That lease expires in 2001. We have entered into
a sublease for an additional 10,000 square feet of space in San Ramon,
California. That space is contiguous to our current space. The sublease also
expires in 2001. Our current facilities will not be sufficient to meet our
anticipated growth. As such, we will need to secure additional space to satisfy
this growth. There can be no assurance we will be able to secure such additional
space.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation concerning claims
arising in the ordinary course of our business. We are not presently a party to
any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of March 31, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeremy R. Lent(3)........... 38 Chairman of the Board, Chief Executive Officer and
President
Yinzi Cai................... 32 Senior Vice President, Decision Analytics
Timothy J. Coltrell......... 38 Chief Operating Officer
Olivia V. Dillan............ 41 Senior Vice President, Technology
John V. Hashman............. 39 Chief Financial Officer
Molly Lent.................. 53 Chief Corporate Development Officer
Robert Linderman............ 47 General Counsel and Secretary
Daniel D. Springer.......... 35 Chief Marketing Officer
Jeffrey D. Brody(1)......... 39 Director
Alan N. Colner(2)........... 44 Director
Tod H. Francis.............. 39 Director
Safi U. Qureshey(1)(2)...... 48 Director
Bruce G. Rigione(2)(3)...... 41 Director
</TABLE>
- ---------------
(1) Member of compensation committee
(2) Member of audit committee
(3) Member of nominating committee
Jeremy R. Lent co-founded NextCard with his wife, Molly Lent, in June 1996
and has been Chairman of the Board, Chief Executive Officer and President since
our inception. From May 1991 to January 1995, Mr. Lent served as Chief Financial
Officer of Providian Bancorp, a direct marketing credit card issuer. From 1994
to January 1995, Mr. Lent also served as a Senior Vice President of Providian.
While at Providian, Mr. Lent was responsible for the company's planning,
treasury, securitization, corporate development and accounting functions. Mr.
Lent received a B.A. and an M.A. from Cambridge University and an M.B.A. from
the University of Chicago.
Yinzi Cai has served as our Senior Vice President, Decision Analytics since
February 1999. From July 1997 to January 1999, she served as our Vice President,
Decision Analytics. From July 1994 to June 1997, Ms. Cai was a Principal in the
Finance Industry Group of American Management Systems, focusing on risk
management and direct marketing strategies for financial institutions. Ms. Cai
served as a Risk Manager for GE Capital from June 1993 to June 1994. Ms. Cai
holds a B.S. from Fudan University and an M.S. from Case Western Reserve
University.
Timothy J. Coltrell has served as our Chief Operating Officer since June
1997. From August 1996 to June 1997, he served as our Senior Vice President of
Operations. From November 1994 to June 1996, he was the Operations Center
Manager, President and Chief Executive Officer of GE Capital Consumer Credit
Card Company. From April 1987 to November 1994, he held a variety of positions
at Providian Bancorp including Assistant Vice President of Collections, Vice
President of Acquisitions, Vice President of Risk Control and Vice President of
Joint Ventures. Most recently, from August 1994 to November 1994, he held the
position of Vice President of Telemarketing at Worldwide Insurance, a subsidiary
of Providian Corporation. Mr. Coltrell received a B.A. and an M.B.A. from the
University of California at Irvine.
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Olivia V. Dillan has served as our Senior Vice President, Technology since
March 1999. From August 1998 to March 1999, Ms. Dillan served as Vice President,
Engineering, NetDynamics Business Unit, Java Software Division, for Sun
Microsystems, Inc. From March 1998 to August 1998, prior to the purchase of
NetDynamics, Inc. by Sun Microsystems, Ms. Dillan served as Vice President,
Engineering at NetDynamics. Prior to this position, from March 1997 to February
1998, Ms. Dillan was Vice President, Product Development at Pretty Good Privacy
Inc. From September 1996 to March 1997, she served as Vice President,
Engineering for Portal Information Network and from February to August 1996, she
served as Vice President, Product Development for Internet Profiles Corporation.
From April 1994 to February 1996, Ms. Dillan served as Vice President, New Media
Tools and Applications Division at Oracle Corporation. Ms. Dillan holds a B.A.
in Computer Science from Hunter College.
John V. Hashman has served as our Chief Financial Officer since September
1997. Prior to joining us, Mr. Hashman worked at Providian Financial, where he
served as Vice President, Direct Telemarketing from June 1995 to September 1997,
Vice President, Operations from November 1993 to June 1995 and Treasurer from
November 1989 to November 1993. Mr. Hashman holds a B.S. from Southeast Missouri
State University and an M.B.A. from the University of San Francisco.
Molly Lent co-founded NextCard with her husband, Jeremy Lent, and, since
April 1998, has served as our Chief Corporate Development Officer. Prior to the
founding of NextCard, Ms. Lent was President of Art Forms, an art distribution
company. Ms. Lent graduated Phi Beta Kappa, cum laude, with a B.A. degree from
State University of New York at Buffalo.
Robert Linderman has served as our General Counsel and Secretary since
October 1997. From January 1993 to January 1996, he served as Associate General
Counsel for San Francisco Federal Savings, and from February 1996 to July 1997,
he served as General Counsel for SIFE Trust Fund. Mr. Linderman received a B.A.
and a J.D. from Boston University.
Daniel D. Springer has served as our Chief Marketing Officer since March
1998. Prior to joining us, from September 1991 to December 1997, Mr. Springer
worked at McKinsey & Co., an international consulting firm, where he consulted
for a wide range of enterprises. Mr. Springer holds a B.A. from Occidental
College and an M.B.A. from Harvard University.
Jeffrey D. Brody has served as a Director of NextCard since August 1997.
Mr. Brody has been employed by Brentwood Venture Capital since April 1994, and
has been a General Partner since October 1995. From December 1988 to April 1994,
Mr. Brody was Senior Vice President of Comdisco Ventures, a venture leasing
company. Mr. Brody holds a B.S. from the University of California at Berkeley
and an M.B.A. from Stanford University Graduate School of Business. Mr. Brody is
a member of the board of directors of Concur Technologies, and serves on its
compensation committee. Mr. Brody also is a member of the board of directors of
several private companies.
Tod H. Francis has served as a Director of NextCard since May 1998. Mr.
Francis has been a General Partner of Trinity Ventures since March 1996. Prior
to being named as a General Partner, Mr. Francis worked at Trinity Ventures as a
Principal from March 1995 to March 1996 and as an Associate from March 1993 to
March 1995. Prior to joining Trinity Ventures, Mr. Francis was a Partner at RAM
Group, a marketing management firm, and worked at Johnson & Johnson in brand
management. Mr. Francis holds a B.A. and an M.B.A. from Northwestern University.
Mr. Francis serves on the board of directors of Computer Literacy, Inc. and the
boards of directors of several private companies.
Alan N. Colner has served as a Director of NextCard since November 1998.
Since August 1996, he has served as Managing Director, Private Equity
Investments at Moore Capital Management, Inc. Before joining Moore, he was a
Managing Director of Corporate Advisors, L.P., the general partner
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of Corporate Partners, a private equity fund affiliated with Lazard Freres & Co.
LLC. Mr. Colner also serves as a director of iVillage Inc., as well as a
director of several privately held companies. Mr. Colner received a B.A. from
Yale University and an M.B.A. from the Stanford University Graduate School of
Business.
Safi U. Qureshey has served as a Director of NextCard since June 1997. Mr.
Qureshey was the founder of AST Research, a personal computer manufacturer, and
served as its Chairman and Chief Executive Officer from 1980 to 1997. Mr.
Qureshey is an active investor and sits on the boards of several private
companies. In addition, Mr. Qureshey is President of the Southern California
Chapter of The Indus Entrepreneurs, a networking and mentoring organization for
entrepreneurs, and a former member of President Clinton's Export Counsel, a
private advisory group focusing on increasing exports of United States goods and
services. Mr. Qureshey holds a B.S. from the University of Karachi, and a B.S.
from the University of Texas at Arlington.
Bruce G. Rigione has served as a Director of NextCard since March 1997. Mr.
Rigione has been a private consultant since January 1999. From April 1996 to
December 1998, Mr. Rigione was a Managing Director and Global Head of Asset
Securitization for HSBC Markets, the capital markets subsidiary of HongKong
Shanghai Banking Corporation. From November 1987 to April 1996, Mr. Rigione was
a Managing Director and Head of Securitization for Chase Securities, Inc., a
subsidiary of Chase Manhattan Bank. Mr. Rigione holds a B.A. from Fairfield
University and an M.B.A. from Columbia University.
BOARD COMMITTEES
The board of directors has a compensation committee, an audit committee and
a nominating committee.
Compensation Committee. The compensation committee reviews and approves the
salary, stock option and stock purchase grants, benefits and other compensation
of our Chief Executive Officer and reviews and approves policies regarding the
compensation of other senior officers. Approval of stock option grants to other
officers and directors is performed by our full board of directors. The current
members of the compensation committee are Messrs. Brody and Qureshey.
Audit Committee. The audit committee, among other things, makes
recommendations to the board of directors concerning the engagement of
independent public accountants, monitors and reviews the quality and activities
of our internal audit and quality assurance functions and monitors the results
of our operating and internal controls as reported by management and the
independent public accountants. The current members of the audit committee are
Messrs. Colner, Qureshey and Rigione.
Nominating Committee. The nominating committee screens and nominates
candidates for election to our board. The current members of the nominating
committee are Messrs. Lent and Rigione.
DIRECTOR COMPENSATION
Although we reimburse members of the board of directors for their
out-of-pocket expenses associated with their participation, directors receive no
other specific compensation for their service as directors or for their service
on any committee of the board of directors. We may, in the future, adopt a
compensation plan for non-employee members of our board of directors.
On May 15, 1997, we entered into a consulting agreement with Safi U.
Qureshey. At that time, Mr. Qureshey was not one of our directors. Mr.
Qureshey's consulting agreement provided that, in exchange for consulting
services including, but not limited to, assisting in our early stage financing
efforts, Mr. Qureshey was to receive (a) a fee warrant exercisable for five
years to acquire 70,677
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shares of our common stock at $0.56 per share, and (b) a consulting warrant
exercisable for five years to acquire 95,963 shares of our common stock at $0.56
per share and vesting semi-annually in eight equal increments, subject to our
continuing to renew Mr. Qureshey's consultancy. Mr. Qureshey joined our board of
directors on June 30, 1997. On April 29, 1998, Mr. Qureshey surrendered the
consulting warrant in exchange for a non-statutory stock option exercisable for
10 years for 95,963 shares of our common stock at $0.06 per share, which the
board of directors determined to be the then fair market value of such common
stock. The fee warrant continues to be outstanding. In March 1999, Mr. Qureshey
assigned 2,250 shares of such warrant to each of six persons, for an aggregate
assignment of 13,500 shares.
On April 29, 1998, Bruce G. Rigione, one of our directors, was granted a
non-statutory stock option exercisable for 10 years for 67,500 shares of our
common stock at $0.06 per share, which the board of directors determined to be
the then fair market value of such common stock. Effective as of January 20,
1999, Mr. Rigione entered into a Consulting Agreement with us under which he
will be paid $15,000 per month. Under the agreement, Mr. Rigione provides his
services on a full time and exclusive basis on projects associated with
securitization, international opportunities and other areas related to our
business. The agreement is terminable by either party upon 30 days' notice.
On March 11, 1999, our board of directors approved the grant of
non-statutory stock options exercisable for ten years for 45,000 shares of our
common stock at $6.67 per share to each of Alan Colner, Tod Francis and Jeffrey
Brody. Each option vests over four years, commencing as of the date of each such
director's first board meeting with us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the board of directors or the
compensation committee and the board of directors or the compensation committee
of any other company, nor has any such interlocking relationship existed in the
past.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
Our Amended and Restated Bylaws further provide that we must indemnify our
directors and executive officers and may indemnify our other officers and
employees and agents to the fullest extent permitted by Delaware law. We
currently maintain liability insurance for our officers and directors.
We have entered into indemnification agreements with each of our directors
and officers. These agreements require us, among other things, to indemnify such
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, penalties and settlement amounts incurred by any such person
in any threatened, pending or completed action, suit, proceeding or alternative
dispute resolution mechanism by reason of any event or occurrence arising out of
such person's services as a director or officer. In addition, our board of
directors has approved a proposal to purchase up to $25 million in directors'
and officers' liability insurance coverage.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents as to which indemnification is being
sought. We are not aware of any pending or threatened litigation or proceeding
that might result in a claim for such indemnification.
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<PAGE> 56
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1998, all
compensation of the Chief Executive Officer and each of our four other most
highly compensated executive officers who earned more than $100,000 in 1998 and
were serving as executive officers at the end of 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- --------- -------- ----------
<S> <C> <C> <C>
Jeremy R. Lent.......................................... $209,375 $175,000 1,350,000
Chairman, Chief Executive Officer and President
Yinzi Cai............................................... 105,125 50,000 171,000
Senior Vice President, Decision Analytics
Timothy J. Coltrell..................................... 129,167 50,000 --
Chief Operating Officer
John V. Hashman......................................... 115,000 50,000 225,000
Chief Financial Officer
Daniel D. Springer...................................... 113,650 50,000 562,500
Chief Marketing Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to our Chief
Executive Officer and each of our four other most highly compensated executive
officers for the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------
NAME GRANTED(1) FISCAL YEAR(2) PER SHARE(3) DATE 5% 10%
---- ---------- -------------- -------------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Jeremy R. Lent............ 225,000 4.15% $0.06 3/24/03 $ 3,799 $ 8,395
1,125,000 20.76 0.14 9/29/03 44,067 97,376
Yinzi Cai................. 58,500 1.08 0.13 7/28/08 4,742 12,017
112,500 2.08 0.56 11/19/08 39,306 99,609
Timothy J. Coltrell....... -- -- -- -- -- --
John V. Hashman........... 225,000 4.15 0.06 3/24/08 7,861 19,922
Daniel D. Springer........ 382,500 7.06 0.06 3/24/08 13,364 33,867
180,000 3.32 0.13 9/29/08 14,590 36,975
</TABLE>
- ---------------
(1) Each such option vests as follows: 1/4 of the shares of common stock
underlying such option vests at the first anniversary of the option vesting
date, which is typically the first day of employment, and 1/36 of the
remainder of such shares vests each month thereafter, such that the optionee
is fully vested on the fourth anniversary of the vesting commencement date.
Certain of the options granted to Jeremy R. Lent are subject to certain
performance based vesting conditions. Such options also are subject to
accelerated vesting under certain circumstances. See
"Management -- Executive Compensation -- Lent Employment Agreement."
(2) Based on a total of 5,419,013 option shares granted to our employees,
directors and consultants under our 1997 Stock Plan during fiscal 1998.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by the board of
directors. The exercise price may be paid in cash, in shares of our common
stock valued at the full market value of such stock on the exercise date.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and
does not represent our prediction of our stock price performance. The
potential realizable
52
<PAGE> 57
value at 5% and 10% appreciation is calculated by assuming that the exercise
price on the date of grant appreciates at the indicated rate for the entire
term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price.
FISCAL YEAR END-OPTION VALUES
The following table sets forth, for our Chief Executive Officer and each of
our four other most highly compensated executive officers, the number and value
of securities underlying options that were held by such executive officers as of
December 31, 1998. No options were exercised by such executive officers in 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, AT DECEMBER 31,
1998(#)(1) 1998($)(2)
---------------------- --------------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ---- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Jeremy R. Lent......................... -- 1,350,000 $ -- $11,826,750
Yinzi Cai.............................. 66,938 293,063 592,025 2,529,535
Timothy J. Coltrell.................... 383,909 493,592 3,395,457 4,365,543
John V. Hashman........................ 112,500 450,000 993,750 3,975,000
Daniel D. Springer..................... -- 562,500 -- 4,955,550
</TABLE>
- ---------------
(1) The heading "Vested" refers to shares that are exercisable as of December
31, 1998; the heading "Unvested" refers to shares that are unexercisable as
of December 31, 1998.
(2) Based on a fair market value of our common stock at the end of 1998 of $8.89
per share.
LENT EMPLOYMENT AGREEMENT
In January 1999, we entered into an employment agreement with Jeremy R.
Lent to employ him as our Chairman of the Board, Chief Executive Officer, and
President. The employment agreement provides that Mr. Lent is entitled to
receive a base salary of $250,000 per year and will be eligible to receive an
annual performance bonus determined at the discretion of the board of directors.
Beginning with calendar year 1999, it is anticipated that the annual bonus will
be a minimum of 100% of Mr. Lent's base salary if we and Mr. Lent achieve
performance goals to be established by our board of directors. The goals for
1999 have not yet been established. Mr. Lent may terminate the agreement at any
time upon 30 days' prior written notice. If such termination is for "good
reason," Mr. Lent will receive:
- a lump sum severance payment equal to 24 times his highest monthly base
salary during the 12-month period immediately preceding the date of
termination;
- full acceleration of the vesting provisions governing any stock options
and restricted stock held by him;
- health plan, life insurance and disability insurance coverage for a
period of 24 months after the date of termination; and
- any bonus that would otherwise have been paid to him, prorated through
the date of termination.
"Good reason" is defined to include an adverse change in Mr. Lent's position,
duties and responsibilities or status, certain reductions in Mr. Lent's base
salary, certain geographic office relocations, our failure to provide Mr. Lent
reasonable support, our failure to continue certain material benefits and any
other material breach of his employment agreement by us.
53
<PAGE> 58
We may terminate Mr. Lent's employment for any reason without "cause" upon
30 days' prior written notice. If we terminate Mr. Lent's employment without
"cause," Mr. Lent will receive:
- a lump sum severance payment equal to 24 times the higher of his monthly
base salary in effect on the date of notice of termination and his
monthly base salary rate in effect six months prior to such date;
- reasonable outplacement services;
- health plan, life insurance and disability insurance coverage for a
period of 24 months after the date of termination;
- full acceleration of the vesting provisions governing any stock options
and restricted stock held by him; and
- any bonus that would otherwise have been paid to him, prorated through
the date of termination.
The agreement also may be terminated upon the death or disability of Mr. Lent or
for "cause." If the termination is due to death or disability, then half of the
remaining balance of any unvested options held by Mr. Lent and all of the
remaining balance of any restricted stock held by him immediately will become
fully vested, and we will continue to pay Mr. Lent (or his estate) an amount
equal to his salary for 12 months following his termination.
EMPLOYEE BENEFIT PLANS
1997 STOCK PLAN
In April 1997, the board of directors adopted, and in June 1997 the
stockholders approved, our 1997 Stock Plan. The plan provides for the grant of:
- incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, to employees (including officers and
employee directors);
- nonstatutory stock options to employees, directors and consultants; and
- the right to purchase restricted common stock to employees, directors and
consultants.
The plan is administered and interpreted by the board of directors or a
committee designated by the board. It will terminate in April 2007.
As of March 31, 1999, the plan authorized the issuance of up to 12,375,000
shares of common stock. As of March 31, 1999, options to purchase 8,354,137
shares were outstanding, no shares of restricted stock were outstanding, and
3,983,365 shares remained available for future grants. As of March 31, 1999,
options to purchase an aggregate of 37,498 shares of common stock had been
exercised.
The plan administrator has discretion, within the limits of the plan, to
select optionees and to determine the number of shares to be subject to each
option and the exercise price and vesting schedule of each option. The exercise
price of incentive stock options granted under the plan must at least be equal
to the fair market value per share of the common stock on the date of grant and
the exercise price of nonstatutory stock options granted under the plan must be
greater than or equal to 85% of the fair market value per share of the common
stock on the date of the grant. With respect to any participant who is a 10%
stockholder, the per share exercise price of any stock option granted under the
plan must equal at least 110% of the fair market value of the common stock on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the plan may not exceed ten years.
54
<PAGE> 59
Upon the occurrence of certain transactions deemed under the plan to
constitute a change in control, the plan provides that all options and shares of
restricted stock issued under the plan that are not assumed or substituted with
equivalent options or shares of restricted stock by the successor corporation
immediately shall become vested.
The plan administrator has the discretion, subject to applicable law, to
determine the terms related to any restricted stock offer, including the number
of shares that a recipient may be entitled to purchase and the purchase price.
The administrator also has the discretion to determine whether and to what
extent the restricted stock will be subject to our right to repurchase the stock
upon the purchaser's termination of employment or engagement for any reason.
EMPLOYEE STOCK PURCHASE PLAN
Our board of directors approved the creation of our Employee Stock Purchase
Plan on April 20, 1999.
The employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will contain successive six-month
offering periods. The offering periods generally will start on the first day of
trading on or after January 1 and July 1 of each year, except for the first such
offering period which will commence on the effectiveness of this offering and
end on June 30, 1999.
Employees will be eligible to participate if they meet certain guidelines.
Participants may purchase common stock through payroll deductions of up to 10%
of their salary.
Amounts deducted and accumulated by each participant will be used to
purchase shares of common stock at the end of each offering period. The price of
stock purchased under the purchase plan will be 85% of the lower of the fair
market value per share of the common stock on the first day of the offering
period or on the last day of the offering period. For the first offering period,
the fair market value of the common stock on the first day of the offering
period will be the initial public offering price.
55
<PAGE> 60
CERTAIN TRANSACTIONS
On July 15, 1996, we sold 4,500,000 shares of common stock to Jeremy and
Molly Lent for an aggregate purchase price of $5,000 ($0.001 per share). On
April 2, 1997, Mr. and Ms. Lent executed a capital contribution agreement
pursuant to which 450,000 of such shares were transferred back to us.
Seventy-five percent of the shares held by the Lents are subject to a repurchase
option in our favor which lapses biannually over a four-year period. Vesting of
such shares may be accelerated under certain circumstances. See
"Management -- Executive Compensation -- Lent Employment Agreement." As of March
31, 1999, 815,625 shares remained subject to such repurchase option.
On September 18, 1996, we sold 472,500 shares of common stock to Timothy
Coltrell for an aggregate purchase price of $2,100 ($0.004 per share). The
shares are subject to a repurchase option in our favor which lapses according to
the following schedule: 1/10 of such shares vested on September 18, 1996 and the
remaining shares vest biannually over a four-year period. As of March 31, 1999,
159,469 shares remained subject to such repurchase option.
In March 1997, Jeremy Lent and Timothy Coltrell each executed a promissory
note in the principal amount of $12,500 in connection with the purchase by each
of 28,125 shares of Series A Preferred Stock. Each promissory note is secured by
such shares of Series A Preferred Stock and matures in March 2000. The aggregate
balance due as of March 31, 1999 was $26,280.
Certain of our directors were granted options and warrants to purchase
shares of our common stock in connection with the provision of services to us.
See "Management -- Director Compensation."
Effective as of January 1, 1999, Jeremy Lent, our Chairman, Chief Executive
Officer and President, entered into an Employment Agreement with us. See
"Management -- Executive Compensation -- Lent Employment Agreement."
Effective as of January 20, 1999, Bruce Rigione, one of our directors,
entered into a Consulting Agreement with us under which he will be paid $15,000
per month. The agreement is terminable by either party upon 30 days' notice.
As of April 30, 1999, each of our executive officers and directors had
entered into indemnification agreements. Such agreements may require us, among
other things, to indemnify our officers and directors (other than for
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Indemnification of Directors and
Executive Officers and Limitations of Liability."
The following table summarizes the shares of preferred stock purchased by
our directors and 5% stockholders, and persons and entities associated with
them, in private placement transactions. Each share of Series A, Series B-1,
Series C-1 and Series D-1 Preferred Stock automatically converts into one share
of voting common stock, and each share of Series B-2, Series C-2 and Series D-2
Preferred Stock automatically converts into one share of non-voting common
stock, upon the closing of this offering. We sold our preferred stock for the
following per share prices on the following dates: Series A Preferred
Stock -- $0.44 per share, December 1996 - March 1997; Series B-1 and B-2
Preferred Stock -- $0.56 per share, August -- September 1997; Series C-1 and C-2
Preferred
56
<PAGE> 61
Stock -- $1.29 per share, May -- June 1998; and Series D-1 and D-2 Preferred
Stock -- $2.67 per share, November 1998.
<TABLE>
<CAPTION>
SERIES B-1 AND SERIES C-1 AND SERIES D-1 AND
SERIES A SERIES B-2 SERIES C-2 SERIES D-2
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
ENTITIES ASSOCIATED WITH
DIRECTORS(1)
Entities associated with
Brentwood Venture Capital
(Jeffrey D. Brody)............ -- 4,680,000 1,212,287 1,867,824
Entities associated with Moore
Capital Management (Alan N.
Colner)....................... -- -- -- 3,749,999
Entities associates with Trinity
Ventures (Tod H. Francis)..... -- -- 2,327,589 427,500
Safi U. Qureshey(2)............. 225,000 306,000 209,484 205,277
Bruce G. Rigione................ 112,500 225,000 163,112 193,608
OTHER 5% STOCKHOLDERS(1)
Forrest, Binkley & Brown........ -- -- 2,288,790 506,250
Kleiner Perkins Caufield & Byers
VIII, L.P..................... -- -- -- 3,000,002
Entities associated with St.
Paul Venture Capital.......... -- -- 2,288,790 431,073
Entities associated with Sequoia
Capital....................... -- -- -- 1,875,002
</TABLE>
- ------------
(1) See "Principal Stockholders" for a summary of the affiliations of each of
the persons and entities described above.
(2) Includes 34,758 shares held by Wasi Qureshey, a brother of Mr. Qureshey, and
34,758 shares held by Lubna Bokhari, a sister of Mr. Qureshey.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 1999 as adjusted to reflect the
conversion of all outstanding shares of preferred stock into common stock
(including nonvoting common stock) and the sale of common stock offered hereby.
The information is provided with respect to:
- each person who is known to us to own beneficially more than 5% of the
outstanding shares of common stock (including nonvoting common stock);
- each of our directors;
- our Chief Executive Officer and each of our four other most highly
compensated executive officers for the year ended December 31, 1998; and
- all of our directors and executive officers as a group (13 persons).
Except as otherwise indicated by footnote, and subject to community property
laws where applicable, the named person has sole voting and investment power
with respect to all of the shares of common stock shown as beneficially owned.
An asterisk indicates beneficial ownership of less than 1% of the common stock
(including nonvoting common stock) outstanding. The percentages shown assume
that the underwriters' option to purchase up to an additional 750,000 shares of
common stock is not exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF NUMBER OF -----------------------------------
BENEFICIAL OWNER SHARES PRIOR TO OFFERING AFTER OFFERING
------------------- --------- ----------------- --------------
<S> <C> <C> <C>
Entities associated with Brentwood Venture
Capital(2)................................... 7,760,111 20.6% 18.2%
3000 Sand Hill Road,
Building 1, Suite 260,
Menlo Park, CA 94025
Entities associated with Moore Capital
Management, Inc.(3).......................... 3,749,999 10.0 8.8
1251 Avenue of the Americas,
New York, NY 10020
Entities associated with Kleiner Perkins
Caufield & Byers(4).......................... 3,000,002 8.0 7.0
2750 Sand Hill Road
Menlo Park, CA 94025
Entity associated with Forrest Binkley &
Brown(5)..................................... 2,795,040 7.4 6.6
800 Newport Center Drive
Suite 725
Newport Beach, CA 92660
Entities associated with Trinity Ventures(6)... 2,755,089 7.3 6.5
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Entities associated with St. Paul Venture
Capital(7)................................... 2,719,863 7.2 6.4
8500 Normandale Lake Blvd.
Suite 1940
St. Paul, MN 55437
Entities associated with Sequoia Capital(8).... 1,875,002 5.0 4.4
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Jeffrey D. Brody(2)............................ 7,782,611 20.7 18.2
</TABLE>
58
<PAGE> 63
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF NUMBER OF -----------------------------------
BENEFICIAL OWNER SHARES PRIOR TO OFFERING AFTER OFFERING
------------------- --------- ----------------- --------------
<S> <C> <C> <C>
Alan N. Colner(3).............................. 3,755,624 10.0 8.8
Tod H. Francis(6).............................. 2,766,339 7.3 6.5
Safi U. Qureshey(9)............................ 981,401 2.6 2.3
Bruce G. Rigione(10)........................... 719,532 1.9 1.7
Jeremy R. Lent and Molly Lent(11).............. 4,103,262 10.9 9.6
Yinzi Cai(12).................................. 86,625 *
Timothy J. Coltrell(13)........................ 919,967 2.4 2.2
John V. Hashman(14)............................ 213,287 *
Daniel D. Springer(15)......................... 111,564 *
All directors and executive Officers as a
Group (13 persons)........................... -- 57.3% 50.6%
</TABLE>
- ------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Shares of common stock subject to options,
warrants or other rights to purchase which are currently exercisable or are
exercisable within 60 days after March 31, 1999 are deemed outstanding for
purposes of computing the percentage ownership of the persons holding such
options, warrants or other rights, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. The
address of each of the directors and executive officers named in the table
is c/o NextCard, Inc., 595 Market Street, Suite 1800, San Francisco,
California 94105.
(2) Represents 228,492 shares held by Brentwood Affiliates Fund, L.P.,
5,663,795 shares held by Brentwood Associates VII, L.P., 1,793,115 shares
held by Brentwood Associates VIII, L.P. and 74,709 shares held by Brentwood
Affiliates Fund II, L.P., of which 228,492 shares, 2,843,798 shares,
1,793,115 and 74,709 shares, respectively, are shares of nonvoting stock
that may be converted into an equal number of shares of voting stock
provided that the holder of such shares will not own more than 9.999% of
the voting power of any class of our equity securities. See "Description of
Capital Stock -- Common Stock." Jeffrey Brody is a general partner of
Brentwood Venture Capital, which is the general partner of each of the
entities. He is also a director of NextCard. Mr. Brody disclaims beneficial
ownership of the shares held by the entities except to the extent of his
interest therein. Amount shown for Mr. Brody includes 22,500 shares
issuable upon exercise of an option that vests within 60 days of March 31,
1999.
(3) Includes 2,002,649 shares of Series D-1 Preferred Stock and 1,072,350
shares of Series D-2 Preferred Stock held by Moore Global Investments, Ltd.
("MGI"), and 675,000 shares of Series D-1 Preferred Stock held by Remington
Investment Strategies, Ltd. ("RIS"). Moore Capital Management, Inc., a
Connecticut corporation, is vested with investment discretion with respect
to portfolio assets held for the account of MGI. Moore Capital Advisors,
L.L.C., a New York limited liability company, is the sole general partner
of RIS. Mr. Louis M. Bacon is the majority shareholder of Moore Capital
Management, Inc., and is the majority equity holder of Moore Capital
Advisors, L.L.C. As a result, Mr. Bacon, though he disclaims beneficial
ownership of such shares, may be deemed to be the beneficial owner of the
aggregate shares held by MGI and RIS. Alan Colner is a Managing Director,
Private Equity Investments, at Moore Capital Management, Inc., which is the
trading advisor of MGI. He is also a director of NextCard. Mr. Colner does
not have voting or investment power with respect to the shares of
securities owned by MGI or RIS, and disclaims beneficial ownership of such
shares. The address of Moore Capital Management, Inc. is 1251 Avenue of the
Americas, New York, NY 10020. Amount shown for Mr. Colner includes 11,250
shares issuable upon exercise of an option that vests within 60 days of
March 31, 1999.
(4) Represents 2,764,800 shares held by Kleiner Perkins Caufield & Byers, VIII,
L.P., 160,200 shares held by KPCB VIII Founders Fund, L.P. and 75,002
shares held by KPCB Information Sciences Zaibatsu Fund II, L.P.
(5) Such shares are held of record by Mesquite Transaction Partners, L.P.
(6) Includes 149,886 shares held by Trinity V Side-By-Side Fund, L.P. and
2,605,203 shares held by Trinity Ventures V, L.P. Tod Francis is a general
partner of Trinity Ventures, which is the general partner of Trinity V
Side-By-Side Fund, L.P. and Trinity Ventures V, L.P. He also is a director
of NextCard. Mr. Francis disclaims beneficial ownership of the shares held
by the entities except to the extent of his interest therein. Amount shown
for Mr. Francis includes 5,625 shares issuable upon exercise of an option
that vests within 60 days of March 31, 1999.
59
<PAGE> 64
(7) Represents 74,795 shares held by St. Paul Venture Capital Affiliates Fund
I, LLC and 2,645,069 shares held by St. Paul Venture Capital IV, LLC.
(8) Represents 4,122 shares held by Sequoia 1997 Fund, 21,564 shares held by
Sequoia International Technology Partners VIII, 1,699,317 shares held by
Sequoia Capital VIII L.P., 112,500 shares held by Sequoia International
Technology Partners VIII (Q) and 37,499 shares held by CMS Partners LLC.
(9) Includes 57,177 shares issuable upon exercise of a warrant and 47,979
shares issuable upon exercise of an option that vests within 60 days of
March 31, 1999. Also includes 682,448 shares held by the Safi Qureshey
Family Trust, of which Safi U. Qureshey is the grantor, and 193,797 shares
held by Skyline Nevada LLC, of which Mr. Qureshey is a trustee.
(10) Includes 25,313 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
(11) Includes 65,628 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
(12) Represents 86,625 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
(13) Includes 419,342 shares issuable upon exercise of options that vest within
60 days of March 31, 1999.
(14) Represents 213,287 shares issuable upon exercise of options that vest
within 60 days of March 31, 1999.
(15) Represents 111,564 shares issuable upon exercise of an option that vests
within 60 days of March 31, 1999.
60
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 77,432,715 shares of common stock,
$0.001 par value, 10,000,000 shares of nonvoting common stock, $0.001 par value
and 12,567,285 shares of preferred stock, $0.001 par value. As of March 31,
1999, 5,041,287 shares of common stock were issued and outstanding, no shares of
nonvoting common stock were issued and outstanding and 7,250,163 shares of
preferred stock, convertible into 32,625,734 shares of common stock or nonvoting
common stock upon the completion of the offering, were issued and outstanding.
As of March 31, 1999, we had 64 stockholders.
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our Amended and
Restated Certificate of Incorporation to be effective after the closing of this
offering, our bylaws and the provisions of applicable Delaware law.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders.
Subject to the preferences to which holders of any shares of preferred
stock issued after the offering may be entitled, holders of the common stock are
entitled to receive ratably such dividends and other distributions, if any, that
the board of directors may, from time to time, declare out of funds legally
available therefor. See "Dividend Policy." In the event of our liquidation,
dissolution or winding up, holders of common stock would be entitled to share in
any of our assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights, nor are there any redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares of common stock offered by us in this offering, when issued and paid
for, will be, fully paid and nonassessable. The rights, preferences and
privileges of the holders of the common stock are subject to, and may be
adversely affected by, the rights of the holders of any shares of preferred
stock that we may designate in the future.
NONVOTING COMMON STOCK
Holders of nonvoting common stock will have the same rights, preferences
and privileges as the holders of voting common stock except that the holders of
nonvoting common stock will have no voting rights except with respect to
approval of amendments to our Certificate of Incorporation that could adversely
affect their rights. Shares of nonvoting common stock may be converted into
shares of common stock by the holder only when the holder's total shares will
not exceed 9.999% of any class of our equity securities outstanding after giving
effect to the conversion or in connection with a widely disbursed distribution
or private placement of shares in certain circumstances.
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by law, without stockholder approval, from time to time, to fix or alter the
rights, preferences and privileges, including voting rights, conversion rights,
dividend rights, redemption privileges and liquidation preferences of any wholly
unissued series of preferred stock. The rights of the holders of the common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any such preferred stock that may be issued in the future. Issuance
of preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a
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<PAGE> 66
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
WARRANTS
Upon completion of the offering, we will have outstanding warrants to
acquire 1,308,749 shares of common stock, at a weighted average exercise price
of $0.88 per share. These warrants have net exercise provisions under which the
holder may, in lieu of payment of the exercise price in cash, surrender the
warrant and receive a net amount of shares, based on their fair market value of
the common stock at the time of exercise of the warrant, after deducting the
exercise price of the warrant. These warrants expire on dates ranging from two
years from the closing of this offering to May 2003. In addition, in connection
with the April 1999 increase in our line of credit with a finance company from
$5,000,000 to $10,000,000, we will issue additional common stock warrants on May
31, 1999 with an aggregate exercise price of $600,000. The exercise price per
share of the warrants will be 70% of the initial public offering price of our
shares.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
We have adopted provisions in an Amended and Restated Certificate of
Incorporation and in our Amended and Restated Bylaws that do the following:
- eliminate the right of stockholders to call a special meeting of
stockholders or bring matters before a special meeting of stockholders;
- require stockholders to give NextCard advance notice of intent to
nominate directors or bring matters before an annual meeting of
stockholders;
- eliminate the ability of stockholders to take action by written consent;
- stagger the board into three classes so that only one-third of the board
members are elected each year, and effectively provide that directors may
not be removed from office other than for cause;
- provide that vacancies on the board resulting from increases in the size
of the board or from death, resignation, retirement or removal may only
be filled by the board; and
- permit the board of directors to create one or more series of preferred
stock and to issue the shares thereof.
These provisions could adversely affect the rights of the holders of common
stock by delaying, deferring or preventing a change in control. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and in the policies formulated by the
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control. These provisions are designed
to reduce our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from actual or rumored
takeover attempts. Such provisions also may have the effect of preventing
changes in our management.
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<PAGE> 67
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a publicly held Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless:
- prior to such date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced; and
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of our
assets involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by us of any of our stock to the interested
stockholder;
- any transaction involving us that has the effect of increasing the
proportionate share of the stock of any class or series beneficially
owned by the interested stockholder; and
- the receipt by the "interested stockholder" of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
REGISTRATION RIGHTS
After this offering, the holders of 76.47% of the aggregate outstanding
shares of common stock and nonvoting common stock will be entitled to certain
demand registration rights with respect to the registration of such shares under
the Securities Act. Under the terms of our Third Amended and Restated Investors'
Rights Agreement, we are not required to effect more than three such
registrations pursuant to such demand rights; further, the demand registration
rights expire on the six-month anniversary of the closing of the offering. In
the event that we propose to register any of our securities under the Securities
Act, the holders of shares entitled to "piggyback" registration rights are
entitled to receive notice of such registration and, subject to certain
limitations, include their shares therein.
At any time after we become eligible to file a registration statement on
Form S-3, stockholders who are parties to the Rights Agreement may require us to
file an unlimited number of registration statements on Form S-3 with respect to
their shares of common stock, provided that we are not required to effect more
than one such registration statement in any 12-month period.
Each of the foregoing registration rights is subject to certain conditions
and limitations, among them the right of the underwriters in any underwritten
offering to limit the number of share of
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<PAGE> 68
common stock held by stockholders with registration rights to be included in
such registration statement. We are generally required to bear all expenses
associated with such registration statements, except underwriting discounts and
commissions, as well as to indemnify the holders of such registration rights,
subject to certain limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is BankBoston, N.A.
EquiServe L.P.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering (assuming no exercise of the underwriters'
overallotment option), we will have an aggregate of 42,667,021 shares of common
stock and nonvoting common stock outstanding, assuming no exercise of options or
warrants. Of these shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, except that any shares held by our affiliates, as that term is defined
under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 37,667,021 shares of common stock and nonvoting common stock
are deemed restricted shares under Rule 144. Sale in the public market of these
restricted shares is limited by restrictions under the Securities Act and
lock-up agreements or similar arrangements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. On the date of
this prospectus, no shares other than the 5,000,000 shares offered hereby will
be eligible for sale in the public market. Beginning 180 days after the date of
this prospectus, or earlier with the consent of Donaldson, Lufkin & Jenrette
Securities Corporation, 37,667,021 restricted shares will become available for
sale in the public market, subject to certain limitations of Rule 144 of the
Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the then-outstanding shares of our common stock (approximately 426,670 shares
after giving effect to this offering) and the average weekly trading volume of
our common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 of the Securities Act are subject to
certain restrictions relating to manner of sale, notice and the availability of
current public information about us. A person who is not our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least two years, would be entitled to sell such shares immediately
following this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent may require an opinion of counsel that a proposed
sale of shares comes within the terms of Rule 144 of the Securities Act prior to
effecting a transfer of such shares.
Prior to this offering, there has been no public market for our common
stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
OPTIONS
As of March 31, 1999, options to purchase a total of 1,332,464 shares of
common stock pursuant to the 1997 Stock Plan were exercisable. All of the shares
subject to options are subject to lock-up agreements or similar arrangements.
See "Lock-up Agreements." An additional 3,983,365 shares of common stock were
reserved as of March 31, 1999 for future option grants or direct issuances under
the 1997 Stock Plan. See "Management -- 1997 Stock Plan and Note 8 of notes to
Consolidated Financial Statements.
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<PAGE> 70
We intend to file a registration statement on Form S-8 under the Securities
Act to register all shares of common stock subject to outstanding stock options
and common stock issued or issuable under our 1997 Stock Plan and our 1999
Employee Stock Purchase Plan. We expect to file such a registration statement
shortly after the closing of this offering. Such registration statement is
expected to become effective upon filing. Shares covered by this registration
statement will thereupon be eligible for sale in the public markets, subject to
the lock-up agreements.
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<PAGE> 71
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement, the underwriters named below, for whom Donaldson, Lufkin & Jenrette
Securities Corporation, Thomas Weisel Partners LLC and U.S. Bancorp Piper
Jaffray Inc. are acting as representatives, have severally agreed to purchase,
and NextCard has agreed to sell to them, severally, the respective number of
shares of common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS: SHARES
- ------------- ------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
--------
Total.............................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from NextCard and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
An electronic prospectus is available on the website maintained by
DLJdirect Inc., a selected dealer and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. The underwriters have agreed to allocate a
limited number of shares to DLJdirect Inc. for sale to its brokerage account
holders.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to an aggregate of 750,000
additional shares of common stock at the initial public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of common stock offered hereby. To the extent such option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of common
stock as the number set forth next to such underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to the
names of all underwriters in the preceding table. If the underwriters' option is
exercised in full, the total price to the public for this offering would be
$103.5 million, the total underwriters' discounts and commissions would be $7.2
million and the net total proceeds to NextCard would be $95.0 million.
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<PAGE> 72
The underwriters have informed us that each principal underwriter in this
offering may, subject to the approval of Donaldson, Lufkin & Jenrette Securities
Corporation, sell to discretionary accounts over which such principal
underwriter executes discretionary authority. The underwriters have further
informed us that they estimate that such will not exceed five percent of the
total number of shares of common stock offered by them.
NextCard has applied to list the common stock on the Nasdaq National Market
under the symbol "NXCD."
At the request of NextCard, the underwriters will reserve up to 350,000
shares of common stock to be issued by NextCard and offered hereby for sale, at
the initial public offering price, to directors, officers, employees, business
associates and related persons of NextCard. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
NextCard, our directors, executive officers, and certain other stockholders
and optionholders have each agreed that, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
underwriters, he, she or it will not, during the period ending 180 days after
the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly, or indirectly, any shares of common stock; or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or similar arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
The restrictions described in the previous paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by NextCard of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than NextCard relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
- the granting of stock options pursuant to existing NextCard employee
benefit plans, provided that such options do not become exercisable and
such options do not vest during such 180-day period; and
- certain gifts, distributions or transfers to trusts, provided that
transferees in transactions described in this clause enter into lock-up
agreements similar to those described in the previous paragraph.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the 5,000,000 shares of common stock NextCard has agreed
to sell them. This over-allotment would create a short position in the common
stock for the underwriters' account. To cover any over-allotments or to
stabilize the price of the
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<PAGE> 73
common stock, the underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above interdependent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
NextCard and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Thomas Weisel Partners LLC was organized and registered as a broker-dealer
in December 1998. Since December 1998, Thomas Weisel Partners LLC has been named
as a lead or co-manager on 32 filed public offerings of equity securities, of
which 8 have been completed, and has acted as a syndicate member in an
additional 10 public offerings of equity securities. Thomas Weisel Partners LLC
does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
Mark Lieberman, a Thomas Weisel Partners LLC partner, holds 5,625 shares of
our Series D-1 Preferred Stock, which will be converted into common stock upon
completion of this offering. Mr. Lieberman's shares are restricted from sale,
transfer, assignment or hypothecation for one year following the effective date
of this offering.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
our common stock or any other of our securities. The initial public offering
price for the shares of common stock was determined by negotiations between the
representatives and us. Among the factors considered in determining the initial
public offering price were our future prospects and our industry in general,
sales, earnings and certain other financial and operating information of about
us in recent periods, and the price-earnings ratios, price-sales ratios, market
prices of securities and certain financial and operating information of
companies engaged in activities similar to ours.
LEGAL MATTERS
The validity of the shares of common stock being offered by NextCard will
be passed upon for NextCard by Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, San Francisco, California, which has acted as our
counsel in connection with this offering. Howard, Rice holds a warrant to
purchase 4,500 shares of NextCard's common stock at an exercise price of $0.44
per share. Certain federal bank regulatory legal matters in connection with this
offering will be passed upon for NextCard by Sidley & Austin, Washington, D.C.,
which has acted as our special federal bank regulatory counsel in connection
with this offering. Certain legal matters in connection with this offering will
be passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Menlo Park, California.
EXPERTS
The consolidated financial statements of NextCard, Inc. and subsidiary as
of December 31, 1997 and 1998, for the period from June 5, 1996 (inception) to
December 31, 1997 and for the year ended December 31, 1998 appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
69
<PAGE> 74
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock being offered. This
prospectus, which forms a part of the registration statement, does not contain
all of the information set forth in the registration statement. For further
information with respect to us and our common stock, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the registration statement, and each such statement is
qualified in all respects by such reference.
Copies of the registration statement may be examined without charge at the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and the Securities and Exchange
Commission's Regional Offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any portion of the registration
statement can be obtained from the Public Reference Section of the Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of certain prescribed fees. The Securities and Exchange Commission
maintains a website that contains registration statements, reports, proxy and
information statements and other information regarding registrants (including
us) that file electronically. The address of such website is http://www.sec.gov.
We intend to distribute annual reports containing audited financial
statements and will make copies of quarterly reports available for the first
three quarters of each fiscal year containing unaudited interim financial
statements.
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<PAGE> 75
NEXTCARD, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1997 and 1998
and at March 31, 1999 (unaudited)...................... F-3
Consolidated Statements of Operations for the period from
June 5, 1996 (inception) to December 31, 1997, the year
ended December 31, 1998 and the three months ended
March 31, 1998 and 1999 (unaudited).................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the period from June 5, 1996 (inception) to
December 31, 1997, the year ended December 31, 1998 and
the three months ended March 31, 1998 and 1999
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the period from
June 5, 1996 (inception) to December 31, 1997, the year
ended December 31, 1998 and the three months ended
March 31, 1998 and 1999 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
NextCard, Inc. and subsidiary
We have audited the accompanying consolidated balance sheets of NextCard,
Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the period from June 5, 1996 (inception) to December 31, 1997 and for
the year ended December 31, 1998. These financial statements are the
responsibility of NextCard, Inc.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NextCard,
Inc. and subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from June 5, 1996 (inception) to
December 31, 1997, and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
San Francisco, California
February 5, 1999, except as to Note 4,
and Note 11
as to which the date is
May XX, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
restatement of capital accounts described in Note 11 to the consolidated
financial statements.
ERNST & YOUNG LLP
San Francisco, California
May 10, 1999
F-2
<PAGE> 77
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
---- ---- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,840,267 $ 40,134,274 $ 25,455,951
Credit card loans receivable less allowance for loan losses
of $994,608 at March 31, 1999............................. -- -- 67,357,516
Receivable from third-party processor....................... 500,000 -- --
Servicing and profit-sharing receivable..................... -- 965,825 --
Prepaid loan fees........................................... -- 2,100,000 4,011,000
Equipment and leasehold improvements, net................... 293,298 2,102,647 3,358,020
Prepaid and other assets.................................... 54,184 239,666 1,088,765
----------- ------------ ------------
Total assets................................................ $ 3,687,749 $ 45,542,412 $101,271,252
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 134,701 $ 3,366,350 $ 2,721,119
Due to Heritage............................................. -- -- 3,599,057
Accrued expenses............................................ 266,401 1,242,238 1,421,499
Equipment loan.............................................. -- 504,101 1,156,669
Other borrowings............................................ -- -- 5,000,000
Deferred revenue............................................ 500,000 493,119 488,614
Secured borrowings.......................................... -- -- 54,069,349
----------- ------------ ------------
Total liabilities........................................... 901,102 5,605,808 68,456,307
Shareholders' equity:
Convertible preferred stock, Series A, $0.001 par value
(2,756,250 shares authorized, issued and outstanding at
December 31, 1997; 2,735,154 shares authorized, issued
and outstanding at December 31, 1998 and March 31,
1999), net of costs of issuance. Liquidation preference:
$1,225,000 at December 31, 1997 and $1,215,624 at
December 31, 1998 and March 31, 1999.................... 2,756 2,735 2,735 $ --
Convertible preferred stock, Series B, $0.001 par value
(authorized 7,200,000 shares at December 31, 1997;
7,996,500 shares authorized at December 31, 1998 and
March 31, 1999; issued and outstanding 6,354,000 shares
at December 31, 1997 and 1998 and March 31, 1999), net
of costs of issuance. Liquidation preference: $3,530,000
at December 31, 1997 and 1998 and March 31, 1999........ 6,354 6,354 6,354 --
Convertible preferred stock, Series C, $0.001 par value
(authorized 9,621,455 shares at December 31, 1998 and
March 31, 1999; issued and outstanding 9,132,660 shares
at December 31, 1998 and March 31, 1999), net of costs
of issuance. Liquidation preference: $11,770,984 at
December 31, 1998 and March 31, 1999.................... -- 9,133 9,133 --
Convertible preferred stock, Series D, $0.001 par value
(authorized 20,250,000 shares at December 31, 1998 and
March 31, 1999; issued and outstanding 14,403,920 shares
at December 31, 1998 and March 31, 1999), net of costs
of issuance. Liquidation preference: $38,410,452 at
December 31, 1998 and March 31, 1999.................... -- 14,404 14,404 --
Common stock, $0.001 par value (authorized 90,000,000
shares at December 31, 1997 and 62,896,892 shares at
December 31, 1998 and March 31, 1999; issued and
outstanding 4,894,875, 4,932,374 and 5,041,287 shares at
December 31, 1997 and 1998 and March 31, 1999).......... 4,895 4,932 5,041 37,667
Additional paid-in capital................................ 4,694,590 63,875,162 77,069,796 77,069,796
Deferred stock compensation............................... -- (6,000,000) (15,334,308) (15,334,308)
Notes receivable from shareholders........................ (35,654) (26,280) (26,280) (26,280)
Accumulated deficit....................................... (1,886,294) (17,949,836) (28,931,930) (28,931,930)
----------- ------------ ------------ ------------
Total shareholders' equity.................................. 2,786,647 39,936,604 32,814,945 $ 32,814,945
----------- ------------ ------------ ============
Total liabilities and shareholders' equity.................. $ 3,687,749 $ 45,542,412 $101,271,252
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 78
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Cash and investments.................... $ 92,726 $ 501,879 $ 32,863 $ 280,177
Credit card loans....................... -- -- -- 379,570
----------- ------------ ----------- ------------
Total interest income..................... 92,726 501,879 32,863 659,747
Interest expense.......................... -- 61,574 -- 647,053
----------- ------------ ----------- ------------
Net interest income....................... 92,726 440,305 32,863 12,694
Provision for loan losses................. -- -- -- 994,608
----------- ------------ ----------- ------------
Net interest income (loss) after provision
for loan losses......................... 92,726 440,305 32,863 (981,914)
Non-interest income:
Servicing and profit and loss sharing... -- 661,825 34,252 204,344
Interchange fee......................... -- -- -- 95,691
Credit card fees and other.............. -- 34,968 -- 43,092
----------- ------------ ----------- ------------
Total non-interest income................. -- 696,793 34,252 343,127
Non-interest expenses:
Salaries and employee benefits.......... 1,495,155 6,730,079 789,183 3,309,175
Marketing and advertising............... 49,656 4,324,638 208,610 2,554,756
Credit card activation and servicing
costs................................ 799 2,327,646 51,919 1,521,732
Occupancy and equipment................. 137,141 958,074 115,455 551,985
Professional fees....................... 167,608 519,737 40,846 255,155
Amortization of deferred compensation... -- 1,800,000 164,000 1,365,692
Amortization of loan structuring fee.... -- -- -- 568,379
Other................................... 127,061 538,866 70,729 216,433
----------- ------------ ----------- ------------
Total non-interest expenses............... 1,977,420 17,199,040 1,440,742 10,343,307
Loss before income taxes.................. (1,884,694) (16,061,942) (1,373,627) (10,982,094)
Provision for income taxes................ 1,600 1,600 -- --
----------- ------------ ----------- ------------
Net loss.................................. $(1,886,294) $(16,063,542) $(1,373,627) $(10,982,094)
=========== ============ =========== ============
Basic and diluted net loss per common
share................................... $ (1.08) $ (5.07) $ (0.48) $ (2.84)
=========== ============ =========== ============
Weighted average common shares used in net
loss per common share calculation....... 1,746,864 3,166,317 2,891,142 3,866,963
=========== ============ =========== ============
Pro forma basic and diluted net loss per
common share (unaudited, see Notes 2 and
11)..................................... $ (0.30)
============
Weighted average common shares used in
computing pro forma basic and diluted
net loss per common share (unaudited,
see Notes 2 and 11)..................... 36,492,697
============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 79
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK SERIES A-D COMMON STOCK ADDITIONAL NOTES
---------------------- -------------------- PAID-IN DEFERRED STOCK RECEIVABLE FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS
----------- -------- ---------- ------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuances of common
stock............... -- $ -- 6,772,500 $6,773 $ 8,327 $ -- $ --
Issuances of
convertible
preferred stock
Series A............ 2,756,250 2,756 -- -- 1,201,858 -- (35,654)
Issuances of
convertible
preferred stock
Series B............ 6,354,000 6,354 -- -- 3,488,072 -- --
Return of common
stock............... -- -- (630,000) (630) 630 -- --
Repurchase of common
stock............... -- -- (1,247,625) (1,248) (4,297) -- --
Net loss from
inception to
December 31, 1997... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ------------ --------
Balances at December
31, 1997............ 9,110,250 9,110 4,894,875 4,895 4,694,590 -- (35,654)
Issuances of
convertible
preferred stock
Series C............ 9,132,660 9,133 -- -- 11,662,213 -- --
Issuances of
convertible
preferred stock
Series D............ 14,403,920 14,404 -- -- 38,350,957 -- --
Issuances of common
stock upon exercise
of stock options.... -- -- 37,499 37 1,755 -- --
Issuance of preferred
stock warrants...... -- -- -- -- 1,375,000 -- --
Return of convertible
preferred stock
Series A in
settlement of notes
receivable.......... (21,096) (21) -- -- (9,353) -- 9,374
Deferred stock
compensation........ -- -- -- -- 7,800,000 (7,800,000) --
Amortization of
deferred stock
compensation........ -- -- -- -- -- 1,800,000 --
Net loss.............. -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ------------ --------
Balances at December
31, 1998............ 32,625,734 32,626 4,932,374 4,932 63,875,162 (6,000,000) (26,280)
Issuances of common
stock upon exercise
of warrants
(unaudited)......... -- -- 108,913 109 58,634 -- --
Issuances of preferred
stock warrants
(unaudited)......... -- -- -- -- 2,436,000 -- --
Deferred stock
compensation
(unaudited)......... -- -- -- -- 10,700,000 (10,700,000) --
Amortization of
deferred stock
compensation
(unaudited)......... -- -- -- -- -- 1,365,692 --
Net loss
(unaudited)......... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ------------ --------
Balances at March 31,
1999 (unaudited).... 32,625,734 $32,626 5,041,287 $5,041 $77,069,796 $(15,334,308) $(26,280)
========== ======= ========== ======= =========== ============ ========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Issuances of common
stock............... $ -- $ 15,100
Issuances of
convertible
preferred stock
Series A............ -- 1,168,960
Issuances of
convertible
preferred stock
Series B............ -- 3,494,426
Return of common
stock............... -- --
Repurchase of common
stock............... -- (5,545)
Net loss from
inception to
December 31, 1997... (1,886,294) (1,886,294)
------------ ------------
Balances at December
31, 1997............ (1,886,294) 2,786,647
Issuances of
convertible
preferred stock
Series C............ -- 11,671,346
Issuances of
convertible
preferred stock
Series D............ -- 38,365,361
Issuances of common
stock upon exercise
of stock options.... -- 1,792
Issuance of preferred
stock warrants...... -- 1,375,000
Return of convertible
preferred stock
Series A in
settlement of notes
receivable.......... -- --
Deferred stock
compensation........ -- --
Amortization of
deferred stock
compensation........ -- 1,800,000
Net loss.............. (16,063,542) (16,063,542)
------------ ------------
Balances at December
31, 1998............ (17,949,836) 39,936,604
Issuances of common
stock upon exercise
of warrants
(unaudited)......... -- 58,743
Issuances of preferred
stock warrants
(unaudited)......... -- 2,436,000
Deferred stock
compensation
(unaudited)......... -- --
Amortization of
deferred stock
compensation
(unaudited)......... -- 1,365,692
Net loss
(unaudited)......... (10,982,094) (10,982,094)
------------ ------------
Balances at March 31,
1999 (unaudited).... $(28,931,930) $ 32,814,945
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 80
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $(1,886,294) $(16,063,542) $(1,373,627) $(10,982,094)
Adjustments to net loss to arrive at cash used
in operating activities:
Provision for loan losses.................... -- -- -- 994,608
Depreciation and amortization................ 15,500 250,512 19,987 704,071
Amortization of deferred stock
compensation............................... -- 1,800,000 164,000 1,365,692
Changes in operating assets and liabilities:
(Increase) decrease in servicing and profit
and loss sharing receivable............. -- (965,825) -- 965,825
Decrease in receivable from third party
processor............................... -- 500,000 500,000 --
Increase (decrease) in accounts payable.... 134,701 3,231,649 (64,151) (645,231)
Increase (decrease) in accrued expenses.... 266,401 968,956 (139,589) 179,261
(Increase) decrease in prepaid and other
assets.................................. (54,184) (910,482) 27,175 (853,604)
----------- ------------ ----------- ------------
Net cash used in operating activities.......... (1,523,876) (11,188,732) (866,205) (8,271,472)
INVESTING ACTIVITIES
Net loans originated or collected.............. -- -- -- (68,352,124)
Change in due to Heritage...................... -- -- -- 3,599,057
Purchase of equipment and leasehold
improvements................................. (308,798) (2,059,861) (144,486) (1,434,443)
----------- ------------ ----------- ------------
Net cash used in investing activities.......... (308,798) (2,059,861) (144,486) (66,187,510)
FINANCING ACTIVITIES
Net change in secured borrowings............... -- -- -- 54,069,349
Proceeds from other borrowings................. -- -- -- 5,000,000
Proceeds from issuances of convertible
preferred stock.............................. 4,663,386 50,036,707 -- --
Proceeds from issuances of common stock........ 9,555 1,792 -- 58,743
Proceeds from equipment loan................... -- 545,545 -- 692,795
Payments made on equipment loan................ -- (41,444) -- (40,228)
----------- ------------ ----------- ------------
Net cash provided by financing activities...... 4,672,941 50,542,600 -- 59,780,659
Net increase (decrease) in cash and cash
equivalents.................................. 2,840,267 37,294,007 (1,010,691) (14,678,323)
Cash and cash equivalents at the beginning of
period....................................... -- 2,840,267 2,840,267 40,134,274
----------- ------------ ----------- ------------
Cash and cash equivalents at the end of
period....................................... $ 2,840,267 $ 40,134,274 $ 1,829,576 $ 25,455,951
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest and
taxes...................................... $ 1,800 $ 23,300 -- $ 639,930
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Unearned stock based compensation............ -- $ 7,800,000 -- $ 10,700,000
Issuance of preferred stock warrants for loan
structuring/origination fee................ -- $ 1,375,000 -- $ 2,436,000
Issuance/return of convertible preferred
stock Series A............................. $ 35,654 $ 9,374 -- --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 81
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS
NextCard, Inc., formerly known as Internet Access Financial Corporation
("NextCard"), was incorporated on June 5, 1996 in the state of California for
the purpose of offering Internet-based consumer financial services. For the
period from June 5, 1996 (inception) to December 31, 1996, NextCard developed
and implemented its corporate structure. Operations during that period consisted
of approximately $50,000 in expenses. Beginning in 1997, NextCard focused on the
initial planning and development of an Internet-based credit card ("NEXTCARD(R)
VISA(R)"), and the development of the necessary systems infrastructure, website
and supporting operations. Prior to 1998, NextCard was in the development stage.
On December 23, 1997, NextCard began accepting applications for the
NEXTCARD VISA, which are issued through a strategic alliance with Heritage Bank
of Commerce ("Heritage Bank" or "Heritage"), a San Jose, California based
depository institution. NextCard originates credit card relationships and
services the related credit card accounts on behalf of Heritage pursuant to a
profit and loss sharing agreement. NextCard markets its credit card product
solely through the Internet and provides online approval and customized product
pricing. Other key product features include a customer service interface which
enables the customer to review statements online, review recent account activity
and download data into different formats.
NextCard has experienced operating losses to date and had an accumulated
deficit at December 31, 1998. Increasing and significant net losses are expected
for the foreseeable future. Since its formation, NextCard has raised significant
capital through private placements of equity securities. At December 31, 1998,
NextCard had $40.1 million in cash and cash equivalents. Future capital
requirements, however, depend on many factors including NextCard's ability to
execute its business plan. NextCard may need to raise additional capital through
the issuance of debt or equity securities. There can be no assurance that
NextCard will be able to raise additional financing, or that such financing will
be available on terms satisfactory to NextCard, if at all. Failure by NextCard
to raise additional funding when needed could have a material adverse effect on
its business, results of operations and financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include NextCard, Inc. and its wholly
owned subsidiary, NextCard Funding Corp. ("NC Funding"). All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior year financial statements to conform
to the 1998 presentation.
INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of March 31, 1999 and the
consolidated statements of operations and cash flows for the three months ended
March 31, 1999 and 1998 and the consolidated statement of changes in
shareholders' equity for the three months ended March 31, 1999 are unaudited. In
the opinion of management, these statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to
F-7
<PAGE> 82
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL INFORMATION (CONTINUED)
the consolidated financial statements for these periods is also unaudited. The
consolidated statement of operations and cash flows for the interim period are
not necessarily indicative of the results to be expected for any other interim
future period.
CASH AND CASH EQUIVALENTS, AND CONCENTRATION OF CREDIT RISK
Cash and cash equivalents include cash on hand and investments in money
market funds. NextCard considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents. The carrying
amount reported in the balance sheets for cash and cash equivalents approximates
its fair value.
Financial instruments that potentially subject NextCard to concentrations
of credit risk consist principally of cash deposits at financial institutions.
NextCard places its cash deposits with a high credit quality financial
institution. Balances in NextCard's cash accounts exceed the Federal Deposit
Insurance Corporation (FDIC) limits of $100,000 per account.
ALLOWANCE FOR LOAN LOSSES
Provisions for loan losses are made in amounts necessary to maintain the
allowance for loan losses at a level considered by management to be sufficient
to absorb probable net credit losses inherent in the existing loan portfolio. In
evaluating the adequacy of the allowance for loan losses, management considers
several factors including: historical charge-off and recovery activity by age
(vintage) of each loan portfolio (noting any particular trends over recent
periods); recent delinquency and collection trends by vintage; current economic
conditions and the impact such conditions might have on borrowers' ability to
repay; the risk characteristics of the portfolios; and other factors. Credit
card accounts are generally charged off at the end of the month during which the
loan becomes contractually 180 days past due, with the exception of bankrupt
accounts, which are charged off immediately upon formal notification of
bankruptcy. As of March 31, 1999, NextCard has had no charge-off activity.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed on a straight-line basis over the
estimated useful lives of the respective assets or lease term. Depreciation is
computed using a three-year life for computer equipment and a five-year life for
furniture and office equipment.
PROVISION FOR INCOME TAXES
The liability method of accounting is used for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of existing differences between financial
reporting and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carryforwards, using enacted tax laws and rates.
Deferred tax expense represents the net change in the deferred tax asset or
liability balance during the year. This amount,
F-8
<PAGE> 83
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROVISION FOR INCOME TAXES (CONTINUED)
together with income taxes currently payable or refundable for the current year,
represents the total income tax expense for the year.
SERVICING AND PROFIT AND LOSS SHARING REVENUE RECOGNITION
NextCard generates servicing and profit and loss sharing non-interest
income pursuant to the Consumer Credit Card Program Agreement (the "Agreement")
which NextCard executed with Heritage. Under the Agreement, NextCard charges
Heritage for certain credit card origination and servicing costs associated with
credit card accounts originated and shares equally with Heritage in the profit
and loss sharing income (as defined in the Agreement) generated from these
credit card accounts. The servicing and profit or loss sharing income is
recognized when realized based on the terms of the Agreement.
INTEREST INCOME ON CREDIT CARD LOANS
Interest income on credit card loans is recognized based on the principal
amount of the loans outstanding in accordance with the terms of the applicable
account agreement until the outstanding balance is paid or charged off. At that
time, the accrued interest portion of the charged off balance is deducted from
current period interest income.
CREDIT CARD AND INTERCHANGE FEE INCOME
Credit card and interchange fee income includes late and overlimit charges,
cash advance fees, bonus reward fees, processing fees, interchange activity and
other miscellaneous fees. Credit card and interchange fee income is recognized
in the month realized.
MARKETING, ADVERTISING, CREDIT CARD ORIGINATION AND SERVICING COSTS
NextCard expenses all marketing and advertising costs as incurred. Credit
card origination costs are recognized when the account is originated and credit
card servicing costs are recognized as incurred.
COMPREHENSIVE INCOME (LOSS)
NextCard adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130") at December 31, 1998. Under FAS
130, NextCard is required to display comprehensive income (loss) and its
components as part of the financial statements. Other comprehensive income
(loss) includes certain changes in equity that are excluded from net income
(loss). Specifically, FAS 130 requires unrealized holding gains and losses on
available-for-sale securities, to be included in accumulated other comprehensive
income (loss). NextCard has no material components of other comprehensive loss
and, accordingly, the comprehensive loss is the same as net loss for all periods
presented.
F-9
<PAGE> 84
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for
financial statements for periods beginning after December 15, 1997. FAS 131
establishes standards for the way that public business enterprises report
financial and descriptive information about reportable operating segments in
annual financial statements and interim reporting to shareholders. NextCard
adopted FAS 131 in 1998. NextCard has determined that it has one operating and
reportable segment, origination and servicing of Internet-based credit card
relationships for United States cardholders, which is further described in Note
1.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of NextCard's consolidated financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect amounts reported in the consolidated
financial statements and the accompanying notes. These estimates are based on
information available as of the date of the consolidated financial statements;
therefore, actual results could differ from those estimates, although management
does not believe that any differences would materially affect NextCard's
consolidated financial position or results of operations.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), encourages but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. NextCard has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations ("APB Opinion No. 25") in accounting for its stock options
plans.
NET LOSS PER COMMON SHARE
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128"), for all periods presented. In accordance
with FAS 128, basic and diluted net loss per common share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Shares associated with stock
options and convertible preferred stock are not included because their inclusion
would be antidilutive (i.e., reduce the net loss per share). Pro forma basic and
diluted net loss per common share, as presented in the consolidated statements
of operations, has been computed for the year ended December 31, 1998 as
described above, and also gives effect, under Securities and Exchange Commission
guidance, to the conversion of the convertible preferred stock (using the
if-converted method) from the original date of issuance.
F-10
<PAGE> 85
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma (See Note 11) basic and diluted net loss per common share:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, --------------------------
-------------------------- MARCH 31, MARCH 31,
1997 1998 1998 1999
---- ---- ----------- ------------
<S> <C> <C> <C> <C>
Net loss.......................... $(1,886,294) $(16,063,542) $(1,373,627) $(10,982,094)
=========== ============ =========== ============
Basic and diluted:
Weighted-average shares of
common stock outstanding..... 5,241,902 4,906,935 4,894,875 4,957,835
Less: Weighted-average shares
subject to repurchase........ (3,495,038) (1,740,618) (2,003,733) (1,090,872)
----------- ------------ ----------- ------------
Weighted-average shares used in
computing basic and diluted
net loss per common share.... 1,746,864 3,166,317 2,891,142 3,866,963
=========== ============ =========== ============
Basic and diluted net loss per
share........................... $ (1.08) $ (5.07) $ (0.48) $ (2.84)
=========== ============ =========== ============
Pro forma (See Note 11):
Net loss........................ $(10,982,094)
============
Shares used above............... 3,866,963
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible
preferred stock
(unaudited).................. 32,625,734
------------
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited).................. 36,492,697
============
Pro forma basic and diluted net
loss per common share
(unaudited).................. $ (0.30)
============
</TABLE>
NextCard has excluded all convertible preferred stock, warrants for common
stock, warrants for convertible preferred stock, outstanding stock options and
shares subject to repurchase from the calculation of diluted loss per common
share because their inclusion would be antidilutive (i.e., reduce the net loss
per common share) for all periods presented. The total number of shares excluded
from the calculations of diluted net loss per common share are 13,975,817,
42,130,854, 15,637,883 and 43,203,727 for the period from inception to December
31, 1997, for the year ended December 31, 1998 and for the three months ended
March 31, 1998 and 1999 respectively. Such securities, had
F-11
<PAGE> 86
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
they been dilutive, would have been included in the computations of diluted net
loss per common share using the treasury stock method.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
No. 133"), which is effective for financial statements for fiscal years
beginning after June 15, 1999. FAS No. 133 will require NextCard to record all
derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of accumulated
comprehensive income in shareholders' equity until the hedged transactions occur
and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
While NextCard currently has no derivative financial instruments and does not
currently engage in hedging activities, NextCard anticipates engaging in
derivative and hedging activity in the future, and therefore expects to be
impacted by the pronouncement. The impact of FAS No. 133 on NextCard's
consolidated financial statements, however, will depend on a variety of factors
including the level of future hedging activity, the types of hedging instruments
used and the effectiveness of such instruments.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following is a summary of equipment and leasehold improvements:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment.......................................... $262,121 $1,360,293
Furniture and office equipment.............................. 32,897 490,692
Leasehold improvements...................................... 13,780 517,674
-------- ----------
308,798 2,368,659
Less: Accumulated depreciation and amortization............. 15,500 266,012
-------- ----------
$293,298 $2,102,647
======== ==========
</TABLE>
4. CREDIT FACILITIES
During 1998, NextCard entered into a $1,250,000 equipment loan and security
agreement with a finance company. The loan is secured by a pledge of all
equipment purchased with the proceeds from borrowings under the loan agreement
and bears interest at 7.55% per year. NextCard's ability to borrow under this
agreement expires on May 31, 1999. The loan had an outstanding balance of
$504,101 at December 31, 1998. This loan matures in installments in the
following years: 1999 -- $147,496; 2000 -- $159,026; 2001 -- $171,457; and
2002 -- $26,122.
F-12
<PAGE> 87
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
4. CREDIT FACILITIES (CONTINUED)
In addition, during 1998 NextCard entered into a $1,000,000 lease/loan
financing arrangement with a finance company. The lease/loan financing
arrangement is secured by a pledge of all equipment leased under the arrangement
and bears interest at 7.5% per year. The lease/loan financing arrangement
expires on May 22, 2000 and was unutilized at December 31, 1998.
In February 1999, NextCard entered into a $5.0 million line of credit with
a finance company. Borrowings under the line of credit accrue interest at 12.25%
per year, are repayable in 36 monthly installments of principal and interest
through February 2002 and are secured by a subordinated security interest in all
tangible and intangible assets.
5. SECURED BORROWING
On December 29, 1998, NextCard operating through a wholly owned,
bankruptcy-remote, special purpose subsidiary, NC Funding, executed a $100
million secured borrowing facility (the "revolving credit facility") with an
investment banking company ("the bank"). The revolving credit facility will be
secured by credit card receivables which may be purchased using the revolving
credit facility's proceeds. The revolving credit facility bears interest at the
prime rate or LIBOR plus 2.50% at NextCard's option, matures on December 29,
1999, requires that NextCard pay an annual 25 basis point fee on the unutilized
commitment and provides for certain financial covenants. The revolving credit
facility provides financing for 85% of the purchase price of the receivables
with NC Funding providing the remaining 15%. NextCard may increase the bank's
financing to 90% upon payment of an additional fee including warrants to the
bank.
NextCard paid the bank a fee for services rendered in connection with
structuring the revolving credit facility of $2,100,000 consisting of $725,000
in cash and warrants to purchase 562,500 shares of preferred stock. The
warrants' estimated fair market value was $1,375,000. These warrants are
immediately exercisable at a price of $0.22 per warrant. This loan structuring
fee has been capitalized and is being amortized on a straight-line basis over
the term of the revolving credit facility.
Effective January 1999, pursuant to the terms of the Account Origination
Agreement, Heritage continues to fund newly originated credit card receivables
which NC Funding is now required to purchase on a daily basis. On January 12,
1999, NC Funding utilized the revolving credit facility to purchase
approximately $24.0 million of credit card receivables from Heritage.
NextCard, through NC Funding, expects to continue to utilize the proceeds
of the revolving credit facility to purchase additional credit card receivables
on a continuous basis from Heritage. NextCard paid $130,000 in November 1998 to
acquire the right to purchase all remaining credit card receivables from
Heritage on or prior to September 30, 1999 at a negotiated fair value. The
option fee has been capitalized and is included in other assets. The option fee
is being amortized on a straight-line basis over ten months beginning in
December 1998.
6. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
NextCard leases its office space under separate lease agreements and has
operating leases for office equipment. The minimum payments, by year and in the
aggregate, under lease obligations with
F-13
<PAGE> 88
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
RENTAL COMMITMENTS (CONTINUED)
initial or remaining terms of one year or more, some of which contain renewal
options based on the then current fair market values, consist of the following:
<TABLE>
<S> <C>
1999........................................ $ 779,592
2000........................................ 786,206
2001........................................ 715,945
2002........................................ 649,540
2003........................................ 663,360
----------
$3,594,643
==========
</TABLE>
In connection with NextCard's principal office lease, NextCard executed a
$450,000 irrevocable standby letter of credit in favor of the landlord which
expires on October 31, 1999. This letter of credit can be drawn on by the
landlord under certain circumstances if NextCard defaults on the lease
agreement. Rent expense for the period from inception to December 31, 1997 and
for the year ended December 31, 1998 was $54,800 and $346,855, respectively.
PROCESSING AGREEMENT
In December 1997, NextCard signed a five-year agreement with a third-party
for processing of credit card receivables with a renewal option. The minimum
payments, which must be made by NextCard, by year and in the aggregate, under
the agreement are as follows:
<TABLE>
<S> <C>
1999........................................ $ 275,000
2000........................................ 1,000,000
2001........................................ 2,500,000
2002........................................ 3,750,000
----------
$7,525,000
==========
</TABLE>
Under the terms of the processing agreement, NextCard also received a
$500,000 signing bonus from its third party processor which is being recognized
as a reduction of servicing expense on a pro-rata basis over the five-year term
of the contract. Cash payment of the signing bonus was received in January 1998.
The unamortized portion of this bonus is included in deferred revenue on the
consolidated balance sheet.
7. SHAREHOLDERS' EQUITY
NextCard has two classes of authorized stock: common stock and preferred
stock. In October 1998, the Shareholders approved a decrease in the originally
authorized number of shares of common stock from 90,000,000 to 62,896,892 and
preferred stock from 45,000,000 to 40,603,109.
F-14
<PAGE> 89
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
On July 15, 1996, the Chairman, Chief Executive Officer and President of
NextCard purchased 4,500,000 shares of newly issued common stock at $0.001 per
share, 75% of which were issued subject to NextCard's right, but not its
obligation, to repurchase at the original issue price. NextCard's repurchase
rights lapse semi-annually over a four year period, subject to continuing
employment by NextCard. On April 2, 1997, the Chairman and Chief Executive
Officer returned 450,000 of such shares to NextCard without consideration.
Accordingly, as of December 31, 1997, and 1998 and March 31, 1999, 2,081,250,
1,237,500 and 815,625 shares were subject to repurchase, respectively. In the
event that a sale of any such shares to any competitor, former employee or
certain other persons is proposed, NextCard has a right of first refusal to
repurchase such shares at a negotiated price.
On September 18, 1996, NextCard sold 2,272,500 shares of common stock to
three of its employees (two of whom have since left NextCard's employment) for a
purchase price of $0.004 per share. Those shares of common stock are subject to
NextCard's right to repurchase at the original issuance price. NextCard's
repurchase rights to ten percent of the stock lapsed at the date of sale and the
repurchase rights to the remaining shares lapse semi-annually over a four year
period subject to continued employment by NextCard. During 1997, one of the
employees returned 180,000 of such shares to NextCard without consideration, and
NextCard exercised its right to repurchase 1,247,625 shares from employees who
left NextCard. As of December 31, 1997 and 1998 and March 31, 1999, 318,938,
212,625 and 159,458 shares remain subject to repurchase, respectively.
Common stock was reserved for issuances as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
Conversion of convertible preferred stock................... 32,625,734 32,625,734
Exercise of outstanding stock options....................... 6,975,563 8,354,137
Shares of common stock available for grant under the 1997
Stock Plan................................................ 1,986,939 3,983,365
Exercise of outstanding warrants............................ 1,139,409 1,308,749
---------- ----------
42,727,645 46,271,985
========== ==========
</TABLE>
CONVERTIBLE PREFERRED STOCK
NextCard is authorized to issue 40,603,109 shares of convertible preferred
stock in one or more series. Dividends on each series of convertible preferred
stock are noncumulative and are payable, in any fiscal year, when and as
declared by NextCard.
F-15
<PAGE> 90
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Convertible preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
DECEMBER 31, 1997 AND MARCH 31, 1999
---------------------------- -----------------------------
SHARES SHARES
OUTSTANDING(1) AMOUNT(2) OUTSTANDING(1) AMOUNT(2)
-------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Series A............... 2,756,250 $1,204,614 2,735,154 $ 1,195,240
Series B-1, B-2........ 6,354,000 3,494,426 6,354,000 3,494,426
Series C-1, C-2........ -- -- 9,132,660 11,671,346
Series D-1, D-2........ -- -- 14,403,920 38,365,361
--------- ---------- ---------- -----------
9,110,250 $4,699,040 32,625,734 $54,726,373
========= ========== ========== ===========
</TABLE>
- ------------
(1) The per share issuance cost for Series A, Series B, Series C, and Series D
was $0.44, $0.56, $1.29 and $2.67, respectively.
(2) Amount is net of issuance costs.
Holders of Series C and D Convertible Preferred Stock are entitled to
receive a liquidation preference prior and in preference to any distribution to
the holders of Series A or Series B Convertible Preferred Stock and the common
shareholders in an amount equal to all declared but unpaid dividends, if any,
attributable to the Series C and D Convertible Preferred Stock, plus $1.29 and
$2.67 per share of Series C and D Convertible Preferred Stock, respectively,
adjusted for any combinations, consolidations, stock distributions or dividends.
The liquidation preference for holders of Series C and D Convertible Preferred
Stock was $11,770,984 and $38,410,452 at December 31, 1998 and March 31, 1999.
After payment of the prior liquidation preference to Series C and D
Convertible Preferred Stock, holders of Series A and B Convertible Preferred
Stock are entitled, prior and in preference to any common shareholders to
receive an amount equal to all declared but unpaid dividends, if any,
attributable to the Series A and B Convertible Preferred Stock plus $0.44 and
$0.56 per share of Series A and B Convertible Preferred Stock, respectively, as
adjusted for any combinations, consolidations, stock distributions or dividends.
The liquidation preference for holders of Series A Convertible Preferred Stock
was $1,225,000 and $1,215,624 at December 31, 1997 and 1998, respectively. The
liquidation preference for holders of Series B Convertible Preferred Stock
$3,530,000 at December 31, 1997, December 31, 1998 and March 31, 1999.
If the distributable assets are insufficient to permit payment to the
Series C and D Preferred Shareholders of their preferential amount, then the
entire amount of distributable assets, shall be distributed pro rata among the
Series C and D Preferred Shareholders in proportion to their respective
preferential amounts. Similarly, if the remaining distributable assets after
payment of the Series C and D Preferred Shareholders' initial liquidation amount
is insufficient to permit payment to the Series A and B Preferred Shareholders
of their preferred amount, then the remaining distributable assets shall be
distributed pro rata among the Series A and B Preferred Shareholders in
proportion to their respective preferential amounts.
F-16
<PAGE> 91
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Following payment of such liquidation preference, the remaining assets, if
any, will be available for distribution to the holders of NextCard's Common
Stock, except that the holders of the Series C and D Convertible Preferred Stock
are entitled to participate with the holders of NextCard's Common Stock until
holders of Series C Convertible Preferred Stock have received a total of $2.58
per share and the holders of Series D Convertible Preferred Stock have received
a total of $6.67 per share.
Each share of Series A, B-1, C-1 and D-1 Convertible Preferred Stock
carries voting rights ("Voting Preferred"). Each holder of Voting Preferred is
entitled to the number of votes equal to the number of shares of common stock
into which such shares of Voting Preferred held by such Preferred Shareholder
could then be converted; provided, however, that each holder of Series A
Convertible Preferred Stock shall be entitled to the number of votes equal to
the number of shares of common stock into which such shares of Series A
Convertible Preferred Stock held by such Preferred Shareholder could then be
converted, times 1.1. Shares of Series B-2, C-2 and D-2 Convertible Preferred
Stock are non-voting, except as otherwise required by the relevant provisions of
California law.
Each share of Voting Preferred is convertible at the option of the holder
into shares of common stock equal to the number of preferred shares multiplied
by the then effective Conversion Rate. At December 31, 1997 and 1998, the
Conversion Rate for each series of voting and non-voting Preferred Stock was one
share of common stock for each share of preferred stock.
In addition, each share of convertible preferred stock shall automatically
be converted into shares of common stock at the then effective Conversion Rate
for such share immediately upon the consummation of a firmly underwritten public
offering of common stock (other then a registration on Form S-8 or comparable
form), provided that the price per share is not less than $5.56 (subject to
appropriate adjustment for stock splits, stock dividends, combinations,
recapitalizations and the like) and the aggregate gross proceeds to NextCard are
not less than $25 million after deduction of underwriters' commissions and
expenses.
8. STOCK OPTION PLAN AND WARRANTS
STOCK OPTION PLAN
Under the 1997 Stock Plan ("the Plan"), NextCard offers options to purchase
shares of its common stock to employees, including officers and directors of,
and consultants to, NextCard who are not also employees of NextCard. At December
31, 1997, 1998 and March 31, 1999, NextCard had reserved 5,130,000, 9,000,000
and 12,375,000 shares of common stock for issuance through the Plan. The Plan is
administered by the Board of Directors. The Board of Directors may award a
number of forms of stock-based compensation to eligible participants including
incentive and nonqualified stock options which generally vest over a four year
period. Restricted stock purchase rights may also be granted under the Plan.
F-17
<PAGE> 92
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The following summarizes stock option activity and related information
during the years ended December 31, 1997 and 1998 and the three months ended
March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES EXERCISE PRICE PRICE
------ -------------- --------
<S> <C> <C> <C>
Outstanding at April 2, 1997 (Plan
inception)............................... -- -- --
Granted.................................. 2,344,500 $0.04 - $0.06 $0.05
Forfeited................................ (315,000) $ 0.04 $0.04
--------- ------------- -----
Outstanding at December 31, 1997........... 2,029,500 $0.04 - $0.06 $0.05
Granted.................................. 5,419,013 $0.06 - $0.56 $0.16
Exercised................................ (37,499) $0.04 - $0.06 $0.05
Forfeited................................ (435,451) $0.06 - $0.33 $0.09
--------- ------------- -----
Outstanding at December 31, 1998........... 6,975,563 $0.04 - $0.56 $0.13
Granted.................................. 1,522,350 $1.67 - $6.67 $5.99
Forfeited................................ (143,776) $0.13 - $6.67 $1.05
--------- ------------- -----
Outstanding at March 31, 1999
(unaudited).............................. 8,354,137 $0.04 - $6.67 $1.19
========= ============= =====
Options exercisable at December 31, 1997... 204,467 $ 0.04 $0.04
========= ============= =====
Options exercisable at December 31, 1998... 801,540 $0.04 - $0.13 $0.05
========= ============= =====
Options exercisable at March 31, 1999
(unaudited).............................. 1,332,464 $0.04 - $6.67 $0.25
========= ============= =====
</TABLE>
F-18
<PAGE> 93
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Exercise prices for stock options outstanding as of December 31, 1997, 1998
and March 31, 1999 and the weighted average remaining contractual life are as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------- ----------- ---------------- -----------
<S> <C> <C> <C>
December 31, 1997
$0.04................................ 1,291,500 9.5 years 204,467
$0.05................................ 738,000 9.8 years --
--------- ---------
2,029,500 204,467
========= =========
December 31, 1998
$0.04................................ 1,201,500 8.5 years 500,058
$0.05................................ 2,149,763 9.6 years 288,828
$0.06................................ 225,000 4.6 years --
$0.13................................ 1,433,025 9.7 years 12,654
$0.14................................ 1,125,000 4.7 years --
$0.33................................ 248,175 9.8 years --
$0.56................................ 593,100 9.9 years --
--------- ---------
6,975,563 801,540
========= =========
March 31, 1999 (unaudited)
$0.04................................ 1,201,500 8.3 years 555,750
$0.05................................ 2,149,763 9.4 years 668,435
$0.06................................ 225,000 4.4 years 56,250
$0.13................................ 1,338,750 9.5 years 12,654
$0.14................................ 1,125,000 4.5 years --
$0.33................................ 241,424 9.6 years --
$0.56................................ 590,850 9.7 years --
$1.67................................ 171,000 9.8 years --
$6.67................................ 1,310,850 9.9 years 39,375
--------- ---------
8,354,137 1,332,464
========= =========
</TABLE>
As discussed in Note 2, NextCard has elected to follow APB Opinion No. 25
and related interpretations in accounting for its employee and director
stock-based awards because, as discussed below, the alternative fair value
accounting provided for under FAS 123 requires use of option valuation models
that were not developed for use in valuing employee stock-based awards. Under
APB Opinion No. 25, NextCard does not recognize compensation expense with
respect to such awards if the exercise price equals or exceeds the fair value of
the underlying security on the date of grant and other terms are fixed.
F-19
<PAGE> 94
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The fair value of these awards for the purpose of the alternative fair
value disclosures required by FAS 123 was estimated as of the date of grant
using the minimum value option pricing model. This model was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected life of the
options. Because NextCard's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. For the purposes of
NextCard's pro forma disclosures, the fair value of options granted during the
period ended December 31, 1997, and the year ended December 31, 1998 was
determined using the minimum value method with a risk-free interest rate of
approximately 5.0%, an expected life of five years, and a dividend yield of
zero.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. NextCard's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Net Loss:
As reported....................................... $(1,886,294) $(16,063,542)
Pro Forma......................................... (1,888,511) (16,533,081)
Basic and diluted net loss per common share
As reported....................................... $ (1.08) $ (5.07)
Pro Forma......................................... (1.08) (5.22)
</TABLE>
The compensation cost associated with NextCard's stock-based compensation
plans determined using the minimum value method prescribed above did not result
in a material difference from the reported net income for the period from June
5, 1996 (inception) to December 31, 1997 and the year ended December 31, 1998.
Future pro forma net income results may be materially different from actual
amounts reported.
DEFERRED STOCK COMPENSATION
In connection with certain stock option grants to employees during the year
ended December 31, 1998, NextCard recorded deferred stock compensation of
$7,800,000 representing the difference between the exercise price and the deemed
fair value of NextCard's common stock on the date such stock options were
granted. Such amount is included as a reduction of shareholders' equity and is
being amortized by charges to operations on a graded vesting method over the
corresponding vesting period of each respective option, generally four years. In
the year ended 1998, NextCard recorded amortization of deferred stock
compensation expense of $1,800,000. At December 31, 1998, $6,000,000 of deferred
stock compensation remained unamortized.
F-20
<PAGE> 95
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
WARRANTS
NextCard had outstanding the following warrants to purchase its securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
-------------------------- --------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
WARRANTS PRICE PER WARRANTS PRICE PER
DESCRIPTION OF SERIES ISSUED SHARE ISSUED SHARE
--------------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Common Stock..................... 515,615 $0.13 - $0.56 406,702 $0.13 - $0.56
Series C-1 Convertible Preferred
Stock.......................... 38,794 $1.29 38,794 $1.29
Series D-1 Convertible Preferred
Stock.......................... 585,000 $0.22 - $2.67 863,253 $0.22 - $2.67
--------- ---------
1,139,409 1,308,749
========= =========
</TABLE>
These warrants were issued to third parties for services rendered and loan
fees. At December 31, 1998, and March 31, 1999, 1,079,433 and 1,248,773 warrants
were exercisable, respectively. Expenses related to the deemed fair market value
of these warrants for services rendered by third parties were not material. As
described further in Note 5, NextCard paid a loan structuring fee of $2,100,000
consisting of $725,000 in cash and 562,500 warrants with a deemed fair value of
$1,375,000. The warrants are exercisable from March 24, 1997 to March 24, 2007.
During the first quarter of 1999, NextCard paid a loan structuring fee to a
finance company of $2,486,000 consisting of $50,000 in cash and 262,503 warrants
with a deemed fair value of $2,436,000. The warrants are exercisable for the
shorter of five years or two years from the date of an initial public offering.
9. INCOME TAXES
The provision for income taxes consists of the minimum California state
franchise tax of $1,600 and results in an effective tax rate that differs from
the federal statutory rate primarily due to net operating losses for which a
valuation allowance has been established.
The following is a summary of deferred tax assets:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 95,307 $ 6,021,000
Deferred start-up costs.............................. 718,202 541,000
Deferred revenue..................................... -- 209,000
Other................................................ 31,708 72,000
--------- -----------
Total deferred tax assets.............................. 845,217 6,843,000
Valuation allowance.................................... (845,217) (6,843,000)
--------- -----------
Net deferred tax assets................................ $ -- $ --
========= ===========
</TABLE>
F-21
<PAGE> 96
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
At December 31, 1998, NextCard has federal and California net operating
loss carryforwards (NOLs) of approximately $14,200,000 available to offset
future taxable income. The NOLs expire beginning in 2012 for federal purposes
and 2005 for California purposes.
Realization of NOLs is dependent on future earnings, if any, the timing and
the amount of which are uncertain. Accordingly, a valuation allowance in an
amount equal to the deferred tax assets as of December 31, 1997 and 1998 has
been established to reflect these uncertainties. The change in the valuation
allowance was a net increase of $5,997,783 for the year ended December 31, 1998.
During the period ended December 31, 1997, NextCard provided a valuation
allowance of $845,217.
Utilization of tax carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation could result in expiration of NOLs before full utilization.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1998, the respective carrying values of
NextCard's financial instruments approximated their fair values. These financial
instruments include cash and cash equivalents, due from third-party processor
amounts, accounts payable, accrued expenses, short-term borrowings and certain
other assets and liabilities that are considered financial instruments. Carrying
values were estimated to approximate fair values for these financial instruments
as they are short-term in nature and are receivable or payable on demand.
The fair value of NextCard's long-term borrowings was estimated using a
discounted cash flow model. The discount rates used were based on yield-curves
appropriate for the remaining maturities of the instruments. The fair value of
long-term debt at December 31, 1998 approximated its carrying value.
11. PROPOSED INITIAL PUBLIC OFFERING AND OTHER SUBSEQUENT EVENTS
NextCard is contemplating filing a registration statement with the
Securities and Exchange Commission relating to an initial public offering of
shares of its unissued common stock. If the initial public offering is
consummated under the terms presently anticipated, all of the preferred stock
outstanding will automatically convert into common stock or non voting common
stock at the shareholder's election subject to NextCard's agreement. At December
31, 1998, on an unaudited pro forma basis, 32,625,734 shares of common stock
would be issued upon automatic conversion of the preferred stock. The pro forma
effect on stockholders' equity and pro forma effect on basic and diluted net
loss per common share, as adjusted for the assumed conversion of the preferred
stock, is set forth on the accompanying consolidated balance sheet and statement
of operations, and in Note 2 under Net Loss per Common Share.
In April 1999, NextCard's board of directors declared a stock split of 4.5
shares for every one share of common stock then outstanding. The stock split
will become effective immediately prior to the closing of the initial public
offering. In addition, the board of directors approved the reincorporation of
NextCard from California to Delaware. All share and per share data in the
accompanying consolidated financial statements and notes have been restated to
reflect the stock split and the reincorporation.
F-22
<PAGE> 97
[INSIDE BACK COVER OF PROSPECTUS]
[MY VISA WEB PAGE]
<PAGE> 98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
LOGO
5,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of NextCard
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by us in
connection with the sale of the common stock we are offering, other than
underwriting commissions and discounts. All amounts, except the SEC registration
fee, the NASD Filing Fee and the Nasdaq National Market listing fee, are
estimates.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
SEC registration fee........................................ $ 30,371.50
NASD filing fee............................................. 9,125.00
Nasdaq National Market listing fee.......................... 100,000.00
Blue Sky fees and expenses.................................. 10,000.00
Printing and engraving expenses............................. 240,000.00
Legal fees and expenses..................................... 550,000.00
Accounting fees and expenses................................ 250,000.00
Transfer Agent and Registrar fees........................... 10,000.00
Miscellaneous expenses...................................... 6,897.50
-------------
Total............................................. $ 1,206,314
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Delaware law, our Amended and Restated Certificate of
Incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of duty of loyalty to us or to our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; and
- for any transaction from which the director derived an improper personal
benefit.
The Amended and Restated Certificate of Incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our Amended and Restated
Certificate of Incorporation covers negligence and gross negligence on the part
of indemnified parties. The Amended and Restated Certificate of Incorporation
also permits us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether Delaware law would permit indemnification.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify such
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in our right, arising out of
such person's services as a director or officer to us, any subsidiary of us or
any other company or enterprise to which the person provides services at our
request.
The underwriting agreement (Exhibit 1.1) provides for indemnification by
our underwriters, our directors, our officers who sign the registration
statement, and our controlling persons for certain
II-1
<PAGE> 100
liabilities, including liabilities arising under the Securities Act, and affords
certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On July 15, 1996, we issued 4,500,000 shares of common stock to our
founders for an aggregate consideration of $5,000. Of such shares, 450,000
subsequently were transferred to us as a capital contribution. A portion of the
remaining 4,050,000 shares held by the founders are subject to our repurchase
right. See "Certain Transactions."
On September 18, 1996, we issued an aggregate of 2,272,500 shares of common
stock to certain key employees for an aggregate consideration of $10,100. Of
such shares, 180,000 were transferred to us as capital contributions and
1,247,625 were repurchased by us at a repurchase price of $0.004 per share.
From December 1996 to March 1997, we issued an aggregate of 2,756,250
shares of Series A Preferred Stock to 27 accredited investors for an aggregate
consideration of $1,225,000. We subsequently repurchased 21,056 such shares in
settlement of certain promissory notes.
On April 2, 1997, we issued one consultant a warrant to purchase 67,500
shares of common stock at an exercise price of $0.44 per share.
On May 15, 1997, we issued one consultant a warrant to purchase 95,963
shares of common stock at an exercise price of $0.56 per share. On August 15,
1997, we issued the same consultant an additional warrant to purchase 70,677
shares of common stock at an exercise price of $0.56 per share. We issued both
warrants in connection such consultant's provision of certain consulting
services to us. On March 31, 1999, we issued a total of 37,031 shares of our
common stock to the consultant upon such consultant's exercise of both warrants.
From August to September 1997, we issued an aggregate of 6,354,000 shares
of Series B-1 and Series B-2 Preferred Stock to 23 accredited investors for an
aggregate consideration of $3,530,000.
On August 15, 1997, we issued one consultant warrants to purchase 70,677
shares of common stock and 95,963 shares of common stock, respectively, at an
exercise price of $0.56 per share in connection with such consultant's provision
of certain consulting services to us. Such consultant subsequently became one of
our directors and surrendered to us the warrant to purchase 95,963 shares of
common stock in exchange for a non-statutory option to purchase 95,963 shares of
common stock, at an exercise price of $0.56 per share. The remaining outstanding
warrant is exercisable, in whole or in part, in exchange for cash or for shares
equal to the value of the warrant. In March 1999, Mr. Qureshey assigned 500
shares of such warrant to each of six persons, for an aggregate assignment of
3,000 shares. One such person exercised his warrant in April for 500 shares of
our common stock.
On November 6, 1997, we issued one consultant a warrant to purchase 8,100
shares of common stock at an exercise price of $0.56 per share in connection
with such consultant's provision of certain consulting services to us. The
warrant is exercisable in whole or in part, in exchange for cash or for shares
equal to the value of the warrant.
On December 10, 1997, we issued one consultant a warrant to purchase 18,000
shares of common stock at an exercise price of $0.56 per share in connection
with such consultant's provision of certain consulting services to us. The
warrant is exercisable, in whole or in part, in exchange for cash or shares
equal to the value of the warrant.
On December 10, 1997, we issued one consultant a warrant to purchase 4,500
shares of common stock at an exercise price of $0.56 per share in connection
with such consultant's provision of certain
II-2
<PAGE> 101
consulting services to us. In April 1999, we issued 4,500 shares of our common
stock to such consultant upon her exercise of the warrant.
On February 24, 1998, we issued our legal counsel a warrant to purchase
4,500 shares of common stock at an exercise price of $0.44 per share in
connection such legal counsel's provision of legal services to us. The warrant
is exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
From May to June 1998, we issued an aggregate of 9,132,660 shares of Series
C-1 and Series C-2 Preferred Stock to 24 accredited investors for an aggregate
consideration of $11,770,984.
On June 1, 1998, we issued one financial institution a warrant to purchase
38,795 shares of Series C Preferred Stock at an exercise price of $1.29 per
share in connection with the execution of a loan and security agreement. Upon
the closing of this offering, the warrant will be exercisable for shares of our
common stock. The warrant is exercisable at any time, in whole or in part, prior
to May 28, 2003, in exchange for cash or shares equal to the value of the
warrant.
On July 28, 1998, we issued one former director a warrant to purchase
67,500 shares of common stock for an exercise price of $0.13 in connection with
such individual's service as a member of our board of directors. Such warrant is
exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
On July 28, 1998, we issued one consultant a warrant to purchase 108,198
shares of common stock for an exercise price of $0.56 per share. The warrant is
exercisable, in whole or in part, in exchange for cash or shares equal to the
value of the warrant.
In November 1998, we issued an aggregate of 14,403,920 shares of Series D-1
and D-2 Preferred Stock to 45 accredited investors for an aggregate
consideration of $38,410,452.
On November 5, 1998, we issued to Silicon Valley Bank a warrant to purchase
22,500 shares of Series D-1 Preferred Stock at an exercise price of $2.67 per
share in connection with its provision of our revolving line of credit. Upon the
closing of this offering, the warrant will be exercisable for shares of our
common stock. The warrant is exercisable at any time, in whole or in part, prior
to November 5, 2003, in exchange for cash or shares equal to the value of the
warrant.
On December 29, 1998, we issued to NextCard Funding Corp. two warrants to
purchase 562,500 and 525,002 shares of Series D-1 Preferred Stock, respectively,
at exercise prices of $0.22 and $2.67 per share, respectively, in connection
with the establishment of a secured lending facility arranged by Credit Suisse
First Boston. Upon the closing of this offering, the warrants will be
exercisable for shares of our common stock. Each warrant is exercisable, in
whole or in part, at any time prior to December 29, 2005, for cash or shares
equal to the value of the warrant. The warrant to purchase 562,500 shares of
Series D-1 Preferred Stock was transferred to Credit Suisse First Boston as
partial payment for an origination fee. The warrant to purchase 525,002 shares
of Series D Preferred Stock has not yet been transferred to Credit Suisse First
Boston and therefore, is not deemed "outstanding" for purposes of computing our
capitalization.
On February 9, 1999, we issued to Comdisco, Inc., a warrant to purchase
131,252 shares of Series D-1 Preferred Stock at an exercise price of $2.67 per
share in connection with the execution of a loan and security agreement. Upon
the closing of this offering, the warrant will be exercisable for shares of our
common stock. The warrant is exercisable, in whole or in part, at any time prior
to two years after the closing of this offering, for cash or shares equal to the
value of the warrant.
On February 18, 1999, we issued one consultant a warrant to purchase 2,250
shares of Series D-1 Preferred Stock at an exercise price of $0.44 per share in
connection with such consultant's provision of consulting services to us. The
warrant is exercisable, in whole or in part, in exchange for cash or shares
equal to the value of the warrant.
II-3
<PAGE> 102
On March 11, 1999, we issued one consultant a warrant to purchase 11,250
shares of Series D-1 Preferred Stock at an exercise price of $2.67 per share in
connection with such consultant's provision of consulting services to us. The
warrant is exercisable, in whole or in part, in exchange for cash or shares
equal to the value of the warrant.
On March 29, 1999, we issued to Comdisco, Inc. a warrant to purchase
131,252 shares of Series D-1 Preferred Stock in connection with a $5 million
advance under our loan and security agreement. Upon the closing of this
offering, the warrant will be exercisable for shares of our common stock. The
warrant is exercisable in whole or in part, at any time prior to two years after
the closing of this offering, for cash or shares equal to the value of the
warrant.
Since our inception, we have issued options to purchase an aggregate of
9,285,863 shares of our common stock to a number of our employees, directors and
consultants.
The issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances of stock options described above were deemed
exempt from registration under the Securities Act in reliance upon Rule 701
promulgated under the Securities Act. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
II-4
<PAGE> 103
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1++ Form of Stock Certificate.
5.1 Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of issuance
of the common stock registered hereby.
10.1++ Form of Indemnification Agreement between NextCard and each
of its officers and directors.
10.2++ Amended and Restated Stock Restriction Agreement dated March
1999 between NextCard and Jeremy Lent.
10.3++ Stock Purchase and Restriction Agreement dated September 18,
1996 between NextCard and Timothy Coltrell.
10.4++ Form of Subscription Agreement for Series A Preferred Stock.
10.5++ Series B Preferred Stock Purchase Agreement dated August 15,
1997 among NextCard and certain investors.
10.6++ Office Lease dated September 24, 1997 between NextCard and
Market & Second, Inc., as amended.
10.7++ 1997 Stock Plan and form of Option Agreement under 1997
Stock Plan.
10.8+++ Consumer Credit Card Program Agreement dated November 25,
1997 between NextCard and Heritage Bank of Commerce.
10.9++ Remittance Processing Services Agreement dated December 1,
1997 between Heritage Bank of Commerce and National
Processing Company.
10.10++ Professional Services Agreement dated October 14, 1998
between Heritage Bank of Commerce and Response Data
Corporation.
10.11+++ Service Agreement dated December 22, 1997 between NextCard
and First Data Resources Inc.
10.12++ Master Services Agreement dated December 23, 1997 between
NextCard and Exodus Communications, Inc.
10.13++ License Agreement dated May 1, 1998 between NextCard and
Binary Compass Enterprises, Inc.
10.14++ Series C Preferred Stock Purchase Agreement dated May 13,
1998 among NextCard and certain investors.
10.15++ Sublease dated May 15, 1998 between NextCard and KAO
Infosystems Company.
10.16++ Master Lease Agreement dated May 22, 1998 between NextCard
and Comdisco, Inc.
10.17++ Loan and Security Agreement dated June 17, 1998 by and
between NextCard and Lighthouse Capital Partners II, L.P.
10.18++ Cardholder Rewards Program Agreement dated June 22, 1998
between NextCard and Intellipost Corporation (subsequently
renamed MyPoints.com).
10.19++ Form of Bottom Dollar Network Membership Agreement.
</TABLE>
II-5
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
10.20++ Series D Preferred Stock Purchase Agreement dated November
5, 1998 among NextCard and certain investors.
10.21+++ Loan Agreement dated December 29, 1998 between NextCard
Funding Corp. and Credit Suisse First Boston.
10.22+++ Account Origination Agreement dated December 29, 1998 among
NextCard, NextCard Funding Corp. and Heritage Bank of
Commerce.
10.23++ Employment Agreement dated as of January 1, 1999 between
NextCard and Jeremy R. Lent.
10.24++ Subordinated Loan and Security Agreement dated February 9,
1999 between NextCard and Comdisco, Inc.
10.25++ Consulting Agreement dated as of January 20, 1999 between
NextCard and Bruce Rigione.
10.27 Employee Stock Purchase Plan.
10.26++ Amendment Number One to Subordinated Loan and Security
Agreement dated as of February 9, 1999 between NextCard,
Inc., as Borrower, and Comdisco, Inc., as Lender.
23.1 Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney.
27.1++ Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment requested.
++ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreements certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
our payment of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE> 105
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offerings of such securities at that time shall be
deemed to be the initial bona fide offerings thereof.
II-7
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act, we have had duly caused
this amendment no. 3 to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, State of
California, on the 12(th) day of May, 1999.
NEXTCARD, INC.
By: /s/ JEREMY R. LENT
------------------------------------
Jeremy R. Lent
Chairman of the Board,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act, this amendment no. 3 to
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ JEREMY R. LENT Chairman of the Board, Chief May 12, 1999
- --------------------------------------------------- Executive Officer, President and
Jeremy R. Lent Director (Principal Executive
Officer)
/s/ JOHN V. HASHMAN Chief Financial Officer May 12, 1999
- --------------------------------------------------- (Principal Financial and
John V. Hashman Accounting Officer)
* Director May 12, 1999
- ---------------------------------------------------
Jeffrey D. Brody
* Director May 12, 1999
- ---------------------------------------------------
Alan N. Colner
* Director May 12, 1999
- ---------------------------------------------------
Tod H. Francis
* Director May 12, 1999
- ---------------------------------------------------
Safi U. Qureshey
* Director May 12, 1999
- ---------------------------------------------------
Bruce G. Rigione
*By: /s/ JOHN V. HASHMAN
- ---------------------------------------------------
John V. Hashman
Attorney-in-fact
</TABLE>
II-8
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBITS
NUMBER EXHIBIT INDEX PAGE
- -------- ------------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement..............................
3.1++ Amended and Restated Certificate of Incorporation...........
3.2 Amended and Restated Bylaws.................................
4.1++ Form of Stock Certificate...................................
5.1 Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of issuance
of the common stock registered hereby.......................
10.1++ Form of Indemnification Agreement between NextCard and each
of its officers and directors...............................
10.2++ Amended and Restated Stock Restriction Agreement dated March
1999 between NextCard and Jeremy Lent.......................
10.3++ Stock Purchase and Restriction Agreement dated September 18,
1996 between NextCard and Timothy Coltrell..................
10.4++ Form of Subscription Agreement for Series A Preferred
Stock.......................................................
10.5++ Series B Preferred Stock Purchase Agreement dated August 15,
1997 among NextCard and certain investors...................
10.6++ Office Lease dated September 24, 1997 between NextCard and
Market & Second, Inc., as amended...........................
10.7++ 1997 Stock Plan and form of Option Agreement under 1997
Stock Plan..................................................
10.8+++ Consumer Credit Card Program Agreement dated November 25,
1997 between NextCard and Heritage Bank of Commerce.........
10.9++ Remittance Processing Services Agreement dated December 1,
1997 between Heritage Bank of Commerce and National
Processing Company..........................................
10.10++ Professional Services Agreement dated October 14, 1998
between Heritage Bank of Commerce and Response Data
Corporation.................................................
10.11+++ Service Agreement dated December 22, 1997 between NextCard
and First Data Resources Inc. ..............................
10.12++ Master Services Agreement dated December 23, 1997 between
NextCard and Exodus Communications, Inc. ...................
10.13++ License Agreement dated May 1, 1998 between NextCard and
Binary Compass Enterprises, Inc. ...........................
10.14++ Series C Preferred Stock Purchase Agreement dated May 13,
1998 among NextCard and certain investors...................
10.15++ Sublease dated May 15, 1998 between NextCard and KAO
Infosystems Company.........................................
10.16++ Master Lease Agreement dated May 22, 1998 between NextCard
and Comdisco, Inc. .........................................
10.17++ Loan and Security Agreement dated June 17, 1998 by and
between NextCard and Lighthouse Capital Partners II, L.P....
10.18++ Cardholder Rewards Program Agreement dated June 22, 1998
between NextCard and Intellipost Corporation (subsequently
renamed MyPoints.com).......................................
10.19++ Form of Bottom Dollar Network Membership Agreement..........
10.20++ Series D Preferred Stock Purchase Agreement dated November
5, 1998 among NextCard and certain investors................
</TABLE>
II-9
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBITS
NUMBER EXHIBIT INDEX PAGE
- -------- ------------- ----
<S> <C> <C>
10.21+++ Loan Agreement dated December 29, 1998 among NextCard
Funding Corp. and Credit Suisse First Boston................
10.22+++ Account Origination Agreement dated December 29, 1998 by and
between NextCard and Heritage Bank of Commerce..............
10.23++ Employment Agreement dated as of January 1, 1999 between
NextCard and Jeremy R. Lent.................................
10.24++ Subordinated Loan and Security Agreement dated February 9,
1999 between NextCard and Comdisco, Inc. ...................
10.25++ Consulting Agreement dated as of January 20, 1999 between
NextCard and Bruce Rigione .................................
10.26++ Amendment Number One to Subordinated Loan and Security
Agreement dated as of February 9, 1999 between NextCard,
Inc., as Borrower, and Comdisco, Inc., as Lender............
10.27 Employee Stock Purchase Plan................................
23.1 Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1)........
23.2 Consent of Ernst & Young LLP, Independent Auditors..........
24.1++ Power of Attorney...........................................
27.1++ Financial Data Schedule.....................................
</TABLE>
- ---------------
+ Confidential treatment requested.
++ Previously filed.
II-10
<PAGE> 1
EXHIBIT 1.1
5,000,000 Shares
NextCard, Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
NextCard, Inc., a Delaware corporation (the "COMPANY"), proposes to
issue and sell 5,000,000 shares of its Common Stock, par value $0.001 (the "FIRM
SHARES") to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 750,000 shares of its Common Stock, par
value $0.001 (the "ADDITIONAL SHARES") if requested by the Underwriters as
provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "SHARES". The shares of common stock
of the Company to be outstanding after giving effect to the sales contemplated
1
<PAGE> 2
hereby are hereinafter referred to as the "COMMON STOCK".
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "PURCHASE Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 750,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time, but in any event only once, by
giving written notice thereof to the Company within 30 days after the date of
this Agreement. You shall give any such notice on behalf of the Underwriters and
such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business days
after such notice has been given. If any Additional Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase from the Company
the number of Additional Shares (subject to such adjustments to eliminate
2
<PAGE> 3
fractional shares as you may determine) which bears the same proportion to the
total number of Additional Shares to be purchased from the Company as the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
bears to the total number of Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in the immediately
foregoing clause (i) or (ii) is to be settled by the delivery of Common Stock,
or such other securities, in cash or otherwise), except to the Underwriters
pursuant to this Agreement, for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. Notwithstanding the foregoing, during such period (i)
the Company may grant stock options pursuant to the Company's existing stock
option plan; (ii) the Company may issue shares of Common Stock pursuant to its
Employee Stock Purchase Plan and (iii) the Company may issue shares of Common
Stock upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. The Company
shall, prior to or concurrently with the execution of this Agreement, deliver an
agreement executed by (i) each of the directors and officers of the Company and
(ii) each stockholder listed on Annex I hereto to the effect that such person
will not, during the period commencing on the date such person signs such
agreement and ending 180 days after the date of the Prospectus, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
(A) engage in any of the transactions described in the first sentence of this
paragraph or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
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definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in the account specified by the Company. The certificates
representing the Shares shall be made available for inspection not later than
9:30 A.M., New York City time, on the business day prior to the Closing Date or
the applicable Option Closing Date, as the case may be, at the office of DTC or
its designated custodian (the "DESIGNATED OFFICE"). The time and date of
delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time,
on ________, 1999 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery and payment for any Additional Shares
to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on
the date specified in the exercise notice given by you pursuant to Section 2 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of delivery for any Additional Shares are hereinafter referred to as an "OPTION
CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, Three Embarcadero Center, Seventh Floor, San Francisco, CA 94111 Attn:
Joanne Bal, and the Shares shall be delivered at the Designated Office, all on
the Closing Date or the Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a
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Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four (4) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request. The Company shall bear the
cost of any amendment to the Registration Statement or amendment or supplement
to, or delivery of, the Prospectus pursuant to Section 5(c) above, this Section
5(d) or Section 5(e) below for any such amendment or supplement made within nine
months of the date of this Agreement, and thereafter, the Company's
out-of-pocket costs incurred pursuant to any such amendment or supplement shall
be borne by the Underwriters.
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(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon
as practicable an earnings statement covering the twelve-month period ending
June 30, 2000 that shall satisfy the provisions of Section 11(a) of the Act, and
to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
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consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares, (viii)
the costs and charges of any transfer agent, registrar and/or depositary, and
(ix) all other costs and expenses incident to the performance of the obligations
of the Company hereunder for which provision is not otherwise made in this
Section.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or the Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
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this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the company's knowledge,
threatened by the Commission.
(b)(i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter or the Underwriters' method of
distributing the Shares furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the
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Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any preliminary
prospectus based upon information relating to any Underwriter or the
Underwriters' method of distributing the Shares furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
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(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or will likely be a party or to which any of their respective property is or
will likely be subject that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the
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aggregate, would not have a material adverse effect on the business, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where such failure
to be valid and in full force and effect or to be in compliance, the occurrence
of any such event or the presence of any such restriction would not, singly or
in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole.
(o) This Agreement has been duly authorized, executed and delivered by
the Company.
(p) Ernst & Young, LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
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(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(s) Except as disclosed in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(u) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a
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representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(v) The Company and its subsidiaries have good and marketable title to
all personal property reflected as owned by them in the Prospectus or which is
material to the business of the Company and its subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are disclosed in
the Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, in each case except as disclosed
in the Prospectus. The Company and its subsidiaries do not own any real
property.
(w) The Company and its subsidiaries own or possess, or can acquire or
license on reasonable terms, all patents, patent rights, inventions, copyrights,
trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently
employed by them in connection with the business now operated by them except
where the failure to own or possess or otherwise be able to acquire or license
such intellectual property would not, singly or in the aggregate, have a
material adverse effect on the business, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole; and neither the
Company nor any of its subsidiaries has received any notice of infringement of
or conflict with asserted rights of others with respect to any of such
intellectual property which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect on
the business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(x) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged; and
neither the Company nor any of its subsidiaries (i) has received notice from any
insurer or agent of such insurer that substantial capital improvements or other
material expenditures will have to be made in order to continue such insurance
or (ii) has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers at a cost that would not have a material adverse
effect on the business, financial conditions or results of operations of the
Company and its subsidiaries, taken as a whole.
(y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
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stockholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be disclosed in the
Registration Statement or the Prospectus which is not so disclosed.
(z) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the Company's knowledge,
threatened against the Company or any of its subsidiaries before the National
Labor Relations Board or any state or local labor relations board, (ii) strike,
labor dispute, slowdown or stoppage pending or threatened against the Company or
any of its subsidiaries or (iii) union representation question existing with
respect to the employees of the Company and its subsidiaries, except for such
actions specified in clause (i), (ii) or (iii) above, which, singly or in the
aggregate, would not have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole. To the best of the Company's knowledge, no collective bargaining
organizing activities are taking place with respect to the Company or any of its
subsidiaries.
(aa) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(bb) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
SECTION 7. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any
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untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter or the Underwriters'
method of distributing the Shares furnished in writing to the Company by such
Underwriter through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter who failed to deliver a Prospectus,
as then amended or supplemented, (so long as the Prospectus and any amendments
or supplements thereto was provided by the Company to the several Underwriters
in the requisite quantity and on a timely basis to permit proper) to the person
asserting any losses, claims, damages, liabilities or judgments caused by any
untrue statement or alleged untrue statement of a material fact contained in
such preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, if such material misstatement or omission
or alleged material misstatement or omission was cured in the Prospectus, as so
amended or supplemented, and such Prospectus was required by law to be delivered
at or prior to the written confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to such Underwriter but
only with reference to information relating to such Underwriter or the
Underwriters' method of distributing the Shares furnished in writing to the
Company by such Underwriter through you expressly for use in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party may assume the defense of such action, and in such
case employ counsel reasonably satisfactory to the indemnified party in
connection with such defense and shall be responsible for the payment of all
fees and expenses of such counsel, as incurred. Any indemnified party shall have
the
15
<PAGE> 16
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party unless (i) the employment of such counsel shall
have been specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified parties
and all such fees and expenses shall be reimbursed as they are incurred. Such
firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, in the case of parties indemnified pursuant to Section 7(a), and by
the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is a party and indemnity or contribution may be sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the
16
<PAGE> 17
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause 7(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 7(d)(i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to
17
<PAGE> 18
contribute pursuant to this Section 7(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Jeremy R. Lent and John Hashman, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
respectively, confirming the matters set forth in Sections 8(a) and 8(b) and
that the Company has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 8(d)(i),
8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable
18
<PAGE> 19
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Howard, Rice, Nemerovski, Canady, Rabkin & Falk, A Professional Corporation
("Howard, Rice"), counsel for the Company, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with requisite corporate power and
authority to own its properties and conduct its business as described
in the Prospectus.
(ii) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of California.
(iii) other than as set forth or contemplated in the
Prospectus, to such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings, pending or threatened
against the Company or any of its properties or to which the Company is
or may be a party or to which any property of the Company is or may be
the subject which is required by the Securities Act to be so set forth.
(iv) to such counsel's knowledge, there are no material
contracts that are required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement that are not described therein or filed as exhibits thereto.
(v) this Agreement has been duly authorized, executed and
delivered by the Company.
(vi) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus.
(vii) the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be sold by the Company have been
duly authorized and are validly issued, fully paid and nonassessable.
(viii) the Shares to be issued and sold by the Company under
this Agreement have been duly authorized, and when delivered to and
paid for by the Underwriters in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable and the
issuance of the shares is not subject to any preemptive or similar
rights under the
19
<PAGE> 20
Certificate of Incorporation or Bylaws or under any agreement known to
such counsel.
(ix) the statements in the Prospectus under the captions
"Management--Employee Benefit Plans," "Certain Transactions,"
"Description of Capital Stock," "Shares Eligible for Future Sale" and
in Part II of the Registration Statement in Items 14 and 15, insofar as
such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents or proceedings.
(x) the Registration Statement and the Prospectus and any
amendments and supplements thereto (other than the financial statements
and related schedules and statistical data therein) comply as to form
in all material respects with the requirements of the Securities Act
and rules promulgated thereunder by the Commission.
(xi) the Company is not, nor with the giving of notice or
lapse of time or both will the Company be, in violation of or in
default under, its Certificate of incorporation or Bylaws, except for
violations and defaults which individually and in the aggregate are not
material to the Company and its subsidiaries taken as a whole; the
issue and sale of the Shares being delivered on the closing date, and
the performance by the Company of its obligations under this Agreement
and the consummation of the transactions contemplated therein in
accordance with the terms thereof do not result in a breach of any of
the terms or provisions of, or constitute a default under, any
agreement or instrument filed as an exhibit to the Registration
Statement, nor does any such action result in any violation of the
provisions of the Certificate of Incorporation or the Bylaws of the
Company or any Applicable Laws or any order of any court or
governmental agency in which the Company is a named party.
(xii) no consent, approval, authorization, order, license,
registration or qualification of or with any court or governmental
agency or body is required for the Company's issuance and sale of the
Shares or the consummation of the other transactions contemplated by
this Agreement, except such consents, approvals, authorizations,
orders, licenses, registrations or qualifications as have been obtained
under the Securities Act and as may be required under state securities
laws in connection with the purchase and distribution of the Shares by
the Underwriters.
(xiii) the Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or
entity
20
<PAGE> 21
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act of 1940, as amended; and
(xiv) (A) the Registration Statement and the Prospectus and
any supplement or amendment thereto (except for the financial
statements and other financial data included therein as to which no
opinion need be expressed) comply as to form with the Act, (B) such
counsel has no reason to believe that at the time the Registration
Statement became effective or on the date of this Agreement, the
Registration Statement and the prospectus included therein (except for
the financial statements and other financial data as to which such
counsel need not express any belief) contained any untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) such counsel has no reason to believe that the
Prospectus, as amended or supplemented, if applicable (except for the
financial statements and other financial data, as aforesaid) contains
any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
The opinion of Howard, Rice described in Section 8(e) above shall be
rendered to you at the request of the Company and shall so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Gunderson Dettmer, counsel for the Underwriters, as to the
matters referred to in Sections 8(e)(iv), 8(e)(vi), 8(e)(ix) (but only with
respect to the statements under the caption "Description of Capital Stock" and
"Underwriting") and 8(e)(xvii).
In giving such opinions with respect to the matters covered by Section
8(e)(xvii) counsel for the Company and counsel for the Underwriters may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
(g) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Ernst & Young, LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
21
<PAGE> 22
(h) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required to
be performed or complied with by the Company on or prior to the Closing Date.
(k) The Underwriters shall have received on the Closing Date an opinion
of Sidley & Austin, regulatory affairs counsel for the Company, dated the
Closing Date, to the effect that:
(i) Such counsel represents the Company in certain matters
relating to banking regulation.
(ii) Such counsel is familiar with the business of the Company
and has read the portions of the Registration Statement and the
Prospectus entitled "Risk Factors We may face increased governmental
regulation and legal uncertainties" and "Business Government
Regulation" (together, the "Regulatory Portion") and, in such counsel's
opinion, the Regulatory Portion, insofar as such statements constitute
descriptions of applicable banking statutes, laws, regulations or
proceedings, are accurate and complete in all material respects.
(iii) Such counsel has no reason to believe that the
information contained in the Regulatory Portion of the Registration
Statement or the Prospectus at the time if became effective contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statement
therein not misleading or that, at the Closing Date, the information
contained in the Regulatory Portion of the Prospectus or any amendment
or supplement to the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with
respect to the good standing of the Company, the due authorization and
issuance of such
22
<PAGE> 23
Additional Shares and other matters related to the issuance of such
Additional Shares.
SECTION 9. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on the option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters
23
<PAGE> 24
agreed but failed or refused to purchase is not more than one-tenth of the total
number of Firm Shares or Additional Shares, as the case may be, to be purchased
on such date by all Underwriters, each non-defaulting Underwriter shall be
obligated severally, in the proportion which the number of Firm Shares set forth
opposite its name in Schedule I bears to the total number of Firm Shares which
all the non-defaulting Underwriters have agreed to purchase, or in such other
proportion as you may specify, to purchase the Firm Shares or Additional Shares,
as the case may be, which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Firm Shares or Additional Shares, as the case may be, which any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 9 by an amount in excess of one-ninth of such number of
Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If on the Closing Date any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased by all
Underwriters and arrangements satisfactory to you and the Company for purchase
of such Firm Shares are not made within 48 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter and the Company. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 10. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
NextCard, Inc., 595 Market St., Suite 1800, San Francisco, CA 94015 Attn: John
Hashman and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the
24
<PAGE> 25
Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. Any party that is entitled to
indemnification as provided in Section 7 above, shall be entitled to
reimbursement of the indemnifying party of such indemnified party's fees and
expenses (including, without limitation, the fees disbursements of counsel
incurred by them in connection with enforcing their rights pursuant to Section 7
hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
25
<PAGE> 26
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
NextCard, Inc.
By: ______________________________
Jeremy R. Lent
Chief Executive Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By ______________________________
26
<PAGE> 27
SCHEDULE I
----------
Underwriters Number of Firm Shares
to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
Thomas Weisel Partners LLC
U.S. Bancorp Piper Jaffray Inc.
Total
<PAGE> 28
Annex I
[Insert names of stockholders of the Company who will be required to sign lock
ups]
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS OF
NEXTCARD, INC.
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of
NextCard, Inc. (hereafter called the "Corporation") in the State of Delaware
shall be at 1209 Orange Street, Wilmington, County of New Castle, and the name
of the registered agent at that address shall be CT Corporation System.
Section 1.02. Principal Office. The principal office for the
transaction of the business of the Corporation shall be in the State of
California at 595 Market Street, Suite 1800, San Francisco. The Board of
Directors (hereafter called the "Board") is hereby granted full power and
authority to change said principal office from one location to another.
Section 1.03. Other Offices. The Corporation may also have an
office or offices at such other place or places, either within or without the
State of Delaware, as the Board may from time to time determine or as the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Annual Meetings. Annual meetings of the
stockholders of the Corporation for the purpose of electing directors and for
the transaction of such other proper business as may come before such meetings
shall be held each year within 13 months of the previous annual meeting or, if
none, of the date of incorporation, on a specific date and at a time designated
by the Board.
Section 2.02. Special Meetings. Special meetings of the
stockholders for any purpose or purposes may only be called by a majority of the
Board of Directors or by the Chief Executive Officer. Unless otherwise
prescribed by statute, the Certificate of Incorporation or these Bylaws, special
meetings may not be called by any other person or persons. No business may be
transacted at any special meeting of stockholders other than such business as
has been properly brought before the meeting by or at the direction of the Board
of Directors.
Section 2.03. Place of Meetings. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
<PAGE> 2
Section 2.04. Notice of Meetings. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder of record entitled to vote at such
meeting by delivering a typewritten or printed notice thereof to him personally,
or by depositing such notice in the United States mail, in a postage prepaid
envelope, directed to him at his post office address furnished by him to the
Secretary of the Corporation for such purpose or, if he shall not have furnished
to the Secretary his address for such purpose, then at his post office address
last known to the Secretary, or by transmitting a notice thereof to him at such
address by telegraph, cable, or wireless. Except as otherwise expressly required
by law, no publication of any notice of a meeting of the stockholders shall be
required. Every notice of a meeting of the stockholders shall state the place,
date and hour of the meeting, and, in the case of a special meeting, shall also
state the purpose or purposes for which the meeting is called. Notice of any
meeting of stockholders shall not be required to be given to any stockholder who
shall have waived such notice and such notice shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of the stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
Section 2.05. Advance Notification of Director Nomination. Only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation at the annual meeting may be made at such
meeting by or at the direction of the Board of Directors, by any committee
appointed by the Board of Directors or by any common stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.05. Such
nominations, other than those made by or at the direction of the Board of
Directors or by any committee appointed by the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not later than the close of
business on the 60th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class, series and number of shares of
capital stock of the Corporation which are beneficially owned by the person and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to the
Rules and Regulations of the Securities and Exchange Commission under Section 14
of the Securities
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Exchange Act of 1934, as amended; and (b) as to the stockholder giving the
notice (i) the name and record address of the stockholder, (ii) the class,
series and number of shares of capital stock of the Corporation which are
beneficially owned by the stockholder and (iii) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder. Such notice shall
be accompanied by the executed consent of each nominee to serve as a director if
so elected. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a director of the
Corporation. No person shall be eligible for election as a director of the
Corporation by the holders of Common Stock of the Corporation unless nominated
in accordance with the procedures set forth herein. The officer of the
Corporation presiding at an annual meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the foregoing
procedure and, if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
Section 2.06. Advance Notification of Business to be Transacted
at Stockholder Meetings. To be properly brought before the annual meeting of
stockholders, business must be either (a) specified in the notice of meeting (or
any supplement or amendment thereto) given by or at the direction of the Board
of Directors or any committee appointed by the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before any annual meeting of stockholders by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder, and (iv) any material interest of the stockholder in
such business.
No business shall be conducted at the annual meeting of stockholders
unless it is properly brought before the meeting in accordance with the
procedures set forth in this Section 2.06, provided, however, that nothing in
this Section 2.06 shall be deemed to preclude discussion by any stockholder of
any business properly brought before the meeting in accordance with the
procedures set forth in this Section 2.06. The officer of the Corporation
presiding at the meeting
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shall, if the facts warrant, determine that business was not properly brought
before the meeting in accordance with the provisions of this Section 2.06 and,
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Section 2.07. Quorum. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority of the shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class. In the absence of a quorum at any meeting or any adjournment
thereof, a majority in voting interest of the stockholders present in person or
by proxy and entitled to vote thereat or, in the absence therefrom of all the
stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time. At any such adjourned
meeting at which a quorum is present any business may be transacted which might
have been transacted at the meeting as originally called. No business may be
transacted at a meeting in the absence of a quorum other than the adjournment of
such meeting, except that if a quorum is present at the commencement of a
meeting, business may be transacted until the meeting is adjourned even though
the withdrawal of stockholders results in less than a quorum.
Section 2.08. Voting.
(a) Each stockholder shall, at each meeting of the stockholders,
be entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 6.05 of these
Bylaws as the record date for the determination of stockholders entitled
to notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then
(a) at the close of business on the day next preceding the day on which
notice of the meeting shall be given or (b) if notice of the meeting
shall be waived, at the close of business on the day next preceding the
day on which the meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Nothing in this section shall be construed as limiting the right of
the Corporation to vote stock, including but not limited to its own stock, held
by it in a fiduciary capacity. Persons holding stock of the Corporation in a
fiduciary capacity shall be
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entitled to vote such stock. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Corporation he
shall have expressly empowered the pledgee to vote thereon, in which case only
the pledgee, or their proxy, may represent such stock and vote thereon. Stock
having voting power standing of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or with respect to which two or more
persons have the same fiduciary relationship, shall be voted in accordance with
the provisions of the General Corporation Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by his proxy appointed by an instrument in
writing, subscribed by such stockholder or by his attorney thereunto authorized
and delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date unless said proxy
shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the effect of
revoking the same unless he shall in writing so notify the secretary of the
meeting prior to the voting of the proxy. At any meeting of the stockholders all
matters, except as otherwise provided in the Certificate of Incorporation, in
these Bylaws or by law, shall be decided by the vote of a majority of the shares
present in person or by proxy and entitled to vote thereat and thereon, a quorum
being present. The vote at any meeting of the stockholders on any questions need
not be by ballot, unless so directed by the chairman of the meeting. On a vote
by ballot each ballot shall be signed by the stockholder voting, or by their
proxy, if there be such proxy, and it shall state the number of shares voted.
Section 2.09. List of Stockholders. The Secretary of the
Corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the duration thereof, and may be inspected by any stockholder who is
present.
Section 2.10. Judges. If at any meeting of the stockholders a
vote by written ballot shall be taken on any question, the chairman of such
meeting may appoint a judge or judges to act with respect to such vote. Each
judge so appointed shall first subscribe an oath faithfully to execute the
duties of a judge at such meeting with strict impartiality and according to the
best of their ability. Such judges shall decide upon the qualification of the
voters and shall report the number of shares represented at the meeting and
entitled to vote on such questions, shall conduct and accept the votes, and,
when the voting is completed, shall ascertain and report the number of shares
voted respectively for and against the question. Reports of judges shall be in
writing and subscribed and delivered by them to the Secretary of the
Corporation. The judges need not be stockholders of the Corporation, and any
officer of the Corporation may be a judge
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on any question other than a vote for or against a proposal in which he shall
have a material interest.
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Section 2.11. No Stockholder Action by Written Consent. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken by the stockholders of the Corporation must be effected at
a duly called annual or special meeting of such holders and may not be effected
by any consent in writing by such stockholder except that the preceding sentence
shall not apply prior to the consummation of an initial underwritten public
offering of the Corporation's stock that is registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. General Powers. The property, business and affairs
of the Corporation shall be managed by or under the direction of the Board.
Section 3.02. Number; Qualifications. The Board of Directors
shall consist of one or more members. The number of directors shall be as
determined from time to time by resolution of the Board of Directors. No
decrease in the authorized number of directors constituting the Board of
Directors shall shorten the term of any incumbent director. Directors need not
be stockholders of the Corporation.
Section 3.03. Election of Directors; Terms. The directors shall
be elected by the stockholders of the Corporation at each annual meeting of
stockholders, and at each election the persons receiving the greatest number of
votes, up to the number of directors then to be elected, shall be the persons
then elected. The election of directors is subject to any provisions contained
in the Certificate of Incorporation relating thereto. Cumulative voting shall
not apply for the election of directors. The directors shall be divided into
classes with terms by class as provided in the Certificate of Incorporation.
Section 3.04. Resignations. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary of
the Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
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Section 3.05. Removal. Except as otherwise provided for or fixed
by or pursuant to the provisions of the Certificate of Incorporation relating to
the rights of any class or series of stock having a preference over Common Stock
as to dividends or upon liquidation to elect directors under specified
circumstances, any director may be removed from office at any time, but only for
cause and only by the affirmative vote of the holder of 80% of the combined
voting power of the then outstanding shares of stock entitled to vote generally
inn the election of directors voting together as a single class.
Section 3.06. Vacancies. Subject to applicable laws and except as
otherwise provided for or fixed by or pursuant to the provisions of the
Certificate of Incorporation relating to the rights of any class or series of
stock having a preference over Common Stock as to dividends or upon liquidation
to elect directors under specified circumstances, newly created directorships
resulting from any increase in the number of directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or any other cause may be filled by the
Board of Directors (and not by the stockholders unless there are no directors
then in office), provided that a quorum is then in office and present, or by a
majority of the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. A director elected to fill a newly
created directorship or other vacancy shall hold office for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor has been elected and
qualified.
Section 3.07. Place of Meeting, Etc. The Board may hold any of
its meetings at such place or places within or without the State of Delaware as
the Board may from time to time by resolution designate or as shall be
designated by the person or persons calling the meeting or in the notice or a
waiver of notice of any such meeting. Directors may participate in any regular
or special meeting of the Board by means of conference telephone or similar
communications equipment pursuant to which all persons participating in the
meeting of the Board can hear each other, and such participation shall
constitute presence in person at such meeting.
Section 3.08. First Meeting. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
Section 3.09. Regular Meetings. Regular meetings of the Board
shall be held at least four times per year, at such times as the Board shall
from time to time by resolution determine. If any day fixed for a regular
meeting shall be a legal holiday at the place where the meeting is to be held,
then the meeting shall be held at the same hour and place on the next succeeding
business day not a legal holiday. Except as provided by law, notice of regular
meetings need not be given.
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Section 3.10. Special Meetings. Special meetings of the Board may
be called by the Chairman of the Board of Directors or the Chief Executive
Officer and shall be called by the Chief Executive or Secretary on the written
request of two directors. Notice of all special meetings of the Board shall be
given to each director at their address as it appears on the records of the
Corporation, as follows:
(a) by first-class mail, postage prepaid, deposited in the
United States mail in the city where the principal office of the Corporation is
located at least five (5) days before the date of such meeting; or
(b) by telegram, charges prepaid, such notice to be
delivered to the telegraph company in the city of the principal office of the
Corporation at least forty-eight (48) hours before the time of holding such
meeting; or
(c) by personal delivery at least twenty-four (24) hours
prior to the time of holding such meeting.
Such notice may be waived by any director and any meeting shall
be a legal meeting without notice having been given if all the directors shall
be present thereat or if those not present shall, either before or after the
meeting, sign a written waiver of notice of, or a consent to, such meeting or
shall after the meeting sign the approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or be
made a part of the minutes of the meeting.
Section 3.11. Quorum and Manner of Acting. Except as otherwise
provided in the Certificate of Incorporation or these Bylaws or by law, the
presence of a majority of the total number of directors then in office shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board. Except as otherwise provided in the Certificate of Incorporation
or these Bylaws or by law, all matters shall be decided at any such meeting, a
quorum being present, by the affirmative votes of a majority of the directors
present. In the absence of a quorum, a majority of directors present at any
meeting may adjourn the same from time to time until a quorum shall be present.
Notice of any adjourned meeting need not be given. The directors shall act only
as a Board, and the individual directors shall have no power as such.
Section 3.12. Action by Consent. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.13. Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse each
such director for any expense incurred by him on account of their attendance at
any meetings of the Board or Committees of the Board. Neither the payment of
such compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Corporation or its subsidiaries in any
other capacity and
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receiving compensation therefor.
Section 3.14. Executive Committee. There may be an Executive
Committee of two or more directors appointed by the Board, who may meet at
stated times, or in notice to all by any of their own number, during the
intervals between the meetings of the Board; they shall advise and aid the
officers of the Corporation in all matters concerning its interest and the
management of its business, and generally perform such duties and exercise such
powers as may be directed or delegated by the Board from time to time. The Board
of Directors may also designate, if it desires, other directors as alternate
members who may replace any absent or disqualified member of the Executive
Committee at any meeting thereof. To the full extent permitted by law, the Board
may delegate to such committee authority to exercise all the powers of the Board
while the Board is not in session. Vacancies in the membership of the committee
shall be filled by the Board at a regular meeting or at a special meeting for
that purpose. In the absence or disqualification of any member of the Executive
Committee and any alternate member in their place, the member or members of the
Executive Committee present at the meeting and not disqualified from voting,
whether or not he or she or they constitute a quorum, may, by unanimous vote,
appoint another member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member. The Executive Committee shall keep
written minutes of its meeting and report the same to the Board when required.
The provisions of Sections 3.09, 3.10, 3.11 and 3.12 of these Bylaws shall
apply, mutatis mutandis, to any Executive Committee of the Board.
Section 3.15. Other Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more other committees,
each such committee to consist of one or more of the directors of the
Corporation. The Board of Directors may also designate, if it desires, other
directors as alternate members who may replace any absent or disqualified member
of any such committee at any meeting thereof. To the full extent permitted by
law, any such committee shall have and may exercise such powers and authority as
the Board may designate in such resolution. Vacancies in the membership of a
committee shall be filled by the Board at a regular meeting or a special meeting
for that purpose. Any such committee shall keep written minutes of its meeting
and report the same to the Board when required. In the absence or
disqualification of any member of any such committee and any alternate member or
members of any such committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may, by unanimous
vote, appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member. The provisions of Sections 3.09,
3.10, 3.11 and 3.12 of these Bylaws shall apply, mutatis mutandis, to any such
committee of the Board.
ARTICLE IV
OFFICERS
Section 4.01. Number. The officers of the corporation shall be a
Chairman of the Board, a Chief Executive Officer or a President, or any two or
all three, Chief Financial Officer and a Secretary. The Board may also elect one
or more Vice Presidents and Assistant
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Secretaries. A person may hold more than one office providing the duties thereof
can be consistently performed by the same person.
Section 4.02. Other Officers. The Board may appoint such other
officers as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4.03. Election. Each of the officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 4.02 or Section 4.04 of this Article, shall be chosen annually by the
Board and shall hold their office until he or she shall resign or shall be
removed or otherwise disqualified to serve, or their successor shall be elected
and qualified.
Section 4.04. Removal; Vacancies. Subject to the express
provisions of a contract authorized by the Board, any officer may be removed,
either with or without cause, at any time by the Board or by any officer upon
whom such power of removal may be conferred by the Board. Any vacancy occurring
in any office of the Corporation shall be filled by the Board.
Section 4.05. The Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the stockholders and directors and shall
have such other powers and duties as may be prescribed by the Board or by
applicable law. The Chairman shall be an ex-officio member of standing
committees, if so provided in the resolutions of the Board appointing the
members of such committees.
Section 4.06. Chief Executive Officer. The Chief Executive
Officer shall be the managing officer of the Corporation. Subject to the control
of the Board, the Chief Executive Officer shall have general supervision,
control and management of the affairs and business of the Corporation, and
general charge and supervision of all officers, agents and employees of the
Corporation; shall see that all orders and resolutions of the Board are carried
into effect; shall, in the absence of the Chairman of the Board, preside at all
meetings of the stockholders and Board; and in general shall exercise all powers
and perform all duties incident to Chief Executive Officer and managing officer
of the Corporation and such other powers and duties as may from time to time be
assigned to the Chief Executive Officer by the Board or as may be prescribed in
these Bylaws.
Section 4.07. The President. The President shall direct the
day-to-day affairs and business of the Corporation and shall report to the Chief
Executive Officer. In the absence of the Chief Executive Officer or in the event
of such officer's inability or refusal to act, the President shall perform the
duties of the Chief Executive Officer, and when so acting, shall have all the
powers of and be subject to all restrictions upon the Chief Executive Officer.
The President shall perform such other duties and have such other powers as may
from time to time be assigned to the President by the Board or as may be
prescribed in these Bylaws.
Section 4.08. The Vice Presidents. In the absence of the
President or in the event or their inability or refusal to act, the Vice
President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated, or in the absence of any designation, then
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in the order of their election) shall perform the duties of the President, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. The Vice Presidents shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
Section 4.09. The Secretary. The Secretary shall attend all
meetings of the Board and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board in a book to be
kept for that purpose and shall perform like duties for the standing and special
committees of the Board when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board, and shall perform such other duties as may be prescribed by the Board or
President, under whose supervision the Secretary shall act. The Secretary shall
have custody of the corporate seal of the Corporation and shall have authority
to affix the same to any instrument requiring it and, when so affixed, it may be
attested by the Secretary's signature. The Board may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by such officer's signature.
The assistant secretary, if there is one, shall, in the absence
of the Secretary or in the event of the Secretary's inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
Section 4.10. The Chief Financial Officer. The Chief Financial
Officer shall have the custody of the corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may be
designated by the Board.
The Chief Financial Officer shall disburse the funds of the
Corporation as may be ordered by the Board, making proper vouchers for such
disbursements, and shall render to the President and the Board, at its regular
meetings, or when the Board so requires, an account of all the transactions of
the Chief Financial Officer and of the financial condition of the Corporation.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01. Checks, Drafts, Etc. All checks, drafts or other
orders for payment of money, notes or other evidence of indebtedness payable by
the Corporation and all contracts or agreements shall be signed by such person
or persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person or persons shall give such bond, if
any, as the Board may require.
Section 5.02. Deposits. All funds of the Corporation not
otherwise employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
may select, or as may be selected by any officer or
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officers, assistant or assistants, agent or agents, or attorney or attorneys of
the Corporation to whom such power shall have been delegated by the Board. For
the purpose of deposit and for the purpose of collection for the account of the
Corporation, the Chief Executive Officer, President, any Vice President or the
Chief Financial Officer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
Section 5.03. General and Special Bank Accounts. The Board may
from time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01. Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by such person. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman, Chief Executive Officer, President or a Vice President, and by the
Secretary or the Chief Financial Officer, or any Assistant Secretary or Chief
Financial Officer. Any or all of the signatures on the certificates may be a
facsimile. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon, any such certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, such certificate may nevertheless be issued by the Corporation with
the same effect as though the person who signed such certificate, or whose
facsimile signature shall have been placed thereupon, were such officer,
transfer agent or registrar at the date of issue. A record shall be kept of the
respective names of the persons, firms or corporations owning the stock
represented by such certificates, the number and class of shares represented by
such certificates, respectively, and the respective dates thereof, and in case
of cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be cancelled, and
no new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so cancelled, except
in cases provided for in Section 6.04.
Section 6.02. Transfers of Stock. Transfers of shares of stock of
the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by their attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.03, and upon surrender of
the certificate or certificates for such shares properly endorsed and the
payment of
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<PAGE> 14
all taxes thereon. The person in whose name shares of stock stand on the books
of the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, such fact shall be so expressed in the entry of
transfer if, when the certificate or certificates shall be presented to the
Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
Section 6.03. Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
Section 6.04. Lost, Stolen, Destroyed, and Mutilated
Certificates. In any case of loss, theft, destruction or mutilation of any
certificate of stock, another may be issued in its place upon proof of such
loss, theft, destruction or mutilation and upon the giving of a bond of
indemnity to the Corporation in such form and in such sum as the Board may
direct; provided, however, that a new certificate may be issued without
requiring any bond when, in the judgment of the Board, it is proper so to do.
Section 6.05. Fixing Date for Determination of Stockholders of
Record. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action except for consenting to corporate action in
writing without a meeting, the Board of Directors may fix a record date, which
shall not precede the date the resolution fixing the record date is adopted and
which record date shall not be more than 60 nor less than 10 days before the
date of any meeting of stockholders, nor more than 60 days prior to the time for
such other action as herein before described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held and, for determining stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or to exercise any rights in respect of any change, conversion or
exchange of stock or any other lawful action except for consenting to corporate
action in writing without a meeting, the record date shall be the close of
business on the day on which the Board of Directors adopts a resolution relating
thereto.
For purposes of determining the stockholders entitled to consent
to corporate action in writing without a meeting, the Board of Directors may fix
a record date, which shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than 10 days after the date upon which the resolution fixing
the record date is adopted, as of which shall be determined the stockholders of
14
<PAGE> 15
record entitled to consent to corporate action in writing without a meeting. If
no record date has been fixed by the Board of Directors and no prior action by
the Board of Directors is required by the Delaware General Corporation Law, the
record date shall be the first date on which a signed written consent setting
forth the action taken or proposed to be taken is delivered to the Corporation
in the manner prescribed in Section 2.09 hereof. If no record date has been
fixed by the Board of Directors and prior action by the Board of Directors is
required by the Delaware General Corporation Law with respect to the proposed
action, the record date for determining stockholders entitled to consent to
corporate action in writing shall be the close of business on the day in which
the Board of Directors adopts the resolutions taking such prior action.
ARTICLE VII
INDEMNIFICATION
Section 7.01. Indemnification of Officers, Directors, Employees
and Agents; Insurance.
(a) Right to Indemnification. Each person who was or is
made a party or is threatened to be made a party to or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that except as provided in paragraph (c)
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized or is subsequently ratified by the board of directors of
the Corporation.
(b) Right to Advancement of Expenses. The right to
indemnification conferred in paragraph (a) of this Section shall include the
right to be paid by the Corporation the expenses incurred in defending any
proceeding for which such right to indemnification is applicable in advance of
its final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires, an advancement
of expenses incurred by an indemnitee in their capacity as a director or officer
(and not in any other
15
<PAGE> 16
capacity in which service was or is rendered by such indemnitee, including,
without limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise.
(c) Right of Indemnitee to Bring Suit. The rights to
indemnification and to the advancement of expenses conferred in paragraphs (a)
and (b) of this Section shall be a contract between the Corporation and each
director or officer of the Corporation who serves or served in such capacity at
any time while this Article VII is in effect. Any repeal or modification of this
Article VII or any repeal or modification of relevant provisions of the Delaware
General Corporation Law or any other applicable laws shall not in any way
diminish any rights to indemnification of such director or officer or the
obligations of the Corporation hereunder. If a claim under paragraph (a) or (b)
of this Section is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its board of
directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section or otherwise shall be on the
Corporation.
(d) Non-Exclusivity of Rights. The rights to
indemnification and to the advancement of expenses conferred in this Section
shall not be exclusive of any other right which any person may have or hereafter
acquire under any statute, the Corporation's certificate of incorporation,
by-law, agreement, vote of stockholders or disinterested directors or otherwise.
16
<PAGE> 17
(e) Insurance. The Corporation may maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law, provided that such
insurance is available on acceptable terms, which determination shall be made by
the Board of Directors or by a committee thereof.
(f) Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent and in accordance with the terms
authorized from time to time by the board of directors, grant rights to
indemnification, and to the advancement of expenses to any employee or agent of
the Corporation to the fullest extent of the provisions of this Section with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
(g) References to "the Corporation". For purposes of this
Section, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Section
with respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had continued.
(h) References to "Serving at the Request of the
Corporation". For purposes of this Section, references to "serving at the
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to an
employee benefit plan, its participants or beneficiaries; and a person who acted
in good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in the Delaware General Corporation Law.
(i) Amendment of Delaware General Corporation Law.
Notwithstanding anything else in this Article VII, in the event that the express
provisions of the Delaware General Corporation Law relating to indemnification
of, or advancement of expenses by the Corporation to, persons eligible for
indemnification or advancement of expenses under this Article VII are amended to
permit broader indemnification or advancement of expenses, then the Corporation
will provide such indemnification and advancement of expenses to the maximum
extent permitted by the Delaware General Corporation Law.
(j) Effect of Invalidity. If this Article VII or any
portion hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall
17
<PAGE> 18
nevertheless indemnify each indemnitee of the Corporation as to costs, charges
and expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable portion
of this Article VII that shall not have been invalidated and to the full extent
permitted by applicable law.
(k) Possible Effect of California Law. Notwithstanding
anything else in this Article VII, at any and all times at which the Corporation
is subject to the provisions of the California Corporations Code by virtue of
the operation of Section 2115 thereof or otherwise, the indemnification and
advancement of expenses provided by, or granted pursuant to, this Article VII
shall be in all respects limited by the provisions of the California
Corporations Code made applicable by such Section 2115 (or such other provision
of California law).
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Seal. The Board shall provide a corporate seal,
which shall be in the form of a circle and shall bear the name of the
Corporation and words and figures showing that the Corporation was incorporated
in the State of Delaware and the year of incorporation.
Section 8.02. Waiver of Notices. Whenever notice is required to
be given by these Bylaws or the Certificate of Incorporation or by law, the
person entitled to said notice may waive such notice in writing, either before
or after the time stated therein, and such waiver shall be deemed equivalent to
notice.
Section 8.03. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board.
Section 8.04. Amendments. Subject to the provisions of the
Certificate of Incorporation, these Bylaws and applicable law, these Bylaws or
any of them may be amended or repealed and new Bylaws may be adopted (a) by the
Board, by vote of a majority of the number of directors then in office or (b) by
the vote of the holders of in excess of 50% of the total voting power of all
outstanding shares of voting stock of the Corporation at a meeting of
stockholders; provided that such action may be taken at a special meeting of the
Board or stockholders only if notice of such proposed amendment, repeal or
adoption is given in the notice of special meeting. Subject to the provisions of
the Certificate of Incorporation, any Bylaws adopted or amended by the
stockholders may be amended or repealed by the Board or the stockholders.
Section 8.05. Voting Stock. Any person so authorized by the
Board, and in the absence of such authorization, the Chairman of the Board, the
Chief Executive Officer, the President or any Vice President, shall have full
power and authority on behalf of the Corporation to attend and to act and vote
at any meeting of the stockholders of any corporation in which the Corporation
may hold stock and at any such meeting shall possess and may exercise any and
all
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<PAGE> 19
rights and powers which are incident to the ownership of such stock and which as
the owner thereof the Corporation might have possessed and exercised if present.
The Board by resolution from time to time may confer like powers upon any other
person or persons.
19
<PAGE> 1
[HOWARD RICE LETTERHEAD]
May 12, 1999
NextCard, Inc.
595 Market Street, Suite 1800
San Francisco, CA 94105
Re: 5,000,000 SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE
Ladies and Gentlemen:
You have requested our opinion of counsel for NextCard, Inc., a
Delaware corporation (the "Company"), in connection with the registration
statement on Form S-1 (together with all amendments and exhibits thereto, the
"Registration Statement") filed with the Securities and Exchange Commission
with respect to the registration under the Securities Act of 1933, as amended
(the "Securities Act"), of 5,000,000 shares of Common Stock of the Company
(the "Offered Shares").
We have examined originals or copies certified or otherwise identified
to our satisfaction as authentic copies of the Registration Statement, the
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Company, resolutions and unanimous written consents of the
Board of Directors of the Company, certificates of one or more officers of
the Company, and such other corporate records of the Company and other
documents of which we are aware as we considered necessary for purposes of
enabling us to render the opinion set forth below.
In connection with this opinion we have assumed the following: (a) the
authenticity of original documents and the genuineness of all signatures;
(b)the conformity to the originals of all documents submitted to us as
copies; and (c) the truth, accuracy and completeness of the information,
representations and warranties contained in the instruments, documents,
records and certificates we have reviewed.
As to matters of fact material to our opinions, we have relied on our
review of the documents referred to above and statements made to us by
officers of the Company. We have not independently verified any factual
matters or any assumptions made by us in this letter and disclaim any
inference as to the reasonableness of any such assumption.
Based upon the foregoing and subject to the exceptions, qualifications
<PAGE> 2
and limitations set forth hereinafter, we are of the opinion that upon the
issuance and sale of the Offered Shares in accordance with the terms of the
Registration Statement, the Offered Shares will be legally issued, fully paid
and non-assessable.
We are members of the bar of the State of California and are not admitted
to practice in any other jurisdiction. The opinions set forth above are limited
in all respects to matters governed by the federal laws of the United States of
America and the General Corporation Law of the State of Delaware.
The opinion set forth herein is given as of the date hereof and is
expressly limited to the matters stated. No opinion is implied or may be
inferred beyond what is explicitly stated in this letter.
We are delivering this opinion to the Company to satisfy the
requirement of the Securities and Exchange Commission set forth in Item 601(a)
and Item 601(b)(5)(i) of Regulation S-K under the Securities Act. Copies of
this letter may not be circulated or furnished to any other person or entity,
and this letter may not be referred to in any report or document furnished to
any other person or entity, without our prior written consent.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
prospectus constituting part of the Registration Statement.
Very truly yours,
/s/ HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN
A Professional Corporation
<PAGE> 1
EXHIBIT 10.27
NEXTCARD, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the Company and
its Designated Subsidiaries with an opportunity to purchase Common Stock of the
Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean NextCard, Inc., a California corporation, and
any Designated Subsidiary of the Company. Following the merger of NextCard,
Inc., a California corporation ("NextCard California"), with and into NextCard,
Inc, a Delaware corporation ("NextCard Delaware"), with NextCard Delaware being
the surviving corporation, the term "Company" shall mean NextCard Delaware and
any Designated Subsidiary.
(e) "Compensation" shall mean all base straight time gross earnings and
commissions, exclusive of payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering Period.
(i) "Exercise Date" shall mean the last day of each Offering Period.
(j) "Fair Market Value" shall mean, as of any date, the value of Common
Stock determined as follows:
<PAGE> 2
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable, or;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Period" shall mean a period of approximately six (6)
months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after July 1 and terminating on the
last Trading Day in the period ending the following December 31, or commencing
on the first Trading Day on or after January 1 and terminating on the last
Trading Day in the period ending the following June 30; provided, however, that
the first Offering Period under the Plan shall commence with the first Trading
Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and end on the last
Trading Day on or before June 30, 1999. The duration of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean the NextCard, Inc. Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(n) "Reserves" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or foreign, of which
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
<PAGE> 3
(p) "Trading Day" shall mean a day on which national stock exchanges and
the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive Offering
Periods with a new Offering Period commencing on the first Trading Day on or
after July 1 and January 1 each year, or on such other date as the Board shall
determine, and continuing thereafter until terminated in accordance with Section
20 hereof; provided, however, that the first Offering Period under the Plan
shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the last Trading Day on or before June 30, 1999. The
Board shall have the power to change the duration of Offering Periods (including
the commencement dates thereof) with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not
<PAGE> 4
exceeding ten percent (10%) of the Compensation which he or she receives on each
pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during an
Offering Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at the
time some or all of the Company's Common Stock issued under the Plan is disposed
of, the participant must make adequate provision for the Company's federal,
state, or other tax withholding obligations, if any, which arise upon the
exercise of the option or the disposition of the Common Stock. At any time, the
Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that the Board of
Directors reserves the right to limit the number of shares that Employees may
purchase during any Offering Period, and provided further that such purchase
shall be subject to the limitations set forth in Section 3(b). Exercise of the
option shall occur as provided in Section 8 hereof, unless the participant has
withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day
of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as provided
in Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the
<PAGE> 5
Exercise Date, and the maximum number of full shares subject to option shall be
purchased for such participant at the applicable Purchase Price with the
accumulated payroll deductions in his or her account. No fractional shares shall
be purchased; any payroll deductions accumulated in a participant's account
which are not sufficient to purchase a full share shall be retained in the
participant's account for the subsequent Offering Period, subject to earlier
withdrawal by the participant as provided in Section 10 hereof. Any other monies
left over in a participant's account after the Exercise Date shall be returned
to the participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on which a
purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, the shares purchased upon exercise of his or her
option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an Employee
for any reason, he or she shall be deemed to have elected to withdraw from the
Plan and the payroll deductions credited to such participant's account during
the Offering Period but not yet used to exercise the option shall be returned to
such participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 15 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the Company
as provided in Section 19 hereof, the maximum number of shares of the Company's
Common Stock which shall
<PAGE> 6
be made available for sale under the Plan shall be 100,000 shares, plus an
annual increase to be added on the first day of the Company's fiscal year
beginning in 2000 equal to the lesser of (i) 0.5% of the outstanding shares on
such date or (ii) an amount determined by the Board. If, on a given Exercise
Date, the number of shares with respect to which options are to be exercised
exceeds the number of shares then available under the Plan, the Company shall
make a pro rata allocation of the shares remaining available for purchase in as
uniform a manner as shall be practicable and as it shall determine to be
equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a committee
of members of the Board appointed by the Board. The Board or its committee shall
have full and exclusive discretionary authority to construe, interpret and apply
the terms of the Plan, to determine eligibility and to adjudicate all disputed
claims filed under the Plan. Every finding, decision and determination made by
the Board or its committee shall, to the full extent permitted by law, be final
and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to an Exercise Date on
which the option is exercised but prior to delivery to such participant of such
shares and cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under the
Plan in the event of such participant's death prior to exercise of the option.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in Section 15 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company
<PAGE> 7
may treat such act as an election to withdraw funds from an Offering Period in
accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant in the
Plan. Statements of account shall be given to participating Employees at least
annually, which statements shall set forth the amounts of payroll deductions,
the Purchase Price, the number of shares purchased and the remaining cash
balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger
or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Offering Period then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date"), and shall
terminate immediately prior to the consummation of such proposed dissolution or
liquidation, unless provided otherwise by the Board. The New Exercise Date shall
be before the date of the Company's proposed dissolution or liquidation. The
Board shall notify each participant in writing, at least ten (10) business days
prior to the New Exercise Date, that the Exercise Date for the participant's
option has been changed to theNew Exercise Date and that the participant's
option shall be exercised automatically on the New Exercise Date, unless prior
to such date the participant has withdrawn from the Offering Period as provided
in Section 10 hereof.
(c) Merger or Asset Sale.In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall
<PAGE> 8
be shortened by setting a new Exercise Date (the "New Exercise Date"). The New
Exercise Date shall be before the date of the Company's proposed sale or merger.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and Section 20 hereof, no amendment may make any change in any
option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of the
Plan may result in unfavorable financial accounting consequences, the Board may,
in its discretion and, to the extent necessary or desirable, modify or amend the
Plan to reduce or eliminate such accounting consequence including, but not
limited to:
(i) altering the Purchase Price for any Offering Period including
an Offering Period underway at the time of the change in Purchase Price;
(ii) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(iii) allocating shares.
<PAGE> 9
Such modifications or amendments shall not require stockholder approval or the
consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect
to an option unless the exercise of such option and the issuance and delivery of
such shares pursuant thereto shall comply with all applicable provisions of law,
domestic or foreign, including, without limitation, the Securities Act of 1933,
as amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require the person
exercising such option to represent and warrant at the time of any such exercise
that the shares are being purchased only for investment and without any present
intention to sell or distribute such shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to occur of
its adoption by the Board of Directors or its approval by the stockholders of
the Company. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20 hereof.
24. Governing Law.The Plan shall be governed by the provisions of Delaware law,
except to the extent preempted by the provisions of federal law.
<PAGE> 10
EXHIBIT A
NEXTCARD, INC.
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: _______
_____ Change in Payroll Deduction Rate Dated: ___________
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the NextCard, Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase
Plan") and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock Purchase
Plan.
2. I hereby authorize payroll deductions from each paycheck in the
amount of ____% of my Compensation on each payday (from 1 to 10%) during the
Offering Period in accordance with the Employee Stock Purchase Plan. (Please
note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for
the purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I understand
that if I do not withdraw from an Offering Period, any accumulated payroll
deductions will be used to automatically exercise my option.
4. I have received a copy of the complete Employee Stock Purchase Plan.
I understand that my participation in the Employee Stock Purchase Plan is in all
respects subject to the terms of the Plan. I understand that my ability to
exercise the option under this Subscription Agreement is subject to stockholder
approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the Offering
Period during which I purchased such shares), I will be treated for federal
income tax purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value of the
shares at the time such shares were purchased by me over the price which I paid
for the shares. I hereby agree to notify the Company in writing within 30 days
after the date of any disposition of shares and I will make adequate provision
for Federal, state or other tax withholding obligations, if any, which arise
upon the disposition of the Common Stock. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to meet any
applicable
<PAGE> 11
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time after
the expiration of the 2-year holding period, I understand that I will be treated
for federal income tax purposes as having received income only at the time of
such disposition, and that such income will be taxed as ordinary income only to
the extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares, or (2) 15% of the fair market value of the shares
on the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock
Purchase Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan
NAME: (Please print)
---------------------------------------------------------
(First) (Middle) (Last)
---------------------------------------------------------
Relationship
---------------------------------------------------------
(Address)
Employee's Social Security Number: -------------------------------
Employee's Address:
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
- --------------------- --------------------------------------------
Signature of Employee Spouse's Signature (If beneficiary other
than spouse)
<PAGE> 12
EXHIBIT B
NEXTCARD, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the NextCard, Inc.
Employee Stock Purchase Plan which began on ___________, ______ (the "Enrollment
Date") hereby notifies the Company that he or she hereby withdraws from the
Offering Period. He or she hereby directs the Company to pay to the undersigned
as promptly as practicable all the payroll deductions credited to his or her
account with respect to such Offering Period. The undersigned understands and
agrees that his or her option for such Offering Period will be automatically
terminated. The undersigned understands further that no further payroll
deductions will be made for the purchase of shares in the current Offering
Period and the undersigned shall be eligible to participate in succeeding
Offering Periods only by delivering to the Company a new Subscription Agreement.
Name and Address of Participant:
- ------------------------------------
- ------------------------------------
- ------------------------------------
Signature:
- ------------------------------------
Date:
------------------------------
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 5, 1999, except as to Note 4, and Note 11, as
to which the date is May XX, 1999 in the Registration Statement (Form S-1 No.
333-74755) and related Prospectus of NextCard, Inc. and subsidiary for the
registration of 5,000,000 shares of its common stock.
San Francisco, California
May XX, 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon completion of the
restatement of capital accounts as described in Note 11 to the consolidated
financial statements.
/s/ ERNST & YOUNG LLP
San Francisco, California
May 10, 1999
