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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-91333
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PROSPECTUS
DECEMBER 10, 1999
NEXTCARD LOGO
8,000,000 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
SYMBOL & MARKET:
- - NXCD/Nasdaq National Market
LAST REPORTED SALE PRICE:
- - $35.9375
THE OFFERING:
- - We are offering 4,500,000 shares of our common stock, and the selling
stockholders identified in this prospectus are offering 3,500,000 shares of
our common stock.
- - The underwriters have an option to purchase an additional 900,000 shares from
NextCard and 300,000 shares
from selling stockholders to cover over-allotments.
- - We plan to use the net proceeds we receive from this offering for general
corporate purposes, including working capital, funding of credit card loan
receivables and further capitalization of NextBank, N.A.
- - Closing: December 14, 1999
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Per Share Total
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Public offering price: $35.9375 $287,500,000
Underwriting fees: 1.80 14,400,000
Proceeds to NextCard: 34.1375 153,618,750
Proceeds to selling stockholders: 34.1375 119,481,250
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DONALDSON, LUFKIN & JENRETTE GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL SECURITIES
U.S. BANCORP
PIPER JAFFRAY
DLJDIRECT INC.
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[Inside Cover of Prospectus]
[Picture of www.nextcard.com web page]
Apply Now!
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[Prospectus Gatefold]
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[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 offers Double Rewards Points offers
customized 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........ 17
Use of Proceeds..................... 18
Price Range of Common Stock......... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial
Data.............................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 23
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Business............................ 36
Management.......................... 53
Certain Transactions................ 62
Principal and Selling
Stockholders...................... 63
Description of Capital Stock........ 66
Shares Eligible for Future Sale..... 70
Underwriting........................ 71
Legal Matters....................... 73
Experts............................. 73
Additional Information.............. 74
Index to Consolidated Financial
Statements........................ F-1
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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 our 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 our common stock.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' option to purchase an additional 1,200,000 shares
of common stock.
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 remain
outstanding after the closing of this offering. Except as otherwise indicated,
all references to common stock and common shares include our nonvoting common
stock.
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NextCard is our registered trademark. This prospectus also contains
trademarks of other companies.
[INTENTIONALLY LEFT BLANK]
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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 us and our 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 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 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 credit cards 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 September 30, 1999, we had over $268.0
million in loan receivables outstanding, and had approximately 134,000 open
credit card accounts. We earn most of our revenue from the finance charges paid
by our customers based on their outstanding credit card balances. We also earn
revenue from the amounts paid through the Visa system for purchases made with
the NextCard Visa and from fees paid by our cardholders.
3
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THE OFFERING
Common stock offered by NextCard...... 4,500,000 shares
Common stock offered by selling
stockholders.......................... 3,500,000 shares
Common stock and nonvoting common
stock to be outstanding after the
offering............................ 50,701,517 shares
Use of proceeds....................... For general corporate purposes,
including working capital, funding
of credit card loan receivables and
further capitalization of NextBank,
N.A., our limited purpose bank
subsidiary. We will not receive any
of the proceeds from the sale of the
shares of our common stock being
offered by the selling stockholders.
See "Use of Proceeds."
Dividend policy....................... We do not anticipate paying cash
dividends in the foreseeable future.
Nasdaq National Market symbol......... NXCD
The outstanding share information is based on our shares outstanding as of
September 30, 1999. This information excludes:
- 13,235,616 shares reserved under our 1997 Stock Plan, of which 7,433,524
shares are subject to outstanding options at a weighted average exercise
price of $3.08 per share;
- 5,802,092 shares reserved for future option grants under our 1997 Stock
Plan; and
- warrants to purchase 1,023,621 shares at a weighted average price of
$1.28 per share.
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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NINE MONTHS ENDED
PERIOD FROM YEAR ENDED SEPTEMBER 30,
JUNE 5, 1996 (INCEPTION) DECEMBER 31, ------------------
TO DECEMBER 31, 1997 1998 1998 1999
(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS:
Interest income................................... $ 93 $ 502 $ 228 $ 10,577
Interest expense.................................. -- 62 48 5,762
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Net interest income............................... 93 440 180 4,815
Provision for loan losses......................... -- -- -- 5,227
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Net interest income (loss) after provision for
loan losses..................................... 93 440 180 (412)
Non-interest income............................... -- 697 306 2,089
Non-interest expenses............................. 1,977 17,199 9,731 54,121
Provision for income taxes........................ 2 2 -- --
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Net loss.......................................... $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted net loss per share.............. $ (1.08) $ (5.07) $ (3.03) $ (2.11)
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Weighted-average shares of common stock
outstanding used in computing basic and diluted
net loss per share(1)........................... 1,747 3,166 3,050 24,809
Pro forma basic and diluted net loss per share
(unaudited)..................................... -- -- -- $ (1.28)
========
Shares used in computing pro forma basic and
diluted net loss per share(1) (unaudited)....... -- -- -- 41,001
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER
MANAGEMENT(2):
Total credit card receivables outstanding......... -- $ 66,042 $35,334 $268,014
Total number of open credit card accounts......... -- 40 19 134
Total revenue: interest income and non-interest
income.......................................... -- $ 1,199 $ 534 $ 12,666
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AS OF SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED(3)
(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 99,534 $252,653
Credit card loan receivables, net of allowance for loan
losses.................................................... 261,836 261,836
Total assets................................................ 388,906 542,025
Secured borrowings.......................................... 229,129 229,129
Total liabilities........................................... 264,284 264,284
Total stockholders' equity.................................. 124,622 277,741
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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) For the periods ending September 30, 1998 and December 31, 1998, assets
under management represented all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage Bank of Commerce's
balance sheet. For the periods ending March 31, 1999 and June 30, 1999,
assets under management represented all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage Bank of
Commerce's and our balance sheets. As of September 30, 1999, assets under
management represent all credit card loan receivables generated under the
NextCard Visa and outstanding on our balance sheet.
(3) Adjusted to reflect the sale of 4,500,000 shares of common stock offered in
this offering at a public offering price of $35.9375 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses payable by us and the application of our estimated net proceeds
from the offering. See "Capitalization."
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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 $52.4 million for the nine months ended September 30, 1999. As of September
30, 1999, we had an accumulated deficit of $70.4 million. To date, we have not
achieved profitability and we expect to incur significant and increasing net
losses for at least the next three years. We intend to continue to invest
significantly in marketing, operations, technology and the development of
statistical analyses. As a result, we will need to generate significant revenue
to achieve profitability. We cannot be certain that we will be able either to
maintain our recent revenue growth rates or to generate adequate revenue 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 forecast of 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 revenue. Our ability to accurately forecast our
revenue is limited. If our revenue does not meet our internally developed
projections, our net losses will be even greater than we anticipate and our
business, operating results and financial condition may be materially and
adversely affected.
OUR UNSEASONED CREDIT CARD PORTFOLIO MAKES OUR PREDICTION OF DELINQUENCY
AND LOSS LEVELS DIFFICULT.
As of September 30, 1999, approximately 75% of our credit card balances
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 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."
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WE MAY BE UNABLE TO RETAIN CUSTOMERS WHEN WE INCREASE THEIR INTRODUCTORY OR
FIXED INTEREST RATES.
To attract new customers, we have offered and may continue to offer low
introductory interest rates that increase after expiration of the introductory
period. In addition, we offer fixed rate products that may increase if customers
fail to pay their credit card bills on a timely, consistent basis. Given our
limited operating history, we do not know what percentage of our customers will
continue to use their NextCard Visa after they are repriced. If fewer customers
than we expect continue to use their NextCard Visa after they are repriced, 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 these consumers.
Therefore, we may encounter difficulties managing the expected delinquencies and
losses and appropriately pricing 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 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 cardholder payment defaults or other unfavorable
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, which
could increase our delinquencies and losses. See "Business -- Underwriting and
Credit Management."
FLUCTUATIONS IN OUR QUARTERLY REVENUE 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,
the timing of payments of our cardholders and the volume of NextCard Visa
purchases. Variations of these factors could affect our quarterly revenue. 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 of 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;
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- 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;
- our ability to securitize credit card loan receivables and the timing of
such securitizations;
- 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,
including our recently announced agreement with Amazon.com, L.L.C.; 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 to us 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. Our failure 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, the equity securities may have
rights, preferences or privileges senior to those of our common stock.
WE MAY BE UNABLE TO SATISFACTORILY FUND OUR LOAN PORTFOLIO.
Our primary source of funding is the securitization of our credit card loan
portfolio through commercial paper conduit facilities. We currently fund our
loan portfolio through the following commercial paper conduit facilities: a
$300.0 million facility arranged by Barclays Bank PLC, a $150.0 million facility
arranged by ING Barings (U.S.) Capital Markets LLC and a $220.0 million facility
established November 12, 1999 with First Union Securities, Inc. As of September
30, 1999, $229.1 million was outstanding under the Barclays Bank facility and
there was no amount outstanding under the ING Barings facility.
Securitization transactions involve the sale of beneficial interests in
credit card loan balances. Until now, we have completed securitization
transactions on terms that we believe are favorable. The availability of
securitization funding, however, depends on the difficulty and expense of the
funding. Securitizations can be affected by many factors, such as whether a
third party will be willing to provide credit enhancement and the rates at which
cardholders have repaid their balances in the past. In addition, legal,
regulatory, accounting and tax changes can make securitization funding more
difficult, more expensive or unavailable on any terms. Securitizations may not
always offer us attractive funding, and we may have to seek other more expensive
funding sources in the future. In general, the amount, type and cost of our
financing affect our financial results. Changes within our organization and
changes in the activities of parties with which we have agreements or
understandings could all make the financings available to us more difficult,
more expensive or unavailable on any terms.
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With the acquisition of NextBank, our funding strategy includes the ability
to fund a portion of our loan portfolio through short-term deposits solicited
and 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 could have an adverse
effect on our operating results and financial condition.
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.
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 could cause traffic to strain
our website'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 these increases in a timely manner.
Our systems and operations also are vulnerable to damage or interruption
from human error, natural disasters, power losses, 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 interruptions or delays in
our entire operation. 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. We also depend, directly and indirectly, on
other key third party vendors to provide essential services. 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. Any interruption, deterioration or termination in
these third-party services could be disruptive to our business and harm our
results of operations and financial condition. See "Business --
Operations -- Key Outside Relationships."
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
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past experienced, and we expect to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
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
September 30, 1999, we grew from approximately 18 to 244 employees, and our
loans under management increased from $0 to $268.0 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
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 brand names, such as Visa or MasterCard, than
to the identity of the issuer. The Internet may change 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 and 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.
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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
financial products and services is at an early stage and is subject to a high
level of uncertainty. Although our long-term vision is to redefine the banking
experience for the Internet consumer, presently we offer only a single product,
the NextCard credit card. 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. The recently enacted Gramm-Leach-Bliley Act of 1999, which permits
the affiliation of commercial banks, insurance companies and securities firms,
may increase the level of competition in the financial services market,
including the credit card business. We operate in this 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. In addition, 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. Existing Internet providers and new
Internet entrants may launch new websites using commercially available software.
In addition, companies that provide alternate online payment methods, such as
debit card and micropayment offerings, may compete for our business. 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
11
<PAGE> 15
- 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 revenue is 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 revenue. At the same time, a significant portion of our outstanding
balances are at fixed rates and do not fluctuate with interest rate movements.
Our borrowing costs may also fluctuate based on general interest rate
fluctuations. A rise in our borrowing costs may not be met by a corresponding
increase in revenue generated by finance charges. Likewise, a decrease in
revenue 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 and adversely affect our results of operations and
financial condition. We may have to manage our interest rate risk through
interest rate hedging techniques. However, we currently do not use hedging
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 our products and
services. 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 and adversely affected.
12
<PAGE> 16
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 further enact laws regulating Internet
banking that address issues such as user privacy, pricing and the
characteristics and quality of products and services. For example, the
Gramm-Leach-Bliley Act of 1999 established new privacy requirements applicable
to all financial institutions. 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 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. NextBank, our wholly owned
subsidiary, is a limited purpose national credit card bank, and is subject to
regulation under federal banking laws and certain laws of California and other
states, as well as regulatory supervision by the Office of the Comptroller of
the Currency (OCC) and the FDIC. As an affiliate of NextBank, we are also
subject to oversight by the OCC and the 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 is subject to minimum capital, funding and leverage requirements
prescribed by federal statute and the OCC regulations and orders. If NextBank
fails to meet these regulatory capital requirements, NextBank will be subject to
additional restrictions that could have a material adverse effect on our ability
to conduct normal operations and possibly result in the seizure of NextBank by
government regulators under certain circumstances. Our ability to maintain or
increase NextBank's capital levels in the future will be subject to, among other
things, general economic conditions, our ability to raise new capital and our
ability and willingness to make additional capital contributions to NextBank or
a related institution. See "Business -- NextBank."
WE MAY FACE DIFFICULTIES PROTECTING AND ENFORCING OUR INTELLECTUAL PROPERTY
RIGHTS.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret and trademark laws as well as
confidentiality procedures and contractual provisions. However, any steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property. Any
such infringement or misappropriation could have a material adverse effect on
our business, results of operations and financial condition. In addition, we may
infringe upon the intellectual property rights of third parties, including third
party rights in patents that have not yet been issued. Any such infringement, or
alleged infringement, could have a material adverse effect on our business,
results of operations and financial condition.
We have filed three patent applications and have applied to register
several of our trademarks, both in the United States and abroad. 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
13
<PAGE> 17
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 subject to any limitations related to privacy such as those
contained in the Gramm-Leach-Bliley Act. 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 could, in turn, have a material adverse effect on our
business, results of operations and financial condition.
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 the 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 third party supplier could
materially adversely affect our business. Additionally, the Internet could face
serious disruptions arising from year 2000 issues.
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 year 2000 issues;
- 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."
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<PAGE> 18
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to be highly
volatile. 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 which differ from market
expectations;
- changes in financial estimates or ratings by securities analysts;
- changes in market valuations of Internet or financial services companies;
- fluctuations in interest rates;
- 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 addition, the Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. The trading prices of many
Internet companies' stocks are at or near historical highs and these trading
prices and multiples are substantially above historical levels. These trading
prices and multiples may not be sustainable. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance.
In the past, following periods of volatility in the market price of a
particular company's securities, stockholders have instituted securities class
action litigation against such company. Securities class action litigation may
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 our common stock in the public
market, could cause the market price of our common stock to decline by
potentially introducing a large number of sellers of our common stock into a
market in which the common stock price is already volatile. In addition, the
sale of these shares could impair our ability to raise capital through the sale
of additional equity securities. Upon completion of this offering, we will have
50,701,517 shares outstanding, or 51,601,517 shares if the underwriters' option
to purchase an additional 900,000 shares of common stock from us is exercised in
full, and 6,447,211 shares subject to currently exercisable options and
warrants. Approximately 37,912,133 shares of common stock were issued and sold
by us in private transactions and are restricted shares. These shares are
eligible for public sale if registered under the Securities Act or sold in
accordance with Rules 144 or 701 under the Securities Act. On November 10, 1999,
"lock-up" agreements applying to 37,667,021 shares executed in connection with
our initial public offering expired. We expect that, in connection with this
offering, our directors, executive officers, certain private equity funds and
selling stockholders will enter into lock-up agreements expiring 90 days from
the date of this prospectus covering approximately 26,528,135
15
<PAGE> 19
shares of our common stock (or approximately 28,107,615 shares, if options and
warrants exercisable during such 90-day period are included). Upon execution of
the 90-day lockup agreements, 8,987,101 restricted shares will be available for
sale in the public market, subject to certain limitations of Rule 144 of the
Securities Act. Beginning 90 days after the date of this prospectus, or earlier
with our consent and the consent of Donaldson, Lufkin & Jenrette Securities
Corporation and Goldman, Sachs & Co., all restricted shares will become
available for sale in the public market, subject to Rule 144 limitations. The
8,000,000 shares sold in this offering, or 9,200,000 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 our
"affiliates" as that term is defined in Rule 144 under the Securities Act.
Subject to our consent, Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co. may release all or any portion of the shares subject to
lock-up agreements prior to expiration of the lock-up period. See "Shares
Eligible for Future Sale."
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.
Following this offering, our executive officers, directors and 5% or
greater stockholders will own up to approximately 60% of our outstanding common
stock. As a result, they may 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, the 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 and Selling Stockholders."
CERTAIN ANTI-TAKEOVER PROVISIONS MAY DELAY, DEFER OR PREVENT A CHANGE IN
CONTROL.
Provisions of our Amended and Restated Certificate of Incorporation, our
Amended and Restated 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 the change was favored by our stockholders. See "Description
of Capital Stock."
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<PAGE> 20
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 changes in our expectations.
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<PAGE> 21
USE OF PROCEEDS
We estimate that the net proceeds we receive from the sale of the 4,500,000
shares of our common stock offered by us will be approximately $153.1 million,
after deducting estimated underwriting discounts and commissions and offering
expenses. We will not receive any of the proceeds from the sale of the shares of
our common stock being offered by the selling stockholders in this prospectus.
If the underwriters' option to purchase an additional 900,000 shares of common
stock from us is exercised in full, we estimate that our net proceeds will be
approximately $183.8 million.
We intend to use the net proceeds to us from this offering for general
corporate purposes, including working capital, funding of credit card loan
receivables and further capitalization of NextBank. Pending these uses, we
intend to invest the net proceeds in short-term, investment grade,
interest-bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- NextBank."
PRICE RANGE OF COMMON STOCK
Since our initial public offering on May 14, 1999, our common stock has
been traded on the Nasdaq National Market under the symbol "NXCD." The following
table sets forth, for the periods indicated, the high and low sales prices for
our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1999:
Second Quarter (from May 14)................................ $50.00 $22.00
Third Quarter............................................... 41.50 19.13
Fourth Quarter (through December 8, 1999)................... 53.13 22.81
</TABLE>
On December 8, 1999, the last reported sale price for our common stock on
the Nasdaq National Market was $35.9375 per share. As of December 8, 1999, there
were approximately 317 holders of record of our common stock.
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 September
30, 1999:
- on an actual basis; and
- as adjusted to reflect our receipt of the estimated net proceeds from our
sale of 4,500,000 shares of common stock in this offering at a public
offering price of $35.9375 per share (after deducting the underwriting
discounts and commissions and offering expenses) and the application of
our proceeds from this offering:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------
AS
ACTUAL ADJUSTED
<S> <C> <C>
Common stock and nonvoting common stock, 87,432,715 shares
authorized, 46,201,517 shares outstanding actual; 87,432,715
shares authorized, 50,701,517 shares outstanding as
adjusted.................................................... $ 46 $ 51
Notes receivable from officers.............................. (13) (13)
Additional paid-in capital.................................. 209,918 363,032
Deferred stock compensation................................. (14,935) (14,935)
Accumulated deficit......................................... (70,394) (70,394)
-------- --------
Total stockholders' equity........................ 124,622 277,741
-------- --------
Total capitalization.............................. $124,622 $277,741
======== ========
</TABLE>
The outstanding share information is based on our shares outstanding as of
September 30, 1999. The information excludes:
- 7,433,524 shares of common stock issuable upon exercise of options
outstanding on September 30, 1999, with a weighted average exercise price
of $3.08 per share;
- 5,802,092 shares of common stock reserved for issuance of ungranted
options under our 1997 Stock Plan; and
- 1,023,621 shares of common stock subject to outstanding warrants, with a
weighted average exercise price of $1.28 per share.
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<PAGE> 23
DILUTION
The actual net tangible book value as of September 30, 1999, was
approximately $119.6 million, or $2.59 per share of common stock. Net tangible
book value per share represents the amount of total assets, less intangible
assets and total liabilities, divided by the number of shares outstanding. After
giving effect to the issuance and sale of the 4,500,000 shares of common stock
offered by us at a public offering price of $35.94 per share and deducting
underwriting discounts and commissions and offering expenses payable by us, our
adjusted net tangible book value as of September 30, 1999, would have been
approximately $272.7 million, or $5.38 per share. This represents an immediate
increase in the net tangible book value of $2.79 per share to the existing
stockholders and an immediate and substantial dilution of $30.56 per share to
the new public investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $35.94
Net tangible book value per share at September 30, 1999..... $2.59
Increase per share attributable to new public
investors............................................. 2.79
-----
Pro forma net tangible book value per share after the
offering.................................................. 5.38
------
Dilution per share to new investors......................... $30.56
======
</TABLE>
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<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE 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 statements of
operations for the nine months ended September 30, 1998 and 1999 and the
consolidated balance sheet data at September 30, 1998 and 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 nine months ended September 30, 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 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Interest income:
Cash and cash equivalents................................. $ 93 $ 502 $ 228 $ 2,585
Credit card loan receivables.............................. -- -- -- 7,992
------- -------- ------- --------
Total interest income....................................... 93 502 228 10,577
Interest expense............................................ -- 62 48 5,762
------- -------- ------- --------
Net interest income......................................... 93 440 180 4,815
Provision for loan losses................................... -- -- -- 5,227
------- -------- ------- --------
Net interest income (loss) after provision for loan
losses.................................................... 93 440 180 (412)
------- -------- ------- --------
Non-interest income:
Servicing and profit and loss sharing..................... -- 662 301 341
Interchange fees.......................................... -- -- -- 1,130
Card fees and other....................................... -- 35 5 618
------- -------- ------- --------
Total non-interest income................................... -- 697 306 2,089
------- -------- ------- --------
Non-interest expenses:
Salaries and employee benefits............................ 1,495 6,730 4,262 15,322
Marketing and advertising................................. 50 4,324 2,201 16,364
Credit card activation and servicing costs................ 1 2,328 1,322 7,116
Occupancy and equipment................................... 137 958 602 2,656
Professional fees......................................... 167 520 167 1,106
Amortization of deferred stock compensation............... -- 1,800 867 7,096
Amortization of loan structuring fee...................... -- -- -- 2,967
Other..................................................... 127 539 310 1,494
------- -------- ------- --------
Total non-interest expenses................................. 1,977 17,199 9,731 54,121
------- -------- ------- --------
Loss before income taxes.................................... (1,884) (16,062) (9,245) (52,444)
Provision for income taxes.................................. 2 2 -- --
------- -------- ------- --------
Net loss.................................................... $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted net loss per share........................ $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Weighted average shares outstanding used in computing basic
and diluted net loss per share(1)......................... 1,747 3,166 3,050 24,809
======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... -- -- -- $ (1.28)
========
Shares used in computing pro forma basic and diluted net
loss per share(1) (unaudited)............................. -- -- -- 41,001
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(2):
Total credit card receivables outstanding................... -- $ 66,042 $35,334 $268,014
Total number of open credit card accounts................... -- 40 17 134
Total revenue: interest income and non-interest income...... -- $ 1,199 $ 534 $ 12,666
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,840 $40,134 $ 99,534
Credit card loan receivables, net of allowance for loan
losses.................................................... -- -- 261,836
Total assets................................................ 3,688 45,542 388,906
Secured borrowings.......................................... -- -- 229,129
Total liabilities........................................... 901 5,605 264,284
Total stockholders' equity.................................. 2,787 39,937 124,622
</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) For the periods ended September 30, 1998 and December 31, 1998, assets under
management represented all credit card loan receivables generated under the
NextCard Visa and outstanding on Heritage Bank of Commerce's balance sheet.
As of September 30, 1999, assets under management represent all credit card
loan receivables generated under the NextCard Visa and outstanding on our
balance sheet.
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<PAGE> 26
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 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 to 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 through our website,
www.nextcard.com. We have entered into marketing agreements with leading
websites on the Internet. We also have marketing relationships with
Internet-based affiliates, co-branded partners and affinity groups. For example,
in November 1999, we entered into a five year exclusive credit card marketing
agreement with Amazon.com, L.L.C. We offer our 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 (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 our formation, 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 September 30, 1999, we had 244
employees. From December 31, 1997 through September 30, 1999, we significantly
increased the new loans generated through our website as well as the total loans
under our 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
September 30, 1999, our loan receivables outstanding grew from $0 to $268.0
million. As of September 30, 1999, we had approximately 134,000 open credit card
accounts.
Since our inception, we have incurred significant losses. As of September
30, 1999, we had an accumulated deficit of $70.4 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 the rate and amount at which such losses will be
incurred may increase significantly from current levels. These expected costs
are related to advertising, marketing and other
23
<PAGE> 27
promotional activities; expansion of our direct marketing, database and testing
capabilities; expansion of our product offerings; and strategic relationship
development.
RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
EARNINGS SUMMARY
Net loss for the three months ended September 30, 1999, was $22.8 million,
or $0.50 per pro forma share, up 375% from $4.8 million for the three months
ended September 30, 1998. The increase in net loss is the result of increases in
interest expense, the provision for loan losses and non-interest expenses. These
increases were partially offset by increases in net interest income and non-
interest income. These increases are largely attributable to the growth in
average managed loans to $212.7 million for the three months ended September 30,
1999 from $20.7 million for the same period in 1998.
Net loss for the nine months ended September 30, 1999, was $52.4 million,
or $1.28 per pro forma share, up 470% from $9.2 million, for the nine months
ended September 30, 1998. The increase in net loss was the result of increases
in interest expense, the provision for loan losses and non-interest expenses.
These increases were partially offset by increases in net interest income and
non-interest income. These increases are largely attributable to the growth in
average managed loans to $142.8 million for the nine months ended September 30,
1999, from $9.5 million for the same period in 1998.
MANAGED LOAN PORTFOLIO
Until January 12, 1999, Heritage Bank of Commerce 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 charged
Heritage for origination and servicing of the accounts and shared 50% of the
resulting net profits or losses.
In January 1999, we terminated the Consumer Credit Card Program Agreement
and entered into an Account Origination Agreement with Heritage. We began
purchasing credit card receivables utilizing secured lending facilities extended
to our subsidiary, NextCard Funding Corp. Pursuant to the terms of our Account
Origination Agreement with Heritage, Heritage continued to fund newly originated
credit card receivables, which were then purchased on a daily basis by NextCard
Funding Corp. using borrowings from its secured lending facilities. The
purchased receivables were pledged as collateral for the secured lending
facilities. Heritage's obligation to establish new credit card accounts
terminated in October 1999.
Our managed loan portfolio is comprised of all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage's and our balance
sheets. On July 15, 1999, we exercised our option to purchase (through NextCard
Funding Corp.) all remaining credit card receivables from Heritage. The acquired
credit card portfolio had $21.3 million in outstanding balances. We financed the
acquisition with a combination of proceeds from one of our secured borrowing
facilities and operating cash. Prior to this purchase, since Heritage had funded
and owned a portion of the managed loan portfolio, that portion of the loan
portfolio was not an asset of ours, and therefore, was not shown on our
consolidated balance sheet.
On September 16, 1999, in connection with the acquisition and formation of
NextBank, N.A. (discussed below), we contributed all of the issued and
outstanding capital stock of NextCard
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<PAGE> 28
Funding Corp. to NextBank. As of that date, NextCard Funding Corp. became a
wholly owned subsidiary of NextBank, which is a wholly owned subsidiary of
NextCard.
The following table summarizes our managed loan portfolio:
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1999
(IN THOUSANDS)
<S> <C> <C>
PERIOD-END BALANCES
Credit card loans:
On-balance sheet................................. $ -- $268,014
Heritage owned................................... 35,334 --
------- --------
Total managed loan portfolio....................... $35,334 $268,014
======= ========
AVERAGE BALANCES
Credit card loans:
On-balance sheet................................. $ -- $117,060
Heritage owned................................... 9,492 25,780
------- --------
Total managed loan portfolio....................... $ 9,492 $142,840
======= ========
</TABLE>
On September 16, 1999, we acquired Textron National Bank, a wholly owned
indirect subsidiary of Textron Corporation, for $5.0 million over its net book
value. Textron had not actively engaged in the banking business for several
years, and on the acquisition date held $2.6 million of cash and cash
equivalents and a single deposit liability of approximately $540,000.
Immediately prior to the acquisition, Textron converted into a national bank
limited to credit card operations and changed its name to "NextBank, National
Association." In September 1999, NextBank became a member of the Visa system and
in October 1999 commenced the issuance of NextCard Visa cards.
NET INTEREST INCOME
Net interest income consists of interest earned on our credit card loan
portfolio, cash and cash equivalents less interest expense on borrowings to fund
these interest earning assets.
Net interest income for the three and nine months ended September 30, 1999,
was $3.6 million and $4.8 million, respectively, compared to $69,000 and
$180,000 for the same periods in 1998. These increases were primarily due to
$203.7 million and $117.1 million increases in on-balance sheet average loans
over the comparable three- and nine-month periods in 1998 and $109.0 million and
$70.5 million increases in average cash and cash equivalents over the comparable
three- and nine-month periods in 1998. The annualized net interest margin on
average earning assets for the three months ended September 30, 1999 was 4.5%
compared with 2.5% for the three months ended June 30, 1999. The net interest
margin for the three months ended September 30, 1999 was favorably affected by
the repricing of our credit card loan portfolio due to the expiration of the
introductory rate periods, introduction of fixed rate credit card products and a
lower cost of funds. The net interest margin for the three months ended
September 30, 1999 was negatively affected by $234,000 of loan fee amortization
expense related to $2.7 million of warrants paid to a finance company in 1999 in
connection with a financing transaction. This loan fee is being amortized over a
three-year period. The annualized net interest spread for the three months ended
September 30, 1999 was 1.2% compared with 1.1% for the three months ended June
30, 1999. The net interest spread is the annualized yield on average interest
earning assets minus the annualized funding rate on average interest bearing
liabilities. The net interest spread is expected to continue to improve as our
loan portfolio seasons; however, there can be no assurances that such spread
will improve.
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<PAGE> 29
The following tables provide an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data for the
three- and nine-month periods ended September 30, 1999.
STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
----------------------------- -----------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Consumer loans............. $203,652 $5,486 10.78% $117,060 $ 7,992 9.10%
Interest-earning cash.... 118,826 1,400 4.71 76,618 2,585 4.50
-------- ------ ------ -------- ------- ------
Total interest-earning
assets................... 322,478 6,886 8.54% 193,678 10,577 7.28%
Allowance for loan
losses................... (4,134) (2,154)
Other assets............... 20,943 13,247
-------- --------
Total assets............... $339,287 $204,771
======== ========
LIABILITIES AND EQUITY
Interest-bearing
liabilities:
Borrowings............... $177,754 $3,249 7.31% $100,858 $ 5,762 7.62%
Other liabilities.......... 26,236 17,504
-------- --------
Total liabilities.......... 203,990 118,362
Equity..................... 135,297 86,409
-------- --------
Total liabilities and
equity................... $339,287 $204,771
======== ========
NET INTEREST SPREAD........ 1.23% (0.34%)
====== ======
Interest income to average
interest-earning
assets................... 8.54% 7.28%
Interest expense to average
interest-earning
assets................... 4.03 3.97
------ ------
NET INTEREST MARGIN........ 4.51% 3.31%
====== ======
</TABLE>
NON-INTEREST INCOME
Interchange and other credit card fees consist of income from the Visa
system for purchases made with the NextCard Visa and fees paid by our
cardholders, such as late fees, overlimit fees and program fees. The income for
the three and nine months ended September 30, 1999, was $1.1 million and $1.7
million, respectively. Interchange and other credit card fees are expected to
continue to increase in the future as the credit card portfolio grows.
On July 15, 1999, we exercised our option to purchase all remaining credit
card receivables from Heritage. As a result, servicing and profit-and-loss
sharing income, consisting of amounts arising under the Consumer Credit Card
Program Agreement with Heritage for the three and nine months ended September
30, 1999 was $0 and $341,000, respectively, compared to $137,000 and $301,000
for the same periods in 1998.
26
<PAGE> 30
NON-INTEREST EXPENSES
Total non-interest expenses for the three and nine months ended September
30, 1999 were $24.4 million and $54.1 million, respectively, compared to $5.0
and $9.7 million for the same periods in 1998. These increases are primarily due
to higher employee compensation, credit card activation and servicing costs and
marketing expenses. Employee compensation increased due to staffing needs to
support the increase in credit card accounts and other functions. In addition,
the amortization of deferred stock compensation, which represents the difference
between the exercise price of certain stock option grants and the estimated fair
value of our common stock at the time of the grants, for the three and nine
months ended September 30, 1999, was $2.3 million and $7.1 million,
respectively. The increase in credit card activation and servicing costs was
largely due to an increase in the number of credit card accounts, transaction
volumes and loan balances. The increase in other expenses is primarily due to
general growth in the business and the building of an infrastructure to support
this growth.
ASSET QUALITY
Our delinquency and net loan charge-off rates reflect, among other factors,
the credit risk of loans, the average age of our credit card account portfolio,
the success of our collection and recovery efforts and general economic
conditions. Additionally, the credit risk of the loans is affected by the
underwriting criteria we utilize to approve customers. The average age of our
credit card portfolio affects the level and stability of delinquency and loss
rates of the portfolio. We continue to focus our resources on refining our
credit underwriting standards for new accounts, as well as on collections and
post charge-off recovery efforts, to minimize net losses. At September 30, 1999,
the majority of our loan portfolio was less than six months old. Accordingly, we
believe that our loan portfolio will experience increasing or fluctuating levels
of delinquency and loan losses as the average age of our accounts and balances
increases.
For the three months ended September 30, 1999, our managed net charge-off
ratio was 1.72% compared to 0.29% for the three months ended September 30, 1998.
For the nine months ended September 30, 1999, the managed net charge-off ratio
was 1.42% compared to 0.25% for the nine months ended September 30, 1998. We
believe, based on our statistical models and other credit analyses, that this
rate may continue to fluctuate but will generally rise over the next year as our
portfolio ages and becomes more seasoned.
Our primary strategy for managing loan losses is the development of
underwriting criteria and credit scoring algorithms to assess the
creditworthiness of new customers and provide conservative customer credit line
assignments. In addition, we monitor credit lines closely and have built a
collections department, as well as use outside parties, to pursue delinquent
customers. Under these strategies, interest rates and credit line assignments
are established for each credit card account based on its perceived risk
profile. Individual accounts and their related credit lines are also continually
managed using various marketing, credit and other management processes in order
to continue to maximize the profitability of accounts.
DELINQUENCIES
A credit card account is contractually delinquent if the minimum payment is
not received by the specified date on the cardholder's statement. It is our
policy to continue to accrue interest and fee income on all credit card
accounts, except in limited circumstances, until the account and all related
loans, interest and other fees are charged-off. Credit card loans are generally
charged off when the loan becomes contractually past due for 180 days, with the
exception of bankrupt accounts, which are
27
<PAGE> 31
charged off no later than the month after formal notification of bankruptcy. The
following table presents the delinquency trends of our credit card loan
portfolio on a managed portfolio basis.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
--------------------- ----------------------
LOANS % OF TOTAL LOANS % OF TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Managed loan portfolio....... $35,334 100.00% $268,014 100.00%
Loans delinquent:
31 - 60 days............... 139 0.39% 1,482 0.55%
61 - 90 days............... 38 0.11 677 0.25
91 or more................. 27 0.08 938 0.35
------- ------ -------- ------
Total........................ $ 204 0.58% $ 3,097 1.15%
======= ====== ======== ======
</TABLE>
NET CHARGE-OFFS
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude finance
charges and fees, which are charged against the related income at the time of
charge-off. Losses from new account fraud and fraudulent cardholder activity are
included in non-interest expense.
The following table presents our net charge-offs for the periods indicated
as reported in the consolidated financial statements and on a managed portfolio
basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ON-BALANCE SHEET:
Average loans outstanding..................... $ -- $203,652 $ -- $117,060
Net charge-offs............................... -- 915 -- 949
Net charge-offs as a percentage of average
loans outstanding........................... 0.00% 1.80% 0.00% 1.08%
MANAGED:
Average loans outstanding..................... $20,694 $212,659 $9,492 $142,840
Net charge-offs............................... 15 915 18 1,516
Net charge-offs as a percentage of average
loans outstanding........................... 0.29% 1.72% 0.25% 1.42%
</TABLE>
As our credit card loan portfolio continues to grow and season, net loan
losses will increase, delinquency levels may fluctuate and increase, and the
ratio of the allowance for loan losses to on-balance sheet credit card loans
outstanding will increase. We will continue to monitor delinquency amounts and
actual loan losses, and will adjust our allowance for loan losses accordingly.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained for on-balance sheet loans.
Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable losses
inherent in the existing on-balance sheet loan portfolio. For loans maintained
on Heritage's balance sheet until July 1999, anticipated losses and related
reserves are reflected in the calculations of the servicing and profit-and-loss
sharing income from Heritage.
The provision for loan losses for on-balance sheet loans for the three and
nine months ended September 30, 1999, totaled $3.2 million and $5.2 million,
respectively. We anticipate that the
28
<PAGE> 32
provision for loan losses will increase as the credit card loan portfolio
continues to increase and season. The following table presents the changes in
our allowance for loan losses for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period........................ $2,008 $ --
Provision for loan losses............................. 3,185 5,227
Allowance acquired.................................... 1,900 1,900
Charge-offs........................................... (915) (949)
------ ------
Balance at end of period.............................. $6,178 $6,178
====== ======
</TABLE>
INCEPTION PERIOD AND YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME AND INTEREST EXPENSE
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.
We had no interest expense during 1996 and 1997. In 1998, we had interest
expense of $62,000 attributable to our equipment loan.
NON-INTEREST INCOME
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
Total non-interest expenses increased $15.2 million from $2.0 million in
the Inception Period to $17.2 million in 1998. This increase was primarily due
to higher employee compensation, credit card activation and servicing costs and
marketing expenses. The increase in employee compensation of $5.2 million was
caused by the growth of employees from 18 as of December 31, 1997 to 107 as of
December 31, 1998. The increase in credit card activation and servicing costs of
$2.3 million resulted from the increase in the credit card portfolio. Lastly,
the increase in marketing expenses of $4.3 million was primarily attributable to
the expansion of Internet-based advertising.
PROVISION FOR 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
carryforwards will start expiring in 2012 and the state net operating loss
carryforwards will start expiring in 2005. Because of uncertainty regarding
realizability, we have provided a full valuation allowance on our deferred tax
assets consisting primarily of net operating loss carryforwards. See Note 9 of
notes to the Consolidated Financial Statements.
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<PAGE> 33
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operating
data for the eight quarters ended September 30, 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
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Interest income:
Cash and cash equivalents........ $ 49 $ 33 $ 79 $ 116 $ 274 $ 280 $ 905 $ 1,400
Credit card loan receivables..... -- -- -- -- -- 380 2,126 5,486
----- ------- ------- ------- ------- -------- -------- --------
Total interest income.............. 49 33 79 116 274 660 3,031 6,886
Interest expense................... -- -- 1 47 14 647 1,866 3,249
----- ------- ------- ------- ------- -------- -------- --------
Net interest income................ 49 33 78 69 260 13 1,165 3,637
Provision for loan losses.......... -- -- -- -- -- 995 1,047 3,185
----- ------- ------- ------- ------- -------- -------- --------
Net interest income (loss) after
provision for loan losses........ 49 33 78 69 260 (982) 118 452
----- ------- ------- ------- ------- -------- -------- --------
Non-interest income:
Servicing and profit and loss
sharing........................ -- 34 130 137 361 204 136 --
Interchange fees................. -- -- -- -- -- 96 318 717
Credit card fees and other....... -- -- 3 2 30 43 159 416
----- ------- ------- ------- ------- -------- -------- --------
Total non-interest income.......... -- 34 133 139 391 343 613 1,133
----- ------- ------- ------- ------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits... 763 789 1,349 2,124 2,468 3,309 5,288 6,724
Marketing and advertising........ 33 209 936 1,056 2,124 2,555 4,997 8,813
Credit card origination and
servicing costs................ 1 51 391 880 1,005 1,522 2,481 3,114
Occupancy and equipment.......... 62 116 160 326 356 552 877 1,227
Professional fees................ 77 41 77 49 353 255 211 640
Amortization of deferred stock
compensation................... -- 164 235 468 933 1,366 3,381 2,349
Amortization of loan structuring
fee............................ -- -- -- -- -- 568 1,743 655
Other............................ 45 71 133 106 229 216 443 835
----- ------- ------- ------- ------- -------- -------- --------
Total non-interest expenses........ 981 1,441 3,281 5,009 7,468 10,343 19,421 24,357
----- ------- ------- ------- ------- -------- -------- --------
Loss before income taxes........... (932) (1,374) (3,070) (4,801) (6,817) (10,982) (18,690) (22,772)
Provision for income taxes......... 2 -- -- -- 2 -- -- --
----- ------- ------- ------- ------- -------- -------- --------
Net loss........................... $(934) $(1,374) $(3,070) $(4,801) $(6,819) $(10,982) $(18,690) $(22,772)
===== ======= ======= ======= ======= ======== ======== ========
SUPPLEMENTAL OPERATING DATA -- ASSETS UNDER MANAGEMENT(1):
Total credit card loan receivables
outstanding...................... -- $ 1,626 $ 9,402 $35,334 $66,042 $ 96,293 $163,446 $268,014
Total number of open credit card
accounts at period end........... -- 1 5 19 40 66 85 134
Total revenue: interest income and
non-interest income.............. -- $ 3 $ 59 $ 292 $ 845 $ 1,885 $ 3,644 $ 8,019
</TABLE>
30
<PAGE> 34
- ---------------
(1) For the periods ending September 30, 1998, and December 31, 1998, assets
under management represented all credit card loan receivables generated
under the NextCard Visa and outstanding on Heritage Bank of Commerce's
balance sheet. For the periods ending March 31, 1999 and June 30, 1999,
assets under management represented all credit card loan receivables
generated under the NextCard Visa and outstanding on Heritage Bank of
Commerce's and our balance sheets. As of September 30, 1999, assets under
management represent all credit card loan receivables generated under the
NextCard Visa and outstanding on our balance sheet.
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:
- 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, products and services
by us or our competitors and the level of price competition for the
products and services we offer;
- timing of any off-balance sheet securitization that we may undertake;
- 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;
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 finance charges paid by our
customers based on their outstanding credit card account 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 revenue and
operating results are likely to be particularly affected by these variables.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
and public sales of preferred and common stock. Net proceeds from these sales
from inception to September 30, 1999 have totaled approximately $182.0 million.
Net cash used in operating activities was $1.5 million in the Inception
Period and $11.2 million in 1998. For the nine months ended September 30, 1999,
net cash used in operating activities was $30.4 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 stock compensation and, for the nine months ended
September 30, 1999, also offset by the provision for loan losses and the
amortization of prepaid loan fees.
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<PAGE> 35
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 nine months ended September 30, 1999, net cash used in
investing activities was $280.1 million. For this period, net cash used in
investing activities was primarily related to the purchases of credit card loan
receivables from Heritage, the purchase of Textron National Bank 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 $545,000 against an equipment loan from a
financial institution. For the nine months ended September 30, 1999, net cash
provided by financing activities was $369.8 million. For this period, net cash
provided by financing activities resulted primarily from the borrowing of $229.1
million under our secured borrowing facilities, net proceeds of $127.0 million
from our initial public offering and $11.7 million from our lines of credit from
finance companies.
At September 30, 1999, our principal source of liquidity was approximately
$99.5 million of cash and cash equivalents. In February and May 1999, we entered
into two $5.0 million lines of credit with a finance company. Borrowings under
these lines 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. These
lines of credit had an aggregate outstanding balance of $10.0 million at
September 30, 1999.
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 expired on May 31, 1999. The loan had an outstanding balance of $1.0
million at September 30, 1999.
Also during 1998, we entered into a $1.0 million financing arrangement with
a finance company. The financing arrangement is secured by a pledge of all
equipment leased under the arrangement and bears interest at 7.50% per year. The
financing arrangement expires on May 22, 2000, and $850,000 was outstanding at
September 30, 1999.
Until January 12, 1999, Heritage funded all of the credit card amounts and
loans originated through our website. Beginning January 1999, we began
purchasing credit card loan receivables from Heritage. Until May 21, 1999, we
utilized a $100.0 million secured borrowing facility extended to NextCard
Funding Corp. by Credit Suisse First Boston to fund the majority of those
receivables. On May 21, 1999, we executed a $300.0 million commercial paper
conduit facility through Barclays Bank PLC and began utilizing this facility to
purchase credit card receivables. Borrowings under the facility are secured by
the purchased receivables. We also used a portion of the Barclays facility to
pay off the $87.8 million balance then outstanding under the Credit Suisse
facility. As of September 30, 1999, $229.1 million was outstanding under the
Barclays facility.
In addition, on June 23, 1999 and November 12, 1999, we entered into
similar facilities with ING Barings (U.S.) Capital Markets LLC for $150.0
million and First Union Securities, Inc. for $220.0 million. Our borrowings
under these facilities are secured by all credit card receivables that may be
purchased by using funds from these facilities. As of September 30, 1999, there
was no amount outstanding under the ING Barings facility.
We will have the ability to fund new receivables during the revolving
period of these credit facilities. After the revolving period, principal
collections generated by the receivables will be used to pay the principal
amount owed. The revolving period ends in June 2001 for the Barclays facility,
January 2002 for the ING Barings facility and February 2003 for the First Union
facility.
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<PAGE> 36
We are in discussions with financial institutions related to establishing
additional borrowing facilities to fund the origination of credit card loan
receivables. Such new or increased facilities would increase our capacity to
originate credit card loan receivables. There are no assurances that any new or
expanded facility will be established. If such a facility is established 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 term of
the agreement.
In connection with our principal executive office lease, in October 1999,
we executed a $1.3 million irrevocable standby letter of credit in favor of the
landlord which expires on October 31, 2000. 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 facilities
are sufficient to fund our current loan portfolio, they are not sufficient to
cover our anticipated loan portfolio over the next 12 months. Therefore, any
loss of funding under these credit facilities 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.
Now that we have established NextBank, a bank limited to generating and
financing credit card loans, we will fund a portion of our loan portfolio
through short-term deposits raised by NextBank as well as the commercial paper
conduit facilities discussed above. However, we may not be able to attract or
retain sufficient deposits at attractive interest rates to fund a portion of 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."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133" to defer the effective date of SFAS 133, until
fiscal years beginning after June 15, 2000. While
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NextCard currently has no derivative financial instruments and does not
currently engage in hedging activities, NextCard anticipates engaging in
derivative and hedging activities in the future, and therefore expects to be
affected by the pronouncement. The impact of SFAS 133 on NextCard's consolidated
financial statements, however, will depend on a variety of factors including the
level of future hedging activities, 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 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.
Because we founded NextCard less than four years ago, we developed our
systems and technology in consideration 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 this 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. During the
assessment phase, 11 vendors were identified as critical to us, all of whom have
provided us with certifications of year 2000 compliance or a readiness
disclosure statement and we have conducted tests of their systems. Accordingly,
based on the results of the responses we have received and the availability of
alternate 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 a vendor's systems that causes the vendor to
fail to provide us with services it had agreed to provide us, we will seek to
recover from that vendor damages for the amount we suffered due to the failure.
Our suit would be based on breach of the vendor's agreement with us and
misrepresentation of the vendor's year 2000 representation to us. However, there
can be no assurance that these agreements and these 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 our growth.
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To date, we have incurred approximately $400,000 of expenses relating to
our year 2000 analysis, testing and remediation efforts. We anticipate that,
when all analysis, testing and remediation efforts are complete, we will have
incurred approximately $450,000 of expenses, all of which will be recognized in
1999. However, such expenses could be significantly higher than we anticipated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. This
affects us directly in its lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of our
cardholders.
The majority of our revenue is generated by the interest rates we charge on
outstanding receivable balances in the form of finance charges. Our receivables
generally yield either a variable interest rate indexed to the prime rate, or a
fixed interest rate, set independently of market interest rates. Accordingly,
fluctuations in interest rates will affect our revenue. At the same time, our
borrowing costs under our commercial paper conduit facilities are generally
indexed to variable commercial paper rates, and may also fluctuate based on
general interest rate fluctuations. A rise in 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 and adversely affect our results of
operations and financial condition.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our balance
sheet to minimize the impact changes in interest rates have on the fair value of
assets, liabilities, net income and cash flow. Management seeks to minimize the
impact of changes in interest rates on us primarily by matching assets and
liability repricings.
Our fixed interest rate loan receivables have no stated maturity or
repricing period. However, we generally have the right to increase rates when
the customer fails to comply with the terms of the account agreement. In
addition, we may reprice our credit card receivables upon providing the required
prior notice to the customer, which is generally no more than 30 days.
We may manage our interest rate risk through interest rate hedging
techniques. However, we currently do not use such techniques and it may not be
successful in reducing or eliminating our interest rate risk in the future.
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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 through our website,
www.nextcard.com. We have entered into marketing agreements with leading
websites on the Internet. We also have marketing relationships with
Internet-based affiliates, co-branded partners and affinity groups. For example,
in November 1999, we entered into a five year exclusive credit card marketing
agreement with Amazon.com, L.L.C. We offer our 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;
- personalization of the look of the NextCard Visa through our My Visa
PictureCard product; and
- Instant Credit, an active account number that can be used for purchases
immediately upon completing the new account application process.
ONLINE SHOPPING ENHANCEMENTS
- NextCard Rewards, an Internet-based incentives program allowing customers
to earn NextCard points that can be redeemed for a variety of goods and
services;
- NextCard Concierge, electronic wallet software that fills in purchase
forms on websites and remembers passwords;
- GoShopping!, an Internet-based shopping service; and
- 100% protection against credit card fraud.
INTERNET-BASED ACCOUNT MANAGEMENT
- online statements;
- the ability to download account activity into personal financial
management software;
- the ability to pay NextCard bills online using our ClickPay technology;
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- online customer service functionality; and
- online chat capability with a customer service representative at the
website.
The NextCard Visa has experienced significant consumer demand since its
introduction in December 1997. As of September 30, 1999, we had over $268
million in loans receivable outstanding and approximately 134,000 open credit
card accounts. We earn most of our revenue from the finance charges paid by our
customers based on their outstanding credit card account balances. We also earn
revenue from the amounts paid through the Visa system for purchases made with
the NextCard Visa and from fees paid by our cardholders.
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 142 million Internet users worldwide at the
end of 1998 and anticipates that number will grow to approximately 502 million
users by the end of 2003. In addition, IDC estimates that the worldwide consumer
electronic commerce market is expected to grow from approximately $15 billion in
1998 to approximately $171 billion in 2003. 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;
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- 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.
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 $404 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 $750 billion in 1998 and are expected to increase to $929
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. As of June 30, 1999, of the total
Visa and MasterCard balances outstanding, no credit card issuer has
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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.
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 a 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. Qualifying customers can also receive an active
account number at the time they complete the new account application
process, allowing for instant purchasing. 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.
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- 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. Additionally, we offer the NextCard Concierge, electronic
wallet software that fills in purchase forms on websites and remembers
passwords, creating a more streamlined online shopping experience. 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.
ONLINE CUSTOMER SERVICE
- At our website, customers can access statements, check recent account
activity, pay their NextCard bills, 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 and should assist us in building customer relationships and
improving customer loyalty. Customers can also interact online, or
"chat," with a customer service representative during business hours to
ask questions about their NextCard accounts.
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 that are
customized to meet the specific needs of particular applicants. 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. We
intend to broaden our online banking products and services, including
online checking accounts, retail certificates of deposit and money market
accounts. We also plan to enter at least one international market in the
year 2000.
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 application, credit review, approval and product offering 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.
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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 offers a unique combination of Internet-based
functionality, including an automated application process, customized terms,
personalization options and add-on 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 two customized upgrades
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 greater than a thousand
pictures.
- INSTANT CREDIT. Qualifying customers can receive an active account number
at the conclusion of the application process. Providing the account
number at the time of approval may promote purchase activity.
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 and miles that can be
redeemed on major airlines. In this way, customers can apply their points
towards offerings of interest to them.
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- NEXTCARD CONCIERGE. We provide electronic wallet software to our
customers that can be downloaded at the conclusion of the application
process, creating a more streamlined online shopping experience. The
NextCard Concierge fills in purchase forms on websites and remembers
passwords.
- 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, which helps 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, paying NextCard bills, reviewing account 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.
- ONLINE CHAT CAPABILITIES. Customers can interact online with a customer
service representative live on the NextCard website to ask questions
about their NextCard account.
FUTURE PRODUCTS AND SERVICES
We intend to add new financial 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
targeted sweepstakes programs, special incentive offers and enhanced chat
capabilities.
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 four 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 diverse selection of
websites that provide millions of ad impressions each day.
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Diversification is a key driver of our success. To date, no particular site
has accounted for more than 18% 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 website. For each banner and website combination, we are able to
monitor:
- the click-through rate (percent of people who click from the banner to
our website);
- the application rate (percent of those people who then decide to apply
for our credit card 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 and individuals that have Internet
sites to drive new account volume. Those 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 September 30, 1999, we had more than
17,000 affiliates, and currently we are gaining approximately 3,000 new
affiliates each month.
CO-BRANDED MARKETING
We have recently signed agreements with Amazon.com, United Media (Dilbert),
BizRate.com and PlanetOut to create co-branded credit cards.
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 enters 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 work with partners to offer the power of our
customization to their customer bases, with both brands marketed together. We
believe that the power of two Internet brands can create an important message of
industry strength and expertise to the customer, and further promotes our brand.
MICROAFFINITY MARKETING
We also offer credit cards that are designed around a particular affinity
group. To build customer loyalty, a large market historically has been required
to economically market an affinity card. However, our technology allows us to
market affinity cards to groups of all sizes. For larger affinities, we can
tailor advertising and content to appeal to a particular interest group. For
smaller affinities and
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niche market segments, our PictureCard technology allows customers to create an
affinity card using a picture of their choice.
To enhance the effectiveness of our four marketing channels, we also build
our corporate brand and leverage it to attract new customers, affiliates and
partners. For example, we have introduced two offline branding campaigns and
recently, we introduced the NextCard eCommerce Index(SM), which tracks online
purchase activity of NextCard customers. We believe that these types of
initiatives will help build brand awareness.
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. 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 losses.
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 apply
internally developed credit scores to augment the FICO score. If the applicant
meets minimum FICO score criteria and our internally developed criteria, the
applicant is approved for a NextCard Visa. Certain customers may require further
authentication of information before being issued a NextCard Visa. In instances
where an applicant does not have a FICO score, we will approve the applicant
based on minimum scores 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.
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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 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 will continue to move 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.
Applicants that have been approved through our credit review process are
assigned a proprietary fraud score. This fraud score consists of a series of
internally-developed algorithms using credit bureau information to determine the
probability that an application may involve fraud. Customers that pass the
proprietary algorithms receive an active account number and line of credit at
the conclusion of the online application process.
Customers that do not pass the automated fraud scoring process are
processed through several customer authentication tests. Each of these potential
customers is processed through a series of third party 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, either the
information will be validated by a third party or we will initiate telephone
contact to attempt to verify the identity of the applicant. We plan to automate
further our authentication process during the next several quarters.
At the conclusion of this authentication 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. We maintain internal
customer service coverage during the hours of 6:00 a.m. to 11:00 p.m., Pacific
time, Monday through Friday, and 8:00 a.m. to 6:00 p.m. on Saturday
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and Sunday. After-hours and weekend hours support is provided through an
arrangement with First Data. We expect to continue the process of moving 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. Customers may also
interact online with a customer service representative over the Internet in
order to ask questions, verify information or review the activity on their
NextCard Visa. Online chat capabilities are currently available from 8:00 a.m.
to 5:00 p.m., Pacific time, Monday through Friday. The technology that enables
online chat capabilities is provided through an agreement with a third party
vendor. We monitor customer communications to ensure the quality of our customer
service. In addition, we use call management software to monitor call
abandonment, call length and other call center productivity measurements. We
plan to increase the hours of online chat support during the next several
quarters.
COLLECTIONS
Collections activities are performed at our San Ramon operations facility.
Collection activity involves contacting the customer and taking other
appropriate actions to secure payment if no payment has been received beginning
10-15 days after the payment due date. Accounts are recorded 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.
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:
- 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, Inc. provides us with technical support and a
secure facility for Internet hosting services;
- Three major credit bureaus (Trans Union, Experian Information Systems,
Inc. and Equifax, Inc.) furnish the credit information that we require to
process our credit card applications;
- First Express Remittance Corporation, formerly National Processing
Corporation, provides collection and lockbox services for customer
payments;
- MyPoints.com, Inc. furnishes administrative and fulfillment services for
our NextCard Rewards incentive program;
- Binary Compass Enterprises, Inc. and WebCentric, Inc. provide software
technology underlying our GoShopping! program;
- Gator.com provides the technology underlying the NextCard Concierge;
- eShare Technologies, Inc. provides the online customer service chat
technology; and
- Heritage Bank provides select correspondent banking services.
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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 high levels of
data security and integrity 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, California, at our corporate headquarters;
San Ramon, California, in our operations center; and Santa Clara, California, in
the Exodus Communications Data Center. Additionally, we rely upon the security
infrastructure of First Data and Response Data Corporation. Each of these key
business locations is connected through privately leased lines. In all
locations, access to the network servers is tightly restricted. Internet
security is addressed with leading technologies, vendors and design approaches.
Our most sensitive data and hardware reside at the Exodus Communications
Data Center located 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 Communications 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 for the NextCard
Visa has involved relationships with Heritage Bank, Credit Suisse First Boston,
Barclays Bank PLC, ING Barings (U.S.) Capital Markets LLC and First Union
Securities, Inc.
HISTORICAL ARRANGEMENTS
From the introduction of the NextCard Visa 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.
From January 1999 to May 1999, a majority of the funding of NextCard Visa
receivables was provided by Credit Suisse, in cooperation with Heritage, under a
$100.0 million revolving credit facility. Under the Account Origination
Agreement by and between Heritage Bank and NextCard Funding Corp., our wholly
owned subsidiary, Heritage continued to issue the NextCard Visa and
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NextCard Funding Corp. purchased the receivables from Heritage on a daily basis.
Heritage's compensation under the Account Origination Agreement was primarily an
origination fee for each credit card account originated. In addition, Heritage
is entitled to reimbursement for certain out-of-pocket expenses.
In May 1999, we entered into a $300.0 million commercial paper conduit
credit facility through Barclays Bank PLC and immediately began utilizing this
facility to purchase credit card receivables. Borrowings under this credit
facility are secured by the purchased receivables. We used a portion of this
facility to pay off the $87.8 million balance then outstanding under the Credit
Suisse facility. As of September 1999, $229.1 million was outstanding under the
Barclays Bank credit facility.
In addition, in June 1999 and November 1999, we entered into similar
facilities with ING Barings (U.S.) Capital Markets LLC for $150.0 million and
with First Union Securities, Inc. for $220.0 million, respectively. As of
September 30, 1999, there were no amounts outstanding under these facilities.
We will have the ability to fund new receivables during the revolving
period of these structures. After the revolving period, principal collections
generated by the receivables will be used to pay the principal amount owed. The
revolving period ends in June 2001 for the Barclays facility, January 2002 for
the ING Barings facility and February 2003 for the First Union Securities
facility.
Heritage's obligation to establish new credit card accounts terminated in
October 1999. Heritage will continue to perform account settlement and other
correspondent banking services under an arrangement that will terminate as of
December 31, 2000.
NEXTBANK
On September 16, 1999, we acquired Textron National Bank, a wholly owned
indirect subsidiary of Textron Corporation, for $5.0 million over its net book
value. Textron had not actively engaged in the banking business for several
years, and on the acquisition date held $2.6 million of cash and cash
equivalents and a single deposit liability of approximately $540,000.
Immediately prior to the closing of the acquisition, Textron converted into a
national bank limited to credit card operations and changed its name to
"NextBank, National Association." In September 1999, NextBank became a member of
the Visa system and in October 1999 commenced the issuance of NextCard Visa
cards. We intend to originate NextCard credit card accounts through NextBank and
partially fund 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 is subject to 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.
NextBank is subject to capital adequacy guidelines adopted by the OCC. The
capital adequacy guidelines and the regulatory framework for prompt corrective
action require NextBank to maintain specific capital levels based upon
quantitative measures of its assets, liabilities and off-balance sheet
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items. Core capital (Tier 1) consists principally of stockholders' equity less
goodwill. Total risk-based capital (Tier 1 + Tier 2) includes a portion of the
allowance for loan losses. Based on these classifications, the capital adequacy
regulations establish three capital ratios that are used to measure whether a
financial institution is "well capitalized." As of September 30, 1999, NextBank
was "well capitalized" in all regulatory capital ratio categories, as set forth
below.
<TABLE>
<CAPTION>
TO BE "WELL
CAPITAL RATIO ACTUAL RATIO CAPITALIZED"
------------- ------------ ------------
<S> <C> <C>
Tier 1 Capital............................... 23.3% 6.00%
Total Capital................................ 24.6% 10.00%
Tier 1 Leverage.............................. 22.2% 5.00%
</TABLE>
In addition to the above capital ratios, the Office of the Comptroller of the
Currency requires that for the first three years of operation, NextBank maintain
a ratio of stockholders' equity plus the allowance for loan losses to total
managed assets at no less than 6.5%. As of September 30, 1999, NextBank was in
compliance with this capital requirement.
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 our current and potential competitors
have greater financial resources and greater name recognition than we have with
the public. 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 Bank One Corporation, Citibank, N.A., Providian Financial Corp. and
American Express Company, 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 Wells Fargo Bank & Co. and Chase
Manhattan Bank, N.A., 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.
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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 WingspanBank.com, Telebanc Financial
Corporation and Net.B@nk, Inc., 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, Bank One, in partnership with
Yahoo!, has introduced a Yahoo! branded credit card and promoted that
credit card on the Internet. In addition, alternative forms of payment are
emerging online, such as debit cards and micropayment offerings, which may
affect the use of credit cards for online purchases.
GOVERNMENT REGULATION
Ongoing Governmental 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 the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act,
the Electronic Funds Transfer Act and the Fair Debt Collection Practices Act.
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 and in the various state legislatures
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,
restricting telemarketing activities, expanding consumer protection laws and
other regulatory restructuring proposals. 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 be named as defendants in class action
litigation alleging fraud or violations of federal or state laws and
regulations. 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 either Heritage, a
California state-chartered bank, or NextBank, a national bank domiciled in the
State of California. 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
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(DIDA). However, with respect to state-chartered banks seeking to export
interest rates, the DIDA permits states to "opt out" of this provision. During
the period that the NextCard Visa was offered through Heritage, we decided not
to offer the NextCard Visa in any opt-out jurisdiction and other select
jurisdictions, specifically Alabama, Iowa, Wisconsin and Puerto Rico. Since
states do not have the right to opt out of the federal interest rate preemption
afforded to national banks, the NextCard Visa is now offered by NextBank in all
domestic jurisdictions.
NextBank is subject to regulation and supervision primarily by the OCC and
also is subject to regulation and supervision by the FDIC.
If NextBank decided to expand its activities beyond those permissible for a
limited purpose national credit card bank, we would be required to file an
application with, and receive the prior approval of, the OCC to amend NextBank's
charter. Moreover, we would be required to file an application with, and receive
the prior approval of, the Board of Governors of the Federal Reserve System to
become a bank holding company. If these applications were approved, NextBank
could engage in the full range of permissible banking activities and we would
then become a bank holding company, subject to the regulation (including minimum
capital requirements) of, and supervision by, the Federal Reserve Board. Bank
holding companies are permitted to engage only in activities that are determined
by statute or Federal Reserve Board regulation or order to be properly incident
to the business of banking. While we cannot predict, with certainty, the
activities that we may in the future engage in, we do not believe that bank
holding company status would impact materially our business, as currently
conducted.
Recent Legislation. On November 12, 1999, the Gramm-Leach-Bliley Act of
1999 became law. The Gramm-Leach-Bliley Act repeals the Glass-Steagall Act of
1933, which separated commercial and investment banking, and eliminates the Bank
Holding Company Act's prohibition on insurance underwriting activities by bank
holding companies. As a result, the Gramm-Leach-Bliley Act permits the
affiliation of commercial banks, insurance companies and securities firms. This
change may increase the ability of insurance companies and securities firms to
acquire, or otherwise affiliate with, commercial banks and likely will increase
the number of competitors in the banking industry and the level of competition
for banking products, including credit cards.
The Gramm-Leach-Bliley Act creates a new type of bank holding company, a
"financial holding company," that may engage in a range of activities that are
financial in nature, including insurance and securities underwriting, insurance
sales, merchant banking and real estate development and investment. The
Gramm-Leach-Bliley Act also establishes new privacy requirements applicable to
all financial institutions. Financial institutions are required to establish a
privacy policy and to disclose the policy at the start of a customer
relationship and once a year thereafter. Additionally, financial institutions
must give a customer the opportunity to block the sharing of the customer's
nonpublic personal information with unaffiliated third parties, except in
certain limited circumstances. Further, financial institutions are barred from
sharing credit card numbers, account numbers or access numbers of customers with
third-party marketers. State laws that provide a greater degree of privacy
protection are not preempted by federal law.
The Gramm-Leach-Bliley Act also specifically authorizes a limited purpose
credit card bank to control a foreign bank, subject to certain conditions.
Although we have no present intention to engage in banking activities outside of
the U.S., this change would allow us to do so.
We do not anticipate that the applicable provisions of the Act will have a
material effect on our business or practices. Of course, to the extent that the
Act promotes competition or consolidation among financial service providers
active in the provision of products and services by means of the Internet, we
could experience increased competition for customers, employees and funding.
Further,
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to the extent that the new privacy requirements impact our ability to market the
products and services of third parties to our customers, our revenue could be
affected. We are, however, unable to predict at this time the scope or extent of
any such impact.
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 several patent applications that are now
pending in the United States to protect certain proprietary systems and
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 trade and service marks in the United
States and our United States service mark for "NextCard" has been issued. We
cannot assure you that our patent applications or other trade or service mark
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 September 30, 1999, we employed 244 people, of which 33 were in
marketing, 69 were in technology, 97 were in operations, 27 were in finance and
administration and 18 were in decision analytics. None of our employees is
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
work environment for our employees.
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 June 1999, we amended the five year lease agreement to
provide for an additional 28,000 square feet, located within the same building
as our current corporate headquarters in San Francisco, and we expect to occupy
the space by the end of the year. In addition, we sublease approximately 17,500
square feet of office space in San Ramon, California, where most of our
operations and customer service activities are located. That lease expires in
June 2001. Our current facilities will not be sufficient to meet our anticipated
growth. We are currently conducting a site search for additional space. 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 September 30,
1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Jeremy R. Lent(3).......... 39 Chairman of the Board, Chief Executive Officer and President
Yinzi Cai.................. 32 Senior Vice President, Decision Analytics
Timothy J. Coltrell........ 39 Chief Operating Officer
Shaun C. Deane............. 46 Vice President, Project Integration and Planning
John V. Hashman............ 40 Chief Financial Officer
Molly Lent................. 54 Chief Corporate Development Officer
Robert Linderman........... 47 General Counsel and Secretary
Bruce G. Rigione(2)(3)..... 41 Senior Vice President, Business Development and Director
Daniel D. Springer......... 36 Chief Marketing Officer
Jeffrey D. Brody(1)........ 39 Director
Alan N. Colner(2).......... 44 Director
Daniel R. Eitingon......... 54 Director
Tod H. Francis............. 40 Director
Safi U. Qureshey(1)(2)..... 48 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. In October 1999, Mr. Lent was awarded the Albert
Einstein Technology Medal for innovation in technology.
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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Shaun C. Deane has served as our Vice President, Project Integration and
Planning, since February 1997. From December 1994 to February 1997, Mr. Deane
was the Vice President and founder of the New Media Products Group at
Addison-Wesley Longman, a leading educational publisher. From 1989 to 1994, Mr.
Deane held a variety of positions at Apple Computer, including Director of its
Evangelism Group from March 1993 to December 1994. Mr. Deane holds a B.A. from
Brandeis University and an M.A. from the University of San Francisco.
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.
Bruce G. Rigione has served as our Senior Vice President, Business
Development, since July 1999 and as our Director since March 1997. From January
1999 to August 1999, Mr. Rigione was a private consultant. From April 1996 to
December 1998, he 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.
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 our Director since August 1997. Mr. Brody
has been employed by Brentwood Venture Capital since April 1994, and has been a
General Partner since October 1995. He is also a Managing Director of Redpoint
Ventures, a firm he co-founded in October 1999. 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.
Alan N. Colner has served as our Director 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 of Corporate Partners, a private
equity fund affiliated with Lazard Freres & Co. LLC. Mr. Colner also serves as a
director of GoTo.com and 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.
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<PAGE> 58
Daniel R. Eitingon was elected as one of our Directors in November 1999.
Mr. Eitington has approximately 30 years of financial and technology experience.
Mr. Eitington is the former President of the Global Support Services Group and
served as a member of the Management Executive Committee of Visa International.
Prior to joining Visa International, Mr. Eitington was an Executive Vice
President responsible for the technology banking group and served as a member of
the Executive Operating Committee of First Interstate Bank. Mr. Eitington holds
a B.S. from Cornell University, an M.B.A. from the University of Chicago and an
M.S.E.E. from the University of California at Berkeley.
Tod H. Francis has served as our Director 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 Fatbrain.com, Inc. and the board
of directors of several private companies.
Safi U. Qureshey has served as our Director 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.
BOARD COMMITTEES
Our board of directors has a compensation committee, an audit committee and
a nominating committee.
Compensation Committee. Our 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. Our audit committee, among other things, makes
recommendations to our 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. Our nominating committee screens and nominates
candidates for election to our board of directors. The current members of the
nominating committee are Messrs. Lent and Rigione.
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<PAGE> 59
DIRECTOR COMPENSATION
Although we reimburse members of our 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 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 our common stock. The fee warrant continues to be outstanding.
In March 1999, Mr. Qureshey assigned 2,250 shares of the fee 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 our common stock. Effective as of January 20,
1999, Mr. Rigione entered into a consulting agreement with us under which he was
paid $15,000 per month. Under the agreement, Mr. Rigione provided his services
on a full time and exclusive basis on projects associated with securitization,
international opportunities and other areas related to our business. On July 21,
1999, Mr. Rigione joined us as Senior Vice President, International Business
Development. In connection with his employment, Mr. Rigione was granted an
incentive stock option to purchase 150,000 shares of our common stock at an
exercise price of $23.50 per share.
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
director's first board meeting with us.
On November 29, 1999, our board of directors granted a non-statutory stock
option exercisable for ten years for 50,000 shares of our common stock at
$32.875 per share to Daniel R. Eitingon. The option vests over three years,
commencing on May 29, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or the compensation committee
of any other company, nor has any interlocking relationship existed in the past.
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<PAGE> 60
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 each
director and officer for certain expenses (including attorneys' fees),
judgments, fines, penalties and settlement amounts incurred 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 individual's
services as our director or officer.
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 indemnification.
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 $100,000 in 1998 and
were serving as executive officers at the end of 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------------- UNDERLYING
SALARY($) BONUS($) OPTIONS(#)
<S> <C> <C> <C>
Jeremy R. Lent
Chairman, Chief Executive Officer and President...... $209,375 $175,000 1,350,000
Yinzi Cai
Senior Vice President, Decision Analytics.......... 105,125 50,000 171,000
Timothy J. Coltrell
Chief Operating Officer............................ 129,167 50,000 --
John V. Hashman
Chief Financial Officer............................ 115,000 50,000 225,000
Daniel D. Springer
Chief Marketing Officer............................ 113,650 50,000 562,500
</TABLE>
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<PAGE> 61
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options to our Chief
Executive Officer and each of our four other most highly compensated executive
officers for the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED
NUMBER PERCENT OF ANNUAL RATES OF
OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES PRICE PER TERM($)(4)
NAME GRANTED(#) IN FISCAL SHARE EXPIRATION -----------------
---- (1) YEAR(%)(2) ($/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 option vests as follows: 1/4 of the shares of our common stock
underlying each 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 shares our common stock vests each month thereafter, 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 performance based vesting conditions. The 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 our common stock on the date of grant as determined by our board of
directors. The exercise price may be paid in cash or in shares of our common
stock valued at the full market value of the common 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 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.
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<PAGE> 62
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 each executive officer as of
December 31, 1998. No options were exercised by our 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)
---------------------- -------------------------
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. 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.
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<PAGE> 63
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 the termination
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);
- non-statutory 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 our board of directors or a
committee designated by our board or directors. It will terminate in April 2007.
As of September 30, 1999, the plan authorized the issuance of up to
14,625,000 shares of common stock. As of September 30, 1999, options to purchase
7,433,524 shares were outstanding, no shares of restricted stock were
outstanding, and 5,802,092 shares remained available for future grants. As of
September 30, 1999, options to purchase an aggregate of 1,389,384 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
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<PAGE> 64
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.
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 commenced on May 14, 1999, the date of our initial public
offering, and ended 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 our 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 was $20.00, the initial public offering price.
401(k) PLAN
In October 1999, we adopted a 401(k) plan covering our full-time employees.
The 401(k) plan is intended to qualify under Section 401(k) of the Internal
Revenue Code of 1986. Contributions to the 401(k) plan by employees or by us,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) plan. Consequently, contributions by us, if any, will
be deductible by us when made. Employees may elect to reduce up to 15% of their
current compensation by up to the statutorily prescribed annual limit, which was
$10,000 in 1998, and to have the amount of such reduction contributed to the
401(k) plan. The 401(k) plan permits, but does not require, additional matching
contributions to the 401(k) plan by us on behalf of all participants in the
401(k) plan. To date, we have not made any contributions to the 401(k) plan.
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<PAGE> 65
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 the 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 bi-annually over a four-year period. Vesting of
the shares may be accelerated under certain circumstances. See
"Management -- Executive Compensation -- Lent Employment Agreement." As of
September 30, 1999, 393,750 shares remained subject to the 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 the shares vested on September 18, 1996 and the
remaining shares vest biannually over a four-year period. As of September 30,
1999, 106,317 shares remained subject to the 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
the shares of common stock and matures in March 2000. The aggregate balance due
as of September 30, 1999 was $13,140.
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 was paid $15,000 per
month. The agreement was terminated in July 1999 when Mr. Rigione joined us as
an employee.
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."
On November 8, 1999 we signed a five year marketing agreement with
Amazon.com under which we will partner with Amazon.com to deliver co-branded
credit card accounts originated on a customized website. We will pay Amazon.com
an origination fee for each co-branded credit card account. We will also pay
additional compensation, including per account renewal fees on each account's
anniversary date. Over the term of the agreement we will make origination
payments of $85.0 million to Amazon.com, subject to performance requirements. We
could also pay up to an additional $17.5 million, based on the number of credit
card accounts originated. We separately received $22.5 million from Amazon.com
in exchange for a warrant to acquire up to 4.4 million of our common shares.
This warrant has an exercise price per share of $39.20, is fully vested and
expires on November 8, 2002.
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<PAGE> 66
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 1999 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 our common stock;
- each of our directors;
- each selling stockholder;
- 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 (14 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. The table includes information regarding the beneficial ownership of
options and warrants that may be exercised within 60 days of September 30, 1999.
An asterisk indicates beneficial ownership of less than 1% of the common stock
outstanding. The percentages shown assume that the underwriters' option to
purchase up to an additional 900,000 shares of common stock from us is not
exercised.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
NAME AND ADDRESS OF -------------------- --------------------
BENEFICIAL OWNER SHARES
------------------- NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Entities Associated with Brentwood Venture
Capital(2)................................. 7,760,111 16.8% 655,058 7,105,053 14.0%
3000 Sand Hill Road,
Building 1, Suite 260
Menlo Park, CA 94025
Amazon.com, L.L.C.(3)........................ 4,400,000 8.7 -- 4,400,000 8.0
1200 Twelfth Avenue South
Suite 1200
Seattle, WA 98144
Entities associated with Moore Capital
Management, Inc.(4)........................ 3,749,999 8.1 326,087 3,423,912 6.8
1251 Avenue of the Americas
New York, NY 10020
Entities associated with Kleiner Perkins
Caufield & Byers(5)........................ 3,000,002 6.5 -- 3,000,002 5.9
2750 Sand Hill Road
Menlo Park, CA 94025
Entity associated with Forrest Binkley & 2,795,040 6.0 -- 1,313,790 2.6
Brown(6)...................................
800 Newport Center Drive
Suite 725
Newport Beach, CA 92660
Entities associated with Trinity 2,755,089 6.0 239,573 2,515,516 5.0
Ventures(7)................................
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
NAME AND ADDRESS OF -------------------- --------------------
BENEFICIAL OWNER SHARES
------------------- NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Entities associated with St. Paul Venture 2,719,863 5.9 1,600,000 1,119,863 2.2
Capital(8)...................................
8500 Normandale Lake Blvd.
Suite 1940
St. Paul, MN 55437
Entities associated with Sequoia 1,875,002 4.1 -- 1,875,002 3.7
Capital(9).................................
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Jeffrey D. Brody(2).......................... 7,793,861 16.8 655,058 7,138,803 14.1
Alan N. Colner(4)............................ 3,772,499 8.2 326,087 3,446,412 6.8
Daniel R. Eitingon........................... 32,500 * 32,500 *
Tod H. Francis(7)............................ 2,777,589 6.0 239,573 2,538,016 5.0
Safi U. Qureshey(10)......................... 993,399 2.1 76,195 917,204 1.8
Bruce G. Rigione(11)......................... 749,807 1.6 64,035 685,772 1.4
Jeremy R. Lent and Molly Lent(12)............ 4,434,516 9.5 389,142 4,045,374 7.9
Yinzi Cai(13)................................ 164,660 * 13,870 150,790 *
Timothy Coltrell(14)......................... 1,067,500 2.3 92,739 974,761 2.0
John V. Hashman(15).......................... 283,594 * 24,660 258,934 *
Daniel D. Springer(16)....................... 217,375 * 18,641 198,734 *
All directors and executive officers as a
group (14 persons)......................... 22,520,146 47.4 1,900,000 20,620,146 40.0
</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 September 30, 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 the 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." Brentwood Affiliates Fund, Brentwood
Associates VII, Brentwood Associates VIII and Brentwood Affiliates II are
also participating in this offering as selling stockholders by offering to
sell 19,288 shares, 478,100 shares, 151,363 shares and 6,306 shares,
respectively. 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 33,750 shares issuable upon exercise of
an option that vests within 60 days of September 30, 1999.
(3) Represents 4,400,000 shares issuable upon exercise of a fully vested
warrant.
(4) Includes 3,074,999 shares of common stock held by Moore Global Investments,
Ltd. , and 675,000 shares of non-voting common stock held by Remington
Investment Strategies, Ltd. Moore Capital Management, Inc., a Connecticut
corporation, is vested with investment discretion with respect to portfolio
assets held for the account of Moore Global Investments. Moore Global
Investments and Remington Investment Strategies are also participating in
this offering as selling stockholders by offering to sell 267,391 shares
and 58,696 shares, respectively. Moore Capital Advisors, L.L.C., a New York
limited liability company, is the sole general partner of Remington
Investment Strategies. 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 the shares, may be deemed to be the beneficial
owner of the aggregate shares held by Moore Global Investments and
Remington Investment Strategies. Alan Colner is a Managing Director,
Private Equity Investments, at Moore Capital Management, Inc., which is the
trading advisor of Moore Global Investments. 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 Moore Global Investments or Remington
Investment Strategies, and disclaims beneficial ownership of the shares.
The address of Moore Capital Management, Inc. is 1251 Avenue of the
Americas, New York, NY 10020. Amount shown for Mr. Colner includes 22,500
shares issuable upon exercise of an option that vests within 60 days of
September 30, 1999.
(5) 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.
(6) Represents the shares held of record by Mesquite Transaction Partners, L.P.
Prior to the date of this offering, 1,451,250 shares were sold.
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(7) 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. Trinity V Side-By-Side
Fund and Trinity Ventures V are also participating in this offering as
selling stockholders by offering to sell 13,034 shares and 226,539 shares,
respectively. 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
22,500 shares issuable upon exercise of an option that vests within 60 days
of September 30, 1999.
(8) Represents 74,794 shares held by St. Paul Venture Capital Affiliates Fund
I, LLC and 2,645,069 shares held by St. Paul Venture Capital IV, LLC. St.
Paul Venture Capital Affiliates Fund I and St. Paul Venture Capital IV are
also participating in this offering as selling stockholders by offering to
sell 43,999 shares and 1,556,001 shares, respectively.
(9) 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.
(10) Includes 57,177 shares issuable upon exercise of a warrant and 59,977
shares issuable upon exercise of an option that vests within 60 days of
September 30, 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.
(11) Includes 42,188 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999. Also includes 2,300 shares owned by
Mr. Rigione's minor son, of which Mr. Rigione disclaims beneficial
ownership.
(12) Includes 381,250 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999.
(13) Includes 40,074 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999. Also includes 160 shares owned by Ms.
Cai's husband, of which Ms. Cai disclaims beneficial ownership.
(14) Includes 146,533 shares issuable upon exercise of options that vest within
60 days of September 30, 1999.
(15) Includes 283,594 shares issuable upon exercise of options that vest within
60 days of September 30, 1999.
(16) Includes 25,937 shares issuable upon exercise of an option that vests
within 60 days of September 30, 1999.
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<PAGE> 69
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 September 30,
1999, 46,201,517 shares of common stock were issued and outstanding, including
3,660,110 shares of nonvoting common stock, and no shares of preferred stock
were issued and outstanding. As of September 30, 1999, we had 242 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 our 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 may be entitled, holders of our common stock are entitled to
receive ratably dividends and other distributions, if any, that our 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 Amended and Restated 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 9.9% 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
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difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of our outstanding voting stock. We have no
present plans to issue any shares of preferred stock.
WARRANTS
As of September 30, 1999, we had issued outstanding warrants to acquire
1,023,620 shares of our common stock, at a weighted average exercise price of
$1.28 per share. On November 8, 1999, we issued to Amazon.com, L.L.C. a warrant
to purchase 4,400,000 shares of our common stock at an exercise price of $39.20
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 May 14, 1999 to May
2003.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED
BYLAWS
We have adopted provisions in our 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 us 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 terms of our board of directors into three classes so that
only one-third of the directors 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 of directors resulting from increases
in the size of the board of directors or from death, resignation,
retirement or removal may only be filled by the board of directors; and
- permit the board of directors to create one or more series of preferred
stock and to issue the preferred shares once the shares have been
designated.
These provisions could adversely affect the rights of the holders of our
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 our 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, these
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. These provisions also may have the effect of preventing
changes in our management.
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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 the stockholder
became an interested stockholder, unless:
- prior to the date the stockholder became interested, 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 the date the stockholder became interested, the
business combination is approved by our 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
The holders of approximately 26,000,000 of the aggregate outstanding shares
of our common stock and nonvoting common stock will be entitled to certain
demand registration rights with respect to the registration of the shares of our
common stock under the Securities Act of 1933, as amended. Under the terms of
our Third Amended and Restated Investors' Rights Agreement, we are not required
to effect more than three registrations pursuant to demand rights. The holders
of the shares entitled to "piggyback" registration rights were entitled to
receive notice of this registration and, subject to certain limitations, include
their shares in this registration.
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 registration statement in any 12-month period.
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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 shares of common stock held by stockholders with
registration rights to be included in registration statement. We are generally
required to bear all expenses associated with the 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 our common stock is BankBoston, N.A.
EquiServe L.P.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering (assuming no exercise of the underwriters'
overallotment option), we will have an aggregate of 50,701,517 shares of common
stock outstanding, assuming no exercise of options or warrants. Of these shares,
the 6,900,000 shares sold in our initial public offering and the 8,000,000
shares sold in this offering, as well as the 286,281 shares issued pursuant to
exercised options and registered on our Registration Statement on Form S-8, will
be freely tradable without restriction or further registration under the
Securities Act, unless such shares are held by our affiliates, as that term is
defined under the Securities Act, or are subject to lockup agreements.
SALES OF RESTRICTED SHARES
Upon completion of this offering, 35,515,236 shares of common stock will be
deemed restricted shares under Rule 144 of the Securities Act. In connection
with our initial public offering, stockholders owning 37,667,021 shares of our
common stock signed 180-day lockup agreements, which expired on November 10,
1999. We expect that, in connection with this offering, our directors, executive
officers, certain private equity funds and selling stockholders will enter into
lockup agreements expiring 90 days from the date of this prospectus covering
approximately 26,528,135 shares of our common stock (or approximately 28,107,615
shares, if options and warrants exercisable during such 90-day period are
included). Upon execution of the 90-day lockup agreements, 8,987,101 restricted
shares will be available for sale in the public market, subject to certain
limitations of Rule 144 of the Securities Act. Beginning 90 days after the date
of this prospectus, or earlier with our consent and the consent of Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co., all such
restricted shares will become available for sale in the public market, subject
to Rule 144 limitations.
In general, under Rule 144 of the Securities Act as currently in effect, 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 507,015 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. Under
Rule 144(k), 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. Upon expiration of the
lockup period, approximately 6,811,513 shares will be available for sale without
regard to volume limitations. 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.
OPTIONS
As of September 30, 1999, options to purchase a total of 1,073,574 shares
of common stock pursuant to the 1997 Stock Plan were exercisable. An additional
5,802,092 shares of common stock were reserved as of September 30, 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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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated December 9, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.,
Thomas Weisel Partners LLC, Prudential Securities Incorporated, U.S. Bancorp
Piper Jaffray Inc. and DLJdirect Inc., have severally agreed to purchase from us
and the selling stockholders the number of shares opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
UNDERWRITERS: ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 2,409,500
Goldman, Sachs & Co. ....................................... 2,409,500
Thomas Weisel Partners LLC.................................. 1,343,000
Prudential Securities Incorporated.......................... 750,500
U.S. Bancorp Piper Jaffray Inc. ............................ 987,500
DLJdirect Inc. ............................................. 100,000
----------
Total............................................. 8,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval, including the absence of any material adverse
change in our business and receipt of acceptable certificates, opinions and
letters from us, our counsel and the independent auditors. The underwriters are
obligated to purchase and accept delivery of all the shares, other than those
shares covered by the over-allotment option described below, if they purchase
any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $1.08 per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $0.10 per share on
sales to other dealers. After the offering of the shares to the public, the
representatives may change the public offering price and such concessions.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling stockholders, and the offering expenses to be
paid by us, in connection with this offering. The underwriting fee is equal to
the public offering price per share of common stock less the amount paid by the
underwriters to us, or the selling stockholders as the case may be, per share of
common stock. Offering expenses, all of which we will pay, are expenses incurred
by us in connection with this offering and include filing fees, Nasdaq listing
fees, printing expenses and legal and accounting expenses. The amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY NEXTCARD STOCKHOLDERS
------------------------ ----------------------
NO FULL NO FULL
EXERCISE EXERCISE EXERCISE EXERCISE
<S> <C> <C> <C> <C>
Underwriting fees per share................ $ 1.80 $ 1.80 $ 1.80 $ 1.80
Total underwriting fees.................... 8,100,000 9,720,000 6,300,000 6,840,000
Offering expenses per share................ 0.11 0.09 -- --
Total offering expenses.................... 500,000 500,000 -- --
</TABLE>
An electronic prospectus is available on the web site maintained by
DLJdirect Inc., a selected dealer and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Other than the
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prospectus in electronic format, the information on this website relating to
this offering is not a part of this prospectus and has not been approved and/or
endorsed by us or any underwriter, and should not be relied on by prospective
investors.
We and the selling stockholders have granted to the underwriters an option,
exercisable for 30 days after the date of this prospectus, to purchase up to
1,200,000 additional shares at the public offering price on the cover page of
this prospectus minus the underwriting fees. The underwriters may exercise this
option solely to cover over-allotments, if any, made in connection with this
offering. To the extent that the underwriters exercise this option, each
underwriter will become obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to that underwriter's
initial purchase commitment.
We and the selling stockholders have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect of any of those liabilities.
We expect that, in connection with this offering, certain stockholders,
including all of our executive officers, directors, certain private equity funds
and selling stockholders, will enter into lock-up agreements expiring 90 days
from the date of this prospectus covering an aggregate of approximately
26,528,135 shares of our common stock (or approximately 28,107,615 shares,
including options and warrants exercisable during such 90-day period). The
stockholders signing these agreements will agree not to, during the lock-up
period, without the prior written consent of us as well as Donaldson, Lufkin &
Jenrette and Goldman, Sachs & Co.: (1) 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 our common stock or any
securities convertible into or exercisable or exchangeable for our common stock;
or (2) enter into any swap or other arrangement that transfer 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 clause (1) or (2) is
to be settled by the delivery of common stock, or such other securities, in cash
or otherwise. In addition, during this period, we have agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and some of our stockholders have agreed not to 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 (other than a registration statement registering options or shares
granted under a stock option plan) without the prior written consent of
Donaldson, Lufkin & Jenrette and Goldman, Sachs & Co.
Other than in the United States, no action has been taken by us, the
selling stockholders or the underwriters that would permit a public offering of
the shares of our common stock included in this offering in any jurisdiction
where action for that purpose is required. The shares included in this offering
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisement in connection with the offer and
sale of any these shares be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of our common stock included in this offering in any jurisdiction where
that would not be permitted or legal.
In the event our common stock does not constitute an excepted security
under the provisions of Regulation M promulgated by the Commission, the
underwriters and dealers may engage in passive market making transactions in
accordance with Rule 103. In general, a passive market maker may
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not bid for or purchase shares of common stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the common stock during a specified two-month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
common stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
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 88
filed public offerings of equity securities, of which 68 have been completed,
and has acted as a syndicate member in an additional 46 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 common stock. Mr. Lieberman's shares are restricted from sale, transfer,
assignment or hypothecation until May 14, 2000.
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 4,500 shares of our
common stock. Ronald H. Star, a director of Howard, Rice, holds 2,000 shares of
our common stock. Certain federal bank regulatory legal matters described in
this prospectus will be passed upon for NextCard by Sidley & Austin, Washington,
D.C. Pillsbury Madison & Sutro LLP, San Francisco, California, is acting as
counsel for the underwriters in connection with selected legal matters relating
to the shares of common stock offered by this prospectus.
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
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
We filed a registration statement on Form S-1 with respect to this offering
of common stock with the Securities and Exchange Commission. 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.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, we file reports and other
information with the Securities and Exchange Commission. Copies of the
registration statement as well as our reports and other information we file with
the Securities and Exchange Commission 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. Copies of all or any portion of
the registration statement and our publicly filed reports 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. Please call the Securities and Exchange commission at 1-800-SEC-0330 for
more information about the operation of the public reference rooms. Our filings
are also available to the public at the Securities and Exchange Commission's
website at www.sec.gov.
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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 September 30, 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 nine months ended
September 30, 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 nine months ended September 30, 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 nine months ended
September 30, 1998 and 1999 (unaudited)................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 79
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.
/s/ Ernst & Young LLP
San Francisco, California
February 5, 1999, except as to Note 4,
as to which the date is
May 13, 1999
F-2
<PAGE> 80
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,840 $ 40,134 $ 85,541
Cash and cash equivalents, restricted....................... -- -- 13,993
Credit card loans receivable less allowance for loan losses
of $6,178 at September 30, 1999........................... -- -- 261,836
Prepaid loan fees........................................... -- 2,100 5,145
Equipment and leasehold improvements, net................... 294 2,102 6,939
Prepaid and other assets.................................... 554 1,206 15,452
------- -------- --------
Total assets................................................ $ 3,688 $ 45,542 $388,906
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................... $ -- $ -- $ 2,541
Accounts payable............................................ 135 3,366 3,914
Accrued expenses and other liabilities...................... 766 1,735 16,821
Other borrowings............................................ -- 504 11,879
Secured borrowings.......................................... -- -- 229,129
------- -------- --------
Total liabilities........................................... 901 5,605 264,284
------- -------- --------
Shareholders' equity:
Convertible preferred stock, Series A, $0.001 par value
(2,756 shares authorized, issued and outstanding at
December 31, 1997; 2,735 shares authorized, issued and
outstanding at December 31, 1998), net of costs of
issuance. Liquidation preference: $1,225 at December 31,
1997 and $1,216 at December 31, 1998.................... 3 3 --
Convertible preferred stock, Series B, $0.001 par value
(authorized 7,200 shares at December 31, 1997; 7,997
shares authorized at December 31, 1998; issued and
outstanding 6,354 shares at December 31, 1997 and 1998),
net of costs of issuance. Liquidation preference: $3,530
at December 31, 1997 and 1998........................... 6 6 --
Convertible preferred stock, Series C, $0.001 par value
(authorized 9,621 shares at December 31, 1998; issued
and outstanding 9,133 shares at December 31, 1998), net
of costs of issuance. Liquidation preference: $11,771 at
December 31, 1998....................................... -- 9 --
Convertible preferred stock, Series D, $0.001 par value
(authorized 20,250 shares at December 31, 1998; issued
and outstanding 14,404 shares at December 31, 1998), net
of costs of issuance. Liquidation preference: $38,410 at
December 31, 1998....................................... -- 15 --
Common stock, $0.001 par value (authorized 90,000 shares
at December 31, 1997, 62,897 shares at December 31, 1998
and 87,433 shares at September 30, 1999; issued and
outstanding 4,895, 4,932 and 46,201 shares at December
31, 1997 and 1998 and September 30, 1999)............... 5 5 46
Additional paid-in capital................................ 4,694 63,875 209,918
Deferred stock compensation............................... -- (6,000) (14,935)
Notes receivable from shareholders........................ (35) (26) (13)
Accumulated deficit....................................... (1,886) (17,950) (70,394)
------- -------- --------
Total shareholders' equity.................................. 2,787 39,937 124,622
------- -------- --------
Total liabilities and shareholders' equity.................. $ 3,688 $ 45,542 $388,906
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 81
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Cash and cash equivalents..................... $ 93 $ 502 $ 228 $ 2,585
Credit card loans............................. -- -- -- 7,992
------- -------- ------- --------
Total interest income........................... 93 502 228 10,577
Interest expense................................ -- 62 48 5,762
------- -------- ------- --------
Net interest income............................. 93 440 180 4,815
Provision for loan losses....................... -- -- -- 5,227
------- -------- ------- --------
Net interest income (loss) after provision for
loan losses................................... 93 440 180 (412)
------- -------- ------- --------
Non-interest income:
Servicing and profit and loss sharing......... -- 662 301 341
Interchange fee............................... -- -- -- 1,130
Credit card fees and other.................... -- 35 5 618
------- -------- ------- --------
Total non-interest income....................... -- 697 306 2,089
------- -------- ------- --------
Non-interest expenses:
Salaries and employee benefits................ 1,495 6,730 4,262 15,322
Marketing and advertising..................... 50 4,324 2,201 16,364
Credit card activation and servicing costs.... 1 2,328 1,322 7,116
Occupancy and equipment....................... 137 958 602 2,656
Professional fees............................. 167 520 167 1,106
Amortization of deferred stock compensation... -- 1,800 867 7,096
Amortization of loan structuring fee.......... -- -- -- 2,967
Other......................................... 127 539 310 1,494
------- -------- ------- --------
Total non-interest expenses..................... 1,977 17,199 9,731 54,121
------- -------- ------- --------
Loss before income taxes........................ (1,884) (16,062) (9,245) (52,444)
Provision for income taxes...................... 2 2 -- --
------- -------- ------- --------
Net loss........................................ $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted net loss per common share..... $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Weighted average common shares used in net loss
per common share calculation.................. 1,747 3,166 3,050 24,809
======= ======== ======= ========
Pro forma basic and diluted net loss per common
share (unaudited, see Note 2)................. $ (1.28)
========
Weighted average common shares used in computing
pro forma basic and diluted net loss per
common share (unaudited, see Note 2).......... 41,001
========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 82
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK SERIES A-D COMMON STOCK ADDITIONAL NOTES
---------------- ---------------- PAID-IN DEFERRED STOCK RECEIVABLE FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS DEFICIT
------- ------ ------- ------ ---------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuances of common stock.... -- $ -- 6,773 $ 7 $ 8 $ -- $ -- $ --
Issuances of convertible
preferred stock Series A..... 2,756 3 -- -- 1,201 -- (35) --
Issuances of convertible
preferred stock Series B... 6,354 6 -- -- 3,488 -- -- --
Return of common stock....... -- -- (630) (1) 1 -- -- --
Repurchase of common stock... -- -- (1,248) (1) (4) -- -- --
Net loss from inception to
December 31, 1997.......... -- -- -- -- -- -- -- (1,886)
------- ---- ------- --- -------- -------- ---- --------
Balances at December 31,
1997....................... 9,110 9 4,895 5 4,694 -- (35) (1,886)
Issuances of convertible
preferred stock Series C... 9,133 9 -- -- 11,662 -- -- --
Issuances of convertible
preferred stock Series D... 14,404 15 -- -- 38,351 -- -- --
Issuances of common stock
upon exercise of stock
options.................... -- -- 37 -- 2 -- -- --
Issuance of preferred stock
warrants................... -- -- -- -- 1,375 -- -- --
Return of convertible
preferred stock Series A in
settlement of notes
receivable................. (21) -- -- -- (9) -- 9 --
Deferred stock
compensation............... -- -- -- -- 7,800 (7,800) -- --
Amortization of deferred
stock compensation......... -- -- -- -- -- 1,800 -- --
Net loss..................... -- -- -- -- -- -- -- (16,064)
------- ---- ------- --- -------- -------- ---- --------
Balances at December 31,
1998....................... 32,626 33 4,932 5 63,875 (6,000) (26) (17,950)
Issuances of common stock
upon exercise of stock
options and warrants
(unaudited)................ -- -- 1,743 1 350 -- -- --
Issuance of common stock for
IPO, net of expenses
(unaudited)................ -- -- 6,900 7 126,969 -- -- --
Issuances of common stock
warrants (unaudited)....... -- -- -- -- 2,693 -- -- --
Conversion of preferred stock
to common stock
(unaudited)................ (32,626) (33) 32,626 33 -- -- -- --
Deferred stock compensation
(unaudited)................ -- -- -- -- 16,031 (16,031) 13 --
Amortization of deferred
stock compensation
(unaudited)................ -- -- -- -- -- 7,096 -- --
Net loss (unaudited)......... -- -- -- -- -- -- -- (52,444)
------- ---- ------- --- -------- -------- ---- --------
Balances at September 30,
1999 (unaudited)........... -- $ -- 46,201 $46 $209,918 $(14,935) $(13) $(70,394)
======= ==== ======= === ======== ======== ==== ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Issuances of common stock.... $ 15
Issuances of convertible
preferred stock Series A..... 1,169
Issuances of convertible
preferred stock Series B... 3,494
Return of common stock....... --
Repurchase of common stock... (5)
Net loss from inception to
December 31, 1997.......... (1,886)
--------
Balances at December 31,
1997....................... 2,787
Issuances of convertible
preferred stock Series C... 11,671
Issuances of convertible
preferred stock Series D... 38,366
Issuances of common stock
upon exercise of stock
options.................... 2
Issuance of preferred stock
warrants................... 1,375
Return of convertible
preferred stock Series A in
settlement of notes
receivable................. --
Deferred stock
compensation............... --
Amortization of deferred
stock compensation......... 1,800
Net loss..................... (16,064)
--------
Balances at December 31,
1998....................... 39,937
Issuances of common stock
upon exercise of stock
options and warrants
(unaudited)................ 351
Issuance of common stock for
IPO, net of expenses
(unaudited)................ 126,976
Issuances of common stock
warrants (unaudited)....... 2,693
Conversion of preferred stock
to common stock
(unaudited)................ --
Deferred stock compensation
(unaudited)................ 13
Amortization of deferred
stock compensation
(unaudited)................ 7,096
Net loss (unaudited)......... (52,444)
--------
Balances at September 30,
1999 (unaudited)........... $124,622
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 83
NEXTCARD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $(1,886) $(16,064) $(9,245) $ (52,444)
Adjustments to net loss to arrive at net cash used in
operating activities:
Provision for loan losses............................ -- -- -- 5,227
Depreciation and amortization........................ 15 252 139 4,122
Amortization of deferred stock compensation.......... -- 1,800 867 7,096
Changes in operating assets and liabilities:
Increase in accounts payable....................... 135 3,231 1,330 548
Increase in accrued expenses....................... 766 969 589 15,086
Increase (decrease) in prepaid and other assets.... (554) (1,377) 181 (9,994)
------- -------- ------- ---------
Net cash used in operating activities.................. (1,524) (11,189) (6,139) (30,359)
INVESTING ACTIVITIES
Net loans originated or collected...................... -- -- -- (247,540)
Loan portfolio acquisition............................. -- -- -- (22,240)
Purchase of Textron Bank, net of cash acquired......... -- -- -- (4,459)
Purchase of equipment and leasehold improvements....... (309) (2,060) (1,037) (5,846)
------- -------- ------- ---------
Net cash used in investing activities.................. (309) (2,060) (1,037) (280,085)
FINANCING ACTIVITIES
Net increase in deposits............................... -- -- -- 2,000
Net change in secured borrowings....................... -- -- -- 229,129
Proceeds from other borrowings......................... -- 545 539 11,673
Payments made on other borrowings...................... -- (41) -- (298)
Proceeds from issuances of convertible preferred
stock................................................ 4,663 50,037 11,671 --
Proceeds from issuances of common stock................ 10 2 1 127,327
Proceeds from settlement of notes receivable........... -- -- -- 13
------- -------- ------- ---------
Net cash provided by financing activities.............. 4,673 50,543 12,211 369,844
Net increase in cash and cash equivalents.............. 2,840 37,294 5,035 59,400
Cash and cash equivalents at the beginning of period... -- 2,840 2,840 40,134
------- -------- ------- ---------
Cash and cash equivalents at the end of period......... $ 2,840 $ 40,134 $ 7,875 $ 99,534
======= ======== ======= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest and taxes... $ 2 $ 23 $ -- $ 2,688
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Unearned stock based compensation.................... $ -- $ 7,800 $ 6,100 $ 16,031
Issuance of preferred stock warrants for loan
structuring/origination fee........................ $ -- $ 1,375 $ -- $ 2,693
Issuance/return of convertible preferred stock Series
A.................................................. $ 35 $ 9 $ 9 $ --
Issuance of convertible preferred stock Series C..... $ -- $ -- $11,671 $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 84
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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 and
reincorporated in Delaware in May 1999 in connection with the initial public
offering ("IPO") (See Note 2), 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(R) VISA(R), which through September 30, 1999 were issued solely 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 products solely through the Internet and
provides online approval and customized customer 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.
On September 16, 1999, NextCard acquired all of the outstanding common
stock of Textron National Bank ("TNB"), a wholly owned indirect subsidiary of
Textron Corporation, for $5.0 million over its net book value. TNB had not
actively engaged in the banking business for several years, and on the
acquisition date held $2.6 million of cash and cash equivalents and a single
deposit liability of approximately $540,000. Immediately prior to the closing of
the acquisition, TNB converted into a national bank limited to credit card
operations and changed its name to "NextBank, National Association"
("NextBank"). On September 16, 1999, in connection with the acquisition and
formation of NextBank, all of the issued and outstanding capital stock of
NextCard Funding Corp. ("NCFC") was contributed to NextBank. Accordingly, NCFC
became a wholly owned subsidiary of NextBank, which, in turn, is a wholly owned
subsidiary of NextCard. The acquisition was accounted for using the purchase
method.
NextCard has experienced operating losses to date and had an accumulated
deficit at December 31, 1998 and September 30, 1999. Significant net losses are
expected for the foreseeable future. Since its formation, NextCard has raised
significant capital through the IPO and private placements of equity securities.
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.
F-7
<PAGE> 85
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
INITIAL PUBLIC OFFERING
On May 19, 1999, NextCard completed its IPO in which it sold 6.9 million
shares of its common stock at a price of $20 per share raising $138.0 million in
gross proceeds. Net offering proceeds to NextCard, net of approximately $9.7
million in aggregate underwriters' discounts and commissions and $1.3 million in
related costs, were approximately $127.0 million.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include NextCard and its wholly owned
subsidiary, NextBank. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to prior year
financial statements to conform to the 1999 presentation.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of September 30, 1999 and
the consolidated statements of operations and cash flows for the nine months
ended September 30, 1998 and 1999 and the consolidated statement of changes in
shareholders' equity for the nine months ended September 30, 1999 are unaudited.
In the opinion of management, the accompanying unaudited interim consolidated
financial 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 the consolidated financial statements for these
periods is also unaudited. The consolidated statements of operations and cash
flows for the interim periods are not necessarily indicative of the results to
be expected for any other future interim 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 high credit quality financial
institutions. Balances in NextCard's cash accounts exceed the Federal Deposit
Insurance Corporation (FDIC) limit 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,
F-8
<PAGE> 86
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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 no later than the month
after formal notification of bankruptcy.
At December 31, 1997 and 1998, there was no allowance for loan losses as
NextCard did not own any loans until January 1999 (see Note 5). The following
table presents the change in NextCard's allowance for loan losses for the nine
months ended September 30, 1999 (In thousands):
<TABLE>
<S> <C>
Balance at beginning of period.............................. $ --
Provision for loan losses................................... 5,227
Allowance acquired.......................................... 1,900
Charge-offs................................................. (949)
------
Balance at September 30, 1999............................... $6,178
======
</TABLE>
On July 15, 1999, NextCard exercised its option to purchase all remaining
credit card receivables from Heritage. The acquired portfolio consisted of $21.3
million in outstanding balances. NextCard recorded an allowance for loan losses
of $1.9 million for the Heritage portfolio upon purchase to reflect the expected
loan losses of the acquired portfolio.
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.
INTANGIBLE ASSETS
In connection with the acquisition of TNB (see Note 1), $5.0 million in
goodwill was recorded, representing the excess purchase price over the estimated
fair value of TNB's net assets. The goodwill is being amortized over 15 years on
a straight-line basis.
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-9
<PAGE> 87
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND 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" ("SFAS 130") at December 31, 1998. Under SFAS
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, SFAS 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-10
<PAGE> 88
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND 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" ("SFAS 131"), which is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises report
financial and other descriptive information about reportable operating segments
in annual financial statements and interim reporting to shareholders. NextCard
adopted SFAS 131 in 1998. NextCard has determined that through September 30,
1999 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 CONSOLIDATED 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. Actual results could differ
from those estimates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 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" ("SFAS 123"), for all periods presented. In accordance
with SFAS 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 common share). Pro forma
basic and diluted net loss per common share, as presented in the consolidated
statements of operations, has been computed for the nine months ended September
30, 1999 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-11
<PAGE> 89
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per common share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net loss.................................. $(1,886) $(16,064) $(9,245) $(52,444)
======= ======== ======= ========
Basic and diluted:
Weighted-average shares of common stock
outstanding.......................... 5,242 4,907 4,894 25,703
Less: Weighted-average shares subject to
repurchase........................... (3,495) (1,741) (1,844) (894)
------- -------- ------- --------
Weighted-average shares used in
computing basic and diluted net loss
per common share..................... 1,747 3,166 3,050 24,809
======= ======== ======= ========
Basic and diluted net loss per common
share................................... $ (1.08) $ (5.07) $ (3.03) $ (2.11)
======= ======== ======= ========
Pro forma:
Net loss................................ $(52,444)
========
Shares used above....................... 24,809
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock
(unaudited).......................... 16,192
--------
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited).......................... 41,001
========
Pro forma basic and diluted net loss per
common share (unaudited)............. $ (1.28)
========
</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, 26,949,208 and 8,907,728 for the period from inception to December
31, 1997, for the year ended December 31, 1998 and for the nine months ended
September 30, 1998 and 1999, respectively. Such securities, had
F-12
<PAGE> 90
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
2. SUMMARY OF OPERATIONS AND 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" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," to defer the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. 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 SFAS 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 (In
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
<S> <C> <C>
Computer equipment.......................................... $262 $1,360
Furniture and office equipment.............................. 33 490
Leasehold improvements...................................... 14 518
---- ------
309 2,368
Less: Accumulated depreciation and amortization............. 15 266
---- ------
$294 $2,102
==== ======
</TABLE>
4. CREDIT FACILITIES
During 1998, NextCard entered into a $1,250,000 equipment loan and security
agreement with a finance company. Borrowings under the loan agreement bear
interest at 7.55% per year and are secured by related equipment purchases.
NextCard's ability to borrow under this loan agreement expired on May 31, 1999.
As of December 31, 1998, the loan had an outstanding balance of $504,101 which
was due in the following years: 1999 -- $147,496; 2000 -- $159,026;
2001 -- $171,457; and 2002 -- $26,122.
F-13
<PAGE> 91
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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 financing 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 and May 1999, NextCard entered into separate $5 million lines
of credit with a finance company. Borrowings under the lines of credit accrue
interest at 12.25% per year, are repayable in monthly installments and final
payment is due in May 2000 and April 2002, respectively. These lines are secured
by subordinated security interests in all tangible and intangible assets. These
lines of credit had an aggregate outstanding balance of $10.0 million at
September 30, 1999.
5. CREDIT FACILITIES AND SECURED BORROWINGS
Until January 12, 1999, Heritage funded all of the credit card accounts and
loans originated through NextCard's website. Beginning in January 1999, NextCard
began purchasing such credit card receivables from Heritage. Until May 21, 1999,
NextCard utilized a $100.0 million secured borrowing facility extended to NCFC
by Credit Suisse First Boston ("Credit Suisse") to fund the majority of those
receivables. On May 21, 1999, NextCard executed a $300.0 million commercial
paper conduit facility through Barclays Bank PLC and began utilizing this
facility to purchase credit card receivables. Borrowings under this facility are
secured by the purchased receivables. NextCard also used a portion of the
Barclays facility to pay off the $87.8 million balance then outstanding under
the Credit Suisse facility. As of September 30, 1999, $229.1 million was
outstanding under this facility.
In connection with the $100.0 million secured borrowing facility described
above, 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, which are
outstanding at September 30, 1999, are immediately exercisable at a price of
$0.22 per warrant. This loan structuring fee was capitalized and was being
amortized on a straight-line basis over the term of the revolving credit
facility. Upon the termination of this facility in May 1999, the then
unamortized amount was expensed.
In addition, on June 23, 1999, NextCard entered into a $150.0 million
facility with ING Barings (U.S.) Capital Markets. NextCard's borrowings under
this facility are secured by all credit card receivables that may be purchased
using this facility. As of September 30, 1999, there were no amounts outstanding
under the ING Barings facility.
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-14
<PAGE> 92
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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
at December 31, 1998 (In thousands):
<TABLE>
<S> <C>
1999............................................ $ 780
2000............................................ 786
2001............................................ 716
2002............................................ 650
2003............................................ 663
------
$3,595
======
</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 at December 31, 1998 (In thousands):
<TABLE>
<S> <C>
1999............................................ $ 275
2000............................................ 1,000
2001............................................ 2,500
2002............................................ 3,750
------
$7,525
======
</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 accrued expenses and other
liabilities in the consolidated balance sheets.
F-15
<PAGE> 93
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY
NextCard has two classes of authorized stock: common stock and preferred
stock. Each share of convertible preferred stock automatically converted into
shares of common stock at the then effective conversion rate immediately upon
the consummation of the IPO. A total of 32,625,734 of new common shares were
issued.
Under the amended articles of incorporation adopted as of May 13, 1999,
12,567,285 shares of convertible preferred stock are authorized to be issued in
one or more series. Also, 77,432,715 shares of voting common stock are
authorized and 10,000,000 shares of non-voting common stock are authorized.
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 for aggregate
consideration of $5,000, 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 September 30,
1999, 2,081,250, 1,237,500 and 393,750 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
aggregate consideration of $10,100. 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 September 30, 1999, 318,938,
212,625 and 106,317 shares remain subject to repurchase, respectively.
Common stock was reserved for issuances as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
<S> <C> <C>
Conversion of convertible preferred stock................... 32,626 --
Exercise of outstanding stock options....................... 6,976 7,434
Shares of common stock available for grant under the 1997
Stock Plan................................................ 1,987 5,802
Exercise of outstanding warrants............................ 1,139 1,024
---------- ----------
42,728 14,260
========== ==========
</TABLE>
F-16
<PAGE> 94
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock issued and outstanding was as follows (In
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- ---------------------------
SHARES SHARES
OUTSTANDING(1) AMOUNT(2) OUTSTANDING(1) AMOUNT(2)
<S> <C> <C> <C> <C>
Series A.................. 2,756 $1,204 2,735 $ 1,195
Series B-1, B-2........... 6,354 3,494 6,354 3,494
Series C-1, C-2........... -- -- 9,133 11,671
Series D-1, D-2........... -- -- 14,404 38,366
----- ------ ------ -------
9,110 $4,698 32,626 $54,726
===== ====== ====== =======
</TABLE>
- ------------
(1) The per share issuance price 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.
Dividends on each series of convertible preferred stock are noncumulative
and are payable, in any fiscal year, when and as declared by NextCard.
Holders of Series C and D Convertible Preferred Stock were 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 at December 31, 1998.
After payment of the prior liquidation preference to Series C and D
Convertible Preferred Stock, holders of Series A and B Convertible Preferred
Stock were 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 was
$3,530,000 at December 31, 1997 and December 31, 1998.
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
F-17
<PAGE> 95
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
distributable assets shall be distributed pro rata among the Series A and B
Preferred Shareholders in proportion to their respective preferential amounts.
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.
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 and 1998, and September 30, 1999, NextCard had reserved 5,130,000,
9,000,000 and 14,625,000 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-18
<PAGE> 96
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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 period from plan inception to December 31, 1997, the year ended
December 31, 1998, and the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES EXERCISE PRICE PRICE
------ -------------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Outstanding at April 2, 1997 (Plan
inception)................................... -- -- --
Granted.................................... 2,345 $0.04 - $ 0.06 $0.05
Forfeited.................................. (315) $ 0.04 $0.04
------ -------------- -----
Outstanding at December 31, 1997............. 2,030 $0.04 - $ 0.06 $0.05
Granted.................................... 5,419 $0.06 - $ 0.56 $0.16
Exercised.................................. (37) $0.04 - $ 0.06 $0.05
Forfeited.................................. (435) $0.06 - $ 0.33 $0.09
------ -------------- -----
Outstanding at December 31, 1998............. 6,977 $0.04 - $ 0.56 $0.13
Granted.................................... 2,817 $1.67 - $23.94 $9.61
Exercised.................................. (1,352) $0.04 - $ 0.13 $0.06
Forfeited.................................. (1,008) $0.06 - $23.94 $5.00
------ -------------- -----
Outstanding at September 30, 1999
(unaudited)................................ 7,434 $0.04 - $23.94 $3.08
====== ============== =====
Options exercisable at December 31, 1997..... 204 $ 0.04 $0.04
====== ============== =====
Options exercisable at December 31, 1998..... 802 $0.04 - $ 0.13 $0.05
====== ============== =====
Options exercisable at September 30, 1999
(unaudited)................................ 1,074 $0.04 - $ 0.33 $0.08
====== ============== =====
</TABLE>
F-19
<PAGE> 97
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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 and
1998, and September 30, 1999, and the weighted average remaining contractual
life are as follows (In thousands, except per share data):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------- ----------- ---------------- -----------
<S> <C> <C> <C>
December 31, 1997
$0.04.................................. 1,292 9.5 years 204
$0.05................................ 738 9.8 years --
----- -----
2,030 204
===== =====
December 31, 1998
$0.04................................ 1,203 8.5 years 500
$0.05................................ 2,150 9.6 years 289
$0.06................................ 225 4.6 years --
$0.13................................ 1,433 9.7 years 13
$0.14................................ 1,125 4.7 years --
$0.33................................ 248 9.8 years --
$0.56................................ 593 9.9 years --
----- -----
6,977 802
===== =====
September 30, 1999
$0.04................................ 675 7.9 years 240
$0.05................................ 1,565 9.0 years 437
$0.06................................ 169 4.0 years 28
$0.13................................ 966 9.1 years 86
$0.14................................ 1,125 4.1 years 282
$0.33................................ 264 9.2 years 1
$0.56................................ 591 9.3 years --
$1.67................................ 152 9.4 years --
$6.67................................ 1,305 9.5 years --
$15.00............................... 219 9.6 years --
$23.50............................... 344 9.8 years --
$23.94............................... 59 9.9 years --
----- -----
7,434 1,074
===== =====
</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
F-20
<PAGE> 98
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
below, the alternative fair value accounting provided for under SFAS 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.
The fair value of these awards for the purpose of the alternative fair
value disclosures required by SFAS 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 (In thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Net Loss:
As reported........................................ $(1,886) $(16,064)
Pro Forma.......................................... (1,889) (16,533)
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 loss 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.
F-21
<PAGE> 99
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
8. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
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.
WARRANTS
NextCard had outstanding the following warrants to purchase its securities:
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 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 $0.13 - $0.56 1,024 $0.22 - $20.00
Series C-1 Convertible Preferred
Stock.............................. 39 $1.29 -- --
Series D-1 Convertible Preferred
Stock............................ 585 $0.22 - $2.67 -- --
----- -----
1,139 1,024
===== =====
</TABLE>
These warrants were issued to third parties for services rendered and loan
fees. At December 31, 1998, and September 30, 1999, 1,079,433 and 973,637
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 two years from the date of the IPO.
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.
F-22
<PAGE> 100
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
The following is a summary of deferred tax assets (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 95 $ 6,021
Deferred start-up costs................................... 718 541
Deferred revenue.......................................... -- 209
Other..................................................... 32 72
----- -------
Total deferred tax assets................................... 845 6,843
Valuation allowance......................................... (845) (6,843)
----- -------
Net deferred tax assets..................................... $ -- $ --
===== =======
</TABLE>
At December 31, 1998, NextCard had 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 taxable 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, and September 30, 1999, the respective
carrying values of NextCard's financial instruments approximated their fair
values. These financial instruments include cash and cash equivalents, accounts
payable, accrued expenses and other liabilities, 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.
F-23
<PAGE> 101
NEXTCARD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
AND 1999 IS UNAUDITED)
11. SUBSEQUENT EVENTS (UNAUDITED)
On November 8, 1999, NextCard signed a five-year marketing agreement with
Amazon.com, L.L.C. whereby NextCard and Amazon.com, L.L.C. will join to deliver
co-branded credit card accounts originated on a customized website. NextCard
will pay to Amazon.com, L.L.C. an origination fee for each co-branded credit
card account, and will pay certain additional compensation including per account
renewal fees on each account's anniversary date. Minimum account payments of
$85.0 million (subject to performance requirements) will be made by NextCard to
Amazon.com, L.L.C. over the term of the agreement. In addition, based on the
number of credit card accounts originated, NextCard could pay up to an
additional $17.5 million. Separately, NextCard received $22.5 million from
Amazon.com, L.L.C. in exchange for a warrant to acquire up to 4.4 million common
shares of NextCard. This warrant has an exercise price per share of $39.20, is
fully vested and expires on November 8, 2002.
In addition, on November 12, 1999, NextCard entered into a $220 million
commercial paper conduit facility with First Union Securities. NextCard
borrowings under this facility are secured by all credit card receivables that
may be purchased using funds from this facility.
F-24
<PAGE> 102
[INSIDE BACK COVER OF PROSPECTUS]
[MY VISA WEB PAGE]
<PAGE> 103
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DECEMBER 10, 1999
LOGO
8,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL SECURITIES
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
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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.
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