<PAGE>
As filed with the Securities and Exchange Commission on August 30, 1999
Registration No. 333-83443
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NETCENTIVES INC.
(Exact Name of Registrant as Specified in Its Charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7389 93-1213291
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
690 Fifth Street
San Francisco, CA 94107
(415) 538-1888
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
West Shell, III
Chairman and Chief Executive Officer
Netcentives Inc.
690 Fifth Street
San Francisco, CA 94107
(415) 538-1888
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------
Copies to:
<TABLE>
<S> <C>
Craig W. Johnson Mark A. Bertelsen
Elias J. Blawie Jose F. Macias
Sanjay K. Khare Betsey Sue
Matthew Oshinsky Melissa V. Hollatz
VENTURE LAW GROUP WILSON SONSINI GOODRICH & ROSATI
A Professional Corporation Professional Corporation
2800 Sand Hill Road 650 Page Mill Road
Menlo Park, CA 94025 Palo Alto, CA 94304
(650) 854-4488 (650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
----------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-----------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Unit Price(1) Fee(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001................ 6,900,000 $12.00 $82,800,000.00 $23,018.40
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act.
(2) Includes $19,182.00 previously paid by Registrant on July 22, 1999.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999
6,000,000 Shares
[LOGO]
Common Stock
---------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$10.00 and $12.00 per share. We have applied to list the common stock on The
Nasdaq Stock Market's National Market under the symbol "NCNT."
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 4.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Netcentives
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Hambrecht & Quist
Thomas Weisel Partners LLC
The date of this prospectus is , 1999
<PAGE>
[INSIDE FRONT COVER]
Title: The Netcentives Foundation for Loyalty
Graphic: An elliptical set of arrows connecting three numbered circles
representing the elements of a loyalty system.
Text: loyalty--Loyalty programs are designed to build lasting relationships
with customers and employees
Labels: 1: recognize--Our loyalty programs identify and recognize customers
for purchasing and employees for superior performance.
2: reward--Our loyalty programs reward positive behavior.
3: respond--Customers respond by repeat purchase and employees by
increased productivity.
<PAGE>
[GATEFOLD]
Title: The Netcentives Loyalty Platform
Graphic: An elliptical set of arrows connection icons representing
transactions, rewards, tracking, redemption and the Netcentives products.
Labels: transaction--Consumer performs an action at a merchant site,
or an employee does extraordinary work.
reward--A customer is automatically rewarded with miles, points, or
other custom currency.
tracking--Rewards are tracked with email and Web-based account
statements.
redemption--Customers electronically redeem currencies for frequent
flyer miles, or merchandise.
ClickRewards
Custom Loyalty Networks
Enterprise Incentive Solutions
Logos: Rewards Suppliers: British Airways, Delta Airlines, Northwest Airlines,
TWA, United Airlines, American Airlines, US Airways, Continental,
shop.the.globe.com
ClickRewards Merchants: barnesandnoble.com, macys.com, OfficeMax.com,
previewtravel, CDNOW, E*TRADE, eBags, Cooking.com, planetRx, Cook Express
Screen shot of the ClickRewards Web page.
Caption: ClickRewards develops direct marketing, promotion, and loyalty
programs for ecommerce merchants.
Screen shot of the Cisco ClickRewards Program Web page.
Caption: *Enterprise Incentive Solutions creates loyalty programs for
employees, resellers, and partners for such companies as Adacution, Cisco
Systems, EventSource, and Exceptional People.
Screen shot of the LookSmart RewardPoints Web page.
Caption: *Custom Loyalty Networks produces loyalty networks for the GO Network,
LookSmart, and Lycos.
Additional Caption: *Revenues from these programs through June 30, 1999 are not
material.
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 5
Special Note Regarding Forward-Looking Statements........................ 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 47
Related Party Transactions................................................. 58
Principal Stockholders..................................................... 60
Description of Capital Stock............................................... 62
Shares Eligible for Future Sale............................................ 64
Underwriting............................................................... 66
Notice to Canadian Residents............................................... 69
Legal Matters.............................................................. 70
Experts.................................................................... 70
Where You Can Find More Information........................................ 70
Index to Consolidated Financial Statements................................. F-1
</TABLE>
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in this offering. You should read the
entire prospectus carefully.
Netcentives Inc.
Our Business
- ------------
Netcentives is a leading provider of Internet loyalty, direct marketing and
promotion products and services used to drive consumer behavior. Netcentives'
flagship program, the ClickRewards Network, is a powerful online promotion and
loyalty program that allows e-commerce sites to reward consumers with
ClickMiles, a digital promotion currency, for making online purchases. The
ClickRewards Network was launched in March 1998, and as of August 27, 1999,
included over 1.8 million members who have earned, in the aggregate, over 285
million ClickMiles. Members include those who have either earned ClickMiles
from participating merchants or who have enrolled in the ClickRewards program.
The ClickRewards Network includes a broad range of e-commerce companies that
purchase ClickMiles from us and award them to consumers in order to convert
browsers to buyers, increase average purchase size, drive repeat purchases and
build loyalty to their sites. Representative companies in the ClickRewards
Network include Web sites ranked by Media Metrix as being among the top 500
digital media properties, such as barnesandnoble.com, E*TRADE, macys.com,
OfficeMax.com and Preview Travel, as well as other Web sites such as Cook
Express, Cooking.com, eBags, eNutrition and PlanetRx. Our technology allows
consumers to earn rewards currency at the point of purchase on sites throughout
the Web and to track and manage them in their own personal account at a central
Web site.
Utilizing the technology platform we have developed for the ClickRewards
Network and our expertise with promotional products and services, we have
expanded our product offerings to provide Custom Loyalty Networks. Custom
Loyalty Networks are promotional programs for portals, companies with major
brands and other Web sites with substantial membership that use a customized
currency. The currency and network are branded with our customer's identity. We
launched our first Custom Loyalty Network for Looksmart in July 1999 and have
signed contracts to develop Loyalty Networks for the GO Network and Lycos that
we expect to launch in the fourth quarter of 1999. We have also launched
Enterprise Incentive Solutions programs with four corporate customers. These
are programs through which corporations use ClickMiles to motivate and reward
employees, partners and stakeholders. We also offer a broad array of
complementary services to our ClickRewards merchants and Custom Loyalty and
Enterprise Incentive customers, including technical consulting and development,
marketing consulting, on-line advertising and sponsorship, joint marketing
programs and e-mail direct marketing.
We have exclusive agreements with eight major airlines for the use of their
frequent flyer miles in points-based Internet promotions networks. These
relationships allow consumers to redeem ClickMiles one-for-one for frequent
flyer miles from American Airlines, British Airways (USA), Continental
Airlines, Delta Air Lines, Northwest Airlines, TWA, United Airlines and US
Airways. These exclusive agreements give our ClickRewards merchants the ability
to attract and retain online shoppers using a compelling, relevant and
differentiated rewards currency. They also give our merchants access to
frequent flyer program members, a set of consumers that we believe has a
demographic profile closely aligned with that of online consumers. According to
Jupiter Communications, 41% of online consumers are also members of frequent
flyer programs. In addition to frequent flyer miles, ClickRewards and our other
programs offer redemption options such as merchandise and other travel awards.
In order to drive purchases at the merchant Web sites participating in the
ClickRewards Network and to make our products more valuable to them, we
actively recruit a consumer membership base for ClickRewards.
2
<PAGE>
Consumers participating in our ClickRewards and Custom Loyalty Networks can
learn about offers and track and redeem their loyalty currencies at a
centralized Web site for each network. In addition, for ClickRewards merchants
and our Custom Loyalty Network customers we offer a variety of direct marketing
services. These services include collecting information about consumers and
their purchasing behavior, offering e-mail direct marketing using this
information and managing merchant promotions.
Risks
- -----
Our business is subject to risks. In particular, we have incurred losses
since our inception, including losses of $14.1 million in 1998 and
$16.1 million for the first six months of 1999. Our accumulated deficit as of
June 30, 1999 was $34.7 million, and we expect to continue to incur losses for
the foreseeable future. Furthermore, we have a limited operating history and
limited revenues from operations, and we operate in a highly competitive
market. These risks, as well as others that are important to our business, are
detailed in the Risk Factors section beginning on page 5.
----------------
All information in this prospectus assumes:
. no exercise of the underwriters' over-allotment option;
. the exercise of outstanding warrants to purchase 46,891 shares of Series B
preferred stock which expire upon the closing of this offering;
. the conversion of all outstanding shares of our convertible preferred
stock into an aggregate of 20,569,126 shares of common stock upon
completion of this offering; and
. the filing of our Amended and Restated Certificate of Incorporation,
authorizing a class of 5,000,000 shares of undesignated preferred stock
upon completion of this offering.
----------------
Netcentives, ClickRewards, ClickMiles, Custom Loyalty Networks, Enterprise
Incentive Solutions, RewardBroker, Secure Value Transfer Protocol,
SecureRewards Architecture, the Netcentives logo and the ClickRewards logo are
trademarks of Netcentives. This prospectus also contains brand names,
trademarks, or service marks of companies other than Netcentives, which are the
property of their respective holders.
3
<PAGE>
This Offering
<TABLE>
<C> <S>
Common Stock offered........................ 6,000,000 shares
Common Stock to be outstanding after this
offering................................... 31,793,417 shares
Use of proceeds............................. For general corporate purposes,
including working capital
Proposed Nasdaq National Market symbol...... NCNT
</TABLE>
The information in the above table excludes:
. 4,849,101 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $1.87 per share as of June 30, 1999;
. 615,448 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.13 per share as of June 30, 1999;
and
. an aggregate of 2,285,388 shares available for future issuance under our
employee benefit plans as of June 30, 1999.
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Inception Years Ended Six Months Ended
(June 21, 1996) December 31, June 30,
to December 31, ----------------- -----------------
1996 1997 1998 1998 1999
--------------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Total revenues......... -- $ 9 $ 647 $ 127 $ 3,021
Loss from operations... $ (273) (4,265) (14,408) (5,205) (16,611)
Net loss............... (266) (4,180) (14,111) (5,131) (16,149)
Basic and diluted net
loss per share........ $(0.97) $ (5.70) $ (8.58) $ (3.68) $ (5.10)
Shares used to compute
basic and diluted
net loss per share.... 273 734 1,644 1,396 3,167
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheets Data:
Cash and equivalents...................................... $36,152 $96,332
Working capital........................................... 27,635 87,815
Deferred revenues--product and services................... 4,311 4,311
Long-term obligations..................................... 973 973
Total stockholders' equity................................ 35,300 95,527
</TABLE>
See Note 8 to our Consolidated Financial Statements for an explanation of the
method used to determine the number of shares used to compute the loss per
share amounts.
The as adjusted information in the above table is adjusted to reflect the
sale of 6,000,000 shares of common stock offered by Netcentives at an assumed
public offering price of $11.00 per share after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses.
Netcentives was incorporated in California in June 1996 and reincorporated
into Delaware in August 1999. Our principal executive offices are located at
690 Fifth Street, San Francisco, California 94107, and our telephone number is
(415) 538-1888.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an investment
decision. You should also refer to the other information set forth in this
prospectus, including the discussion set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operations and Business, as well
as our consolidated financial statements and the related notes.
Business and Financial Risks
We have a history of losses and expect increasing future losses.
We incurred losses of $266,000 in 1996, $4.2 million in 1997, $14.1 million
in 1998 and $16.1 million in the first six months of 1999. Our net loss was
46,444%, 2,181% and 535% of our revenues for the periods ended December 31,
1997 and 1998 and June 30, 1999, respectively. As of June 30, 1999 we had an
accumulated deficit of $34.7 million. We currently expect that we will continue
to incur losses for the foreseeable future and that the magnitude of these
losses will increase substantially. We cannot assure you of when or if we will
become profitable. We believe that our ability to become profitable will be
based on a number of factors, including the other risk factors listed in this
section.
Because we have a limited operating history, it is difficult to evaluate
our business and prospects.
We were incorporated in June 1996 and launched our first product in March
1998. Therefore, we have a limited operating history on which you can base an
investment decision. Furthermore, the Internet promotion and direct marketing
industry is a new industry. As such, our business is subject to certain
challenges that a more mature company or a company operating in a more mature
industry may not face, such as:
. we have an unproven business model;
. members may not redeem ClickMiles or our custom loyalty currencies in
regular patterns;
. redemptions may exceed our available cash resources and cause
fluctuations in our operating results;
. we are dependent upon the expansion of the Internet and the growth of e-
commerce;
. we expect competition to intensify as new competitors emerge and existing
competitors offer new products and services;
. we may be unsuccessful in establishing or maintaining our brand;
. we depend on the promotional efforts of our merchants and other third
parties; and
. our sales cycles are unpredictable and may result in quarterly
fluctuations in our operating results which could lower our stock price.
If the market for e-commerce fails to grow, our revenues will not grow.
Our success will depend in large part on the continued growth in the use of
the Internet for commerce. We do not have direct control over the expansion of
e-commerce, and to the extent that the market for e-commerce does not increase,
our customer base and revenues will not grow.
In addition, critical and unresolved issues concerning the commercial use of
the Internet may affect the development of the market for our products and
services, including:
. the ability of consumers, sellers and other intermediaries to conduct e-
commerce on a secure basis;
. the reliability of the Internet for e-commerce, including the regular
availability of e-commerce sites;
. the availability of low-cost access to the Internet for consumers; and
. availability of sufficient telecommunications bandwidth to consumers to
enhance their ability to interact in the e-commerce shopping process.
If our supplier relationships become non-exclusive or are terminated, our
competitive position will be harmed.
We believe that our relationships with major airlines and their frequent
flyer programs are a source of competitive advantage, particularly to the
extent that they remain exclusive in the area of points-based Internet
5
<PAGE>
promotions networks. While we believe that we have established a broad scope
of exclusivity within our agreements with airlines, our competitors could
circumvent the terms of these agreements. Furthermore, in some cases, airlines
may terminate the exclusivity provisions contained in these agreements
following a 90 day notice period. If the ClickRewards Network ceases to be the
sole points-based Internet promotions network provider of frequent flyer miles
for multiple airlines, our business would be harmed. Additionally, some of our
airline agreements may be terminated in their entirety following notice
periods ranging from 90 to 180 days. To the extent that the ClickRewards
program can no longer offer frequent flyer miles from one or more of our
current rewards suppliers, our business would be harmed.
If our merchants terminate their relationships with us, our competitive
position and financial results may suffer.
Our merchants may generally terminate their relationships with us on 30 days
prior notice if changes we implement to the ClickRewards Network materially
impact the merchant's ability to participate in the program. Any termination
of merchant relationships could harm our business and financial results either
directly through the loss of revenues we generate through these merchants or,
more generally, through a perception of decreased value by our members or
other merchants participating in the ClickRewards Network.
We are subject to intense competition, and we expect to face increased
competition in the future.
As a provider of loyalty, direct marketing and promotion products and
services, we generally compete with advertising and other promotional programs
for a portion of a customer's total marketing budget. In addition, within the
promotions market, we compete with a variety of businesses in connection with
each of our three programs. For the ClickRewards Network our primary
competition can be categorized as follows:
. loyalty programs operated by and/or for portals and other large e-
commerce sites, such as AOL Rewards;
. Custom Loyalty Networks we operate on behalf of third parties; and
. stand-alone loyalty programs and promotional tools developed by and/or
for e-commerce sites, such as Autobytel.com Mobalist Rewards, CDnow Fast
Forward Rewards, CBS SportsLine Rewards, Cybergold and MyPoints.com.
We believe that we face substantial obstacles competing against internally
developed products created by our existing and potential customers.
Additionally, Custom Loyalty Networks that we develop for third parties may
compete directly with the ClickRewards Network for merchants and members in
electronic commerce.
Our Enterprise Incentive Solutions products and services compete with
existing, offline incentive products provided by parties such as Maritz
Marketing Research, Carlson Marketing Group, Loyalty Group, a division of
Alliance Data Systems and BI Performance Services. Our Custom Loyalty Network
and Enterprise Incentive Solution products and services also compete with
products offered by third parties, such as MyPoints.com.
For each of our programs, we expect competition to intensify as more
competitors enter our market. We believe that such future competition could
come from newly formed companies and, more importantly, from traditional
offline promotions and loyalty companies such as Carlson Marketing Group,
Brierley & Partners and Signature Group, a division of GE Capital. In order to
compete in our market, companies will need to develop the necessary Internet-
based technology infrastructure, enter into relationships with key suppliers
and obtain access to appropriate business processes. We believe that large
offline promotions and loyalty companies have the necessary resources and
expertise to do so. While we currently have contractual relationships with
many rewards suppliers, such as airline frequent flyer programs, any of these
suppliers could themselves enter our markets and provide us with substantial
competition.
Many of our potential competitors have greater resources than we do, which
may impair our ability to compete.
Many of our potential competitors, and in particular offline promotions
companies and offline rewards programs, have longer operating histories,
stronger brand names and significantly greater financial, technical,
6
<PAGE>
marketing and other resources than we do. In addition, these companies may have
existing relationships with our potential customers and may be able to respond
to changes in market dynamics and technology faster than we can. We cannot
assure you that we will be able to compete successfully against any potential
competitors. If we are unable to compete successfully against any potential
competitors, our business would suffer.
Because our business model is unproven, we cannot assure you that our
revenue will grow or that we will become profitable.
Our business model depends upon our ability to leverage and to expand our
network of ClickRewards Network merchants, Custom Loyalty Network customers,
Enterprise Incentive Solutions customers, rewards suppliers and members to
generate multiple revenue streams. The potential profitability of this business
model is unproven, and to be successful we must, among other things, develop
and market additional products and services to existing customers effectively.
Finally, we may be forced by competitive pressures, industry consolidation or
otherwise, to change our business model for certain or all of our customers, in
which case our financial results could be harmed. Our business model may not be
successful and we may not sustain revenue growth or achieve or sustain
profitability.
Recent changes to our ClickMiles terms and conditions for our merchants may
cause revenues to decline.
We recently changed the terms and conditions on which our merchants can
purchase ClickMiles. Beginning in the third quarter of 1999, new merchants are
required to purchase a minimum of 450,000 ClickMiles. On an ongoing basis,
merchants are required to purchase ClickMiles in quantities equal to one
month's expected usage and maintain specified minimum balances. These
ClickMiles are non-refundable and expire if not awarded by the merchant within
a six-month period. Since these changes were recently implemented, we have not
observed any material impact on our business; however, we cannot provide any
assurances that our current participating customers will accept these policies
and remain in our programs or that we will be able to attract new customers to
our programs. Moreover, we cannot provide any assurances that we will not have
to change our pricing policies again in the future to retain and attract new
customers.
Consumers may not redeem loyalty currencies in regular patterns. If
redemptions are higher than we anticipate, our available cash resources
could be depleted and our operating results could fluctuate.
A significant element of our business model is based on the effective
management of the potential financial liabilities associated with our points-
based loyalty products. We typically receive cash from a merchant for a given
ClickMile months before the consumer earns and subsequently redeems the
ClickMile. However, we typically do not pay for the redemption reward until the
consumer redeems the ClickMile. Therefore, we do not control when we will incur
this cash expenditure. As a result, over time, as the number of ClickMiles or
custom currency points in circulation increases, we will have increasing
liabilities for the potential eventual redemption of these points, and
consequently we will need to maintain adequate cash balances for any such
future redemptions. Because we have very limited historical data with respect
to our members' redemption behavior, we cannot assure you that members will
redeem their points in predictable patterns. If redemption requests are
inconsistent with our expectations or exceed our available cash resources, our
financial condition could be harmed. We do not currently have unused and
available credit facilities or similar sources of external financing.
Therefore, if we do not maintain adequate cash reserves we will be obligated to
raise additional funds. In addition, because we recognize a portion of our
revenues upon redemption by the consumer, unexpected redemptions could cause
fluctuations in our operating results and cause our stock price to fluctuate.
If the market for Internet-based promotion and direct marketing products
and services does not evolve as we anticipate, our business will be harmed.
The market for Internet-based promotion and direct marketing products and
services has only recently developed and is rapidly changing. As is typical for
a new and rapidly evolving industry, demand and market
7
<PAGE>
acceptance is uncertain, and few proven offerings exist. Moreover, since the
market for our promotion products and services is new and evolving, it is
difficult to predict the size of this market or its future growth rate, if any.
We cannot assure you that a sufficient volume of merchants will accept online
loyalty programs and promotions as a consumer attraction and retention device.
If the market for Internet-based promotion and direct marketing fails to
develop, develops more slowly than expected, or becomes saturated with
competitors, or if our products fail to achieve market acceptance, our business
would be harmed.
If factors outside of our control, or our member policies, cause ClickMiles
or frequent flyer miles to become less valuable, we may lose merchants and
members.
We have based the ClickRewards Network, in part, on the assumption that
frequent flyer miles of major airlines and similar rewards from other suppliers
have a high perceived value for e-commerce shoppers. Furthermore, we have
established ClickMiles as being redeemable one-for-one for the frequent flyer
miles of several major airlines. To the extent that the airlines who provide us
with frequent flyer miles reduce the value of such miles by increasing the
number of miles required to achieve free travel, or by reducing the number of
seats available for free travel, the perceived value of ClickMiles to consumers
and, consequently, to merchants would be correspondingly reduced, which could
harm our business. We have no control over the policies of these airlines. In
addition, while we believe that e-commerce Web sites and shoppers currently
have a high perceived value for frequent flyer miles and the other awards that
we offer, if our belief is false, or if the perceptions of consumers shift over
time, our business could be adversely affected. Finally, to the extent that we
change the terms on which we offer or redeem ClickMiles, this may result in
dissatisfaction with the ClickRewards Network or in lawsuits, either of which
would harm our business or result in management distraction. For example, we
have recently added an expiration provision to our ClickMiles rewards currency,
such that consumers must redeem ClickMiles within 24 to 36 months of their
award. We cannot assure you that this or other changes to our ClickRewards
policies will not result in member or merchant dissatisfaction with, or reduced
acceptance of, our products and services.
We depend on the ClickRewards Network and Netcentives Professional Services
for most of our revenue; if we cannot develop revenues from new products,
our financial results will be harmed.
Substantially all of our revenues to date have come from the ClickRewards
Network and Netcentives Professional Services. Until we are able to develop
revenues from additional products, any reduction in revenues from ClickRewards
or any material unanticipated change in professional service-related revenues
would harm our results of operations. While we hope that our Custom Loyalty
Networks and Enterprise Incentive Solutions programs will account for a
significant portion of our future revenues, we have had only limited experience
with these programs. Therefore, we cannot assure you that we will be successful
in establishing these products as sources of revenue or profitability, or that
these are the appropriate programs on which we should be focusing our efforts.
For the six months ended June 30, 1999, technical consulting services and
currency related revenues were 79% and 21% of total revenues, respectively.
If we do not successfully establish or maintain our brands, our results of
operations will suffer.
We believe that establishing and maintaining the Netcentives and ClickRewards
brands are critical aspects of our efforts to attract, retain and expand our
merchant and member base and traffic, and to increase ClickMiles revenues. As a
result, we incurred $3.7 million and $3.5 million in advertising expenses for
the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively. We also believe that the importance of brand recognition will
increase as the number of Internet marketing and promotions companies
increases. In order to attract and retain merchants and members, we continue to
increase our financial commitment to creating and maintaining brand loyalty. We
are doing this using Internet-specific means, as well as more traditional
means, such as media advertising campaigns via print, radio and billboards. If
we do not generate a corresponding increase in revenues as a result of our
branding efforts or otherwise fail to promote our brand successfully, or if we
incur excessive expenses in an attempt to promote and maintain our brand, our
results of operations will suffer.
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<PAGE>
If our merchants fail to promote the ClickRewards Network effectively, our
revenues could suffer.
Our business model is substantially dependent upon the promotional efforts of
our merchants. For example, if our merchants do not prominently display
ClickRewards offers or do not work with us to create promotional offers that
are attractive and understandable to consumers, their ClickRewards promotions
may not be successful, and as a result, we may not be successful. We cannot
assure you that our merchants will continue to allocate sufficient technical
resources and promotional budgets and efforts to make their ClickRewards
promotions successful. If our merchants' promotional programs are not
successful, our revenues could suffer.
Any delays in our normally lengthy sales cycles could result in significant
fluctuations in our operating results.
The typical cycle to attract a new merchant to the ClickRewards Network is
between three to six months and the cycle for attracting Custom Loyalty Network
customers extends up to one year. Our sales are also unpredictable and involve
significant strategic marketing decisions by prospective customers. Our sales
process often requires us to educate potential customers about the uses and
benefits of our products and services and promotion tools more generally. In
particular, our Custom Loyalty Networks require customers to reconsider their
business in fundamental ways and often involve large financial commitments.
Finally, our prospective customers typically do not have personnel dedicated to
the implementation of promotion products such as ours either at a technical or
operational level. As a result, our customers typically spend substantial time
before purchasing our programs in performing internal reviews and obtaining
corporate approvals. We cannot be certain that this cycle will not lengthen in
the future. Any delay in sales of our programs could cause our operating
results to be significantly impaired.
Our future revenues are unpredictable, and our quarterly financial results
may fluctuate significantly.
We expect that our revenues will vary substantially from quarter to quarter
as a result of a variety of factors outside of our control. For example,
because the majority of our products and services are related to e-commerce, we
expect that ClickRewards merchants and Custom Loyalty Network customers will
award more ClickMiles and custom loyalty currencies during the holiday shopping
season. Similarly, at any given time, a limited number of customers conducting
particularly large issuance or redemption promotions may account for a large
fraction of our revenues. We will recognize the associated product and service
revenues from these transactions over a period of up to 36 months. To the
extent a large promotion ends or begins, or to the extent we begin or end
recognizing revenue associated with the holiday season in a given quarter, our
results for that quarter could be disproportionately affected. In addition we
expect other factors outside of our control to affect our quarterly results,
such as:
. fluctuations in the growth rate of e-commerce;
. changes in currency redemption and expiration patterns; and
. the concentration of our Custom Loyalty and Enterprise Incentive products
and services among a limited number of customers.
Salaries, wages, and facilities-related expenses, which are relatively fixed
in the short term, comprised 34% of our total expenses in the three months
ended June 30, 1999. We expect such costs to continue to be a significant
percentage of total expenses in future periods. In addition, other expenses,
such as advertising and promotion, are incurred in advance of the associated
expected revenues. As a result, fluctuations in revenues may have a
disproportionate effect on our quarterly results of operations and consequently
our stock price.
We do not currently have any unused credit or other external financing
facilities. If we are unable to raise additional capital, our business and
financial condition would suffer.
Since our inception, we have experienced negative cash flow from operations
and we expect to continue to experience significant negative cash flow from
operations for the foreseeable future. We believe that our current
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<PAGE>
capital resources prior to this offering, will be sufficient to meet our
anticipated cash requirements for at least the next twelve months. After that
time, we may be required to raise additional capital, and there can be no
assurance that we will be able to raise these funds on reasonable terms, or at
all. If we are unable to raise additional capital on reasonable terms, our
current stockholders could suffer substantial dilution. In addition, we may be
unable to pursue our current strategy, respond to competitive pressures or
otherwise conduct our business in the manner in which we would like. Any of
these events would harm our business and financial condition.
You will experience immediate and substantial dilution.
If you purchase shares of common stock in this offering, you will experience
immediate and substantial dilution in that the price you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. In particular, based on an assumed initial public offering price
of $11.00 per share, you will suffer immediate dilution of $8.11 per share.
This dilution is largely because our earlier investors paid substantially less
than the public offering price when they purchased their shares of common
stock. You will experience additional dilution upon the exercise of outstanding
stock options or warrants to purchase common stock.
We do not intend to pay dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and therefore
do not expect to pay any cash dividends in the foreseeable future.
Technical Risks
If our systems do not prevent fraudulent transactions, our business and
financial condition could suffer.
Even though we have implemented network security measures, our servers are
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering. If a third party is able to conduct fraudulent
transactions on our servers or tamper with transactions that occur between our
servers and our suppliers, members or merchants, we could be financially liable
for such transactions. In addition, our reputation and business could suffer.
Our network infrastructure may be compromised or damaged, which could harm
our business and financial condition.
We utilize the services of Exodus Communications to host our production
servers and provide us with telecommunications links. The successful delivery
of our services is substantially dependent on our ability and the ability of
Exodus to protect our server and network infrastructure against damage from:
. human error;
. fire;
. flood;
. power loss;
. telecommunications failure;
. on-line or physical sabotage; and
. intentional acts of vandalism.
In addition, our primary server and network infrastructure is located in a
single location in Northern California, an area susceptible to earthquakes,
which could cause system outages or failures if one should occur. Although we
have redundant systems for our server and network infrastructure, they are all
located at a single site. Despite precautions taken by Exodus and us, the
occurrence of other natural disasters or other unanticipated problems at our
respective facilities could result in interruption in the services we provide
or
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<PAGE>
significant damage to our server and network infrastructure. If any of these
events occur, interruptions, delays, or the loss or corruption of critical data
or cessations in service may result, which could harm our business and
financial condition. In addition, our reputation and the Netcentives and
ClickRewards brands could suffer.
The failure of our computing systems could result in financial losses or
impair our reputation.
The performance of our hardware and software is critical to our business,
reputation and ability to attract members, merchants and rewards suppliers to
the ClickRewards Network and our Custom Loyalty Networks. Although we have
designed our system to continue operating despite software or physical
failures, system failures that cause an interruption in service or a decrease
in responsiveness of our transaction processing or data storage capabilities
could impair our reputation and the attractiveness of our brands. We rely on
Exodus for a significant portion of our Internet connectivity as well as
monitoring and managing of power and operating environment for our server and
networking equipment. Periodically, we experience unscheduled downtime which
results in our members and merchants being unable to check their statements or
request redemptions. For example, a power failure at Exodus in March 1999
caused approximately eight hours of interruption in our network. To date, these
interruptions have not had a material impact on our financial results. However,
any future interruptions in service could result in financial losses or impair
our reputation.
Delays in integrating our services with customer systems could result in
fluctuations in financial results or the loss of potential customers.
In order for ClickRewards merchants or Enterprise Incentive Solutions
customers to participate in the ClickRewards Network, they usually must install
our software on their computer systems and implement promotions on their Web
sites. For customers implementing Custom Loyalty Networks, substantially more
systems integration may be required. Our software is not designed for every
available platform and system. Many of our potential customers have older
computer systems and manual processes that were not designed with promotion
products in mind. Therefore, the integration process may become so complex as
to delay a customer's implementation of a program and potentially prevent the
sale of a promotion product altogether. In addition, many of our potential
customers have limited technical resources and promotion budgets. They may not
have the capacity to install and maintain our software in order to use our
products effectively or implement them at all. To the extent that the software
component of our products cannot be integrated with the computer platforms and
software currently used by our potential customers, or these customers do not
have the technical or financial resources to implement our software
effectively, our potential customer base and revenues would be reduced.
System capacity constraints may result in a loss of revenues.
An increase in the use of our products could strain the capacity of our
systems, which could lead to slower response time or system failures. System
failures or slowdowns adversely affect the speed and responsiveness of our
rewards transaction processing. These would diminish the experience for our
members and reduce the number of transactions, and, thus, could reduce our
revenue. Although we have designed and tested our system to handle at least 100
times the highest daily transaction volume we have experienced to date, the
ability of our systems to manage this volume of transactions in a production
environment is unknown. As a result, we face risks related to our ability to
scale up to our expected transaction levels while maintaining satisfactory
performance. If our usage of telecommunications bandwidth increases, we will
need to purchase additional servers and networking equipment and rely more
heavily on Exodus and its services to maintain adequate data transmission
speeds. The availability of these products or services may be limited or their
cost may be significant.
Software defects or errors could damage our reputation or result in a loss
of revenues.
The software that we have developed to run the ClickRewards Network, Custom
Loyalty Networks and Enterprise Incentive Solutions is complex and may contain
undetected errors or defects, especially when newer versions are released. Any
errors or defects that are discovered after commercial release or that delay a
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<PAGE>
commercial release could result in lost revenues, errors in member account
information, delays in the introduction of new products or services, delays in
implementation of promotions, customer or member dissatisfaction and damage to
our reputation.
We face Year 2000 risks that could harm our business and financial
condition.
Many computer systems currently in use are not capable of distinguishing
twenty-first century dates from twentieth century dates. As a result, beginning
on January 1, 2000, computer systems and software used by many companies and
organizations in a wide variety of industries, including e-commerce, will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Although we believe that the current
versions of our software are Year 2000 compliant, we may face claims based on
Year 2000 issues arising from the integration of our software into the systems
of third parties. In addition, we have not developed a contingency plan in the
event that our software is not Year 2000 compliant. Exodus, which hosts our
production servers and provides us telecommunications links, has published
statements that their facilities are Year 2000 compliant.
We may experience reduced sales of our products and services as a result of
the unavailability of technical and other personnel required to implement our
products who are otherwise focused on Year 2000 issues. Use of our software can
be dependent on the successful operation of the systems of our existing
merchants and rewards suppliers, and we have no information regarding the Year
2000 compliance of our merchants or the rewards supplier systems with which we
do not directly interface. Our customers or rewards suppliers could experience
Year 2000 issues that cause their systems, and consequently our services, to
fail. Any such claims, or reduction in sales, could harm our business and
financial condition. We are currently assessing the compliance of our internal
systems for Year 2000 issues. If our internal systems fail to be Year 2000
compliant, our operations could be disrupted or suspended, causing us to lose
revenue or business opportunities, or result in management distraction.
Legal Risks
We could become involved in disputes regarding the validity of our patent
which would result in unexpected expenses and management distraction.
The Internet, and specifically the market for e-commerce and online
advertising, direct marketing and promotions, is characterized by a rapidly
evolving legal landscape. A variety of patents relating to this market have
been issued in the recent past, including our own patent which relates
generally to online incentive award programs. One aspect of our patent is
directed to a computer system for implementing an incentive award program, with
the computer system including an online product catalog, an online awards
catalog and a database for storing account information for each user of the
incentive award program. Our patent protects the architecture on which all of
our online loyalty products and services are based. We also believe that many
current and potential competitive products may use the architecture covered by
our patent. Therefore, we believe this patent is important to our business. We
believe that several additional, related patents are currently pending. We
believe that there will continue to be substantial activity in this area and
that litigation may arise due to our attempts or a third party's efforts to
enforce their respective patent rights.
We may incur substantial expenses and management attention may be diverted if
litigation occurs. In addition, whether or not any claims against us are
meritorious, we may be required to enter into license agreements or be subject
to injunctive or other equitable relief, any of which would result in
unexpected expenses and management distraction.
We may be subject to claims as a result of our database marketing efforts
which could result in a loss of members and revenues.
A component of our strategy is leveraging our database marketing
technologies. We have designed our technology infrastructure and services to
allow us to aggregate data regarding specific member behavior throughout the
network. We have a strict privacy policy that governs how we use information
about our
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<PAGE>
members. We currently do not sell this information to third parties and have no
plans to do so in the future. Furthermore, our communications are not sent to
members who have declined to be contacted. However, we cannot assure you that
certain persons who receive promotional materials from us will not be
dissatisfied with being contacted. In addition, while we strictly protect the
identity of individual members on our networks, we do provide merchants and
rewards suppliers with aggregate information regarding network participation,
and we cannot ensure that such aggregated information will not be the cause of
dissatisfaction among our members. There has been substantial publicity
regarding privacy issues surrounding the Internet, and to the extent that our
database marketing efforts conflict with any privacy protection initiatives, or
if any private information is inadvertently made public, we may be subject to
legal claims. If members of our networks become dissatisfied as a result of our
database marketing efforts, or if we become the subject of legal proceedings in
this regard, our business and results of operations would suffer.
Federal, state and local governments may further regulate e-commerce and
travel awards which could reduce our ability to become profitable.
The frequent flyer miles and other travel awards that we currently award are
the subject of substantial government regulation, including excise taxes. In
addition, our rewards are frequently used as prizes in sweepstakes operated by
our customers, which are subject to substantial regulation. Finally, as a
result of the increasing popularity of the Internet and e-commerce, a number of
legislative and regulatory proposals that affect e-commerce are under
consideration by federal, state, local and foreign governmental organizations.
Thus it is possible that a number of laws or regulations may be adopted with
respect to the Internet, e-commerce and online database marketing. In the event
that our rewards, the promotions operated by our merchants or e-commerce
generally becomes the subject of further regulation or taxation, including the
taxation of frequent flyer miles received by consumers, this regulation or
taxation could have a negative effect on our financial results or our ability
to sell our products.
If we are unable to protect our proprietary rights adequately, our
competitive position would suffer.
We currently rely on a mixture of patents, copyrights, trademarks, trade
secrets and agreements with third parties and employees to protect our
proprietary rights. We have a patent that relates generally to online incentive
award programs. One aspect of our patent is directed to a computer system for
implementing an incentive award program, with the computer system including an
online product catalog, an online awards catalog and a database for storing
account information for each user of the incentive award program. Netcentives,
ClickRewards, ClickMiles, Custom Loyalty Networks, Enterprise Incentive
Solutions, RewardBroker, Secure Value Transfer Protocol, Secure Rewards
Architecture, the Netcentives logo and the ClickRewards logo are trademarks of
Netcentives. We copyright our Web site content, our software and our sales and
promotional literature. Despite our efforts to protect our proprietary rights,
unauthorized parties may use aspects of our business model and products and
obtain and use information we regard as proprietary. In addition, other parties
may breach confidentiality agreements or other protective contracts with us,
and we may not be able to enforce our rights in the event of such breaches. We
believe that each of these proprietary rights is important to our business in
our effort to prevent unauthorized use of our technology and processes and
protect our investment in establishing and maintaining our brand. Our
competitors may independently develop technologies or business models that are
substantially equivalent or superior to ours. We have licensed our patent to
MyPoints.com, a competitor of ours, who uses this license to compete with us
using our business process. We may decide to license our patent to other
competitors. If we expand internationally, many countries do not protect
intellectual property rights to the same extent as the laws of the United
States. In the event that we are unable to protect our proprietary rights, our
business, financial condition and results of operations could be materially
adversely affected.
Our officers and directors control a large percentage of our voting stock
and will be able to control matters requiring stockholder approval.
After this offering, our executive officers and directors, and the venture
capital funds that some of our directors represent, will beneficially own
approximately 45.5% of our outstanding common stock in the aggregate. As a
result, these stockholders will be able to exercise effective control over all
matters requiring
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<PAGE>
stockholder approval, including the election of directors and approval of
significant corporate matters, such as mergers and acquisitions and amendments
to our Certificate of Incorporation. This concentration of ownership may delay,
deter or prevent transactions that would result in the change of control of
Netcentives, which in turn could reduce the market price of our common stock.
Our Certificate of Incorporation and Bylaws and Delaware law contain
provisions that could discourage a takeover.
Certain provisions of our Certificate of Incorporation and Bylaws and
Delaware law may delay, deter or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
. authorizing the board to issue additional preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. establishing a staggered board of directors;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Management Risks
We may not be successful in integrating any businesses or technologies we
may acquire in the future, which could harm our financial position or
result in management distraction.
We may acquire or make investments in complementary businesses, products,
services or technologies. From time to time we have had discussions with
companies regarding acquiring or investing in their businesses, products,
services or technologies. We cannot assure you that we will be able to identify
suitable acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make acquisitions or
investments on commercially acceptable terms. We may have difficulty
assimilating the products, services or technologies of companies we may acquire
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and harm our
results of operations due to accounting requirements such as goodwill.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
Expanding internationally will create management and financial
difficulties.
We intend to enter new international markets, including Canada and Europe.
This expansion will require significant management attention and financial
resources. International operations are subject to a number of risks and
uncertainties, including:
. the difficulties and costs of staffing and managing international
operations;
. the need to establish relationships with distributors and the performance
of these distributors;
. the difficulties and costs of localizing products for international
markets;
. unexpected changes in regulatory requirements;
. legal uncertainties regarding liability, Internet commerce restrictions,
tariffs, the offering of purchase incentives and trade barriers;
. inadequate protection of intellectual property in some countries;
. increased difficulty in collecting delinquent or unpaid accounts;
. fluctuations in the value of the U.S. dollar relative to other
currencies;
. potentially adverse tax consequences; and
. political and economic instability.
Any of these factors could impair our ability to expand into international
markets. Similarly, we cannot accurately predict the impact that future
fluctuations in currency exchange rates may have on our business, operating
results or financial condition.
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<PAGE>
We have broad discretion to use the proceeds of this offering.
We have not designated any specific use for the net proceeds of this
offering. We expect to use the proceeds primarily for working capital and
general corporate purposes. We may also use a portion of the net proceeds to
acquire or make investments in additional businesses, products and technologies
or to establish joint ventures that we believe will complement our current or
future business. However, we have no specific agreements or commitments to do
so. As a result, our management and board of directors will have broad
discretion in spending the proceeds of this offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary, Risk Factors, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Business and elsewhere in this prospectus are forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms. These statements involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under Risk Factors and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by securities laws.
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USE OF PROCEEDS
We estimate that we will receive approximately $60.2 million in net proceeds
from the sale of the 6,000,000 shares of common stock in this offering. We base
this estimate on an assumed initial public offering price of $11.00 per share
and after the deduction of estimated underwriting discounts and commissions and
estimated offering expenses totaling approximately $5.8 million.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes to meet the needs of our
business. We expect increasing future losses as a result of increased marketing
and sales, research and development and other expenditures, as well as capital
expenditures made in the ordinary course of business. We believe we have
sufficient cash balances prior to this offering to fund our operations for at
least twelve months following the offering, and we have not completed our
budgeting process for any future periods. As a result, we do not have a
specific plan for the use of proceeds of this offering. We may use a portion of
the net proceeds to acquire or make investments in additional businesses,
products or technologies or to establish joint ventures that we believe will
complement our current or future business. The amounts that we actually spend
for working capital purposes will vary significantly depending on a number of
factors, including future revenue growth, if any, and the amount of cash we use
in our operations. As a result, we will retain broad discretion in allocating
the net proceeds of this offering. Pending the use of the net proceeds, we will
invest them in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend to
retain any future earnings to fund the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends in the
foreseeable future.
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CAPITALIZATION
The table below sets forth the following information:
. our capitalization as of June 30, 1999 on an actual basis;
. our pro forma capitalization which gives effect to the exercise of
warrants to purchase 46,891 shares of Series B preferred stock which will
expire if unexercised prior to the offering, and the conversion of
20,569,126 shares of preferred stock into shares of common stock; and
. our pro forma as adjusted capitalization which gives effect to the sale
by us of the 6,000,000 shares of common stock being offered at an assumed
offering price of $11.00 per share less the estimated underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share
data)
<S> <C> <C> <C>
Long-term obligations.......................... $ 973 $ 973 $ 973
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value;
shares authorized: 21,329,221 actual; and
5,000,000 pro forma and pro forma as adjusted;
shares outstanding: 20,522,235 actual, none
pro forma and pro forma as adjusted........... 21 -- --
Common Stock, $.001 par value; 33,240,000
shares authorized; shares outstanding:
5,224,291 actual; 25,793,417 pro forma and
31,793,417 pro forma as adjusted.............. 5 26 32
Paid-in capital................................ 77,321 77,368 137,542
Deferred stock compensation.................... (6,891) (6,891) (6,891)
Receivables from sales of stock................ (450) (450) (450)
Accumulated deficit............................ (34,706) (34,706) (34,706)
-------- -------- --------
Total stockholders' equity................... 35,300 35,347 95,527
-------- -------- --------
Total capitalization......................... $ 36,273 $ 36,320 $ 96,500
======== ======== ========
</TABLE>
The information in the above table excludes:
. 4,849,101 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $1.87 per share as of June 30, 1999;
. 615,448 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.13 per share as of June 30, 1999;
and
. an aggregate of 2,285,388 shares available for future issuance under our
employee benefit plans as of June 30, 1999.
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DILUTION
As of June 30, 1999, our pro forma net tangible book value was approximately
$31.7 million, or $1.23 per share of common stock. Pro forma net tangible book
value represents the total amount of our pro forma stockholders' equity less
intangible assets and deferred offering costs divided by the pro forma number
of shares of common stock outstanding. If we do not take into account any
changes in pro forma net tangible book value after June 30, 1999, except our
receipt of the estimated net proceeds from this offering based upon an assumed
initial public offering price of $11.00 per share after deducting estimated
underwriting discounts and commissions and estimated offering expenses, our pro
forma as adjusted net tangible book value at June 30, 1999 would have been
approximately $91.9 million, or $2.89 per share. This represents an immediate
increase in net tangible book value of $1.66 per share to existing stockholders
and an immediate dilution of $8.11 per share to new investors purchasing shares
in this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $11.00
Pro forma net tangible book value per share as of June 30,
1999....................................................... $1.23
Increase per share attributable to new investors............ 1.66
-----
Pro forma, as adjusted, net tangible book value per share
after this offering.......................................... 2.89
------
Dilution per share to new investors........................... $ 8.11
======
</TABLE>
The following table summarizes, as of June 30, 1999, the pro forma number of
shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid by existing stockholders and new
investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 25,793,417 81.1% $ 65,380,000 49.8% $ 2.54
New investors.............. 6,000,000 18.9 66,000,000 50.2 11.00
---------- ----- ------------ -----
Total.................... 31,793,417 100.0% $131,380,000 100.0%
========== ===== ============ =====
</TABLE>
The information in the above tables excludes:
. 4,849,101 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $1.87 per share as of June 30, 1999;
. 615,448 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.13 per share as of June 30, 1999;
. an aggregate of 2,285,388 shares available for future issuance under our
employee benefit plans as of June 30, 1999; and
. the estimated underwriting discounts and commissions and estimated
offering expenses.
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SELECTED CONSOLIDATED FINANCIAL DATA
This section presents historical and pro forma financial data of Netcentives
Inc. You should read the following selected consolidated financial data in
conjunction with our Consolidated Financial Statements and the related Notes
and with Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this prospectus. The selected data
in this section is not intended to replace the financial statements.
The consolidated statements of operations data for the period from June 21,
1996 (inception) to December 31, 1996 and for the years ended December 31, 1997
and 1998 and consolidated balance sheets data as of December 31, 1997 and 1998
are derived from our Consolidated Financial Statements included elsewhere in
this prospectus, which have been audited by Deloitte & Touche LLP. The pro
forma consolidated statement of operations data for the year ended December 31,
1998 are derived from the unaudited pro forma consolidated statement of
operations that give effect to our acquisition of the Panttaja Consulting
Group, Inc. in December 1998 and are included elsewhere in this prospectus. The
consolidated statements of operations data for the six months ended June 30,
1998 and 1999 and the consolidated balance sheet data as of June 30, 1999 are
derived from our unaudited consolidated financial statements which, in the
opinion of management, have been prepared on the same basis as the audited
consolidated financial statements and reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of our
results of operations and financial position. The historical results presented
below are not necessarily indicative of the results to be expected for any
future fiscal year.
<TABLE>
<CAPTION>
Six Months
Inception Ended
(June 21, 1996) Years Ended December 31, June 30,
to December 31, ------------------------------- -----------------
1996 1997 1998 1998 1998 1999
--------------- ------- -------- ------------ ------- --------
(pro forma
for Panttaja
acquisition)
Consolidated Statements
of Operations Data: (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $ -- $ -- $ 64 $ 64 $ 10 $ 216
Program-related
services.............. -- 9 583 583 117 428
Technical consulting
services.............. -- -- -- 3,432 -- 2,377
------ ------- -------- -------- ------- --------
Total revenues......... -- 9 647 4,079 127 3,021
------ ------- -------- -------- ------- --------
Costs and expenses:
Cost of product
revenues.............. -- -- 59 59 9 185
Program-related
services, marketing
and support costs..... 102 1,496 7,293 7,293 2,439 9,566
Cost of technical
consulting services
revenues.............. -- -- -- 2,153 -- 1,496
Research and
development........... 63 1,505 3,383 3,135 1,401 1,869
Selling, general and
administrative........ 108 1,210 3,134 4,758 1,319 3,596
Amortization of
deferred stock
compensation,
supplier stock awards
and intangibles....... -- 63 1,186 3,151 164 2,920
------ ------- -------- -------- ------- --------
Total costs and
expenses.............. 273 4,274 15,055 20,549 5,332 19,632
------ ------- -------- -------- ------- --------
Loss from operations.... (273) (4,265) (14,408) (16,470) (5,205) (16,611)
Interest income, net.... 7 85 297 252 74 462
------ ------- -------- -------- ------- --------
Net loss................ $ (266) $(4,180) $(14,111) $(16,218) $(5,131) $(16,149)
====== ======= ======== ======== ======= ========
Net loss per share--
basic and diluted...... $(0.97) $ (5.70) $ (8.58) $ (7.12) $ (3.68) $ (5.10)
====== ======= ======== ======== ======= ========
Shares used in computing
per share amounts--
basic and diluted...... 273 734 1,644 2,278 1,396 3,167
====== ======= ======== ======== ======= ========
Pro forma net loss per
share on a converted
basis--basic and
diluted(1)............. $ (1.05) $ (0.78)
======== ========
Shares used in computing
pro forma per share
amounts on a converted
basis(1)............... 13,422 20,807
======== ========
</TABLE>
- --------
(1) Gives retroactive effect to the conversion of all outstanding shares of
preferred stock into common stock which will occur upon completion of this
offering.
19
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of
---------------------- June 30,
1996 1997 1998 1999
------ ------ ------- --------
Consolidated Balance Sheets Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and equivalents............... $1,118 $6,608 $13,651 $36,152
Working capital.................... 1,027 6,348 9,923 27,635
Total assets....................... 1,255 8,549 21,935 47,251
Deferred revenues--product and
services.......................... -- 59 1,906 4,311
Long-term obligations.............. -- 196 1,233 973
Total stockholders' equity......... 1,146 7,128 14,334 35,300
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
--------------- -----------------
1997 1998 1998 1999
Additional Operating Data: ------ ------- ------- --------
Loyalty currencies activities: (in thousands)
<S> <C> <C> <C> <C> <C>
Number of points awarded by
merchants
Beginning balance................. -- 233 233 45,603
New awards by merchants........... 236 48,554 10,065 67,939
Redeemed.......................... (3) (3,184) (537) (10,788)
------ ------- ------- --------
In circulation.................... 233 45,603 9,761 102,754
====== ======= ======= ========
Deferred revenues--product
Beginning balance................. $ -- $ 43 $ 43 $ 1,250
Awards by merchants............... 5 971 201 1,359
Sold to merchants not yet awarded,
net.............................. 38 498 279 570
Redeemed.......................... -- (64) (10) (216)
Expired........................... -- (198) -- --
------ ------- ------- --------
Ending balance.................... $ 43 $ 1,250 $ 513 $ 2,963
====== ======= ======= ========
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We were incorporated in June 1996. From inception until March 1998, our
operations consisted primarily of various start-up activities, such as research
and development, personnel recruiting, capital raising and trial sales of our
products with initial customers. We launched the ClickRewards program in March
1998 and began recognizing revenue from non-trial program sales in April 1998.
In December 1998, we acquired the Panttaja Consulting Group, Inc., a provider
of technical consulting services to e-commerce merchants and other businesses.
We launched our first Enterprise Incentive Solutions program in January 1999
and our first Custom Loyalty Network in July 1999.
How our Programs Work
We sell rewards currencies to electronic retailers and other Internet sites.
Our primary rewards currency is ClickMiles, which we sell to merchants who
become part of the ClickRewards Network. These merchants, in turn, award these
ClickMiles to consumers as purchase, loyalty and other incentives. ClickMiles
are redeemable for, among other things, frequent flyer miles on major airlines
at a ratio of one frequent flyer mile for each ClickMile. We have also
developed and continue to develop additional loyalty and rewards currencies for
large Internet merchants, portals, community sites and other business
customers. We sell these custom currencies to our customers, who then
distribute them under their own brands. The custom loyalty currencies are
redeemable for items specific to the customer for whom the currency has been
developed and, in certain cases, are exchangeable for ClickMiles.
Merchants who participate in the ClickRewards Network receive the benefit of
our promotion of the ClickRewards brand and network, which includes direct
links to the merchants' sites from our ClickRewards web page. We also provide
merchants who participate in the ClickRewards Network with a variety of related
marketing and promotional services. These services include promotional
consulting, direct marketing services to our member base and integration and
maintenance of our enabling software. Depending on the specific relationship we
have with the merchant, we may either include some of these services in our
ClickMiles pricing or we may price them separately. To the extent that services
are bundled with ClickMiles, we increase the price of the ClickMiles package to
reflect the value of these services. We also offer similar marketing services
to our Custom Loyalty and Enterprise Incentive customers on both a bundled and
separately-priced basis.
We provide services to members, such as allowing them to manage and track
balances as they earn currencies in their personal, online accounts at the
designated Web site for that program and redeem the currency for merchandise
and other awards. We purchase the relevant awards and either have the
merchandise delivered to the consumer through a third-party fulfillment house,
or in the case of frequent flyer miles, electronically credit their chosen
frequent flyer account. We also provide our members with ongoing support to
assist them in managing and redeeming their currency.
How We Recognize Revenues
Currency-related revenues; product and program-related services
The revenues we receive from the sale of currencies are made up of two
components: product revenues and program-related services revenues. Product
revenues reflect the value of the reward our members will ultimately receive
upon redemption of the promotion currency. Program-related services revenues
reflect the value of services that we perform for our merchants and members. As
a result, our revenues related to sale of currencies are recognized at various
times.
A merchant typically purchases currencies from us before awarding them to
consumers. Upon the sale of our loyalty currencies, we allocate these revenues
between the product component, and the program-related
21
<PAGE>
services components. The product component of revenues is deferred until the
member redeems the currency for his or her selected reward. At the time of
redemption, we recognize the product component of revenues and the associated
cost of revenue based on the actual cost of the redemption reward. The revenue
related to the services component of the currency sale is deferred until the
sale of the currency becomes non-refundable, which historically has been upon
award of the currency to a consumer by the merchant. Services revenues relating
to separately-priced services are recognized when these services are delivered.
The remaining portion of services revenues is recognized ratably over the
period during which these services are provided. For all ClickMiles sold
through June 30, 1999, this service period has been initially calculated for
the maximum life of the ClickMile based on its expiration date. To the extent
ClickMiles are redeemed prior to expiration, the remaining unamortized amount
of deferred services revenues is recognized at the time of redemption.
If loyalty currency points expire or are forfeited, we recognize the
remaining amount of deferred product and program-related services revenues at
the time of expiration or forfeiture. Since we do not have sufficient
experience concerning the redemption or forfeiture of currency points, we
cannot currently predict in which periods we will recognize these revenues.
Currently, ClickRewards merchants buy ClickMiles in advance based on their
anticipated needs. Beginning in the third quarter of 1999, new merchants will
be required to purchase a minimum of 450,000 ClickMiles. On an ongoing basis,
merchants are required to purchase ClickMiles in quantities at least equal to
one month's expected usage and maintain specified minimum balances. These
ClickMiles are non-refundable and will expire if not awarded by the merchant
within a six-month period. The merchant services portion of revenues of any
ClickMiles sold under these arrangements will be amortized over the maximum
period during which the merchant may use the ClickMiles, resulting in a shorter
amortization period than has historically been used. The member services
component of revenues will continue to be amortized over the expected life of
the ClickMile.
We typically sell our loyalty currency products and related services to
merchants or custom loyalty program customers for cash. However, from time to
time, in connection with promoting the ClickRewards Network, we also sell
ClickMiles to our merchants for non-cash consideration, such as advertising and
merchandise. The revenue from the sale of these ClickMiles is accounted for on
the same basis as cash sales and the value of the advertising or merchandise is
recorded as an expense or a prepaid asset as appropriate. In 1998,
approximately $956,000 of advertising expense was recorded under these
arrangements, of which 74% was transacted with two merchants. In the six months
ended June 30, 1999, approximately $608,000 of advertising expense was recorded
under these arrangements, of which 92% was transacted with two merchants.
We also derive program-related service revenues from advertising and other
direct marketing services provided to third parties.
Technical consulting services revenues
We provide systems integration and technical consulting services to a variety
of clients, including ClickRewards merchants and Custom Loyalty and Enterprise
Incentive customers, to help them deploy our programs. These revenues are
recognized as the services are provided.
Results of Operations
Years Ended December 31, 1996, 1997 and 1998
Revenues
We had no revenues during 1996. We began test marketing the ClickRewards
Network during December 1997. Total revenues increased from $9,000 in 1997 to
$647,000 in 1998. Total 1998 revenues were composed of $64,000 of product
revenues, and $583,000 of program-related service revenues. Our 1998 revenues
increased principally because of our commercial launch of the ClickRewards
Network at the end of
22
<PAGE>
March 1998 and the associated purchase and issuance of ClickMiles by merchants
in the ClickRewards Network. Merchants awarded 236,000 ClickMiles in 1997 and
48.6 million ClickMiles in 1998 which was principally attributable to increases
in the number of merchants participating in the ClickRewards Network. Product
revenues reflect the redemption of ClickMiles for awards during the year.
Program-related service revenues in 1998 included $296,000 relating to the
expiration of ClickMiles owned by a merchant which were not distributed to
consumers as well as $84,000 of consulting services revenues attributable to a
non-recurring consulting contract with Visa International. Pro forma 1998
revenues include the technical consulting service revenues of Panttaja
Consulting Group, which was acquired in December 1998.
Cost of Product Revenues
Cost of product revenues represents the actual cost of awards selected by
members in exchange for ClickMiles. There were no redemptions during 1996 and
1997 and therefore no cost of product revenues during those years. Cost of
product revenues were $59,000 for 1998, which represented 92% of product
revenues.
Program-Related Services, Marketing and Support Costs
Program-related services, marketing and support costs represents the cost of
marketing services provided for the ClickRewards Network, as well as costs
incurred to support merchants and members in the Network. These costs consist
primarily of compensation and related costs for marketing and sales personnel,
advertising and marketing for the ClickRewards program, merchant account and
rewards supplier management, product management activities and ClickMiles
issued to acquire new members for the ClickRewards program. Program-related
marketing and support costs increased from $102,000 in 1996 to $1.5 million in
1997 and $7.3 million in 1998. The increase from period to period was primarily
the result of increased marketing and consumer support personnel expenses of
$623,000 from 1996 to 1997 and $1.8 million from 1997 to 1998, member
acquisition costs of $500,000 from 1997 to 1998, and advertising and promotions
expenses of $504,000 from 1996 to 1997 and $3.0 million from 1997 to 1998
associated with the launch of the ClickRewards Network. We expect to increase
substantially our marketing expenditures, particularly those related to
acquiring members for the ClickRewards Network, advertising and promoting our
brands and products, recruiting additional marketing personnel and managing
programs for our Custom Loyalty Networks and Enterprise Incentive Solutions
customers.
Cost of Technical Consulting Services Revenues
Cost of technical consulting services consists of the personnel and overhead
costs incurred in connection with providing technical consulting services.
There were no technical consulting services provided in 1996, 1997 and 1998 and
therefore no cost of technical consulting services revenues during those years.
The pro forma cost of technical consulting services consists of the personnel
and overhead costs incurred by the Panttaja Consulting Group.
Research and Development
Research and development expenses consist primarily of compensation and
related costs for research and development personnel, including independent
contractors and consultants, software licensing expenses and allocated
operating expenses such as site hosting, Web site production, facilities
expenses, and equipment costs. Research and development expenses increased from
$63,000 in 1996 to $1.5 million in 1997 and $3.4 million in 1998. These
increases from period to period were principally the result of an increase in
expenses in preparation for the launch of and enhancements to the ClickRewards
Network, as well as initial development efforts relating to our Custom Loyalty
Networks. The largest component of this increase was the growth in compensation
and related staff expenses as a result of increased staffing levels. These
expenses increased by $1.2 million from 1996 to 1997 and by an additional $1.2
million from 1997 to 1998 due to increased staffing. Site hosting expenses also
increased by $254,000 from 1997 to 1998. We expect to continue to increase
substantially research and development spending in absolute dollars as we
develop new products and expand our resources to maintain existing products.
23
<PAGE>
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Software Developed for Internal Use,
which will be effective for Netcentives beginning in 1999. The effects will be
to capitalize certain development costs that were previously expensed. The
amortization of these costs will be charged to research and development
expense.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries
and related expenses, sales commissions, treasury expenses, accounting and
administrative expenses, professional fees, and other selling and corporate
expenses. Selling, general and administrative expenses increased from $108,000
in 1996 to $1.2 million in 1997 and $3.1 million in 1998. The increase from
period to period was primarily the result of increased sales efforts to enroll
merchants into the ClickRewards Network, increased business development efforts
for our Custom Loyalty Networks and increased general and administrative
personnel. The largest component in this increase was the growth in
compensation expense and related staff costs as a result of increased staffing
levels. These expenses increased by $661,000 from 1997 to 1998 and by $1.2
million from 1997 to 1998 due to increased staffing. Other significant
components of the increase include the increase in legal fees and facilities-
related expenses of $385,000 from 1996 to 1997 and of $127,000 from 1997 to
1998. We expect selling, general and administrative expenses to increase in
absolute dollars as we add personnel and incur additional costs related to the
anticipated growth of our ClickRewards and Custom Loyalty Networks, our
expansion into international markets and our operation as a public company.
Amortization of Deferred Stock Compensation, Supplier Stock Awards and
Intangibles
Amortization of deferred stock compensation represents the difference between
the purchase or exercise price of certain restricted stock and stock option
grants, and the deemed fair market value of our common stock at the time of
these grants. This difference is amortized over the vesting period for such
grants, which is typically four years. Amortization of deferred stock
compensation was $296,000 for 1998 and is estimated to be a total of
$2.1 million in 1999, $2.1 million in 2000, $2.0 million in 2001 and $1.7
million in 2002 as a result of certain stock option grants and stock awards
during 1998.
Amortization of supplier stock awards represents the cost of warrants granted
to certain airlines and other rewards suppliers in return for exclusivity.
Expenses related to contingent stock warrants granted to certain airlines and
other partners was $63,000 in 1997 and $811,000 in 1998. Because the vesting of
these awards is subject to maintaining the exclusivity of the arrangement with
these rewards suppliers, the valuation of the warrants is not finalized until
the vesting date. Accordingly, the amount of the expense recognized for these
warrants increased as the value of our stock increased. A substantial number of
these warrants had not yet vested as of December 31, 1998. As a result, we
expect that the charge relating to supplier stock awards to increase in 1999.
In December 1998, we acquired Panttaja Consulting Group in a transaction that
was accounted for as a purchase. The resulting intangibles of $3.5 million
recorded in the acquisition will be amortized over two years.
Interest Income, Net
Interest income, net was $7,000 in 1996, $85,000 in 1997 and $297,000 in
1998. The year over year increases reflected primarily increases in interest
income from $7,000 in 1996 to $121,000 in 1997, and $441,000 in 1998, offset in
part by an increase in interest expense from $36,000 in 1997 to $144,000 in
1998, relating to capital leases and other financing arrangements.
Income Taxes
We have incurred losses since inception, and anticipate losses for the
foreseeable future. We have therefore recorded no provision for income taxes in
1996, 1997 or 1998. We have provided a full valuation allowance against our net
operating loss tax carryforwards and deferred income tax assets at December 31,
1998. As of December 31, 1998, our federal and state net operating loss tax
carryforwards were $14.2 million and $14.1 million, respectively.
24
<PAGE>
Net Loss
Net loss increased from $266,000 in 1996 to $4.2 million in 1997 and
$14.1 million in 1998. These increases were principally due to an increase of
costs and expenses of $273,000 in 1996, $4.3 million in 1997 and $15.1 million
in 1998.
Six Months Ended June 30, 1998 and 1999
Revenues
Revenues increased from $127,000 in the six months ended June 30, 1998 to
$3.0 million for the six months ended June 30, 1999. The increase in revenues
was primarily a result of the acquisition of Panttaja Consulting Group in
December 1998 and the growth of our ClickRewards Network launched in March
1998. Merchants awarded 67.9 million ClickMiles in the six months ended June
30, 1999. During the six months ended June 30, 1999, we began providing
technical consulting services through our Netcentives Professional Services
subsidiary.
Cost of Product Revenues
Cost of product revenues increased from $9,000 in the six months ended June
30, 1998 to $185,000 for the six months ended June 30, 1999 primarily as a
result of the increased redemption of ClickMiles by members. For the first two
weeks of July 1999, we offered our members the ability to redeem their
outstanding ClickMiles for frequent flyer miles on a two-for-one basis. As a
result of this offer, we incurred approximately $300,000 of additional product
costs which will affect our product margins in the third quarter of 1999.
Program-Related Services, Marketing and Support Costs
Program-related services, marketing and support costs increased from
$2.4 million in the six months ended June 30, 1998 to $9.6 million for the six
months ended June 30, 1999. The increase from period to period was primarily
the result of increased marketing and consumer support personnel expenses of
$782,000, member acquisition costs of $1.3 million, and advertising and
promotions expenses of $3.7 million associated with the launch of the
ClickRewards Network.
Cost of Technical Consulting Services Revenues
Costs of technical consulting services revenues totaling $1.5 million were
incurred in the six months ended June 30, 1999 from the associated revenues
recognized during the same period, as a result of the acquisition of Panttaja
Consulting Group in December 1998.
Research and Development
Research and development expenses increased from $1.4 million in the six
months ended June 30, 1998 to $1.9 million for the six months ended June 30,
1999. The increase was primarily the result of an increase in these expenses
for enhancements to the ClickRewards Network, as well as initial development
efforts relating to our Custom Loyalty Networks. The largest component of the
increase was the growth in compensation and related staff expenses of $499,000.
Selling General and Administrative
Selling, general and administrative expenses increased from $1.3 million in
the six months ended June 30, 1998 to $3.6 million for the six months ended
June 30, 1999. The increase from period to period was primarily the result of
increased sales efforts to enroll merchants into the ClickRewards Network,
increased business development efforts for our Custom Loyalty Networks and
increased general and administrative personnel. The largest component of the
increase was the growth in compensation expense and related staff costs of
$1.2 million. Other significant components of the increase include $413,000 of
legal fees and facility related expenses.
25
<PAGE>
Amortization of Deferred Stock Compensation, Supplier Stock Awards and
Intangibles
Amortization of deferred stock compensation, supplier stock awards and
intangibles increased from $164,000 in the six months ended June 30, 1998 to
$2.8 million for the six months ended June 30, 1999. The increase in
amortization resulted from amortization of deferred stock compensation related
to stock options and common stock granted in 1998, the cost of warrants granted
to certain airlines and other rewards suppliers and intangibles recorded at the
time of the acquisition of Panttaja Consulting Group in December 1998.
Interest Income, Net
Interest income, net increased from $74,000 for the six months ended June 30,
1998 to $462,000 for the six months ended June 30, 1999. The increase was a
result of increased interest income from $116,000 for the six months ended June
30, 1998 to $553,000 for the six months ended June 30, 1999, offset in part by
an increase in interest expense from $42,000 to $91,000 for the comparable
period.
Income Taxes
We have recorded losses since inception, and anticipate losses for the
foreseeable future. We have therefore recorded no provision for income taxes
for the six months ended June 30, 1998 and 1999.
Net Loss
Net loss increased from $5.1 million in the six months ended June 30, 1998 to
$16.1 million in the six months ended June 30, 1999. The increase in net loss
was primarily due to an increase of costs and expenses from $5.3 million in the
six months ended June 30, 1998 to $19.6 million in the six months ended
June 30, 1999.
26
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statements of
operations data for the six months ended June 30, 1999. This data has been
derived from unaudited consolidated financial statements that, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information when read in
conjunction with our annual audited consolidated financial statements and notes
to those statements. Our operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
------- ------- --------- -------- -------- --------
(in thousands, except per share amounts)
Consolidated Statements of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product................. $ 2 $ 8 $ 15 $ 39 $ 103 $ 113
Program-related
services............... 13 104 349 117 117 311
Technical consulting
services............... -- -- -- -- 1,436 941
------- ------- ------- ------- ------- --------
Total revenues........ 15 112 364 156 1,656 1,365
------- ------- ------- ------- ------- --------
Costs and expenses:
Costs of product
revenues............... 2 7 14 36 92 93
Program-related
services, marketing and
support costs.......... 684 1,755 1,640 3,214 4,583 4,983
Cost of technical
consulting services
revenues............... -- -- -- -- 817 679
Research and
development............ 685 716 804 1,178 1,025 844
Selling, general and
administrative......... 704 615 715 1,100 1,335 2,261
Amortization of deferred
stock compensation,
supplier stock awards,
and intangibles........ 73 91 290 732 1,515 1,405
------- ------- ------- ------- ------- --------
Total costs and
expenses............. 2,148 3,184 3,463 6,260 9,367 10,265
------- ------- ------- ------- ------- --------
Loss from operations...... (2,133) (3,072) (3,099) (6,104) (7,711) (8,900)
Interest income, net...... 53 21 82 141 103 359
------- ------- ------- ------- ------- --------
Net loss.................. $(2,080) $(3,051) $(3,017) $(5,963) $(7,608) $ (8,541)
======= ======= ======= ======= ======= ========
Net loss per share--basic
and diluted.............. $ (1.63) $ (2.01) $ (1.71) $ (2.85) $ (2.53) $ (2.56)
======= ======= ======= ======= ======= ========
Shares used in computing
per share amounts--basic
and diluted.............. 1,276 1,516 1,760 2,095 3,004 3,330
======= ======= ======= ======= ======= ========
</TABLE>
Total revenues increased during the first three quarters of 1998. In the
third quarter, $296,000 of ClickMiles owned by a customer expired without being
distributed to consumers, and the associated deferred revenue was recognized as
revenue. While total revenues for the fourth quarter declined relative to the
third quarter, fourth quarter total revenues would have been higher than third
quarter total revenues if revenue recognized as a result of the expiration of
ClickMiles was excluded. Total revenues increased substantially in the first
six months of 1999 as a result of the acquisition of Panttaja Consulting Group
in December 1998. The decrease in technical consulting services revenues from
the quarter ended March 31, 1999 to the quarter ended June 30, 1999 is
consistent with the historical pattern of Panttaja's prior years operations.
The program-related services, marketing and support costs increased from
$684,000 to $5.0 million from the first quarter of 1998 to the second quarter
of 1999. The increases over the six quarters were primarily the result of
increased marketing personnel, member acquisition costs and advertising and
promotions expenses
27
<PAGE>
associated with the launch of the ClickRewards Network. These costs were
particularly high in the second quarter of 1998 as a result of increased
advertising and promotions costs in the periods immediately preceding and
following the commercial launch of the ClickRewards Network.
Cost of technical consulting services revenues totaling $1.5 million were
incurred in the first six months of 1999 as a result of the associated revenues
recognized during the same six months following the acquisition of Panttaja
Consulting Group in December 1998.
Research and development, marketing, consumer support, and sales and general
and administrative costs have generally increased on a quarterly basis as we
have expanded our operations in connection with the introduction and expansion
of the ClickRewards Network. We expect this trend to continue. Selling, general
and administrative costs increased from the quarter ended March 31, 1999 to
June 30, 1999 primarily due to increased staffing in the sales, general and
administration departments.
Amortization of deferred stock compensation, supplier stock awards, and
intangibles has increased on a quarterly basis. This reflects the impact of
additional stock option grants made during the year, which will continue to be
amortized over the vesting life of the options, typically four years, as well
as the accounting for our contingent stock warrants with certain suppliers,
whose value and related expense must be adjusted each period as our stock value
changes prior to their vesting. The amount decreased from the quarter ended
March 31, 1999 to the quarter ended June 30, 1999 due to the accounting for our
contingent stock warrants, whose value was adjusted in the periods for the
change in our stock value.
Shares used in computing per share amounts increased significantly in the
first quarter of 1999 relative to the preceding quarters of 1998 as a result of
the shares issued in connection with the acquisition of Panttaja Consulting
Group in December 1998.
We intend to increase our marketing, sales, research, development and
administrative activities and to increase other operating expenses as required
to expand our operations and launch Custom Loyalty Networks. We have
experienced significant losses to date and we anticipate that our expenses will
continue to exceed significantly the revenues generated by this increased
spending such that we will continue to incur losses for the foreseeable future.
In addition, we expect the magnitude of these losses to increase substantially
from current levels. If we do not experience significantly increased revenues
from these efforts, our results of operations would be impaired. In addition,
our operating expense levels are based in part on our expectations concerning
future revenues, and are relatively fixed in the short term. Consequently, if
our revenues are below expectations in any period, we may not be able to adjust
our spending levels in a timely manner.
Liquidity and Capital Resources
We have funded our operations since inception primarily through the private
placement of preferred equity securities, through which we had raised net
proceeds of $63.8 million through June 30, 1999. We have also financed our
operations through equipment lease financing and bank borrowings. As of June
30, 1999, we had outstanding equipment lease financing and bank borrowings
totaling $1.1 million. On July 1, 1999 we borrowed an additional $1.2 million
under a note payable secured by equipment. We have no other available lines of
credit or credit available under existing arrangements.
Cash used in operations was $170,000 in 1996, $4.1 million in 1997, $9.5
million in 1998 and $7.9 million for the six months ended June 30, 1999. The
cash used in 1996 and 1997 was primarily the result of our operating losses in
those years. Subsequent to 1997, cash used in operations primarily reflected
cash received from customers of $1.3 million in 1998 and $4.9 million in the
six months ended June 30, 1999, offset by cash paid to suppliers and employees
of $11.2 million and $13.3 million in the same periods.
We initially defer recording revenue at the time we sell our loyalty
currencies, even though we have received cash from our customers for these
sales. A significant portion of revenue is not recognized until the currency is
redeemed by the consumer. The remaining revenue is recognized on a ratable
basis over the periods in which marketing and support services are provided to
merchants and members. As a result of this accounting method, the cash received
from customers is substantially greater than the amount of revenues reported
for
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these periods. The difference in these amounts is reflected primarily as an
increase in the amount of deferred revenues for products and services shown on
our consolidated balance sheet. Total deferred revenues increased on a net
basis from cash transactions by $848,000 during 1998 and $1.8 million during
the six months ended June 30, 1999. The growth in deferred revenues in 1998 was
offset in part by an increase in accounts receivable of $201,000.
Cash paid to suppliers and employees was significantly less than costs and
expenses reported for these same periods. This resulted from non-cash charges
relating to depreciation, the amortization of deferred stock compensation,
supplier stock awards and intangible assets arising from the Panttaja
Consulting Group acquisition, and the use of ClickMiles in lieu of cash to pay
for certain expenses. Non-cash amortization charges totaled $1.8 million in
1998 and $3.9 million in the six months ended June 30, 1999. The use of
ClickMiles in lieu of cash to pay for certain expenses resulted in the deferral
of cash payments of $1.5 million during 1998 and $2.1 million during the six
months ended June 30, 1999.
Investments in property and equipment were $124,000 in 1996, $1.0 million in
1997, $1.2 million in 1998 and $3.6 million in the six months ended June 30,
1999.
Cash provided from financing activities was $1.4 million in 1996, $10.5
million in 1997, $17.9 million in 1998 and $34.5 million in the six months
ended June 30, 1999. Cash was provided primarily from sales of preferred stock
of $1.4 million in 1996, $10.1 million in 1997, $17.2 million in 1998 and $35.1
million in the six months ended June 30, 1999.
At June 30, 1999, we had 153 million loyalty currency points outstanding
which had been sold to merchants (of which 103 million had been awarded to
members and are in circulation). The June 30, 1999 balance sheet includes
approximately $3.0 million of deferred revenues relating to the product
component of these currencies, which will be recognized as revenue at the time
of redemption. Other than barter exchanges, we have already received cash from
our merchants relating to these points, which is unrestricted and which we can
use for any corporate purpose. In addition, an additional 99 million points
were outstanding which had been issued by us to pay for expenses in lieu of
cash. As of June 30, 1999, we have an accrued liability of approximately $1.9
million for the estimated cost of redemption of these points. All of these
points expire if not redeemed by December 31, 2001. Although we have purchased
some frequent flyer miles in advance, most of the funding to pay for the costs
associated with these product redemption liabilities must come from available
cash resources at the time of redemption. Although these liabilities are
reflected as current liabilities in our balance sheet, the timing of the
related liability is controlled by the actual redemptions, which could occur in
irregular patterns over the next 2 1/2 years until expiration. Because we
cannot control the timing of our members' decision to redeem points, should the
rate of redemption of points exceed our estimates, it could be necessary for us
to obtain additional working capital and our results of operations could be
materially and adversely affected.
At June 30, 1999, we had cash and equivalents totaling $36.2 million. We
anticipate that our available cash resources will be sufficient to meet our
presently anticipated working capital and capital expenditure needs for at
least the next twelve months.
Our future liquidity and capital requirements will depend on numerous
factors. For example, our pace of expansion will affect our future capital
requirements, as may our decision to acquire or invest in complementary
businesses and technologies. Therefore, we may be required to raise additional
funds in the future through the issuance of debt or equity securities. If
additional funds are raised through the issuance of equity securities, our
existing stockholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if available, such
financing may not be on terms favorable to us or our stockholders. If financing
is not available when required or is not available on acceptable terms, we may
be unable to develop or enhance our programs or other services. In addition, we
may be unable to take advantage of business opportunities or to respond to
competitive pressures. Any of these events could harm our business and
financial condition.
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Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We have defined Year 2000 Compliant as the ability to:
. handle correctly date information needed for the December 31, 1999 to
January 1, 2000 date change;
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. respond to two-digit date input where appropriate in a way that resolves
the ambiguity as to century in a disclosed, defined, and predetermined
manner;
. store and provide output of date information if the date elements in
interfaces and data storage specify the century in ways that are
unambiguous as to century; and
. recognize Year 2000 as a leap year.
All software developed by Netcentives utilizes the JavaSoft implementation of
date object and calendar classes for expression and manipulation of dates. When
dates are saved in persistent storage, the values are either serialized objects
or date fields in a relational database; in both cases, the full 4-digit year
is maintained. Our products do not perform any kind of truncation of century
values or any string operations that jeopardize the integrity of the date
values. We have also tested all of the third-party software incorporated in our
products to ensure their proper processing of twenty-first century dates. As a
result, we believe that all versions of our products including the production
systems that manage our promotional networks, are Year 2000 Compliant, provided
that the underlying operating system of the host machine and any other software
used with or on the host machine or our products are also Year 2000 Compliant.
Statements published by the providers of such software, hardware and operating
systems indicate that they are or will be Year 2000 Compliant by December 1999.
We have evaluated the data feeds from each of our rewards suppliers to
determine if they are Year 2000 Compliant. Data feeds from approximately 13% of
our active rewards suppliers may not be Year 2000 Compliant and we have
informed these suppliers of the potential deficiencies we have identified.
These suppliers have orally assured us that any such problems will be corrected
prior to October 1999. We do not have any information regarding the Year 2000
Compliance of the systems of any of our rewards suppliers with which we do not
directly interface. To the extent that our rewards suppliers are unable to
transmit data to or receive data from Netcentives as a result of their failure
to be Year 2000 Compliant, or they inaccurately maintain balances of frequent
flyer miles for member accounts, general member dissatisfaction with frequent
flyer programs may result and have an adverse effect on our business.
We do not currently have any information concerning the Year 2000 Compliance
status of any of our merchant customers. We plan to notify merchants to remind
them of the Year 2000 problem and its potential effects on their systems.
However, to the extent that our merchants are no longer able to process
e-commerce transactions, process them incorrectly, or transmit incorrect data
to our systems, our business could be adversely affected. If our current or
future merchants fail to achieve Year 2000 compliance or if they divert
technology expenditures, especially technology expenditures that were reserved
for promotional products, to address Year 2000 Compliance problems, our
business, results of operations, or financial condition could be materially
adversely affected.
We have initiated an assessment of our material internal information
technology systems and our non-information technology systems. Our material
internal information technology systems are primarily comprised of a local area
network, telecommunications network, computer hardware, operating systems and
applications software. Our material non-information technology systems are
primarily comprised of facilities-related systems, such as heating and cooling
and security. We expect to complete our assessment and any associated
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remediation of our information technology systems by October 1999. To date, we
have identified one deficiency in the software operating system for our local
area network server for which an upgrade is publicly available. We expect to
install this upgrade by October 1999. To the extent that we are not able to
test the technology provided by third-party vendors, we are seeking assurances
from vendors that their systems are Year 2000 Compliant. We are not currently
aware of any material operational issues or costs associated with preparing our
internal systems for the Year 2000. However, we may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal systems.
We have funded our Year 2000 plan from available cash and have not separately
accounted for these costs in the past. To date, these costs have not been
material, and we do not expect these costs to exceed $100,000. In addition, we
may experience material problems and costs with Year 2000 compliance that could
adversely affect our business, results of operations, and financial condition.
We have not developed a contingency plan to address situations that may
result if our products are not Year 2000 Compliant, or if our suppliers or
customers suffer major Year 2000 related problems or our internal systems fail
as a result of Year 2000 issues. We expect to develop such a plan, along with
an analysis of the worst case scenario that might result from Year 2000 issues,
by the fourth quarter of 1999. We are also subject to external forces that
might generally affect e-commerce, such as retailing and distribution company
Year 2000 compliance failures and related service interruptions.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative Information About Market Risk
Our exposure to market risk for changes in interest rates primarily relates
to our investment portfolio. We maintain an investment policy designed to
ensure the safety and preservation of our invested funds by limiting default
risk, market risk, and reinvestment risk. As of June 30, 1999, we had $36.2
million of cash and cash equivalents earning a weighted average variable
interest rate of 4.66%.
Qualitative Information About Market Risk
To date, we have not sought to hedge the risks associated with fluctuations
in interest rates. We do not plan to use derivative financial instruments in
our investment portfolio.
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BUSINESS
Overview
Netcentives is a leading provider of Internet loyalty, direct marketing and
promotion products and services to drive consumer behavior. Netcentives'
flagship program, the ClickRewards Network, is a powerful online promotion and
loyalty program that allows e-commerce sites to reward consumers with
ClickMiles, a digital promotion currency, for making online purchases. The
ClickRewards Network was launched in March 1998 and as of August 27, 1999,
included over 1.8 million members who have earned, in the aggregate, over 285
million ClickMiles. The ClickRewards Network includes a broad range of e-
commerce companies that purchase ClickMiles from us and award them to consumers
in order to convert browsers to buyers, increase average purchase size, drive
repeat purchases, and build loyalty to their sites. Representative companies in
the ClickRewards Network include Web sites ranked by Media Metrix as being
among the top 500 digital media properties, such as barnesandnoble.com,
E*TRADE, macys.com, OfficeMax.com and Preview Travel, as well as other Web
sites such as Cook Express, Cooking.com, eBags, eNutrition and PlanetRx. We
also offer online advertising and sponsorship, joint marketing programs,
sponsored e-mail offers, and technical and marketing consulting services.
Utilizing the technology platform we have developed for the ClickRewards
Network we have expanded our product offering to provide Custom Loyalty
Networks to portals, companies with major brands and other Web sites with
substantial membership. We launched our first Custom Loyalty Network for
Looksmart in July 1999 and have signed contracts to develop additional Custom
Loyalty Networks for the GO Network and Lycos that we expect to launch in the
fourth quarter of 1999. We have also launched Enterprise Incentive Solutions
programs with four corporate customers. We also offer consulting and other
services to our ClickRewards merchants and Custom Loyalty and Enterprise
Incentive customers.
We have exclusive agreements with eight major airlines for the use of their
frequent flyer miles in points-based Internet promotions networks. These
relationships allow consumers, for example, to exchange ClickMiles one-for-one
for frequent flyer miles from American Airlines, British Airways (USA),
Continental Airlines, Delta Air Lines, Northwest Airlines, TWA, United Airlines
and US Airways. These exclusive agreements give our ClickRewards merchants the
ability to attract and retain online shoppers using a compelling, relevant and
differentiated rewards currency.
Industry Background
Growth of the Internet and Online Advertising
The Internet has emerged as a unique global communications medium, enabling
millions of people to interact and conduct business electronically.
International Data Corporation, or IDC, estimates that there were approximately
97 million Internet users at the end of 1998, and that this number will grow to
320 million by the end of 2002. IDC further estimates that the total value of
commerce over the Internet will increase from approximately $32 billion in 1998
to $425 billion in 2002. Similarly, Forrester Research estimates that U.S.
business e-commerce revenue will grow from $109 billion in 1999 to $1.3
trillion in 2003. Internet commerce transactions are often faster, less
expensive and more convenient for both buyers and sellers, and the opportunity
to take advantage of these business efficiencies has attracted a broad group of
participants.
During the early stages of development of e-commerce, merchants were focused
on building general brand awareness and acquiring customers. Consequently, the
rapidly growing market for Internet marketing was heavily dominated by banner
advertising. However, the low barriers to entry for new competitors, the
emergence of below-cost online retailers and the ease with which consumers can
switch between Internet retailers have intensified online commerce competition.
As a result, Internet retailers seeking to differentiate themselves from
competitors and to build a substantial, loyal consumer base are finding that
banner advertising alone is either insufficient or ineffective. For example,
Net Ratings, an online market research firm, found that the consumer response
rate for banner advertising declined from 2% to 0.5% in December 1998.
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The Market for Loyalty, Direct Marketing and Promotion Products
According to the Direct Marketing Association, offline expenditures on direct
marketing, including promotions, reached $163 billion in 1998. Jupiter
Communications estimates that online spending for Internet-based advertising
alone will total $7.7 billion in the U.S. by 2002. As e-commerce Web sites
increasingly focus on customer retention and loyalty, we believe that spending
for online marketing will shift toward promotions and direct marketing. For
example, Forrester Research predicts that by 2003, 50 to 70% of all Internet
marketing budgets will be spent on promotional marketing as opposed to
advertising, with the largest growth coming from membership, rewards and
loyalty programs.
As Internet retailers, portals and offline rewards providers increase their
online promotional activities, we believe they face a number of challenges that
require additional capabilities and skills outside of their traditional
competencies. Specifically, any of the following operational requirements could
pose problems for these entities:
. integration of point of purchase promotional capabilities;
. attraction and retention of consumers with an attractive demographic
profile, such as frequent flyer program members;
. establishment of a network of earning and award opportunities that is
significant enough to make promotions appealing to consumers;
. creation of a transaction processing system designed for use on the
Internet;
. development of Web site enhancements necessary to track consumer
participation in and satisfaction with online promotional programs;
. investment necessary to develop online promotions capabilities;
. possession of the expertise required to develop and administer promotion
programs and the associated financial liabilities; and
. integration of new online promotions with existing offline promotion
programs.
We believe that Internet retailers, portals and offline rewards providers
recognize the benefits of deploying online promotion programs, but have not
been able to justify the resources required to build and maintain their own
programs independently.
The Netcentives Solution
Netcentives is a leading provider of powerful Internet loyalty, direct
marketing and promotion products and services used by Web sites to drive
consumer behavior. Leveraging our advanced technology infrastructure,
experience and knowledge of promotions, we have developed three products to
serve the online promotions market: the ClickRewards Network, Custom Loyalty
Networks and Enterprise Incentive Solutions.
ClickRewards Network. The ClickRewards Network is a loyalty program that
gives online merchants the capability to reward consumers for making purchases
at their Web sites. Web merchants ranked by Media Metrix as being among the top
500 digital media properties that are also a part of the network include
barnesandnoble.com, E*TRADE, macys.com, OfficeMax.com and Preview Travel. Other
Web sites participating in the ClickRewards Network include Cook Express,
Cooking.com, eBags, eNutrition and PlanetRx. By shopping at participating Web
sites, consumers can earn ClickMiles, a digital currency that is exchangeable
one-for-one for frequent flyer miles on eight major airlines and for other
valuable rewards. Our customers reward consumers with ClickMiles as an
incentive to convert browsers to buyers, drive repeat purchases, increase
transaction size and build loyalty within their online communities.
ClickRewards addresses the needs of the three major constituencies in
promotional programs: e-commerce merchants, rewards suppliers and members.
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Merchants that participate in the ClickRewards Network benefit by:
. attracting and retaining a targeted and loyal customer base including
frequent flyer program members and online shoppers;
. participating in a growing network of high-quality merchants with well
known brands, the value of which increases with each additional merchant;
. increasing the attractiveness of their online community with a loyalty
program;
. increasing the effectiveness of their marketing expenditures through e-
mails to a targeted member base, Web site placements and joint marketing
activities;
. enhancing customer loyalty and retention with ClickMiles, which are
redeemable one-for-one for the frequent flyer miles of eight major
airlines and a wide range of valuable merchandise rewards, which may
include a merchant's own products; and
. having the ability to create and maintain ClickRewards promotions on the
merchant's Web site.
Rewards suppliers that provide us with frequent flyer miles and merchandise
benefit by:
. selling additional products through a growing online channel;
. broadening their online presence to reach more consumers with an
attractive demographic profile; and
. increasing the value of frequent flyer miles by expanding the markets in
which they are available.
Our members benefit by:
. increasing the value of their online purchases, by receiving a valuable
currency with their purchases;
. aggregating currency across a large network of high quality, well known
merchants to realize meaningful value more quickly;
. centralizing their earning and tracking of this currency in an online
personal account; and
. accumulating and holding a valuable currency that can be converted into
frequent flyer miles or other rewards at a later date.
Launched in March 1998, the ClickRewards Network has attracted 64 merchants
from many of the top e-commerce categories. We have also entered into exclusive
relationships to provide frequent flyer miles in points-based Internet
promotion networks with American Airlines, British Airways (USA),
Continental Airlines, Delta Air Lines, Northwest Airlines, TWA, United Airlines
and US Airways. The exclusivity provision in some of these agreements may be
terminated following a 90 day notice period and some of these agreements may be
terminated in their entirety following notice periods ranging from 90 to
180 days. Based on our strong reward supplier relationships and network of
merchants, as of August 27, 1999, membership in the ClickRewards Network has
grown to over 1.8 million members who have earned, in the aggregate, over
285 million ClickMiles. Members can redeem these ClickMiles by visiting the
ClickRewards Web site and selecting their chosen redemption option. ClickMiles
expire on the third December following the date they are earned. This may cause
increases in redemption activity in December of each year.
Custom Loyalty Networks. Our Custom Loyalty Network products enable portals,
companies with major brands and other Web sites with substantial membership and
scale to launch branded loyalty programs. We launched our first Custom Loyalty
Network for Looksmart in July 1999 and we have signed contracts to develop
Loyalty Networks for the GO Network and Lycos that we expect to launch in the
fourth quarter of 1999. We are in discussions with additional potential Custom
Loyalty clients; however, we currently have relationships with only these three
entities. Using their own branded promotional currency, our clients are able to
deploy programs that are designed to build community and drive customer
acquisition and retention. Custom Loyalty Network clients receive all the
benefits of operating a loyalty program like ClickRewards, such as increasing
purchases, acquiring consumers and members and establishing a direct marketing
channel. In addition, these clients are able to utilize our expertise and the
power of our technology platform to outsource functions such as consumer
account management, reward catalog development, transaction processing, reward
redemption, customer service, database marketing and financial management of
currency and liabilities.
Enterprise Incentive Solutions. We sell Enterprise Incentive Solutions
programs to corporations who use them to motivate and reward employees,
partners and stakeholders across their intranets and extranets.
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Corporations can benefit from using our Enterprise Incentive Solutions by
reducing the cost of implementing and administering employee incentive programs
and increasing the effectiveness of these programs. Additionally, through the
ClickRewards@Work program, companies can launch an effective incentive program
that is linked to the broader consumer network of the ClickRewards Network. We
launched our first Enterprise Incentive Solutions program in late 1998 and are
currently operating programs for adauction.com, Cisco Systems, Event Source and
Exceptional People.
Netcentives Professional Services. All of our products are complemented by
Netcentives Professional Services, our team of consulting professionals who
offer significant expertise in relationship marketing, developing e-commerce
applications and implementing our promotion solutions. Since our acquisition of
Panttaja Consulting Group in December 1998, we have provided professional
services to 16 clients in a variety of areas, including those related to e-
commerce. A partial list of these clients includes CATS, the Family Education
Company, Legacy Marketing Group, the San Francisco Opera and Simpson Timber.
The Netcentives Strategy
Our objective is to be the leading provider of Internet loyalty, direct
marketing and promotion products used by Web sites to drive consumer behavior.
We intend to achieve this objective by establishing ClickRewards as the leading
Internet loyalty program and utilizing our technology and marketing expertise
to provide products and services to retailers, portals and employers who are
establishing their own loyalty networks. The key elements of our strategy are
to:
Expand the ClickRewards Network of Merchants, Rewards Suppliers and Members
The ClickRewards Network has grown rapidly and as of August 27, 1999 included
64 merchants, 1.8 million members, and 15 rewards suppliers. We plan to
continue to provide value-added products and services to our merchants in order
to drive acceptance and growth of our incentive and rewards products. We use
our capabilities to provide targeted offers from merchants to our member base.
We use e-mails to our member base and inserts in frequent flyer newsletters and
statements to increase the value of the ClickRewards currency to our members
and to drive consumers to our merchants. Furthermore, we believe that we can
increase the value of the ClickRewards Network to participating merchants by
increasing the number of consumers who are members. As the ClickRewards Network
grows, we believe that it will create the opportunity to provide additional
services to existing merchants, including enhanced direct marketing and other
professional services.
Establish ClickRewards as the Primary Loyalty Program for Leading Online
Merchants
We believe that our customers will increasingly use the ClickRewards Network
to address their particular business objectives, such as revenue growth and
consumer loyalty. The key features that allow us to address the needs of our
merchants include:
. enabling them to create and maintain their own ClickRewards promotions;
. featuring their own products in the ClickRewards rewards catalog;
. promoting their brand on the ClickRewards Web site;
. integrating ClickRewards functionality on their e-commerce Web site;
. launching joint marketing programs; and
. customizing ClickRewards e-mail communications for their consumers.
Maximize Lifetime Value of ClickRewards Members
We seek to maximize the frequency, size and number of purchases made by
ClickRewards members throughout the network. Capitalizing on the attractive
demographics and purchase behavior of our membership base, we intend to enhance
the lifetime value of our members to our merchants through database marketing,
a tiered loyalty program for top purchasers, additional site functionality and
other features targeted to active ClickRewards members.
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Extend Network Loyalty Platform and Infrastructure to Support Additional
Products
We have developed a technology platform and infrastructure and a set of
products, services and management expertise that effectively support Internet-
based promotion and loyalty networks. We intend to use this platform to drive
revenue opportunities beyond ClickRewards, including:
. Custom Loyalty Networks. As portals, companies with major brands and
other web sites transition from a media or advertising revenue model to
an e-commerce revenue model, they are starting to seek ways of
influencing consumers to shop at their site or network of sites. We are
leveraging our experience in building and operating the ClickRewards
Network to offer these major online companies the ability to implement
custom loyalty programs. Not only do our Custom Loyalty Network products
and services offer many of the same features as our ClickRewards Network,
but they are also designed around the customer's brand, existing consumer
base and partners. Our Custom Loyalty Network products and services
enable these companies to award their members with their own private
label currency points and customized redemption options. We launched our
first Custom Loyalty Network for Looksmart in July 1999 and have entered
into contracts to develop Loyalty Networks for the GO Network and Lycos
that we expect to launch in the fourth quarter of 1999.
. Enterprise Incentive Solutions. To address the large market for employee
and channel partner incentives, we intend to deploy additional incentive
programs for enterprises based on both the ClickRewards Network and
custom implementations. These incentive programs allow enterprises to
motivate, retain and reward employees, channel partners and stakeholders.
We launched our first Enterprise Incentive Solutions program in late 1998
and operate programs for adauction.com, Cisco Systems, Event Source and
Exceptional People.
. Online and Offline Rewards Programs. Many merchants have both an online
and offline presence. For such merchants, we intend to offer integrated
rewards programs that increase consumer loyalty across multiple channels.
In the future, we intend to pursue relationships that will enable
merchants in the ClickRewards and Custom Loyalty Networks to award their
members and consumers for offline activity. We currently do not offer
these types of programs.
Build the Netcentives and ClickRewards Brands
We believe that building greater awareness of the Netcentives and
ClickRewards brands is critical to expanding our merchant, rewards supplier,
and member base and our roster of Enterprise Incentive Solutions and Custom
Loyalty Networks customers. In order to accelerate the acceptance and
penetration of the ClickRewards Network, we have developed and are continuing
to pursue relationships with merchants and rewards suppliers whose brands are
well known and widely respected. We believe that increasing the number of
ClickRewards members makes the ClickRewards Network more attractive and
valuable to merchants. Therefore, we actively promote the ClickRewards brand
among consumers through a variety of marketing programs, including promotions,
direct e-mail marketing, and targeted advertising. We also promote the
Netcentives brand to potential Enterprise Incentive Solutions customers and
Custom Loyalty Networks customers in trade journals and other industry forums.
As we increase our collective base of merchants rewards suppliers and members,
we believe that the value of the Netcentives and ClickRewards brands will be
reinforced.
Offer a Broad Range of Loyalty and Direct Marketing Services
We seek to provide a broad range of marketing solutions to our ClickRewards
merchants and our Custom Loyalty Network clients. Separate from providing these
customers with a promotional currency, we also offer a wide range of
promotional and marketing services including database marketing, promotion
development and management, e-mail direct marketing, and creative services. We
believe that these services offer a complete loyalty marketing solution to our
customers and allow them to maximize the return from their loyalty program.
For example, our advanced technology, substantial membership bases and
merchant and rewards supplier relationships allow us to collect information
about consumers and their purchasing behavior. We maintain data
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warehouses of this and other data. We also capture transactional activity
across multiple merchant product categories, allowing us to aggregate and view
consumer patterns throughout each network.
We enforce strict privacy policies that govern how information about members
is used, and communications are not sent to members who have previously
declined to be contacted. This form of permission-based marketing removes the
issue of unsolicited offers and increases responsiveness to promotional offers.
We currently do not sell member information to third parties and do not intend
to do so in the future. While adhering to our privacy policies, we intend to
use the accumulated data to provide advanced marketing services to merchants
and Custom Loyalty Network clients.
Through the use of our tools, information and processes, we have the
capability to assist merchants in targeting members for specific marketing
promotions. Examples include e-mail messages targeted to the member based on
past interactions, preferences and interests and the monitoring of members'
responses to these promotions. We believe that our capabilities will make
Netcentives' direct marketing capabilities attractive to merchants who prefer
to outsource this function rather than make the necessary investment
themselves.
Extend Technology and Business Process Leadership
We believe that our ability to scale our technology and infrastructure in a
secure manner with the growth in the number of merchants, members and
transactions has been a competitive advantage. We hold a patent that
encompasses a set of systems, procedures and methods for providing Internet-
based incentive and reward programs which we license on a non-exclusive basis.
With our recent acquisition of the Panttaja Consulting Group, Inc., we have
added further capacity to develop enhancements to our technology base and to
bring them to market. We expect to continue to invest heavily in research and
development. We also expect to pursue technology relationships to enhance the
performance, security and functionality of our core technology infrastructure.
Expand Internationally
To date, we have focused on pursuing opportunities in the United States and
Canada. However, we believe that international markets present an attractive
marketplace for our network loyalty infrastructure. We expect to begin our
international efforts by expanding the ClickRewards Network into Europe. We
intend to expand our Custom Loyalty Networks products to portals and online
merchants based in other countries and our Enterprise Incentive Solutions
products to large multinational corporations.
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Products and Services
We provide a suite of products and services to address our customers' various
needs for online promotions and loyalty programs. Our programs are positioned
as follows:
<TABLE>
<CAPTION>
Netcentives Target Program Program
Solution Customers Members Branding Rewards
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ClickRewards Internet commerce Current shoppers ClickRewards Frequent flyer miles,
Network merchants and ClickRewards branded merchandise and
members travel-related awards
- -----------------------------------------------------------------------------------------------
Custom Loyalty Portals, companies Customer's user Customer branded ClickMiles and
Networks with major brands base customer-specific
and other large scale merchandise
Web sites
- -----------------------------------------------------------------------------------------------
Enterprise Businesses Employees and Customer and Frequent flyer miles,
Incentive channel partners ClickRewards travel-related awards
Solutions co-branded and customer-specific
merchandise
</TABLE>
ClickRewards Network
The ClickRewards Network brings together e-commerce merchants, ClickRewards
members and awards suppliers into a networked loyalty program. Netcentives
sells merchants ClickMiles, a digital promotions currency. Merchants then award
the ClickMiles to consumers for activities such as making purchases, winning
sweepstakes and completing surveys. Members can earn ClickMiles from merchants
across the ClickRewards Network and can track their award balances online.
Members can redeem their ClickMiles for frequent flyer miles from eight leading
airlines on a one-for-one basis and for other travel awards and merchandise
using our online catalog.
. ClickRewards Membership. Consumers become ClickRewards members by either
enrolling in the ClickRewards program or earning ClickMiles from
participating merchants. Because our merchants pay us for ClickMiles
prior to awarding them to members, most of our merchants also require
that a consumer elect to become a ClickRewards member at the time of a
qualifying purchase in order to earn ClickMiles. Membership in
ClickRewards is free and protected by a strict privacy policy. Launched
in March 1998, as of August 27, 1999, there were over 1.8 million
ClickRewards members who have earned, in the aggregate, over 285 million
ClickMiles. Members learn about earning opportunities by visiting the
ClickRewards Web site, receiving member e-mails, or by electronically
visiting a merchant that features ClickRewards. In addition, the shopping
sites that participate in the ClickRewards Network promote their
ClickRewards offers via e-mails to their customers, banner ads, placement
on their Web site and offline advertising. The consumer's ClickMiles
earning activity is integrated with the purchase process. Once the
qualifying transaction is complete, information about the member and the
ClickMiles that have been earned is sent to Netcentives securely over the
Internet, automatically triggering an e-mail receipt to the member
confirming the deposit of ClickMiles. The member can then track his or
her account balance on the ClickRewards Web site in a password-protected
area.
. ClickMiles Redemption. To redeem ClickMiles, members simply visit the
ClickRewards Web site, log into their personal account, and select the
redemption option of their choice. Members can choose to redeem their
ClickMiles one-for-one and add them into their existing frequent flyer
account with American Airlines, British Airways (USA), Continental
Airlines, Delta Air Lines, Northwest Airlines, TWA, United Airlines, or
US Airways. ClickMiles can also be redeemed for other travel awards such
as car rental and hotel certificates, and for a wide range of
merchandise.
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<PAGE>
. Merchant Participation. We have targeted Web sites in each major shopping
category as merchants. Currently we have 64 e-commerce shopping sites in
the ClickRewards Network. A representative sample of merchants who have
offered ClickRewards promotions during the past twelve months or are
currently developing ClickRewards promotions include:
Representative Merchants
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
areyougame.com CyberBills.com KBKids.com ShopSports
ArtSelect DealDeal.com TheKnot.com Someone Special
Azazz eBags macys.com Visa
@Backup eNutrition MSN Shopping Visto
barnesandnoble.com E*TRADE(TM) Music Boulevard WebFlyer
beyond.com First Auction OfficeMax.com Wells Fargo
CDnow garden.com PlanetRx XOOM.com
ClubComputer iOwn.com Preview Travel 1-800-FLOWERS
Cooking.com iPrint.com Red Herring Online
</TABLE>
Custom Loyalty Networks
We believe that most individual merchant sites are best served by
participating in a network loyalty program, such as ClickRewards. However,
portals and other large community sites have their own network of merchants and
consumers, and possess their own considerable scale, traffic and brand.
Therefore, we are leveraging our experience in building and operating the
ClickRewards Network to offer these major online companies the ability to
implement custom loyalty programs. Not only do our Custom Loyalty Network
products and services offer many of the same features as our ClickRewards
Network, but they are also designed around the customer's brand, existing
consumer base and partners. Our Custom Loyalty Network products and services
enable these companies to award their members with custom branded currency
points and customized redemption options. To build large-scale loyalty
programs, we believe that we can provide the necessary tools and expertise,
such as:
. Overall Program Management. We offer overall management services for
custom loyalty products from the definition phase, to design,
implementation and maintenance.
. Loyalty Program Design Services. We offer program design services that
take advantage of the advertising, promotions and loyalty program
experience of our management team, including the conceptualization and
development of the awards catalog.
. Technology and Process Licensing. We offer customers access to our base
of proprietary technology and business processes that enable certain
types of promotions.
. Currency Creation. We work with customers to create unique promotional
currencies that specifically target the customer's consumer base and
utilize the customer's brand identity.
. Currency and Liability Management. We have experience with the complex
financial management of rewards programs. We offer these services to
Custom Loyalty customers to allow them to focus on their core business.
. Awards Transaction Processing and Data Center Services. We offer
reliable, secure and fault-tolerant transaction processing services to
support the issuance of currencies and the exchange of awards. We also
offer reliable data center services for the storage of account
information for a particular customer's program.
. Consumer Services. We offer customers software that enables their
consumer service representatives to have access to real-time consumer
information. In addition, we offer complete outsourcing of the loyalty
program consumer service function.
39
<PAGE>
. Risk Management/Fraud Control. Through technical and operational
processes, we offer comprehensive risk management and fraud control
services to address and prevent potential fraudulent activity.
. Database Marketing Consulting. We offer data analysis based on our
understanding of consumer behavior. Database marketing consulting can
provide our customers with the opportunity to design and modify their
program based on demonstrated consumer behavior.
Enterprise Incentive Solutions
The market for enterprise incentives is estimated to be greater than $20
billion per year by the Incentive Federation, an independent trade
organization. We believe that this market, traditionally managed offline, can
be more efficiently automated using Internet technology that leverages the
enterprise's investment in intranets and extranets. For example, incentives can
be offered to sales forces as additional compensation for the adoption of sales
force automation systems, for performance-based programs and for other
motivational programs. Incentives can also be offered to other employees to
increase loyalty, improve job performance, increase information sharing,
encourage self-improvement training and refer employees.
We believe that the ClickRewards Network has many attributes that make it an
effective platform for enterprise solutions. Our use of the current Netcentives
rewards management technology allows us to reduce the cost of developing and
operating incentive programs for these markets. We launched our first
Enterprise Incentive Solutions program in late 1998 and are currently operating
programs for adauction.com, Cisco Systems, EventSource and Exceptional People.
Netcentives Professional Services
Technical and marketing consulting services are an integral part of our
ClickRewards, Custom Loyalty Networks, and Enterprise Incentives Solutions
offerings to customers. Through the Netcentives Professional Services group, we
have provided systems integration and technical consulting services to clients
to help them deploy the ClickRewards program as well to other businesses. We
also offer software-related training and educational services in the Internet
and client/server market sectors through this group. Additionally, we expect
customers of our Custom Loyalty Networks and Enterprise Incentives Solutions to
use our e-commerce systems development skills to integrate Netcentives
technology with their existing systems, or to build customized applications
that support their e-commerce, loyalty or other initiatives. We have provided
professional services to 16 clients in a variety of industries. A partial list
includes CATS, FamilyEducation Company, Legacy Marketing Group, San Francisco
Opera and Simpson Timber.
Rewards Suppliers
We believe that a critical element of developing successful direct marketing
and promotion products for merchants is to offer compelling awards to consumers
with a high perceived value. Frequent flyer miles are among the most popular,
proven and effective offline consumer incentives. We have cultivated exclusive
relationships with eight major airlines for the use of frequent flyer miles in
points-based Internet-based promotion networks. A significant advantage we
offer with ClickRewards is the ability for consumers to add ClickMiles to their
existing frequent flyer accounts. We have also entered into a variety of
relationships with other suppliers of incentive awards in order to provide
broad yet compelling appeal to our awards catalog offerings. Current rewards
suppliers include:
Representative ClickRewards Rewards Suppliers
<TABLE>
- -----------------------------------------------------------------------------
<S> <C>
American Airlines AAdvantage US Airways Dividend Miles
British Airways Executive Club (USA) United Airlines Mileage Plus
Continental Airlines OnePass barnesandnoble.com
Delta Air Lines SkyMiles CDnow
Northwest Airlines WorldPerks shop.theglobe.com
TWA Aviators Club Marriott Hotels Marriott Rewards
</TABLE>
40
<PAGE>
Marketing and Sales
We have a comprehensive approach to marketing and sales. To our ClickRewards
Network merchants and rewards suppliers, we position ourselves as the leader in
providing powerful relationship marketing products and services to drive
consumer behavior. To the consumer, we position the ClickRewards Network as the
most rewarding way to shop online. Finally, for our Custom Loyalty and
Enterprise Incentive Solutions customers, we market Netcentives as the premier
outsourcing partner for relationship marketing and incentive products and
services. As such, our marketing and sales efforts are distinct to each
audience.
ClickRewards Merchants
We have a direct sales force that sells our entire portfolio of products and
services and includes individuals focused on distinct markets and specific
products and services. Our sales force is based out of our San Francisco
headquarters, with sales offices in Chicago and New York. An internal telesales
team responds to inbound inquiries and provides additional support to our
direct sales force. We plan to increase our direct sales force and open
additional sales offices in the United States and internationally. We will also
pursue distribution relationships with advertising agencies, systems
integrators, consulting firms and others in order to allow third parties to
sell ClickMiles. Our marketing department supports our sales efforts and
coordinates attendance at industry events and pursues trade advertising and
media relations. We also have joint online marketing agreements with Yahoo!,
MSN Shopping and CoolSavings which allow us to feature ClickRewards on their
Web sites.
ClickRewards Consumers
We believe that increasing our membership base is a critical element to
making our products and services more valuable to merchants. Therefore, our
consumer marketing strategy and programs are designed to build the ClickRewards
brand, drive new member acquisition, convert members to buyers, encourage
repeat purchases, drive purchases across the network and create loyalty to the
ClickRewards Network and its shopping sites.
We intend to continue building the relationship with our members through
targeted, relevant communications and offers based on their past buying
behavior and preferences. In addition, we offer bonuses to our members to
encourage seasonal purchases and purchases throughout the network. We believe
that if we can build a loyal member base, we can offer greater value to our
merchants.
In order to achieve our brand, acquisition, retention and loyalty goals, we
employ a wide range of promotional, direct marketing, media and public
relations activities.
. Advertising and Public Relations. We advertise in a variety of online and
offline media including newspaper, magazines, radio, outdoor and Internet
banner advertisements. Our advertising efforts are augmented by extensive
consumer public relations to generate coverage in radio and print, and on
television.
. Airline Supplier Co-Marketing. As a benefit of our relationships with our
airline suppliers, we have access to multiple direct marketing channels
targeting the members of the airlines' frequent flyer programs. We have
utilized statement inserts, newsletter articles, e-mails, in-flight video
and Web site placement to reach these frequent flyer program members.
. Merchant Co-Marketing. The majority of our participating e-commerce
shopping sites feature the ClickRewards logo and promotional offers on
their home page. In addition, the ClickRewards message is often threaded
throughout the purchase process. The ClickRewards offers are often
included in e-mails to the shopping sites' customers and included in
their advertising campaigns both online and offline.
. Ongoing E-mail Communications. We have a variety of ongoing e-mail
communications which feature new shopping sites, new offers and special
offers. We will continue to enhance this channel of communication to
become more personalized and customized.
41
<PAGE>
. Network Promotions. We develop and launch network-wide promotions on a
seasonal basis to provide added incentives for members to shop frequently
and throughout the ClickRewards Network. Examples include volume, multi-
purchase and refer-a-friend bonuses.
Custom Loyalty, Enterprise Incentive Solutions and Netcentives Professional
Services Customers
The launch of a custom loyalty program represents a significant and strategic
decision for a company. Consequently, we are primarily using a direct sales
force for Custom Loyalty Networks. These sales efforts are complemented by our
general trade marketing efforts that aim to establish our position as the
leader in our field. Enterprise Incentive Solutions products and services are
also sold by a direct sales force. In the future, we expect this solution to be
sold and delivered through resellers and other entities, such as enterprise
software companies, existing incentive product providers and promotion
agencies. Marketing and sales of our professional services and technical
consulting are integrated into the sales and marketing of each of our products.
Additionally, our existing client base and client referrals generate inquiries
and leads for more general e-commerce consulting projects not directly related
to the implementation of a rewards or loyalty product.
Member Service
We believe that to sell high volumes of ClickMiles to merchants we need to
offer them a large, attractive base of potential consumers. We believe that our
ability to create a loyal and valuable membership base for ClickRewards depends
on high quality member service. Furthermore, direct member feedback on our
service is an important way in which we can continually improve the
ClickRewards shopping experience. The member service team is responsible for
providing phone support during business hours and e-mail support with a 24-hour
response time. Representatives are responsible for resolving general inquiries
about ClickRewards, and inquiries relating to the status of orders and
redemption requests. Many of these requests require coordination with the
member service teams of participating merchants and reward suppliers. E-mail
support utilizes customized automatic response systems and a staff of trained
member support agents to generate personalized responses to inquiries. To
customers of our Custom Loyalty Networks and Enterprise Incentive Solutions
products, we offer the option of outsourcing member service support for
inquiries related to their program, or utilizing the member service module of
our software platform for their internal member service representatives.
42
<PAGE>
Technology
We have built a technology platform for the exchange and management of an
online promotional currency. Our SecureRewards Architecture consists of a set
of software and protocols that interact across the Internet to create a network
among merchants, rewards suppliers and consumers. We designed this system for
security and high volume transaction processing, with the ability to handle
hundreds of thousands of transactions per day. Our system uses a high
performance database design and an architecture designed with security in mind.
[GRAPHIC APPEARS HERE]
A diagram using a grid to represent the Internet and boxes representing the
Netcentives Website and a typical merchant Website. The elements of the
Netcentives software residing on the Netcentives Web site and the merchant
Website are represented by boxes within the boxes representing the Web sites.
The software element within the merchant site is the Reward Broker and the
software elements within the Netcentives site are the Payment System,
Netcentives Central, the Redemption System and the Member Relationship Systems.
Arrows representing the interactions between Netcentives, the merchant, rewards
suppliers and a consumer. The merchant site and the Netcentives site are
connected by the Secure Value Transfer Protocol.
The design of our SecureRewards Architecture allows merchants to distribute
promotional currency safely at their own site. The following is a description
of the modules within the SecureRewards Architecture:
. RewardBroker resides at the merchant site and initiates promotional
currency transfers in real time. We provide merchants with a range of
integration options with RewardBroker, including application programming
interfaces and integration services to enable rapid customization and
integration with the merchant's own unique e-commerce environment.
. Payment System resides at our data center and receives and processes all
promotional currency transfer requests from RewardBroker. It first
determines if the requestor is legitimate and that the request has not
been modified. It then passes the request through the Fraud Detection
System, and finally fulfills the request.
. Secure Value Transfer Protocol ensures the privacy and origin of all
messages in the network. RewardBroker and Payment System communicate
through the protocol, which supports a wide variety of message types. It
employs financial transaction-grade cryptography to sign and encrypt
messages.
. Fraud Detection System provides both per-transaction and aggregate fraud
detection and prevention. The system applies a combination of business
rules about each promotion and monitors activity based on past behavior
to determine if activity is fraudulent.
. Account Management Systems provides consumer, merchant and reward
supplier services, such as account creation and reactivation, promotion
funding and transaction inquiries, as well as a consumer support
information.
. Member Relationship Systems presents the current promotions, rewards and
account balance information to individual consumers through a Web based
interface. Each request to manipulate an
43
<PAGE>
individual consumer's account requires authentication to prevent
fraudulent activity. Member Relationship Systems also include the Customer
Contact Module and the Targeting and Segmentation Database.
. Consumer Contact Module provides consumers with instant receipts of
account activity and periodic account statements. We are developing the
capability to use the Consumer Contact Module to provide consumers with
relevant promotions and award opportunities based on self-identified
interests and past behavior in the network.
. Targeting and Segmentation Database is being developed to provide
relevant promotions and rewards opportunities by tracking consumer
preferences. It will be used in conjunction with the Consumer Contact
Module to personalize each consumer's experience.
. Redemption Systems reside at our data center and processes all requests
by consumers to redeem promotional currency for goods or services. The
requests pass through the Fraud Detection System and are then formatted
for transmission as fulfillment requests to the various rewards
suppliers. Responses to fulfillment requests are also processed by the
Redemption Systems.
. Netcentives Central provides merchants and their account managers with
up-to-date information via the Web on current promotions, including
promotion balances and transactional history.
All elements of the SecureRewards Architecture are designed to operate on a
wide range of merchant systems. This design also helps us to deploy new
technologies without needing to re-write the entire system. Much of the
SecureRewards Architecture is written in Java. The SecureRewards Architecture
is the technological foundation for the ClickRewards Network, Enterprise
Incentive Solutions, and Custom Loyalty Networks.
We designed all elements of the SecureRewards Architecture from the ground up
with security in mind. RewardBroker and Payment System, in particular, utilize
private key cryptography with highly secure financial transaction grade
techniques to authenticate merchants and encrypt transactions. Each request to
manipulate an individual consumer's account requires authentication to prevent
fraudulent activity and encryption to enhance consumer security. We have
implemented additional fraud prevention mechanisms to track unusual behavior.
Competition
As a provider of loyalty, direct marketing and promotion products and
services, we generally compete with advertising and other promotional programs
for a portion of a customer's total marketing budget. In addition, within the
promotions market, we compete with a variety of businesses in connection with
each of our three programs. For the ClickRewards Network our primary
competition can be categorized as follows:
. loyalty programs operated by and/or for portals and other large e-
commerce sites, such as AOL Rewards;
. Custom Loyalty Networks we operate on behalf of third parties; and
. stand-alone loyalty programs and promotional tools developed by and/or
for e-commerce sites, such as Autobytel.com Mobalist Rewards, CDnow Fast
Forward Rewards, CBS SportsLine Rewards, Cybergold and MyPoints.com.
We believe that we face substantial obstacles competing against internally
developed products created by our existing and potential customers.
Additionally, Custom Loyalty Networks that we develop for third parties may
compete directly with the ClickRewards Network for merchants and members in
electronic commerce.
Our Enterprise Incentive Solutions products and services compete with
existing, offline incentive products provided by parties such as Maritz
Marketing Research, Carlson Marketing Group, Loyalty Group, a division of
Alliance Data Systems and BI Performance Services. Our Custom Loyalty Network
and Enterprise Incentive Solution products and services also compete with
products offered by third parties, such as MyPoints.com.
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<PAGE>
For each of our programs, we expect competition to intensify as more
competitors enter our market. We believe that such future competition could
come from newly formed companies and, more importantly, from traditional
offline promotions and loyalty companies such as Carlson Marketing Group,
Brierley & Partners and Signature Group, a division of GE Capital. In order to
compete in our market, companies will need to develop the necessary Internet-
based technology infrastructure, enter into relationships with key suppliers
and obtain access to appropriate business processes. We believe that large
offline promotions and loyalty companies have the necessary resources and
expertise to do so. While we currently have contractual relationships with many
rewards suppliers, such as airline frequent flyer programs, any of these
suppliers could themselves enter our markets and provide us with substantial
competition.
Many of our potential competitors, and in particular offline promotions
companies and offline rewards programs, have longer operating histories,
stronger brand names and significantly greater financial, technical, marketing
and other resources than we do. In addition, these companies may have existing
relationships with our potential customers and may be able to respond to
changes in market dynamics and technology faster than we can. We cannot assure
you that we will be able to compete successfully against these potential
competitors.
Proprietary Rights
We currently rely on a mixture of patents, copyrights, trademarks, trade
secrets and agreements with third parties and employees to protect our
proprietary rights. We have a patent which relates generally to online
incentive award programs. One aspect of our patent is directed to a computer
system for implementing an incentive award program, with the computer system
including an online product catalog, an online awards catalog and a database
for storing account information for each user of the incentive award program.
Netcentives, ClickRewards, ClickMiles, Custom Loyalty Networks, Enterprise
Incentive Solutions, RewardBroker, Secure Value Transfer Protocol, Secure
Rewards Architecture, the Netcentives logo and the ClickRewards logo are
trademarks of Netcentives. We copyright our Web site content, our software and
our sales and promotional literature. Despite our efforts to protect our
proprietary rights, unauthorized parties may use aspects of our business model
and products and obtain and use information we regard as proprietary. In
addition, other parties may breach confidentiality agreements or other
protective contracts with us, and we may not be able to enforce our rights in
the event of such breaches. We believe that each of these proprietary rights is
important to our business in our effort to prevent unauthorized use of our
technology and processes and protect our investment in establishing and
maintaining our brand. Our competitors may independently develop technologies
or business models that are substantially equivalent or superior to ours. In
March 1999, we licensed our patent to MyPoints.com, a competitor of ours, who
may use this license to compete with us using our business process. We may
decide to license our patent to other competitors. If we expand
internationally, many countries do not protect intellectual property rights to
the same extent as the laws of the United States. In the event that we are
unable to protect our proprietary rights, our business, financial condition and
results of operations could be materially adversely affected.
The Internet, and specifically the market for e-commerce and online
advertising, direct marketing and promotions, is characterized by a rapidly
evolving legal landscape. A variety of patents relating to this market have
been issued in the past year, including our business process patent. We believe
that several additional, related patents are currently pending. We believe that
there will continue to be substantial activity in this area and that litigation
may arise due to our attempts or a third party's efforts to enforce patent
rights.
We may incur substantial expenses, and the attention of our management may be
diverted if such litigation occurs. In addition, whether or not any claims
against us are meritorious, we may be required to enter into license agreements
or be subject to injunctive or other equitable relief, any of which would
materially adversely affect our business, results of operations and financial
condition.
45
<PAGE>
Employees
As of June 30, 1999, Netcentives had 149 full time employees, including 78 in
marketing and sales, 35 in research and development, 19 in professional
services, and 17 in finance and administration. Our employees are not
represented by any collective bargaining unit or labor union and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
Facilities
Our current headquarters are located in San Francisco, California, where we
lease six locations aggregating approximately 40,000 square feet under leases
expiring between 2000 and 2001. In May 1999, we entered into a lease that
expires in 2007 for approximately 70,000 square feet in which we will
consolidate our San Francisco headquarters in early 2000. We also lease
approximately 1,000 square feet in Chicago, Illinois, approximately 500 square
feet in New York, New York and approximately 4,000 square feet in Healdsburg,
California under leases that are month-to-month.
Legal Proceedings
We are currently involved in no material legal proceedings.
46
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
West Shell, III............ 44 Chairman of the Board of Directors and Chief
Executive Officer
Murray Brozinsky........... 34 Executive Vice President and Managing
Director, North America
John F. Longinotti......... 54 Executive Vice President, Operations and Chief
Financial Officer
Elizabeth S. Ames.......... 42 Senior Vice President and General Manager,
Custom Loyalty Networks
Timothy J. O. Catlin....... 35 Senior Vice President, Research & Development
Edward Fong Soo Hoo........ 47 Senior Vice President, Corporate Development
George Loyer............... 50 Vice President and General Manager,
Netcentives Professional Services
Elliott S. Ng.............. 30 Vice President and General Manager,
ClickRewards
William B. Rusitzky........ 35 Vice President and General Manager, Enterprise
Incentive Solutions
Paul F. Danielsen.......... 44 Vice President, Sales
Perryman K. Maynard........ 43 Vice President, Relationship Marketing and
Strategic Alliances
William McGee.............. 42 Vice President, Corporate Marketing
Stewart Alsop(2)........... 47 Director
Tom Byers, Ph.D.(2)........ 46 Director
Eric W. Tilenius........... 31 Director
Virginia M. Turezyn(1)(2).. 41 Director
Wendell G. Van Auken(1).... 54 Director
Sergio Zyman(1)(2)......... 53 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Shell was elected to our Board of Directors in January 1997 and as
Chairman of the Board of Directors in July 1999. He has served as our President
and Chief Executive Officer since June 1997. In 1986, Mr. Shell founded Pacific
Marketing Group (subsequently Highway One Communications), a marketing firm,
and acted as its Managing Partner until November 1996. Prior to founding
Pacific Marketing Group, Mr. Shell held marketing positions at Atari Corp., a
video game manufacturer, Johnson & Johnson, a healthcare products company,
and Grey Advertising Inc., an advertising agency. Mr. Shell holds a B.S. in
Business Administration from the University of Vermont.
Mr. Brozinsky joined Netcentives in April 1998 and has served us in a variety
of capacities since that time, including currently as Executive Vice President
and Managing Director, North America, a position he has held since July 1999.
From September 1994 to April 1998, Mr. Brozinsky was a consultant with the
Boston Consulting Group, a management consulting firm, where he specialized in
developing e-commerce strategies for high technology and financial services
clients. Prior to September 1994, Mr. Brozinsky served as the Director of
Finance at McCaw Cellular Communications Inc., a cellular telecommunications
company, General Manager of Monitor Marine, a subsidiary of Monitor Aerospace
Corporation, a high technology manufacturing company, and as an investment
banker with Morgan Stanley and Company, Inc., an investment bank. Mr. Brozinsky
holds a B.S. in Finance and a B.A. in Philosophy from the University of
Pennsylvania and an M.B.A. in management and manufacturing from Northwestern
University's Kellogg and McCormick schools.
47
<PAGE>
Mr. Longinotti joined Netcentives in January 1998 and has served as our
Executive Vice President, Operations since July 1999 and as Chief Financial
Officer since January 1998. Mr. Longinotti served as a consultant to
Netcentives from October 1997 to January 1998. From April 1995 to January 1998
he was an independent consultant in an operational and financial consulting
practice. From July 1993 to March 1995 Mr. Longinotti was Chief Executive
Officer of Digital Collections, Inc., a graphics software and multimedia firm.
Mr. Longinotti started his career at U.S. Leasing International where he spent
sixteen years in a variety of executive positions, followed by two years at
AT&T Capital. Mr. Longinotti holds a B.S. in Engineering from Stanford
University and an M.B.A. from the University of California at Berkeley's Haas
School of Business.
Ms. Ames joined Netcentives in November 1998 and has served us in a variety
of capacities since that time, including currently as Senior Vice President and
General Manager, Custom Loyalty Networks, a position she has held since July
1999. From May 1998 to November 1998, Ms. Ames was General Manager, Internet
Merchant Group at VeriFone, Inc., an electronic payment system company, where
she had profit and loss responsibility for sales, marketing and product
development for the Internet merchant market. While at VeriFone, Ms. Ames also
served as Director, Product Marketing, Internet Commerce Division from June
1997 to May 1998. From October 1996 to June 1997, Ms. Ames was an independent
consultant with a focus on internet commerce and marketing technology. From
November 1995 to October 1996, Ms. Ames was Vice President, Product Development
at Eagle River Interactive, an interactive advertising agency. From January
1994 to November 1995, Ms. Ames was a Principal at Opus Consulting, a strategic
marketing and Internet consulting group. Prior to 1994, Ms. Ames held a variety
of positions with Apple Computer, Inc., a computer manufacturer. Ms. Ames holds
a B.F.A. from the Hartford Art School at the University of Hartford and an
M.B.A. from Southern Methodist University.
Mr. Catlin joined Netcentives in November 1996 as our Vice President,
Research & Development and became our Senior Vice President, Research &
Development in July 1999. From July 1996 to October 1996, Mr. Catlin was Senior
Director of Engineering at Eagle River Interactive. From March 1995 to July
1996, Mr. Catlin was an Engineering Manager at Intuit, Inc., a financial
software company. From September 1993 to January 1995, Mr. Catlin was President
and Chief Executive Officer of Streetlight Software, Inc., a software services
company. Mr. Catlin holds a B.A. in Computer Science from Brown University.
Mr. Soo Hoo has served as our Senior Vice President, Corporate Development
since March 1998. From September 1997 to March 1998, Mr. Soo Hoo was Executive
Vice President of Sales at Quote.com, Inc., a Web-based financial services
information company. From February 1996 to September 1997, Mr. Soo Hoo was
Director of Business Development at CyberCash, Inc., an Internet commerce
payment solutions company. From January 1994 to February 1996, Mr. Soo Hoo was
Business Development Manager, OEM at Novell, Inc., a network operating systems
manufacturer. Mr. Soo Hoo studied business administration at both the
University of San Francisco and California State University, Hayward.
Mr. Loyer has served as our Vice President and General Manager, Netcentives
Professional Services since July 1999. From December 1998 to July 1999, Mr.
Loyer served as our Director, Netcentives Professional Services. From March
1993 to December 1998, Mr. Loyer served in a variety of capacities at Panttaja
Consulting Group, Inc., a technology consulting firm which was acquired by
Netcentives, including most recently as Panttaja's Vice President and General
Manager from June 1996 to December 1998. Mr. Loyer studied Chemical Engineering
at Rensselaer Polytechnic Institute.
Mr. Ng was a co-founder of Netcentives in June of 1996 and has served
Netcentives in a variety of capacities since that time, including currently as
our Vice President and General Manager, ClickRewards a position he has held
since July 1999. Mr. Ng also served as a Director of Netcentives from June 1996
to September 1997 and as our Chief Financial Officer from June 1996 to January
1998. From December 1995 to June 1996, Mr. Ng was a Partner in Tilenius & Ng
Ventures, a predecessor entity to Netcentives. From July 1991 to August 1994,
Mr. Ng was a Product Manager at Microsoft Corporation, a software developer.
Mr. Ng holds a B.A. in Social Studies from Harvard University and an M.B.A.
from the Harvard University Graduate School of Business.
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Mr. Rusitzky joined Netcentives in February 1997, and has served us in a
variety of capacities, including currently as our Vice President and General
Manager, Enterprise Incentive Solutions, a position he has held since July
1999. From February 1994 to February 1997, Mr. Rusitzky was Manager, Business
Development and International Marketing/Sales at Silicon Graphics, Inc., a
computer workstation manufacturer. Prior to 1994, Mr. Rusitzky served in a
variety of positions with Silicon Graphics. Mr. Rusitzky holds a B.M.E. from
the Georgia Institute of Technology and an M.E. in Operations Research and
Industrial Engineering and an M.B.A. from Cornell University.
Mr. Danielsen has served as our Vice President, Sales since May 1997. From
October 1995 to May 1997, Mr. Danielsen was Director of Business Development at
Sportsline USA, Inc., an internet-based sports media company, where he was
responsible for developing strategic relationships with national governing
bodies, athletes, and new channel partnerships. From 1990 to October 1995, Mr.
Danielsen was a Managing Partner of P&P West, a sports marketing company
specializing in event packaging, production and television. Mr. Danielsen holds
a B.A. in Economics from the University of Colorado.
Mr. Maynard has served as our Vice President, Relationship Marketing and
Strategic Alliances since August 1998. From July 1997 to August 1998, Mr.
Maynard was a Principal at Maynard & Associates, a marketing consulting firm.
From February 1996 to June 1997, Mr. Maynard was a Senior Vice President at
Brierley & Partners, a direct marketing agency. From October 1994 to January
1996, Mr. Maynard was Executive Director, Marketing at Hilton Grand Vacations
Corporation, a developer and marketer of timeshare resorts. Prior to October
1994, Mr. Maynard was Vice President, Marketing Programs with Hilton Hotels
Corporation, a hotel management company and owner. Mr. Maynard holds a B.A. in
History from Bates College.
Mr. McGee joined Netcentives in March 1999, and has served us in a variety of
capacities, including currently as our Vice President, Corporate Marketing, a
position he has held since July 1999. From March 1999 to July 1999, Mr. McGee
served as our Director of Marketing Services. From September 1990 to March
1999, Mr. McGee was Partner and General Manager of Creative Media, Inc., a
media placement and advertising firm. Prior to September 1990, Mr. McGee served
as a Management Supervisor and Vice President at Ketchum Advertising, an
advertising firm, a Product Manager at Microsoft Corporation, an Advertising
Manager at Atari, and as a Media Buyer for Foote, Cone & Belding, an
advertising firm. Mr. McGee holds a B.A. in Economics from the University of
California, Santa Barbara.
Mr. Alsop has served as a director of Netcentives since September 1997. Mr.
Alsop has been a General Partner at New Enterprise Associates, a venture
capital investment firm, since November 1998. Mr. Alsop was a Venture Partner
at New Enterprise Associates from June 1996 to November 1998. From June 1991 to
June 1996, Mr. Alsop served as Senior Vice President and Editor in Chief of
InfoWorld Publishing Company, Inc., which publishes InfoWorld, a weekly
newspaper for information-technology professionals. Prior to 1991, Mr. Alsop
founded Industry Publishing Company, a publisher of computer industry
newsletters. Mr. Alsop also serves on the board of directors of Macromedia,
Inc., a developer of multimedia and digital arts software tools. Mr. Alsop
holds a B.A. in English from Occidental College.
Dr. Byers has served as a director of Netcentives since December 1998. Dr.
Byers has been an Associate Professor at Stanford University and the founding
Director of the Stanford Technology Ventures Program since July 1995. He also
currently serves as the Director of the AEA/Stanford Executive Institute, a
professional development program for high technology executives. From January
1994 to June 1995, Dr. Byers was a Lecturer at the University of California at
Berkeley's Haas School of Business. Dr. Byers also serves on the board of
directors of Visio Corporation, a graphics software company. Dr. Byers holds a
B.S. in Industrial Engineering and Operations Research, and an M.B.A. and Ph.D.
in Business Administration from the University of California, Berkeley.
Mr. Tilenius has served as a member of the Board of Directors since our
founding in June 1996. Mr. Tilenius has served as an Entrepreneur-in-Residence
at Mayfield Fund, a venture capital investment firm,
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since July 1999. Prior to joining Mayfield Fund, Mr. Tilenius co-founded
Netcentives in June 1996, and served us in a variety of capacities, including
as Chairman of the Board of Directors and Vice President, Business Development,
from June 1997 and to July 1999 and President and Chief Executive Officer from
June 1996 to June 1997. From September 1995 to June 1996, Mr. Tilenius was a
Partner in Tilenius & Ng Ventures. From April 1992 to September 1994, Mr.
Tilenius was Product Manager of the Quicken for Macintosh business at Intuit,
Inc. From September 1990 to April 1992, Mr. Tilenius held product management
positions at Oracle Corporation, a database software company. Mr. Tilenius
holds a B.A. in Economics from Princeton University, a Certificate in Space
Studies from International Space University and an M.B.A. from Stanford
University.
Ms. Turezyn has served as a director of Netcentives since November 1996. Ms.
Turezyn co-founded Information Technology Ventures, a venture capital firm, in
September 1994 and has served as a General Partner from that time to the
present. From April 1982 to September 1994 she served in a variety of
capacities at Morgan Stanley & Company, Inc., including most recently as a Vice
President in the Venture Capital Group. Ms. Turezyn holds a B.A. in Accounting
from Queens College and is a Certified Public Accountant.
Mr. Van Auken has served as a director of Netcentives since September 1997.
Mr. Van Auken has been a General Partner of the Mayfield Fund since October
1986. Prior to joining Mayfield, Mr. Van Auken was an officer, founder or chief
executive officer of three start-ups in three different technology-oriented
fields. Mr. Van Auken serves as a director of Advent Software, Inc., a
portfolio management software company and Montgomery Street Income Securities
Inc., a closed-end bond fund. Mr. Van Auken holds a B.E.E. from Rensselaer
Polytechnic Institute and an M.B.A. from Stanford University.
Mr. Zyman has served as a director of Netcentives since December 1998. Mr.
Zyman has been an independent consultant since June 1998. For more than five
years prior to June 1998, Mr. Zyman served in a variety of positions at Coca-
Cola, Inc., including most recently as the Chief Marketing Officer. Mr. Zyman
serves as a director of Gap, Inc., an apparel retailer, and UC Television
Network Corp., a college television network.
Each executive officer serves at the discretion of the Board of Directors.
There are no family relationships among any of the directors or executive
officers of Netcentives.
Board Composition
We currently have authorized seven directors. In accordance with the terms of
our Amended and Restated Certificate of Incorporation, effective upon the
closing of this offering, the terms of office of the directors will be divided
into two classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 2000 or special meeting held in lieu thereof, and
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2001 or special meeting held in lieu thereof. The Class I directors are
Ms. Turezyn, Messrs. Alsop and Tilenius and Dr. Byers and the Class II
directors are Messrs. Shell, Van Auken, and Zyman. At each annual meeting of
stockholders after the initial classification or special meeting in lieu
thereof, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the second
annual meeting following election or special meeting held in lieu thereof. In
addition, our Amended and Restated Certificate of Incorporation will provide
that the authorized number of directors may be changed only by resolution of
the Board of Directors. Any additional directorships resulting from an increase
in the number of directors will be distributed among the two classes so that,
as nearly as possible, each class will consist of one-half of the directors.
This classification of the Board of Directors may have the effect of delaying
or preventing changes in control or management of Netcentives.
Board Compensation
We do not currently compensate our directors, but they are reimbursed for
out-of-pocket expenses incurred in connection with attendance at meetings of
the Board of Directors or its committees. Our directors are generally eligible
to participate in our 1996 Stock Option Plan and, if a director is an employee
of Netcentives,
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to participate in our 1999 Employee Stock Purchase Plan. Directors who are not
employees will also receive periodic stock option grants under our 1999
Directors' Stock Option Plan.
The Directors' Stock Option Plan provides for an initial grant of an option
to purchase 40,000 shares of common stock to each nonemployee director who has
not received a grant under the 1996 Stock Option Plan during the twelve months
preceding the effective date of the Directors' Stock Option Plan, and to each
person who first becomes a nonemployee director thereafter. These options shall
become exercisable in four equal installments on the first, second, third and
fourth anniversaries of the grant. On the first day of each fiscal year, each
nonemployee director who has served on our Board of Directors for at least six
months shall be granted an additional option to purchase 10,000 shares of
common stock, which shall become exercisable in full on the fourth anniversary
of the date of grant. The exercise price of all stock options granted under the
Directors' Stock Option Plan shall be equal to the fair market value of a share
of our common stock on the date of grant of an option.
Board Committees
The Compensation Committee currently consists of Ms. Turezyn, Messrs. Alsop
and Zyman and Dr. Byers. The Compensation Committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and
. makes recommendations to the Board of Directors regarding these matters.
The Audit Committee currently consists of Ms. Turezyn and Messrs. Van Auken
and Zyman. The Audit Committee:
. makes recommendations to the Board of Directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided by
our independent auditors; and
. reviews and evaluates our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are currently Ms. Turezyn, Messrs.
Alsop and Zyman and Dr. Byers. Neither Ms. Turezyn, Messrs. Alsop and Zyman nor
Dr. Byers has at any time been an officer or employee of Netcentives. No
executive officer of Netcentives serves as a member of the board of directors
or compensation committee of an entity that has one or more executive officers
serving on Netcentives' Board of Directors or Compensation Committee.
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<PAGE>
Executive Compensation
The following table sets forth certain compensation earned by our Chief
Executive Officer and the four other most highly compensated executive officers
whose total compensation exceeded $100,000 during the year ended December 31,
1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Other Securities
Annual Underlying
Name and Principal Position Salary Bonus(1) Compensation Options(#)
- --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
West Shell, III.................... $200,000 $66,936 $7,836(2) --
Chairman and Chief Executive
Officer
Timothy J.O. Catlin................ 130,000 44,667 -- 50,000
Senior Vice President, Research &
Development
Paul F. Danielsen.................. 110,000 72,624 -- 40,000
Vice President, Sales
John F. Longinotti................. 137,427 32,163 -- 50,000
Executive Vice President,
Operations and
Chief Financial Officer
Edward Fong Soo Hoo ............... 106,329 56,163 -- 182,000
Senior Vice President, Corporate
Development
</TABLE>
- --------
(1) Includes the fair market value of ClickMiles awarded in the past fiscal
year.
(2) Represents term life insurance payments.
Option Grants in Last Fiscal Year
The following table shows certain information regarding stock options granted
to each of the executive officers named in the Summary Compensation Table
during the year ended December 31, 1998. No stock appreciation rights were
granted to the executive officers named in the Summary Compensation Table
during the year.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Number of Rates of Stock Price
Shares Percentage of Appreciation for Option
Underlying Total Options Exercise Term(3)
Options Granted to Price Expiration --------------------------
Name Granted(1) Employees(2) per Share Date 0%(4) 5% 10%
- ---- ---------- ------------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
West Shell, III......... -- -- -- -- -- -- --
Timothy J.O. Catlin..... 50,000 1.6% $1.05 12/28/08 $170,000 $309,929 $524,608
Paul F. Danielsen....... 40,000 1.3 1.05 12/28/08 136,000 247,943 419,686
John F. Longinotti...... 50,000 1.6 1.05 12/28/08 170,000 309,929 524,608
Edward Fong Soo Hoo..... 155,000 4.9 0.15 03/15/08 116,250 203,981 338,577
27,000 0.9 1.05 12/28/08 91,800 167,362 283,288
</TABLE>
- --------
(1) These stock options, which were granted under the 1996 Stock Option Plan,
become exercisable at a rate of 1/8th of the total number of shares of
common stock subject to the option on the six month anniversary of the date
of grant, and 1/48th of the total number of shares monthly thereafter, as
long as the optionee remains an employee of, consultant to, or director of
Netcentives.
(2) Based on an aggregate of 3,132,293 options to purchase common stock of
Netcentives granted by Netcentives under the 1996 Stock Option Plan in
fiscal year 1998.
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<PAGE>
(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. The 5% and 10% assumed annual rates of compounded
stock price appreciation are mandated by the Securities and Exchange
Commission. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation
over the 10-year option term will be at the assumed 5% and 10% levels or at
any other defined level. Unless the market price of the common stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officers.
(4) The 0% assumed annual rate of stock price appreciation is indicative of the
difference between the exercise price per share and the fair market value
of our common stock on the date of grant.
Option Exercises and Holdings
The following table sets forth the number of shares of common stock acquired
upon the exercise of stock options by each of the executive officers named in
the Summary Compensation Table during our last fiscal year, and the number and
value of securities underlying unexercised options held by the these executive
officers as of December 31, 1998:
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options
Shares Value December 31, 1998 (#) at December 31, 1998 (2)
Acquired on Realized ------------------------- -------------------------
Name Exercise (#) (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
West Shell, III......... -- -- 40,833 9,167 $177,024 $ 39,876
Timothy J.O. Catlin..... -- -- 25,000 125,000 107,500 492,500
Paul F. Danielsen....... -- -- 30,833 109,167 133,374 434,626
John F. Longinotti...... 41,979 $125,937 -- 163,021 -- 655,990
Edward Fong Soo Hoo..... -- -- 29,062 152,938 124,967 633,333
</TABLE>
- --------
(1) The amount set forth represents the difference between the fair market
value of the shares on the date of exercise as determined by the Board of
Directors and the exercise price of the option.
(2) Based on the fair market value as of December 31, 1998 ($4.45 per share),
as determined by the Board of Directors, minus the exercise price,
multiplied by the number of shares underlying the option.
Employment Agreements
In June 1997, we entered into an Employment Agreement with West Shell, III,
our Chairman and Chief Executive Officer in which we agreed to pay Mr. Shell an
annualized salary of $200,000. In the event of Mr. Shell's involuntary
termination, we agreed to pay Mr. Shell his regular salary for a period of six
months; agreed to provide medical, dental and other like benefits for a period
of six months; agreed to release our repurchase option as to 1/4th of the
common stock then held by him that is then subject to repurchase; and agreed to
preserve Mr. Shell's eligibility to receive a discretionary bonus on the
involuntary termination date.
In October 1998, we entered into an amendment to Mr. Shell's Employment
Agreement. In this amendment, we agreed to extend the term of the Employment
Agreement until October 29, 2000; agreed to increase Mr. Shell's annualized
salary to $250,000; and agreed to loan Mr. Shell $100,000 upon his request. We
subsequently loaned him $100,000 in January 1999, with interest accruing at the
rate of 4.47% per annum, compounded semianually.
In January 1998, we entered into a Change of Control Agreement with John F.
Longinotti, our Executive Vice President, Operations and Chief Financial
Officer in which we agreed that, subject to certain limitations, if Mr.
Longinotti's employment relationship is involuntarily terminated within twelve
months following a change of control transaction, all of Mr. Longinotti's stock
options shall immediately vest.
Stock Plans
1996 Stock Option Plan. Our 1996 Stock Option Plan (the "Option Plan")
provides for the grant of incentive stock options to employees and nonstatutory
stock options and stock purchase rights to employees,
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<PAGE>
directors and consultants. The purposes of the Option Plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. The
Option Plan was originally adopted by our Board of Directors in November 1996
and approved by our stockholders in August 1997. Unless terminated earlier by
the Board of Directors, the Option Plan shall terminate in November 2006. A
total of 7,671,400 shares of common stock have been reserved for issuance under
the Option Plan, plus an automatic annual increase on the first day of our
fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to 1,250,000
shares or such lesser number of shares as the Board of Directors determines. As
of June 30, 1999, options to purchase 4,819,101 shares of common stock were
outstanding at a weighted average exercise price of $1.87, 566,911 shares had
been issued upon exercise of outstanding options, and 2,285,388 shares remained
available for future grant. In addition, options to purchase 30,000 shares of
our common stock were outstanding outside of the Option Plan.
The Option Plan may be administered by the Board of Directors or a committee
of the Board. The Option Plan administrator determines the terms of options or
purchase rights granted under the Option Plan, including the number of shares
subject to an option or award, the exercise or purchase price, and the term and
exercisability of options. In no event, however, may an individual employee
receive option grants or purchase rights under the Option Plan during any one
fiscal year which would allow him or her to purchase more than 2,000,000
shares. Incentive stock options granted under the Option Plan must have an
exercise price of at least 100% of the fair market value of the common stock on
the date of grant and at least 110% of such fair market value in the case of an
optionee who holds more than 10% of the total voting power of all classes of
our stock. The exercise or purchase price of nonstatutory stock options and
stock purchase rights granted under the Option Plan shall be determined by the
Option Plan administrator; provided however that the exercise price of any
nonstatutory stock option granted to our Chief Executive Officer or our four
other most highly compensated officers will generally equal at least 100% of
the fair market value of the common stock on the date of grant. Payment of the
option exercise or purchase price may be made in cash or other consideration,
as determined by the Administrator.
With respect to options granted under the Option Plan, the Option Plan
administrator determines the term of options, which may not exceed 10 years (or
5 years in the case of an option granted to a holder of more than 10% of the
total voting power of all classes of our stock). No option may be transferred
by the optionee other than by will or the laws of descent or distribution;
provided that the Option Plan administrator may grant nonstatutory stock
options with limited transferability rights in certain circumstances.
Generally, each option may be exercised during the lifetime of the optionee
only by the optionee. The Option Plan administrator determines when options
vest and become exercisable.
In the event of a sale of substantially all of the assets of Netcentives, or
its merger or consolidation with or into another corporation, each option may
be assumed or an equivalent option substituted by the successor corporation.
However, if the successor corporation does not agree to such assumption or
substitution of an option, the option will terminate. The Administrator has the
authority to amend or terminate the Option Plan provided that no action that
impairs the rights of any holder of an outstanding option may be taken without
the holder's consent, and provided that stockholder approval for any amendments
to the Option Plan shall be obtained to the extent required by applicable law.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors in March 1999 and was
approved by the stockholders in May 1999, contingent upon the closing of this
offering. A total of 300,000 shares of common stock have been reserved for
issuance under the Purchase Plan, none of which have been issued as of the date
of this offering. The number of shares reserved for issuance under the Purchase
Plan will be subject to an annual increase on the first day of each of our
fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser
of 75,000 shares, 1% of our outstanding common stock on the last day of the
immediately preceding fiscal year, or such lesser number of shares as the Board
of Directors determines. The Purchase Plan becomes effective upon the date of
this prospectus. Unless terminated earlier by the Board of Directors, the
Purchase Plan shall terminate in March 2019.
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<PAGE>
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, will be implemented by a series of overlapping
offering periods of 24 months' duration, with new offering periods (other than
the first offering period) commencing on May 1 and November 1 of each year.
Each offering period will consist of 4 consecutive purchase periods of 6
months' duration. At the end of each such 6 month period an automatic purchase
will be made for participants. The initial offering period is expected to
commence on the date of this offering and end on October 31, 2001; the initial
purchase period is expected to commence on the date of this offering and end on
April 30, 2000. The Board of Directors may, however, amend or terminate an
offering period or a purchase period, if prevailing accounting rules change so
as to have a harmful effect on our financial statements. The Purchase Plan will
be administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors) of Netcentives, or
of any majority-owned subsidiary designated by the Board, are eligible to
participate in the Purchase Plan if they are employed by Netcentives, or any
such subsidiary, for at least 20 hours per week and more than 5 months per
year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions of up to 20% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the common stock at
the beginning of each offering period or at the end of each purchase period.
The Board of Directors shall have the discretion to increase, prior to the
beginning of an offering period, the percentage of participants' compensation
that may be withheld through the Purchase Plan. Employees may end their
participation in the offering period at any time, and participation
automatically ends on termination of employment.
No employee shall be granted an option under the Purchase Plan if immediately
after the grant such employee would own stock and/or hold outstanding options
to purchase stock equaling 5% or more of the total voting power or value of all
classes of Netcentives' stock or its subsidiaries, or if the option would
permit an employee to purchase stock, under all of our, or our subsidiaries',
employee stock purchase plans, to accrue at a rate that exceeds $25,000 of fair
market value of such stock for each calendar year in which the option is
outstanding at any time. In addition, no employee may purchase more than 2,500
shares of common stock under the Purchase Plan in any one purchase period. If
the fair market value of the common stock on a purchase date is less than the
fair market value at the beginning of the offering period, each participant in
the Purchase Plan shall automatically be withdrawn from the offering period as
of the end of the purchase date and re-enrolled in the new 24 month offering
period beginning on the first business day following the purchase date.
The Purchase Plan provides that in the event of a merger or consolidation of
Netcentives with or into another corporation or a sale of all or substantially
all of its assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens any ongoing offering period so that employees'
rights to purchase stock under the Purchase Plan are exercised prior to the
transaction. The Board of Directors has the power to amend or terminate the
Purchase Plan and to change or terminate offering periods as long as such
action does not adversely affect any outstanding rights to purchase stock under
the Purchase Plan, provided however that the Board may amend or terminate the
Purchase Plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan (the
"Directors' Plan") was adopted by the Board of Directors in March 1999 and was
approved by the stockholders in May 1999, contingent upon the closing of this
offering. A total of 400,000 shares of common stock have been reserved for
issuance under the Directors' Plan. The number of shares reserved for issuance
under the Directors' Plan will be subject to an annual increase on the first
day of each of our fiscal years beginning in 2000, 2001, 2002, 2003 and 2004
equal to the lesser of 50,000 shares or 1% of our outstanding common stock on
the last day of the immediately preceding fiscal year. The Directors' Plan
becomes effective upon the effective date of this prospectus. The Directors'
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of Netcentives and is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors without participation by a director with
respect to matters in which the director has a personal interest. Unless
terminated earlier, the Directors' Plan will terminate in March 2009.
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<PAGE>
The Directors' Plan provides for an initial grant of an option to purchase
40,000 shares of common stock to each nonemployee director who has not received
a grant under the Option Plan during the twelve months preceding the effective
date of the Directors' Plan, and to each person who first becomes a nonemployee
director thereafter. These options shall become exercisable in four equal
installments on the first, second, third, and fourth anniversaries of the
grant. On the first day of each fiscal year, each nonemployee director who has
served on our Board of Directors for at least 6 months shall be granted an
additional option to purchase 10,000 shares of common stock, which shall become
exercisable in full on the fourth anniversary of the date of grant. The
exercise price of all stock options granted under the Directors' Plan shall be
equal to the fair market value of a share of Netcentives' common stock on the
date of grant of the option.
The Directors' Plan sets neither a maximum nor a minimum number of shares for
which options may be granted to any one nonemployee director, but does specify
the number of shares that may be included in any grant and the method of making
a grant. No option granted under the Directors' Plan is transferable by the
optionee other than by will or the laws of descent or distribution or pursuant
to a qualified domestic relations order. Each option is exercisable, during the
lifetime of the optionee, only by the optionee. If a nonemployee director
ceases to serve as a director for any reason other than death or disability, he
or she may, within 90 days after the date he or she ceases to be a director,
exercise options granted under the Directors' Plan to the extent that he or she
was entitled to exercise it at the date of termination. To the extent that he
or she was not entitled to exercise any such option at the date of termination,
or if he or she does not exercise an option (which he or she was entitled to
exercise) within the 90 day period, the option shall terminate. If a director's
service on our Board terminates as a result of his or her death, the director's
estate will have the right to exercise any option granted under the Directors'
Plan as if the deceased director had continued in his or her position on the
Board of Directors for an additional six months following the date of death.
Options granted under the Directors' Plan have a term of ten years.
In the event of a dissolution or liquidation of Netcentives, a sale of all or
substantially all of its assets, or a merger, consolidation or other capital
reorganization of Netcentives with or into another corporation, each option
outstanding under the Directors' Plan shall be assumed or equivalent options
substituted by the successor corporation, unless such successor corporation
does not agree to such assumption or substitution, in which case the options
shall terminate upon consummation of the transaction; provided however that
upon a sale of all or substantially all of our assets or a merger or
consolidation of Netcentives with or into another corporation in which more
than 50% of the shares entitled to vote are exchanged, each director holding
options under the Directors' Plan shall have the right to exercise his or her
options immediately prior to the consummation of such transaction as to all of
the shares of stock underlying such options, including shares as to which the
director would not otherwise be entitled to exercise.
The Board of Directors may amend or terminate the Directors' Plan at any
time; provided however that no such action may adversely affect any outstanding
option and provided that stockholder approval for any amendments to the
Directors' Plan shall be obtained to the extent required by applicable law.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that a director
of a corporation will not be personally liable for monetary damages for breach
of such individual's fiduciary duties as a director except for liability:
. for any breach of such director's duty of loyalty to Netcentives or to
its stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which a director derives an improper personal
benefit.
56
<PAGE>
Our Bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our officers, employees and other agents to the
fullest extent permitted by law. We believe that indemnification under our
Bylaws covers at least negligence and gross negligence on the part of an
indemnified party. Our Bylaws also permits us to advance expenses incurred by
an indemnified party in connection with the defense of any action or proceeding
arising out of the party's status or service as a director, officer, employee
or other agent of Netcentives upon an undertaking by the party to repay such
advances if it is ultimately determined that the party is not entitled to
indemnification.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us to, among other things,
indemnify each director or officer against expenses (including attorney's
fees), judgments, fines and settlements paid by such individual in connection
with any action, suit or proceeding arising out of an individual's status or
service as a director or officer of Netcentives (other than liabilities arising
from willful misconduct or conduct that is knowingly fraudulent or deliberately
dishonest) and to advance expenses incurred by an individual in connection with
any proceeding against an individual with respect to which an individual may be
entitled to indemnification by us. We believe that our Certificate of
Incorporation and Bylaw provisions and indemnification agreements are necessary
to attract and retain qualified persons as directors and officers. We also
expect to obtain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding involving
any director, officer, employee or agent of Netcentives where indemnification
will be required or permitted. Furthermore, we are not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
57
<PAGE>
RELATED PARTY TRANSACTIONS
Certain stock option grants to directors and executive officers of
Netcentives are described in this prospectus under the caption "Management--
Executive Compensation."
Benefits to Related Parties in Private Placement Transactions
The following table summarizes (i) the shares of common stock and preferred
stock purchased in private placement transactions by executive officers,
directors and 5% stockholders of Netcentives, and persons and entities
associated with them, in private placement transactions, and (ii) the total
paid-in capital for such shares and their present value:
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E Total Present
Common Preferred Preferred Preferred Preferred Preferred Paid-In Value of
Investor Stock Stock Stock(1) Stock(2) Stock(3) Stock(4) Capital Shares(5)
-------- --------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric W. Tilenius(6)..... 1,000,000(7) -- -- -- -- -- $ 1,000 $11,000,000
Elliot S. Ng(6)......... 1,000,000(7) -- -- -- -- -- 1,000 11,000,000
West Shell, III(6)...... 1,748,600(8) -- -- -- -- -- 347,290 19,234,600
Information Technology
Ventures and
Virginia M.
Turezyn(9)............. -- -- 437,243 1,538,461 539,683 73,314 4,637,245 28,475,711
Integral Capital
Partners(10)........... -- -- 1,269,841 168,621 5,148,860 15,823,082
Mayfield Fund and
Wendell G.
Van Auken(11).......... -- -- -- 2,769,231 1,317,460 549,857 11,500,024 51,002,028
New Enterprise
Associates and
Stewart Alsop(12)...... -- -- -- 1,923,077 634,921 366,568 6,999,995 32,170,226
</TABLE>
- --------
(1) Issued in November 1996 at $1.00 per share.
(2) Issued in September 1997 at $1.30 per share.
(3) Issued in August 1998 at $3.15 per share.
(4) Issued in March, April and June 1999 at $6.82 per share.
(5) Based upon an assumed offering price of $11.00 for the common stock sold
in this offering.
(6) Was an executive officer and director of Netcentives at the time of
purchase.
(7) Issued in June 1996 at $0.001 per share.
(8) Includes 500,000 shares issued in August 1997 at $0.12 per share,
1,048,600 shares issued in December 1997 at $0.15 per share and 200,000
shares issued in December 1998 at $0.65 per share.
(9) Virginia M. Turezyn is a director, and Information Technology Ventures is
a 5% stockholder of Netcentives. Also see note 6 to "Principal
Stockholders."
(10) Integral Capital Partners is a 5% stockholder of Netcentives.
(11) Wendell G. Van Auken is a director, and Mayfield Fund is a 5% stockholder
of Netcentives. Also see note 4 to "Principal Stockholders."
(12) Stewart Alsop is a director, and New Enterprise Associates is a 5%
stockholder of Netcentives. Also see note 5 to "Principal Stockholders."
The Series A, Series B, Series C, Series D and Series E Preferred Stock
issued in private placement transactions are entitled to:
. receive an 8% annual, noncumulative dividend, when and if declared by
the Board of Directors, prior and in preference to any declaration or
payment of any dividend on the Series N Preferred Stock or common stock;
. receive a liquidation preference equal to the purchase price of each
share prior and in preference to the holders of Series N Preferred Stock
and our common stock, in the event of any liquidation, dissolution or
winding up of Netcentives;
. broad-based weighted average anti-dilution protection;
. one vote per share for each share of common into which the preferred
stock is convertible;
. vote together as a class with respect to the election three members of
the Board of Directors;
. vote together as a class to approve or disapprove of any transaction
which negatively impacts the rights, preferences and privileges of the
preferred stock;
58
<PAGE>
. exercise certain demand, piggyback and Form S-3 registration rights; and
. receive audited financial statements and annual budgets.
The Series N Preferred Stock issued in private placement transactions is
entitled to:
. receive an 8% annual, noncumulative dividend, when and if declared by
the Board of Directors, subordinate to the other series of preferred
stock, put prior and in preference to the common stock;
. receive a $1.00 liquidation preference subordinate to the preferences of
the other series of preferred stock, but prior and in preference to the
common stock in the event of any liquidation, dissolution or winding up
of Netcentives; and
. anti-dilution protection in the event of stock splits, stock dividends
and similar events.
All of the preferred stock is convertible into common stock at a one to one
ratio.
Loans to Officers
We have loaned West Shell, III, our Chairman and Chief Executive Officer,
funds according to the terms set forth in the table below. Each loan is secured
by the common stock of Netcentives owned by Mr. Shell and partnerships
affiliated with Mr. Shell.
<TABLE>
<CAPTION>
Note Interest
Issue Date Due Date Amount Rate
---------- -------- -------- --------
<S> <C> <C> <C>
August 1997.................................. August 2001 $ 60,000 6.29%
November 1997................................ November 2001 157,290 6.01
December 1998................................ December 2002 130,000 4.47
January 1999................................. January 2003 100,000 4.47
</TABLE>
Indemnification Agreements
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us to, among other things,
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
Registration Rights Agreements
Certain holders of common stock and preferred stock have certain registration
rights with respect to their shares of common stock (including common stock
issuable upon conversion of their preferred stock) as described in Description
of Capital Stock--Registration Rights of Certain Holders.
Other Related Party Transactions
In April 1999, we entered into a computer software licensing agreement with
Connectify which provides for payments by Netcentives of approximately $300,000
in fees during fiscal 1999. Mr. Alsop is a director of both Netcentives and
Connectify. We believe that this agreement was entered into on terms and
conditions no less favorable to Netcentives than those that could have been
obtained from an unaffiliated third party.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of common stock offered hereby, as to (i) each person (or group of
affiliated persons) known by us to own beneficially more than 5% of our
outstanding common stock, (ii) each of our directors, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
directors and executive officers of Netcentives as a group.
<TABLE>
<CAPTION>
Percent
Beneficially Owned(2)
--------------------------
Name and Address of Beneficial Number of Before After
Owner(1) Shares(2) Offering Offering(3)
- ------------------------------ ---------- ---------- ------------
<S> <C> <C> <C>
Wendell G. Van Auken(4)............... 4,636,548 17.98% 14.58%
2800 Sand Hill Road
Menlo Park, CA 94025
Stewart Alsop(5)...................... 2,873,461 11.14 9.04
2490 Sand Hill Road
Menlo Park, CA 94025
Virginia M. Turezyn(6)................ 2,588,701 10.04 8.14
3000 Sand Hill Road, Building I
Suite 280
Menlo Park, CA 94025
West Shell, III(7)(8)................. 1,792,766 6.94 5.63
Eric W. Tilenius(7)................... 1,004,166 3.89 3.16
Timothy J.O. Catlin(7)................ 149,999 * *
Tom Byers............................. 125,000 * *
John F. Longinotti(7)................. 76,145 * *
Edward Fong Soo Hoo(7)................ 59,395 * *
Paul F. Danielsen(7).................. 54,166 * *
Sergio Zyman(7)....................... 50,000 * *
Mayfield Fund(9)...................... 4,576,741 17.74 14.40
2800 Sand Hill Road
Menlo Park, CA 94025
New Enterprise Associates(10)......... 2,924,566 11.34 9.20
2490 Sand Hill Road
Menlo Park, CA 94025
Information Technology Ventures(11)... 2,588,701 10.04 8.14
3000 Sand Hill Road, Building I
Suite 280
Menlo Park, CA 94025
Integral Capital Partners(12)......... 1,438,462 5.58 4.52
2750 Sand Hill Road
Menlo Park, CA 94025
All directors and officers as a group
(18 persons)(4)(5)(6)(7)(8).......... 14,718,748 55.87 45.50
</TABLE>
- --------
*Less than 1%.
60
<PAGE>
(1) Except as otherwise noted, the address of each person listed in the table
is c/o Netcentives Inc., 690 Fifth Street San Francisco, California 94107,
and the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by
them, subject to community property laws where applicable.
(2) Applicable percentage of beneficial ownership is based on 25,793,417
shares of common stock outstanding as of June 30, 1999, and 31,793,417
shares of common stock to be outstanding upon the consummation of this
offering, together with applicable options exercisable within 60 days of
June 30, 1999 and warrants for such stockholder. Shares issuable pursuant
to such options are deemed outstanding for computing the percentage
ownership of the person holding such options but are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission.
(3) Assumes that the underwriters do not exercise their over-allotment option.
(4) Includes 59,807 shares held by the Wendell G. Van Auken & Ethel S. Van
Auken Trust. Additionally, Mr. Van Auken is a general partner of Mayfield
VIII Management, which is the General Partner of Mayfield VIII which holds
4,033,692 shares and Mayfield Associates Fund III which holds
212,300 shares. Affinity Trust, an investment entity affiliated with the
Mayfield Fund, holds an additional 330,749 shares. Mr. Van Auken disclaims
beneficial ownership of the shares held by Mayfield VIII, Mayfield
Associates Fund III, and Affinity Trust except to the extent of his
pecuniary interest in such entities. See Note 9.
(5) Mr. Alsop is a limited partner of New Enterprise Associates VII, L.P.
which holds 2,873,461 shares. Mr. Alsop disclaims beneficial ownership of
the shares held by this entity except to the extent of his pecuniary
interests in such entities. See Note 10. Shares attributable to Mr. Alsop
do not include any shares owned by NEA President's Fund or NEA Ventures
1997.
(6) Ms. Turezyn is a general partner of Information Technology Ventures, L.P.
which holds 2,521,988 shares and ITV Affiliates Fund, L.P. which holds
66,713 shares. Ms. Turezyn disclaims beneficial ownership of the shares
held by these entities except to the extent of her pecuniary interests in
such entities. See Note 11.
(7) Includes the following shares issuable upon exercise of outstanding
options exercisable within 60 days of June 30, 1999: Mr. Shell, 44,166;
Mr. Tilenius, 4,166; Mr. Catlin, 20,833; Mr. Danielsen, 54,166;
Mr. Longinotti, 34,166; Mr. Soo Hoo, 59,395; Mr. Zyman, 50,000; and
others, 293,594.
(8) Includes 677,512 shares held by Shell Associates, L.P. a family limited
partnership of which Mr. Shell is a general partner.
(9) Includes 4,033,692 shares held by Mayfield VIII, 212,300 shares held by
Mayfield Associates Fund III, and 330,749 shares held by Affinity Trust.
(10) Includes 2,873,461 shares held by New Enterprise Associates VII, L.P.,
47,259 shares held by NEA President's Fund and 3,846 shares held by NEA
Ventures 1997.
(11) Includes 2,521,988 shares held by Information Technology Ventures, L.P.
and 66,713 shares held by ITV Affiliates Fund, L.P.
(12) Includes 1,431,313 shares held by Integral Capital Partners IV, L.P. and
7,149 shares held by Integral Capital Partners IV MS Side Fund, L.P.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, our
authorized capital stock will consist of 100,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001
par value.
Common Stock
As of June 30, 1999, there were 25,793,417 shares of common stock outstanding
that were held of record by approximately 129 stockholders after giving effect
to the conversion of our preferred stock into common stock at a one-to-one
ratio and the exercise of 46,891 warrants terminable upon the closing of this
offering, and assuming no exercise or conversion of outstanding convertible
securities after June 30, 1999. There will be 31,793,417 shares of common stock
outstanding (assuming no exercise of the underwriters' over-allotment option
and no exercise or conversion of outstanding convertible securities after June
30, 1999) after giving effect to the sale of the shares of common stock offered
hereby.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of Netcentives, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of preferred stock, if
any, then outstanding. Our common stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions available to the common stockholders. All outstanding shares of
common stock are fully paid and non-assessable.
Preferred Stock
Effective upon the closing of this offering, we will be authorized to issue
5,000,000 shares of undesignated preferred stock. The Board of Directors will
have the authority to issue the undesignated preferred stock in one or more
series and to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the stockholders. The types of powers and preferences
the Board may designate includes, for example, payment of dividends,
liquidation preferences, anti-dilution protections, conversion privileges,
certain voting rights and redemption rights. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control of
Netcentives without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. At present, we have
no plans to issue any shares of preferred stock.
Registration Rights of Certain Holders
The holders of 20,569,126 shares of common stock, and the holders of 62,948
shares issuable upon exercise of warrants, or their transferees, are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement among
Netcentives and the holders of these securities dated March 19, 1999. Subject
to certain limitations in this agreement, the holders of the these securities
may require, on two occasions at any time after six months from the effective
date of this offering, that we use our best efforts to register the Registrable
Securities for public resale, provided that the proposed aggregate offering
price is at least $10,000,000. If we register any of our common stock either
for our own account or for the account of other security holders, the holders
of these securities are entitled to include their shares of common stock in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in that offering.
Additionally, holders of these securities may require on no more than two
separate occasions in a twelve-month period, that we register their shares for
public resale on Form S-3 or similar short-form registration, once
62
<PAGE>
we are eligible to use Form S-3 or similar short-form registration and provided
further that the value of the securities to be registered is at least $500,000.
All fees, costs and expenses of such registrations must be borne by
Netcentives and all selling expenses (including underwriting discounts, selling
commissions and stock transfer taxes) relating to these securities must be
borne by the holders of the securities being registered.
Anti-Takeover Provisions of Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of Netcentives without further action by the
stockholders.
In addition, upon completion of this offering, certain provisions of our
charter documents, including a provision eliminating the ability of
stockholders to take actions by written consent, may have the effect of
delaying or preventing changes in control or management of Netcentives, which
could have a negative effect on the market price of our common stock. Our
Option Plan, Purchase Plan and Directors' Plan generally provide for assumption
of such plans or substitution of an equivalent option of a successor
corporation or, alternatively, at the discretion of the Board of Directors,
exercise of some or all of the options stock, including non-vested shares, or
acceleration of vesting of shares issued pursuant to stock grants, upon a
change of control or similar event.
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. 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 preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or preventing a change in
control of Netcentives. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance of such preferred stock could have a negative effect on the market
value of the common stock. We have no present plans to issue shares of
preferred stock.
Warrants
As of June 30, 1999, warrants were outstanding to purchase an aggregate of
615,448 shares of common stock at a weighted average exercise price of $1.13
per share. Warrants to purchase 22,500 shares at $2.00 per share will expire in
January 2000. Warrants to purchase 190,000 shares at $1.00 per share will
expire in August 2001. Warrants to purchase 10,000 shares at $1.00 per share
will expire in October 2001. Warrants to purchase 120,000 shares at $1.30 per
share will expire in October 2001. Warrants to purchase 110,000 shares at
$1.00 per share will expire in July 2001. Warrants to purchase 50,000 shares at
$1.00 per share will expire in September 2001. Warrants to purchase 21,000
shares at $1.30 per share will expire in May 2002. Warrants to purchase
10,000 shares at $1.30 per share will expire in September 2002. Warrants to
purchase 50,000 shares at $1.00 per share will expire in October 2002. Warrants
to purchase 31,948 shares at $1.30 per share will expire in May 2003.
63
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is American Stock
Transfer and Trust. Their phone number is (212) 936-5100.
Listing
We have applied to list our common stock on the Nasdaq National Market of the
Nasdaq Stock Market, Inc. under the trading symbol "NCNT."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
We cannot provide any assurances that a significant public market for our
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market, or the possibility of
such sales occurring, could adversely affect prevailing market prices for our
common stock or our future ability to raise capital through an offering of
equity securities.
After this offering, we will have outstanding 31,793,417 shares of common
stock. Of these shares, the 6,000,000 shares to be sold in this offering
(6,900,000 shares if the underwriters' over-allotment option is exercised in
full) will be freely tradable in the public market without restriction under
the Securities Act, unless such shares are held by affiliates, which are
persons or entities that directly or indirectly control Netcentives, such as
officers, directors and substantial stockholders.
The remaining 25,793,417 shares outstanding upon completion of this offering
will be restricted shares meaning that they were not acquired in a public
offering and are not registered or freely tradable. We issued and sold the
restricted shares in private transactions in reliance on exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 or Rule 701 under the Securities Act, as
summarized below.
Pursuant to certain lock-up agreements, all the executive officers, directors
and certain stockholders of Netcentives, who collectively hold the restricted
shares, have agreed not to offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any such shares for a period of 180 days from
the date of this prospectus. We also have entered into an agreement with the
underwriters that we will not offer, sell or otherwise dispose of common stock
for a period of 180 days from the date of this prospectus.
Assuming that this offering is effective on October 1, 1999, on the date of
the expiration of the lock-up agreements, 23,102,330 restricted shares that
will not then be subject to any repurchase option will be eligible for
immediate sale (of which 19,897,882 shares will be subject to certain volume,
manner of sale and other limitations under Rule 144). The remaining 2,691,087
restricted shares will be eligible for sale pursuant to Rule 144 on the
expiration of various one-year holding periods over the six months following
the expiration of the lock-up period and the expiration of certain repurchase
options over the four years following the original purchase date of such
shares. Following the completion of this offering, warrants to purchase 615,448
shares will be outstanding, which if exercised pursuant to net-exercise
provisions would be immediately saleable without restriction upon the
expiration of the 180 day lock-up period. If such warrants were to be otherwise
exercised, they would be saleable upon the expiration of various one-year
holding periods, subject to certain volume, manner of sale, and other
limitations under Rule 144. In general, under Rule 144 as in effect at the
closing of this offering, beginning 90 days after the date of this prospectus,
a person (or persons whose shares of Netcentives are aggregated) who has
beneficially owned restricted shares for at least one year (including the
holding period of any prior owner who is not an affiliate of Netcentives) would
be entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of (1) 1% of the then-outstanding shares of common
stock or (2) the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also
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<PAGE>
subject to certain manner of sale and notice requirements and to the
availability of current public information about Netcentives. Under Rule
144(k), a person who is not deemed to have been an affiliate of Netcentives at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner who is not an affiliate of Netcentives) is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Of the 4,849,101 options to purchase shares of common stock outstanding as of
June 30, 1999, on the date 180 days following the assumed effective date of
this offering, options to purchase 2,165,655 shares of common stock will be
fully exercisable and saleable.
We intend to file, no later than the effective date of this offering, a
Registration Statement on Form S-8 to register approximately 7,804,489 shares
of common stock reserved for issuance under the Option Plan, the Purchase Plan
and the Directors' Plan. The Registration Statement will become effective
automatically upon filing. Shares issued under the foregoing plans, after the
filing of a Registration Statement on Form S-8, may be sold in the open market,
subject, in the case of certain holders, to the Rule 144 limitations applicable
to affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by us.
In addition, following this offering, the holders of 20,569,126 shares of
outstanding common stock and the holders of warrants to purchase 62,948 shares,
or their transferees, will, under certain circumstances, have rights to require
us to register their shares for future sale.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist LLC
and Thomas Weisel Partners LLC are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation...........................
Hambrecht & Quist LLC............................................
Thomas Weisel Partners LLC.......................................
---------
Total.......................................................... 6,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to 900,000 additional shares at the initial public offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters
and selling group members may allow a discount of $ per share on sales
to other broker/dealers. After the initial public offering, the public offering
price and concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- -----------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us....... $ $ $ $
Expenses payable by us........ $ $ $ 1,200,000 $ 1,200,000
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.2 million.
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock being offered.
We, our officers and directors, and some of our stockholders have agreed that
we and they will not offer, sell, contract to sell, announce our intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the
Securities Act relating to, any
66
<PAGE>
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus, except, in our case, issuances pursuant to the exercise of
employee stock options outstanding on the date hereof. Pursuant to the
regulations of the National Association of Securities Dealers, Inc., certain
purchasers of the reserved shares may have to agree not to sell, transfer,
assign or hypothecate their shares for a period of 90 days after the date of
this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
certain entities and individuals who have pre-existing business relationships
with us who have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general public in the
offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NCNT."
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the representatives. The principal factors to be considered in determining
the public offering price consist of the following: the information set forth
in this prospectus; the history and the prospects for the industry in which we
will compete; the ability of our management; our prospects for future earnings;
the present state of our development and our current financial condition; the
general condition of the securities markets at the time of this offering; and
the recent market prices of, and the demand for, publicly traded common stock
of generally comparable companies.
The representatives on behalf of the underwriters may engage in over-
allotment, stabilizing transactions, syndicate covering transactions, penalty
bids and "passive" market making in accordance with Regulation M under the
Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued 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 56 filed public offerings of equity securities, of which 33 have
been completed, and has acted as a syndicate member in an additional 28 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 as provided below and with respect to its
contractual relationship with us pursuant to the underwriting agreement entered
into in connection with this offering.
67
<PAGE>
In March, April and June 1999, Hambrecht & Quist LLC acted as private
placement agent for the sale of an aggregate of 5,278,583 shares of our Series
E preferred stock for which it received a customary fee for its services.
Hambrecht & Quist LLC did not purchase any of the shares in this sale, and they
were selected as the private placement agent through arms-length negotiations
on terms substantially similar to the terms obtained by other underwriters.
Thomas Weisel Partners LLC purchased 73,313 shares of our Series E preferred
stock on the same terms as other purchasers in this sale.
68
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to us and the dealer from whom such purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such common stock without the benefit of
a prospectus qualified under these securities laws, (ii) where required by law,
that such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Netcentives by Venture Law Group, A Professional Corporation, Menlo Park,
California. Craig W. Johnson and Elias J. Blawie, each a director of Venture
Law Group, are the Secretary and Assistant Secretary of Netcentives,
respectively. VLG Investments 1996, an entity affiliated with Venture Law
Group, holds an aggregate of 69,538 shares of our common stock. Mr. Johnson and
Mr. Blawie, hold an aggregate of 20,385 shares and 12,692 shares, respectively,
of our common stock and each has a pecuniary interest in the shares owned by
VLG Investments 1996. The underwriters have been represented by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The (1) consolidated balance sheets of Netcentives Inc. and its subsidiary as
of December 31, 1997 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the period June 21, 1996
(inception) to December 31, 1996 and for the years ended December 31, 1997 and
1998, and (2) Statements of Operations and Cash Flows of Panttaja Consulting
Group, Inc. for the years ended November 30, 1997 and 1998 included herein and
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing in this
prospectus, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the common stock
offered. This prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the SEC. For further information with
respect to Netcentives and the common stock being offered, reference is made to
the Registration Statement, including its exhibits, and the financial
statements and notes filed as a part of the Registration Statement. Statements
made in this prospectus concerning the contents of any other document filed as
an exhibit are not necessarily complete. With respect to each such document
filed with the SEC as an exhibit to the Registration Statement, you should see
the exhibit itself for a more complete description of the matter involved. The
Registration Statement, including exhibits and the financial statements and
notes filed as a part of the Registration Statement, as well as such reports
and other information filed with the SEC, may be inspected without charge at
the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, NY 10048, and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part of these documents may be obtained from the SEC upon
payment of certain fees prescribed by the SEC. These reports and other
information may also be inspected without charge at a Web site maintained by
the SEC. The address of this Web site is http://www.sec.gov.
70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Netcentives Inc.:
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Panttaja Consulting Group, Inc.:
Independent Auditors' Report............................................... F-21
Statements of Operations................................................... F-22
Statements of Cash Flows................................................... F-23
Notes to Financial Statements.............................................. F-24
Pro Forma Consolidated Financial Information:
Pro Forma Consolidated Statement of Operations............................. F-27
Notes to Pro Forma Consolidated Statement of Operations.................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Netcentives Inc.:
We have audited the accompanying consolidated balance sheets of Netcentives
Inc. and its subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period June 21, 1996 (inception) to December 31, 1996 and for the years
ended December 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Netcentives Inc. and its
subsidiary as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the periods stated above in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 14, 1999
F-2
<PAGE>
NETCENTIVES INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................ $ 6,608 $ 13,651 $ 36,152
Accounts receivable............................. 23 893 767
Prepaid incentive awards........................ 703 1,600 1,603
Prepaid expenses................................ 239 147 91
------- -------- --------
Total current assets.......................... 7,573 16,291 38,613
Property and equipment--net....................... 933 1,858 4,274
Intangible assets--net............................ 36 3,611 2,741
Deferred offering costs........................... -- -- 894
Other assets...................................... 7 175 729
------- -------- --------
Total assets.................................. $ 8,549 $ 21,935 $ 47,251
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable............................... $ 200 $ 100 $ --
Accounts payable................................ 583 1,324 783
Accrued compensation and benefits............... 51 667 767
Accrued redemption costs........................ -- 509 1,856
Other accrued liabilities....................... 266 1,198 2,803
Deferred revenue--product....................... 43 1,250 2,963
Deferred revenue--services...................... 16 656 1,348
Current portion of long-term obligations........ 66 664 458
------- -------- --------
Total current liabilities..................... 1,225 6,368 10,978
Long-term obligations............................. 196 1,233 973
Commitments and contingencies (Notes 3, 5, 7, 12,
13 and 15)
Stockholders' equity:
Convertible preferred stock, $.001 par value--
16,050,000 shares authorized;
shares outstanding: 1997, 9,692,460; 1998,
15,168,652; June 30, 1999, 20,522,235
(aggregate liquidation preference of $28,760 at
1998).......................................... 10 15 21
Common stock, $.001 par value--30,000,000 shares
authorized; shares outstanding: 1997,
3,735,683; 1998, 4,894,069;
June 30, 1999, 5,224,491....................... 4 5 5
Paid-in capital................................. 11,780 41,126 77,321
Deferred stock compensation..................... -- (7,905) (6,891)
Receivables from sales of stock................. (220) (350) (450)
Accumulated deficit............................. (4,446) (18,557) (34,706)
------- -------- --------
Total stockholders' equity.................... 7,128 14,334 35,300
------- -------- --------
Total liabilities and stockholders' equity.... $ 8,549 $ 21,935 $ 47,251
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NETCENTIVES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 21, 1996 Years Ended Six Months
(Inception) to December 31, Ended June 30,
December 31, ----------------- -----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product................. $ -- $ -- $ 64 $ 10 $ 216
Program-related
services............... -- 9 583 117 428
Technical consulting
services............... -- -- -- -- 2,377
------ ------- -------- ------- --------
Total revenues........ -- 9 647 127 3,021
------ ------- -------- ------- --------
Costs and expenses:
Cost of product
revenues............... -- -- 59 9 185
Program-related
services, marketing and
support costs.......... 102 1,496 7,293 2,439 9,566
Cost of technical
consulting services
revenues............... -- -- -- -- 1,496
Research and
development............ 63 1,505 3,383 1,401 1,869
Selling, general and
administrative......... 108 1,210 3,134 1,319 3,596
Amortization of deferred
stock compensation..... -- -- 296 31 1,084
Amortization of supplier
stock awards........... -- 63 811 130 958
Amortization of
intangibles............ -- -- 79 3 878
------ ------- -------- ------- --------
Total costs and
expenses............. 273 4,274 15,055 5,332 19,632
------ ------- -------- ------- --------
Loss from operations...... (273) (4,265) (14,408) (5,205) (16,611)
Interest income........... 7 121 441 116 553
Interest expense.......... -- (36) (144) (42) (91)
------ ------- -------- ------- --------
Net loss.................. $ (266) $(4,180) $(14,111) $(5,131) $(16,149)
====== ======= ======== ======= ========
Net loss per share--basic
and diluted.............. $(0.97) $ (5.70) $ (8.58) $ (3.68) $ (5.10)
====== ======= ======== ======= ========
Shares used in computing
per share amounts--basic
and diluted.............. 273 734 1,644 1,396 3,167
====== ======= ======== ======= ========
Pro forma net loss per
share on a converted
basis--basic and
diluted.................. $ (1.05) $ (0.78)
======== ========
Shares used in computing
pro forma per share
amounts on a converted
basis.................... 13,422 20,807
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NETCENTIVES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998 and for the six months ended
June 30, 1999
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Deferred Receivables
------------- ------------- Paid-In Stock from Sales Accumulated
Shares Amount Shares Amount Capital Compensation of Stock Deficit Total
------ ------ ------ ------ ------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock................. 2,050 $ 2 $ 1 $ 3
Sale of Series A
preferred stock, at
$0.65 per share, net
of expenses
of $7................ 1,453 $ 1 936 937
Sale of Series B
preferred stock, at
$1.00 per share, net
of expenses
of $13............... 485 1 471 472
Net loss .............. $ (266) (266)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, December 31,
1996................... 1,938 2 2,050 2 1,408 (266) 1,146
Sale of Series C
preferred stock, at
$1.30 per share, net
of expenses
of $17............... 7,755 8 10,057 10,065
Sale of common stock... 1,564 2 216 $(217) 1
Exercise of common
stock options......... 122 13 (3) 10
Stock warrants......... 86 86
Net loss............... (4,180) (4,180)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, December 31,
1997................... 9,693 10 3,736 4 11,780 (220) (4,446) 7,128
Sale of Series D
preferred stock, at
$3.15 per share, net
of expenses
of $18............... 5,476 5 17,226 17,231
Sale of common stock... 200 630 $ (500) (130) --
Common stock issued for
patent................ 35 76 76
Exercise of common
stock options......... 115 19 19
Stock warrants......... 841 841
Deferred stock
compensation related
to option grants...... 7,071 (7,071) --
Shares issued in
Panttaja acquisition.. 808 1 2,547 (630) 1,918
Vested options issued
in Panttaja
acquisition........... 936 936
Amortization of
deferred stock
compensation.......... 296 296
Net loss............... (14,111) (14,111)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, December 31,
1998................... 15,169 15 4,894 5 41,126 (7,905) (350) (18,557) 14,334
Sale of Series E
preferred stock, at
$6.82 per share, net
of expenses
of $1,017*............ 5,278 6 34,977 34,983
Issuance of receivable
related to previously
issued common stock*.. (100) (100)
Exercise of common
stock options*........ 330 115 115
Stock warrants*........ 958 958
Exercise of Series B
warrants*............. 75 75 75
Deferred stock
compensation related
to option grants*..... 70 (70) --
Amortization of
deferred stock
compensation*......... 1,084 1,084
Net loss*.............. (16,149) (16,149)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, June 30, 1999*
....................... 20,522 $21 5,224 $ 5 $77,321 $(6,891) $(450) $(34,706) $ 35,300
====== === ===== === ======= ======= ===== ======== ========
</TABLE>
- --------
* unaudited
See notes to consolidated financial statements.
F-5
<PAGE>
NETCENTIVES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
June 21, 1996 Years Ended Six Months
(Inception) to December 31, Ended June 30,
December 31, ----------------- -----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from
customers............... $ -- $ 45 $ 1,294 $ 306 $ 4,944
Cash paid to suppliers
and employees........... (177) (4,222) (11,156) (4,618) (12,439)
Cash paid for interest... -- (23) (114) (42) (91)
Cash paid for income
taxes................... -- (2) -- -- --
Interest received........ 7 121 441 116 553
------ ------- -------- ------- --------
Net cash used in
operating activities.. (170) (4,081) (9,535) (4,238) (7,033)
------ ------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment............... (124) (967) (1,157) (380) (3,579)
Cash paid in Panttaja
acquisition, net of cash
acquired................ -- -- (150) -- --
Other long-term assets... -- -- (58) -- (500)
------ ------- -------- ------- --------
Net cash used in
investing activities.. (124) (967) (1,365) (380) (4,079)
------ ------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Sales of common stock.... 3 11 19 15 115
Issuance of receivable
related to previous
issuances of common
stock................... -- -- -- -- (100)
Bridge financing......... -- 1,321 -- -- --
Sales of preferred
stock................... 1,409 8,744 17,231 -- 35,058
Borrowings on long-term
debt.................... -- 279 1,141 109 --
Principal payments on
long-term debt.......... -- (17) (248) -- (466)
Borrowings on bank loan
payable, net............ -- 200 (200) 794 (100)
Deferred offering costs.. -- -- -- -- (894)
------ ------- -------- ------- --------
Net cash provided by
financing activities.. 1,412 10,538 17,943 918 33,613
------ ------- -------- ------- --------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS..... 1,118 5,490 7,043 (3,700) 22,501
CASH AND EQUIVALENTS,
Beginning of period...... -- 1,118 6,608 6,608 13,651
------ ------- -------- ------- --------
CASH AND EQUIVALENTS, End
of period................ $1,118 $ 6,608 $ 13,651 $ 2,908 $ 36,152
====== ======= ======== ======= ========
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of debt to
preferred stock......... $ -- $ 1,321 $ -- $ -- $ --
====== ======= ======== ======= ========
Stock and warrants issued
in exchange for patent.. $ -- $ 10 $ 76 $ -- $ --
====== ======= ======== ======= ========
Sales of stock for notes
and accounts
receivable.............. $ -- $ 217 $ 130 $ -- $ --
====== ======= ======== ======= ========
Acquisition of Panttaja:
Value of stock and
options issued, net of
deferred stock
compensation........... $ 2,854
Cash paid............... 194
Liabilities assumed..... 1,090
--------
Assets acquired
(including intangibles
of $3,526)............ $ 4,138
========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997 and 1998 and six months ended June 30, 1999
and 1998
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
1. Business and Operations
Netcentives Inc. (the "Company") provides Internet-based merchants, portals
and community sites with promotion tools to drive consumer behavior, loyalty,
and sales on the Internet. The Company was incorporated in California in June
1996.
The Company has developed an Internet-based network (the "ClickRewards
Network") of merchants ("Merchants"), consumers ("Members") and redemption
award suppliers ("Suppliers"). The Company has developed a promotional currency
("ClickMiles") which is used throughout the network. The Company sells
ClickMiles to Merchants who use them as promotional incentives to drive their
consumers' behavior in areas such as brand loyalty and increased transaction
size. As consumers are awarded ClickMiles, they establish accounts and become
Members of the Company's ClickRewards program. Consumers can accumulate and
manage ClickMiles on their personal online account and redeem these for
frequent flyer airline miles or other merchandise. ClickMiles expire if not
redeemed within specified periods. Members who do not record any activity for a
twelve-month period forfeit their accumulated ClickMiles. The Company also
offers its Merchants consulting, promotional, and direct marketing services for
a variety of fee arrangements.
In December 1998 the Company acquired Panttaja Consulting Group, Inc. (see
Note 3). The Company now provides technical consulting services to its
Merchants as well as other customers through this wholly-owned subsidiary.
2. Summary of Significant Accounting Policies
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of Netcentives Inc. and its wholly-owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated.
Cash equivalents consist of highly-liquid debt instruments with a maturity at
time of purchase of three months or less.
Prepaid Incentive Awards--The Company has purchased frequent flyer airline
miles ("airmiles") under frequent flyer programs from several airlines. Such
airmiles are stated at cost determined on a weighted-average basis.
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of three years.
Income Taxes--The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities result from
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount expected to be realized.
Revenue Recognition--The Company allocates the sales price of ClickMiles
based on relative fair values between the redemption component of the award
ultimately provided to the Member (the "product component") and the service
components related to the marketing and support services provided to Merchants
F-7
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and members (the "services component"). The fair value of the product component
is determined based on separate pricing offered by the Company as well as other
objective evidence; service component revenues represent the difference between
the product component and the amount received from the sale of the ClickMile.
The product component of revenues is deferred until the Member redeems the
ClickMiles for frequent flyer miles or other awards, or until the ClickMile
expires. The service components of the ClickMile sale are initially deferred
until the sale of the ClickMile becomes non-refundable, which typically is upon
award of the currency by the Merchant to the Member. Upon award of the
ClickMile by the Merchant to a Member, revenues attributable to the service
component generally are amortized over the period from award through expected
redemption or expiration (the life of the ClickMile). Service revenues relating
to separately-priced services, principally software integration services
performed at the inception of the Merchant relationship, are recognized at the
time the services are delivered. Upon termination of a Merchant relationship,
unamortized deferred service revenue attributable to the Merchant is recognized
as revenue.
The service periods for the member and merchant elements of ClickMile
revenues have been initially calculated for the maximum life of the ClickMile
based on its expiration date, which is currently the third December following
award. To the extent ClickMiles are redeemed prior to expiration or Merchants
leave the ClickRewards Network, the remaining amount of deferred service
revenues associated with the member or merchant services, as appropriate, is
recognized at that time. Deferred revenues arising from non-refundable
ClickMiles which have not been awarded by a Merchant are recognized as program-
related service revenues at the time the ClickMiles are forfeited by the
Merchant.
The Company exchanges ClickMiles with certain of its Merchants in return for
advertising and merchandise. Such advertising services are recorded as an
expense or prepaid asset, as appropriate, based on the lower of the estimated
fair value of the services received or the cash value of the ClickMiles issued.
Revenues from such barter transactions are accounted for on the same basis as
cash transactions; i.e., the product component of revenues is deferred until
redemption and the marketing services component is recognized over the service
period. In 1998, approximately $956,000 of advertising expense was recognized
under these arrangements, of which 74% was transacted with two Merchants.
ClickMiles exchanged for advertising are non-returnable and must be awarded by
the Merchant within a specified time frame. Program-related service revenues
for 1998 include $296,000 from an Internet portal which provided the
advertising services but permitted the ClickMiles it purchased to expire
unissued.
Program-related revenues are comprised of the service component of ClickMiles
described above, as well as advertising and other direct marketing services
provided to Merchants, and are recognized as these services are performed.
Technical consulting service revenues are provided by Netcentives
Professional Services (NPS) and are recognized as the services are performed.
NPS offers consulting services in relationship marketing, developing e-commerce
applications and implementing our promotion solutions.
Accrued Redemption Costs--The Company issues ClickMiles to certain Merchants
in exchange for Member referrals and other cross-promotional activities, and
awards ClickMiles directly to Members in connection with promotional and other
activities. These ClickMiles are accounted for as expenses and an accrual is
recorded at the time they are exchanged for these services for the expected
costs to be incurred at redemption.
Advertising Costs--Advertising costs are expensed as incurred. The Company
does not incur any direct-response advertising costs. Advertising expense was
approximately $12,000 in 1996, $534,000 in 1997 and $3,652,000 in 1998.
F-8
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
The Company accounts for equity instruments issued to nonemployees in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, and Emerging Issues
Task Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, which requires that the fair value of such instruments be
recognized as an expense over the period in which the related services are
received.
Segment Reporting--Effective January 1, 1998, the Company adopted SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. In
1998, the Company operated in a single reportable segment and will evaluate
additional segment disclosure requirements as it expands its operations.
Comprehensive Income--For the periods presented, the Company's comprehensive
loss, as defined by SFAS 130, Reporting Comprehensive Income, is equal to its
net loss.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses. Actual results
will differ from these estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentrations of credit risk consist of cash and equivalents,
short-term investments, and accounts receivable. Risks associated with cash are
mitigated by banking and creditworthy institutions. Cash equivalents and short-
term investments consist primarily of governmental obligations, commercial
paper and bank certificates of deposit and are regularly monitored by
management. Credit risk with respect to the trade receivables is spread over
diverse customers who make up the Company's customer base. At December 31,
1997, three customers accounted for 43%, 26% and 26% of total accounts
receivable. At December 31, 1998, one customer accounted for 17% of total
accounts receivable.
Recently Issued Accounting Standards--In March 1998, the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, which requires the capitalization of direct costs after
management commits to funding a project it believes will be completed and used
to perform the functions intended. The Company adopted SOP 98-1 in 1999 as it
is applicable to certain software systems internally developed by the Company.
Through December 31, 1998, no development costs had been capitalized. During
the six months ended June 30, 1999, the Company capitalized $675,000 of
development costs.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company is required to implement the statement
in the first quarter of fiscal 2000. The Company has not used derivative
instruments and is still evaluating the statement's impact.
Fair Value of Financial Instruments--The carrying amount of cash and cash
equivalents, accounts receivable, capital leases and long-term debt approximate
fair value, based on management's estimate.
F-9
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Interim Financial Statements--Interim financial statements as of
June 30, 1999 and for the six months ended June 30, 1998 and 1999 are unaudited
but have been prepared in accordance with generally accepted accounting
principles for interim financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of operations
of any interim period are not necessarily indicative of the results of
operations for the full year.
Reclassifications--Certain prior year amounts have been reclassified for
consistency with the current year presentation. Such reclassifications had no
impact to net loss or total stockholders' equity.
3. Acquisition of Panttaja
On December 18, 1998, the Company acquired all of the outstanding shares and
assumed the outstanding options of Panttaja Consulting Group, Inc.
("Panttaja"), a software consulting firm, in exchange for 808,780 shares of
common stock valued at $2,548,000, cash of $194,000 and options to purchase
455,648 shares of Company stock at $0.254 per share, of which 306,755 were
vested at the date of the acquisition and have been included as part of the
acquisition price at their fair value of $936,000. The common stock includes
200,000 shares subject to vesting over a four-year period, which has initially
been recorded as deferred stock compensation and will be expensed over the
vesting period. The Company also agreed to pay the stockholders additional cash
of up to $450,000 within 13 months following closing based on meeting certain
employment retention milestones, which was considered probable at the time of
the acquisition and has been accrued as part of the purchase price of Panttaja.
The acquisition was accounted for as a purchase and, accordingly, the results
of operations of Panttaja since the date of acquisition have been included in
the Company's consolidated financial statements. The total consideration
exceeded the fair value of the net assets acquired by $3,526,000, which
represents the value of the existing consulting relationships and is being
amortized on a straight-line basis over two years.
The following unaudited pro forma information shows the results of operations
for the two years ended December 31, 1997 and 1998 as if the Panttaja
acquisition had occurred at the beginning of the year. The results are not
necessarily indicative of what would have occurred had the acquisition actually
been made at the beginning of the respective periods presented or of future
operations of the combined companies (in thousands, except per share
information).
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Total revenues........................................... $ 3,005 $ 4,079
Net loss................................................. $(6,004) $(16,218)
Net loss per share, basic and diluted.................... $ (4.39) $ (7.12)
</TABLE>
F-10
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment............................... $ 557 $2,131 $ 4,586
Office and furniture equipment................... 340 192 452
Leasehold improvements........................... 194 237 426
Internal use software............................ -- -- 675
------ ------ -------
Total............................................ 1,091 2,560 6,139
Accumulated depreciation......................... (158) (702) (1,865)
------ ------ -------
Total property and equipment--net................ $ 933 $1,858 $ 4,274
====== ====== =======
</TABLE>
At June 30, 1999, the capitalized internal use software costs relate to
projects which were under development and no amortization has been recorded.
Such costs are expected to be amortized over two to three years, depending on
the specific project. At December 31, 1998 the Company had assets under capital
lease with a net book value of $236,000.
5. Bank Loan Payable and Line of Credit
The Company had a bank loan with principal outstanding at December 31, 1997
of $200,000. During the year ended December 31, 1998, this loan was paid in
full.
In connection with the Panttaja acquisition, the Company assumed a $100,000
bank loan which was repaid in January 1999. The Company pays interest based on
a variable rate determined by the bank (10.5% at December 31, 1998). At
December 31, 1998, the amount due on the credit line is $100,000. Accounts
receivable are pledged as collateral on this line of credit. The borrowing
agreement includes various covenants, including restrictions on payments of a
note payable to an officer.
6. Long-term Obligations
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
December
31,
----------- June 30,
1997 1998 1999
---- ------ -----------
(unaudited)
<S> <C> <C> <C>
Notes payable........................................ $262 $1,155 $ 996
Capital lease obligations............................ -- 193 135
Note payable to officer.............................. -- 48 48
Panttaja acquisition payable (note 3)................ -- 450 252
Other................................................ -- 51 --
---- ------ ------
Total................................................ 262 1,897 1,431
Less current portion................................. 66 664 458
---- ------ ------
Long-term obligations................................ $196 $1,233 $ 973
==== ====== ======
</TABLE>
The notes payable are collateralized by the assets purchased with the
proceeds of these borrowings and are payable in monthly installments through
November 2001. The borrowings bear interest ranging from 9.15% to 14%.
F-11
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The note payable to officer bears interest at 8%, is subordinated to other
debt of the Company and may not be repaid until other long-term debt is repaid.
During 1997, the Company issued $1.3 million of promissory notes. These notes
bore interest at 5.93% and were due in 120 days. In addition, the noteholders
received warrants to buy 156,075 shares of Series B Preferred Stock at $1.00
per share (see Note 7). All of these notes were converted into shares of Series
C Convertible Preferred Stock concurrent with the sale of Series C Preferred
Stock in September 1997. The conversion price was the same price as the cash
sale price of the Series C Preferred Stock.
Maturities of long-term debt and capital leases as of December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Capital
Year Ending December 31, Debt Leases
------------------------ ------ -------
<S> <C> <C>
1999.......................................................... $ 577 $103
2000.......................................................... 600 82
2001.......................................................... 527 32
------ ----
Total payments................................................ $1,704 217
======
Less amount representing interest............................. (24)
----
Present value of capital leases............................... $193
====
</TABLE>
7. Stockholders' Equity
Convertible Preferred Stock
At December 31, 1998, the amounts, terms and liquidation values of the
Company's preferred stock are as follows:
<TABLE>
<CAPTION>
Amount,
Shares Net of Aggregate
Shares Issued and Issue Liquidation
Series Designated Outstanding Costs Preference
------ ---------- ----------- ------- -----------
(In thousands)
<S> <C> <C> <C> <C>
A................................. 1,452,613 1,452,613 $ 937 $ 944
B................................. 660,391 485,000 472 485
C................................. 7,787,155 7,754,847 10,065 10,081
D................................. 5,500,000 5,476,192 17,231 17,250
N................................. 650,000 -- -- --
---------- ---------- ------- -------
Total........................... 16,050,159 15,168,652 $28,705 $28,760
========== ========== ======= =======
</TABLE>
Significant terms of the outstanding preferred stock are as follows:
. Each share of preferred stock is convertible into shares of common stock
on a one-for-one basis, subject to adjustment in certain instances, at
the option of the stockholder. Such shares will be converted
automatically following the effectiveness of a registration statement
under the Securities Act of 1933 meeting certain criteria or the
affirmative vote of the holders of a majority of the shares of preferred
stock outstanding at the time of such vote.
. Except for Series N, each share of preferred stock has voting rights
equivalent to the number of shares of common stock into which it is
convertible. In addition, holders of each series of preferred stock are
entitled as a group to elect two members of the Board of Directors.
Series N has no voting rights.
F-12
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Stockholders are entitled to receive noncumulative dividends as declared
by the Board of Directors out of any assets legally available, prior to
and in preference to any declaration or payment of any dividend on the
common stock. The dividend rate for Series A, Series B, Series C, Series
D and Series N preferred stock per share per annum is $0.052, $0.08,
$0.104, $0.252 and $.08 respectively. No dividends have been declared as
of December 31, 1997 and 1998.
. In the event of liquidation, dissolution or winding up of the Company,
stockholders of Series A, Series B, Series C, Series D and Series N
preferred stock are entitled to receive $0.65, $1.00, $1.30, $3.15 and
$1.00 per share, respectively, plus any declared and unpaid dividends
with respect to such shares prior to any distributions to common
stockholders or non-voting convertible stockholders. If the assets and
funds to be distributed are insufficient to permit full payment, then the
funds shall be distributed on a pro rata basis. Upon completion of the
distribution, the holders of the common stock will receive all remaining
assets of the corporation.
Warrants
During 1997, the Company issued warrants to purchase 410,000 shares of Series
N preferred stock at $1.00 per share to various airlines in connection with
their airmile purchase agreements (see Note 12). The warrants vest over three
years, subject to continuation of exclusivity arrangements with such airlines,
and expire in four or five years. Also during 1997, the Company issued warrants
to purchase 120,000 shares of Series N preferred stock at $1.30 per share to
one of its Merchants. The warrants vest over two years, subject to certain
exclusivity provisions, and expire in four years. All of the warrants permit
the holder to "net exercise" and receive shares of stock with a value equal to
the net appreciation at the time of exercise. Because the vesting of these
warrants is subject to maintaining the exclusivity of the arrangement with
these partners, the valuation of the warrants is not finalized until their
vesting date. The value of these warrants has been estimated using the Black-
Scholes option pricing model with the following assumptions: expected life, the
term of the option; risk-free interest rate of 5.8% in 1997 and 4.6% in 1998;
volatility of 70% in 1997 and 95% in 1998; and no dividend during the expected
term. The estimated value of such warrants is being expensed over the related
exclusivity periods. At December 31, 1997 and 1998, 90,000 and 204,000
warrants, respectively, were vested. Operating expenses include $63,000,
$811,000 and $958,000 in 1997 and 1998 and the six months ended June 30, 1999,
respectively, relating to these warrants.
During 1997, the Company issued warrants to purchase 175,391 shares of Series
B preferred stock at an average price of $1.16 per share in connection with the
Company's financing transactions. During 1998, the Company issued warrants to
purchase 31,948 shares of Series C preferred stock at an average price of $1.30
per share in connection with the Company's financing transactions. The
estimated fair value of these warrants on their grant date was $105,000 in 1997
and $31,000 in 1998, which is being expensed over the term of the related
financings. The Company has included in interest expense $13,000 and $30,000
for the portion relating to 1997 and 1998, respectively.
All warrants issued were outstanding at December 31, 1998; warrants to
purchase 75,000 shares of Series B were exercised in the six months ended June
30, 1999.
F-13
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Receivables from Sales of Stock
At December 31, 1997 and 1998 and June 30, 1999, receivables from sales of
stock included notes receivable from an officer of the Company were comprised
of:
<TABLE>
<CAPTION>
Stock Purchased
-------------------------------
Issue Date Amount Number Per Share Interest Rate
---------- -------- --------- --------- -------------
<S> <C> <C> <C> <C>
August 1997 $ 60,000 500,000 $0.12 6.29%
November 1997 157,290 1,048,600 0.15 6.01
December 1998 130,000 200,000 0.65 4.47
January 1999 100,000 N/A N/A 4.47
</TABLE>
These notes are secured by common stock and are due four years from the issue
date. The 1997 and 1998 notes are full recourse and the 1999 note is non-
recourse. The 1997 stock sales were made at fair market value. The December
1998 loan financed a stock purchase made in October 1998. That stock sale was
made when the fair value of the shares was deemed to be $3.15 per share, and
accordingly, $500,000 of deferred compensation was recorded relating to this
transaction. The January 1999 loan represents a cash loan secured by the shares
of stock previously purchased by the officer. The stock sold in connection with
these notes is subject to repurchase at the original sale price; this right
lapses ratably over a four-year period subject to the officer's continued
employment. At December 31, 1998, 1,167,875 shares of common stock were subject
to this repurchase right.
Stock Option Plan
The Company has a stock option plan (the 1996 Stock Option Plan), under which
incentive and non-qualified options to purchased 5,671,400 shares of common
stock may be granted to employees and independent contractors. Options
generally vest in installments over four years from the grant date and expire
ten years from the grant date.
A summary of activity under the option plan is set forth below:
<TABLE>
<CAPTION>
Outstanding Stock Options
---------------------------
Weighted Average
Number of Exercise Price
Shares per Share
--------- ----------------
<S> <C> <C>
1996 Grants (weighted average fair value of
$0.02 per share).............................. 205,500 $0.10
--------- -----
Outstanding, December 31, 1996................. 205,500 0.10
Granted (weighted average fair value of $0.03
per share).................................... 1,221,550 0.12
Exercised...................................... (122,083) 0.10
Canceled....................................... (16,000) 0.10
--------- -----
Outstanding, December 31, 1997 (284,749
exercisable at a weighted average price of
$0.10)........................................ 1,288,967 0.12
Granted (weighted average fair value of
$0.70 per share).............................. 2,676,645 0.64
Issued in connection with Panttaja
acquisition................................... 455,648 0.25
Exercised...................................... (114,606) 0.17
Canceled....................................... (218,137) 0.15
--------- -----
Outstanding, December 31, 1998 (914,132
exercisable at a weighted average price of
$0.26)........................................ 4,088,517 $0.51
========= =====
</TABLE>
At December 31, 1998, options to purchase 1,346,194 shares of common stock
were available for grant.
F-14
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the six months ended June 30, 1999, the Company issued options to
purchase 1,203,965 shares of common stock at a weighted average exercise price
of $6.56 per share.
Additional information regarding options outstanding as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10-$0.15...... 1,447,559 8.83 $0.14 459,428 $0.13
$0.20-$0.25...... 681,938 9.83 0.25 280,240 0.25
$0.35-$0.65...... 699,588 9.75 0.64 149,000 0.60
$1.05............ 1,259,432 9.92 1.05 25,464 1.05
--------- ---- ----- ------- -----
4,088,517 9.51 $0.51 914,132 $0.26
========= ==== ===== ======= =====
</TABLE>
Shares of common stock sold to employees, directors and consultants under
stock purchase agreements are subject to repurchase at the Company's option
upon termination of their employment or services at the original purchase
price. This right to repurchase expires ratably over the vesting period. At
December 31, 1997 and 1998, respectively, 2,578,985 and 2,105,585 shares were
subject to such repurchase right.
Deferred Stock Compensation
In connection with certain equity transactions during the year ended December
31, 1998 and the six months ended June 30, 1999, the Company recorded deferred
stock compensation of $7,571,000 and $70,000, respectively, for the difference
between the exercise or sale price of the stock and deemed fair value of the
stock at that time. The 1998 total consists of $7,071,000 related to stock
option grants (including $432,000 arising from the Panttaja acquisition) and
$500,000 related to common stock sold to an officer of the Company. An
additional $630,000 arose from shares of common stock issued in connection with
the Panttaja acquisition which are subject to vesting. The 1999 total consists
of $70,000 related to stock option grants. Deferred compensation related to
stock option grants is being amortized over the four-year vesting periods of
the related options. Amortization of such expense during 1998 and the six
months ended June 30, 1999 totaled approximately $296,000 and $1,084,000,
respectively.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based award using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, requires the disclosure of pro forma net loss and net loss
per share had the Company adopted the fair value method. The fair value of
stock-based awards to employees has been calculated using the minimum value
method with the following weighted average assumptions: expected life, 48
months; risk-free interest 5.8% in 1996 and 1997 and 4.6% in 1998; and no
dividends during the expected term. The Company's calculations are based on a
single option valuation approach, and forfeitures are recognized as they occur.
If the computed fair values of the Company's awards had been amortized to
expense over their related vesting periods, the effect would have been to
increase net loss to $271,000 ($0.99 per share) in 1996, $4,313,000 ($5.88 per
share) in 1997 and $14,427,000 ($8.78 per share) in 1998.
F-15
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Net Loss Per Share
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
Period from
June 21, 1996
(inception) Years Ended Six Months
through December 31, Ended June 30,
December 31, ----------------- -----------------
1996 1997 1998 1998 1999
------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss (numerator),
basic and diluted..... $ (266) $(4,180) $(14,111) $(5,131) $(16,149)
====== ======= ======== ======= ========
Shares (denominator):
Weighted average
common shares
outstanding......... 1,074 2,372 3,818 3,757 5,138
Weighted average
common shares
outstanding subject
to repurchase....... (801) (1,638) (2,174) (2,361) (1,971)
------ ------- -------- ------- --------
Shares used in
computation, basic and
diluted............... 273 734 1,644 1,396 3,167
====== ======= ======== ======= ========
Net loss per share,
basic and diluted..... $(0.97) $ (5.70) $ (8.58) $ (3.68) $ (5.10)
====== ======= ======== ======= ========
Shares used in
computation, basic and
diluted............... 1,644 3,167
Weighted average
preferred stock
outstanding........... 11,778 17,640
-------- --------
Shares used in
computing pro forma
per share amounts on a
converted basis....... 13,422 20,807
======== ========
Pro forma net loss per
share on a converted
basis--basic and
diluted............... $ (1.05) $ (0.78)
======== ========
</TABLE>
Pro forma net loss per share assumes that the conversion of all shares of
convertible preferred stock into common stock, which occurs upon the
consummation of the initial public offering contemplated by this Prospectus,
had occurred as of the beginning of 1998.
For the above mentioned periods, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following (in thousands):
<TABLE>
<CAPTION>
Period from
June 21, 1996 Six Months
(inception) Years Ended Ended
through December 31, June 30,
December 31, ------------ ------------
1996 1997 1998 1998 1999
------------- ----- ------ ----- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Convertible preferred stock........ 1,938 9,693 15,169 9,693 20,522
Shares of common stock subject to
repurchase........................ 1,614 2,579 2,106 2,142 1,745
Outstanding options................ 206 1,289 4,089 1,851 4,849
Warrants........................... -- 705 737 737 662
</TABLE>
F-16
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The Company's net deferred tax assets were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards......................... $ 1,409 $ 6,058
General business credits................................. -- 158
Accrued expenses and reserves............................ 11 1,265
Other timing differences................................. -- 276
------- -------
1,420 7,757
Valuation allowance........................................ (1,420) (7,757)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
certain assets and liabilities for financial statement and tax return purposes
and from net operating loss carryforwards. Due to the uncertainty surrounding
the realization of its net deferred tax assets, at December 31, 1997 and 1998,
the Company has fully reserved its net deferred tax assets of approximately
$1,420,000 and $7,757,000, respectively.
The Company's effective tax rate differed from the expected benefit at the
federal statutory tax rate as follows:
<TABLE>
<CAPTION>
Years Ended
June 21, 1996 December 31,
(inception) to ---------------
December 31, 1996 1997 1998
------------------ ------ ------
<S> <C> <C> <C>
Federal statutory tax rate............... (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit...... (5.7) (5.7) (5.7)
Other.................................... 6.9 8.9 (4.2)
Valuation allowance...................... 33.8 31.8 44.9
----- ------ ------
Effective tax rate..................... -- % -- % -- %
===== ====== ======
</TABLE>
At December 31, 1998, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $14,200,000 which expires through
2018. In addition, the Company had, at December 31, 1998, a net operating loss
carryforward for California state income tax purposes of approximately
$14,100,000 which expires through 2004.
At December 31, 1998, the Company also has research and development credit
carryforwards of approximately $109,000 and $49,000 available to offset future
federal and state income taxes, respectively. The federal credit expires
through 2018, and the state credit carryforward has no expiration.
Current federal and California state tax laws include substantial
restrictions on the utilization of net operating losses and tax credits in the
event of an "ownership change" of a corporation. Accordingly, the Company's
ability to utilize net operating loss and tax credit carryforwards may be
limited as a result of such "ownership change" as defined. Such a limitation
could result in the expiration of carryforwards before they are utilized.
F-17
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Employee Benefit Plan
The Company has a 401(k) plan for its employees who meet certain service and
age requirements. Participants may contribute up to 15% of their salaries up to
amounts specified under the Internal Revenue Code. The Company does not
contribute to this plan.
11. Significant Customers and Merchant Relationships
In 1996, no sales were recorded by the Company. In 1997, one Merchant
accounted for 85% of net revenues and 82% of the ClickMiles awarded by all
Merchants during the year. In 1998, two customers accounted individually for
46% and 13% of revenues. Additionally, two Merchants accounted individually for
34% and 21% of the ClickMiles awarded by Merchants during 1998.
12. Airline Arrangements
The Company has entered into certain long-term arrangements to purchase
airmiles from its airline suppliers. At December 31, 1998, the Company had
prepaid for airmiles with a cost of $1,600,000 which are available for
redemption by Members. Certain of these airmiles expire if not exchanged by
Members for ClickMiles within specified time periods, including $237,000 which
are subject to expiration in 1999.
The contracts require certain minimum annual airmile purchases in order for
the Company to maintain its exclusivity agreement. These future minimum
payments, including excise tax, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1999............................................................ $1,142
2000............................................................ 1,432
2001............................................................ 860
------
Total......................................................... $3,434
======
</TABLE>
13. Leases
The following is a schedule of future lease payments required under
noncancelable operating leases, as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1999........................................................... $ 552
2000........................................................... 459
2001........................................................... 119
------
Total minimum payments....................................... $1,130
======
</TABLE>
Rent expense under all rental agreements was $8,000 in 1996, $158,000 in 1997
and $334,000 in 1998.
F-18
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Consolidated Statement of Cash Flows Information
A reconciliation of net loss to net cash used in operating activities follows
(in thousands):
<TABLE>
<CAPTION>
June 21, 1996 Years Ended Six Months
(Inception) to December 31, Ended June 30,
December 31, ----------------- -----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................ $(266) $(4,180) $(14,111) $(5,131) $(16,149)
Reconciliation to net
cash used in operating
activities:
Depreciation and
amortization.......... 8 150 629 235 2,041
Deferred stock
compensation expense.. -- -- 296 31 1,084
Expenses relating to
stock warrants........ -- 76 841 130 958
Advertising expense
arising from barter
transactions.......... -- -- 956 355 608
ClickMiles issued for
services.............. -- -- 587 95 1,531
Changes in operating
assets and
liabilities:
Accounts receivable... -- (23) (201) (155) 126
Prepaid incentive
awards............... -- (703) (897) (253) (3)
Prepaid expenses...... (19) (220) 115 (29) 56
Other assets.......... (2) (31) (155) (249) (62)
Accounts payable...... 71 512 281 140 (541)
Accrued compensation
and benefits......... -- 13 877 126 100
Accrued redemption
costs................ -- -- (78) 9 (184)
Other accrued
liabilities.......... 38 266 477 124 1,605
Deferred revenue--
product and
services............. -- 59 848 334 1,797
----- ------- -------- ------- --------
Net cash used in
operating
activities.......... $(170) $(4,081) $ (9,535) $(4,238) $ (7,033)
===== ======= ======== ======= ========
</TABLE>
15. Subsequent Events
In March and April 1999, the stockholders of the Company approved the
increase of the number of authorized shares of its common stock to 33,240,000
and its preferred stock to 21,329,221 and designated 5,279,062 shares as Series
E Preferred Stock. The Series E Preferred Stock has similar rights and
preferences to the other series of preferred stock (see Note 7), other than its
liquidation preference of $6.82 per share and its annual dividends which, if
declared, would be $0.546 per share.
In March 1999, the Company sold 3,519,053 shares of Series E Preferred Stock
to investors for aggregate proceeds of approximately $23,000,000, net of
expenses. In April and June 1999, the Company sold an additional
1,759,530 shares of Series E Preferred Stock to investors for aggregate
proceeds of approximately $12,000,000, net of expenses.
In May 1999, the stockholders of the Company approved the following:
. Adoption of the 1999 Employee Stock Purchase Plan, and reserved 300,000
shares of common stock (increasing by 75,000 shares in each of the
following five years) for sale to employees at a price no less than 85%
of the lower of fair market value at the beginning of the two-year
offering period or the end of each of the six-month purchase periods.
. Adoption of the 1999 Outside Directors Stock Option Plan, and reserved
400,000 shares of common stock (increasing by 50,000 shares in each of
the following five years) for grants of options to each
F-19
<PAGE>
NETCENTIVES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outside director to purchase 40,000 shares of common stock at fair market
value as of the grant date, as well as additional option grants for 10,000
shares to be issued in each subsequent year.
. The reincorporation of the Company into Delaware by exchanging one share
of common stock of the successor Delaware corporation for each share of
common stock of the predecessor California corporation.
. The number of shares of authorized but unissued preferred stock was
designated at 5,000,000.
In June 1999, the stockholders of the Company approved an increase in the
number of authorized shares available under the Employee Stock Option Plan by
2,000,000 shares and provided for annual increases of 1,250,000 shares in each
of the following five years.
On March 31, 1999, the Company entered into a Patent License Agreement with
MyPoints.com. Under this agreement, the Company earns royalties based on the
issuance of points by MyPoints.com with such royalties recorded as program
related services revenue. During the six months ended June 30, 1999, the
Company recognized approximately $66,000 of royalties.
In May 1999, the Company entered into a seven-year operating lease for a new
headquarters facility. The lease, which is expected to commence in January
2000, requires annual rental payments ranging from approximately $2,600,000 to
$2,900,000 over the term of the lease. The Company is required to obtain a
letter of credit of approximately $2,400,000 as a security deposit prior to
lease commencement (of which $500,000 was obtained in May 1999 and
approximately $1,900,000 was obtained in August 1999), a portion of which may
be released over the term of the lease. The letters of credit are
collaterialized by time deposits which are included in other assets.
On July 1, 1999, the Company borrowed $1.2 million under a note payable,
which is collateralized by certain assets of the Company. The borrowing is
payable in monthly installments through June 2002 and bears interest at
14.44%.
On July 12, 1999, the Company issued to a customer a warrant to purchase
150,000 shares of common stock at an exercise price of $8.00 per share in
exchange for advertising to be provided on the customer's web sites. The
warrant expires in July 2001. The estimated fair value of the advertising to
be received, which is equal to the fair value of the warrant of approximately
$630,000, will be expensed at the time the advertising services are provided.
* * * * *
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Panttaja Consulting Group, Inc.:
We have audited the accompanying statements of operations and cash flows of
Panttaja Consulting Group, Inc. (the "Company") for the years ended November
30, 1997 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements referred to above present fairly,
in all material respects, the result of the Company's operations and its cash
flows for the years ended November 30, 1997 and 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
March 12, 1999
F-21
<PAGE>
PANTTAJA CONSULTING GROUP, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
November 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Net revenues................................................. $ 3,361 $ 4,048
Cost of revenues............................................. (1,777) (2,521)
------- -------
Gross profit............................................. 1,584 1,527
Selling, general and administrative expenses................. (1,416) (1,624)
------- -------
Income (loss) from operations................................ 168 (97)
Interest income.............................................. 1 1
Interest expense............................................. (39) (42)
Other income (expense), net.................................. 1 (4)
------- -------
Income (loss) before taxes on income......................... 131 (142)
Income tax (expense) benefit................................. (39) 24
------- -------
Net income (loss)............................................ $ 92 $ (118)
======= =======
</TABLE>
See notes to financial statements.
F-22
<PAGE>
PANTTAJA CONSULTING GROUP, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
November 30,
--------------
1997 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 92 $ (118)
Reconciliation to net cash used in operating activities:
Depreciation................................................ 90 87
(Gain) loss from disposition of fixed assets................ (1) 4
Deferred income tax provision............................... 36 (25)
Changes in operating assets and liabilities:
Accounts receivable....................................... 62 (382)
Other receivable.......................................... 2 1
Prepaid expenses.......................................... 4 (5)
Accounts payable.......................................... (116) 332
Accrued liabilities....................................... (11) 61
Deferred revenues......................................... (14) 7
------ ------
Net cash provided (used) in operating activities........ 144 (38)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (5) (31)
Sale of property and equipment................................ 7 9
------ ------
Net cash provided (used) in investing activities........ 2 (22)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from short-term borrowing............................ 55 141
Repayments of capital leases.................................. (58) (80)
Repayments of debt............................................ (115) (44)
Proceeds from issuing common stock............................ -- 4
------ ------
Net cash provided (used) in financing activities........ (118) 21
------ ------
NET INCREASE (DECREASE) IN CASH................................. 28 (39)
CASH, Beginning of year......................................... 16 44
------ ------
CASH, End of year............................................... $ 44 $ 5
====== ======
SUPPLEMENTAL DISCLOSURES--
Noncash investing and financing transactions--
Capital lease obligation incurred for equipment............... $ 82 $ 105
====== ======
</TABLE>
See notes to financial statements.
F-23
<PAGE>
PANTTAJA CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended November 30, 1997 and 1998
1. Business and Significant Accounting Policies
Line of Business--Panttaja Consulting Group, Inc.'s (the "Company") provides
software consulting, development, and educational services in the internet and
client/server market sectors. The Company was incorporated in January 1990.
Revenue--The Company's revenues consist primarily of fees for services,
including consulting and education. Consulting services are primarily provided
on a time and materials basis. Educational services are generally priced on a
per student basis. Consulting and education revenues are recognized as the
services are performed.
Cost of Revenues--The cost of services consists primarily of compensation and
travel costs associated with providing consulting and education.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with original maturities of ninety days or less to be cash
equivalents.
Depreciation--Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets which range from five to ten
years. Amortization of leasehold improvements is computed over the shorter of
the lease term or the estimated useful lives of the improvements.
Income Taxes--The Company accounts for income taxes using an asset and
liability approach. Deferred income taxes and liabilities result from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. Valuation allowances are provided when necessary to
reduce deferred tax assets to the amount expected to be realized.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
2. Major Customers
Three customers accounted for 10%, 11%, and 18% of total revenues for the
year ended November 30, 1997. Two customers accounted for 15% and 18% of total
revenues for the year ended November 30, 1998.
3. Leases
Rent expense was $171,000 and $181,000 for the years ended November 30, 1997
and 1998 respectively.
F-24
<PAGE>
PANTTAJA CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Income Taxes
The provision (benefit) from income taxes consists of (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Current:
Federal..................................................... $ 2 $ --
State....................................................... 1 1
--- ----
3 1
Deferred--federal............................................. 36 (25)
--- ----
$39 $(24)
=== ====
</TABLE>
5. Employee Benefit Plans
Deferred Compensation Plan
The Company maintains a qualified deferred compensation plan under Section
401(k) of the Internal Revenue Code. Under the plan, employees may elect to
defer up to 10% of their salary, subject to Internal Revenue Service limits.
The plan allows the Company to make discretionary contributions. During 1997
and 1998, all contributions were made by the employees.
Stock Option Plan
The Company has adopted a stock option plan for employees. Under the terms of
the plan, options generally vest over a period of one to four years after date
of grant. Common stock issued upon exercise of these options is subject to the
Company's right of first refusal upon future sale or transfer. This right of
first refusal terminates at such time as a established market exists for the
Company's common stock.
A summary of activity under the option plan follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Price per Share
--------- ----------------
<S> <C> <C>
Outstanding, November 30, 1996.............. 1,790,000 $0.05
Granted (fair value of $0.01 per share)..... 375,000 0.05
Exercised................................... (5,000) 0.05
Canceled.................................... (309,000) 0.05
--------- -----
Outstanding, November 30, 1997.............. 1,851,000 0.05
Granted (fair value of $0.01 per share)..... 1,187,000 0.05
Exercised................................... (86,000) 0.05
Canceled.................................... (510,000) 0.05
--------- -----
Outstanding, November 30, 1998.............. 2,442,000 $0.05
========= =====
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based award using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock arrangements.
F-25
<PAGE>
PANTTAJA CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, requires the disclosure of pro forma net income (loss) had
the Company adopted the fair value method. The fair value of stock-based awards
to employees has been calculated using the minimum value method with the
following weighted average assumptions: expected life, 48 months; risk-free
interest 5.8% in 1997 and 4.6% in 1998; and no dividends during the expected
term. The Company's calculations are based on a single option valuation
approach, and forfeitures are recognized as they occur. If the computed fair
values of awards made in 1997 and 1998 had been amortized to expense over the
vesting period of the awards, the effect on reported net income (loss) would
not have been significant.
6. Subsequent Events
On December 18, 1998, Netcentives Inc. ("Netcentives") acquired all of the
Company's outstanding shares of common stock and assumed all of its outstanding
options, at which time the Company became a wholly owned subsidiary of
Netcentives.
* * * * *
F-26
<PAGE>
NETCENTIVES INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1998
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Netcentives Panttaja(1) Adjustments Consolidated
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product................... $ 64 $ -- $ -- $ 64
Program-related services.. 583 -- -- 583
Technical consulting
services................. -- 4,048 (616)(2) 3,432
-------- ------ ------- --------
Total revenues.......... 647 4,048 (616) 4,079
-------- ------ ------- --------
Costs and expenses:
Cost of product revenues.. 59 -- -- 59
Program-related services,
marketing and support
costs.................... 7,293 -- -- 7,293
Cost of technical
consulting services
revenues................. -- 2,521 (368)(2) 2,153
Research and development.. 3,383 -- (248)(2) 3,135
Selling, general and
administrative........... 3,134 1,624 -- 4,758
Amortization of deferred
stock compensation....... 296 -- 266 (3) 562
Amortization of supplier
stock awards............. 811 -- 1,699 (4) 2,510
Amortization of
intangibles.............. 79 -- -- 79
-------- ------ ------- --------
Total costs and
expenses............... 15,055 4,145 1,349 20,549
-------- ------ ------- --------
Loss from operations........ (14,408) (97) (1,965) (16,470)
Other income (expense)...... 297 (45) -- 252
-------- ------ ------- --------
Loss before income tax
provision.................. (14,111) (142) (1,965) (16,218)
Income tax benefit.......... 24 (24)(5) --
-------- ------ ------- --------
Net loss.................... $(14,111) $ (118) $(1,989) $(16,218)
======== ====== ======= ========
Net loss per share--basic
and diluted................ $ (8.58) $ (7.12)
======== ========
Shares used in per share
calculations............... 1,644 634 (6) 2,278
======== ======= ========
</TABLE>
See notes to pro forma consolidated statement of operations.
F-27
<PAGE>
NETCENTIVES INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Year ended December 31, 1998
On December 18, 1998, Netcentives Inc. ("Netcentives") acquired all of the
outstanding shares and assumed the outstanding options of Panttaja Consulting
Group, Inc. ("Panttaja"), a software consulting firm in exchange for 808,780
shares of common stock valued at $2,548,000, cash of $194,000 and options to
purchase 455,648 shares of Netcentives stock at $0.254 per share, of which
306,755 were vested at the date of acquisition and have been included as part
of the acquisition price at their fair value of $936,000. The common stock
includes 200,000 shares subject to vesting over a four-year period, will be
accounted for as deferred compensation over the vesting period. Netcentives
also agreed to pay the stockholders additional cash up to $450,000 within 13
months following closing based on certain employment levels, which was
considered probable at the time of the acquisition and has been accrued as part
of the purchase price of Panttaja.
The acquisition was accounted for as a purchase and, accordingly, the results
of operations of Panttaja since the date of acquisition have been included in
the Company's financial statements. The total consideration exceeded the fair
value of the net assets acquired by $3,526,000, which has been recorded as the
value of the existing consulting relationships and is being amortized on a
straight-line basis over two years.
The accompanying pro forma statement of operations is presented in accordance
with Article 11 of Regulation S-X.
The pro forma statement of operations for the year ended December 31, 1998
includes the following adjustments to reflect consummation of the transaction
as if it had occurred at the beginning of 1998:
1. Represents Panttaja's historical results of operations for its fiscal
year ended November 30, 1998. The results of operations of Panttaja for the
period December 18 through December 31, 1998 included in Netcentive's
consolidated results of operations were not significant.
2. To eliminate intercompany consulting revenues.
3. To record one year of compensation expense ($158,000) related to the
200,000 share restricted stock arrangement and one year of expense
($108,000) relating to the options granted to Panttaja employees.
4. To record one year of amortization of the intangible assets recorded
in the acquisition.
5. To reverse income tax benefits recorded by Panttaja. Netcentives has
incurred losses since inception and records a full valuation on all
operating loss carryforwards and deferred tax assets.
6. To reflect the assumed issuance of 608,780 unrestricted shares of
common stock issued in connection with the acquisition and the vesting of
50,000 shares of restricted stock during the year.
The adjustments do not give effect to any potential benefits that might have
been realized through the combination of operations and are not necessarily
indicative of the consolidated results which would have been reported if the
Panttaja acquisition had actually occurred at the beginning of the period
presented.
F-28
<PAGE>
[INSIDE BACK COVER]
Title: Netcentives Technical and Marketing Services
Screen shot of Netcentives Professional Services Web page.
Caption: Netcentives Professional Services. Current clients include CATS,
FamilyEducation Company, Legacy Marketing Group, San Francisco Opera, Seven
Mountains, and Simpson Timber
Screen shot of an e-mail that includes graphics.
Caption: Direct Marketing Services. Targeted direct response email to
ClickRewards members. (Sample)
Picture of ClickRewards advertisement including ClickRewards merchant logos.
Caption: Advertising Services. Joint advertising campaign featuring four
merchants. (Sample)
Picture of a banner advertisement.
Caption: Promotional Services. Network promotional banner. (Sample)
<PAGE>
[LOGO OF NETCENTIVES]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Netcentives in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq Stock
Market listing fee.
<TABLE>
<CAPTION>
Amount to
be Paid
----------
<S> <C>
SEC registration fee........................................... $ 23,018
NASD filing fee................................................ 8,780
Nasdaq Stock Market listing fee................................ 95,000
Printing and engraving expenses................................ 150,000
Legal fees and expenses........................................ 375,000
Accounting fees and expenses................................... 500,000
Transfer Agent and Registrar fees.............................. 4,000
Miscellaneous fees and expenses................................ 48,918
----------
Total........................................................ $1,200,000
==========
</TABLE>
ITEM 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article XIV of our Amended and Restated Certificate of Incorporation (Exhibit
3.3) provides for indemnification of our directors and officers to the maximum
extent permitted by the Delaware General Corporation Law and Section 6.1 of
Article VI of our Amended and Restated Bylaws (Exhibit 3.4) provides for
indemnification of our directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
we have entered into Indemnification Agreements (Exhibit 10.1) with our
directors and officers containing provisions which are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require us, among other
things, to indemnify our directors against certain liabilities that may arise
by reason of their status or service as directors (other than liabilities
arising from willful misconduct of culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' insurance if available on reasonable
terms. Reference is also made to Section 7 of the Underwriting Agreement
contained in Exhibit 1.1, indemnifying our officers and directors against
certain liabilities.
ITEM 15. Recent Sales of Unregistered Securities
(a) From our inception in June 1996 through June 30, 1999, we have issued and
sold (without payment of any selling commission to any person) the following
unregistered securities:
(1) An aggregate of 2,000,000 shares of common stock at $0.001 per share
in June 1996 to Eric W. Tilenius and Elliot S. Ng.
(2) An aggregate of 50,000 shares of common stock at $0.02 per share in
September 1996 to Venture Law Group Investments 1996, Craig Johnson
and Elias Blawie.
(3) An aggregate of 1,452,613 shares of Series A Preferred Stock at $0.65
per share in September 1996 to 11 accredited investors.
II-1
<PAGE>
(4) An aggregate of 485,000 shares of Series B Preferred Stock at $1.00
per share in November 1996 to 7 accredited investors.
(5) A warrant to purchase 10,000 shares of Series B Preferred Stock at
$1.00 per share in November 1996 to Silicon Valley Bank.
(6) Warrants to purchase 22,500 shares of Series B Preferred Stock at
$2.00 per share in January 1997 to Daryl Mobley, Masters-McNeil and
Steve Gunderson.
(7) A warrant to purchase 21,000 shares of Series B Preferred Stock at
$1.30 per share in May 1997 to Phoenix Lending and Leasing.
(8) Warrants to purchase 75,000 shares of Series B Preferred Stock at
$1.00 per share in June 1997 to affiliates of Information Technology
Ventures.
(9) Warrants to purchase 46,891 shares of Series B Preferred Stock at
$1.00 per share in August 1997 to P. William Parish, Margaret C.
Taylor, David A. Duffield Trust, Wasatch Venture Corporation and
Draper Associates, L.P.
(10) An aggregate of 500,000 shares of common stock at $0.12 per share in
August 1997 to West Shell, III.
(11) Promissory notes with an aggregate principal amount of $1,312,601.60
convertible into shares of Series C Preferred Stock during January,
June, August, and September 1997 to 12 accredited investors.
(12) Warrants to purchase 400,000 shares of Series N Preferred Stock at
$1.00 per share in July, August and September 1997 to rewards
suppliers.
(13) An aggregate of 7,754,847 shares of Series C Preferred Stock at $1.30
per share in September 1997 to 17 accredited investors.
(14) Warrants to purchase 130,000 shares of Series N Preferred Stock at
$1.30 per share in October 1997 to American Airlines and Yahoo!.
(15) An aggregate of 30,000 shares of common stock in connection with the
purchase of the United States patent application having SC/Serial
Number 08/572,017 in September 1997 and November 1998.
(16) An aggregate of 1,048,600 shares of common stock at $0.15 per share in
December 1997 to West Shell, III.
(17) Warrants to purchase an aggregate of 31,948 warrants convertible into
shares of Series C Preferred Stock in May 1998 to Phoenix Lending and
Leasing.
(18) An aggregate of 5,476,192 shares of Series D Preferred Stock at $3.15
per share in August 1998 to 18 accredited investors.
(19) An aggregate of 808,780 shares of common stock in connection with the
acquisition of 100 percent of the shares of Panttaja Consulting Group
Inc. in December 1998.
(20) An aggregate of 200,000 shares of common stock at $0.65 per share in
December 1998 to West Shell, III.
(21) An aggregate of 5,278,283 shares of Series E Preferred Stock at $6.82
per share in March, April and June 1999 to 27 accredited investors.
(22) An aggregate of 5,786,808 options to purchase shares of common stock
at an average exercise price of $1.74 per share to our employees and
consultants. In general, 1/8 of the shares of common stock subject to
these options vest after six months and the remainder vests in equal
monthly installments for 42 months thereafter. The term of each option
is ten years.
II-2
<PAGE>
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
Issuances numbered one through twenty, described in Item 15(a), were deemed
to be exempt from registration under the Securities Act in reliance upon
Section 4(2) thereof as transactions by an issuer not involving any public
offering. Issuance number twenty-one was deemed exempt in reliance upon
Regulation D of the Securities Act. Issuances numbered one, ten, sixteen,
twenty and twenty-two, to our founders, executives, employees and consultants,
are also exempt from registration pursuant to Rule 701 promulgated under the
Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends where affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3** Form of Amended and Restated Certificate of Incorporation, to be
filed and effective upon completion of this offering.
3.4** Form of Amended and Restated Bylaws, to be effective upon completion
of this offering.
4.1* Form of Netcentives common stock certificate.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement for directors and officers of
Netcentives.
10.2** 1996 Stock Option Plan, as amended, and form of stock option
agreement and restricted stock purchase agreement.
10.3** 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.4** 1999 Directors' Stock Option Plan and form of stock option agreement.
10.5** Lease between Panttaja Consulting Group and Britphil & Co. Ltd. dated
November 13, 1995.
10.6** Lease between Netcentives and Townsend Associates, L.L.C. dated
August 14, 1997.
10.7** Lease between Netcentives and Townsend Associates, L.L.C. dated
August 11, 1998.
10.8+** Confidential Advantage Participation Agreement between American
Airlines, Inc. and Netcentives Inc. dated August 19, 1997.
10.9+** Supply Agreement between Northwest Airlines, Inc. and Netcentives
Inc. dated September 5, 1997.
10.10+** Supply Agreement between Continental Airlines, Inc. and Netcentives
Inc. dated September 5, 1997.
10.11+** Supply Agreement between US Airways, Inc. and Netcentives Inc, dated
September 20, 1997.
10.12+** Supply Agreement between Mileage Plus Marketing, Inc. and Netcentives
Inc. dated March 20, 1998.
10.13+** Marketing Services Agreement between British Airways PLC and
Netcentives Inc. Agreement Number MKTG 002 dated April 4, 1997.
10.14+** Supply Agreement between Trans World Airlines, Inc. and Netcentives
Inc. dated February 25, 1999.
10.15+ Delta Sky Miles Program Participation Agreement between Delta Air
Lines, Inc. and Netcentives Inc. dated August 15, 1999.
10.16** Office Lease between Netcentives and SKS Brannan Associates, LLC
dated May 5, 1999.
10.17** Employment Agreement between Netcentives and West Shell, III dated
June 26, 1997 and Amendment to Employment Agreement dated October 29,
1998.
10.18** Change of Control Agreement between Netcentives and John F.
Longinotti dated January 15, 1998.
10.19** Amended and Restated Rights Agreement between Netcentives and certain
stockholders dated March 19, 1999.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.20+ America West FlightFund Incentive Miles Agreement between America West
Airlines, Inc. and Netcentives Inc. dated July 1, 1999.
10.21+ Internet Services and Products Agreement between Exodus Communications,
Inc. and Netcentives Inc. dated August 1, 1997.
21.1** Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be supplied by amendment.
**Previously filed.
+Confidential Treatment Requested.
ITEM 17. Undertakings
Netcentives hereby undertakes to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Netcentives
pursuant to the foregoing provisions, or otherwise, Netcentives has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Netcentives of expenses
incurred or paid by a director, officer or controlling person of Netcentives in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Netcentives will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Netcentives hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of California, on August 30,
1999.
NETCENTIVES INC.
/s/ West Shell, III
By: _________________________________
West Shell, III,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ West Shell, III Chairman of the Board of August 30, 1999
____________________________________ Directors and Chief
(West Shell, III) Executive Officer
(Principal Executive
Officer)
/s/ John F. Longinotti Executive Vice August 30, 1999
____________________________________ President, Operations
(John F. Longinotti) and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
* Director August 30, 1999
____________________________________
(Stewart Alsop)
* Director August 30, 1999
____________________________________
(Tom Byers)
* Director August 30, 1999
____________________________________
(Eric W. Tilenius)
* Director August 30, 1999
____________________________________
(Virginia M. Turezyn)
* Director August 30, 1999
____________________________________
(Wendell G. Van Auken)
* Director August 30, 1999
____________________________________
(Sergio Zyman)
</TABLE>
*By: /s/ West Shell, III
---------------------------
West Shell, III
as attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
3.3** Form of Amended and Restated Certificate of Incorporation, to be
filed and effective upon completion of this offering.
3.4** Form of Amended and Restated Bylaws, to be effective upon
completion of this offering.
4.1* Form of Netcentives common stock certificate.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement for directors and officers of
Netcentives.
10.2** 1996 Stock Option Plan, as amended, and form of stock option
agreement and restricted stock purchase agreement.
10.3** 1999 Employee Stock Purchase Plan and form of subscription
agreement.
10.4** 1999 Directors' Stock Option Plan and form of stock option
agreement.
10.5** Lease between Panttaja Consulting Group and Britphil & Co. Ltd.
dated November 13, 1995.
10.6** Lease between Netcentives and Townsend Associates, L.L.C. dated
August 14, 1997.
10.7** Lease between Netcentives and Townsend Associates, L.L.C. dated
August 11, 1998.
10.8+** Confidential Advantage Participation Agreement between American
Airlines, Inc. and Netcentives Inc. dated August 19, 1997.
10.9+** Supply Agreement between Northwest Airlines, Inc. and Netcentives
Inc. dated September 5, 1997.
10.10+** Supply Agreement between Continental Airlines, Inc. and
Netcentives Inc. dated September 5, 1997.
10.11+** Supply Agreement between US Airways, Inc. and Netcentives Inc,
dated September 20, 1997.
10.12+** Supply Agreement between Mileage Plus Marketing, Inc. and
Netcentives Inc. dated March 20, 1998.
10.13+** Marketing Services Agreement between British Airways PLC and
Netcentives Inc. Agreement Number MKTG 002 dated April 4, 1997.
10.14+** Supply Agreement between Trans World Airlines, Inc. and
Netcentives Inc. dated February 25, 1999.
10.15+ Delta Sky Miles Program Participation Agreement between Delta Air
Lines, Inc. and Netcentives Inc. dated August 15, 1999.
10.16** Office Lease between Netcentives and SKS Brannan Associates, LLC
dated May 5, 1999.
10.17** Employment Agreement between Netcentives and West Shell, III dated
June 26, 1997 and Amendment to Employment Agreement dated October
29, 1998.
10.18** Change of Control Agreement between Netcentives and John F.
Longinotti dated January 15, 1998.
10.19** Amended and Restated Rights Agreement between Netcentives and
certain stockholders dated March 19, 1999.
10.20+ America West FlightFund Incentive Miles Agreement between America
West Airlines and Netcentives Inc. dated July 1, 1999.
10.21+ Internet Services and Products Agreement between Exodus
Communications, Inc. and Netcentives Inc. dated August 1, 1997.
21.1** Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be supplied by amendment.
**Previously filed.
+Confidential Treatment Requested.
<PAGE>
EXHIBIT 1.1
______Shares
NETCENTIVES INC.
Common Stock, par value $0.001 per share
FORM OF UNDERWRITING AGREEMENT
------------------------------
August __, 1999
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Netcentives Inc., a Delaware corporation ("Company"),
proposes to issue and sell ______ shares ("Firm Securities") of its Common
Stock, par value $0.001 per share ("Securities") and also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than ______ additional shares ("Optional Securities") of its Securities as
set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities." As part of the offering
contemplated by this Agreement, [____________________] (the "Designated
Underwriter") has agreed to reserve out of the Firm Securities purchased by it
under this Agreement, up to [_________________] shares, for sale to the
Company's directors, officers, employees and other parties associated with the
Company (collectively, "Participants"), as set forth in the Prospectus (as
defined herein) under the heading "Underwriters" (the "Directed Share Program").
The Firm Securities to be sold by the Designated Underwriter pursuant to the
Directed Share Program (the "Directed Shares") will be sold by the Designated
Underwriter pursuant to this Agreement at the public offering price. Any
Directed Shares not orally confirmed for purchase by a Participant by the end of
the business day on which this Agreement is executed will be offered to the
public by the Underwriters as set forth in the Prospectus. The Company hereby
agrees with the several Underwriters named in Schedule A hereto ("Underwriters")
as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-83443) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933, as amended ("Act") and
is not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("initial registration
<PAGE>
statement") has been declared effective, either (i) an additional
registration statement ("additional registration statement") relating to
the Offered Securities may have been filed with the Commission pursuant to
Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities all
have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (ii) such an additional registration statement is proposed to
be filed with the Commission pursuant to Rule 462(b) and will become
effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (i) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (ii) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement." The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration Statement."
The form of prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
424(b)") under the Act or (if no such filing is required) as included in a
Registration Statement, is hereinafter referred to as the "Prospectus." No
document has been or will be prepared or distributed in reliance on Rule
434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
2
<PAGE>
rules and regulations of the Commission ("Rules and Regulations") and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act
and the Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading and (iii) on the date of this
Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects to
the requirements of the Act and the Rules and Regulations, and neither of
such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein, it
being understood and agreed that the only such information is that
described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification.
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued and
is fully paid and nonassessable; and the capital stock of each subsidiary
owned by the Company, directly or through subsidiaries, is owned free from
liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and, when the Offered Securities have
been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined below), such Offered Securities will have been,
validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus; and the stockholders of
the Company have no preemptive rights with respect to the Securities.
3
<PAGE>
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(g) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under the
Act.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any agreement or instrument to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is subject, or
the charter or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered by
the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole ("Material
Adverse Effect").
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
4
<PAGE>
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property [including applications licensed directly from
third parties] (collectively, "intellectual property rights") necessary to
conduct the business now operated by them, or presently employed by them,
and have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property rights
that, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse Effect. The
discoveries, inventions, products or processes of the Company referred to
in the Prospectus do not, to the Company's knowledge, infringe or conflict
with any intellectual property right of any third party.
(p) Except as disclosed in the Prospectus, neither the Company nor any
of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic
or foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively,
"environmental laws"), owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws, or
is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware of
any pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and no such actions, suits or proceedings
are threatened or, to the Company's knowledge, contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis
and the schedules included in each Registration Statement present fairly
the information required to be stated therein and the assumptions used in
preparing the pro forma financial statements included in each Registration
Statement and the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
5
<PAGE>
(t) The execution and delivery of the Agreement and Plan of Merger
dated as of ____________ __, 1999 (the "Merger Agreement") between
Netcentives Inc., a California corporation (the "California Corporation"),
and the Company, effecting the reincorporation of the California
Corporation under the laws of the State of Delaware, was duly authorized by
all necessary corporate action on the part of each of the California
Corporation and the Company. Each of the California Corporation and the
Company had all corporate power and authority to execute and deliver the
Merger Agreement, to file the Merger Agreement with the Secretary of State
of California and the Secretary of State of Delaware and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger
Agreement at the time of execution and filing constituted a valid and
binding obligation of each of the California Corporation and the Company.
(u) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(v) The Company (i) has notified each holder of a currently
outstanding option issued under the 1996 Stock Option Plan and each person
who has acquired Securities pursuant to the exercise of any option granted
under such option plans that pursuant to the terms of such option plans,
none of such options or shares may be sold or otherwise transferred or
disposed of for a period of 180 days after the date of the initial public
offering of the Offered Securities and (ii) has imposed a stop-transfer
instruction with the Company's transfer agent in order to enforce the
foregoing lock-up provision imposed pursuant to the Option Plan.
(w) Except as disclosed in the Prospectus, all outstanding Securities,
and all securities convertible into or exercisable or exchangeable for
Securities, are subject to valid and binding agreements (collectively,
"Lock-up Agreements") that restrict the holders thereof from selling,
making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such Securities, or any such
securities convertible into or exercisable or exchangeable for Securities,
for a period of 180 days after the date of the Prospectus without the prior
written consent of Credit Suisse First Boston Corporation ("CSFBC").
(x) The Company (i) has notified each stockholder who is party to the
Amended and Restated Rights Agreement dated March 19, 1999 (the "Rights
Agreement"), that pursuant to the terms of the Rights Agreement, none of
the shares of the Company's capital stock held by such stockholder may be
sold or otherwise transferred or disposed of for a period of 180 days after
the date of the initial public offering of the Offered Securities and (ii)
has imposed a stop-transfer instruction with the Company's transfer agent
in order to enforce the foregoing lock-up provision imposed pursuant to the
Rights Agreement.
(y) The Company has not offered, or caused the Underwriters to offer,
any offered Securities to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
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Furthermore, the Company represents and warrants to the
Underwriters that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with
the Directed Share Program, and that (ii) no authorization , approval,
consent, license, order, registration or qualification of or with any
government, governmental instrumentality or court, other than such as have
been obtained, is necessary under the securities law and regulations or
foreign jurisdictions in which the Directed Shares are offered outside the
United States.
(aa) All of the Company's products (including products currently under
development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including)
January 1, 2000, and will calculate any information dependent on or
relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates
(collectively, "Year 2000 Compliant"). All of the Company's products will
lose no functionality with respect to the introduction of records
containing dates falling on or after January 1, 2000. All of the Company's
internal computer and technology products and systems are Year 2000
Compliant.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, at the office of CSFBC Eleven Madison Avenue, New
York, New York, against payment of the purchase price in Federal (same day)
funds by official bank check or checks or wire transfer to an account at a bank
acceptable to CSFBC drawn to the order of the Company at the office of Venture
Law Group, A Professional Corporation, ("Venture Law Group"), 2800 Sand Hill
Road, Menlo Park,, California, at 10:00 A.M., New York time, on ______________,
or at such other time not later than seven full business days thereafter as
CSFBC and the Company determine, such time being herein referred to as the
"First Closing Date". For purposes of Rule 15c6-1 under the Exchange Act, the
First Closing Date (if later than the otherwise applicable settlement date)
shall be the settlement date for payment of funds and delivery of securities for
all the Offered Securities sold pursuant to the offering. The certificates for
the Firm Securities so to be delivered will be in definitive form, in such
denominations and registered in such names as CSFBC requests and will be made
available for checking and packaging at the above office of CSFBC in New York at
least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional
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Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company, at the
above office of Venture Law Group. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in such denominations and registered in such names as CSFBC requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of CSFBC at a reasonable time in
advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed
or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent; and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
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<PAGE>
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of 5 years hereafter, the Company will furnish
to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Exchange Act or mailed to stockholders, and (ii)
from time to time, such other information concerning the Company as CSFBC
may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto for the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees
9
<PAGE>
and any other expenses of the Company in connection with attending or
hosting meetings with prospective purchasers of the Offered Securities and
for expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating
to, any additional shares of its Securities or securities convertible into
or exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of CSFBC, except
issuances of Securities pursuant to the conversion of convertible
securities or the exercise of warrants, in each case outstanding on the
date hereof, grants of employee stock options pursuant to the terms of a
plan in effect on the date hereof, issuances of Securities pursuant to the
exercise of such options or the exercise of any other employee stock
options outstanding on the date hereof.
(j) The Company agrees to use its best efforts to cause (i) each of
its directors, officers and stockholders and (ii) each person who acquires
Securities of the Company pursuant to the exercise of any option or right
granted under the Company's 1996 Stock Option Plan to sign a Lock-Up
Agreement, which states that such person will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any shares of
Securities or securities convertible into or exercisable or exchangeable
for any shares of Securities, or publicly disclose the intention to make
any such offer, sale, pledge or disposal, for a period of 180 days after
the date of the Prospectus without the prior written consent of CSFBC; and
the Company will (i) enforce the terms of each such Lock-Up Agreement and
(ii) issue and impose a stop-transfer instruction with the Company's
transfer agent in order to enforce the foregoing Lock-Up Agreements.
(k) Except with the prior written consent of CSFBC, the Company agrees
(i) not to amend or terminate, or waive any right under, any Lock-up
Agreement, or take any other action that would directly or indirectly have
the same effect as an amendment or termination, or waiver of any right
under any Lock-up Agreement, that would permit any holder of Securities, or
any securities convertible into, or exercisable or exchangeable for,
Securities, to make any short sale of, grant any option for the purchase
of, or otherwise transfer or dispose of, any such Securities or other
securities, prior to the expiration of the 180 days after the date of the
Prospectus and (ii) not to consent to any sale, short sale, grant of an
option for the purchase of, or other disposition or transfer of shares of
Securities, or securities convertible into or exercisable or exchangeable
for Securities, subject to a Lock-up Agreement.
(l) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the
NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of the effectiveness of the
Registration Statement. The Designated Underwriter will notify the Company
as to which Participants will need to be so restricted. The Company will
direct the transfer agent to place stop transfer instructions upon such
securities for such period of time.
(m) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program
and stamp duties, similar taxes or duties or other taxes, if any, incurred
by the Underwriters in connection with the Directed Share Program.
10
<PAGE>
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Deloitte & Touche LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act
and the related published Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted
accounting principles;
(B) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date not
more than three business days prior to the date of such letter,
there was any change in the capital stock or any increase in
short-term or long-term debt, total or current liabilities or
total stockholders' deficit, or any decrease in current assets of
total assets of the Company and its consolidated subsidiaries as
compared with amounts shown on the latest balance sheet included
in the Prospectus; or
(C) for the period from the closing date of the latest
statement of operations included in the Prospectus to a specified
date not more than three business days prior to the date of such
letter, there were any decreases, as compared with the
corresponding period of the previous year and with the period of
corresponding length in the previous quarter, in total revenues,
or
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<PAGE>
increases in loss from operations, comprehensive loss or the
total or per share amounts of basic net loss.
except in all cases set forth in clauses B and C above for changes,
increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial and
statistical information are derived from the general accounting
records of the Company and its subsidiaries subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting records
and other procedures specified in such letter and have found such
dollar amounts, percentages and other financial and statistical
information to be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(B) The Company shall have received from Deloitte & Touche
LLP (and furnished to the Representatives) an examination report
with respect to Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company for the three
fiscal years ending December 31, 1998 and review report with
respect to Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company for the six
month period ending June 30, 1999 and the corresponding period
for the prior fiscal year, each in accordance with Statement on
Standards for Attestation Engagement No. 8 issued by the Auditing
Standards Board of the American Institute of Certified Public
Accountants, and such examination report shall be included in the
Registration Statement.
(C) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or such
later date as shall have been consented to by CSFBC. If the
Effective Time of the Additional Registration Statement (if any)
is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00
P.M., New York time, on the date of this Agreement or, if
earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as
shall have been consented to by CSFBC. If the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed
with the Commission in accordance with the Rules and Regulations
and Section 5(a) of this Agreement. Prior to such Closing Date,
no stop order suspending the effectiveness of a Registration
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<PAGE>
Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the
Company or the Representatives, shall be contemplated by the
Commission.
(b) Subsequent to the execution and delivery of this Agreement, there shall
not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, properties
or results of operations of the Company or its subsidiaries taken as one
enterprise which, in the judgment of a majority in interest of the Underwriters
including the Representatives, is material and adverse and makes it impractical
or inadvisable to proceed with completion of the public offering or the sale of
and payment for the Offered Securities; (ii) any downgrading in the rating of
any debt securities of the Company by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance or
review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market; (iv) any banking moratorium declared
by U.S. Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any declaration of war
by Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment for
the Offered Securities.
(c) The Representatives shall have received an opinion, dated such
Closing Date, of Venture Law Group, A Professional Corporation, counsel for
the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority
to own its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification; all of the issued
and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, direct or through subsidiaries, is owned free from liens,
encumbrances and defects;
(iii) The Offered Securities delivered on such Closing Date and all
other outstanding shares of the capital stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable
and conform to the description thereof contained in the Prospectus;
and the stockholders of the Company have no preemptive rights with
respect to the Securities;
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<PAGE>
(iv) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act;
(v) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(vi) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance or sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and
such as may be required under state securities laws;
(vii) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order
of any governmental agency or body or any court having jurisdiction
over the Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the Company or any
such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company
or any such subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
(viii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are
14
<PAGE>
accurate and fairly present the information required to be shown; and
such counsel do not know of any legal or governmental proceedings
required to be described in a Registration Statement or the Prospectus
which are not described as required or of any contracts or documents
of a character required to be described in a Registration Statement or
the Prospectus or to be filed as exhibits to a Registration Statement
which are not described and filed as required; it being understood
that such counsel need express no opinion as to the financial
statements or other financial data contained in the Registration
Statements or the Prospectus;
(ix) The statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport
to summarize certain provisions of the capital stock of the Company,
provide a fair summary of such provisions; and the statements set
forth under the headings "Risk Factors - We could become involved in
disputes regarding the validity of our patent which would result in
unexpected expenses and management distraction", "Risk Factors - Our
Certificate of Incorporation and Bylaws and Delaware law contain
provisions that could discourage a takeover," "Management - Employment
Agreements," "Management -- Limitation of Liability and
Indemnification Matters," "Related Party Transactions" and "Shares
Eligible For Future Sale" in the Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, have been reviewed by such counsel
and fairly present the information called for with respect to such
legal matters, documents and proceedings in all material respects as
required by the Act and the rules and regulations thereunder;
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) The execution and delivery of the Merger Agreement,
effecting the reincorporation of the California Corporation under the
laws of the State of Delaware, was duly authorized by all necessary
corporate action on the part of each of the California Corporation and
the Company;
(d) The Underwriters shall have received on the Closing Date an
opinion of___________________________,special patent counsel to the
Company, dated the Closing Date, to the effect that:
(i) the Company is listed in the records of the United States
Patent and Trademark Office ("PTO") as the holder of record of the
patent applications listed in Exhibit A hereto (the "Patent
Applications"). [One?] of such Patent Applications, listed on Exhibit
B hereto, has been allowed or indicated as containing allowable
subject matter. To such counsel's knowledge, written assignments to
the Company of all ownership interests in the Patent Applications have
been duly authorized, executed and delivered by all of the inventors
in accordance with their terms. To such counsel's knowledge, there is
no claim of any party other than the Company to any ownership interest
or lien with respect to any of the Patent Applications;
(ii) the statements in the Prospectus under the captions "Risk
Factors - We Could Become Involved in Disputes Regarding the Validity
of Our Patent," "Risk Factors -- We May Be Unable to Protect Our
Proprietary Rights Adequately" and "Business -- Proprietary Rights"
(the "Intellectual Property Portions"), to our knowledge, insofar as
such statements relate to the Patent applications or any legal
matters, documents and proceedings relating thereto fairly present the
information
15
<PAGE>
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein.
(iii) to such counsel's knowledge, other than in connection with
assertions or inquiries made by patent office examiners in the
ordinary course of the prosecution of the Company's Patent
Applications, there is not pending or threatened in writing any
action, suit, proceeding or claim by others (A) challenging the
validity or scope of the Patent Applications or any other material
patent or patent applications held by or licensed to the Company, or
(B) other than as disclosed to the Underwriters in writing, asserting
that any patent is infringed by the activities of the Company
described in the Prospectus or by the manufacture, use or sale of any
of the Company's products or other items made and used according to
the Patent Applications held by or licensed to the Company.
(iv) to such counsel's knowledge, there is not pending or
threatened in writing any action, suit, proceeding or claim by the
Company asserting infringement on the part of any third party of the
Patent Applications or any other patents or patent applications held
by or licensed to the Company.
(v) such counsel does not know of any contracts or other
documents relating to patents or proprietary information of a
character required to be filed as exhibits to the Registration
Statement or the Prospectus or required to be described in the
Registration Statement or the Prospectus that are not filed or
described as required.
(vi) such counsel has participated in conferences with employees
of the Company at which the Patent Applications of the Company as
disclosed in the Intellectual Property Portions of the Registration
Statement were discussed, and although such counsel is not passing
upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement (except to the extent stated in paragraph (ii)
above), on the basis of such conferences and such representation of
the Company, nothing has come to such counsel's attention which leads
them to believe that the Intellectual Property Portions of the
Registration Statement and the Prospectus included therein at the time
the Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading and believes that (except for financial statements and
schedules and other financial and statistical data derived therefrom,
as to which such counsel need not express any belief) the Prospectus,
as amended or supplemented, if applicable, does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(e) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the Company,
the validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives
16
<PAGE>
may require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters.
(f) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable investigation,
shall state that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been issued
and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement (if
any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change,
nor any development or event involving a prospective material adverse
change, in the condition (financial or other), business, properties or
results of operations of the Company and its subsidiaries taken as a whole
except as set forth in or contemplated by the Prospectus or as described in
such certificate.
(g) The Representatives shall have received a letter, dated
such Closing Date, of Deloitte & Touche L.L.P., Independent Auditors, which
meets the requirements of subsection (a) of this Section, except that the
specified date referred to in such subsection will be a date not more than
three days prior to such Closing Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of
such opinions, certificates, letters and documents as the Representatives
reasonably request. CSFBC may in its sole discretion waive on behalf of
the Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act (the "Designated Entities"), from and against any and all losses,
17
<PAGE>
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in any material prepared by or with the
consent of the Company for distribution to Participants in connection with the
Directed Share Program or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) caused by the failure of any Participant
to pay for and accept delivery of Directed Shares that the Participant agreed to
purchase; or (iii) related to, arising out of, or in connection with the
Directed Share Program, other than losses, claims, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company, its directors and officers and each person,
if any who controls the Company within the meaning of Section 15 of the
Act, against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for
use therein, and will reimburse any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the concession and
reallowance figures appearing in the fourth paragraph under the caption
"Underwriting" and the information regarding sales to discretionary
accounts and stabilizing transactions contained in the sixth and twelfth
paragraphs under the caption "Underwriting" and (ii) the following
information in the Prospectus furnished on behalf of Hambrecht & Quist LLC
("H&Q"): the description given in the eleventh paragraph of H&Q's role in
the Company's Series E private placement.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under subsection (a) or (b) above, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under subsection (a) or (b) above. In case
any such action is brought against any indemnified party and it notifies
the indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
other than reasonable costs of investigation. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to
the last paragraph in Section 7(a) hereof in respect of such action or
proceeding, then in addition to such separate firm for the indemnified
18
<PAGE>
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local
counsel) for the Designated Underwriter for the defense of any losses,
claims, damages and liabilities arising out of the Directed Share Program,
and all persons, if any, who control the Designated Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party unless such settlement (i) includes an unconditional release of such
indemnified party from all liability on any claims that are the subject
matter of such action (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act by or on behalf of an
indemnified party.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a) or (b)
above (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result
of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of
this subsection (d). Notwithstanding the provisions of this subsection (d),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several
in proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
19
<PAGE>
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 690 Fifth Street, San Francisco,
California 94107, Attention: West Shell, III; provided, however, that any notice
to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
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<PAGE>
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
21
<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Netcentives inc.
By ____________________
[Insert title]
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By Credit Suisse First Boston Corporation
By______________________________________
[Insert title]
22
<PAGE>
SCHEDULE A
Underwriter [Principal
----------- Amount of]
[Number of]
Firm Securities
---------------
Credit Suisse First Boston __________________________ [$]
Hambrecht & Quist LLC _______________________________
Thomas Weisel Partners LLC __________________________
---------------
Total_____________________________ [$]
===============
23
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NETCENTIVES INC.
The following Amended and Restated Certificate of Incorporation of
Netcentives Inc. amends and restates the provisions of and supersedes the
Certificate of Incorporation filed with the Secretary of State of the State of
Delaware on February 9, 1999 in its entirety.
ARTICLE I
The name of the corporation is NETCENTIVES INC. (the "Corporation")
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware, County of New Castle, is The United States Corporation Company (CSC),
1013 Centre Street, Wilmington, Delaware, 19805. The name of its registered
agent at such address is The United States Corporation Company (CSC).
ARTICLE III
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware .
ARTICLE IV
(A) Classes of Stock. This corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock"
------------ ---------------
each with a par value of $0.001 per share. The total number of shares which the
corporation is authorized to issue is Fifty Four Million Five Hundred Sixty Nine
Thousand Two Hundred Twenty One (54,569,221) shares. Thirty Three Million Two
Hundred Forty Thousand (33,240,000) shares shall be Common Stock and Twenty One
Million Three Hundred Twenty Nine Thousand Two Hundred Twenty One (21,329,221)
shares shall be Preferred Stock.
(B) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by this Certificate of Incorporation may be issued from time to
time in series. The rights, preferences, privileges and restrictions granted to
and imposed on the Series A Preferred Stock, which series shall consist of
1,452,613 shares, the Series B Preferred Stock, which series shall consist of
660,391 shares, the Series C Preferred Stock, which series shall consist of
7,787,155 shares, the Series D Preferred Stock, which series shall consist of
5,500,000 shares, and the Series E Preferred Stock, which series shall consist
of 5,279,062 shares, which are as set forth below in this Article IV(B).
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<PAGE>
Except as to the Series A, Series B, Series C, Series D and Series E
Preferred Stock and except as otherwise provided in this Certificate of
Incorporation, the Board of Directors is hereby authorized to fix or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued additional series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of them. The
Board of Directors, except as otherwise provided in this Certificate of
Incorporation, is also authorized to decrease the number of shares of any
series, excluding the Series A, Series B and Series C Preferred Stock,
subsequent to the issuance of shares that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
1. Dividend Provisions. The holders of shares of Series A Preferred
-------------------
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D and Series E
Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Series N Preferred Stock or Common Stock of this corporation, at the rate of (a)
$0.052 per share per annum on each outstanding share of Series A Preferred
Stock, (b) $0.08 per share per annum on each outstanding share of Series B
Preferred Stock, (c) $0.104 per share per annum on each outstanding share of
Series C Preferred Stock, (d) $0.252 per share per annum on each outstanding
share of Series D Preferred Stock, and (e) $0.546 per share per annum on each
outstanding share of Series E Preferred Stock each payable quarterly when, as
and if declared by the Board of Directors. No dividends shall be paid on any
shares of Common Stock unless a dividend (including the amount of any dividends
paid pursuant to the above provision of this Section 1) is paid with respect to
all outstanding shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
equal to or greater than the aggregate amount of such dividends for all shares
of Common Stock into which each such share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock could then be converted. Such dividends shall not be
cumulative.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
this corporation, either voluntary or involuntary, the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets of this corporation
to the holders of Series N Preferred Stock or Common Stock by reason of their
ownership thereof, an amount equal to (i) $0.65 for each share of Series A
Preferred Stock then held by them, plus declared but unpaid dividends on the
Series A Preferred Stock, (ii) $1.00 for each share of Series B Preferred Stock
then held by them, plus declared but unpaid dividends on the Series B Preferred
Stock, (iii) $1.30 for each share of Series C Preferred Stock then held by them,
plus declared but unpaid dividends on the Series C Preferred Stock, (iv) $3.15
for each
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<PAGE>
share of Series D Preferred Stock, then held by them, plus declared but unpaid
dividends on the Series D Preferred Stock and (v) $6.82 for each share of Series
E Preferred Stock, then held by them, plus declared but unpaid dividends on the
Series E Preferred Stock. If upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, the entire assets and funds of
the corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
in proportion to the preferential amount each such holder is otherwise entitled
to receive.
(b) Upon the completion of the distribution required by
Section 2(a) above, if assets remain in this corporation, the holders of the
Series N Preferred Stock and Common Stock of this corporation shall receive all
of the remaining assets of this corporation as provided in Sections 2(a) and (b)
of Division (C), below.
(c) For purposes of this Section 2, a liquidation, dissolution or
winding up of this corporation shall be deemed to be occasioned by, or to
include, (i) the acquisition of the corporation by another entity by means of
any transaction or Series of related transactions (including, without
limitation, any reorganization, merger or consolidation, but excluding any
merger effected exclusively for the purpose of changing the domicile of the
corporation); or (ii) a sale of all or substantially all of the assets of the
corporation, unless the corporation's stockholders of record as constituted
------
immediately prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration for the
corporation's acquisition or sale or otherwise) hold at least 50% of the voting
power of the surviving or acquiring entity in approximately the same relative
percentages after such acquisition or sale as before such acquisition or sale.
(d) In any of the events specified in (c) above, if the
consideration received by the corporation is other than cash, its value will be
deemed its fair market value. Any securities shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a securities exchange or the Nasdaq
National Market System, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
corporation and the holders of at
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<PAGE>
least a majority of the voting power of all then outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (i) (A), (B) or (C) to reflect the approximate fair
market value thereof, as mutually determined by the corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock.
(iii) In the event the requirements of Section 2(d) are not
complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior to the date of the
first notice referred to in Section 2(d)(iv) hereof.
(iv) The corporation shall give each holder of record of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock written notice of such
impending transaction not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
corporation has given the first notice provided for herein or sooner than ten
(10) days after the corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the written consent of the holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all then
outstanding shares of such Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock.
3. Redemption. The Series A Preferred Stock, Series B Preferred
----------
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock are not redeemable.
-4-
<PAGE>
4. Conversion. The holders of the Series A Preferred Stock, Series B
----------
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall have conversion rights as follows (the "Conversion
----------
Rights"):
- ------
(a) Right to Convert.
----------------
(i) Subject to Section 4(c), each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be convertible, at the option
of the holder thereof, at any time after the date of issuance of such share, at
the office of this corporation or any transfer agent for such stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing (i) $0.65 in the case of the Series A Preferred Stock, (ii) $1.00 in
the case of the Series B Preferred Stock, (iii) $1.30 in the case of the Series
C Preferred Stock, (iv) $3.15 in the case of the Series D Preferred Stock and
(v) $6.82 in the case of the Series E, by the Conversion Price applicable to
such share, determined as hereafter provided, in effect on the date the
certificate is surrendered for conversion. The initial Conversion Prices shall
be $0.65 per share of Series A Preferred Stock, $1.00 per share of Series B
Preferred Stock, $1.30 per share of Series C Preferred Stock, $3.15 per share of
Series D Preferred Stock and $6.82 per share of Series E Preferred Stock. Such
initial Conversion Prices shall be subject to adjustment as set forth in
Section 4(d).
(ii) Each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall automatically be converted into shares of Common Stock at
the Conversion Price at the time in effect for such share immediately upon the
earlier of (i) except as provided below in Section 4(c), the corporation's sale
of its Common Stock in a firm commitment underwritten public offering pursuant
to a registration statement under the Securities Act of 1933, as amended, the
public offering price of which is not less than $6.50 per share (adjusted to
reflect subsequent stock dividends, stock splits or recapitalization) and which
results in aggregate cash proceeds to the corporation of $15,000,000 (net of
underwriting discounts and commissions) or (ii) the date specified by written
consent or agreement of the holders of a majority of the then outstanding shares
of the Series of Preferred Stock in question.
(b) Mechanics of Conversion. Before any holder of Series A
-----------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be entitled to convert the
same into shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this corporation or of
any transfer agent for the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock,
and shall give written notice to this corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of
-5-
<PAGE>
Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act of
1933, as amended, the conversion may, at the option of any holder tendering
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive
Common Stock upon conversion of such Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock shall not be deemed to have converted such Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock until immediately prior to the closing of such
sale of securities.
(c) Conversion Price Adjustments of Preferred Stock. The
-----------------------------------------------
Conversion Prices of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall be subject to adjustment from time to time as follows:
(i) (A) If the corporation shall issue, after the date
upon which any shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or Series D Preferred Stock were first issued (the
"Purchase Date" with respect to a particular series), any Additional Stock (as
-------------
defined below) without consideration or for a consideration per share less than
the Conversion Price for such Series of Preferred Stock in effect immediately
prior to the issuance of such Additional Stock, the Conversion Price for such
Series in effect immediately prior to each such issuance shall automatically
(except as otherwise provided in this clause (i)) be adjusted to a price
determined by multiplying such Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock and the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock outstanding immediately prior to such issuance plus the number
of shares of Additional Stock that the aggregate consideration received by the
corporation for such issuance would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of Common Stock and Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock outstanding immediately prior to
such issuance plus the number of shares of such Additional Stock.
(B) No adjustment of the Conversion Prices for the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be made in an amount less than
one cent per share, provided that any adjustments which are not required to be
made by reason of this sentence shall be carried forward and shall be either
taken into account in any subsequent adjustment made
-6-
<PAGE>
prior to three years from the date of the event giving rise to the adjustment
being carried forward, or shall be made at the end of three years from the date
of the event giving rise to the adjustment being carried forward. Except to the
limited extent provided for in Sections 4(c)(i)(E)(3) and 4(c)(i)(E)(4), no
adjustment of a Conversion Price pursuant to this Section 4(c)(i) shall have the
effect of increasing such Conversion Price above the Conversion Price for such
Series in effect immediately prior to such adjustment.
(C) In the case of the issuance of Additional Stock
for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by this corporation for any underwriting or
otherwise in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Additional
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as determined by
the Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on
or after the applicable Purchase Date) of options to purchase or rights to
subscribe for Additional Stock, securities by their terms convertible into or
exchangeable for Additional Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this Section 4(c)(i) and Section 4(c)(ii):
(1) The aggregate maximum number of shares of
Additional Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Additional Stock shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Sections 4(d)(i)(C) and 4(d)(i)(D)), if any, received by the corporation upon
the issuance of such options or rights plus the minimum exercise price provided
in such options or rights (without taking into account potential antidilution
adjustments) for the Additional Stock covered thereby.
(2) The aggregate maximum number of shares of
Additional Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the corporation (without taking into
account potential antidilution adjustments) upon the conversion or exchange of
such securities or the exercise of any related options or rights (the
-7-
<PAGE>
consideration in each case to be determined in the manner provided in Sections
4(d)(i)(C) and 4(d)(i)(D)).
(3) In the event of any change in the number of
shares of Additional Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Prices of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
to the extent in any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Additional Stock or any
payment of such consideration upon the exercise of any such options or rights or
the conversion or exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Prices of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities or options or rights related to such securities,
shall be recomputed to reflect the issuance of only the number of shares of
Additional Stock (and convertible or exchangeable securities which remain in
effect) actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities.
(5) The number of shares of Additional Stock
deemed issued and the consideration deemed paid therefor pursuant to Sections
4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Section 4(d)(i)(E)(3)
or (4).
(ii) "Additional Stock" shall mean any shares of Common
----------------
Stock issued (or deemed to have been issued pursuant to Section 4(c)(i)(E)) by
this corporation after the Purchase Date) other than
(A) Common Stock issued pursuant to a transaction
described in Section 4(c)(iii) hereof,
(B) Shares of Common Stock issuable or issued to
employees, consultants or directors of this corporation directly or pursuant to
a stock option plan or restricted stock plan approved by the Board of Directors
of this corporation,
(C) Capital stock, or options or warrants to
purchase capital stock, issued to financial institutions or lessors in
connection with commercial credit
-8-
<PAGE>
arrangements, equipment financings or similar transactions approved by the Board
of Directors of this corporation,
(D) Shares of Common Stock or Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock issuable upon exercise of warrants
outstanding as of the date of these Amended and Restated Certificate of
Incorporation,
(E) Capital stock or warrants or options to purchase
capital stock issued in connection with bona fide acquisitions, mergers or
similar transactions, the terms of which are approved by the Board of Directors
of the corporation,
(F) Shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, and Series E Preferred Stock,
(G) Shares of Common Stock issued or issuable in a
public offering prior to or in connection with which all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock will be converted to
Common Stock, and
(H) Shares of Series N Preferred Stock, or options
or warrants to purchase Series N Preferred Stock, issued to suppliers of the
Company in connection with the Company's acquisition of inventory for
redistribution in the ordinary course of the Company's business, which issuances
are unanimously approved by the Board of Directors of the corporation.
(iii) In the event the corporation should at any time or
from time to time after the Purchase Date fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Series N Preferred Stock
or Common Stock or the determination of holders of Series N Preferred Stock or
Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common Stock
------------
Equivalents") without payment of any consideration by such holder for the
- -----------
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Prices of the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock respectively shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of Preferred Stock shall be increased in proportion to such increase
of the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents with the number of shares issuable with
respect to Common Stock Equivalents determined from time to time in the manner
provided for deemed issuances in Section 4(c)(i)(E).
-9-
<PAGE>
(iv) If the number of shares of Series N Preferred Stock
or Common Stock outstanding at any time after the Purchase Date for the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for such Series shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such Series shall be decreased in proportion to such decrease in
outstanding shares.
(d) Other Distributions. In the event this corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(c)(iii), then, in
each such case for the purpose of this Section 4(d), the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be entitled to a proportionate
share of any such distribution as though they were the holders of (i) the number
of shares of Common Stock of the corporation into which their shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
corporation entitled to receive such distribution if such distribution is to be
made to holders of Common Stock or (ii) the number of shares of Series N
Preferred Stock equal to the number of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock held by such holder if such distribution is to be made
to holders of Series N Preferred Stock.
(e) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Series N Preferred Stock or Common Stock
(other than a subdivision, combination or merger or sale of assets transaction
provided for elsewhere in this Section 4 or Section 2) provision shall be made
so that the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock the number of shares of stock or
other securities or property of the Company or otherwise, to which a holder of
an equal number of shares of Series N Preferred Stock or Common Stock
deliverable upon conversion, respectively, would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock after the
recapitalization to the end that the provisions of this Section 4 (including
adjustment of the Conversion Prices then in effect and the number of shares
purchasable upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock) shall be applicable after that event and be as nearly equivalent as
practicable.
(f) No Impairment. This corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets,
-10-
<PAGE>
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by this corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock against impairment.
(g) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. Whether or not fractional shares are
issuable upon such conversion shall be determined on the basis of the total
number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock the
holder is at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of a Conversion Price of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock,Series D Preferred Stock or Series E
Preferred Stock pursuant to this Section 4, this corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of affected Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price for the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
at the time in effect, and (C) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of a share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock.
(h) Notices of Record Date. In the event of any taking by this
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, at least 20 days prior to the date specified
-11-
<PAGE>
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series N
Preferred Stock and Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock; and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of
Series N Preferred Stock and Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
in addition to such other remedies as shall be available to the holder of such
Preferred Stock, this corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
(j) Notices. Any notice required by the provisions of this
-------
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at his address
appearing on the books of this corporation.
5. Voting Rights.
-------------
(a) General. Subject to subsection (b) hereof, the holder of each
-------
share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall have the
right to one vote for each share of Common Stock into which such Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote. Fractional votes
shall not, however, be permitted and any fractional voting rights available on
an as-converted basis (after aggregating all shares into which shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
-12-
<PAGE>
(b) Voting for Board of Directors. So long as 3,000,000 shares of
-----------------------------
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock are outstanding, the
holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, voting
separately as a class, shall be entitled to elect three members of the Board of
Directors of this corporation. The holders of shares of Common Stock, voting
separately as a class, shall be entitled to elect two members of the Board of
Directors of the corporation. Any remaining members of the Board of Directors
of this corporation shall be elected by the holders of the Common Stock, Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock voting together as a single class.
If a vacancy on the Board of Directors is to be filled by the Board of
Directors, only a director or directors elected by the same class of
stockholders as those who would be entitled to vote to fill such vacancy, if
any, shall vote to fill such vacancy. No action by members of the Board of
Directors filling a vacancy on the Board of Directors shall be effective until
10 days after all Board members who do not have a right to vote on such
appointment have received notice thereof. A majority of the Board members
entitled to receive such notice may waive such notice requirement on behalf of
all such Board members. A director may be removed from the Board of Directors
with or without cause by the vote or consent of the holders of the outstanding
class or Series with voting power to elect him or her in accordance with the
Delaware General Corporation Law and these Amended and Restated Certificate of
Incorporation.
(c) Cumulative Voting. In the election of directors, each holder
-----------------
of shares of any class or series of capital stock of the Corporation shall be
entitled to as many votes as are equal to the number of votes which (except for
this provision) such holder would be entitled to cast in such election with
respect to such shares of stock multiplied by the number of directors to be
elected by the holders of such stock, and may cast all votes for a single
nominee for director or may distribute them among any two or more nominees.]
6. Protective Provisions. So long as any shares of Series A
---------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock, voting together as
a class except where otherwise required by law:
(a) alter or change the rights, preferences or privileges of the
shares of any Series of Preferred Stock so as to affect adversely the shares of
such series;
(b) increase or decrease (other than by redemption or conversion)
the total number of authorized shares of Preferred Stock;
(c) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity
-13-
<PAGE>
security having a preference over, or being on a parity with, the existing
Series Preferred Stock with respect to voting, dividends or upon liquidation;
(d) exchange, reclassify or cancel all or part of the Preferred
Stock;
(e) cancel or modify any dividends on the Preferred Stock which
have accrued but not been paid; or
(f) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of transactions in which more than fifty
percent (50%) of the voting power of the corporation is disposed of.
7. Status of Converted Stock. In the event any shares of Series A
-------------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so
converted shall be canceled and shall not be issuable by the corporation. The
Certificate of Incorporation of this corporation shall be appropriately amended
to effect the corresponding reduction in the corporation's authorized capital
stock.
(C) Rights, Preferences and Restrictions of Series N Preferred Stock.
----------------------------------------------------------------
The fifth Series of Preferred Stock shall be designated "Series N Preferred
------------------
Stock" and shall consist of 650,000 shares. The rights, preferences, privileges,
- -----
and restrictions granted to and imposed on the Series N Preferred Stock are as
set forth below in this Article III(C).
1. Dividend Provisions. The holders of shares of Series N Preferred
-------------------
Stock shall be entitled to receive dividends, out of any assets legally
available therefor, after payment of all dividends to holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock but prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of this
corporation) on the Common Stock of this corporation, at the rate of $0.08 per
share per annum on each outstanding share of Series N Preferred Stock, payable
quarterly when, as and if declared by the Board of Directors. No dividends shall
be paid on any shares of Series N Preferred Stock unless a dividend (including
the amount of any dividends paid pursuant to the provisions of Division B,
Section 1 above) is paid with respect to all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock Series D
Preferred Stock and Series E Preferred Stock equal to or greater than the
aggregate amount of such dividends for all shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
(as adjusted for stock splits, dividends, recapitalizations and the like). Such
dividends shall not be cumulative.
2. Liquidation Preference.
----------------------
-14-
<PAGE>
(a) In the event of any liquidation, dissolution or winding up
of this corporation (as defined in Division (B) Section 2(c) above) the holders
of the Series N Preferred Stock shall be entitled to receive, after the
satisfaction of the full liquidation preference of all shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, but prior and in preference to any
distribution of any of the assets of this corporation to the holders of Common
Stock, by reason of their ownership thereof, an amount equal to $1.00 for each
share of Series N Preferred Stock then held by them plus declared but unpaid
dividends on the Series N Preferred Stock. If upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Series N
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, the entire assets and funds of
the corporation remaining after distribution of the full liquidation preference
to all holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock and
legally available for distribution shall be distributed ratably among the
holders of the Series N Preferred Stock in proportion to the preferential amount
each such holder is otherwise entitled to receive.
(b) Upon the completion of the distribution required by
Section 2(a) above, if assets remain in this corporation, the holders of the
Common Stock of this corporation shall receive all of the remaining assets of
this corporation.
(c) In any of the events specified in (a) above, if the
consideration received by the corporation is other than cash, its value will be
calculated as provided in Division (B), Sections 2(d)(i) and (ii) above.
3. Redemption. The Series N Preferred Stock is not redeemable.
----------
4. Conversion.
----------
(a) Automatic Conversion. The Series N Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the rate of one share
of Series N Preferred Stock per share of Common Stock (the "Series N Conversion
-------------------
Rate") except as provided below in Section 4(c), immediately upon the earlier of
- ----
(i) the corporation's sale of its Common Stock in a firm commitment underwritten
public offering pursuant to a registration statement under the Securities Act of
1933, as amended, or (ii) the date specified by written consent or agreement of
the holders of a majority of the then outstanding shares of Series N Preferred
Stock, voting together as a class.
(b) Mechanics of Conversion. Before any shares of Series N
-----------------------
Preferred Stock shall be converted into shares of Common Stock, the holder
thereof shall surrender the certificate or certificates therefor, duly endorsed,
at the office of this corporation or of any transfer agent for the Series N
Preferred Stock, and indicating therewith the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. This
corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series N Preferred Stock, or to the nominee or nominees
of such holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as
-15-
<PAGE>
aforesaid. If the conversion is in connection with an underwritten offering of
securities registered pursuant to the Securities Act of 1933, as amended, the
Series N Preferred Stock shall be deemed to have been converted immediately
prior to the closing of such sale of securities. If the conversion is in
connection with a vote or agreement of the outstanding shares of Series N
Preferred Stock, then the Series N Preferred Stock shall be deemed to be
converted on the effective date of such vote or agreement.
(c) Conversion Price Adjustments of Series N Preferred Stock for
------------------------------------------------------------
Splits and Combinations. The Series N Conversion Rate shall be subject to
- -----------------------
adjustment from time to time as follows:
(i) In the event the corporation should at any time or
from time to time after the date on which Series N Preferred Stock is first
issued fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in Common
Stock Equivalents without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Series N Conversion Rate shall
be appropriately increased so that the number of shares of Common Stock issuable
on conversion of each share of Series N Preferred Stock shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed issuances in
Section 4(d)(i)(E) of Division B of this Article III.
(ii) If the number of shares of Common Stock outstanding
at any time after the date on which Series N Preferred Stock is first issued for
the Series N Preferred Stock is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Series N Conversion Rate shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Series N
Preferred Stock shall be decreased in proportion to such decrease in outstanding
shares.
(d) Other Distributions. In the event this corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(c)(i), then, in
each such case for the purpose of this Section 4(d), the holders of Series N
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of (i) the number of shares of
Common Stock of the corporation into which their shares of Series N Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the corporation entitled to receive such
distribution.
(e) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or
-16-
<PAGE>
sale of assets transaction provided for elsewhere in this Section 4 or Section
2) provision shall be made so that the holders of the Series N Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series N
Preferred Stock the number of shares of stock or other securities or property of
the Company or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of the Series N
Preferred Stock after the recapitalization to the end that the provisions of
this Section 4 (including adjustment of the Series N Conversion Rate then in
effect and the number of shares purchasable upon conversion of the Series N
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable.
(f) No Impairment. This corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the holders of
Series N Preferred Stock against impairment.
(g) No Fractional Shares. No fractional shares shall be issued
--------------------
upon the conversion of any share or shares of the Series N Preferred Stock, and
the number of shares of Common Stock to be issued shall be rounded to the
nearest whole share. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series N Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
5. Voting Rights. The Series N Preferred Stock shall have no rights
-------------
with respect to the election of directors or any other matter to be put before
the stockholders of the corporation.
6. Status of Converted Stock. In the event any shares of Series N
-------------------------
Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so
converted shall be canceled and shall not be issuable by the corporation. The
Certificate of Incorporation of this corporation shall be appropriately amended
to effect the corresponding reduction in the corporation's authorized capital
stock.
(D) Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
-17-
<PAGE>
2. Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the corporation, the assets of the corporation shall be distributed as
provided in Section 2 of Division (B) and Section 2 of Division (C) of this
Article IV.
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law and these
Amended and Restated Certificate of Incorporation.
ARTICLE V
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VII, nor the
adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
-18-
<PAGE>
* * *
-19-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at San Francisco, California, on August 26, 1999.
/s/ West Shell, III
------------------------------------
West Shell, III
Chairman & Chief Executive Officer
/s/ John F. Longinotti
------------------------------------
John F. Longinotti,
Asst. Secretary
-20-
<PAGE>
BYLAWS
OF
NETCENTIVES INC.
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.................................................................................... 1
1.1 Registered Office................................................................................... 1
1.2 Other Offices....................................................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................................................ 1
2.1 Place Of Meetings................................................................................... 1
2.2 Annual Meeting...................................................................................... 1
2.3 Special Meeting..................................................................................... 1
2.4 Notice Of Stockholders'Meetings..................................................................... 2
2.5 Manner Of Giving Notice; Affidavit Of Notice........................................................ 2
2.6 Quorum.............................................................................................. 2
2.7 Adjourned Meeting; Notice........................................................................... 2
2.8 Conduct Of Business................................................................................. 3
2.9 Voting.............................................................................................. 3
2.10 Waiver Of Notice................................................................................... 3
2.11 Stockholder Action By Written Consent Without A Meeting............................................ 3
2.12 Record Date For Stockholder Notice; Voting; Giving Consents........................................ 4
2.13 Proxies............................................................................................ 4
ARTICLE III - DIRECTORS.......................................................................................... 5
3.1 Powers.............................................................................................. 5
3.2 Number Of Directors................................................................................. 5
3.3 Election, Qualification And Term Of Office Of Directors............................................. 5
3.4 Resignation And Vacancies........................................................................... 5
3.5 Place Of Meetings; Meetings By Telephone............................................................ 6
3.6 Regular Meetings.................................................................................... 6
3.7 Special Meetings; Notice............................................................................ 7
3.8 Quorum.............................................................................................. 7
3.9 Waiver Of Notice.................................................................................... 7
3.10 Board Action By Written Consent Without A Meeting.................................................. 8
3.11 Fees And Compensation Of Directors................................................................. 8
3.12 Approval Of Loans To Officers...................................................................... 8
3.13 Removal Of Directors............................................................................... 8
3.14 Chairman Of The Board Of Directors................................................................. 8
ARTICLE IV - COMMITTEES.......................................................................................... 9
4.1 Committees Of Directors............................................................................. 9
4.2 Committee Minutes................................................................................... 9
4.3 Meetings And Action Of Committees................................................................... 9
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V - OFFICERS............................................................................................ 10
5.1 Officers........................................................................................... 10
5.2 Appointment Of Officers............................................................................ 10
5.3 Subordinate Officers............................................................................... 10
5.4 Removal And Resignation Of Officers................................................................ 10
5.5 Vacancies In Offices............................................................................... 10
5.6 Chief Executive Officer............................................................................ 11
5.7 President.......................................................................................... 11
5.8 Vice Presidents.................................................................................... 11
5.9 Secretary.......................................................................................... 11
5.10 Chief Financial Officer........................................................................... 12
5.11 Representation Of Shares Of Other Corporations.................................................... 12
5.12 Authority And Duties Of Officers.................................................................. 12
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS................................ 13
6.1 Indemnification Of Directors And Officers.......................................................... 13
6.2 Indemnification Of Others.......................................................................... 13
6.3 Payment Of Expenses In Advance..................................................................... 13
6.4 Indemnity Not Exclusive............................................................................ 13
6.5 Insurance.......................................................................................... 14
6.6 Conflicts.......................................................................................... 14
ARTICLE VII - RECORDS AND REPORTS............................................................................... 14
7.1 Maintenance And Inspection Of Records.............................................................. 14
7.2 Inspection By Directors............................................................................ 15
7.3 Annual Statement To Stockholders................................................................... 15
ARTICLE VIII - GENERAL MATTERS.................................................................................. 15
8.1 Checks............................................................................................. 15
8.2 Execution Of Corporate Contracts And Instruments................................................... 15
8.3 Stock Certificates; Partly Paid Shares............................................................. 15
8.4 Special Designation On Certificates................................................................ 16
8.5 Lost Certificates.................................................................................. 16
8.6 Construction; Definitions.......................................................................... 17
8.7 Dividends.......................................................................................... 17
8.8 Fiscal Year........................................................................................ 17
8.9 Seal............................................................................................... 17
8.10 Transfer Of Stock................................................................................. 17
</TABLE>
-3-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.11 Stock Transfer Agreements......................................................................... 18
8.12 Registered Stockholders........................................................................... 18
ARTICLE IX - AMENDMENTS......................................................................................... 18
</TABLE>
-4-
<PAGE>
BYLAWS
OF
NETCENTIVES INC.
ARTICLE I
CORPORATE OFFICES
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City
of Wilmington, County of New Castle, State of Delaware. The name of the
registered agent of the corporation at such location is CSC-The United States
Corporation Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices
at any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place Of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or
outside the State of Delaware, designated by the Board of Directors. In the
absence of any such designation, stockholders' meetings shall be held at the
registered office of the corporation.
2.2 Annual Meeting.
--------------
The annual meeting of stockholders shall be held on such date,
time and place, either within or without the State of Delaware, as may be
designated by resolution of the Board of Directors each year. At the meeting,
directors shall be elected and any other proper business may be transacted.
2.3 Special Meeting.
---------------
A special meeting of the stockholders may be called at any
time by the Board of Directors, the chairman of the board, the president or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other
than the Board of Directors, the president or the chairman of the board, the
request shall be in writing, specifying
-1-
<PAGE>
the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the chairman of the board, the
president, any vice president, or the secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The officer receiving the request shall cause notice to be promptly
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting, not less than thirty-
five (35) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after the receipt of the request,
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
2.4 Notice Of Stockholders' Meetings.
--------------------------------
All notices of meetings with stockholders shall be in writing
and shall be sent or otherwise given in accordance with Section 2.5 of these
Bylaws not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder entitled to vote at such meeting. The notice
shall specify the place, date, and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
2.5 Manner Of Giving Notice; Affidavit Of Notice.
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless
these Bylaws otherwise require, notice need not be given of the adjourned
meeting if the time and place thereof
-2-
<PAGE>
are announced at the meeting at which the adjournment is taken. At the adjourned
meeting the corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.8 Conduct Of Business.
-------------------
The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including the manner of
voting and the conduct of business.
2.9 Voting.
------
The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.12 of these Bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners of stock and to voting trusts and other voting
agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
Bylaws.
2.11 Stockholder Action By Written Consent Without A Meeting.
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action that may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
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<PAGE>
Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the General Corporation Law of Delaware if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.
-----------------------------------------------------------
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action.
If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is delivered to the corporation.
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
2.13 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for such stockholder by a
written proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed
-4-
<PAGE>
signed if the stockholder's name is placed on the proxy (whether by manual
signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the certificate of incorporation or these Bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
3.2 Number Of Directors.
-------------------
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be seven (7). Thereafter, this
number may be changed by a resolution of the Board of Directors or of the
stockholders, subject to Section 3.4 of these Bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before such director's term of office expires.
3.3 Election, Qualification And Term Of Office Of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors
shall be elected at each annual meeting of stockholders to hold office until the
next annual meeting. Directors need not be stockholders unless so required by
the certificate of incorporation or these Bylaws, wherein other qualifications
for directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation And Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation
or these Bylaws:
-5-
<PAGE>
(a) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other
cause, the corporation should have no directors in office, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders in
accordance with the provisions of the certificate of incorporation or these
Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an
election as provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place Of Meetings; Meetings By Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings,
both regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
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3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the chairman of the board, the president,
any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these Bylaws.
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3.10 Board Action By Written Consent Without A Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the board or committee. Written consents representing
actions taken by the board or committee may be executed by telex, telecopy or
other facsimile transmission, and such facsimile shall be valid and binding to
the same extent as if it were an original.
3.11 Fees And Compensation Of Directors.
----------------------------------
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. No such compensation shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
3.12 Approval Of Loans To Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation
of, or otherwise assist any officer or other employee of the corporation or of
its subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal Of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have
the effect of removing any director prior to the expiration of such director's
term of office.
3.14 Chairman Of The Board Of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board
of Directors, a chairman of the Board of Directors who shall not be considered
an officer of the corporation.
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ARTICLE IV
COMMITTEES
4.1 Committees Of Directors.
-----------------------
The Board of Directors may designate one or more committees,
each committee to consist of one or more of the directors of the corporation.
The Board may designate 1 or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, or in these Bylaws,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to the following matters: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by this chapter to be
submitted to stockholders for approval or (ii) adopting, amending or repealing
any Bylaw of the corporation.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
4.3 Meetings And Action Of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and
held and taken in accordance with, the provisions of Section 3.5 (place of
meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of
notice), and Section 3.10 (action without a meeting) of these Bylaws, with such
changes in the context of such provisions as are necessary to substitute the
committee and its members for the Board of Directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the Board of Directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the Board of Directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The Board of Directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
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ARTICLE V
OFFICERS
5.1 Officers.
--------
The officers of the corporation shall be a president, a
secretary, and a chief financial officer. The corporation may also have, at the
discretion of the Board of Directors, a chief executive officer, one or more
vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these Bylaws. Any number of offices may be held
by the same person.
5.2 Appointment Of Officers.
-----------------------
The officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief
executive officer or the president to appoint, such other officers and agents as
the business of the corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal And Resignation Of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by an affirmative vote of the majority of the Board of Directors at any
regular or special meeting of the board or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to
the attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall
be filled by the Board of Directors.
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<PAGE>
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation (if such an officer is appointed) shall, subject to
the control of the Board of Directors, have general supervision, direction, and
control of the business and the officers of the corporation. He or she shall
preside at all meetings of the stockholders and, in the absence or nonexistence
of a chairman of the board, at all meetings of the Board of Directors and shall
have the general powers and duties of management usually vested in the office of
chief executive officer of a corporation and shall have such other powers and
duties as may be prescribed by the Board of Directors or these bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board (if any) or the chief
executive officer, the president shall have general supervision, direction, and
control of the business and other officers of the corporation. He or she shall
have the general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer
and president, the vice presidents, if any, in order of their rank as fixed by
the Board of Directors or, if not ranked, a vice president designated by the
Board of Directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board of Directors, these Bylaws, the president or the
chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the
principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution of the
Board of Directors, a share register, or a duplicate share register, showing the
names of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
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The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be given
by law or by these Bylaws. He or she shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by these
Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all
officers of the corporation shall respectively have such authority and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the Board of Directors or the stockholders.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
-------------------------------------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (a) who is or was
a director or officer of the corporation, (b) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent
and in the manner permitted by the General Corporation Law of Delaware, to
indemnify each of its employees and agents (other than directors and officers)
against expenses (including attorneys' fees), judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) includes any person (a) who
is or was an employee or agent of the corporation, (b) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for
which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw,
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agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in another capacity while
holding such office, to the extent that such additional rights to
indemnification are authorized in the certificate of incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article
VI, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive
offices or at such place or places as designated by the Board of Directors, keep
a record of its stockholders listing their names and addresses and the number
and class of shares held by each stockholder, a copy of these Bylaws as amended
to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its stockholders, and its other books
and records and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent is the person who seeks the
right to inspection,
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the demand under oath shall be accompanied by a power of attorney or such other
writing that authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at its
registered office in Delaware or at its principal place of business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's
stock ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these
Bylaws, may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by
certificates, provided that the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of
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any or all classes or series of its stock shall be uncertificated shares. Any
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the adoption
of such a resolution by the Board of Directors, every holder of stock
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
corporation by the chairman or vice-chairman of the Board of Directors, or the
president or vice-president, and by the chief financial officer or an assistant
treasurer, or the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares
as partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class
of stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
that the corporation shall issue to represent such class or series of stock;
provided, however, that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing requirements there
may be set forth on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates
for shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and cancelled at the same time. The
corporation may issue a new certificate of stock or uncertificated shares in the
place of any certificate previously issued by it, alleged to have been lost,
stolen or
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destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General Corporation Law
shall govern the construction of these Bylaws. Without limiting the generality
of this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of
the funds of the corporation available for dividends a reserve or reserves for
any proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors and may be changed by the Board of
Directors.
8.9 Seal.
----
The corporation may adopt a corporate seal, which may be
altered at pleasure, and may use the same by causing it or a facsimile thereof,
to be impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
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8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, shall be entitled to hold liable for calls
and assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
-18-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
NETCENTIVES INC.
ADOPTION BY INCORPORATOR
------------------------
The undersigned person appointed in the certificate of incorporation to
act as the Incorporator of Netcentives Inc. hereby adopts the foregoing bylaws
as the Bylaws of the corporation.
Executed this 22nd day of February, 1999.
/s/ Ughetta Manzone
----------------------------------
Ughetta Manzone, Incorporator
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
----------------------------------------------------
The undersigned hereby certifies that the undersigned is the duly
elected, qualified, and acting Assistant Secretary of Netcentives Inc., and that
the foregoing Bylaws were adopted as the Bylaws of the corporation on February
22, 1999, by the person appointed in the certificate of incorporation to act as
the Incorporator of the corporation.
Executed this 22nd day of February .
------ ----------------------
/s/ Sanjay Khare
----------------------------------
Sanjay Khare, Assistant Secretary
-19-
<PAGE>
EXHIBIT 5.1
[Letterhead of Venture Law Group]
August 27, 1999
Netcentives Inc.
690 First Street
San Francisco, CA 94107
Registration Statement on Form S-1
(File No. 333-83443)
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
83443) filed by you, Netcentives Inc., with the Securities and Exchange
Commission (the "Registration Statement") on July 22, 1999 in connection with
the registration under the Securities Act of 1933, as amended, of shares of your
Common Stock (the "Shares"). As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that, assuming effectiveness of the Registration
Statement, the Shares when issued and sold in the manner described in the
Registration Statement will be legally and validly issued, fully paid and
nonassessable.
We are admitted to practice law only in the State of California and
accordingly, we express no opinion as to any matter relating to the laws of any
jurisdiction other than the laws of the State of California and the federal
securities laws of the United States. We consent to the use of this opinion as
an exhibit to the Registration Statement and further consent to the use of our
name whenever appearing in the Registration Statement, including the Prospectus
constituting a part thereof, and in any amendment thereto.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
EJB
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of
---------
_______________, by and between Netcentives Inc., a Delaware corporation (the
"Company"), and <<IndemniteeName>> (the "Indemnitee").
------- ----------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, that
Indemnitee had reasonable cause to believe that Indemnitee's conduct was
unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in
-2-
<PAGE>
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company and
shall be given in accordance with the provisions of Section 12(d) below. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
-3-
<PAGE>
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise.
-4-
<PAGE>
For example, the Company and Indemnitee acknowledge that the Securities and
Exchange Commission (the "SEC") has taken the position that indemnification
---
is not permissible for liabilities arising under certain federal securities
laws, and federal legislation prohibits indemnification for certain ERISA
violations. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the SEC to submit
the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
-5-
<PAGE>
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee
-6-
<PAGE>
with respect to such action, unless as a part of such action, the court of
competent jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of
-7-
<PAGE>
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company to effectively
bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
NETCENTIVES INC.
By:
---------------------------------------
West Shell, III, Chairman and CEO
Address: 690 Fifth Street
San Francisco, CA 94107
AGREED TO AND ACCEPTED:
<<IndemniteeName>>
- ------------------------------
(Signature)
Address: <<IndemniteeAddress1>>
<<IndemniteeAddress2>>
-9-
<PAGE>
EXHIBIT 10.15
DELTA SKYMILES PROGRAM PARTICIPATION AGREEMENT
This Agreement is made and entered in this 15th day of August, 1999, by and
between Delta Air Lines, Inc., having its principal place of business at
Hartsfield Atlanta International Airport, Atlanta, Georgia 30320 ("Delta"), and
Netcentives Inc., having its principal place of business at 690 Fifth Street,
San Francisco, California 94107 ("Netcentives").
Whereas, Delta is in the business of providing travel related services to the
public; and
Whereas, Delta has developed the "SkyMiles(TM) Program" (or "Program"), under
which Members are awarded Mileage for travel on Delta and certain other SkyMiles
Participants (as defined below), and for the purchase of goods or services from
other SkyMiles Participants in association with the SkyMiles Program, and can
obtain bonus travel and other SkyMiles Awards (as defined below) for such
SkyMiles activity; and
Whereas, Delta offers a SkyMiles Program to its passengers who desire to
participate in that Program; and
Whereas, Netcentives desires to purchase Mileage to provide to consumers as an
incentive; and
Whereas, Delta and Netcentives both desire Netcentives to participate in the
Delta SkyMiles Program and allow Netcentives consumers to participate in such
program; and
Whereas, Netcentives desires to accelerate the vesting schedule for the Warrant
(as defined herein) as consideration to Delta for entering into this Agreement;
Now, therefore, in consideration of the mutual promises, agreements and
covenants contained herein, Delta and Netcentives (collectively, the "Parties")
covenant and agree as follows on joint participation in Delta's SkyMiles
Program:
1. DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the following
meanings:
A. "Account" shall mean the account of Members who are also SkyMiles
-------
Members in which Mileage balances are maintained by Delta.
B. "Direct Competitor of Netcentives" means [******]
--------------------------------
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ******. A complete version of this has been filed
separately with the Securities and Exchange Commission.
<PAGE>
[******].
C. "Limited Exclusivity" means Delta's agreement not to sell SkyMiles to
-------------------
any Direct Competitor of Netcentives as defined above. Delta and
Netcentives shall have a relationship of Limited Exclusivity during
the Term unless terminated earlier pursuant to Section 9(C).
D. "Member" means a member in good standing of a Netcentives Program.
------
E. "Netcentives Points" means the promotional currency distributed to
------------------
consumers participating in any Netcentives Program.
F. "Netcentives Program" means any incentives program conducted by
-------------------
Netcentives, in which merchants or web sites purchase Netcentives
Points for distribution to individuals who perform specific
activities.
G. "SkyMiles Award" means the awards or benefits that Members can
--------------
receive from Delta, Delta Connection(TM) and/or certain SkyMiles
participants pursuant to the SkyMiles Program Rules in exchange for
the redemption of accrued SkyMiles, and, if applicable, other
consideration.
H. "SkyMiles Member" means an individual who is a member in good
---------------
standing of the SkyMiles Program.
I. "SkyMiles Participant" means any Person or Company that, pursuant to
--------------------
the SkyMiles Program Rules and an agreement between Delta and such
Person/Company regarding such Person's/Company's participation in the
SkyMiles Program: (i) provides goods and services to Members in
exchange for redemption of SkyMiles, or (ii) in connection with the
sale of goods or services by such Person/Company to Member, offers
SkyMiles to such Member.
J. "SkyMiles Partner" or "Partner Program" means any Person or Company
-------------------------------------
that, pursuant to the SkyMiles Program Rules and an Agreement between
Delta and such Person/Company regarding such Person's/Company's
participation in the SkyMiles Program in connection with the sale of
goods or services by such Person/Company to Member, offers SkyMiles to
such Member. As of the Effective Date, SkyMiles Partners or Partner
Programs shall mean the entities listed in Attachment C.
K. "SkyMiles" or "Mileage" means the points accrued under the SkyMiles
-------- -------
Program by SkyMiles Members for travel on Delta or such other reasons
as are permitted by Delta.
L. "Term" has the meaning given it in Section 2 hereof.
----
2
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
2. TERM
----
This Agreement shall commence on August 16, 1999 (the "Effective Date"),
and continue in effect until August 15, 2002 (the "Term"). This Agreement
terminates at the end of the Term unless renewed in writing upon thirty
(30) days prior written notice by either party prior to the end of the
Term. This Agreement (1) supersedes any previous Delta SkyMiles Program
Participation Agreement(s) between Delta and Netcentives, including without
limitation, the Delta Air Lines SkyRewards Agreement (the "Previous
Agreement") between Delta and Netcentives dated July 24, 1997, as amended;
and (2) amends the Warrant to Purchase Non-Voting Convertible Stock of
Netcentives issued to Delta by Netcentives on July 24, 1997 (the
"Warrant"). Notwithstanding the foregoing, unused SkyMiles purchased
pursuant to the Previous Agreement will continue to be valid and awardable
to consumers by Netcentives, and will be governed by the terms of this
Agreement.
3. TERMINATION
-----------
A. If this Agreement terminates pursuant to Section 3(B) on or before its
scheduled termination date, then:
(i) A "Winding Down Period" of six (6) months will begin, during
-------------------
which both Delta and Netcentives will let SkyMiles Members and
Members know the relationship is ending. Netcentives Points may
continue to be redeemed for SkyMiles during the Winding Down
Period and use of trademarks and confidentiality will survive
during the Winding Down Period.
(ii) After the end of the Winding Down Period, Netcentives will not
process Delta SkyMiles Members Mileage credit and Delta SkyMiles
Members will not be eligible for further accumulation of
Netcentives Points.
B. In the event of breach of any of the material terms and conditions of
this Agreement by Delta or Netcentives, the non-breaching party may
terminate this Agreement, without further liability, upon thirty (30)
days prior written notice to the other party which notice shall
describe, with as much particularity as possible, the alleged material
breach. All notices must conform to the provisions of Paragraph 20 of
this Agreement. Termination pursuant to this provision shall not be
effective, however, if the breaching party shall, within said thirty
(30) day period after receipt of such notice, correct such breach.
Failure to terminate this Agreement pursuant to this
3
<PAGE>
section shall not effect or constitute a waiver of any remedies the
non-defaulting party would have been entitled to demand in absence of
this section, whether by way of damage, termination or otherwise.
4. PROGRAM TERMS AND CONDITIONS
----------------------------
A. Mileage is accrued for SkyMiles Members in the following manner:
(i) Netcentives, currently in the business of Internet and online
service marketing, conducts various Netcentives Programs in which
consumers may earn Netcentives Points by performing various
activities on- and off-line. Web sites in each Netcentives
Program will award Netcentives Points to Members as a form of
incentive, loyalty, or promotional currency for use by a
consumer. Members may then redeem Netcentives Points through
Netcentives for Delta SkyMiles, or other rewards (including other
airlines' frequent flyer miles) at the Member's option.
B. Tracking and Reporting of Mileage
(i) Members will accrue Netcentives Points when visiting associated
web sites which offer these Netcentives Points. Members will
redeem Netcentives Points through Netcentives for Delta Air
Lines SkyMiles Mileage, which will then be posted to the
Members' SkyMiles Account. Netcentives shall only request that
SkyMiles be credited to the Accounts of Members whom Netcentives
believes in good faith to be SkyMiles Members. To the extent
that Netcentives requests that SkyMiles be credited to a person
who is not a SkyMiles Member, Delta shall not be obligated to
credit such Account.
(ii) Netcentives will supply Delta a data tape in a mutually
acceptable format, containing the Member name, Program Account
number and Mileage to be awarded. This tape is to be produced
and sent to Delta at least once per month. Netcentives will bear
all responsibility for ensuring the accuracy of the information
on the tape before sending such tape to Delta.
(iii) Once the tape is received by Delta, the data from the tape will
be entered in the Members' accounts within two (2) weeks of
receipt by Delta. Once the data is entered into the Member
accounts, Netcentives is responsible for payment of the SkyMiles
posted, unless such SkyMiles have been prepaid as provided in
Section 5(B).
(iv) If a SkyMiles Member asserts that he or she is entitled to
Mileage credit but did not receive such Mileage credit, the
Member will be instructed to notify Netcentives in writing or
via e-mail to ensure that Netcentives has
4
<PAGE>
forwarded their redemption request to Delta. In addition, the
SkyMiles Member must include their name and SkyMiles Account
number.
C. Upon prior written notice toDelta, Netcentives may offer Delta
SkyMiles Members extra SkyMiles as a value added incentive for
shopping at the associated web sites. For purposes of this Agreement,
extra SkyMiles shall mean bonus SkyMiles for travel incentives.
Compensation for such extra SkyMiles will be at a rate set forth in
Paragraph 5.C of this Agreement unless otherwise agreed upon by both
Parties.
D. Netcentives agrees that it will offer SkyMiles at a redemption value
of no less than [******] per SkyMile , and that the SkyMiles must meet
at least one of the following purposes: (1) employee sales and/or job
performance awards, recognition or incentives; (2) awards, recognition
or incentives granted by web sites in a Netcentives Program for
shopping, winning contests, or other activities. [******] Netcentives
will not allow Netcentives Points earned for specific activities that
are in violation of current Delta SkyMiles Participants' exclusivity
agreements with Delta to be converted to SkyMiles. Such prohibition
will not apply in cases where Delta has granted prior written
permission to Netcentives. A listing of those activities which are not
eligible for earning SkyMiles is included in Attachment A. Additions
to this restrictions list may only be made with the mutual consent of
both parties.
5. BILLING
-------
In consideration of the marketing opportunities provided by the
participation in the SkyMiles Program and Limited Exclusivity, Delta will
bill Netcentives as follows:
A. Netcentives shall pay to Delta an annual administrative fee of
[******] as consideration for the promotional materials and
advertising set forth in Section 10 herein. If Netcentives purchases
[******] worth of SkyMiles in contract year one, the administrative
fee will be waived for year two. If Netcentives purchases [******]
worth of SkyMiles in contract year two, the fee will be waived in
contract year three. The administrative fee will be billed at the
beginning of each contract year.
B. Netcentives guarantees that it will purchase [******] worth of
SkyMiles in contract year one and in each contract year thereafter, at
the price per SkyMile
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
5
<PAGE>
set forth in Section 5(C). Delta will bill Netcentives at the price
per SkyMile set forth in Section 5(C). At the end of each contract
year, Delta will calculate the annual revenue received from
Netcentives during such contract year. If Netcentives has underpaid
the [******] of annual revenue guarantee, Delta will invoice
Netcentives for the difference owed.
C. In consideration of the marketing opportunities provided by
participation in the Program, Delta will bill Netcentives [******] per
SkyMile posted which is generated under this Agreement, payable
monthly.
D. All SkyMiles paid for are subject to a Federal Excise Tax, currently
7.5%, that must be collected on any sale of miles. Netcentives agrees
that this tax will be included on the monthly invoice to be paid by
Netcentives in cash.
E. All monies due for the purchase of SkyMiles will be invoiced to
Netcentives by Delta on a monthly basis.
F. Netcentives will remit payment directly to Delta within 30 days of
invoice receipt. Payment may be made by check or by wire transfer, at
Netcentives' sole discretion.
G. As consideration for Delta's entering into this Agreement, the parties
agree that the Warrant is hereby amended such that the Warrant shall
be exercisable as to 100% of the total number of shares subject
thereto upon Delta's execution of this Agreement.
6. PROGRAM CHANGES
----------------
Netcentives will not change the exchange rate of Netcentives Points to
SkyMiles without prior written notice to Delta.
7. DELTA SKYMILES REPORTS
----------------------
A. On a monthly basis and at no extra charge to Netcentives, Delta will
provide to Netcentives reports, summarizing:
(i) actual Mileage posted,
(ii) bonus SkyMiles posted as a result of special promotions offered
by Netcentives, and
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
6
<PAGE>
B. Netcentives will keep complete and accurate records of identified
Delta SkyMiles Members and standard accounting records of amounts owed
to Delta. From time to time, as Delta may reasonably request,
Netcentives will confirm in writing by verified statement, the fact
that a person(s) reported as accruing Delta SkyMiles redeemed
Netcentives Points for such SkyMiles at Netcentives and Netcentives
will produce, for good cause, where available, copies of records
verifying same.
8. TITLE AND CONFIDENTIALITY
-------------------------
A. Title
-----
Title and full and complete ownership rights to Delta SkyMiles
Membership data and information developed by Delta and wherever
located will remain with Delta. Netcentives understands and agrees
that such data and information constitutes Delta's proprietary
information whether or not any portion thereof is or may be validly
copyrighted.
Title and full and complete ownership rights to any Member data and
information developed by Netcentives and wherever located will remain
with Netcentives. Delta understands and agrees that such data and
information constitutes Netcentives' proprietary information whether
or not any portion thereof is or may be validly copyrighted.
B. Confidentiality of Information
------------------------------
Each Party agrees to protect as confidential all information and
materials exchanged under this Agreement and that such information and
materials may be used solely for the specific purpose set forth
therein. The recipient of such confidential information ("the
recipient") agrees that, without prior written consent of the supplier
of such confidential information ("the supplier"), the recipient shall
not use, copy or divulge to third parties or otherwise use except in
accordance with the terms of this Agreement, any information or
materials obtained from the supplier or through the supplier in
connection with this Agreement, unless (a) the information or
materials is known to the recipient prior to obtaining same from the
supplier; (b) the information or material is, at the time of
disclosure to the recipient, then in public domain; (c) the
information or material is obtained by the recipient from a third
party who did not receive the same, directly or indirectly, from the
supplier or; (d) the recipient becomes legally compelled to disclose
confidential information or materials by a governmental body or court.
In that event, the recipient will provide the supplier with prompt
notice so that the supplier may seek a protective order or other
appropriate remedy and/or waive compliance (in writing) with the
provisions hereof. In the event that such protective order or other
remedy is not obtained, or the supplier waives, in writing, compliance
7
<PAGE>
with the provisions hereof, recipient will furnish only that portion
of such confidential information or materials which is legally
required and will exercise its reasonable efforts to obtain
appropriate assurance that confidential treatment will be accorded
such confidential information or materials. All confidential
information will either be returned to the supplier or destroyed at
its request upon termination of this Agreement. So long as Delta
SkyMiles membership information is not disclosed to any third party,
except under compulsion of valid legal process, nothing herein may be
construed to restrict Netcentives' use of information contained in its
own customer database obtained from its customers in the normal course
of business. So long as Netcentives' membership information is not
disclosed to any third party, except under compulsion of valid legal
process, nothing herein may be construed to restrict Delta's use of
information contained in its own customer database from its customers
in the normal course of business.
C. Confidentiality of Agreement
----------------------------
The terms of this Agreement shall be deemed confidential information
of both Delta and Netcentives.
9. LIMITED EXCLUSIVITY
-------------------
A. Delta grants Netcentives Limited Exclusivity on the Internet by
[******] This exclusivity is limited in that [******].
B. It is understood that Delta is presently a participant in Partner
Programs and that Partner Programs are participants in Delta's
SkyMiles Program. The Parties agree that Delta's present SkyMiles
Partnerships do not violate the exclusivity provisions of this
Agreement. Delta will not endorse any change to Partner Programs
initiated by the SkyMiles Partner that would infringe
8
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
upon the Limited Exclusivity granted above. The parties agree that
changes to the Partner Programs are at the SkyMiles Partner's
discretion and that Delta shall use its best efforts to ensure that
any such changes will not violate the Limited Exclusivity outlined
above.
C. Termination of Limited Exclusivity. Beginning on the first
----------------------------------
anniversary of the Effective Date, Delta may terminate its own
obligations with respect to Limited Exclusivity by giving at least
ninety (90) days prior written notice of such termination
("Exclusivity Termination Notice") to Netcentives. Effective
immediately after Netcentives receives Delta's Exclusivity Termination
Notice, [******]. Effective ninety (90) days after Netcentives
receives Delta's Exclusivity Termination Notice, Delta will not be
bound under the terms of the Limited Exclusivity.
D. Remedies. Any violation of Section 9(A) during the Term shall be
--------
considered a material breach of this Agreement, provided that either
party shall have 5 business days after receipt of notice of such
breach to cure such breach. Each party agrees that its obligations
under Limited Exclusivity as provided herein are necessary and
reasonable in order to protect Netcentives and its business, and each
party expressly agrees that monetary damages would be inadequate to
compensate Netcentives for any breach by Delta of its Limited
Exclusivity related covenants and agreements. Accordingly, each party
agrees and acknowledges that any such violation would cause
irreparable injury to Netcentives and that, in addition to any other
remedies that may be available, in law, in equity or otherwise,
Netcentives shall be entitled to obtain injunctive relief against any
such breach or the continuation of any such breach by Delta, without
the necessity of proving actual damages. The parties agree that this
Section 9(D) shall only apply as long as Limited Exclusivity has not
been terminated pursuant to Section 9(C). Notwithstanding the
foregoing, nothing in this Section 9(D) shall limit either party's
right to seek any and all remedies available in connection with this
Agreement.
10. PROMOTIONAL MATERIALS AND ADVERTISING
-------------------------------------
Subject to the advance approval of the other party, Delta and Netcentives
agree to promote and/or advertise the Delta SkyMiles Program by:
A. On the Effective Date and from time to time thereafter, Delta will
provide to Netcentives, in quantities and frequencies which Delta
deems reasonably sufficient, the following materials:
(i) Delta SkyMiles applications;
(ii) Delta SkyMiles Program brochures; and
9
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
(iii) Any other collateral materials to the Delta SkyMiles Program
that Delta in its sole discretion deems necessary.
B. Delta will promote and/or advertise Netcentives's participation where
appropriate and on a basis at least consistent with other full
SkyMiles Partners, as determined solely by Delta, by:
(i) Inclusion of Netcentives's name and logo in SkyMiles sales
literature and the SkyMiles Newsletter.
C. Netcentives will promote and/or advertise the Delta SkyMiles Program
where appropriate by:
(i) Advertising at Netcentives's cost its participation in Delta's
SkyMiles Program.
(ii) Including the Delta SkyMiles Program in Netcentives' promotional
literature.
D. Delta agrees to permit Netcentives to insert promotional material in
[******] SkyMiles mailings per year at no additional charge.
Netcentives is not limited to [******] spaces per year and additional
space may be allocated if mutually agreed upon by both parties. Delta
and Netcentives will mutually agree on the month for such insert and
Netcentives agrees to comply with the mailing and creative
specifications and deadlines as set by Delta. Production and delivery
of the inserts to Delta and all costs associated therewith shall be
the sole responsibility of Netcentives, content of the insert is
subject to Delta's prior review and approval. Netcentives will
verify/certify to the best of its knowledge that any insert containing
business reply or courtesy reply letter-size cards or envelopes, shall
bear the correct facing identification marks (FIM) and bar-code, and
all appropriate U.S. Postal Service automation standards. Netcentives
will be liable for and will agree to pay, subject to appeals described
by postal laws and regulations, any revenue deficiencies assessed.
11. COORDINATORS
------------
A. Upon the Effective Date of this Agreement, Netcentives will designate
an individual as its coordinator whom Delta may contact and operate
through concerning all Delta SkyMiles Program related matters. Upon
designation of that individual, Netcentives will provide Delta the
name, address and telephone number of the individual. Netcentives
shall have the right to change such coordinator from time to time at
its sole discretion, with notice to Delta.
B. Upon the effective date of this Agreement, Delta will designate an
individual as its coordinator whom Netcentives may contact and operate
through
10
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
concerning all Delta SkyMiles Program related matters. Upon
designation of that individual, Delta will provide Netcentives the
name, address and telephone number of the individual. Delta shall have
the right to change such coordinator from time to time at its sole
discretion, with notice to Netcentives.
12. ASSIGNABILITY
-------------
Neither Party may assign or otherwise transfer any of its rights or
obligations under this Agreement to any third party without the prior
written consent of the other party, except that (i) either party may assign
this Agreement to its parent corporation or wholly-owned subsidiary of that
party or its parent corporation without consent, but with 14 days advance
written notice, and (ii) no consent will be required for an assignment to
the acquiring or merging entity pursuant to a merger or sale of all or
substantially all of the assets of the assigning party. Any violation of
this provision will be cause for immediate termination of this Agreement
or, at the option of the non-assigning party, the non-assigning party may
declare the assignment of any of the rights or obligations under this
Agreement null and void as of the date of the purported assignment.
Notwithstanding the foregoing, the engagement of an advertising agent or
fulfillment house to prepare or distribute any mailings, advertising, or
promotional materials or perform operational tasks will not be deemed to be
an assignment.
13. ENTIRE AGREEMENT
----------------
This Agreement including all Attachments hereto, including the Warrant as
amended by this Agreement, constitutes the sole and entire agreement of the
parties hereto with respect to the subject matter hereof, and no
modification to or amendment of this Agreement will be binding on either
party unless signed by a duly authorized officer of each party to this
Agreement.
14. HOLD HARMLESS AND INDEMNIFICATION
---------------------------------
(a) Without limitation of any other provision of this Agreement, each
party shall indemnify, defend and hold harmless the other, its
affiliates and their respective employees, attorneys, agents,
successors and assigns from any and all loss, cost or expense,
including reasonable attorneys' fees and costs of suit, directly
arising from any claim, action, government proceeding or suit directly
arising from indemnitor's performance or non-performance under this
Agreement, to the extent that such claim, action or suit does not
result directly from indemnitee's negligence, willful misconduct or
breach of any provision of this Agreement. Each party shall promptly
notify the other party of any claim, demand, suit or threat of suit of
which that party becomes aware which might give rise to a right of
indemnification under this Agreement. Indemnitor shall be entitled to
11
<PAGE>
participate in the settlement or defense thereof and, if indemnitor so
elects, to assume and control the settlement or defense thereof with
counsel satisfactory to indemnitee. In any case, indemnitor and
indemnitee shall cooperate (at no cost to indemnitee) in the
settlement or defense of any such claim, action, government action or
suit.
(b) Neither party shall be obligated to the other party for indirect,
special, consequential or incidental damages, provided that this
subsection (b) shall not limit either party's indemnification
obligations to the other party with respect to claims by unaffiliated
third parties.
15. INDEPENDENT CONTRACTORS
-----------------------
Nothing herein may be construed to create an agency, joint venture,
partnership or other relationship between the parties other than
independent contractors.
16. SEVERABILITY
------------
If any provision of this Agreement is declared inoperative, void or illegal
by a court of competent jurisdiction, the remaining provisions shall not be
affected and shall continue in full force and effect unless this Agreement
is thereby rendered impossible to perform.
17. APPLICABLE LAW
--------------
This Agreement shall be construed and interpreted in accordance with the
laws of the State of Georgia, U.S.A.
18. NOT DEEMED WAIVER
-----------------
If either party at any time fails to require strict compliance with any
term or condition hereunder, such failure will not constitute a waiver of
such term or condition or of any subsequent breach of that term or
condition.
19. FORCE MAJEURE
-------------
Neither party will be liable for delays or failure in its performance
hereunder caused by any act of God, war, work stoppage, fire, act of
government, or any other cause, whether similar or dissimilar, reasonably
beyond the control of that party.
20. NOTICE
------
Any notice, election, or other communication required or submitted
hereunder shall be made in writing and will be:
12
<PAGE>
(i) delivered by hand;
(ii) sent by the appropriate postal service, return receipt requested,
postage and charges prepaid, or overnight delivery service; or
(iii) sent by wire with delivery confirmed, to the following address:
To Delta:
Martin C. White
Vice President Consumer Marketing
Delta Air Lines, Inc.
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320
USA
To Netcentives:
Chief Financial Officer
Netcentives Inc.
690 Fifth Street
San Francisco, CA 94107
CC: Vice President, Relationship Marketing
Notices delivered by hand or by wire shall be effective upon delivery.
Notices delivered by mail will be effective on the tenth business day after
the postmark date, or if earlier, upon the date of actual receipt.
21. USE OF TRADENAMES, TRADEMARKS AND SERVICE MARKS
-----------------------------------------------
Delta and Netcentives each grants to the other a non-exclusive license to
use each party's tradename, trademarks and service marks only in joint
promotion of the SkyMiles Program, and to represent that Netcentives Points
are exchangeable for SkyMiles, as specified below:
A. In connection with the program, Netcentives will not use any Delta
logotype, trade name, service mark, or other proprietary mark or word,
including but not limited to, the names "Delta Air Lines", "Delta",
"Delta SkyMiles Program", or Delta's logo in any public statements,
press releases, or advertising or promotional materials, except where
each specific use has been approved in
13
<PAGE>
advance and in writing by Delta. Materials which are substantially
similar to materials already approved by Delta do not require Delta's
further approval. Subject to Delta's approval of a type of use,
Netcentives may authorize web sites participating in any Netcentives
Program to publish a page which explains such Netcentives Program,
which page may include the Delta logotype or trade name. Approval or
comments on materials submitted will be provided by the next business
day following receipt of materials.
B. In connection with the program, Delta will not use any Netcentives
logotype, trade name, service mark, or other proprietary mark or word,
in any public statements, press releases, or advertising or
promotional materials, except where each specific use has been
approved in advance and in writing by Netcentives. Materials which are
substantially similar to materials already approved by Netcentives do
not require Netcentives' further approval. Approval of or comments on
materials submitted will be provided by the next business day
following receipt of materials.
22. HEADINGS
--------
All paragraph headings in this Agreement are solely for the purpose of
reference and do not supplement, limit or define the scope or content of
this Agreement.
14
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto by
their duly authorized representatives as of the date first above written.
DELTA AIR LINES, INC.
By: /s/ Martin C. White
----------------------------------
Martin C. White
Vice President -- Consumer Marketing
NETCENTIVES INC.
By: /s/ John F. Longinotti
----------------------------------
John F. Longinotti
EVP, CFO
15
<PAGE>
Attachment A
------------
Partner Conflicts (includes any web site visits that offer awards in conjunction
with any of the following):
A. Telecommunications
- -----------------------
Awards associated with:
hardware
software
long distance service
prepaid and non prepaid calling cards
consulting services
local toll dialing
local service
paging
cellular
second line
Internet access software
other products and services that may be added from time to time
B. Credit/Debit Cards: (American Express is current partner)
- ---------------------------------------------------------------
Awards associated with:
credit cards
charge cards
stored value cards
debit cards
C. Financial: (Charles Schwab is current partner)
- ------------------------------------------------------------------
Awards associated with:
stocks
bonds
mutual funds
money market account
financial software
financial advice
D. Mortgage: North American Mortgage Company is current partner
- ------------------------------------------------------------------
Awards associated with:
mortgage
refinance
equity loans
E. Auto Insurance: American International Group is current partner
- ---------------------------------------------------------------------
F. Restaurant:
- ----------------
Awards associated with:
restaurant dining
16
<PAGE>
F. Other:
- -----------
[******]
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omittted portions.
17
<PAGE>
Attachment B
------------
Direct Competitors of Netcentives
- ---------------------------------
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omittted portions.
<PAGE>
Attachment C
------------
Airline Partners
. Aer Lingus
----------
. AeroMexico(R)
----------
. Air France
----------
. Air Jamaica(TM)
. Austrian Airlines
-----------------
. China Southern(TM)
--------------
. Korean Airlines
---------------
. Malaysia
--------
. Sabena
------
. Singapore Airlines
------------------
. Swissair
--------
. TAP Air Portugal
----------------
. United Airlines
---------------
Car Rental
. Alamo
-----
. Avis
----
. Dollar Rent A Car
-----------------
. Hertz
-----
. National
--------
Hotels
. Best Western
------------
. Conrad International Hotels
---------------------------
. Crowne Plaza
------------
. Forte
-----
. Four Points Hotels
------------------
. Hilton Hotels Worldwide
-----------------------
. Holiday Inn
-----------
. Hyatt
-----
. Inter-Continental
-----------------
. Marriott
--------
. Preferred
---------
. Radisson
--------
. Renaissance Hotel
-----------------
. Sheraton
--------
. St Regis Luxury Collection
--------------------------
. Swissotel
---------
. W Hotels
--------
. Westin Hotels and Resorts
-------------------------
Other Partners
. Better Homes & Gardens(R) Real Estate Service
---------------------------------------------
. Delta SkyMiles Credit Card from American Express
------------------------------------------------
. Delta Vacations(TM) Europe/Turkey/Russia
--------------- --------------------
. 1-800-Flowers
-------------
. North American Mortgage Company
-------------------------------
. Radisson Seven Seas Cruises
---------------------------
. Renaissance Cruise Lines
------------------------
2
<PAGE>
. SCANA Energy (Georgia residents only)
------------
. SkyMiles Auto Buying Program
----------------------------
. SkyMiles Dining Program
-----------------------
. MCI
---
3
<PAGE>
EXHIBIT 10.20
[AMERICA WEST AIRLINES LOGO]
AMERICA WEST FLIGHTFUND INCENTIVE MILES AGREEMENT
-------------------------------------------------
THIS AGREEMENT, effective as of the 1st day of July, 1999 (the "Effective
Date") between AMERICA WEST AIRLINES, INC. ("America West"), a Delaware
corporation, whose principal business address is 4000 East Sky Harbor Boulevard,
Phoenix, AZ 85034, and Netcentives Inc. ("Participant"), a California
corporation, whose principal business address is 690 Fifth Street, San
Francisco, CA 94107, sets forth the terms and conditions, and mutual
consideration, by which Participant has agreed to participate in the America
West Incentive Miles Program, as defined herein.
1. Definitions
"Miles" shall mean the fixed amount of miles credited to a FlightFund
member's account upon receipt of appropriate documentation verifying that
such FlightFund member has participated in the Netcentives Program pursuant
to the terms and conditions hereof. No travel on America West is required
to be awarded Miles.
"FlightFund Program" or "FlightFund" shall mean the frequent flyer
recognition program, as established and maintained by America West as of
the date of this Agreement, and from time to time thereafter, whereby
America West customers who become members receive travel benefits based
upon air travel mileage accumulated on America West or other designated air
carriers or through the use or purchase of the goods or services of another
designated vendor. The FlightFund Program may be amended, modified,
canceled, terminated or otherwise managed at any and all times in the sole
and absolute discretion of America West.
"Incentive Miles Program" shall mean the program, as established and
maintained by America West as of the date of this Agreement, and from time
to time thereafter, whereby new or existing FlightFund members accumulate
air travel mileage redeemable on America West or other designated air
carriers through the use or purchase of the goods or services of another
designated vendor. The Incentive Miles Program may be amended, modified,
canceled, terminated or otherwise managed at any and all times in the sole
and absolute discretion of America West.
"Limited Exclusivity" means America West's agreement not to sell FlightFund
Miles to any Direct Competitor of Netcentives as defined above. America
West and Netcentives shall have a relationship of Limited Exclusivity
during the Term.
"Netcentives Program" shall mean any of the Internet-based programs
operated by Netcentives which provide for the grant of points which are
redeemable for airline frequent flyer miles and/or other incentives to end-
users. Under the Netcentives Program, end-users may accrue points through
earning transactions ("Earning Transactions") by performing various
activities, and later, redeem points through redemption transactions
("Redemption Transactions") by requesting that the points be redeemed for
specific goods and services.
1
Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as ******. A complete version of this has been
filed separately with the Securities and Exchange Commission.
<PAGE>
"Direct Competitor of Netcentives" means [******]. Direct Competitors of
Netcentives include, without limitation, the companies listed in Exhibit B
attached hereto.
2. FlightFund Miles Earned by Participant's Customers
A. FlightFund Miles earned by a FlightFund member for participation in
the Netcentives Program may be used by said member toward FlightFund
award benefits in the same manner, and subject to the same terms,
conditions and restrictions, as any other FlightFund mileage
accumulation.
B. Participant shall transmit to America West by computer tape, all
pertinent data necessary to enable America West to credit FlightFund
Program mileage. This data shall be provided in a format compatible
with America West's computer systems, as specified in Exhibit A,
America West Partner Standard Interface Record Layout. Upon receipt
of such data, America West shall credit the appropriate FlightFund
member's accounts. FlightFund data to be provided must include, at
minimum, FlightFund member name and identification number, mileage
amount to be credited and the information necessary to identify Miles.
The tape containing this information shall be delivered by Participant
to America West weekly and posted by America West within one (1) to
three (3) business days upon receipt of such tape, addressed to:
America West Airlines, Inc.
1930 W. University (52N-ISS)
Tempe, AZ 85281
Attn: Tape Librarian
Credit of FlightFund Program miles is contingent upon America West's
timely receipt of such computer tape.
3. Exclusivity
A. The parties hereto acknowledge that they shall have a relationship of
Limited Exclusivity during the Term of this Agreement. Any violation
of this Section 3 shall be considered a material breach of this
Agreement.
B. America West shall not sell or grant FlightFund Miles to any Direct
Competitor of Netcentives during the term of this Agreement. America
West shall not permit access (including, without limitation, access
through regular mail or e-mail) to its FlightFund members by any
Direct Competitor of Netcentives during the term of this Agreement.
2
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
4. Advertising/Promotion Opportunities
A. America West will make available the opportunity for Participant to
insert promotional or advertising material in FlightFund Program
member communications at least [******] time per year. The foregoing
inserts must be printed at Participant's expense, in conformity with
America West's standards for size and content, and delivered by
Participant to America West or its designated vendor in sufficient
time to be incorporated into the desired mailing. Participant shall
submit promotional or advertising material to America West for written
approval prior to printing. All copy generated by Participant that
refers to America West in any way must receive prior written approval
by America West.
B. America West will make available the opportunity for Participant to
include an article in the FlightFund newsletter at least [******] time
per year to promote the Netcentives Program.
C. America West will include Participant, or its brands, such as
ClickRewards, at Participant's sole discretion, in FlightFund program
materials in which partners are listed, including without limitation,
print and electronic materials, as a FlightFund earning partner. When
possible, such materials will include a link to the Participant's web
site at a URL to be specified by Participant.
D. Participant shall include America West and/or the FlightFund Program
in Participant's printed and electronic materials consistent with
other airline partner exposure.
E. Participant shall give America West the opportunity to participate in
promotions targeting Participant's member base and other e-commerce
consumers in the event that such promotions are undertaken by
Participant.
5. Use of Logos and Service Marks
A. Participant agrees that any brochure or other promotional material or
advertising media, which may include print, radio, television, and the
Internet, that mentions America West must include the then current America
West logo (as provided by America West from time to time), provided,
however, that no such use shall constitute a license to Participant to use
for its own purposes (other than as set forth in this Agreement) any of
America West's trademarks, service marks or other similar intellectual
property, all of which shall remain the sole and exclusive property of
America West. All promotional material which mentions America West, and/or
uses its logo, shall be submitted to America West for written approval
prior to publication, provided, however, that promotional materials which
are identical to materials which were previously submitted for approval do
not need to be resubmitted, and shall be deemed to be approved. America
West shall not unreasonably disapprove of any such use. Participant agrees
to neither take nor permit any action that would infringe or interfere with
America West's exclusive ownership of its logo, trademarks and service
marks. Subject to this Section 5A, Participant shall have the right to use
the America West trademarks, service marks or other
3
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
similar intellectual property (i) on its Internet web site(s), (ii) on any
mirror, co-branded, or satellite site of its web site, (iii) on information
pages regarding Participant's programs or products, which pages are housed
at the web sites of its customers, and (iv) in its promotional materials,
provided that any such uses shall be for the sole purpose of promoting
Participant's participation in the FlightFund Program.
B. America West agrees that any brochure or other promotional material or
advertising media, which may include print, radio, television, and the
Internet, that mentions Participant shall include Participant's then
current logo, provided, however, that no such use shall constitute a
license to America West to use for its own purposes any of Participant's
trademarks, service marks or other similar intellectual property, all of
which shall remain the sole and exclusive property of Participant. All
brochures which mention Participant, and use its logo, shall be submitted
to Participant for written approval prior to publication and Participant
shall not unreasonably disapprove of any such use, provided, however, that
promotional materials which are subsantially similar to materials which
were previously submitted for approval do not need to be resubmitted, and
shall be deemed to be approved. America West agrees to neither take nor
permit any action that would infringe or interfere with Participant's
exclusive ownership of its logo, trademarks and service marks. Subject to
this Section 5B, America West shall have the right to use the Participant
trademarks, service marks or other similar intellectual property (i) on its
Internet web site(s), (ii) on any mirror, co-branded, or satellite site of
its web site, and (iii) in its promotional materials, provided that any
such uses shall be for the sole purpose of promoting Participant's
participation in the FlightFund Program.
6. Payment by Participant
A. For all Miles credited to FlightFund members' accounts, Participant
shall pay America West the amount of [******] per mile together with
any and all transportation or excise taxes, including without
limitation, the 7.5% transportation tax assessed on the sale or
purchase of frequent flyer miles in respect of the grant of the Miles
pursuant to this Agreement.
B. In the event that the payments made to America West pursuant to
Paragraph A above (exclusive of any taxes) are less than [******] in
any contract year, Participant shall pay to America West the
difference between the amount paid for such contract year and [******]
promptly upon notice from America West of such shortfall. For purposes
hereof, "contract year" shall mean each twelve month period during the
term hereof commencing after the Effective Date.
4
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
C. America West shall submit monthly invoices to Participant, setting
forth the amounts due and such invoices shall be due and payable
within thirty (30) days from receipt.
D. Payments shall be made either by (i) wire transfer to America West in
accordance with the following wire transfer instructions:
Bank One, Arizona, N.A.
Phoenix Arizona
ABA No. 122-100 024
For the Account of America West Airlines, Inc.
No. 2312 4479
or (ii) check made payable to America West Airlines at the following
address:
America West Airlines, Inc.
P.O. Box 29655
Phoenix, AZ 85038-9655
7. Customer Service and Operations
Each party shall designate a specific individual employee of such party to
be the contact person for any operations or customer service issue
inquiries which may arise during the term of this Agreement. Each party
shall respond to such issues within no more than seven (7) days of receipt
of such inquiry.
8. Reporting
America West shall report, on a monthly basis, the number of generated
Miles that have been credited to the FlightFund database on account of
transactions with Participant. This report shall include, at a minimum,
the member's account to which the Miles were credited, and the applicable
number of Miles credited. FlightFund transactions will be reconciled, by
both America West and Participant, monthly and reviewed quarterly. Any
differences in numbers will be discussed and mutual agreement on the final
position will be determined. If a mutual agreement is not reached, within
sixty (60 days) of receipt of written notice, the America West base control
sheets will be the final position. In the event that any transactions are
rejected, America West shall notify Participant in writing of the reasons
for such rejection within ten (10) days.
9. Retention of Records/Audit Rights
Participant shall retain records relating to Miles earned pursuant to this
Agreement for at least two (2) years from the date qualifying purchases
were reported to America West. At all reasonable times, upon not less than
ten (10) days prior notice, America West or its designated representatives
shall have access to such records in order to verify such information as
may be reasonably necessary, during regular business hours, in America
West's judgment, to effectively
5
<PAGE>
and correctly implement the terms and conditions of this Agreement. Any
such audit will occur at mutually agreeable times and locations, and at the
sole expense of America West. In the event that America West identifies
deficiencies in any such matters, Participant will take all necessary
action to correct all such deficiencies promptly and without charge to
America West. America West agrees that all such records and information
shall be held strictly confidential and not disclosed for any purpose
whatsoever to any third party.
10. Term and Termination
A. This Agreement shall commence on the Effective Date and shall
terminate on June 30, 2001, unless sooner terminated by either party
pursuant to the provisions herein.
E. This Agreement may be terminated by either party at any time upon not
less than ninety (90) days written notice. Except for obligations
accruing prior to the effective date of termination, such termination
will be with no liability whatsoever to either party except as
expressly provided herein.
F. Notwithstanding Section 10(B) above, if either party defaults in the
performance of any provision of this Agreement then the non-defaulting
party may give written notice to the defaulting party that if the
default is not cured within thirty (30) days, the Agreement will be
terminated. If the non-defaulting party gives such notice and the
default is not cured during the thirty (30) day period, then the non-
defaulting party may terminate the Agreement immediately at the end of
that period.
D. For a period of six (6) months after the effective date of termination
of this Agreement, America West will continue to credit FlightFund
Miles on account of Earning Transactions which occurred prior to such
effective date of termination. Points earned through the Netcentives
Program through Earning Transactions which occurred after the
effective date of such termination will not be redeemable for
FlightFund Miles.
11. Miscellaneous
A. Assignment This Agreement may not be assigned except with the prior
----------
written consent of the non-assigning party, and shall inure to the
benefit of the successors and assigns of either party.
B. Publicity After the execution of this Agreement, Participant may
---------
issue a press release which may, among other things, confirm the
existence of a relationship between the parties and may request that
America West issue a similar press release. Any other information
regarding the relationship between the parties including the other
terms of this Agreement and any other agreement between the parties
shall be considered Confidential Information under the definition set
forth herein.
C. Confidentiality Each party agrees to protect as confidential, and not
---------------
use or disclose for any purpose other than performance of the express
provisions of this Agreement, data,
6
<PAGE>
information, trade secrets, research, customer lists or business or
strategic information of any kind or nature, furnished or obtained
from the other party in connection with the performance of this
Agreement, and to not disclose such information to any third party
whatsoever. Upon termination of this Agreement each party shall return
and deliver to the other party within a reasonable time, not to exceed
thirty (30) days after the effective date of termination, all such
data and information of the other party in its possession.
D. Access To Data Base Not less than two (2) times per year, upon
-------------------
request, and subject to the terms of any other relevant
confidentiality or privacy agreements, the parties shall each provide
access to their respective customer databases to the other party for
direct promotional purposes, and such access may be through a third
party vendor provided such vendor has executed a confidentiality
agreement satisfactory to the parties. Access to Participant's
database is through e-mails only. Due to the terms of Participant's
privacy policy, it may require that such e-mails come from Participant
itself, and that the offers promoted be ClickRewards offers. Each
party agrees that any database information obtained from the other
party for special promotions will be used only for such promotion(s)
and will not be retained or merged into the receiving party's database
or the database of any third party, provided, however, that
information obtained from customers responding to such promotion(s)
may become part of the database of the party receiving such response.
Upon conclusion of the promotion for which access to such data has
been provided, the database in all forms, shall be returned to the
originating party, and the using party shall retain no copies thereof
in any form. Under no circumstances shall any such database, or
information derived therefrom, be made available to competitors of the
originating party, either directly or indirectly and each party agree
that, in the case of a breach hereof, legal remedies such as damages
would be inadequate, and therefore expressly consents to the entry of
injunctive and other equitable relief.
E. Independent Contractors It is mutually understood and agreed that
-----------------------
nothing in this Agreement is intended or may be construed to create or
establish any agency, partnership or joint venture relationship
between the parties hereto, and that the relationship of the parties
hereto shall at all times be that of independent contractors.
F. Non-Waiver The right of either party to require strict performance
----------
and observance of any obligations hereunder will not be affected in
any way by any previous waiver, forbearance or course of dealing.
G. Governing Law This Agreement and any dispute arising under or in
-------------
connection with this Agreement, including any action in tort, will be
governed by the internal laws of the State of Arizona, without regard
to the conflicts of laws principles thereof.
H. Notices All notices to the respective parties hereunder shall be sent
-------
by overnight delivery, or certified or registered U.S. mail, return
receipt requested, to the addresses as set forth on the first page of
this Agreement: America West, Attention: Senior Director, Relationship
Marketing; Netcentives, Attention: Chief Financial Officer, Cc: Vice
7
<PAGE>
President, Relationship Marketing. The addresses for the purpose of
notice may be changed at any time by providing notice as set forth
herein.
I. Modification No modification to this Agreement shall be effective
------------
unless it is in writing and signed by the party sought to be charged
with such modification.
J. Captions The captions appearing in this Agreement have been inserted
--------
as a matter of convenience and in no way define, limit or enlarge the
scope of this Agreement or any of its provisions.
K. Entire Agreement This Agreement, including its exhibits, constitutes
----------------
the entire agreement and understanding of the parties on the subject
matter hereof, and, as of the Effective Date, supersedes all prior
agreements, whether written or oral, between the parties hereto
concerning the subject matter hereof. There are no other or further
representations or inducements, whether written or oral, that have
been given or made in connection with this Agreement.
L. Cost In the event of any litigation, arbitration, or other
----
proceedings under this Agreement, the prevailing party shall be
entitled to recover from the other party all costs, reasonable
attorney's fees and other expenses incurred.
M. Consequential Damages In no event will either party be liable for any
----------------------
special, indirect, incidental or consequential damages.
N. Indemnification.
---------------
(i) America West hereby agrees to indemnify, defend and hold
harmless Participant and its respective directors, officers,
agents and employees, from and against any and all claims,
losses, damages, suits, judgments, costs and expenses (including
litigation costs and reasonable attorneys' fees) arising out of
or relating to (i) America West' operation of the FlightFund
Program including without limitation, claims by participants in
the FlightFund Program of America West's breach, violation or
failure to comply with the terms of the FlightFund Program and
(ii) any allegation that Participant's use of the America West
trademarks and logos in strict accordance with this Agreement
infringes a U.S. copyright or trademark existing or issued as of
the date of such use, provided in each case that Participant
promptly notifies America West in writing of any such claim,
gives America West sole control of the defense and all related
settlement negotiations, and cooperates with America West in
defending or settling any such claim.
(ii) Participant hereby agrees to indemnify, defend and hold
harmless America West and its respective directors, officers,
agents and employees, from and against any and all claims,
losses, damages, suits, judgments, costs and expenses (including
litigation costs and reasonable attorneys' fees) arising out of
8
<PAGE>
or relating to (i) Participant' operation of the ClickRewards
Program including without limitation, claims by participants in
the ClickRewards Program of Participant' breach, violation or
failure to comply with the terms of the ClickRewards Program and
(ii) any allegation that America West's use of the Participant
trademarks and logos in strict accordance with this Agreement
infringes a U.S. copyright or trademark existing or issued as of
the date of such use, provided in each case that America West
promptly notifies Participant in writing of any such claim, gives
Participant sole control of the defense and all related
settlement negotiations, and cooperates with Participant in
defending or settling any such claim.
IN WITNESS WHEREOF, Participant and America West have executed this
Agreement as of the dates written below.
AMERICA WEST AIRLINES, INC. NETCENTIVES INC.
/s/ Michael A. Smith /s/ Perryman K. Maynard
- ------------------------------------ ------------------------------------
By: Michael A. Smith By: Perryman K. Maynard
Title: Sr. Vice President,
Marketing & Sales Title: VP, Relationship Marketing
-----------------------------
Date: July 29, 1999 Date: July 23, 1999
---------------------------- ------------------------------
9
<PAGE>
Exhibit B
DIRECT COMPETITORS OF NETCENTIVES
[******]
10
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.21
Exodus
EXODUS COMMUNICATIONS, INC.
Internet Services and Products Agreement
This Agreement defines the terms and conditions between Exodus Communications,
Inc., (hereafter referred to as Exodus) and Netcentives (hereafter referred to
as Customer) whereby Exodus provides value-added Internet services and related
products to Customer.
1. Exodus will provide the following services and products at the prices shown
(see Addenda for additional services):
<TABLE>
<CAPTION>
<S> <C> <C>
Connection Type N/A Usage Level Price Billing Period
-------- ------------ --------- ------------ -----------
One Time Installation Cost Price
------------
Telco Connection provided by Price Billing Period
------------------------ ------------ -----------
One Time Installation Cost Price
------------
Other: Price Billing Period
-------------------------------------------------------- ------------ -----------
Other: Price Billing Period
-------------------------------------------------------- ------------ -----------
Equipment: see Attachment A (if applicable) Price
------------
Request for Service
---------------------------
Date
</TABLE>
Exodus will not increase prices for services provided during the Billing
Period identified above. Exodus reserves the right to change prices beyond
the billing period upon notice to Customer 30 days in advance of any
change. All prices are exclusive of any tax, levy, customs duty, import
tax or similar governmental charge that may be assessed by any
jurisdiction. All such taxes are the responsibility of Customer.
2. The initial term of this Agreement is for one year from the date Internet
access is connected, Customer may cancel within the first 30 days without
penalty, thereafter it is non cancelable, and will automatically renew
yearly thereafter, unless 30 day advanced notice is given by either party
prior to this agreement's anniversary date. At any time, either party will
have the right to terminate this Agreement if (i) the other party breaches
any terms of this Agreement, including but not limited to the payment of
fees, and fails to cure such breach within thirty (30) days after written
notice of the breach or (ii) the other party becomes the subject of a
petition in bankruptcy or any voluntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors.
After the initial term, either party may terminate this Agreement for
convenience by providing sixty (60) days prior written notice. At the time
Exodus connection service is installed or product is shipped, Exodus will
invoice the Customer: Payments for subsequent billing periods will be
issued in advance of the provision of service. Invoices are due upon
receipt.
3. Exodus makes no warranty of any kind with respect to services and products
provided under this Agreement. Exodus DISCLAIMS ALL WARRANTIES, EXPRESS
AND IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT WITH RESPECT TO THE DOMAIN NAMES
OBTAINED FOR CUSTOMERS, SERVICES OR ANY INFORMATION OBTAINED THROUGH THE
SERVICES. In situations involving performance or nonperformance of
services or products furnished under this Agreement, Customer's sole remedy
shall be: in the case of products, repair, or return of the defective
product to Exodus for refund, at the discretion of Exodus. In the case of
services, refund of a pro rata portion of the price paid for services which
were not provided. Credit will only be issued for periods of lost service
greater than 24 hours.
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ******. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
4. Exodus will not be liable for any damages Customer may suffer arising out
of acts of God, use, or inability to use, Exodus's Internet services or
related products unless such damages are caused by an intentional and
willful act of Exodus. In no event shall Exodus be liable for unauthorized
access to Customer's transmission facilities or Customer premise equipment
or for unauthorized access to or alteration, theft or destruction of
Customer's data files, programs, procedure or information through accident,
fraudulent means or devices, or any other method. Exodus will not be
liable for indirect, incidental, special or consequential damages or for
any lost property or data of Customer. Exodus's liability for damages to
Customer for any cause whatsoever, regardless of form of action, including
negligence, shall not exceed an amount equal to the price of products and
services purchased by Customer during the twelve month period preceding the
event which caused the damages or injury.
5. Exodus will indemnify and hold Customer harmless against any claims or
demand by any third party that any hardware or software provided by Exodus
to Customer hereunder, infringes any U.S. copyright or patent. Except for
such indemnity. Customer agrees to indemnify and hold Exodus harmless
against any claim or demand by any third party due to or arising out of the
use by Customer of Internet services and related products provided
hereunder.
6. Customer is solely responsible for the content of any transmissions by
Customer and any third party utilizing customer's facilities or Exodus's
facilities. Use of other organization's network or computing resources are
subject to their respective permission and usage policies. Customer agrees
to comply with all applicable laws with regard to the transmission and use
of information and content, solicitation of any activity that is prohibited
by applicable law over Internet. Customer further agrees not to use the
Internet service for illegal purposes, to interfere with or disrupt other
network users, network services or network equipment. Customer shall be
liable for and shall indemnify and defend EXODUS from and against any
claims in anyway arising from or related to (i) the alleged infringement of
patent, trademark, design, copyright or any other intellectual property
rights in relation to the Customer's use of the services and (ii) Customer
use or inclusion of any information, photographs, art work or other content
(including without limitation claims based on invasion of privacy, right of
publicity, the Communications Decency Act of 1996, obscenity or
pornography, and the violation of any states or ordinances or other laws).
7. Customer understands that Internet use, and related products and services
provided under this Agreement, may require registrations and related
administrative reports which are public in nature. In addition Customer
agrees Exodus may include its name in directories of Exodus customers.
8. Unless otherwise authorized in writing by Exodus and attached as an Addenda
to this agreement, Customer shall limit access to and use of the Internet
connection services to its employees solely for Customer's business
purposes and shall not resell or otherwise generate income by providing
access to the Internet service to third parties. Customer's right to use
the Internet services and products provided hereunder is limited to
Customer and is nontransferable.
9. Failure by the Customer to comply with the terms of this agreement will
result in immediate termination of Exodus Internet services.
10. Customer agrees not to export or re-export (including by way of electronic
transmission), directly or indirectly, any software or technical data
through the Internet services without first obtaining any required export
license or governmental approval.
11. This Agreement, together with any Addenda, constitute the entire agreement
of the parties with respect to the services and products provided hereunder
and supersede any prior agreements. These terms and conditions shall
prevail notwithstanding any different or additional terms and conditions in
any forms provided by Customer. No waiver of any rights hereunder shall be
deemed to be a waiver of the same right on any other occasion. This
Agreement shall be governed by the laws of the State of California without
regards to conflicts of law principles.
12. Force Majeure. Except for the obligation to pay money for services
previously incurred, neither party will be liable for any failure or delay
in its performance under this Agreement due to any cause beyond its
2
<PAGE>
reasonable control, including act of war, acts of God, earthquake, flood,
embargo, riot, sabotage, labor shortage or dispute, or governmental act,
provided that the delayed party: (a) gives the other party written notice
of such cause promptly, and (b) uses its best commercial efforts to
promptly correct such failure or delay in performance. If such delaying
cause shall continue for more than thirty days (30) the party injured by
the inability of the other to perform shall have the right upon written
notice to the other party to (a) terminate this Agreement or (b) treat this
Agreement as suspended during the delay and reduce any commitment in
proportion to the duration of the delay.
These Terms and Conditions have been read, are understood, and are hereby
accepted.
Customer Exodus Communications, Inc.
/s/ Elliot S. Ng 8/1/97 /s/ Adam Wegner 8/1/97
- --------------------------------------- ----------------------------------
(Authorized Signature) Date (Authorized Signature) Date
Elliot S. Ng Adam Wegner
- --------------------------------------- ----------------------------------
Name Name
CFO General Counsel
- --------------------------------------- ----------------------------------
Title Title
3
<PAGE>
Exodus
EXODUS COMMUNICATIONS, INC.
Co-Location Addendum
to
Internet Services and Products Agreement
This CO-LOCATION ADDENDUM is part of the INTERNET SERVICES AND PRODUCTS
AGREEMENT ("Internet Services Agreement") effective as of , 1997,
--------------------------- ------------ --
between Exodus Communications, Inc. ("Exodus") and you ("Customer").
------ --------
The following additional terms and conditions apply under this Addendum.
<TABLE>
<CAPTION>
<S> <C> <C>
1. Co-Located Equipment and Fees
-------------------------
"Equipment" Description
--------- ---------------------------------
"Facility" Description Exo-Cage-R78 - 7 x 8 Cage
--------
Co-location Connection Type Exo-ColNet-D 10
Connection Fee [******] Billing Period - Monthly
Facility Fee [******] Billing Period - Monthly
# Access Cards (3 max) [******]
Other Charges Exo-ColNetBU-T1 - [******]
Exo-Mon-http [******]
Request for Service
-------------------
Date
</TABLE>
2. Installation; Maintenance; Removal. Exodus agrees to allow Customer to
----------------------------------
place the Equipment in the Facility subject and subordinate to the terms and
provisions of Exodus' lease with its landlord. Such placement shall be subject
to this Addendum and Exodus' installation and maintenance specifications (the
"Specifications"), which Exodus shall provide to Customer from time to time and
- ---------------
Customer agrees to comply therewith. Customer agrees that it will be solely
responsible, and at Exodus' request will reimburse Exodus, for all costs and
expenses associated with placing, installing, maintaining, operating and
removing the Equipment and related materials, including but not limited to, all
necessary preparations required to comply with the Specifications, costs
associated with relocation or removal of the Equipment once installed, all
electric, telephone and other utility charges directly attributable to the
Equipment and related use of the Facility, and all taxes or other government
fees arising from or related to the performance of Exodus' obligations under
this Addendum, except for taxes based on Exodus's net income. Customer further
agrees that upon termination of this Addendum, Customer will leave the Facility
in as good condition, subject to normal wear and tear, as it was in at the
beginning of the term of this Addendum, and will remove the Equipment and any
property which it is obligated or permitted to remove prior to the termination
date.
3. Security. Exodus will maintain the Facility at its premises which will
--------
be staffed by an Exodus employee at all times. The Exodus employee will require
all visitors to the premises to sign a sign-in sheet and specify the reason for
their visit. Customer acknowledges that Exodus will allow representatives of
Co-location customers unlimited and unsupervised access to their respective
facilities, and such facilities may be located with and immediately accessible
to other customers facilities, including Customer's Facility. Exodus will take
reasonable measures to protect the security of each customer's facility and
equipment, including the measures described in this Section 3. Notwithstanding
such actions, EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE OR LOSS TO CUSTOMER'S
FACILITY AND/OR EQUIPMENT RESULTING FROM ANY OTHER CUSTOMER'S ACCESS TO ITS
FACILITY OR EXODUS' PREMISES, EXCEPT FOR DAMAGE OR LOSS DIRECTLY ATTRIBUTABLE
DUE TO EXODUS'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY SUCH DAMAGE OR LOSS
WILL BE THE EXCLUSIVE RESPONSIBILITY OF THE CUSTOMER WHO CAUSED
- --------------
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE>
AND THE CUSTOMER WHO INCURRED SUCH LOSS OR DAMAGE. Exodus will provide
reasonable assistance to resolve any disputes regarding any such losses or
damages.
4. Access. Exodus hereby grants Customer's representatives listed below
------
(the "Representatives") unlimited access, twenty-four (24) hours per day, seven
---------------
(7) days per week, to the Facility. Access will be via Access Cards and is
limited to the Representatives. Whenever Customer requires access to the
Facility for persons other than its Representatives, Customer shall give Exodus
twenty-four (24) hours prior notice by calling Exodus at a phone number to be
provided by Exodus and requesting Exodus to arrange for such access. Customer
shall reimburse Exodus for all extraordinary costs incurred by Exodus in
arranging such access. EACH REPRESENTATIVE AND ANY OTHER PERSONS ACCESSING THE
FACILITY MUST SIGN A SIGN-IN SHEET AND ACCESS THE FACILITY AT THEIR OWN RISK AND
EXODUS ASSUMES NO LIABILITY WHATSOEVER FOR ANY HARM TO SUCH PERSONS OR DAMAGE TO
PROPERTY BROUGHT BY SUCH PERSONS TO THE FACILITY. Customer's Representatives
are:
Name: Kevin Rowney Title: Security Architect
-------------------------------- -------------------------
Name: Tim Catlin Title: VP Development
-------------------------------- -------------------------
Name: Title:
-------------------------------- -------------------------
5. Condition of Premises/Limitation of Liability. CUSTOMER HEREBY
---------------------------------------------
ACCEPTS THE FACILITY IN AN "AS IS" CONDITION at the commencement of the term of
this Addendum, and acknowledges that Exodus has no obligation to make
alternations, improvements or additions, decorations or changes within the
Facility or any part thereof. Exodus may be required to relocate the Equipment
within its premises during the term of this Addendum, and Customer authorizes
Exodus to take such action provided Exodus does not disrupt or otherwise impair
Customer's service without first notifying Customer of such planned relocation.
CUSTOMER ACKNOWLEDGES AND AGREES THAT EXODUS SHALL NOT BE LIABLE FOR ANY COSTS,
EXPENSES OR OTHER DAMAGES INCURRED BY CUSTOMER OR ANY THIRD PARTY AS A RESULT OF
THE PERFORMANCE OF EXODUS' OBLIGATIONS PURSUANT TO THIS ADDENDUM OR OTHERWISE
RELATED TO THE EQUIPMENT, EXCEPT AS A RESULT OF EXODUS' GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT. IN NO EVENT WILL EXODUS BE LIABLE TO CUSTOMER FOR ANY
DAMAGES OR LOSSES DUE TO THE FAILURE OR MALFUNCTION OF THE EQUIPMENT LOCATED IN
THE FACILITY. Notwithstanding the foregoing, and without imposing any duty or
obligation on Exodus, Exodus will endeavor to protect the Facility and Equipment
from damage and will notify Customer promptly of any problems or anticipated
problems related thereto and identified by Exodus. TO THE EXTENT EXODUS IS
LIABLE FOR ANY DAMAGE TO CUSTOMER'S EQUIPMENT FOR ANY REASON, SUCH LIABILITY
WILL BE LIMITED SOLELY TO THE EQUIPMENT LISTED ABOVE.
6. Rights to Equipment; Insurance. Customer represents, warrants and
------------------------------
covenants that it owns or has the legal right and authority, and will continue
to own or secure the legal right and authority, during the term of this
Addendum, to use the Equipment and Facility as contemplated by this Addendum.
Customer further covenants and agrees to keep in force and effect during the
term of this Addendum for the benefit of Exodus, Exodus' landlord and Customer,
a policy of comprehensive liability insurance conforming to the requirements of
the applicable provisions of Exodus' lease of the premises containing the
Facility, as presented by Exodus to Customer from time to time.
7. Customer's Responsibility for Losses or Damages; Indemnification.
----------------------------------------------------------------
Customer will be liable to Exodus, Exodus' landlord, other co-location
customers, their respective officers, directors, suppliers, agents, employees
and consultants, for any losses, damages or costs resulting from Customer's
actions or inactions relating to or arising under this Addendum, including
damage caused by Customer's Equipment or resulting from Customer's access to the
Facility. Customer covenants and agrees to indemnify, defend and hold Exodus,
Exodus' landlord, other co-location customers, their respective officers,
directors, suppliers, agents, employees and consultants harmless from and
against any and all costs, liabilities, suits, actions, claims, damages, charges
and expenses, including reasonable attorney fees, resulting from Customer's
Equipment or use of or access to the Facility, unless arising from the willful
misconduct of Exodus.
2
<PAGE>
8. Casualty or Eminent Domain. In the event of taking by eminent domain
--------------------------
or damage by fire or other casualty to the Facility, Customer shall acquiesce
and be bound by any action taken by or agreement entered into between Exodus and
its landlord with respect thereto.
9. Not a Lease. This Co-location Addendum is a services agreement and is
-----------
not intended to and will not constitute a lease of real property. Customer
acknowledges and agrees that it has no rights as a tenant or otherwise under any
real property and/or landlord/tenant laws, regulations or ordinances. Upon
termination of this Addendum for any reason, Exodus will have the right to
remove immediately all of Customer's Equipment located at the Facility.
10. Entire Agreement. Exodus and Customer agree that the terms and
----------------
conditions of the Internet Services Agreement and any prior addenda thereto are
hereby incorporated by reference and made a part hereof to the same extent as if
such terms and conditions were set forth in full herein. To the extent that any
terms and conditions in this Addendum conflict with the terms and conditions in
the Internet Services Agreement or prior addenda thereto, the terms and
conditions of this Addendum will supersede any conflicting prior terms and
conditions.
These Terms and Conditions have been read, are understood, and are hereby
accepted.
Customer Exodus Communications, Inc.
By: /s/ Elliott S. Ng By: /s/ Adam Wegner
--------------------------- ---------------------------
Authorized Signature
Name: /s/ Elliott S. Ng Name: Adam Wegner
--------------------------- ---------------------------
Title: CFO Title: General Counsel
--------------------------- ---------------------------
Date: 8/1/97 8/1/97
--------------------------- ---------------------------
(This is the effective date of this
addendum)
Netcentives
------------------------------
Customer Business Name
3
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-83443 of Netcentives Inc. on Form S-1 of our report dated July 14, 1999
relating to Netcentives Inc. and of our report dated March 12, 1999 relating to
Panttaja Consulting Group, Inc., appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
August 26, 1999
