<PAGE>
As filed with the Securities and Exchange Commission on October 12, 1999
Registration No. 333-83443
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT No. 4
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. [_]
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 OCTOBER 12, 1999
6,000,000 Shares
[LOGO APPEARS HERE]
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 5.
<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]
[Circular diagram entitled
The Netcentives
Loyalty Model showing the
three elements of a
loyalty system]
Title: The Netcentives Loyalty Model
Graphic: An elliptical set of arrows connecting three numbered circles
representing the elements of a loyalty system.
Labels: 1: Recognize--Our loyalty programs identify and recognize prospects,
customers and employees and then acknowledge then for their purchase behavior
or superior performance.
2: Reward--Our system then rewards customers and employees with the
right reward at the right time.
3: Respond-In turn, customers respond by repeat purchase and
employees respond with increased productivity.
<PAGE>
[GATEFOLD]
[Circular Diagram Showing
the Operation of Netcentives
Loyalty Programs, including
Logos of ClickRewards
Merchants and Rewards
Suppliers]
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 -- buys a book, for example --
at an online merchant. Employee performs a task well -- meets a sales quota for
example -- at work. Each transaction is performed or recorded online with
Netcentives RewardBroker Software.
Reward--Then, the online shopper or employee is automatically
rewarded with miles, points, or other custom currency.
Tracking--Next, secure tracking of rewards is performed through
Netcentives' Online systems; personal account statements can be
checked online and are also sent to customers and employees through
their e-mail.
Redemption--In turn, customers and employees electronically redeem
-- through Netcentives -- their currency for frequent flyer miles,
merchandise, or other incentives. And the process starts all over
again.
ClickRewards
Custom Loyalty Networks
Enterprise Incentive Solutions
Logos:
Representative ClickRewards Merchants based on: time in network, type of
promotions, and number of ClickMiles purchased barnesandnoble.com, macys.com,
OfficeMax.com, CDNOW, E*TRADE, eBags, Cooking.com, planetRx, enutrition,
Cooking.com, ShopSports. com
Representative ClickRewards Suppliers British Airways, Delta Airlines,
Northwest Airlines, TWA, United Airlines, American Airlines, US Airways,
Continental, shop.the.globe.com, barnesandnoble.com, CDNOW
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. Revenues from these programs through
6/30/99 were not material.
Screen shot of the LookSmart RewardPoints Web page.
Caption: Custom Loyalty Networks produces loyalty networks for the GO Network,
LookSmart, and Lycos. Revenues from these programs through 6/30/99 were not
material.
<PAGE>
[Screen Shots of
Sample ClickRewards,
Enterprise Incentive
Solutions and Custom
Loyalty Network
implementations]
<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 believes that it 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 September 23, 1999, included over 2.0 million members who have earned, in
the aggregate, over 310 million ClickMiles. Members include those who have
either earned ClickMiles from participating merchants, enrolled in the
ClickRewards program at our Web site or a third party Web site, participated in
a sweepstakes in which ClickMiles are a prize, or joined the ClickRewards
Network in any of the ways we regularly develop. The ClickRewards Network
includes e-commerce companies from a broad range of industries. These e-
commerce companies 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 large, established Web sites who have been a
part of the ClickRewards Network for an extended period of time and are ranked
by Media Metrix as being among the top 500 advertising supported Web sites,
such as barnesandnoble.com, E*TRADE, macys.com and OfficeMax.com, as well as
smaller, newer Web sites who have joined the ClickRewards Network more
recently, such as Cooking.com, eBags, eNutrition, PlanetRx and ShopSports. 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.
As of June 30, 1999, we had derived substantially all of our revenues from
the ClickRewards Network and our technical consulting services. 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 have also begun to offer a broad array of complementary
services to our ClickRewards merchants and Custom Loyalty and Enterprise
Incentive customers. In addition to the technical consulting and development
services we have historically offered through our Netcentives Professional
Services organization, we have also begun to offer 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.
2
<PAGE>
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. 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:
. 4,816,475 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $2.05 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 2,318,014 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) (16,596)
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
-------------------
Pro Forma
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 pro forma 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 notice periods ranging from 45 to 90 days. 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 without
any termination fee. 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. We believe that the Internet loyalty, direct
marketing and promotion product and services industry includes over 45
companies. 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, each
merchant is required to purchase ClickMiles in quantities equal to its expected
monthly usage and to maintain a minimum balance generally equal to its expected
bi-weekly usage. We determine each merchant's expected usage based on past
trends and forecasted requirements in active promotions. 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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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 operating costs and 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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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.
If we are unable to recover the amounts relating to intangible assets that we
have recorded, our financial results would be harmed.
We recorded a $3.5 million asset relating to the value of consulting
relationships acquired in connection with our acquisition of Panttaja
Consulting Group, Inc. We are amortizing this amount over the two-year period
beginning in December 1998, and our June 30, 1999 balance sheet includes $2.6
million relating to this intangible asset. We cannot assure you that the
business associated with those relationships will not deteriorate or that this
business will not be terminated. If this business or these relationships are
terminated, we would be forced to write down the value of this intangible
asset, which would harm our financial results.
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 $8.08 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;
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. 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 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
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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
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.
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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 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. Furthermore,
we may expand internationally,
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and 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 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. Licensees of our patent will be able to compete with us
using our business process. The royalties we receive from these licenses, if
any, may not be sufficient to offset the competitive damage caused by the
competitors we enable. If these competitors are more effective at exploiting
our patent than we are, our business, financial condition and results of
operations would suffer.
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 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.
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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.
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 currently estimate that we will incur
approximately $50.0 million in cash expenses during the next twelve months on
marketing and sales, research and development, other operating expenses and
capital expenditures, as a whole. We expect to finance these expenditures
through our current cash balances of $36.2 million at June 30, 1999, and
expected cash receipts from sales of loyalty currencies and services as well as
professional services revenues. If our currency related receipts or our
professional service revenues are less than anticipated, we will be required to
utilize a portion of the $60.2 million in proceeds from this offering to fund
these expenses. 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. However, we currently
estimate that we will incur approximately $50.0 million in cash expenses during
the next twelve months on marketing and sales, research and development, other
operating expenses and capital expenditures, as a whole. We expect to finance
these expenditures through our current cash balances of $36.2 million at June
30, 1999, and expected cash receipts from sales of loyalty currencies and
services as well as professional services revenues. If our currency related
receipts or our professional service revenues are less than anticipated, we
will be required to utilize a portion of the $60.2 million in proceeds from
this offering to fund these expenses. 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.
If we identify other companies who are strategic to our business, we may
elect to invest in or acquire these businesses. We may use a portion of the net
proceeds to acquire or make investments in these additional businesses,
products or technologies or to establish joint ventures that we believe will
complement our current or future business. We have no current agreements
relating to any such acquisitions or investments. No estimate of these amounts
can accurately be made, and therefore no amounts related to acquisition
investments or joint ventures have been included in our estimate of expenses
for the next twelve months.
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................................ 77,829 77,876 138,050
Deferred stock expense......................... (7,399) (7,399) (7,399)
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:
. 4,816,475 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $2.05 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 2,318,014 shares available for future issuance under our
employee benefit plans as of June 30, 1999.
17
<PAGE>
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 $92.8 million, or $2.92 per share. This represents an immediate
increase in net tangible book value of $1.69 per share to existing stockholders
and an immediate dilution of $8.08 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............ 1.69
-----
Pro forma, as adjusted, net tangible book value per share
after this offering.......................................... 2.92
------
Dilution per share to new investors........................... $ 8.08
======
</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:
. 4,816,475 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $2.05 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 2,318,014 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.
18
<PAGE>
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 2,905
------ ------- -------- -------- ------- --------
Total costs and
expenses.............. 273 4,274 15,055 20,549 5,332 19,617
------ ------- -------- -------- ------- --------
Loss from operations.... (273) (4,265) (14,408) (16,470) (5,205) (16,596)
Interest income, net.... 7 85 297 252 74 447
------ ------- -------- -------- ------- --------
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: ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Loyalty currencies activities
(number of points): (in thousands)
Beginning balance.................. -- 2,130 2,130 62,495
Awarded by merchants............... 236 48,554 10,065 67,939
Redeemed by members................ (3) (3,184) (537) (10,788)
Sold to merchants not yet awarded,
net (1)........................... 1,897 24,895 14,004 33,542
Expired (2)........................ -- (9,900) -- --
------ ------- ------- --------
Ending balance..................... 2,130 62,495 25,662 153,188
====== ======= ======= ========
In circulation (3)................. 233 45,603 9,761 102,754
====== ======= ======= ========
Deferred revenues--product:
Beginning balance.................. $ -- $ 43 $ 43 $ 1,250
Awarded by merchants............... 5 971 201 1,359
Redeemed by members................ -- (64) (10) (216)
Sold to merchants not yet awarded,
net (1)........................... 38 498 279 570
Expired (2)........................ -- (198) -- --
------ ------- ------- --------
Ending balance..................... $ 43 $ 1,250 $ 513 $ 2,963
====== ======= ======= ========
Non-revenue points awarded by
Netcentives (4):
Points outstanding at end of
period............................ -- 27,508 5,600 100,323
====== ======= ======= ========
Accrued redemption costs........... $ -- $ 509 $ 104 $ 1,856
====== ======= ======= ========
</TABLE>
- --------
(1) Merchants are required to purchase points in advance before awarding them
to consumers. This represents the buying activity, net of awards to
members, of our merchants.
(2) Some points purchased by merchants must be awarded within specified periods
and cannot be refunded. This represents the number of points which expired
unawarded and the amounts recorded as revenue at that time.
(3) In circulation represents that portion of the outstanding loyalty currency
points awarded by merchants and still held by members. Upon redemption of
these points, Netcentives will recognize the related product revenue
component.
(4) In addition to points purchased and awarded by merchants, Netcentives has
issued points to its merchants and directly to its members in connection
with promotional campaigns and in lieu of cash for other expenses. These
points are accounted for as an expense and an accrued obligation at the
time of award. This represents the number of points outstanding at the end
of each period and the amount of the related liability.
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,
each merchant is required to purchase ClickMiles in quantities at least equal
to its expected monthly usage and to maintain a minimum balance generally equal
to its expected bi-weekly usage. We determine each merchant's expected usage
based on past trends and forecasted requirements in active promotions. 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 $1.2 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 1996 to 1997 and by $1.1
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 $192,000 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 operating 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 $158,000 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 relationship marketing and consumer support personnel
expenses of $1.9 million 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 $498,000.
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 and employee relocation 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
$2.9 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 $447,000 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 $106,000 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 operating 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. June
31, 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 1,508 1,397
------- ------- ------- ------- ------- --------
Total costs and
expenses............. 2,148 3,184 3,463 6,260 9,360 10,257
------- ------- ------- ------- ------- --------
Loss from operations...... (2,133) (3,072) (3,099) (6,104) (7,704) (8,892)
Interest income, net...... 53 21 82 141 96 351
------- ------- ------- ------- ------- --------
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
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<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 $7.0 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 $12.4 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
28
<PAGE>
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 $4.1 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 $33.6 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 100 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.
29
<PAGE>
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 this software, hardware and these
operating systems indicate that they are or will be Year 2000 Compliant by
December 1999. Our internal analysis of this software, hardware and these
operating systems indicates that they are all currently Year 2000 Compliant.
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
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<PAGE>
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 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
We had no holdings of derivative financial or commodity instruments at June
30, 1999. However, we are exposed to financial market risks associated with
fluctuations in interest rates. Because all of the amounts in our portfolio
have expected maturities of three months or less, we believe that the fair
value of our investment portfolio or related income would not be significantly
impacted by increases or decreases in interest rates due mainly to the short-
term nature of our investment portfolio. If market rates were to increase
immediately by 10 percent from levels on June 30, 1999, the fair value of this
investment portfolio would decline by an immaterial amount. A sharp decline in
interest rates could reduce future interest earnings of our investment
portfolio. If market rates were to decrease immediately by 10 percent from
levels on June 30, 1999, the resultant decrease in interest earnings of our
investment portfolio would not have a material impact on our earnings as a
whole.
The table below presents principal amounts (in thousands) and related
weighted average fixed interest rates for our investment portfolio.
<TABLE>
<CAPTION>
Expected Maturity Estimated Fair Value
1999 at June 30, 1999
----------------- --------------------
<S> <C> <C>
Federal instruments................. $10,500 $10,500
Weighted average fixed interest
rate............................... 4.84%
Commercial paper & short-term
obligations........................ $25,652 $25,652
Weighted average fixed interest
rate............................... 4.68%
Total portfolio..................... $36,152 $36,152
</TABLE>
As of June 30, 1999, we had $36.2 million of cash and cash equivalents
earning a weighted average variable interest rate of 4.72%.
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<PAGE>
BUSINESS
Overview
Netcentives believes that it is a leading provider of Internet loyalty,
direct marketing and promotion products and services to drive consumer
behavior. We believe that the Internet loyalty, direct marketing and promotion
products and services industry includes over 45 companies of which we are one
of the leaders. 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
September 23, 1999, included over 2.0 million members who have earned, in the
aggregate, over 310 million ClickMiles. The ClickRewards Network includes e-
commerce companies from a broad range of industries. These e-commerce companies
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 large, established Web sites who have been a part of the
ClickRewards Network for an extended period of time and are ranked by Media
Metrix as being among the top 500 advertising supported Web sites, such as
barnesandnoble.com, E*TRADE, macys.com and OfficeMax.com, as well as smaller,
newer Web sites have joined the ClickRewards Network more recently, such as
Cooking.com, eBags, eNutrition, PlanetRx and ShopSports. We also offer online
advertising and sponsorship, joint marketing programs, sponsored e-mail offers,
and technical and marketing consulting services.
As of June 30, 1999, we had derived substantially all of our revenues from
the ClickRewards Network and Netcentives Professional 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. In addition to the technical consulting and development services we
have historically offered through our Netcentives Professional Services
organization, we have also begun to offer marketing and promotions services.
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
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<PAGE>
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, several industry reports have concluded 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.
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 believes that it is a leading provider of Internet loyalty,
direct marketing and promotion products and services used by Web sites to drive
consumer behavior. We believe that the Internet loyalty, direct marketing and
promotions product and services industry includes over 45 companies, of which
we are one of the leaders. 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 and OfficeMax.com. 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
33
<PAGE>
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.
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 69 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 notice periods of between 45 and 90 days, 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 September 23, 1999, membership in the
ClickRewards Network has grown to over 2.0 million members who have earned, in
the aggregate, over 310 million ClickMiles. On average, the current
ClickRewards membership has been awarded approximately 160 ClickMiles each.
Once a member has accumulated a sufficient number of ClickMiles, which is
currently 500 ClickMiles and will be reduced to 250 ClickMiles beginning in the
fourth quarter of 1999, he or she can redeem these ClickMiles by visiting the
ClickRewards Web site and selecting his or her 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
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<PAGE>
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. 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.
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 September 23, 1999
included 69 merchants, 2.0 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;
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. 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.
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 airlines 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
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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 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 in a
variety of ways, including by enrolling in the ClickRewards program on
our Web site, earning ClickMiles from participating merchants,
participating in sweepstakes in which ClickMiles are a prize and
enrolling through third-party Web sites. Because our merchants pay us for
ClickMiles prior to awarding them to members, substantially all 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 September 23, 1999, there were over
2.0 million ClickRewards members who have earned, in the aggregate, over
310 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. Once a member has accumulated the minimum balance
required for redemption, which is currently 500 ClickMiles and will be
reduced to 250 ClickMiles beginning in the fourth quarter of 1999, he or
she can redeem them by visiting the ClickRewards Web site, logging into
his or her personal account, and selecting 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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. Merchant Participation. We have targeted Web sites in each major shopping
category as merchants. Currently we have 69 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 ClickRewards Merchants
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
areyougame.com CyberBills.com KBKids.com Someone Special
ArtSelect DealDeal.com TheKnot.com Visa
Azazz eBags macys.com Visto
@Backup eNutrition MSN Shopping WebFlyer
barnesandnoble.com E*TRADE(TM) Music Boulevard Wells Fargo
beyond.com First Auction OfficeMax.com XOOM.com
CDnow garden.com PlanetRx 1-800-FLOWERS
ClubComputer iOwn.com Red Herring Online
Cooking.com iPrint.com ShopSports
</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.
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. 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.
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
</TABLE>
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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 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.
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. 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.
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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.
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
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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. We believe that the Internet loyalty, direct
marketing and promotion product and services industry includes over 45
companies, of which we are one of the leaders. 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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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. Furthermore, we may expand
internationally, and 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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<PAGE>
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,
49
<PAGE>
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,
50
<PAGE>
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 03/31/08 116,250 203,981 338,577
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....... -- -- 30,833 109,167 133,057 434,143
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 4,786,475 shares of common stock were
outstanding at a weighted average exercise price of $2.05, 566,911 shares had
been issued upon exercise of outstanding options, and 2,318,014 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.
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<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.
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<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;
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<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.
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<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%.
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<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
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<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
64
<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 4,816,475 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 1,687,055 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.
65
<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.
The underwriters have reserved for sale, at the initial public offering
price, up to 900,000 shares of the common stock for merchants, custom loyalty
clients, companies with whom we are developing commercial relationships,
rewards suppliers, consultants and service providers and employees of such
entities who have expressed an interest in purchasing common stock in the
offering. Directors and officers who purchase the reserved shares are subject
to resale restrictions promulgated by the Securities and Exchange Commission,
and employees of the Company may be restricted by the free-riding and
withholding restrictions of the National Association of Securities Dealers,
Inc. 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 stabilizing transaction or 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
67
<PAGE>
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.
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. An
entity associated with Thomas Weisel Partners LLC purchased an aggregate of
73,313 shares of our Series E preferred stock on the same terms as other
purchasers in this sale for a total purchase price of approximately $500,000,
or $6.82 per share, and has agreed not to sell, pledge, transfer or hypothecate
its shares for a one year period from the effective date of this offering.
Charles Schwab & Co., Inc., which is anticipated to be a member of the
underwriting syndicate, expects to make copies of the preliminary prospectus
available over the Internet to certain customers who meet certain risk-
tolerance criteria through a password protected, proprietary Web site.
Prospective investors must confirm receipt of the preliminary prospectus before
making an offer to purchase any shares.
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
(September 9, 1999 as to the last two paragraphs of Note 15)
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--shares
authorized: 1997 and 1998, 30,000,000; June 30,
1999, 33,240,000; shares outstanding: 1997,
3,735,683; 1998, 4,894,069; June 30, 1999,
5,224,491...................................... 4 5 5
Paid-in capital................................. 12,080 41,654 77,829
Deferred stock expenses......................... (300) (8,433) (7,399)
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........... -- 63 811 130 943
Amortization of
intangibles............ -- -- 79 3 878
------ ------- -------- ------- --------
Total costs and
expenses............. 273 4,274 15,055 5,332 19,617
------ ------- -------- ------- --------
Loss from operations...... (273) (4,265) (14,408) (5,205) (16,596)
Interest income........... 7 121 441 116 553
Interest expense.......... -- (36) (144) (42) (106)
------ ------- -------- ------- --------
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 Expenses 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 issued.. 386 $ (386) --
Amortization of stock
warrant expenses...... 86 86
Net loss............... (4,180) (4,180)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, December 31,
1997................... 9,693 10 3,736 4 12,080 (300) (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 to
officer............... 200 630 (500) (130) --
Common stock issued for
patent................ 35 76 76
Exercise of common
stock options......... 115 19 19
Stock warrants issued.. 31 (31) --
Increase in value of
unvested warrants..... 1,038 (1,038) --
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
expenses.............. 1,137 1,137
Net loss............... (14,111) (14,111)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, December 31,
1998................... 15,169 15 4,894 5 41,654 (8,433) (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
Increase in value of
unvested warrants..... 938 (938) --
Exercise of Series B
warrants*............. 75 75 75
Deferred stock
compensation related
to option grants*..... 70 (70) --
Amortization of
deferred stock
expenses.............. 2,042 2,042
Net loss*.............. (16,149) (16,149)
------ --- ----- --- ------- ------- ----- -------- --------
BALANCES, June 30, 1999*
....................... 20,522 $21 5,224 $ 5 $77,829 $(7,399) $(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>
Six Months
June 21, 1996 Years Ended Ended June 30,
(Inception) to December 31, -----------------
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.
Deferred Stock Expense-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. The value of the warrants is estimated and
is adjusted each period until the exclusivity milestones are met and the
warrants vests. The initial value of the warrants issued in 1997 was estimated
at $281,000; this was increased by $1,038,000 in 1998 and $938,000 in the first
six months of 1999. Operating expenses include $63,000, $811,000 and $943,000
in 1997 and 1998 and the six months ended June 30, 1999, respectively, relating
to these warrants. The value relating to the unvested warrants of $440,000 as
of June 30, 1999 is subject to adjustment for changes in the future value of
the Company's common stock.
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, $30,000 and
$15,000 for the portion relating to 1997 and 1998, and the six months ended
June 30, 1999, 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 Expense-Employee 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. Such authorization is contingent upon the
completion of the closing of the initial public offering contemplated by
this Prospectus.
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.
In July 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%.
In July 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 was fully
vested upon issuance and 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 recorded in the third quarter of 1999 and will
be expensed at the time the advertising services are provided.
In August 1999, the Company issued 100,000 shares of common stock in
connection with the hiring of an employee. The shares vest in tranches over
one year and the fair value of the common stock of approximately $1,000,000
will be charged to expense over the vesting period.
On September 9, 1999, the Company agreed to issue to one of its suppliers a
warrant to purchase 85,000 shares of common stock at $11.00 per share in
connection with the extension of its exclusive supply arrangement. The warrant
is fully vested and expires in three years. The estimated value of the warrant
of $580,000 will be recorded in the third quarter of 1999 and expensed over
the one year exclusivity term.
* * * * *
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. Through Netcentives Professional
Services, we provide systems integration and technical consulting services to
clients to help them deploy ClickRewards programs as well as other businesses.
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 and Promotional Services. We derive revenue from selling
placement in advertising campaigns and banner advertisements. Revenues from
these programs through 6/30/99 were not material. Joint advertising campaign.
(Sample)
Picture of a banner advertisement.
Caption: Joint banner advertisement. (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
which were subsequently converted into 1,009,693 shares of Series C
Preferred Stock in September 1997 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 shares of Series C
Preferred Stock in May 1998 with an aggregate value of $31,000 to
Phoenix Lending and Leasing in consideration for entering into an
equipment financing relationship pursuant to which we financed $1.2
million of equipment.
(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 with a value of
$2,548,000 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 Amended and Restated Supply Agreement between Mileage Plus, Inc. and
Netcentives Inc. dated September 9, 1999.
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>
- --------
**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. 4 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 October 12,
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. 4 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 October 12, 1999
____________________________________ Directors and Chief
(West Shell, III) Executive Officer
(Principal Executive
Officer)
/s/ John F. Longinotti Executive Vice October 12, 1999
____________________________________ President, Operations
(John F. Longinotti) and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
* Director October 12, 1999
____________________________________
(Stewart Alsop)
* Director October 12, 1999
____________________________________
(Tom Byers)
* Director October 12, 1999
____________________________________
(Eric W. Tilenius)
* Director October 12, 1999
____________________________________
(Virginia M. Turezyn)
* Director October 12, 1999
____________________________________
(Wendell G. Van Auken)
* Director October 12, 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 Amended and Restated Supply Agreement between Mileage Plus, Inc.
and Netcentives Inc. dated September 9, 1999.
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>
- --------
**Previously filed.
+Confidential Treatment Requested.
<PAGE>
EXHIBIT 10.8
CONFIDENTIAL
AADVANTAGE PARTICIPATION AGREEMENT
BETWEEN
AMERICAN AIRLINES, INC.
AND
NETCENTIVES INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
1 DEFINITIONS........................................................................................... 1
2 MILEAGE ACCRUAL....................................................................................... 6
2.1 Mileage Accrual............................................................................ 6
2.2 Good Standing.............................................................................. 6
2.3 Rounding................................................................................... 6
2.4 Bonus Miles................................................................................ 6
2.5 Ongoing Conditions Precedent - American.................................................... 6
2.6 Ongoing Conditions Precedent - Participant................................................. 7
2.7 Survival................................................................................... 8
3 CHARGES............................................................................................... 8
3.1 Pricing.................................................................................... 8
3.2 Mileage Payments........................................................................... 8
3.3 Method of Payments......................................................................... 9
3.4 Minimum Purchase; Prepayment............................................................... 9
3.5 Survival................................................................................... 9
4 PROGRAM CONTENT AND ADMINISTRATION.................................................................... 9
4.1 Program Content............................................................................ 9
4.2 AADVANTAGE Program Enrollment.............................................................. 10
4.3 AADVANTAGE Program Administration.......................................................... 10
4.4 Customer Service........................................................................... 10
4.5 Member Disputes............................................................................ 10
4.6 Transaction Processing..................................................................... 11
4.7 Training................................................................................... 11
4.8 Trademarks................................................................................. 11
4.9 Applicable Law............................................................................. 12
4.10 AADVANTAGE Program Abuse.................................................................. 12
4.11 Cancellation or Alteration of AADVANTAGE Program.......................................... 12
4.12 Air Carrier Sponsor....................................................................... 13
4.13 Reserve Requirement....................................................................... 13
4.14 Management of Program..................................................................... 13
4.15 Computer Reservation Function............................................................. 13
5 EXCLUSIVITY........................................................................................... 13
5.1 Limited Exclusivity........................................................................ 13
5.2 Termination of Limited Exclusivity......................................................... 14
6 REPORTS............................................................................................... 14
6.1 Report from Participant.................................................................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
6.2 Verification............................................................................... 14
6.3 Report from American....................................................................... 14
6.4 Tax Reporting.............................................................................. 14
6.5 Survival................................................................................... 14
7 MARKETING AND ADVERTISING............................................................................. 15
7.1 Web Site and Telephone Number.............................................................. 15
7.2 Newsletter Inserts......................................................................... 15
7.3 American Approval of Promotional Materials; Graphic Standards.............................. 15
7.4 Web Site Co-Marketing...................................................................... 16
7.5 Termination................................................................................ 16
8 REPORTS; AUDITS....................................................................................... 16
8.1 Informational Reports...................................................................... 16
8.2 Audit Access............................................................................... 16
8.3 Survival................................................................................... 16
9 TERM OF AGREEMENT..................................................................................... 17
9.1 Term....................................................................................... 17
9.2 Notice of Termination...................................................................... 17
10 INDEMNIFICATION; LIMITATION OF USABILITY............................................................. 17
10.1 Participant Indemnification............................................................... 17
10.2 Limitation................................................................................ 17
10.3 Survival.................................................................................. 17
11 DEFAULT OF PARTICIPANT; REMEDIES; OTHER RIGHTS OF AMERICAN........................................... 18
11.1 Participant Default....................................................................... 18
11.2 American Remedies......................................................................... 18
11.3 Additional Rights......................................................................... 18
12 DEFAULT OF AMERICAN; Remedies........................................................................ 19
12.1 American Default.......................................................................... 19
12.2 Participant Remedies...................................................................... 19
13 REPRESENTATIONS AND WARRANTIES OF PARTICIPANT........................................................ 19
13.1 Due Organization.......................................................................... 19
13.2 Requisite Power; Enforceability........................................................... 20
13.3 No Conflict............................................................................... 20
13.4 No Consent................................................................................ 20
14 REPRESENTATIONS AND WARRANTIES OF AMERICAN........................................................... 20
14.1 Due Organization.......................................................................... 20
14.2 Requisite Power; Enforceability........................................................... 20
14.3 No Conflict............................................................................... 21
14.4 No Consent................................................................................ 21
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
15 NOTICES.............................................................................................. 21
16 GOVERNING LAW; CONSENT TO JURISDICTION............................................................... 22
17 WAIVER............................................................................................... 22
18 AMERICAN'S CONFIDENTIALITY........................................................................... 23
18.1 American's Confidential Information....................................................... 23
18.2 Non-Disclosure by Participant............................................................. 23
18.3 Return of American's Confidential Information............................................. 24
18.4 Participant's Employees and Agents........................................................ 24
18.5 American's Equitable Relief............................................................... 24
18.6 Survival.................................................................................. 24
19 PARTICIPANT'S CONFIDENTIALITY........................................................................ 24
19.1 Participant's Confidential Information.................................................... 24
19.2 Non-Disclosure by American................................................................ 25
19.3 Return of Participant's Confidential Information.......................................... 25
19.4 American's Employees and Agents........................................................... 25
19.5 Participant's Equitable Relief............................................................ 25
19.6 AADVANTAGE Database....................................................................... 26
19.7 Survival.................................................................................. 26
20 FORCE MAJEURE........................................................................................ 26
21 INDEPENDENT CONTRACTOR............................................................................... 26
22 ENTIRE AGREEMENT..................................................................................... 26
23 SUCCESSORS AND ASSIGNS............................................................................... 26
24 TAXES................................................................................................ 27
24.2 Indemnity for Taxes....................................................................... 27
24.3 Withholding............................................................................... 27
25 CAPTIONS............................................................................................. 27
26 CONSTRUCTION......................................................................................... 27
27 SEVERABILITY......................................................................................... 27
28 NO THIRD PARTY BENEFICIARIES......................................................................... 27
29 EFFECTIVE DATE....................................................................................... 27
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
Attachment 1
Pricing......................................................................................... 1-1
Attachment 2
Minimum Purchase Requirements and Prepayment Schedule........................................... 2-1
Attachment 3
Netcentives Approval Request Form............................................................... 3-1
Attachment 4
Data Transmission Layouts....................................................................... 4-1
Attachment 5
Guidelines for Producing AADVANTAGE(R) Related Materials
and Using the AADVANTAGE Travel Awards' Trademark............................................... 5-1
</TABLE>
-iv-
<PAGE>
AADVANTAGE PARTICIPATION AGREEMENT
AGREEMENT made as of the date set forth below between AMERICAN
AIRLINES, INC., a corporation organized and existing under the laws of Delaware
("American") and NETCENTIVES INC., a corporation organized and existing under
the laws of California ("Participant").
WHEREAS, American has developed the AADVANTAGE Program, under which
Members are awarded AADVANTAGE Miles for travel on American, and certain other
AADVANTAGE Participants, and for the purchase of goods or services from other
AADVANTAGE Participants in association with the AADVANTAGE Program, and can
obtain Award Travel and other AADVANTAGE Awards for such AADVANTAGE Miles; and
WHEREAS, American is willing to allow Participant to participate in the
AADVANTAGE Program on the following terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and promises
in this Agreement, the parties hereto agree as follows:
1 Definitions. The words "hereof", "herein" or "hereunder" as
-----------
used in this Agreement refer to this Agreement as a whole and not to any
specific portion or provision of this Agreement. For all purposes of this
Agreement, the following terms shall have the following meanings:
"AADVANTAGE Account" means the record, maintained by American,
------------------
of a Member's AADVANTAGE Program activity, including, without limitation, the
accrual and redemption of AADVANTAGE Miles by such Member.
"AADVANTAGE Awards" means the awards or benefits that Members
-----------------
can receive from American, American Eagle and/or certain AADVANTAGE Participants
pursuant to the AADVANTAGE Program Rules in exchange for the redemption of
accrued AADVANTAGE Miles, and if applicable, other consideration.
"AADVANTAGE Miles" means the points or "Miles" (including
----------------
bonus points or "Miles") accrued under the AADVANTAGE Program Rules by Members
for (i) travel on American or American Eagle, (ii) travel on, and/or the
purchase of goods or services from, AADVANTAGE Participants, or (iii) any other
reason permitted by American.
"AADVANTAGE Participant" means any Person that, pursuant to
----------------------
the AADVANTAGE Program Rules and an agreement between American or an Affiliate
of American and such Person regarding such Person's participation in the
AADVANTAGE Program: (i) provides goods or services to Members in exchange for
the redemption of AADVANTAGE Miles, or (ii) in connection with the sale of goods
or services by such Person to Member offers AADVANTAGE Miles to such Member.
<PAGE>
"AADVANTAGE Program" means the travel awards program
------------------
established and governed by American, as such program may be in effect from time
to time, pursuant to which, among other things, Members receive AADVANTAGE Miles
for travel on American or for travel on, or for the use or purchase of goods or
services offered by, an AADVANTAGE Participant, or for any reason permitted by
American.
"AADVANTAGE Program Rules" means the rules, regulations, terms
------------------------
and conditions established or modified, from time to time, by American, in its
sole discretion, which shall govern the AADVANTAGE Program.
"Additional Warrant Agreement" means the Letter Agreement
----------------------------
dated on or about the date hereof, executed by American and Participant, as it
may be amended from time to time, concerning certain additional warrants for
certain non-voting common stock of Participant potentially available to
American.
"Affiliate" means, with respect to any Person, any other
---------
Person directly or indirectly controlling or controlled by or under common
control with such Person. For purposes of this definition, "control" (including
"controlled by" and "under common control with") shall mean the power, directly
or indirectly, to direct or cause the direction of the management and policies
of such Person whether through the ownership of voting securities or by contract
or otherwise.
"Agreement" means this AADVANTAGE Participation Agreement, as
---------
it may, from time to time, be amended or modified in accordance herewith.
"American" has the meaning assigned to such term in the
--------
preamble to this Agreement.
"American Default" shall have the meaning assigned to such
----------------
term in Section 12.1 (American Default).
------------
"American Eagle" means the scheduled air carrier operations of
--------------
any regional airlines that are permitted by American or an Affiliate of American
to do business under the name American Eagle, whether or not an Affiliate of
American.
"American Indemnified Parties" shall have the meaning assigned
----------------------------
to such term in Section 10.1 (Participant Indemnification).a
------------
"American's Confidential Information" shall have the meaning
-----------------------------------
assigned to such term in Section 18.1 (American's Confidential Information).
------------
"Applicable Law" means all applicable laws of any
--------------
jurisdiction, worldwide, including securities laws, tax laws, tariff and trade
laws, ordinances, judgments, decrees, injunctions, writs and orders or like
actions of any Competent Authority and the rules, regulations, orders,
interpretations, licenses and permits of any Competent Authority.
-2-
<PAGE>
"Award Certificate" means a document, issued to a Member by
-----------------
American, that entitles such Member to Award Travel or other AADVANTAGE Awards
obtained by such Member in accordance with this Agreement and the AADVANTAGE
Program Rules.
"Award Ticket" means a ticket good for Award Travel, issued by
------------
American or American's authorized agents.
"Award Travel" means the air transportation on, or any
------------
upgrades or other benefits provided by, American or American Eagle or an
AADVANTAGE Participant, and provided wholly or partly in exchange for the
redemption of AADVANTAGE Miles pursuant to the AADVANTAGE Program Rules.
"Base Miles" means AADVANTAGE Miles awarded to a Member for
----------
each Qualifying Transaction as described in Section 2.1 (Mileage Accrual).
-----------
"Base Rate" shall have the meaning assigned to such term in
---------
Section 3.1 (Pricing).
- -----------
"Bonus Miles" means AADVANTAGE Miles offered by Participant in
-----------
addition to Base Miles offered in connection with a Qualifying Transaction with
American's prior written consent or in connection with other offers made by
Participant to Members with American's prior written consent.
"Business Day" means any day other than a Saturday, Sunday or
------------
other day on which banks in Fort Worth, Texas, are required or authorized to
close.
"Competent Authority" means any foreign, international,
-------------------
national, federal, state, county, local or municipal government body, bureau,
commission, board, board of arbitration, instrumentality, authority, agency,
court, department, inspector, minister, ministry, official or public or
statutory person (whether autonomous or not) having jurisdiction over this
Agreement or any of the parties to this Agreement.
"Commencement Date" shall have the meaning assigned to such
-----------------
term in Section 9.1 (Term).
-----------
"Contract Year" means each August 1 of one (1) year through
-------------
July 31 of the immediately following year during the Term.
"Contract Quarter" means each three (3) month period ending
----------------
October 31, January 31, April 30 and July 31 during the Term.
"Direct Competitor of Participant" shall have the meaning
--------------------------------
assigned to such term in Section 5.1 (Limited Exclusivity).
-----------
"Exclusivity Termination Notice" shall have the meaning
------------------------------
assigned to such term in Section 5.2 (Termination of Limited Exclusivity).
-----------
-3-
<PAGE>
"FFP Supplier" shall have the meaning assigned to such term in
------------
Section 4.1 (Program Content).
- -----------
"Frequent Flyer Points" shall mean the points, credits, or
---------------------
miles, for example, AADVANTAGE Miles, however denominated, offered under a FFP
Supplier's travel awards program or frequent flyer program.
"Incentive Program" shall have the meaning assigned to such
-----------------
term in Section 5.1 (Limited Exclusivity).
-----------
"Limited Exclusivity" shall have the meaning assigned to such
-------------------
term in Section 5.1 (Limited Exclusivity).
-----------
"Losses" means any and all liabilities, obligations, losses,
------
damages, claims, deficiencies, penalties, taxes, levies, actions, judgments,
settlements, suits, costs, legal fees, accountants' fees, disbursements or
expenses.
"Material Adverse Effect" means with respect to any Person, a
-----------------------
material adverse effect on (a) the business, assets, operations, performance,
properties or condition (financial or otherwise) of such Person or (b) the
ability of such Person to perform its obligations under this Agreement.
"Member" means, as of any date, any individual who is a member
------
in good standing of the AADVANTAGE Program.
"Netcentives Points" shall have the meaning assigned to such
------------------
term in Section 4.1 (Program Content).
-----------
"Netcentives Program" shall have the meaning assigned to such
-------------------
term in Section 4.1 (Program Content).
-----------
"Participant Default" shall have the meaning assigned to such
-------------------
term in Section 11.1 (Participant Default).
------------
"Participant Indemnification" shall have the meaning assigned
---------------------------
to such term in Section 10.1 (Participant Indemnification).
------------
"Participants Confidential Information" shall have the
-------------------------------------
meaning assigned to such term in Section 19.1 (Participant's Confidential
------------
Information).
"Participant's Product or Service" shall have the meaning
--------------------------------
assigned to such term in Section 4.1 (Program Content).
-----------
"Participant Taxes" shall have the meaning assigned to such
-----------------
term in Section 24.1 (Participant Taxes).
------------
-4-
<PAGE>
"Person" means any individual, corporation, partnership, joint
------
venture, association, joint stock company, trust, unincorporated organization or
Competent Authority.
"Qualifying Transaction" shall have the meaning assigned to
----------------------
such term in Section 4.1 (Program Content).
-----------
"Report" means the report to be delivered by Participant
------
pursuant to Section 6.1 (Report from Participant) hereof, which Report shall
-----------
contain such information, and shall follow' such procedures, as American shall
reasonably specify from time to time.
"Rights Agreement" means the Netcentives Inc. Rights Agreement
----------------
dated on or about the date hereof, executed by American and Participant, as it
may be amended from time to time, concerning certain additional warrants for
certain non-voting common stock of Participant potentially available to American
and other FFP Suppliers.
"Sponsors" shall have the meaning assigned to such term in
--------
Section 4.1 (Program Content).
- -----------
"Sponsor Contacts" shall have the meaning assigned to such
----------------
term in Section 4.1 (Program Content).
-----------
"$" and "Dollar" means United States Dollars.
--------------
"Total Netcentives Points Redeemed for Frequent Flyer Points"
-----------------------------------------------------------
shall mean all Netcentives Points redeemed for Frequent Flyer Points of FFP
Suppliers.
"Total Redeemed Netcentives Points" shall mean the total
---------------------------------
Netcentives Points redeemed for any service or product.
"Taxes" shall have the meaning assigned to such term in
-----
Section 24.1 (Participant Taxes).
- ------------
"Term" shall have the meaning assigned to such term in Section
---- -------
9.1 (Term).
- ---
"Tour Packages" shall have the meaning assigned to such term
-------------
in Section 4.1 (Program Content).
-----------
"United States" or "U.S." means the fifty United States of
----------------------
America, the District of Columbia, Puerto Rico and territories or possessions of
the United States.
"U.S. AADVANTAGE Summary" means the summary of AADVANTAGE
-----------------------
Program activity sent at intervals to all Members except those with mailing
addresses in Japan, Europe, the Middle East, Africa, and/or Latin America.
"Warrant Agreements" means the two Warrant Agreements dated on
------------------
or about the date hereof, executed by American and Participant, as each may be
amended from time to time,
-5-
<PAGE>
concerning grants of 100,000 and 90,000 share tranches, respectively, of
warrants for certain non-voting common stock of Participant.
2 Mileage Accrual.
---------------
2.1 Mileage Accrual. In connection with each Qualifying
---------------
Transaction, (i) Participant shall purchase from American and American shall
sell to Participant AADVANTAGE Miles upon payment terms specified herein, (ii)
Participant shall award AADVANTAGE Miles in exchange for Netcentives Points
subject to the terms stated in Section 4.1 (Program Content) and (iii) American
-----------
shall post such AADVANTAGE Miles in accordance with Section 4.6 Transaction
-----------
Processing).
Any pre-paid AADVANTAGE Miles must be awarded by Participant
pursuant to the terms of this Agreement not later than two (2) years following
their purchase or American's obligation to post such AADVANTAGE Miles shall
cease. American may, at American's option, return to Participant the amount
pre-paid by Participant for such unawarded AADVANTAGE Miles by written notice at
any time upon sixty (60) days prior written notice after one (1) year following
Participant's payment therefor. In such case, Participant shall not be entitled
to award such AADVANTAGE Miles.
Provisions of this Agreement that are stated to survive
termination or expiration of this Agreement shall survive for an additional
period, if longer, until all pre-paid AADVANTAGE Miles purchased hereunder are
awarded as provided in the immediately preceding paragraph.
2.2 Good Standing. American will post AADVANTAGE Miles
-------------
hereunder only if such Member is enrolled and in good standing in the AADVANTAGE
Program. In order for a Member to be in good standing such Member must not
engage in activity that is contrary to AADVANTAGE Program Rules. There shall be
no refunds to Participant for AADVANTAGE Miles posted by American to a Member's
AADVANTAGE Account that are subsequently canceled or voided by American due to
such Member's failure to be in good standing as of the date such AADVANTAGE
Miles were posted or due to the circumstances described in Section 4.10
------------
(AADVANTAGE Program Abuse).
2.3 Rounding. In any Qualifying Transaction, if applicable, a
--------
partial AADVANTAGE Mile in such Transaction of (a) .50 or greater shall be
rounded up to one (1) AADVANTAGE Mile and (b) .49 or less shall be rounded down
to zero (0) AADVANTAGE Miles.
2.4 Bonus Miles. Participant may offer Bonus Miles for special
-----------
promotions with American's prior written consent, such consent not to be
unreasonably withheld.
2.5 Ongoing Conditions Precedent - American. The obligation of
---------------------------------------
American to perform hereunder and make available AADVANTAGE Miles to Participant
at any time shall be subject to the conditions precedent that, as of the date of
the purchase of such AADVANTAGE Miles or the date such performance is due by
American, as applicable:
-6-
<PAGE>
2.5.1 No Defaults. There exists no Participant
-----------
Default or any event that with the giving of notice or lapse of time, or both,
would become a Participant Default.
2.5.2 Compliance with Agreement. Participant
-------------------------
shall have performed and complied in all material respects with all agreements
and conditions contained herein which are required to be performed or complied
with by Participant before or at the date of such purchase of AADVANTAGE Miles.
2.5.3 No Material Adverse Effect. No event has
--------------------------
occurred after the date hereof having a Material Adverse Effect on Participant.
2.5.4 Representations and Warranties. The
------------------------------
representations and warranties of Participant contained in Section 13
----------
(Representations and Warranties of Participant) shall be true in all material
respects on the date of such purchase of AADVANTAGE Miles, with the same force
and effect as though made on and as of that date.
2.5.5 Bankruptcy Proceedings. No federal, state
----------------------
or foreign bankruptcy proceeding, case or similar action under similar laws
shall have been commenced by or against Participant.
2.5.6 Judicial or Environmental Intervention. No
--------------------------------------
proceeding or case is pending before any court or governmental authority
investigating or seeking to enjoin or limit (i) American's rights hereunder or
(ii) the sale of AADVANTAGE Miles by American to Participant.
2.5.7 Force Majeure. No event or condition has
-------------
occurred or is existing for which Participant is excused from performing
hereunder pursuant to Section 20 (Force Majeure).
----------
2.6 Ongoing Conditions Precedent - Participant. The
------------------------------------------
obligation of Participant to perform hereunder and purchase AADVANTAGE Miles
from American at any time shall be subject to the conditions precedent that, as
of the date of the requirement to purchase such AADVANTAGE Miles or the date
such performance is due Participant, as applicable:
2.6.1 No Defaults. There exists no American
-----------
Default or any event that with the giving of notice or lapse of time, or both,
would become an American Default.
2.6.2 Compliance with Agreement. American shall
-------------------------
have performed and complied in all material respects with all agreements and
conditions contained herein which are required to be performed or complied with
by American before or at the date such performance is due.
2.6.3 No Material Adverse Effect. No event has
--------------------------
occurred after the date hereof having a Material Adverse Effect on American.
-7-
<PAGE>
2.6.4 Representations and Warranties. The
------------------------------
representations and warranties of American contained in Section 14
----------
(Representations and Warranties of American) shall be true in all material
respects on the date of such performance is due, with the same force and effect
as though made on and as of that date.
2.6.5 Bankruptcy Proceedings. No federal, state
----------------------
or foreign bankruptcy proceeding, case or similar action under similar laws
shall have been commenced by or against American.
2.6.6 Judicial or Governmental Intervention. No
-------------------------------------
proceeding or case is pending before any court or governmental authority
investigating or seeking to enjoin or limit Participants rights hereunder.
2.6.7 Force Majeure. No event or condition has
-------------
occurred or is existing for which American is excused from performing hereunder
pursuant to Section 20 (Force Majeure).
----------
2.7 Survival. Sections 2.2 (Good Standing) and 2.3
-------- ------------ ---
(Rounding) shall survive termination or expiration of this Agreement and shall
continue in full force and effect until all AADVANTAGE Miles awarded hereunder
have been paid for.
3 Charges.
-------
3.1 Pricing. For Participant's participation in the
-------
AADVANTAGE Program, and for the AADVANTAGE Miles purchased by Participant
hereunder, Participant shall pay American, without offset, in accordance with
Section 3.2 (Mileage Payments), the amount per AADVANTAGE Mile ("Base Rate")
- -----------
purchased by Participant hereunder as specified on Attachment 1. Participant
------------
shall also pay either (i) a one time data processing hookup charge (less than
$1,000) for processing mileage transmissions or, at Participant's option, (ii)
the applicable per-mile administration and handling fee for the AAIM processing
mechanism chosen by Participant that shall be no greater than the administrative
fee charged to other AAIM customers.
3.2 Mileage Payments. Not later than five (5) Business
----------------
Days after the date that Participant provides American with cartridges or
transmissions for AADVANTAGE Miles to be posted hereunder as provided in Section
-------
6.1 (Report from Participant), Participant shall pay American the per AADVANTAGE
- ---
Mile Base Rate charges described in Section 3.1 (Pricing). American shall
-----------
reconcile the payment amount received against the cartridge or transmission not
later than 30 days after American's receipt of the payment and will notify
Participant of any discrepancies. Any under-payment or over-payment by
Participant will require adjustment to subsequent payments in the amount of such
over-payment or under-payment and, with respect to underpayment, such adjustment
shall be paid by Participant before there will be any subsequent posting of
AADVANTAGE Miles. At American's option, American may choose not to post
AADVANTAGE Miles with respect to any under-paid amount.
-8-
<PAGE>
3.3 Method of Payments. All payments hereunder shall be
------------------
made on their respective due dates by check or by wire transfer pursuant to
wiring instructions given by American or by other means of payment agreed in
writing by American.
3.4 Minimum Purchase; Prepayment. Participant shall
----------------------------
prepay and purchase from American a minimum number of AADVANTAGE Miles each year
as specified in Attachment 2.
------------
3.5 Survival. This Section 3 shall survive termination or
-------- ---------
expiration of this Agreement and shall continue in full force and effect until
all AADVANTAGE Miles awarded hereunder have been paid for.
4 Program Content and Administration.
----------------------------------
4.1 Program Content. Participant will carry out a
---------------
promotional program that includes the following key elements (such promotional
program is hereinafter referred to as the "Netcentives Program"). Participant
will enter into contracts ("Sponsor Contracts") with manufacturers, wholesalers,
retailers and service providers ("Sponsors") under which Sponsors will be
entitled to purchase from Participant and provide credits or points
("Netcentives Points") to such Sponsors' customers solely in connection with
offers appearing on the Internet and online services. Each offer shall be
subject to American's prior written approval unless Netcentives Points will not
be exchangeable for AADVANTAGE Miles in connection with such offer. Requests for
approval of offers shall be submitted by Participant to American in the form of
Attachment 3. American shall use its reasonable best efforts to respond to a
- ------------
request for offer approval not later than two (2) Business Days after American's
receipt of such request. American's approval of an offer shall not be
unreasonably withheld. Effective upon not less than ninety (90) days prior
written notice by American to Participant, Netcentives Points will not be
exchangeable for AADVANTAGE Miles in connection with offers previously approved
by American. For informational purposes, American hereby discloses to
Participant that American presently has exclusive AADVANTAGE Participant
relationships in the following product/service categories such that, without
American's prior written consent, no Netcentives Points may be redeemed for
AADVANTAGE Miles with any participant offer in these categories: use of a credit
card, real estate transactions, mortgage financing or refinancing, dining,
floral purchases, long distance/local telephone service, paging services and
prepaid calling cards. If Participant wishes to have an offer that conflicts
with these exclusive AADVANTAGE Participant relationships, or that is an offer
that has not been approved by American, Participant may do so, but must
restrict the Netcentives Points earned from that offer from being redeemed for
AADVANTAGE Miles, unless prior written approval is received from American.
Except for special limited-time promotions, Netcentives Points will be
exchangeable for AADVANTAGE Miles at a ratio not less favorable to the Member
than the exchange ratio applicable to Frequent Flyer Points offered by any other
airline participating as a Frequent Flyer Point award supplier ("FFP Supplier")
in the Netcentives Program, but in any event not less than a ratio of one (1)
AADVANTAGE Mile for each one (1) Netcentives Point.
-9-
<PAGE>
Participant shall maintain a database of Netcentives Points earned and redeemed
by Sponsors' customers. Participant shall maintain a web site where Sponsors,
customers can check on the status of their Netcentives Points account and redeem
Netcentives Points for awards. Participant will not offer as an award under the
Netcentives Program any tour package in which any air travel component thereof
is supplied by an air carrier other than a FFP Supplier. Except for special
limited-time promotions, Participant will at all times remain neutral in
communicating the availability of Frequent Flyer Point awards on Participant's
web site, advertising and press releases so that in no instance is American
treated less favorably than any other FFP Supplier and will ensure that Sponsors
are similarly bound under their Sponsor Contracts.
"Qualifying Transaction" shall mean a redemption of
----------------------
Netcentives Points for AADVANTAGE Miles in accordance with the terms herein
stated. "Participant's Product or Service" shall mean the product(s) or
service(s) of Participant as described in this Section 4.1.
-----------
4.2 AADVANTAGE Program Enrollment. Prospective Members must
-----------------------------
be enrolled in the AADVANTAGE Program in accordance with AADVANTAGE Program
Rules in order to earn AADVANTAGE Miles hereunder. American will not post
AADVANTAGE Miles hereunder until an AADVANTAGE Account number has been assigned.
4.3 AADVANTAGE Program Administration. Administration of the
---------------------------------
AADVANTAGE Program shall be performed by American and all AADVANTAGE Program
Rules shall apply to Participant's participation in the AADVANTAGE Program.
American will issue all Award Certificates, U.S. AADVANTAGE Summaries, and
AADVANTAGE Program newsletters.
4.4 Customer Service. Member questions concerning
----------------
Participant's participation in the AADVANTAGE Program or record keeping in
connection therewith will be referred by American to Participant's customer
service department having a web site address and telephone number to be
furnished by Participant to American. Participant will maintain a customer
service department, with personnel available 8:00 A.M. PST to 5:00 P.M. PST, to
resolve any Member questions. This department will be staffed and supported by
Participant in such a manner that Participant will be able to effectively
address Member issues relating to Participant's participation in the AADVANTAGE
Program. Participant will ensure that the quality of Participant's Product or
Service and the quality of customer service provided by Participant to Members
hereunder shall be commensurate with that offered by major U.S. World Wide Web
providers and marketers of similar products or services.
4.5 Member Disputes. If a Member asserts that he or she is
---------------
entitled to AADVANTAGE Miles in connection with a Qualifying Transaction but did
not receive such AADVANTAGE Miles, and Participant has not, not later than
fifteen (15) Business Days after request of American, provided American with
documents (e.g., photocopy of correspondence) indicating that Participant has
----
responded to such Member concerning such dispute, and provided the Member
applies to American within twelve (12) months after the date of the Qualifying
Transaction, American shall have the right to post to the Member's AADVANTAGE
Account
-10-
<PAGE>
and invoice Participant, and Participant shall pay, in accordance with Section
-------
3.1 (Pricing), for the AADVANTAGE Miles in dispute.
- ---
4.6 Transaction Processing. Participant will be
----------------------
responsible for obtaining and maintaining the transaction processing function
necessary to process Qualifying Transactions. Participant will calculate the
number of AADVANTAGE Miles earned by Members for each Qualifying Transaction and
will incorporate that information into each Report to be furnished by
Participant to American pursuant to this Agreement. Participant understands and
agrees that American will rely on the accuracy of each Report submitted by
Participant to post AADVANTAGE Miles to a Member's AADVANTAGE Account subject to
any adjustment provided for in Section 3.2 (Mileage Payments) and Section 4.5
----------- -----------
(Member Disputes).
4.7 Training. Participant will provide training for all
--------
relevant Participant field and corporate staff members during the Term. Updated
training material as related to Participant's participation in the AADVANTAGE
Program will be produced and distributed by Participant on a regular basis. The
nature and extent of such training programs shall be sufficient to enable proper
administration of all items for which Participant is responsible hereunder.
4.8 Trademarks.
----------
4.8.1 American's Marks. Participant acknowledges
----------------
that the AADVANTAGE Program name and logo and the other names and marks referred
to below are the property of American and upon termination of this Agreement,
Participant will cease use of such logo, names and marks. The marks "AMERICAN
AIRLINES," and "AADVANTAGE" are the only marks owned by American that may be
used by Participant in marketing and promoting Participant's participation in
the AADVANTAGE Program and then only as provided in this Section and Section 7.3
-----------
(American Approval of Promotional Materials; Graphics Standards). Whenever the
words trademark, service mark or trade name are used in this Agreement, such
words shall be deemed to refer to the marks listed immediately above.
Participant will take no actions that are adverse to American's ownership rights
in such marks. Participant shall use only the term "Participant" to describe its
participation in the AADVANTAGE Program. Participant shall provide for
American's approval one or more templates for Netcentives Program description
for use in Sponsors' web sites and for Netcentives Program Internet banner ads
if any of such items use any of American's marks. Upon approval by American,
Participant may use and make available such templates for use by Sponsors.
Except as provided above, with respect to pre-approved templates, Sponsors may
not use in any press release, web site, web advertisement or other public
communication any of American's names or marks listed above without American's
prior written consent. Participant will ensure that Sponsors are so bound in
their Sponsor Contracts. Upon request of American, Participant shall terminate
from the Netcentives Program any Sponsor that fails to comply with the
foregoing.
4.8.2 Netcentives' Marks. American acknowledges
------------------
that Netcentives, ClickRewards, and ClickPoints names and logos (and other marks
as disclosed by Participant to American during the course of this Agreement) are
the property of Participant and upon
-11-
<PAGE>
termination of this Agreement, American will cease use of such logo, names and
marks. Netcentives hereby grants American a limited, non-exclusive license to
duplicate and use Participant's marks in American's promotional materials and on
its Internet web site, during the Term of this Agreement, provided, however,
that any use of Participant's marks shall be for the purpose of promoting the
AADVANTAGE Program or the Netcentives Program and shall only be used with regard
to the inclusion of AADVANTAGE Miles within the Netcentives Program or
termination as provided in Section 7.5 (Termination).
-----------
4.9 Applicable Law. Participant will comply with Applicable
--------------
Law with respect to its operations, including the marketing and sale of
Participant's Product or Service, and its role in connection with the AADVANTAGE
Program.
4.10 AADVANTAGE Program Abuse. American reserves the right to
------------------------
terminate from the AADVANTAGE Program any Member that, in American's judgment,
engages in any activity that is contrary to AADVANTAGE Program Rules contained
in the AADVANTAGE member guide in effect from time to time. Fraud or abuse in
relation to AADVANTAGE mileage credit or award usage is subject to appropriate
administrative and/or legal action by American including, without limitation:
the forfeiture of all Award Certificates, tickets issued against Award
Certificates and any accrued mileage in a Member's AADVANTAGE Account; as well
as cancellation of the account and Member's future participation in the
AADVANTAGE Program. Participant shall cooperate with all reasonable requests of
American concerning any investigation and/or prosecution of anyone engaging in
or suspected of engaging in AADVANTAGE Program abuse or fraud, including but not
limited to assisting American in verifying any purported Member's AADVANTAGE
Program membership status and cooperating with any civil or criminal
prosecution. In the event that Participant detects fraud or abuse in relation to
the issuance or redemption of Netcentives Points, American shall, insofar as
such fraud or abuse involves the AADVANTAGE Program, cooperate with all
reasonable requests of Participant concerning any investigation of anyone
engaging in or suspected of engaging in Netcentives Program abuse or fraud,
including but not limited to, assisting Participant in verifying AADVANTAGE
Program membership status.
4.11 Cancellation or Alteration of AADVANTAGE Program.
------------------------------------------------
Participant acknowledges that American may cancel or alter any part of the
AADVANTAGE Program, the AADVANTAGE mileage accrual structure, or any AADVANTAGE
Award at any time and may offer supplemental award promotions. American may add
or delete other Persons as AADVANTAGE Participants, subject to Section 5
---------
(Exclusivity).
4.12 Air Carrier Sponsor. No air carrier that is not a FFP
-------------------
Supplier may be a Sponsor or may advertise on Participant's web site.
Participant agrees that American or its Affiliates shall have the right to be a
Sponsor or advertise on Participant's web site on terms mutually acceptable to
American or such Affiliate, as applicable, and Participant, but in any event on
terms no less favorable to American or such Affiliate than those terms
applicable to any other FFP Supplier Sponsor in the Netcentives Program.
-12-
<PAGE>
4.13 Reserve Requirement. Participant shall work with Deloitte
-------------------
& Touche, or such other "Big 6" auditor as Participant deems fit, to structure a
reserve process to provide for redemptions. American shall, upon thirty (30)
days written request, receive from Participants auditor an opinion on the
suitability of such reserve process to meet Participant's business obligations.
4.14 Management of Program. The price, terms and conditions
---------------------
for the purchase of Frequent Flyer Points from a FFP Supplier, as well as the
selection of FFP Suppliers, shall be determined exclusively by Participant
without participation by any FFP Supplier. American and its Affiliates shall
have no duties or responsibilities, administrative, financial or otherwise, with
respect to the Netcentives Program except, in the case of American, American's
duties and responsibilities expressly set forth herein as a vendor of AADVANTAGE
Miles and any other responsibilities or American expressly set forth herein.
American and its Affiliates shall have no implied duties or obligations with
respect to the Program. Participant shall operate its business and the Program
independently from the FFP Suppliers and shall not permit any FFP Supplier to
exercise influence or control over management of its business or the Netcentives
Program.
4.15 Computer Reservation Function. Participant shall allow
-----------------------------
American or its Affiliates, including The SABRE Group, Inc., to bid on providing
Participant with computerized reservation booking capability if Participant
decides it needs such capability.
5 Exclusivity.
5.1 Limited Exclusivity. Subject to the terms and limitations
-------------------
set forth herein, American will not offer AADVANTAGE Miles to be used as an
incentive in any program that is a Direct Competitor of Participant. The term
"Direct Competitor of Participant" means a program, owned or operated by a third
party, whose primary purpose is to reward Internet or online service activities
by residents of the U.S. or Canada under which the end user may earn points or
credits that are redeemable for the incentive awards of more than one company.
This limited exclusivity is herein referred to as "Limited Exclusivity." It is
acknowledged and understood by Participant that except as pertains to a Direct
Competitor of Participant, American may offer AADVANTAGE Awards or AADVANTAGE
Miles on the Internet and that none of such actual or potential promotional
activities are precluded hereunder. American presently or in the future may
offer AADVANTAGE Miles to AADVANTAGE Participants or AAIM customers who
combine AADVANTAGE Miles with awards or benefits offered by other companies in
an incentive points or credits program ("Incentive Program"), for example, but
not limited to, the Sheraton Program or Diners Club Program. Participant
acknowledges and agrees that even if such Incentive Programs presently or in
the future appear on the Internet, they shall not be considered a Direct
Competitor of Participant hereunder so long as their primary purpose is not to
reward Internet or online service activities.
5.2 Termination of Limited Exclusivity. American or
----------------------------------
Participant may terminate American's obligations with respect to Limited
Exclusivity by giving not less than ninety (90) days prior written notice of
such termination to the other party ("Exclusivity Termination Notice");
provided, however, that in no event may American so terminate its
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<PAGE>
obligations with respect to Limited Exclusivity with an effective date of
termination prior to January 31, 1998. Effective ninety (90) days after
Participant's or American's receipt of the other party's Exclusivity Termination
Notice, (i) the price paid by Participant for AADVANTAGE Miles purchased
thereafter shall be adjusted as provided in Attachment 1, (ii) the AADVANTAGE
------------
Mile minimum purchase and prepayment requirements shall end as provided on
Attachment 2 and (iii) American will not be bound under the terms
- ------------
of Limited Exclusivity.
6 Reports.
-------
6.1 Report from Participant. Participant will provide American
-----------------------
with cartridges or transmissions listing AADVANTAGE Miles to be posted by Member
name, AADVANTAGE Account number, transaction code and other items as specified
in the Report. Participant will submit these cartridges or transmissions, which
will be merged with the AADVANTAGE data base maintained by American, to American
at least once each month (and if only once each month, on the day of the month
specified by written notice from American to Participant), but not more often
than once each week. The cartridges or transmissions will include all AADVANTAGE
Miles to be posted for Qualifying Transactions for the immediately preceding
period and any corrections of prior cartridges or transmissions.
6.2 Verification. To minimize posting errors, Participant will
------------
verify that the Member's AADVANTAGE Account number is valid prior to
transmission to American as per the algorithm outlined in the Report.
6.3 Report from American. American will promptly provide
--------------------
Participant with cartridge, tape, transmission or hard copy summary error report
concerning requested postings.
6.4 Tax Reporting. Participant shall be responsible for any
-------------
tax reporting in connection with the award of AADVANTAGE Miles hereunder.
6.5 Survival. This Section 6 shall survive termination or
-------- ---------
expiration of this Agreement and shall continue in full force and effect until
all AADVANTAGE Miles awarded hereunder have been paid for.
7 Marketing and Advertising.
-------------------------
7.1 Web Site and Telephone Number. Participant at its sole
-----------------------------
expense shall maintain throughout the Term a web site and telephone number to be
used exclusively for marketing Participant's Product or Service. All advertising
and promotion of Participant's Product or Service by Participant shall feature
Participant's web site address. Participant will have adequate personnel
available 8:00 A.M. PST to 5:00 P.M. PST to service callers on the telephone
number. Participant shall furnish American such statistical information
concerning the calls that relate to Participant's participation in the
AADVANTAGE Program as American may request from time to time.
7.2 Newsletter Inserts. Subject to the terms hereof and
------------------
American's ability to physically accommodate the insert in the U.S. AADVANTAGE
Summary envelope, Participant shall purchase two (2) inserts in the U.S.
AADVANTAGE Summary envelope sent by American
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<PAGE>
to Members for each Contract Year during the Term. Participant shall pay the
preferred AADVANTAGE Participant rate for inserts. American may, but shall not
be obligated to, make additional insert opportunities available to Participant
on a space available basis. All inserts are subject to a maximum weight of .10
ounces. Participant, at its sole cost and expense, shall create and produce all
inserts that it wishes American to consider inducing. Participant shall deliver
each insert to American no less than five (5) Business Days prior to the date of
the U.S. AADVANTAGE Summary mailing. Insertion costs associated with these
inserts is included in American's preferred rates referred to above, provided
the insert does not place the mailing overweight or require special handling by
the mailing vendor, in which case Participant shall pay the extra costs.
American shall have the right to approve the content of such inserts. In the
event that such insert will require extra postage, Participant shall have the
option to pay such extra postage or to reschedule the insert to a U.S.
AADVANTAGE Summary mailing when no extra postage will be required but
Participant must still meet the timing requirement described above, if
applicable. Nothing herein shall be considered as giving Participant the right
to an insert for any particular summary mailing. In the event Participant
chooses not to incorporate a requested insert that has been approved and
scheduled by American, it must provide American with written notice not less
than sixty (60) days prior to the scheduled insertion date.
7.3 American Approval of Promotional Materials; Graphic
---------------------------------------------------
Standards. Participant shall submit to American for review and approval, prior
- ---------
to publication or use, the portion of any and all artwork, scripts, copy,
advertising, promotional materials, direct mail, press releases, newsletters,
Internet pages or other communications or any other publicity published or
distributed by Participant (or at its direction or authorization) that
specifically references this Agreement, the AADVANTAGE Program, American (or any
of American's Affiliates) or uses any trademark, service mark, logo or trade
name of American or any of its Affiliates. All such promotional materials shall
follow the graphics standards and AADVANTAGE Program disclaimers set forth on
Attachment 5. American shall have the right to modify the graphics standards and
- ------------
AADVANTAGE Program disclaimers from time to time. All promotional or
informational material using the name "AADVANTAGE" or "American Airline" will
require the tag line "American Airlines and AADVANTAGE are registered trademarks
of American Airlines, Inc." Notwithstanding the foregoing, certain templates are
to be submitted for American's approval as provided in Section 4.8.1 (American's
-------------
Marks). American and Participant shall issue mutually acceptable press releases,
at a mutually agreed time, concerning American's participation in the
Netcentives Program, including the exclusive nature of such participation.
American will have a representative at Participant's Netcentives Program launch
press conference.
7.4 Web Site Co-Marketing. American agrees to provide a link
---------------------
to Participant's web site from American's web site. Participant agrees to
provide a link to American's web site from Participant's web site.
7.5 Termination. All promotion and publication rights of
-----------
Participant and American hereunder shall immediately cease upon notice of
termination of this Agreement by either party.
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<PAGE>
8 Reports; Audits.
---------------
8.1 Informational Reports. Participant will produce and
---------------------
deliver to American, at such intervals as American shall reasonably request,
reports of the aggregate number of Netcentives Points issued to or purchased by
Sponsors (as a whole and not identified as to any particular Sponsor), the
aggregate number of Netcentives Points distributed by Sponsors (as a whole and
not identified as to any particular Sponsor) to their customers, Total Redeemed
Netcentives Points, Total Netcentives Points Redeemed for Frequent Flyer Points
(as a whole and not identified as to any particular FFP Supplier) of FFP
Suppliers, forecasts of Netcentives Program demand and such other reports and
information regarding the sale or licensing and redemption of Netcentives Points
in relation to American's participation in the Netcentives Program as American
shall reasonably request.
8.2 Audit Access. Participant will permit American and any of
------------
American's accountants, attorneys and representatives reasonable access to audit
Participant's participation in the AADVANTAGE Program and for such purpose to
examine all books of account, records, reports and other papers, to make copies
therefrom and to discuss same with Participant's officers, employees and
accountants, all at such reasonable times and as often as may be reasonably
requested by American. Such audits will be at American's sole cost. Such audits
may include but will not be limited to, an audit of Participant's records
concerning AADVANTAGE Miles purchased or awarded by Participant, the quality of
customer service provided by Participant to Members, the compliance by
Participant with Applicable Law and compliance by Participant with the terms of
this Agreement.
8.3 Survival. This Section 8 shall survive termination or
-------- ---------
expiration of this Agreement and shall continue in full force and effect until
all AADVANTAGE Miles awarded hereunder have been paid for.
9 Term of Agreement.
-----------------
9.1 Term. This Agreement shall become effective on the date
----
hereof ("Commencement Date") and shall continue in full force and effect until
and including July 31, 2000 (the "Term").
9.2 Notice of Termination. All notices to the general public
---------------------
and Members of the termination of Participant's participation in the AADVANTAGE
Program will be the sole responsibility of American and shall be undertaken at
American's sole cost and expense. In addition, Participant may announce
termination to Netcentives Program members at Participant's cost and expense.
10 Indemnification; Limitation of Usability.
----------------------------------------
10.1 Participant Indemnification. Participant shall indemnify
---------------------------
and hold harmless American, as well as American's parent company, subsidiaries,
licensees and Affiliates and their officers, shareholders, directors, employees
and agents (herein collectively referred to as "American Indemnified Parties")
from and against any and all Losses incurred by, borne by or
-16-
<PAGE>
asserted against any of the American Indemnified Parties arising out of or
resulting from (i) Participant's performance, failure to perform or improper
performance of this Agreement, (ii) breach of any representation or warranty of
Participant contained herein, (iii) the marketing, sale or use of Participant's
Product or Service, (iv) any claim that any permitted use hereunder by American
of any Participant trademark or name infringes on any existing copyright,
trademark or property right of any Person, (v) any claims or statements made by
Participant in its advertising or promotional activities that are in conflict,
or inconsistent, with the terms of this Agreement or fail to comply with
Applicable Law, or (vi) any Program Sponsor's purchase or use of Netcentives
Points. American will inform Participant promptly after American receives notice
of any claim with respect to which indemnity hereunder is asserted and will
grant to Participant the right to control, and will cooperate with Participant
in, the defense of such claim.
10.2 Limitation. Except for the indemnification obligations
----------
stated above, in no event will either party be liable under this Agreement or
under Applicable Law in connection with this Agreement to the other party for
consequential, punitive or exemplary damages relating to this Agreement and each
party hereby releases and waives any claims against the other party for such
damages. In no event shall American be liable under this Agreement or under
Applicable Law in connection with this Agreement for an amount in excess of the
aggregate amount of revenues received by American from Participant under this
Agreement.
10.3 Survival. This Section 10 shall survive termination or
-------- ----------
expiration of this Agreement and shall continue in full force and effect for a
period of three (3) years thereafter.
11 Default of Participant; Remedies; Other Rights of American.
----------------------------------------------------------
11.1 Participant Default. The occurrence of any one or more
-------------------
of the following events shall constitute a "Participant Default":
11.1.1 Participant defaults in the performance of any
of the terms and conditions of this Agreement, and such default continues for a
period of thirty (30) days or longer (ten (10) days or longer in the case of
default in payment of any sums due hereunder) following written notice thereof
from American to Participant, which notice shall describe in reasonable detail
the alleged default;
11.1.2 Participant defaults under, or breaches the terms
of, the Warrant Agreement;
11.1.3 Participant voluntarily files for bankruptcy or
makes an assignment for the benefit of its creditors, or if an involuntary
assignment or bankruptcy petition is made or filed against Participant and not
dismissed or satisfied within sixty (60) days, or if the interest of Participant
hereunder passes by operation of law to any Person; or
11.1.4 Any representation or warranty made at any time
by Participant to American proves to be untrue in any material respect.
-17-
<PAGE>
11.2 American Remedies. If a Participant Default shall
-----------------
occur, then American, at its option, may immediately terminate this Agreement by
written notice to Participant at any time after the occurrence of such
Participant Default and/or pursue any remedies available under Applicable Law,
subject to the limitations stated in Section 10.2 (Limitation). Nothing
------------
contained herein shall be deemed to restrict or prevent American from pursuing
equitable remedies at any time to prevent or enjoin the breach or threatened
breach of this Agreement by Participant. All such remedies shall be cumulative
and the pursuit of one or more remedies by American shall not be deemed a waiver
of any other rights or remedies of American hereunder.
11.3 Additional Rights. American shall have the following
-----------------
additional rights and Participant the following additional duties whether or not
there exists a Participant Default:
11.3.1 If American decides to terminate the AADVANTAGE
Program, American may terminate this Agreement at any time upon not less than
one hundred eighty (180) days' prior written notice to Participant.
11.3.2 In the event that (i) Participant merges with
or into or is acquired, in whole or in part, by another Person; (ii)
Participant sells substantially all of its assets; or (iii) Participant acquires
another Person or purchases substantially all of the assets of another Person,
American shall have the right, upon not less than thirty (30) days prior written
notice, to terminate this Agreement if in American's judgment (a) such other
Person is a competitor of American or (b) such event will have a Material
Adverse Effect upon this Agreement or Participant's participation in the
AADVANTAGE Program.
In the event of termination by American under this Section
11.3, any amounts prepaid by Participant hereunder will promptly be refunded by
American to Participant net of any amounts due and owing to American hereunder.
12 Default of American; Remedies:
-----------------------------
12.1 American Default. The occurrence of any one or more
----------------
of the following events shall constitute an "American Default":
12.1.1 American defaults in the performance of any of
the terms and conditions of this Agreement, and such default continues
for a period of thirty (30) days or longer following written notice thereof from
Participant to American, which notice shall describe in reasonable detail the
alleged default;
12.1.2 American voluntarily files for bankruptcy or
makes an assignment for the benefit of its creditors, or if an involuntary
assignment or bankruptcy petition is made or filed against American and not
dismissed or satisfied within sixty (60) days, or if the interest of American
hereunder passes by operation of law to any Person; or
12.1.3 Any representation or warranty made hereunder
by American to Participant proves to be untrue in any material respect.
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<PAGE>
12.2 Participant Remedies. If an American Default shall occur,
--------------------
then Participant, at its option, may immediately terminate this Agreement by
written notice to American at any time after the occurrence of such American
Default and/or pursue any remedies available under Applicable Law, subject to
the limitations stated in Section 10.2 (Limitation), including without
------------
limitation the right to promptly receive a refund from American of any amounts
prepaid by Participant hereunder, net of any amounts due and owing to American
hereunder. Nothing contained herein shall be deemed to restrict or prevent
Participant from pursuing equitable remedies at any time to prevent or enjoin
the breach or threatened breach of this Agreement by American. All such remedies
shall be cumulative and the pursuit of one or more remedies by Participant shall
not be deemed a waiver of any other rights or remedies of Participant hereunder.
13 Representations and Warranties of Participant. As an
---------------------------------------------
inducement to American to enter into this Agreement, Participant represents and
warrants to American as follows:
13.1 Due Organization. Participant is a corporation duly
----------------
organized and validly existing under the laws of California. Participant has
full power to own or lease its properties and to conduct its business as
presently conducted, including the marketing and sale of Participant's Product
or Service. Participant is duly authorized, qualified or licensed to do business
and validly existing as a foreign corporation in each jurisdiction in which it
is so required to be authorized, qualified or licensed where the failure to be
so qualified would have a Material Adverse Effect on Participant.
13.2 Requisite Power; Enforceability. Participant has all
-------------------------------
requisite corporate power and authority to execute, enter into and carry out the
terms and conditions of this Agreement and any other agreements and instruments
contemplated hereby, and to perform its obligations hereunder and thereunder.
This Agreement has been duly executed and delivered and is a legal, valid and
binding agreement of Participant, enforceable in accordance with its terms,
except that the enforceability of this Agreement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
13.3 No Conflict. Neither the execution or delivery of this
-----------
Agreement, nor the consummation of the transactions contemplated hereby, will
conflict with or result in the breach of any term or provision of, or constitute
a default under, or give any third party the right to accelerate any material
obligation under, any charter provision, bylaw, contract or Applicable Law to
which Participant is a party or by which Participant or any its assets or
properties are in any way bound or obligated.
13.4 No Consent. No consent, approval, order or authorization
----------
of, or registration, qualification, designation, declaration or filing with, any
Competent Authority is required on the part of Participant in connection with
the transactions contemplated by this Agreement, except for those which have
been obtained and except for the filing of revised
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<PAGE>
Articles of Incorporation with the Secretary of State of California with respect
to the issuance of non-voting convertible stock. No consent, approval, waiver or
other action by any Person under any contract is required or necessary for the
execution, delivery and performance of this Agreement by Participant, or the
consummation by Participant of the transactions contemplated hereby, except for
those which have been obtained, except for approval by Participant's Board with
respect to the warrants contemplated under this Agreement.
14 Representations and Warranties of American. As an
------------------------------------------
inducement to Participant to enter into this Agreement, American represents and
warrants to Participant as follows:
14.1 Due Organization. American is a corporation duly
----------------
organized and validly existing under the laws of Delaware. American has full
power to own or lease its properties and to conduct its business as presently
conducted. American is duly authorized, qualified or licensed to do business and
validly existing as a foreign corporation in each jurisdiction in which it is so
required to be authorized, qualified or licensed.
14.2 Requisite Power; Enforceability. American has all
-------------------------------
requisite corporate power and authority to execute, enter into and carry out the
terms and conditions of this Agreement and any other agreements and instruments
contemplated hereby, and to perform its obligations hereunder and thereunder.
This Agreement has been duly executed and delivered and is a legal, valid and
binding agreement of the American, enforceable in accordance with its terms,
except that the enforceability of this Agreement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
14.3 No Conflict. Neither the execution or delivery of this
-----------
Agreement, nor the consummation of the transactions contemplated hereby, will
conflict with or result in the breach of any term or provision of, or constitute
a default under, or give any third party the right to accelerate any material
obligation under, any charter provision, bylaw, contract or Applicable Law to
which American is a party or by which American or any its assets or properties
are in any way bound or obligated.
14.4 No Consent. No consent, approval, order or authorization
----------
of, or registration, qualification, designation, declaration or filing with, any
Competent Authority is required on the part of American in connection with the
transactions contemplated by this Agreement, except for those which have been
obtained. No consent, approval, waiver or other action by any Person under any
contract is required or necessary for the execution, delivery and performance of
this Agreement by American, or the consummation by American of the, transactions
contemplated hereby, except for those which have been obtained.
15 Notices. All notices, reports, invoices and other
-------
communications required or permitted hereunder to be given to or made upon any
party hereto in writing, shall be addressed as provided below and shall be
considered as property given (i) if delivered in person; (ii) if sent by an
express courier delivery service which provides signed acknowledgments of
receipt; (iii) if
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<PAGE>
deposited in the US. certified or registered first class mail, postage prepaid,
return receipt requested or (iv) if transmitted by telecopier (upon receipt by
sender thereof of evidence that a complete transmission of such telecopy was
made to the recipient thereof) and, in the case of telecopier transmission,
confirmed by (a) telephone contemporaneously to the person entitled to receive
such notice or to such person's secretary, and (b) dispatching a copy of such
notice by the methods described in clause (i), (ii) and (iii) above. All notices
shall be effective upon receipt. For the purposes of notice, the addresses of
the parties shall be as set forth below; provided, however, that either party
shall have the right to change its address for notice hereunder to any other
location by giving not less than thirty (30) days notice to the other party in
the manner set forth above.
If to American:
--------------
By Mail: American Airlines, Inc.
P.O. Box 619616, MD 2424
DFW Airport, TX 75261-9616
Attn: Bruce Chemel
By Courier: 4200 Amon Carter Boulevard
MD 2424
Fort Worth, TX 76155
Attn: Bruce Chemel
Phone: (817) 931-2526
Fax: (817) 967-3037
If to Participant:
-----------------
Netcentives Inc.
2121 El Camino Real
Suite 615
San Mateo, CA 94403
Attn: Eric W. Tilenius, Chairman
Phone: (415) 577-3535
Fax: (415) 572-5205
16 Governing Law; Consent to Jurisdiction. THIS AGREEMENT AND THE
--------------------------------------
RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF TEXAS,
EXCLUDING ITS RULES OF CONFLICTS OF LAW. Each party hereto irrevocably consents,
agrees and submits to the exclusive jurisdiction of the U.S. federal courts of
the Northern District of Texas or, if such court does not have jurisdiction, of
the courts of the State of Texas in Tarrant County, for the purposes of any
suit, action or proceeding arising out of or relating to this Agreement and
irrevocably waives, to the
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<PAGE>
fullest extent permitted by law, any objection to the Iaylng of venue of any
such suit, action or proceeding in any such court or any claim that any such
suit, action or proceeding has been brought in an inconvenient forum. Each party
agrees that neither of them will bring any suit, action or other proceeding
arising out of this Agreement, the subject matter herein, or any of the
transactions described herein, in any jurisdiction other than the jurisdiction
described above. Each party consents to process being served in any such suit,
action or proceeding by any of the methods of notice specified in Section 15
(Notices). Each such party agrees that such service shall be deemed in every
respect effective service of process in any such suit, action or proceeding and
shall, to the fullest extent permitted by law be taken and held to be valid
personal service upon and personal delivery to such party.
17 Waiver. No waiver of breach of any provision of this Agreement by
------
either party shall constitute a waiver of any subsequent breach of the same or
any other provision hereof, and no waiver shall be effective unless made in
writing and signed by an officer of the other party.
18 American's Confidentiality.
--------------------------
18.1 American's Confidential Information. "American's
-----------------------------------
Confidential Information" shall mean (i) all data, reports, interpretations,
forecasts, records or other information concerning the AADVANTAGE Program or
Members, tangible or intangible, oral or written, which American may give
Participant access to or which Participant obtains through the Netcentives
Program, (ii) all AADVANTAGE Program documents and marketing materials that
American may provide to Participant where such documents are identified orally
or in writing by American as confidential immediately prior to or immediately
after disclosure by American to Participant, and (iii) any other information
identified orally or in writing by American as confidential immediately prior to
or immediately after disclosure by American to Participant. Participant
acknowledges that American's Confidential Information is the sole and exclusive
property of American. Participant acknowledges that American's Confidential
Information includes this Agreement and its terms and the names, addresses and
other information disclosed by American to Participant regarding any Member or
obtained by Participant in connection with processing mileage accrual for
Qualifying Transactions. Nothing in this Agreement, however, shall prevent
Participant from independently compiling information regarding its customers so
long as (i) the status of being an AADVANTAGE Member, AADVANTAGE Account
numbers, any other AADVANTAGE membership data, or any reference to or other
association with American is not identified in, or used as a factor or criteria
in compiling, such information, and (ii) any promotions or communications
directed at such customers, or any partial grouping thereof, by Participant or
by Participant jointly with another Person or Persons, are not directed
exclusively to such individuals, and will not reference such individuals, as
Members or travelers on American, without American's prior written consent.
18.2 Non-Disclosure by Participant. Participant shall not
-----------------------------
sell, transfer, publish, disclose, display or otherwise make available
American's Confidential Information to any third Person except as may be
required by Applicable Law, in which case Participant shall (i) promptly notify
American, (ii) use reasonable and lawful efforts to resist making any disclosure
not approved by American, (iii) use reasonable and lawful efforts to limit the
amount of
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<PAGE>
confidential information to be disclosed pursuant to any such disclosure not
approved by American, and (iv) use reasonable and lawful efforts to obtain a
protective order or other appropriate relief to minimize the further
dissemination of any confidential information to be disclosed pursuant to any
such disclosure not approved by American. In addition, Participant shall not
disclose American's Confidential Information to any Affiliate, employee, or
agent of Participant, except on a need-to-know basis. Participant shall ensure
that all such Affiliates, employees and agents recognize that American's
Confidential Information is subject to this non-disclosure obligation.
Furthermore, Participant will not use American's Confidential Information for
any purposes other than as expressly provided in this Agreement. Participant
will maintain American's Confidential Information in secrecy at all times, using
at least the same degree of care with respect to such confidential information
as Participant uses in protecting Participant's own proprietary information and
trade secrets. Information shall not be subject to the foregoing confidentiality
restrictions to the extent such information (i) was in possession of or known to
Participant prior to Participant's execution of this Agreement, unless such
information was received by Participant subject to earlier confidentiality
agreements or arrangements with American or its Affiliates; (ii) is or becomes
public knowledge other than by means of a breach of confidentiality by
Participant; (iii) is received by Participant from a third party that
Participant reasonably believes is lawfully in possession of such information
and under no duty to keep it in confidence, or (iv) is approved by American, in
writing, for release by Participant.
18.3 Return of American's Confidential Information. Upon
---------------------------------------------
termination or expiration of this Agreement for any reason, American's
Confidential Information shall be promptly returned to American and Participant
shall destroy any copies, extracts or other reproductions, in whole or in part,
of American's Confidential Information, regardless of the media in which
recorded or stored, and any working papers or notes containing any item of
American's Confidential Information. Upon written request of American,
Participant shall deliver to American a signed certification that all such
copies, extracts, reproductions and working papers have been destroyed.
18.4 Participant's Employees and Agents. Participant covenants
----------------------------------
and agrees that it shall cause Participant's principals, members, partners,
officers, directors, stockholders, employees, agents and contractors who may
gain access to American's Confidential Information, whether or not such access
is permitted hereunder, to comply with each agreement of Participant under this
Section 18.
- ----------
18.5 American's Equitable Relief. Participant acknowledges and
---------------------------
agrees that American will have no adequate remedy at law if there is a breach or
threatened breach of this Section 18 and, accordingly, that American shall be
----------
entitled to an injunction against such breach. Nothing herein shall be construed
as a waiver of any other legal or equitable remedies which may be available to
American if Participant breaches this Section 18.
----------
18.6 Survival. This Section 18 shall survive termination or
-------- ----------
expiration of this Agreement and shall continue in full force and effect for a
period of five (5) years thereafter.
-23-
<PAGE>
19 Participant's Confidentiality.
-----------------------------
19.1 Participant's Confidential Information. "Participant's
--------------------------------------
Confidential Information" shall mean any information, technical data, or
know-how, including, but not limited to, that which relates to research, product
plans, products, services, information on individuals who are members of the
Netcentives Program, customers, markets, software, developments, inventions,
processes, designs, drawings, engineering, hardware, configuration information,
marketing or finances of Participant, which is designated in writing to be
confidential or proprietary, or if given orally, is identified as confidential
or proprietary at the time of disclosure. American acknowledges that
Participant's Confidential Information is the sole and exclusive property of
Participant.
19.2 Non-Disclosure by American. American shall not sell,
--------------------------
transfer, publish, disclose, display or otherwise make available Participant's
Confidential Information to any third Person except as may be required by
Applicable Law, in which case American shall (i) promptly notify Participant,
(ii) use reasonable and lawful efforts to resist making any disclosure not
approved by Participant, (iii) use reasonable and lawful efforts to limit the
amount of confidential information to be disclosed pursuant to any such
disclosure not approved by Participant, and (iv) use reasonable and lawful
efforts to obtain a protective order or other appropriate relief to minimize the
further dissemination of any confidential information to be disclosed pursuant
to any such disclosure not approved by Participant. In addition, American shall
not disclose Participant's Confidential Information to any Affiliate, employee,
or agent of American, except on a need-to-know basis. American shall ensure that
all such Affiliates, employees and agents recognize that Participant's
Confidential Information is subject to this non-disclosure obligation.
Furthermore, American will not use Participant's Confidential Information for
any purposes other than as expressly provided in this Agreement. American will
maintain Participant's Confidential Information in secrecy at all times, using
at least the same degree of care with respect to such confidential information
as American uses in protecting American's own proprietary information and trade
secrets. Information shall not be subject to the foregoing confidentiality
restrictions to the extent such information (i) was in possession of or known to
American prior to American's execution of this Agreement, unless such
information was received by American subject to earlier confidentiality
agreements or arrangements with Participant or its Affiliates; (ii) is or
becomes public knowledge other than by means of a breach of confidentiality by
American; (iii) is received by American from a third party that American
reasonably believes is lawfully in possession of such information and under no
duty to keep it in confidence, or (iv) is approved by Participant, in writing,
for release by American.
19.3 Return of Participant's Confidential Information. Upon
------------------------------------------------
termination or expiration of this Agreement for any reason, Participant's
Confidential Information shall be promptly returned to Participant and American
shall destroy any copies, extracts or other reproductions, in whole or in part,
of Participant's Confidential Information and any working papers or notes
containing any item of Participant's Confidential Information. Upon written
request of Participant, American shall deliver to Participant a signed
certification that all such copies, extracts, reproductions and working papers
have been destroyed.
-24-
<PAGE>
19.4 American's Employees and Agents. American covenants and
-------------------------------
agrees that it shall cause American's principals, members, partners, officers,
directors, stockholders, employees, agents and contractors who may gain access
to Participant's Confidential Information, whether or not such access is
permitted hereunder, to comply with each agreement of American under this
Section 19.
- ----------
19.5 Participant's Equitable Relief. American acknowledges and
------------------------------
agrees that Participant will have no adequate remedy at law if there is a breach
or threatened breach of this Section 19 and, accordingly, that Participant shall
----------
be entitled to an injunction against such breach. Nothing herein shall be
construed as a waiver of any other legal or equitable remedies which may be
available to Participant if American breaches this Section 19.
----------
19.6 AADVANTAGE Database. Notwithstanding the foregoing,
-------------------
Participant acknowledges and agrees that names, addresses, phone numbers and
other information concerning Participant's customers may become part of the
AADVANTAGE Program database and American shall not be restricted in any way in
its utilization of such database. However, American will not furnish AADVANTAGE
membership data that identifies a Member as a customer of Participant to any
Person without Participant's prior written consent.
19.7 Survival. This Section 19 shall survive termination or
-------- ----------
expiration of this Agreement and shall continue in full force and effect for a
period of five (5) years thereafter.
20 Force Majeure. Neither party shall be liable for delays or
-------------
failure in its performance hereunder caused by any act of God, war, strike,
labor dispute, work stoppage, fire, act of government, or any other cause,
whether similar or dissimilar, beyond the control of that party; provided
however that this clause shall not apply to Participant's obligation to pay for
AADVANTAGE Miles or pay other sums when due hereunder.
21 Independent Contractor. Nothing in this Agreement is intended or
----------------------
shall be construed to create or establish any agency, partnership or joint
venture relationship between the parties. The parties expressly disclaim such
relationship, agree that they are acting solely as independent contractors
hereunder and agree that the parties have no fiduciary duty to one another or
any other special or implied duties that are not expressly stated herein.
22 Entire Agreement. This Agreement and all Attachments hereto
----------------
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede any prior or contemporaneous agreement or
understanding, whether written or oral, if any, between the parties with respect
to such subject matter. This Agreement may be modified only by a further written
agreement signed by all of the parties hereto. THERE ARE NO ORAL AGREEMENTS
CONCERNING THE SUBJECT MATTER OF THIS AGREEMENT.
23 Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the permitted successors and assigns of each party
hereto. Participant may not assign, delegate or otherwise convey this Agreement,
or any of its rights and obligations hereunder, to any Person without the prior
written consent of American, and any such attempted assignment without consent
shall be void. American may assign the administration of this
-25-
<PAGE>
Agreement to any Person that is an Affiliate of American. American may, from
time to time, delegate one or more of American's administrative duties hereunder
to an Affiliate or non-Affiliate of American.
24 Taxes.
-----
24.1 Participant Taxes. Participant will pay when due all
-----------------
present and future taxes and levies, imposts, deductions, charges, stamp taxes
or withholdings whatsoever, including without limitation sales, use, excise or
goods and services taxes (collectively "Taxes") imposed, assessed, levied or
collected by any taxing jurisdictions together with interest thereon and
penalties, fines and surcharges with respect thereto, if any, on or in respect
of any payments made or to be made by Participant under this Agreement but
excluding any such Taxes arising from or measured by American's net income (such
non-excluded taxes are collectively referred to as "Participant Taxes").
24.2 Indemnity for Taxes. Without limiting the foregoing,
-------------------
Participant will indemnify American against, and reimburse American upon demand
for, any Participant Taxes that American is obligated to pay or has paid.
24.3 Withholding. In the event that Participant is required by
-----------
Applicable Law to deduct or withhold Participant Taxes from any amounts payable
under or in respect of this Agreement, Participant shall (i) pay to American
such additional amounts as may be required, so that after the deduction or
withholding of such Participant Taxes, American will receive from Participant on
the due date thereof an amount equal to the amount stated to be payable to
American under this Agreement had such Participant Taxes not been imposed, (ii)
make the required deduction or withholding and (iii) promptly pay the
authorities before penalties attach thereto or interest accrues thereon.
25 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 the provisions hereof.
26 Construction. The parties acknowledge and agree that this
------------
Agreement has been drafted and prepared through the efforts of both parties and
the rule of construction that any vague or ambiguous terms are to be construed
against the party drafting same shall not be applied to either party to this
Agreement.
27 Severability. If any provision of this Agreement is deemed to be
------------
illegal, invalid or unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected, and this Agreement shall continue in full
force and effect.
28 No Third Party Beneficiaries. All rights, remedies and
----------------------------
obligations of the parties under this Agreement shall accrue or apply solely to
the parties hereto or their permitted successors or assigns and there is no
intent to benefit any other Person, including without limitation Members.
-26-
<PAGE>
29 Effective Date. Although signed as of the date specified below,
--------------
this Agreement shall not become effective unless and until (i) the Rights
Agreement, Additional Warrant Agreement and Warrant Agreements have been signed
by all parties thereto and become effective and the first 190,000 share tranche
of warrants has been granted by the board of directors of Participant; and (ii)
Participant has delivered to American an opinion of Participant's legal counsel,
in substantially the form attached hereto.
-27-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of August 19, 1997.
NETCENTIVES INC. AMERICAN AIRLINES, INC.
By: /s/ Eric W. Tilenius By: /s/ Michael W. Gunn
-------------------- ---------------------
Name: Eric Tilenius Name: Michael W. Gunn
Title: Chairman Title: Senior Vice President,
Marketing
-28-
<PAGE>
ATTACHMENT 1
Pricing
The following volume pricing and rebate shall apply to all AADVANTAGE
Miles purchased by Participant during each Contract Year hereunder. With
respect to any Contract Year, the volume discount and rebate amount apply only
to the incremental volume set forth opposite the price discount and rebate
amount in the chart below that is actually purchased and paid for by
Participant during such Contract Year. With respect to any Contract Year, so
long as no Participant Default has occurred and is continuing, or event that
with the giving of notice or lapse of time or both would constitute a
Participant Default, American, upon written request from Participant, shall
promptly pay over to Participant the rebate amount, net of any amounts due and
owing from Participant to American hereunder, but only if and when the total
volume of AADVANTAGE Miles purchased by Participant hereunder during such
Contract Year equals or exceeds 56,349,207. If the 56,349,207 AADVANTAGE Mile
threshold is not met during a Contract Year, there will be no rebate for
AADVANTAGE Miles purchased by Participant during such Contract Year.
Participant may prepay in order to receive a volume discount and qualify for a
rebate.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
VOLUME OF PRICE PER REBATE PER
AADVANTAGE MILES AADVANTAGE MILE AADVANTAGE MILE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than 27,777,778 $0.018 $0.001
- -----------------------------------------------------------------------------------------------------------
27,777,778 - 56,349,207 0.0175 0.0005
- -----------------------------------------------------------------------------------------------------------
More than 56,349,207 0.017 None
- -----------------------------------------------------------------------------------------------------------
</TABLE>
If Participant gives American an Exclusivity Termination Notice, then
the following volume pricing shall apply to all AADVANTAGE Miles purchased by
Participant following the effective date of termination of Limited Exclusivity.
With respect to any Contract Year, the volume price discount applies only to the
incremental volume set forth opposite the price discount in the chart below that
is actually purchased and paid for by Participant during such Contract Year
after the effective date of termination of Limited Exclusivity. Participant may
prepay in order to receive a volume discount.
- ------------------------------------------------------------------------
VOLUME OF PRICE PER
AADVANTAGE MILES AADVANTAGE MILE
- ------------------------------------------------------------------------
Less than 25,000,000 $0.020
- ------------------------------------------------------------------------
25,000,000 - 45,000,000 0.019
- ------------------------------------------------------------------------
45,000,001 - 70,000,000 0.018
- ------------------------------------------------------------------------
More than 70,000,000 0.017
- ------------------------------------------------------------------------
If American gives Participant an Exclusivity Termination Notice, then a
price per AADVANTAGE Mile of one and seven-tenths cents ($0.017) shall apply to
all AADVANTAGE Miles purchased by Participant following the effective date of
termination of Limited Exclusivity.
1-1
<PAGE>
ATTACHMENT 2
Minimum Purchase Requirements and Prepayment Schedule
1. Minimum Purchase Requirement. So long as neither party
----------------------------
has given the other an Exclusivity Termination Notice, Participant shall
purchase and pay for $250,000.00 worth of AADVANTAGE Miles during each Contract
Year during the Term. If either party gives the other an Exclusivity Termination
Notice, then this minimum purchase requirement and the $250,000.00 prepayment
requirement stated below shall no longer apply commencing with the first full
Contract Year that begins after the date of the notice of termination of Limited
Exclusivity.
2. Prepayment Schedule. Participant shall pay American
-------------------
$250,000.00 on the date this Agreement is executed and on the first day of
each Contract Year thereafter as a prepayment of Participant's AADVANTAGE Mile
purchase obligations hereunder. This amount will be credited against payments
due under Section 3.2 (Mileage Payments) until such amount will be exhausted.
-----------
If American terminates Limited Exclusivity with an effective date of termination
within ninety (90) days after the beginning of any Contract Year, American
shall, promptly upon Participant's written request, refund the unused portion
of the prepayment made by Participant for such Contract Year, net of any
amount due and owing by Participant to American hereunder.
2-1
<PAGE>
ATTACHMENT 3
------------
Netcentives Approval Request Form
Please indicate your approval of a Netcentives program with the
following company or organization by faxing back a signed copy of this request.
Company or Organization:
Name:
Address:
City, State & Zip:
Phone:
Business Description:
Program Objective(s):
Program Period: Start Date:____________ End Date:____________
Submitted by: Approved by:
Netcentives Inc. American Airlines, Inc.
____________________________ ____________________________
Signature Signature
____________________________ ____________________________
Title Title
____________________________ ____________________________
Date Date
<PAGE>
ATTACHMENT 4
------------
Data Transmission Layouts
AAdvantage Participant Record Layouts in AATMS
MISCELLANEOUS - Activity Posting
LRECL = 110, BLKSIZE=32760, RECFM=FB
ALL Data MUST be in EBCDIC Format and ALL Alpha (A) Text MUST be in CAPS
HEADER Record Layout
<TABLE>
<CAPTION>
Data Element Position Length Type Rationale/Edit Rules Required(R)/Optional(O)
- ------------ -------- ------ ---- -------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Transaction Type 001 1 N Value = '1' for Header All Data Elements
Partner ID 002-004 3 A/N Value = '(Vendor Code)' Are REQUIRED
Filler 1 005 1 A/N Blank Filled
Wording 1 006-017 12 A Value = 'POSTING DATA'
Filler 2 018-019 2 A/N Blank Filled
File Creation Date 020-027 8 A/N YYYYMMDD Format
Filler 3 028-029 2 A/N Blank Filled
*Batch Number 030 1 N Right Justified, Zero Filled
Filler 4 031-110 80 A/N Blank Filled
</TABLE>
TRAILER Record Layout
<TABLE>
<CAPTION>
Data Element Position Length Type Rationale/Edit Rules Required(R)/Optional(O)
- ------------ -------- ------ ---- -------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Transaction Type 001 1 N Value = '9' for Header All Data Elements
Partner ID 002-004 3 A/N Value = '(Vendor Code)' Are REQUIRED
Filler 1 005 1 A/N Blank Filled
Wording 1 006-017 12 A Value = 'POSTING DATA'
Filler 2 018-019 2 A/N Blank Filled
File Creation Date 020-027 8 A/N YYYYMMDD Format
Filler 3 028-029 2 A/N Blank Filled
*Batch Number 030 1 N Right Justified, Zero Filled
Filler 4 031-039 9 A/N Blank Filled
Wording 2 040-053 14 A Value = 'TOTAL RECORDS:'
Posting Record Count 054-060 7 N Right Justified, Zero Filled
Filler 5 061-110 50 A/N Blank Filled
________________________________________________________________________________________________________________________________
</TABLE>
*Batch Number will be either 0 or 1-9 (use 1-9 Batch Number based on number of
Daily transmittals)
<PAGE>
AAdvantage Participant Record Layouts in AATMS
MISCELLANEOUS - Activity Posting
LRECL = 110, BLKSIZE=32670, RECFM=FB
ALL Data MUST be in EBCDIC Format and ALL Alpha (A) Text MUST be in CAPS
DETAIL ACTIVITY Record Layout
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Data Element Position Length Type Rationale/Edit Rules Required(R)/Optional(O)
- ------------ -------- ------ ---- -------------------- -----------------------
*Transaction Type 001 1 A Value = * see below R
Partner ID 002-004 3 A/N Value = '(Vendor Code)' R
Partner Service Term Code 005-009 5 A/N Value Provided by AA R
Member ID 010-016 7 A/N AAdvantage Number R
Member Last Name 017-036 20 A Left Justified, Blank Filled R
Member First Initial 037 1 A Left Justified, Blank Filled R
Activity Date 038-045 8 A/N YYYYMMDD Format R
Supplied Miles 046-052 7 N Right Justified, Zero Filled R/O
Filler 1 (Cross-Ref Nbr) 053-068 16 A/N Left Justified, Blank Filled O
Filler 2 069-072 4 A/N Blank Filled R
Filler 3 073 1 A/N Left Justified, Blank Filled R
Filler 4 (Property Code) 074-078 5 A/N Alpha- Left Justified, Blank Filled O
Num- Right Justified, Zero Filled R
Filler 5 079-080 2 A/N Blank Filled R
Filler 6 (Input Record Nbr) 081-085 5 A/N Left Justified, Blank Filled O
filler 7 (Ptr Tracking Nbr) 086-095 10 A/N Left Justified, Blank Filled O
Filler 8 096-110 15 A/N Left Justified, Blank Filled O
________________________________________________________________________________________________________________________
</TABLE>
*Transaction Type Codes: "I" for Miscellaneous
"D" for Destination
"F" for Financial
"M" for Merchandise
"P" for Promotional
"L" for Telecommunications
<PAGE>
ATTACHMENT 5
------------
Guidelines for Producing AADVANTAGE(R) Related Materials
and Using the AADVANTAGE Travel Awards' Trademark
To protect the legal registration of the AADVANTAGE trademark and to
achieve instant and consistent recognition of the AADVANTAGE travel awards
program, the following guidelines must be followed when producing AADVANTAGE
related material.
Register Mark: The first time the word "AADVANTAGE" or "American Airlines"
- -------------
appears in a headline, subhead or text, it must include the register mark
of (R)or (R).
Eagle: The first time the word "AADVANTAGE" appears in a headline, subhead or
- -----
text, it must include an eagle between the two capital A's and carry the
register mark (R). The eagle must always be facing to the right. If the Eagle
----------------------------------
cannot be produced, as in a letter, it is not required but, the register mark
(R) must still be used.
Note: Both the registrar mark (R) and Eagle are required only one time
-------------
per piece
Tag Line: When using the word "AADVANTAGE" in a headline, subhead or text, if
- --------
the slug "A registered trademark of American Airlines, Inc." is not used
immediately below the AADVANTAGE logo, the following tag line must appear at the
bottom of the page/piece (along with the disclaimer):
American Airlines and AADVANTAGE are registered trademarks of American
Airlines, Inc.
(The eagle and registered mark (R) do not have to appear in the tag
line.)
NOTE: You should also include other AA trademark names in the tag line when
appropriate. For example: AADVANTAGE Platinum, AADVANTAGE Gold, American
Eagle, Something Special in the Air, Admirals Club, etc.
Disclaimer: All pieces discussing the AADVANTAGE travel awards program must have
- ----------
a legal disclaimer added to the bottom of the page/piece. The disclaimer is in
accordance with guidelines of the National Association of Attorneys General. If
the material referencing AADVANTAGE has perforations or can be separated, each
separate piece that can potentially be viewed as a "stand-alone" piece must have
both the disclaimer and tag line. See the attached list of disclaimers that are
to be used.
Multiple Pieces: If several pieces are being produced for distribution, each
- ---------------
separate piece that can potentially be viewed as a "stand-alone" piece must have
both the tag line and disclaimer.
Colors: PMS 485 Red and PMS 281 Blue are the colors for the AADVANTAGE logo. The
- ------
preferred treatment for the AADVANTAGE logo is the first capital A in red with
the rest of the word, register mark (R) and the eagle in blue.
A AADVANTAGE(R) American Airlines(R)
(red) (blue) (red) (blue)
5-1
<PAGE>
If it is not possible to use both red and blue, the AADVANTAGE logo is also
acceptable as follows:
- all blue
- all black
- reversed out in all white
Other colors or color combinations are not acceptable.
Type: AADVANTAGE and American Airlines are to be printed in Helvetica type if
- ---- --
printed as a logo. For text or headings, the type may match that used for the
- -----------------
rest of the piece noting the following provisions: AADVANTAGE should not be
printed in SCRIPT illustrated or art typefaces.
Spacing: The word "AADVANTAGE" should never be hyphenated and the name
- -------
American Airlines should not be split over any lines.
Use as an Adjective: The word "AADVANTAGE" may never be used as a noun or verb.
- -------------------
It should only be used as an adjective and in connection with the common name of
the service, such as the "AADVANTAGE travel awards program."
Any play on the word ADVANTAGE should be avoided. For example, copy
such as "The AADVANTAGE of American Airlines" or "THE ADVANTAGES AND BENEFITS OF
MEMBERSHIP" are not acceptable.
---
Awards: If awards are mentioned, the wording of the awards should be the same
- ------
as the wording used in our AADVANTAGE Rules Brochure or on our Mileage Summary.
Description of Miles: AADVANTAGE miles or mileage cannot be described as FREE.
- --------------------
Miles are not free, they are EARNED as a result of a specified transaction.
Description of Program: Any time the AADVANTAGE program is explained, the
- ----------------------
descriptive phrase "travel awards program" should be used versus "frequent flyer
program." The AADVANTAGE program benefits not only frequent travelers, but also
infrequent travelers who use our AADVANTAGE Participants or travel on American
consistently. Additionally, there are several non-travel related opportunities
to earn mileage credit.
The piece should not mention any other companies or organizations
unless approved by the American Airlines Partner Marketing Department, AA/HDQ-MD
5321. Other airlines participating in the AADVANTAGE travel awards program
should be referred to as "participating carriers," NOT affiliated carriers.
Additionally, no AADVANTAGE Participant should be referred to as a partner. The
words partner or partnership should never be used in any promotional materials.
Announcements: If Bonus Miles or any enhancements to the AADVANTAGE travel
- -------------
awards program are being introduced, the announcement should first be made by
-----------------------
AA/HDQ and, if Possible, through the AADVANTAGE Newsletter.
- ----------------------------------------------------------
5-2
<PAGE>
AADVANTAGE PROGRAM DISCLAIMERS
The following disclaimers are required on all/any advertisement or promotional
piece that references the AADVANTAGE program. The length of the disclaimer
varies with the type of promotion.
LONG VERSION
------------
(Rules Brochure, Newsletter, Certificates, detailed AADVANTAGE information)
American Airlines may find it necessary to change AADVANTAGE program rules,
regulations, travel awards and special offers at any time. This means that
American may initiate changes impacting, for example, participant affiliations,
rules for earning mileage credit, mileage levels and rules for the use of travel
awards, continued availability of travel awards, blackout dates and limited
seating for travel awards, and the features of special offers. American Airlines
reserves the right to end the AADVANTAGE program with six months notice.
AADVANTAGE travel awards, mileage accrual and special offers subject to
government regulations. American Airlines is not responsible for products or
services offered by other participating companies.
MEDIUM VERSION
--------------
(Promotional brochures, mailings, when AADVANTAGE is not
the main subject of piece but the program is mentioned).
American Airlines may find it necessary to change AADVANTAGE program rules,
regulations, travel awards and special offers at any time, impacting, for
example, Participant affiliations, rules for earning mileage and blackout dates
and limited seating for travel awards. American reserves the right to end the
AADVANTAGE program with six months notice. AADVANTAGE travel awards, mileage
accrual and special offers subject to government regulations. American Airlines
is not responsible for products or services offered by other participating
companies.
SHORT VERSION
-------------
(Posters, advertising)
American Airlines reserves the right to change AADVANTAGE program rules,
regulations, travel awards and special offers at any time without notice, and to
end the AADVANTAGE program with six months notice. American Airlines is not
responsible for products or services offered by other participating companies.
(OR)
American Airlines reserves the right to change the AADVANTAGE program at any
time without notice. American Airlines is not responsible for products or
services offered by other participating companies.
5-3
<PAGE>
AADVANTAGE ADVERTISING COPY
RETAIL COPY STANDARDS
SHORT VERSION
-------------
Members of our AADVANTAGE travel awards program can earn valuable mileage credit
good for special upgrades and free trips to exciting destinations around the
world.
MEDIUM VERSION
--------------
Our AADVANTAGE travel awards program makes it easy for you to earn valuable
mileage credit every time you fly on American Airlines or American Eagle, or use
one of our AADVANTAGE Participants. You can redeem your AADVANTAGE miles for
special upgrades to Business and First Class, as well as free tickets to a host
of exciting destinations around the world.
LONG VERSION
------------
Our AADVANTAGE travel awards program makes it easy for you to earn valuable
mileage credit every time you fly on American Airlines or American Eagle, or use
one of our AADVANTAGE Participants. You can redeem your AADVANTAGE miles for
special upgrades to Business and First Class, as well as free tickets to a host
of exciting destinations around the world.
If you're not a member of the AADVANTAGE program, now's the time to enroll. You
can join instantly at any American Airlines ticket counter, or by calling
1-800-433-7300 or your local American Airlines Reservations number.
NOTE: APPROPRIATE AADVANTAGE DISCLAIMER
MUST BE INCLUDED WITH ALL VERSIONS.
5-4
<PAGE>
EXHIBIT 10.9
NETCENTIVES INC.
SUPPLY AGREEMENT
This Supply Agreement (the "Agreement") is entered into between Netcentives
---------
Inc., a California corporation ("Netcentives") and Northwest Airlines, Inc., a
-----------
Minnesota corporation ("NW") and shall be effective for all purposes as of
--
September 5, 1997 (the "Effective Date").
--------------
RECITALS
WHEREAS, Netcentives has developed an Internet-based program which provides
for the grant of airline frequent flier miles and other incentives to end-users
(the "Netcentives Program");
-------------------
WHEREAS, NW has established a travel awards program (the "WorldPerks
----------
Program") pursuant to which, among other things, certain persons may receive
- -------
frequent flier miles for travel on NW and for such other reasons as are
permitted by NW;
WHEREAS, in connection with the execution of this Agreement, NW has joined
a Rights Agreement among Netcentives and certain other parties and Netcentives
has issued NW a Warrant to purchase shares of the Non-Voting Convertible Stock
of Netcentives;
WHEREAS, Netcentives wishes to purchase Miles (as hereinafter defined) from
NW and NW wishes to sell Miles to Netcentives pursuant to the terms of this
Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
consideration provided for herein, the parties hereto hereby agree as follows:
SECTION I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Account" shall mean the account of Netcentives Members who are also
-------
WorldPerks Members in which Miles balances are maintained by NW.
1.2 "Confidential Information" means any information, technical data, or
------------------------
know-how, including, but not limited to, that which relates to research, product
plans, products, services, Netcentives Members, customers, markets, software,
developments, inventions, processes, designs, drawings, engineering, hardware
configuration information, marketing or finances of a party, which is designated
in writing to be confidential or proprietary, or if given orally, is identified
as confidential or proprietary at the time of disclosure or is obviously
confidential considering the context in which such disclosure is made.
Confidential Information does not include information, technical data or know-
how which (i) is rightfully in the possession of the receiving party at the time
of disclosure, (ii) prior to or after the time of disclosure becomes part
<PAGE>
of the public knowledge or literature other than as a result of any improper
inaction or action of the receiving party hereunder, or (iii) is approved by the
disclosing party, in writing, for release.
1.3 "Direct Competitor of Netcentives" means any third party that operates
--------------------------------
a program to reward Internet or online service activities, (a) where end-users
may earn Miles at multiple web sites or multiple online service areas, or (b)
where end-users may earn points which are redeemable for the incentive awards
of more than one company.
1.4 NW and Netcentives shall have a relationship of "Limited Exclusivity"
-------------------
so long as (a) this Agreement has not been terminated in accordance with its
terms, (b) NW has not been released from its obligations under clause (c) hereof
pursuant to Section 5.1 hereof, and (c) NW has not sold Miles to any Direct
Competitor of Netcentives.
1.5 "Miles" means the points accrued under the Supplier Program by
-----
WorldPerks Members for travel on NW or such other reasons as are permitted by
NW.
1.6 "Netcentives Marks" means the trademarks and logos of Netcentives set
-----------------
forth on Exhibit A1 hereto.
----------
1.7 "Netcentives Member" means, as of any date, an individual who is a
------------------
member in good standing of the Netcentives Program.
1.8 "Partner Advisory Board" means the consultative board of Netcentives
----------------------
which is composed of representatives of certain suppliers to Netcentives.
1.9 "Supplier Marks" means the trademarks and logos of NW set forth on
--------------
Exhibit A2 hereto.
- ----------
1.10 "Term" has the meaning given it in Section 5.2(a) hereof.
----
1.11 "WorldPerks Member" means, as of any date, an individual who is a
-----------------
member in good standing of the WorldPerks Program.
SECTION II
PURCHASE AND SALE
2.1 Orders. Netcentives shall deliver orders to NW for Miles in such
------
format as is mutually agreed by the parties, which orders shall designate the
aggregate number of Miles to be purchased, the Account or Accounts to which such
Miles are to be credited, and the number of Miles to be credited to each such
Account. NW shall credit Accounts designated by Netcentives within a reasonable
time after receipt of an order from Netcentives, but in any event within seven
(7) business days thereof. Netcentives will supply NW with computer tapes, or
other mutually agreeable format, twice a month indicating those WorldPerks
Members who are eligible for Miles from Netcentives. The tapes will include the
name, WorldPerks number, the number of miles to be credited and any other
information reasonably identified as necessary by NW. All costs associated with
the accumulation of these data and delivery to NW will be borne by Netcentives.
-2-
<PAGE>
2.2 Purchase Terms. The terms specific to the purchase of NW's WorldPerks
--------------
Miles by Netcentives under this Agreement are fixed and are contained in
Appendix A hereto. The prices for Miles shall not be changed during the term of
this Agreement without the prior written consent of Netcentives, provided
however, that the prices for Miles shall vary as set forth on Appendix A based
upon whether the parties have a relationship of Limited Exclusivity at the
time of an order.
2.3 Payment. The number of Miles will be obtained from the twice monthly
-------
tapes sent by Netcentives to NW. NW will issue an invoice to Netcentives by the
end of the month following the previous month for payment. The invoice shall
set forth an account total for all transactions for Miles during the previous
month, any retroactive transactions for the previous six months and the total
amount due. Within thirty (30) days of the receipt of such invoice, Netcentives
shall pay NW the amount set forth thereon. Should Netcentives reasonably
believe there is discrepancy in the number of transactions billed and so advises
NW, the parties will work together in good faith to resolve the dispute within
sixty (60) days of the receipt of the invoice. Netcentives shall pay the
disputed portion of the invoice as provided above. At termination of this
Agreement, any outstanding balance owed by Netcentives to NW will be paid within
thirty (30) days of receipt of the invoice.
2.4 Letter of Credit. To secure its payment obligation hereunder,
----------------
simultaneous with execution of this Agreement, Netcentives will establish for
the exclusive benefit of NW an irrevocable Letter of Credit, upon substantially
the same terms as in Appendix B, with Silicon Valley Bank, or another bank at
Netcentives' discretion, provided such bank has assets in excess of
$2,000,000,000 and is headquartered in on of the 48 states. The initial amount
of such Letter of Credit shall be $10,000, which is the parties' present
estimate of Netcentives' monthly payment obligations hereunder. To the extent
such monthly obligation is reasonably estimated by NW to increase, it may, from
time to time, require Netcentives to increase the Letter of Credit face amount
to an appropriate level to secure anticipated monthly payment obligations. Any
such increase in the Letter of Credit will be accomplished within ten (10) days
of notice. The Letter of Credit shall provide for payment upon the terms set
forth in Appendix B. In addition to this remedy, a failure to make any payment
due hereunder or to provide or increase the Letter of Credit shall also be the
basis for NW to terminate the Agreement pursuant to Section 5.2 (a) (ii), except
that for payment defaults related to the Letter of Credit there shall be no cure
period.
SECTION III
OBLIGATIONS OF NETCENTIVES
3.1 Distribution to Netcentives Members. Netcentives shall only request
-----------------------------------
that Miles be credited to the accounts of persons in exchange for their
participation in the Netcentives Program.
3.2 Distribution to WorldPerks Members. Netcentives shall only request
----------------------------------
that Miles be credited to the Accounts of Netcentives Members whom Netcentives
believes in good faith to be WorldPerks Members. To the extent that Netcentives
requests that Miles be credited to a person who is not a WorldPerks Member, NW
shall not be obligated to credit such Account, provided however, that upon
----------------
giving notice to Netcentives that a specified account does not
-3-
<PAGE>
belong to a WorldPerks Member, NW treat such Miles as if they had never been
ordered (in which case Netcentives' payment obligation shall be reduced
accordingly).
3.3 No Resale Of Miles. At no time shall Netcentives offer Miles to any
------------------
person for resale to a third party. If Netcentives discovers with reasonable
certainty that any Netcentives Member is inappropriately redistributing Miles,
Netcentives shall immediately cease requesting that Miles be credited to the
Account of such Netcentives Member, and shall notify NW of the identity of such
Netcentives Member and the nature of the potential infraction.
3.4 Partner Advisory Board. For so long as Netcentives and NW maintain a
----------------------
relationship of Limited Exclusivity and Netcentives has an active Partner
Advisory Board, Netcentives shall permit one representative of NW to participate
in all of its Partner Advisory Board meetings, pursuant to the rules and
regulations of the Partner Advisory Board in effect at the time.
SECTION IV
PROPRIETARY INFORMATION
4.1 Confidential Information. Each party agrees not to use any
------------------------
Confidential Information disclosed to it by the other party for its own use or
for any purpose other than to carry out its obligations under this Agreement.
Neither party will disclose any Confidential Information of the other party to
third parties or to employees of the party receiving Confidential Information,
other than employees who are required to have the information in order to carry
out such party's obligations under this Agreement. Each party agrees that it
will take all reasonable measures to protect the secrecy of and avoid disclosure
or use of Confidential Information of the other party in order to prevent it
from falling into the public domain or the possession of persons other than
those persons authorized under this Agreement to have any such information,
including (without limitation) ensuring that recipients of the disclosing
party's Confidential Information adhere to confidentiality terms in content
substantially similar to the terms in this Agreement. Such measures shall
include the highest degree of care that the receiving party utilizes to protect
its own Confidential Information of a similar nature. Each party agrees to
notify the other in writing of any misuse or misappropriation of Confidential
Information of the disclosing party which may come to the receiving party's
attention.
4.2 Publicity. After the execution of this Agreement, Netcentives shall
---------
be permitted, at its discretion, to issue a press release which may, among other
things, confirm the existence of a relationship between the parties and of the
exclusive nature of such relationship, and may request that NW 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.
-4-
<PAGE>
4.3 Trademarks.
----------
(a) NW hereby grants Netcentives a limited, non-exclusive license to
duplicate and use the Supplier Marks in Netcentives' promotional materials and
on its Internet Web site, during the Term of this Agreement (as extended by
Section 5.2(b)(ii), as appropriate), provided however, that any use of the
----------------
Supplier Marks shall be for the purpose of promoting the Netcentives Program and
shall only be used with regard to the inclusion of Miles within the Netcentives
Program.
(b) Netcentives hereby grants NW a limited, non-exclusive license to
duplicate and use the Netcentives Marks in NW's promotional materials and on its
Internet Web site, during the Term of this Agreement, provided however, that any
----------------
use of the Netcentives Marks shall be for the purpose of promoting the
WorldPerks Program or the Netcentives Program and shall only be used with regard
to the inclusion of Miles within the Netcentives Program.
(c) Nothing herein shall be deemed to grant either party any ownership
interest in the Marks of the other party.
SECTION V
LIMITED EXCLUSIVITY; TERM AND TERMINATION
5.1 Limited Exclusivity.
-------------------
(a) Relationship. The parties hereto acknowledge that they shall have
------------
a relationship of Limited Exclusivity during the Term of this Agreement, whereby
NW grants Netcentives Limited Exclusivity on the Internet by agreeing not to
sell Miles to any Direct Competitor of Netcentives, and that certain rights and
privileges under this Agreement and other agreements between the parties are
dependent on the maintenance of such a relationship. This exclusivity is limited
in that it shall in no way prevent NW from pursuing its own sale of Miles on the
Internet (except to Direct Competitors). As long as a program is not a direct
competitor of Netcentives, NW is free to (i) sell Miles to any individual
Internet web site, (ii) sell mileage to an Internet provider or online service,
(iii) have current WorldPerks Partners offer Miles on their web sites or as
part of an Internet promotion, and (iv) award Miles on NW's own web site. Either
party hereto may terminate the obligations of the parties under the relationship
of Limited Exclusivity upon provision of ninety (90) days written notice to the
non-terminating party (the "Notice"), which termination shall have the effects
------
set effects set forth in subsection (b), below.
(b) Effect of Termination of Limited Exclusivity. Termination of the
--------------------------------------------
relationship of Limited Exclusivity between NW and Netcentives shall not affect
the obligations of the parties under this Agreement except that upon the
termination of the relationship of Limited Exclusivity, in addition to the loss
of certain other rights as set forth in other Agreements between the parties,
(i) immediately upon receipt of the Notice by the non-terminating party,
prices paid for miles by Netcentives shall be adjusted downward in accordance
with Appendix A, hereof; (ii) immediately upon receipt of the Notice by the non-
terminating party, designees of NW shall no longer be permitted to participate
on the Partner Advisory Board; and (iii)
-5-
<PAGE>
beginning ninety (90) days after receipt of the Notice by the non-terminating
party, NW shall be permitted to sell Miles to any third party, including a
Direct Competitor of Netcentives.
5.2 Term and Termination.
--------------------
(a) Term and Termination.
--------------------
(i) The term of this Agreement shall be four (4) years from
the Effective Date (the "Term"), unless terminated pursuant to this Section 5.2.
----
This Agreement shall terminate upon the expiration of the Term unless renewed by
the parties hereto in writing.
(ii) If either party defaults in the performance of any
material 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 Agreement shall automatically terminate at the end of that
period.
(iii) This Agreement shall terminate, without notice, (A) upon
the institution by or against either party of insolvency, receivership or
bankruptcy proceedings or any other proceedings for the settlement of such
party's debts, (B) upon either party's making an assignment for the benefit of
creditors, (C) upon the dissolution of either party.
(b) Effect of Termination or Expiration. Upon termination of this
-----------------------------------
Agreement for any reason whatsoever: (i) NW will credit all uncredited orders to
the Accounts originally designated by Netcentives; and (ii) if the parties
choose, by mutual agreement, to provide for a "winding down" period during which
Netcentives Members may redeem their accumulated Netcentives Points for Miles,
then the term of the license granted to Netcentives under section 4.3(a) shall
be extended until the end of such "winding down" period.
(c) Survival. NW's obligations to credit Accounts in a timely manner
--------
and Netcentives' obligations to pay NW all amounts due hereunder, as well as
Sections 4.1, 4.2, 4.3(a) (to the extent provided in Section 5.2(b) above),
4.3(c), 6.2, 6.3 and 6.7 shall survive termination of this Agreement.
SECTION VI
MISCELLANEOUS
6.1 Independent Contractors. The relationship of Netcentives and NW
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to constitute the parties as
agents, partners, joint venturers, co-owners or otherwise as participants in a
joint or common undertaking.
6.2 Indemnification.
---------------
(a) NW hereby agrees to indemnify, defend and hold harmless
Netcentives and its respective directors, officers. agents and employees, from
and against any and all claims,
-6-
<PAGE>
losses, damages, suits, judgments, costs and expenses (including litigation
costs and reasonable attorneys' fees) arising out of or relating to (i) NW's
operation of the WorldPerks Program including without limitation, claims by
participants in the WorldPerks Program of NW's breach, violation or failure to
comply with the terms of the WorldPerks Program and (ii) an allegation that
Netcentives use of the Supplier Marks licensed hereunder infringes a copyright
or trademark existing or issued as of the date of such use, provided in each
case that Netcentives promptly notifies NW in writing of any such claim, gives
NW sole control of the defense and all related settlement negotiations, and
cooperates with NW in defending or settling any such claim.
(b) Netcentives hereby agrees to indemnify, defend and hold harmless
NW 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) Netcentives' operation of the Netcentives Program
including without limitation, claims by participants in the Netcentives Program
of Netcentives' breach, violation or failure to comply with the terms of the
Netcentives Program and (ii) an allegation that NW's use of the Netcentives
Marks licensed hereunder infringes a copyright or trademark existing or issued
as of the date of such use, provided in each case that NW promptly notifies
Netcentives in writing of any such claim, gives Netcentives sole control of the
defense and all related settlement negotiations, and cooperates with Netcentives
in defending or settling any such claim.
6.3 Notices. All notices and demands hereunder shall be in writing and
-------
shall be delivered by personal service or by telex, facsimile, cable, telegram,
certified or registered mail, or return receipt express courier to the address
of the receiving party set forth on the signature page of this Agreement, or to
any other address of the receiving party designated by written notice in
accordance with this paragraph.
6.4 Waiver, Amendment and Modification. No waiver, amendment or
----------------------------------
modification of any provision hereof shall be effective unless in writing and
signed by the party against whom such waiver, amendment or modification is
sought to be enforced. No failure by either party to exercise and no delay by
either party in exercising any right, power or remedy with respect to the
obligations secured hereby shall operate as a subsequent waiver of any such
right, power or remedy.
6.5 Assignment. Each of the parties agrees that its rights and
----------
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, provided
--------
however, that such consent shall not be required for an assignment of this
- -------
contract pursuant to a merger, sale of substantially all of the assets, or sale
of all of the outstanding stock of either party. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, their successors
and assigns.
6.6 Severability. In the event that any of the provisions of this
------------
Agreement shall be held by a court of competent jurisdiction to be
unenforceable, such provision will be enforced to the maximum extent permissible
and the remaining portions of this Agreement shall remain in full force and
effect. The parties agree to negotiate in good faith a substitute, valid and
-7-
<PAGE>
enforceable provision that most nearly effects the parties' intent and to be
bound by the mutually agreed substitute provision.
6.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Minnesota, without reference to
conflict of laws provisions thereof. Sole and exclusive jurisdiction of any
lawsuit filed by either party shall be in a federal or state court located in
Hennepin or Dakota counties, Minnesota.
6.8 Force Majeure. Neither party shall be responsible for any failure to
-------------
perform (except for payment obligations) due to unforeseen circumstances or to
causes beyond its control, including but not limited to acts of God, war, riot
embargoes, acts of civil or military authorities, fire, floods, accidents,
strikes, or shortages of transportation facilities, fuel, energy, labor or
materials. A party whose performance is affected by a force majeure condition
shall be excused from such performance to the extent required by the force
majeure condition so long as such party takes all reasonable steps to avoid or
remove such causes of nonperformance and immediately continues performance
whenever and to the extent such causes are removed.
6.9 Entire Agreement; Amendment. This Agreement together with the Rights
---------------------------
Agreement among NW, Netcentives and certain other parties and the Warrant to
Purchase Non-Voting Convertible Stock of even date herewith, constitute the
final and entire Agreement between the parties and may not be modified or
amended except in writing signed by both of the parties.
6.10 Headings. The headings and captions used in this Agreement are for
--------
convenience of reference only, and shall not in any way affect the
interpretation of the provisions of this Agreement.
6.11 Counterparts. This Agreement maybe executed in counterparts, each of
------------
which shall be deemed an original and all of which together shall constitute one
instrument.
[SIGNATURE PAGE TO FOLLOW]
-8-
<PAGE>
The parties have executed this Supply Agreement as of the date set forth
below.
NETCENTIVES INC.
ADDRESS:
2121 S. El Camino Real, Suite 615
San Mateo, CA 94403
/s/ Eric W. Tilenius Facsimile: (415) 572-5205
- ------------------------------
Eric W Tilenius, Chairman
NORTHWEST AIRLINES, INC.
ADDRESS:
Northwest Airlines, Inc.
Dept. A6800 5101 Northwest Dr.
St. Paul, MN 55111-3034
/s/ Susan B. Edberg Facsimile: (612) 726-7049
- ------------------------------
(Signature of Authorized Person)
Susan B. Edberg
- ------------------------------
(Print Name of Signatory)
Director - WorldPerks Mktg
- ------------------------------
(Print Title of Signatory)
[SIGNATURE PAGE TO SUPPLY AGREEMENT]
-9-
<PAGE>
EXHIBIT A1
TRADEMARKS OF NETCENTIVES
Netcentives
ClickRewards
ClickPoints
Internet Incentives Network
NETCENTIVES
C1ICKREWARDS
Online Rewards Program
<PAGE>
EXHIBIT A2
TRADEMARKS OF NW
<PAGE>
APPENDIX A
PURCHASE TERMS
--------------
Item Limited Exclusivity Non-Exclusive
- ---- ------------------- -------------
Price per mile - if under $0.0160 $0.0140
$1,000,000 of miles purchased
per year
Price per mile - if over $0.0150 $0.0140
$1,000,000 of Miles
purchased per year
Warrants to purchase
Netcentives Inc. common stock* 50,000 Vesting cases
plus right to unused
warrants of other airlines
Partner Advisory Board Seat Yes No
*
See Warrant Agreement for Details
<PAGE>
APPENDIX B
LETTER OF CREDIT TERMS
----------------------
Beneficiary's signed statement stating that Netcentives Inc. is in default
of payment of its certain invoice(s) and/or other obligations, such as a
required increase in the amount of this Letter of Credit, which is/are unpaid
and due, under the terms of the contract between Netcentives Inc. and Northwest
Airlines, Inc., dated September, 1997.
Copy(ies) of the above mentioned invoice(s) marked "UNPAID" (no such
invoices required with respect to Letter of Credit claims).
<PAGE>
EXHIBIT 10.10
NETCENTIVES INC.
SUPPLY AGREEMENT
This Supply Agreement (the "Agreement") is entered into between Netcentives
---------
Inc., a California corporation ("Netcentives") and Continental Airlines, Inc., a
-----------
Delaware corporation ("Continental") and shall be effective for all purposes as
-----------
of September 5, 1997 (the "Effective Date").
--------------
RECITALS
WHEREAS, Netcentives has developed an Internet-based program which provides
for the grant of airline frequent flier miles and other incentives to end-users
(the "Netcentives Program");
-------------------
WHEREAS, Continental has established a travel awards program (the "OnePass
-------
Program") pursuant to which, among other things, certain persons may receive
- -------
frequent flier miles for travel on Continental and for such other reasons as are
permitted by Continental;
WHEREAS, in connection with the execution of this Agreement, Continental
has joined a Rights Agreement among Netcentives and certain other parties and
Netcentives has issued Continental a Warrant to purchase shares of the Non-
Voting Convertible Stock of Netcentives;
WHEREAS, Netcentives wishes to purchase Miles (as hereinafter defined) from
Continental and Continental wishes to sell Miles to Netcentives pursuant to the
terms of this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
consideration provided for herein, the parties hereto hereby agree as follows:
SECTION I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Account" shall mean the account of Netcentives Members who are also
-------
OnePass Program Members in which Miles balances are maintained by Continental.
1.2 "Confidential Information" means any information, technical data, or
------------------------
know-how, including, but not limited to, that which relates to research, product
plans, products, services, Netcentives Members, customers, markets, software,
developments, inventions, processes, designs, drawings, engineering, hardware
configuration information, marketing or finances of a party, which is designated
in writing to be confidential or proprietary, or if given orally, is identified
as confidential or proprietary at the time of disclosure or is obviously
confidential considering the context in which such disclosure is made.
Confidential Information does not
<PAGE>
include information, technical data or know-how which (i) is rightfully in the
possession of the receiving party at the time of disclosure, (ii) prior to or
after the time of disclosure becomes part of the public knowledge or literature
other than as a result of any improper inaction or action of the receiving party
hereunder, or (iii) is approved by the disclosing party in writing, for release.
1.3 "Direct Competitor of Netcentives" means any third-party that
--------------------------------
operates a program to reward Internet or online service activities, (a) where
end-users may earn Miles at multiple web sites or multiple online service
areas, or (b) where end-users may earn points which are redeemable for the
incentive awards of more than one company.
1.4 "Limited Exclusivity" means Continental agrees not to sell Miles to
-------------------
any Direct Competitor of Netcentives as defined above. Continental and
Netcentives shall have a relationship of "Limited Exclusivity" so long as (a)
-------------------
this Agreement has not been terminated in accordance with its terms, and (b)
Continental has not sold Miles to any Direct Competitor of Netcentives.
1.5 "Miles" means the points accrued under the OnePass Program by OnePass
-----
Program Members for travel on Continental or such other reasons as are permitted
by Continental.
1.6 "Netcentives Marks" means the trademarks and logos of Netcentives set
-----------------
forth on Exhibit Al hereto.
----------
1.7 "Netcentives Member" means, as of any date, an individual who is a
------------------
member in good standing of the Netcentives Program.
1.8 "Supplier Marks" means the trademarks and logos of Continental set
--------------
forth on Exhibit A2 hereto.
----------
1.9 "Term" has the meaning given it in Section 5.2(a) hereof.
----
1.10 "OnePass Program Member" means, as of any date, an individual who is
----------------------
a member in good standing of the OnePass Program.
SECTION II
PURCHASE AND SALE
2.1 Orders.
------
(a) General. Netcentives shall deliver orders to Continental for
-------
Miles in such format as is detailed in Attachment A3, which orders shall
designate the aggregate number of Miles to be purchased, the Account or Accounts
to which such Miles are to be credited, and the number of Miles to be credited
to each such Account. Continental shall credit Accounts designated by
Netcentives within a reasonable time after receipt of an order from Netcentives,
but in any event within fifteen (15) business days thereof. As long as this
Agreement is in effect, Continental shall not reject any order of Netcentives,
except in accordance with the terms of Section 3.2 hereof.
-2-
<PAGE>
(b) Reserve Account. Netcentives may also order Miles for
---------------
undesignated accounts, which Miles shall be reserved in an Account for the
benefit of Netcentives (the "Reserve Account"). Upon notice by Netcentives (in
---------------
such format as is mutually agreed by the parties) of an election to credit some
or all Miles retained in the Reserve Account to an Account, such Miles shall be
credited to the designated Account within two (2) business days of such notice.
Miles held in the Reserve Account shall be valid and shall not expire while this
Agreement between Continental and Netcentives is in place, as extended by
Section 5.2(b).
(c) Minimum Orders. Beginning on March 5, 1998, and every six (6)
--------------
months thereafter during the Term of this Agreement, if Netcentives and
Continental have a relationship of Limited Exclusivity and if Netcentives has
purchased less than an aggregate of 5,000,000 Miles during the preceding six (6)
month period, Netcentives shall submit an order for that number of Miles that
represents the difference between 5,000,000 and the aggregate Miles purchased by
Netcentives during such six (6) month period. The Miles subject to such order
may be designated by Netcentives for credit to any Account, including the
Reserve Account. Netcentives shall not be obligated to purchase any quantity of
Miles if Netcentives and Continental do not have a relationship of Limited
Exclusivity.
2.2 Price. If Netcentives and Continental have a relationship of Limited
-----
Exclusivity as of the date of an order, the price per mile to be paid to
Continental by Netcentives shall be $0.015 per Mile. If Netcentives and
Continental do not have a relationship of Limited Exclusivity as of the date
of such order, the price per mile to be paid to Continental by Netcentives
shall be $0.013 per mile. The prices for Miles shall not be changed during the
term of this Agreement without the prior written consent of Netcentives.
2.3 Payment. All payments due to Continental pursuant to an order under
-------
this Section 2 shall become due and payable within thirty (30) days of
presentation of evidence that the Miles subject to such order have been credited
to the appropriate Account or Accounts. Any payments made by Netcentives to
Continental hereunder shall be non-refundable.
2.4 Mileage Usage. Netcentives agrees to not transfer Miles to any party
-------------
for resale. All sales not in the form of Netcentive Points to eligible
consumers for redemption of Continental Miles may be awarded only with previous
approval by Continental.
2.5 Taxes. Prices for Miles do not include taxes. Netcentives is
-----
responsible for any and all taxes on the sale of Miles to Netcentives pursuant
to this Agreement.
SECTION III
OBLIGATIONS OF NETCENTIVES
3.1 Distribution to Netcentives Members. Netcentives shall only request
-----------------------------------
that Miles be credited to the accounts of persons in exchange for their
participation in the Netcentives Program.
3.2 Distribution to OnePass Program Members. Netcentives shall only
---------------------------------------
request that Miles be credited to the Accounts of Netcentives Members whom
Netcentives believes in good faith to be OnePass Program Members. To the extent
that Netcentives requests that Miles be credited to a person who is not a
OnePass Program Member, Continental shall not be obligated to credit such
Account, provided however, that upon receiving Notice from Continental that a
----------------
-3-
<PAGE>
specified account does not belong to a OnePass Program Member, Netcentives may,
at its election, have such Miles credited to the Reserve Account (in which case
Netcentives shall be obligated to pay Continental as if it had originally
requested that such Miles be placed in the Reserve Account) or treat such Miles
as if they had never been ordered (in which case Netcentives' payment obligation
shall be reduced accordingly).
3.3 No Resale Of Miles. At no time shall Netcentives offer Miles to any
------------------
person for resale to a third party. If Netcentives discovers with reasonable
certainty that any Netcentives Member is inappropriately redistributing Miles,
Netcentives shall immediately cease requesting that Miles be credited to the
Account of such Netcentives Member, and shall notify Continental of the identity
of such Netcentives Member and the nature of the potential infraction.
3.4 Maximum Number of Miles Per Year. Netcentives agrees that it will not
--------------------------------
allow a Netcentives Member to redeem Netcentives Points for more than 50,000
Miles during any calendar year without Continental's written permission.
SECTION IV
PROPRIETARY INFORMATION
4.1 Confidential Information. Each party agrees not to use any
------------------------
Confidential Information disclosed to it by the other party for its own use or
for any purpose other than to carry out its obligations under this Agreement.
Neither party will disclose any Confidential Information of the other party to
third parties or to employees of the party receiving Confidential Information,
other than employees who are required to have the information in order to carry
out such party's obligations under this Agreement. Each party agrees that it
will take all reasonable measures to protect the secrecy of and avoid disclosure
or use of Confidential Information of the other party in order to prevent it
from falling into the public domain or the possession of persons other than
those persons authorized under this Agreement to have any such information,
including (without limitation) ensuring that recipients of the disclosing
party's Confidential Information adhere to confidentiality terms in content
substantially similar to the terms in this Agreement. Such measures shall
include the highest degree of care that the receiving party utilizes to protect
its own Confidential Information of a similar nature. Each party agrees to
notify the other in writing of any misuse or misappropriation of Confidential
Information of the disclosing party which may come to the receiving party's
attention.
4.2 Publicity. After the execution of this Agreement, Netcentives shall
---------
be permitted, at its discretion, to issue a press release which may, among other
things, confirm the existence of a relationship between the parties and of the
exclusive nature of such relationship, and may request that Continental issue a
similar press release. Such press release shall require Continental's previous
written approval, which shall not be unreasonably withheld. 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.
4.3 Trademarks.
----------
-4-
<PAGE>
(a) Continental hereby grants Netcentives a limited, non-exclusive
license to duplicate and use the Supplier Marks in Netcentives' promotional
materials and on its Internet Web site, during the Term of this Agreement (as
extended by Section 5.2(b)(iii), as appropriate), provided however, that any use
----------------
of the Supplier Marks shall be for the purpose of promoting the Netcentives
Program, shall only be used with regard to the inclusion of Miles within the
Netcentives Program, and shall be used only upon previous written approval by
Continental. Such approval shall not be unreasonably withheld.
(b) Netcentives hereby grants Continental a limited, non-exclusive
license to duplicate and use the Netcentives Marks in Continental's promotional
materials and on its Internet Web site, during the Term of this Agreement,
provided however, that any use of the Netcentives Marks shall be for the purpose
- ----------------
of promoting the OnePass Program or the Netcentives Program, shall only be used
with regard to the inclusion of Miles within the Netcentives Program, and shall
be used only upon previous written approval by Netcentives. Such approval shall
not be unreasonably withheld.
(c) Nothing herein shall be deemed to grant either party any ownership
interest in the Marks of the other party.
SECTION V
LIMITED EXCLUSIVITY; TERM AND TERMINATION
5.1 Limited Exclusivity.
-------------------
(a) Relationship. The parties hereto acknowledge that they shall have
------------
a relationship of Limited Exclusivity (as defined in Section 1.4) during the
Term of this Agreement and that certain rights and privileges under this
Agreement and other agreements between the parties are dependent on the
maintenance of such a relationship. Either party may terminate the obligations
of the parties under the relationship of Limited Exclusivity upon provision of
ninety (90) days written notice (the "Notice") to the non-terminating party,
------
which termination shall have the effects set forth in subsection (b), below.
(b) Effect of Termination of Limited Exclusivity. Termination of the
--------------------------------------------
relationship of Limited Exclusivity between Continental and Netcentives shall
not affect the obligations of the parties under this Agreement except that upon
the termination of the relationship of Limited Exclusivity, in addition to the
loss of certain other rights as set forth in other Agreements between the
parties, (i) immediately upon receipt of the Notice by Netcentives, [.....]; and
(ii) beginning ninety (90) days after receipt of the Notice by Netcentives,
Continental shall be permitted to sell Miles to any third party, including a
Direct Competitor of Netcentives. Any sales by Continental to a Direct
Competitor of Netcentives prior to the expiration of such period shall be
considered a material breach of this Agreement. 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 Continental of its Limited Exclusivity related
covenants and agreements. Accordingly, each party agrees and acknowledges
-5-
<PAGE>
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 Continental, without the
necessity of proving actual damages. Notwithstanding the above, Netcentives
recognizes that third parties may obtain Miles through Continental's "Miles of
Thanks" program, and that it is not always possible to determine the intended
use of the Miles purchased in the "Miles of Thanks" program. Continental will
use commercially reasonable efforts to prevent any Direct Competitor of
Netcentives from purchasing miles through the "Miles of Thanks" program, but if,
after having done so, a Direct competitor of Netcentives obtains miles,
Continental will not be in breach of the Limited Exclusivity Provision of this
Agreement, provided however, that if Netcentives identifies such Direct
----------------
Competitor of Netcentives and provides for Continental opportunity to cure by
removing participation by such Direct Competitor of Netcentives, Continental
will be in breach of this Agreement if it fails to: a) immediately refuse to
sell additional "Miles of Thanks" Miles to said Direct Competitor of
Netcentives; and b) use best efforts to prevent the use of any existing
purchased "Miles of Thanks" Miles by said Direct Competitor of Netcentives.
5.2 Term and Termination.
--------------------
(a) Term and Termination.
--------------------
(i) The term of this Agreement shall be three (3) years from
the Effective Date (the "Term"), unless terminated pursuant to this Section 5.2.
----
This Agreement shall terminate upon the expiration of the Term unless renewed by
the parties hereto in writing.
(ii) If either party defaults in the performance of any material
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 Agreement shall automatically terminate at the end of that period.
(iii) This Agreement shall terminate, without notice, (A) upon
the institution by or against either party of insolvency, receivership or
bankruptcy proceedings or any other proceedings for the settlement of such
party's debts, (B) upon either party's making an assignment for the benefit of
creditors, (C) upon the dissolution of either party.
(b) Effect of Termination or Expiration. Upon termination of this
-----------------------------------
Agreement for any reason whatsoever: (i) Continental will credit all uncredited
orders to the Accounts originally designated by Netcentives in accordance with
this Agreement, provided that it has received payment; (ii) all Miles in the
Reserve Account shall be credited to Accounts in the manner provided for herein
and shall remain valid for the shorter of (a) one year, or (b) until the balance
of Miles in the Reserve Account is zero (0); and (iii) the term of the license
granted to Netcentives under section 4.3(a) shall be extended until the balance
of Miles in the Reserve Account is zero (0) or all such miles have expired;
Netcentives agrees not to use such license for the solicitation of new
Netcentives Members.
-6-
<PAGE>
(c) Survival. Continental's obligations to credit Accounts in a
--------
timely manner and Netcentives' obligations to pay Continental all amounts due
hereunder, as well as Sections 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 4.3(a) (to the
extent provided in Section 5.2(b) above), 4.3(c), 6.2, 6.3 and 6.7 shall survive
termination and expiration of this Agreement.
SECTION VI
MISCELLANEOUS
6.1 Independent Contractors. The relationship of Netcentives and
-----------------------
Continental established by this Agreement is that of independent contractors,
and nothing contained in this Agreement shall be construed to constitute the
parties as agents, partners, joint venturers, coowners or otherwise as
participants in a joint or common undertaking.
6.2 Indemnification.
---------------
(a) Continental hereby agrees to indemnify, defend and hold harmless
Netcentives 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) Continental's operation of the OnePass Program including
without limitation, claims by participants in the OnePass Program of
Continental's breach, violation or failure to comply with the terms of the
OnePass Program and (ii) an allegation that Netcentives use of the Supplier
Marks licensed hereunder infringes a copyright or trademark existing or issued
as of the date of such use, provided in each case that Netcentives promptly
notifies Continental in writing of any such claim, gives Continental sole
control of the defense and all related settlement negotiations, and cooperates
with Continental in defending or settling any such claim.
(b) Netcentives hereby agrees to indemnify, defend and hold harmless
Continental 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) Netcentives' operation of the Netcentives Program
including without limitation, claims by participants in the Netcentives Program
of Netcentives' breach, violation or failure to comply with the terms of the
Netcentives Program and (ii) an allegation that Continental's use of the
Netcentives Marks licensed hereunder infringes a copyright or trademark existing
or issued as of the date of such use, provided in each case that Continental
promptly notifies Netcentives in writing of any such claim, gives Netcentives
sole control of the defense and all related settlement negotiations, and
cooperates with Netcentives in defending or settling any such claim.
6.3 Notices. All notices and demands hereunder shall be in writing and
-------
shall be delivered by personal service or by telex, facsimile, cable, telegram,
certified or registered mail, or return receipt express courier to the address
of the receiving party set forth on the signature page of this Agreement, or to
any other address of the receiving party designated by written notice in
accordance with this paragraph.
-7-
<PAGE>
6.4 Waiver, Amendment and Modification. No waiver, amendment or
----------------------------------
modification of any provision hereof shall be effective unless in writing and
signed by the party against whom such waiver, amendment or modification is
sought to be enforced. No failure by either party to exercise and no delay by
either party in exercising any right, power or remedy with respect to the
obligations secured hereby shall operate as a subsequent waiver of any such
right, power or remedy.
6.5 Assignment. Each of the parties agrees that its rights and
----------
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, provided
--------
however, that such consent shall not be required for an assignment of this
- -------
contract pursuant to a merger, sale of substantially all of the assets, or sale
of all of the outstanding stock of either party. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, their successors
and assigns.
6.6 Severability. In the event that any of the provisions of this
------------
Agreement shall be held by a court of competent jurisdiction to be
unenforceable, such provision will be enforced to the maximum extent permissible
and the remaining portions of this Agreement shall remain in full force and
effect. The parties agree to negotiate in good faith a substitute, valid and
enforceable provision that most nearly effects the parties' intent and to be
bound by the mutually agreed substitute provision.
6.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, without reference to
conflict of laws provisions thereof.
6.8 Force Majeure. Neither party shall be responsible for any failure to
-------------
perform (except for payment obligations) due to unforeseen circumstances or to
causes beyond its control, including but not limited to acts of God, war, riot,
embargoes, acts of civil or military authorities, fire, floods, accidents,
strikes, or shortages of transportation facilities, fuel, energy, labor or
materials. A party whose performance is affected by a force majeure condition
shall be excused from such performance to the extent required by the force
majeure condition so long as such party takes all reasonable steps to avoid or
remove such causes of nonperformance and immediately continues performance
whenever and to the extent such causes are removed.
6.9 Entire Agreement; Amendment. This Agreement together with the Rights
---------------------------
Agreement among Continental, Netcentives and certain other parties and the
Warrant to Purchase Non-Voting Convertible Stock of even date herewith,
constitute the final and entire Agreement between the parties and may not be
modified or amended except in writing signed by both of the parties.
6.10 Headings. The headings and captions used in this Agreement are for
--------
convenience of reference only, and shall not in any way affect the
interpretation of the provisions of this Agreement.
6.11 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original and all of which together shall constitute
one instrument.
-8-
<PAGE>
[SIGNATURE PAGE TO FOLLOW]
-9-
<PAGE>
The parties have executed this Supply Agreement as of the date set forth
below.
NETCENTIVES INC.
ADDRESS:
2121 S. El Camino Real, Suite 615
San Mateo, CA 94403
/s/ Eric W. Tilenius Facsimile: (415) 572-5205
- ----------------------------------
Eric W. Tilenius
Chairman
CONTINENTAL AIRLINES, INC.
ADDRESS:
2929 Allen Parkway, Suite 1231
Houston, TX 77219
Facsimile: (713) 834-2828
/s/ Richard H. Metzner
- ----------------------------------
Richard H. Metzner
Vice President, Marketing Programs
[SIGNATURE PAGE TO SUPPLY AGREEMENT]
<PAGE>
DESIGN GUIDELINES AND LOGO SHEET
[THIS PAGE CONTAINS ARTWORK FOR CONTINENTAL ONEPASS LOGO]
<PAGE>
PROCEDURES FOR TRANSFERRING FILES
BETWEEN THE MAIN FRAME AND A PERSONAL COMPUTER USING RLINK
. Install the RLINK software onto the PC where the file transfer will take
place. RLINK can found on the Internet at http://www.renex.com. From
--------------------
the home page border buttons, select software. Once on the software
page, select the pre-production version of RLINK for Windows from the
drop-down box and commence the download.
. Using the RLINK product, dial into EDSNET (800-321-7208).
. At the number-of-sessions prompt, enter 1.
. At the terminal emulation prompt, enter "RLINK4".
. At the WELCOME screen, enter "EDSNET".
. At the Security screen, enter your assigned logon-id (HZRNYZ) and
password (trltNG1).
Note: The initial password is set up to expire the first time you log on
in order to force a password change. The password must then be changed
at least every 30 days. It has a length of 8, and must contain 6
characters and 2 numbers, in any order.
. There should be one application id on the next panel. Select it by
number to logon to TSO.
. In TSO, you will be prompted for your logon ID and password. This will
be the same as your network logon-id and password, so enter these same
parameters when prompted.
. You should now be at the READY prompt.
. You are now ready to transfer files between the mainframe and the PC.
You will select TRANSFER from the RLINK menu, choose IND$FILE and TSO
line format as the environment. Select the mainframe and PC file names.
To upload files from the PC to the mainframe, make sure that you are
using the append, ASCII and CRLF options, and then execute send. The
file name you will be uploading to is "PT1CO.TBKDR.NETCENT.DEPOSIT".
. Once the file is transferred, toggle to the mainframe session and back
out of TSO to the READY prompt (press PF3 a few times to get there), and
type LOGOFF. Please make sure to disconnect by exiting RLINK or
selecting the HANGUP icon.
If you encounter problems with the transfer, please contact Karen Howard,
713/834-2725. She will route you to the appropriate person to handle the call.
[EDS LOGO]
[OnePass Activity Deposits]
- ---------------------------------------------------------------------------
Netcentives deposits will need to be provided as a file in the following format
on either a weekly, semi-monthly, or monthly basis as determined by volume.
- --------------------------------------------------------------------------------
Field Position Format Length Description
- --------------------------------------------------------------------------------
1 1 char 1 Deposit record type, always "2"
- --------------------------------------------------------------------------------
2 2-9 char 8 OnePass member account number
- --------------------------------------------------------------------------------
3 10-15 char 6 Batch ID, a constant "NET" plus DDD,
where DDD is the julian date
- --------------------------------------------------------------------------------
4 16-29 char 14 Ticket field descriptor, fill with
membership number if applicable - if
multiple deposits are sent for the same
account and same date, this field must
be made unique for each deposit for
that account.
- --------------------------------------------------------------------------------
5 30-35 char 6 Origin and Destination (bonus code),
the constant "NETCNT" Bonus code can
verify for specific promotional offers.
- --------------------------------------------------------------------------------
6 36-37 char 2 Partner code, the constant "OP"
- --------------------------------------------------------------------------------
7 38-39 char 2 Filler, always blank
- --------------------------------------------------------------------------------
8 40-43 num 4 Filler, always 0000
- --------------------------------------------------------------------------------
9 44-49 num 6 Billing date (Process Date) YYMMDD
- --------------------------------------------------------------------------------
10 50-69 char 20 Member's last name
- --------------------------------------------------------------------------------
11 70-135 char 66 Filler, always blank
- --------------------------------------------------------------------------------
12 136 char 1 Source indicator, always "P"
- --------------------------------------------------------------------------------
13 137-167 char 31 Filler, always blank
- --------------------------------------------------------------------------------
14 168-173 num 6 Base mileage amount, ALWAYS ZERO FILL
(right justify)
- --------------------------------------------------------------------------------
15 174-179 num 6 Bonus mileage amount, fill with mileage
amount (right justify)
- --------------------------------------------------------------------------------
16 180-250 char 71 Filler, always blank
- --------------------------------------------------------------------------------
The technical information for files sent to OnePass is as follows:
. Logical record length - 250
. Block size - 23,250
. Format - EBCDIC
. Label format - Standard (for cartridges, tapes)
OnePass can accept 3490 cartridges, or can provide dial-in download access to
the OnePass system through the use of RLINK. If dial-in access is used, EDS will
provide the partner with a copy of the RLINK software.
<PAGE>
EXHIBIT A1
TRADEMARKS OF CONTINENTAL
<PAGE>
NETCENTIVES INC.
2121 S. El Camino Real, Suite 615
San Mateo, CA 94403
September 29, 1997
Continental Airlines, Inc.
2929 Allen Parkway, Suite 1231
Houston,TX 77219
Attention: Colleen McCauley
Dear Ms. McCauley:
This letter agreement (the "Amendment") is entered into between the parties
as of September 25, 1997 (the "Effective Date") for the purpose of amending the
Supply Agreement dated September 5, 1997 between Netcentives Inc.
("Netcentives") and Continental Airlines, Inc. ("Continental"). When used
herein, capitalized terms will have the same meaning as in the Supply Agreement.
1. Netcentives agrees to purchase, and Continental agrees to sell
5,000,000 Miles at $0.015 per mile, for a total payment of $75,000. Following
receipt of payment from Netcentives, such Miles shall be held, pursuant to
Section 2.1(b) of the Supply Agreement, in the Reserve Account for the benefit
of Netcentives.
2. Continental agrees that the Miles purchased under this Amendment shall
be credited towards Netcentives' minimum order obligation set forth in Section
2.1(c) of the Supply Agreement.
3. Continental shall promptly provide an invoice to Netcentives for the
Miles purchased under this Amendment. Payment shall be due upon receipt of such
invoice.
4. Absent a breach of the Supply Agreement by Continental, Netcentives
shall not be entitled to a refund for Miles that are purchased under this
Amendment, but not used by Netcentives.
5. The parties shall execute the Tax Indemnification Agreement in the form
set forth in the Attachment hereto.
6. Continental agrees to promptly notify Netcentives of any taxes claimed
due pursuant to Section 2.5 of the Supply Agreement, and Continental shall
remit, subject to Netcentives' payment of same, any such taxes to the
appropriate government authority.
<PAGE>
Continential Airlines, Inc.
September 29, 1997
Page 2
7. Except as set forth in this Amendment, the Supply Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained herein, and each provision of the Supply Agreement shall continue in
full force and effect.
If the foregoing accurately reflects your understanding, please have this
Amendment executed on behalf of Continental by a duly authorized officer and
return it to me as soon as possible.
Best regards,
NETCENTIVES INC.
By: /s/ Eric W. Tilenius
-----------------------------
Eric Tilenius
Chairman and Executive Vice President
AGREED AND ACCEPTED AS OF
THE DATE FIRST SET FORTH ABOVE:
CONTINENTAL AIRLINES, INC.
By: /s/ Richard H. Metzner
------------------------------------------
Title: Vice President Marketing Programs
-------------------------------------
<PAGE>
EXHIBIT 10.11
NETCENTIVES INC.
SUPPLY AGREEMENT
This Supply Agreement (the "Agreement") is entered into between Netcentives
---------
Inc., a California corporation ("Netcentives") and US Airways, Inc., a Delaware
-----------
corporation ("US Airways") and shall be effective for all purposes as of
----------
September 20, 1997 (the "Effective Date").
--------------
RECITALS
WHEREAS, Netcentives is in a business to provide for the grant of points
redeemable for airline frequent flier miles and other incentives to end-users of
a certain Internet-based program (the "Netcentives Program");
-------------------
WHEREAS, US Airways has established a travel awards program (the "Dividend
--------
Miles Program") pursuant to which, among other things, certain persons may
- -------------
receive frequent flier miles for travel on US Airways and for such other reasons
as are permitted by US Airways; and
WHEREAS, Netcentives wishes to purchase Miles (as hereinafter defined) from
US Airways and US Airways wishes to sell Miles to Netcentives pursuant to the
terms of this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
consideration provided for herein, the parties hereto hereby agree as follows:
SECTION I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Account" shall mean the account of Netcentives Members who are also
-------
Dividend Miles Members in which Miles balances are maintained by US Airways.
1.2 "Confidential Information" means any information, technical data, or
------------------------
know-how, including, but not limited to, that which relates to research, product
plans, products, services, Netcentives Members, customers, markets, software,
developments, inventions, processes, designs, drawings, engineering, hardware
configuration information, marketing or finances of a party, which is designated
in writing to be confidential or proprietary, or if given orally, is identified
as confidential or proprietary at the time of disclosure or is obviously
confidential considering the context in which such disclosure is made.
Confidential Information does not include information, technical data or know-
how which (i) is rightfully in the possession of the receiving party at the time
of disclosure, (ii) prior to or after the time of disclosure becomes part of the
public knowledge or literature other than as a result of any improper inaction
or action of the receiving party hereunder, or (iii) is approved by the
disclosing party, in writing, for release.
<PAGE>
1.3 "Direct Competitor of Netcentives" means any third-party that operates
--------------------------------
a program to reward Internet or online service activities, (a) where end-users
may earn Miles at multiple web sites or multiple online service areas, or (b)
where end-users may earn points which are redeemable for the incentive awards of
more than one company.
1.4 "Dividend Miles Member" means, as of any date, an individual who is a
---------------------
member in good standing of the Dividend Miles Program.
1.5 "Limited Exclusivity" means US Airways agrees not to sell Miles to any
-------------------
Direct Competitor of Netcentives as defined above. US Airways and Netcentives
shall have a relationship of "Limited Exclusivity" so long as (a) this Agreement
has not been terminated in accordance with its terms, and (b) US Airways has not
sold Miles to any Direct Competitor of Netcentives.
1.6 "Miles" means the points accrued under the Dividend Miles Program by
-----
Dividend Miles Members for travel on US Airways or such other reasons as are
permitted by US Airways.
1.7 "Netcentives Marks" means the trademarks and logos of Netcentives set
-----------------
forth on Exhibit A1 hereto, which exhibit may be changed by Netcentives from
----------
time to time upon notice to US Airways.
1.8 "Netcentives Member" means, as of any date, an individual who is a
------------------
member in good standing of the Netcentives Program.
1.9 "Netcentives Points" shall mean the points accrued under the
------------------
Netcentives Program by Netcentives Members for redemption for such products and
services as are offered by Netcentives from time to time.
1.10 "Term" has the meaning given it in Section 5.2(a) hereof.
----
1.11 "US Airways Marks" means the designated trademarks and logos of US
----------------
Airways set forth on Exhibit A2 hereto, which exhibit may be changed by US
----------
Airways from time to time upon notice to Netcentives.
SECTION II
PURCHASE AND SALE
2.1 Orders.
------
(a) General. Netcentives shall deliver orders to US Airways for Miles
-------
in such format as is detailed in Attachment A3 (to be determined by both parties
within the first 30 days of the Effective Date of this Agreement), which orders
shall designate the aggregate number of Miles to be purchased, the Account or
Accounts to which such Miles are to be credited, and the number of Miles to be
credited to each such Account. US Airways shall credit Accounts designated by
Netcentives within a reasonable time after receipt of an order from Netcentives,
but in any event within seven (7) business days thereof. As long is this
Agreement is in effect, US Airways shall not reject any order of Netcentives,
except in accordance with the terms of Section 3.2 hereof.
-2-
<PAGE>
(b) Pre-paid Miles Account. Netcentives will order Miles to be used
----------------------
at its discretion, which Miles shall be reserved in an Account for the benefit
of Netcentives (the "Pre-paid Miles Account"). Upon receipt of an order for
----------------------
Miles pursuant to Section 2.1(a) above, US Airways shall deduct the aggregate
number of Miles required to fulfill such order from the Pre-Paid Miles Account.
If there are not enough Miles in the Pre-paid Miles Account to fulfill such
order, US Airways shall issue additional Miles to fulfill such order, and bill
Netcentives for the difference in accordance with Section 2.3 herein. Miles
held in the Pre-paid Miles Account shall be valid and shall not expire for a
period of two (2) years from the date of credit to the Pre-paid Miles Account.
(c) Minimum Orders. Netcentives agrees to purchase a minimum number
--------------
of Miles during the term of this Agreement from US Airways (the "Minimum
-------
Orders"), as set forth in Appendix A hereto, in accordance with the terms and
- ------
conditions therein. The due date of such Minimum Orders shall be as set forth
in Appendix A hereto. Any Miles purchased to meet a Minimum Order shall be
credited to the Pre-paid Miles Account. Any orders above the Minimum Orders
shall be at the discretion of Netcentives.
2.2 Purchase Terms. The terms specific to the purchase of Miles by
--------------
Netcentives under this Agreement are fixed and are contained in Appendix B
hereto.
2.3 Payment. If any orders for Miles exceed the balance in the Pre-paid
-------
Miles account, US Airways shall invoice Netcentives monthly for the additional
amount due. Netcentives will pay such invoice within thirty (30) days of
receipt of the invoice. Any payments made by Netcentives to US Airways
hereunder shall be non-refundable.
2.4 Taxes. Prices for Miles do not include taxes. Netcentives is
-----
responsible for any and all taxes on the sale of Miles to Netcentives pursuant
to this Agreement.
SECTION III
OBLIGATIONS OF NETCENTIVES
3.1 Distribution to Netcentives Members. Netcentives shall only request
-----------------------------------
that Miles be credited to the Accounts of Dividend Miles Members in exchange for
their participation in the Netcentives Program.
3.2 Distribution to Dividend Miles Members. Netcentives shall only
--------------------------------------
request that Miles be credited to the accounts of Netcentives Members whom
Netcentives believes in good faith to be Dividend Miles Members. In the event
that Netcentives requests that Miles be credited to the account of a person who
is not a Dividend Miles Member, US Airways shall deposit the Miles in the Pre-
paid Miles Account and promptly notify Netcentives.
3.3 No Resale Of Miles. At no time shall Netcentives offer Miles to any
------------------
person for resale or redistribution to a third party. If Netcentives discovers
with reasonable certainty that any Netcentives Member is inappropriately
redistributing Miles, Netcentives shall immediately cease requesting that Miles
be credited to the Account of such Netcentives Member, and shall
-3-
<PAGE>
notify US Airways of the identity of such Netcentives Member and the nature of
the potential infraction. If US Airways discovers that any Netcentives Member
has resold or redistributed Miles in violation of this provision, US Airways
can, at its option, cease distributing any additional Miles to such Dividend
Miles Member's Account, or exercise any other legal right to which it is
entitled under this, or its Frequent Traveler Program Agreement.
3.4 Limits to Distribution of Miles. Netcentives will not allow
-------------------------------
Netcentives Points earned for Restricted Activities to be converted to Miles.
For the purposes of this Agreement, "Restricted Activities" are transactions
involving (a) gambling, (b) alcohol, (c) tobacco, (d) lotteries, (e) any
sexually explicit material, (f) any illegal or immoral activity, (g)
distribution of air travel, and (h) any travel service provider (e.g., online
air travel booking, travel agent or CRS). If Netcentives wishes to have an offer
that conflicts with these Restricted Activities, it may do so, but must restrict
the Netcentives Points earned from that transaction from being redeemed for
Miles. Such restriction shall not apply in cases where prior written approval is
received from U.S. Airways.
3.5 Maximum Number of Miles Per Year. Netcentives will notify US Airways
--------------------------------
if any Netcentives Member redeems Netcentives Points for 100,000 Miles or more
during any calendar year, and will provide US Airways with a summary of such
Netcentive Member's Mile redemption activity.
3.6 Dividend Miles Program Information. Netcentives shall post contact
----------------------------------
information regarding the Dividend Miles Program on its Internet Web site to
enable Netcentives Members to enroll in the Dividend Miles Program.
SECTION IV
PROPRIETARY INFORMATION
4.1 Confidential Information. Each party agrees not to use any
------------------------
Confidential Information disclosed to it by the other party for its own use or
for any purpose other than to carry out its obligations under this Agreement.
Neither party will disclose any Confidential Information of the other party to
third parties or to employees of the party receiving Confidential Information,
other than employees who are required to have the information in order to carry
out such party's obligations under this Agreement. Each party agrees that it
will take all reasonable measures to protect the secrecy of and avoid disclosure
or use of Confidential Information of the other party in order to prevent it
from falling into the public domain or the possession of persons other than
those persons authorized under this Agreement to have any such information,
including (without limitation) ensuring that recipients of the disclosing
party's Confidential Information adhere to confidentiality terms in content
substantially similar to the terms in this Agreement. Such measures shall
include the highest degree of care that the receiving party utilizes to protect
its own Confidential Information of a similar nature. Each party agrees to
notify the other in writing of any misuse or misappropriation of Confidential
Information of the disclosing party which may come to the receiving party's
attention.
-4-
<PAGE>
4.2 Publicity. After the execution of this Agreement, Netcentives shall,
---------
at its discretion, and with approval from and coordination with a designated
representative of US Airways, whose approval shall not be unreasonably withheld,
issue a press release which may, among other things, confirm the existence of a
relationship between the parties and of the exclusive nature of such
relationship, and may request that US Airways 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.
4.3 Trademarks.
----------
(a) US Airways hereby grants to Netcentives a limited, non-exclusive,
royalty-free license, without the right to sublicense, to use, reproduce,
display, and transmit the US Airways Marks in Netcentives' promotional materials
and on its Internet Web site during the Term of this Agreement (as extended by
Section 5.2(b)(iii), as appropriate), provided however, that any use of the US
----------------
Airways Marks shall be for the purpose of promoting the Netcentives Program,
shall only be used with regard to the inclusion of Miles within the Netcentives
Program, and shall be subject to the review and prior approval of US Airways.
US Airways shall use its best efforts to provide approval of, or comments upon,
submitted materials promptly, but in no event later than five business day
following receipt of such materials.
(b) Netcentives hereby grants to US Airways a limited, non-exclusive,
royalty-free license, without the right to sublicense, to use, reproduce,
display, and transmit the Netcentives Marks in US Airways's promotional
materials and on its Internet Web site during the Term of this Agreement,
provided however, that any use of the Netcentives Marks shall be for the purpose
- ----------------
of promoting the Dividend Miles Program or the Netcentives Program and shall
only be used with regard to the inclusion of Miles within the Netcentives
Program.
(c) Nothing herein shall be deemed to grant either party any ownership
interest in the Marks of the other party. Netcentives shall retain all right,
title, and interest in and to the Netcentives Program. US Airways shall retain
all right, title, and interest in and to the Dividend Miles Program.
SECTION V
LIMITED EXCLUSIVITY; TERM AND TERMINATION
5.1 Limited Exclusivity.
-------------------
(a) Relationship. The parties hereto acknowledge that they shall have
------------
a relationship of Limited Exclusivity during the Term of this Agreement and that
certain rights and privileges under this Agreement and other agreements between
the parties are dependent on the maintenance of such a relationship. Either
party may terminate the obligations of the parties under the relationship of
Limited Exclusivity upon provision of ninety (90) days written notice to the
non-terminating party (the "Notice"), which termination shall have the effects
------
set forth in subsection (b), below.
-5-
<PAGE>
(b) Effect of Termination of Limited Exclusivity. Termination of the
--------------------------------------------
relationship of Limited Exclusivity between US Airways and Netcentives shall not
affect the obligations of the parties under this Agreement except that upon the
termination of the relationship of Limited Exclusivity, in addition to the loss
of certain other rights as set forth in other Agreements between the parties,
(i) immediately upon receipt of the Notice by Netcentives, Netcentives shall no
longer be responsible for meeting the volume purchase requirements as set forth
in this Agreement, (ii) beginning ninety (90) days after receipt of the Notice
by Netcentives, US Airways shall be permitted to sell Miles to any third party,
including a Direct Competitor of Netcentives, (iii) immediately upon receipt of
the Notice by Netcentives, Netcentives shall no longer pay for Miles according
to the pricing schedule under Limited Exclusivity and will instead pay for Miles
according to the pricing schedule under dropping of Limited Exclusivity, as set
forth in Appendix B. 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 US
Airways 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 US Airways, without the necessity of proving
actual damages.
(c) Breach; Cure. Any sales by US Airways to a Direct Competitor of
------------
Netcentives prior to the expiration of the Limited Exclusivity period shall be
considered a material breach of this Agreement. Notwithstanding the foregoing,
Netcentives recognizes that it is not always possible to determine whether a
purchaser is a Direct Competitor. US Airways agrees to use its reasonable
commercial efforts to prevent any Direct Competitor from purchasing Miles.
However, if despite using such efforts, US Airways sells Miles to a Direct
Competitor, US Airways will not be in breach of the Agreement and the Limited
Exclusivity period will not be terminated, provided however, that once
----------------
Netcentives notifies US Airways that Miles were sold to a Direct Competitor, US
Airways immediately: (i) refuses to sell any additional Miles to such Direct
Competitor; (ii) removes participation by such Direct Competitor in the Dividend
Miles Program (except that US Airways shall not be required to repurchase Miles
sold to such Direct Competitor as part of such removal); and (iii) takes all
necessary steps to ensure that no additional Miles are sold to such Direct
Competitor until the effective date of termination or expiration of this
Agreement, or until the effective date of termination of the Limited Exclusivity
period, whichever comes first.
5.2 Term and Termination.
--------------------
(a) Term and Termination.
--------------------
(i) This Agreement shall become effective as of the Effective
Date, and unless sooner terminated as provided below, shall remain effective for
an initial term of three (3) years (the "Initial Term"). The Initial Term shall
------------
automatically be extended for successive periods of one (1) year (the "Extension
---------
Terms"), unless either party provides the other party with written notice of
- -----
termination at least 120 days prior to the end of such Initial Term or Extension
Term as applicable. The parties shall renegotiate the terms reflected in
Appendix A and
-6-
<PAGE>
Appendix B at least ninety (90) days prior to the commencement of each Extension
Term. As used herein, "Term" shall mean the Initial Term plus any applicable
----
Extension Terms.
(ii) If either party defaults in the performance of any material
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 Agreement shall automatically terminate at the end of that period.
(iii) This Agreement shall terminate with 60 days written notice
and reasonable opportunity to cure, (A) upon Netcentives' failure to make
payment by a due date indicated in this Agreement, (B) upon Netcentives'
violation of an applicable governmental regulation with respect to Miles granted
under this Agreement, or (C) upon Netcentives' inability to meet its financial
obligations as they become due.
(iv) US Airways may suspend or cancel its Miles program or
Netcentives' participation in the program at any time upon 120 days advance
written notice. Upon such notification, a winding down period of six months
will begin, during which both US Airways and Netcentives will let US Airways and
Netcentives customers know that the relationship will be ending. During such
period, Netcentives customers may continue to redeem their points for US Airways
Miles as set forth under this Agreement. US Airways will refund to Netcentives
the price paid for any Miles in the Pre-paid Miles Account that Netcentives may
no longer use.
(b) Effect of Termination or Expiration. Upon termination of this
-----------------------------------
Agreement for any reason whatsoever: (i) US Airways will credit all uncredited
orders to the Accounts originally designated by Netcentives; (ii) all Miles in
the Pre-paid Miles Account shall remain valid for their fall term and shall be
credited to Accounts in the manner provided for herein until the balance of
Miles in the Pre-paid Miles Account is zero (0); and (iii) the term of the
license granted to Netcentives under section 4.3(a) shall be extended until the
balance of Miles in the Pre-paid Miles Account is zero (0) or all such miles
have expired.
(c) Survival. US Airways' obligations to credit Accounts in a timely
--------
manner and Netcentives' obligations to pay US Airways all amounts due hereunder,
as well as Sections 1, 4.1,4.2,4.3(a) (to the extent provided in Section 5.2(b)
above), 4.3(c), 5.2(a)(iv), 5.2(b), 5.2(c), 6.2, 6.3 and 6.7 shall survive
termination of this Agreement.
SECTION VI
MISCELLANEOUS
6.1 Independent Contractors. The relationship of Netcentives and US
-----------------------
Airways established by this Agreement is that of independent contractors, and
nothing contained in this Agreement shall be construed to constitute the parties
as agents, partners, joint venturers, co-owners or otherwise as participants in
a joint or common undertaking.
-7-
<PAGE>
6.2 Indemnification.
---------------
(a) US Airways hereby agrees to indemnify, defend and hold harmless
Netcentives 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) US Airways' operation of the Dividend Miles Program
including without limitation, claims by participants in the Dividend Miles
Program of US Airways' breach, violation or failure to comply with the terms of
the Dividend Miles Program and (ii) any allegation that Netcentives use of the
US Airways Marks within the scope of this Agreement infringes a copyright or
trademark existing or issued as of the date of such use, provided in each case
that Netcentives promptly notifies US Airways in writing of any such claim,
gives US Airways sole control of the defense and all related settlement
negotiations, and cooperates with US Airways in defending or settling any such
claim.
(b) Netcentives hereby agrees to indemnify, defend and hold harmless
US Airways 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) Netcentives' operation of the Netcentives Program
including without limitation, claims by participants in the Netcentives Program
of Netcentives' breach, violation or failure to comply with the terms of the
Netcentives Program and (ii) any allegation that US Airways' use of the
Netcentives Marks within the scope of this Agreement infringes a copyright or
trademark existing or issued as of the date of such use, provided in each case
that US Airways promptly notifies Netcentives in writing of any such claim,
gives Netcentives sole control of the defense and all related settlement
negotiations, and cooperates with Netcentives in defending or settling any such
claim.
6.3 Notices. All notices and demands hereunder shall be in writing and
-------
shall be delivered by personal service or by telex, facsimile, cable, telegram,
certified or registered mail, or return receipt express courier to the address
of the receiving party set forth on the signature page of this Agreement (and if
to US Airways, with a copy to the Office of the General Counsel, fax no: (703)
872-5252), or to any other address of the receiving party designated by written
notice in accordance with this paragraph.
6.4 Waiver, Amendment and Modification. No waiver, amendment or
----------------------------------
modification of any provision hereof shall be effective unless in writing and
signed by the party against whom such waiver, amendment or modification is
sought to be enforced. No failure by either party to exercise and no delay by
either party in exercising any right, power or remedy with respect to the
obligations secured hereby shall operate as a subsequent waiver of any such
right, power or remedy.
6.5 Assignment. Each of the parties agrees that its rights and
----------
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, provided
--------
however, that such consent shall not be required for an assignment of this
- -------
contract pursuant to a merger, sale of substantially all of the assets, or sale
of
-8-
<PAGE>
all of the outstanding stock of either party. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, their successors and
assigns.
6.6 Severability. In the event that any of the provisions of this
------------
Agreement shall be held by a court of competent jurisdiction to be
unenforceable, such provision will be enforced to the maximum extent permissible
and the remaining portions of this Agreement shall remain in full force and
effect. The parties agree to negotiate in good faith a substitute, valid and
enforceable provision that most nearly effects the parties' intent and to be
bound by the mutually agreed substitute provision.
6.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without reference to conflict
of laws provisions thereof.
6.8 Force Majeure. Neither party shall be responsible for any failure to
-------------
perform (except for payment obligations) due to unforeseen circumstances or to
causes beyond its control, including but not limited to acts of God, war, riot,
embargoes, acts of civil or military authorities, fire, floods, accidents,
strikes, or shortages of transportation facilities, fuel, energy, labor or
materials. A party whose performance is affected by a force majeure condition
shall be excused from such performance to the extent required by the force
majeure condition so long as such party takes all reasonable steps to avoid or
remove such causes of nonperformance and immediately continues performance
whenever and to the extent such causes are removed.
6.9 Entire Agreement; Amendment. This Agreement constitutes the final and
---------------------------
entire Agreement between the parties and may not be modified or amended except
in writing signed by both of the parties.
6.10 Headings. The headings and captions used in this Agreement are for
--------
convenience of reference only, and shall not in any way affect the
interpretation of the provisions of this Agreement.
6.11 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original and all of which together shall constitute
one instrument.
[SIGNATURE PAGE TO FOLLOW]
-9-
<PAGE>
The parties have executed this Supply Agreement as of the date set forth
above.
NETCENTIVES INC.
ADDRESS:
2121 S. El Camino Real, Suite 615
San Mateo, CA 94403
/s/ Eric W. Tilenius Facsimile: (415) 572-5205
- --------------------------------
Eric W. Tilenius, Chairman
US AIRWAYS, INC.
ADDRESS:
2345 Crystal Drive
Arlington, VA 22227
/s/ Martin C. White
- --------------------------------
Martin C. White Facsimile: (703) 872-7057
Vice President
Marketing Programs and Services
[SIGNATURE PAGE TO SUPPLY AGREEMENT]
-10-
<PAGE>
EXHIBIT A1
TRADEMARKS OF NETCENTIVES
NETCENTIVES
CLICKREWARDS
CLICKPOINTS
INTERNET INCENTIVES NETWORK
Netcentives
ClickRewards
ClickRewards(TM)
ClickRewards(TM)
Online Incentives Network
ClickRewards(TM)
Online Incentives Network
-11-
<PAGE>
EXHIBIT A2
TRADEMARKS OF US AIRWAYS
<PAGE>
EXHIBIT A3
SPECIFICATIONS FOR DATA
<PAGE>
APPENDIX A
MINIMUM ORDERS
--------------
While Limited Exclusivity is in effect:
On each date specified below, Netcentives shall pay to US Airways the
amount, if any, by which the price of the cumulative minimum orders to-date
exceed the cumulative payments to-date.
------------------------------------------------------------
DATE Minimum Order Due
------------------------------------------------------------
Effective Date 5,714,286 ($100,000 worth)
January 1, 1998 2,857,143 ($50,000)
April 1, 1998 2,857,143 ($50,000)
July 1, 1998 2,857,143 ($50,000)
October 1, 1998 5,882,353 ($100,000)
January 1, 1999 5,882,353 ($100,000)
April 1, 1999 5,882,353 ($100,000)
July 1, 1999 11,764,705 ($200,000)
October 1, 1999 8,928,571 ($150,000)
January 1, 2000 8,928,571 ($150,000)
April 1, 2000 8,928,571 ($150,000)
July 1, 2000 17,857,142 ($300,000)
------------------------------------------------------------
If Limited Exclusivity is dropped:
- ---------------------------------
If the parties cease to have a relationship of Limited Exclusivity or this
Agreement is terminated, there will be no future minimum orders due.
___________________
/1/ For example, if on April 1, 1998 Netcentives has purchased a total of
10,000,001 Miles for a cumulative price of $175,000, Netcentives shall pay
$25,000 to US Airways for the purchase of 1,428,572 additional Miles, and US
Airways shall credit 1,428,572 Miles to the Pre-paid Miles Account (in
accordance with Section 2.1(c)).
<PAGE>
APPENDIX B
PRICING
Purchase Terms Under Limited Exclusivity:
- ----------------------------------------
Contract Year Price Per Mile
- ------------- --------------
Year 1 $.0175
If > $500K in purchases $.0170 per incremental mile
If > $1MM in purchases $.0165 per incremental mile
Year 2 $.0170
If > $1MM in purchases $.0165 per incremental mile
Year 3 $.0168
If > $1MM in purchases $.0165 per incremental mile
If Netcentives drops Limited Exclusivity:
- ----------------------------------------
If Netcentives drops Limited Exclusivity, pricing remains in effect as
above.
If US Airways drops Limited Exclusivity:
- ---------------------------------------
If US Airways drops Limited Exclusivity, the price per Mile will
immediately drop to $.016 and remain at that level for the duration of this
Agreement, regardless of volume or contract year.
<PAGE>
EXHIBIT 10.12
U N I T E D M I L E A G E P L U S - N E T C E N T I V E S I N C.
A M E N D E D A N D R E S T A T E D S U P P L Y A G R E E M E N T
This Amended and Restated Supply Agreement (the "Agreement") is
---------
entered into and is effective as of September 9, 1999 (the "Effective Date") by
and between Netcentives Inc., a Delaware corporation with offices at 690 Fifth
Street, San Francisco, California 94107 ("Netcentives"), and Mileage Plus, Inc.,
-----------
a Delaware corporation with offices at Department WHQDX, 1200 East Algonquin
Road, Elk Grove Village, Illinois 60007 ("MPI"). This Agreement supercedes the
---
Supply Agreement between Netcentives and MPI dated as of March 20, 1998 (the
"Previous Agreement"). Notwithstanding the foregoing, unused Miles (as defined
herein) 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.
R E C I T A L S
WHEREAS, MPI is a wholly-owned subsidiary of Mileage Plus Holdings,
Inc. ("MPHI") which is a wholly-owned subsidiary of United Air Lines, Inc.
("United"), and MPI, on behalf of United, offers the United Mileage Plus
frequent traveler recognition program to all travelers who desire to participate
in that program; and
WHEREAS, Netcentives develops and operates Internet-based programs
which provide for the grant of points which are redeemable for airline frequent
flier miles and other incentives to end-users (collectively, the "Netcentives
-----------
Programs"); and
- --------
WHEREAS, MPI and Netcentives have agreed upon the revised terms and
conditions of MPI's and Netcentives's rights and obligations pursuant to
Netcentives's continued purchase of the right to award Miles from MPI; and
WHEREAS, Mileage Plus Marketing, Inc. ("MPM") is a wholly-owned
subsidiary of MPHI and, on behalf of MPI and United, is responsible for the
marketing, advertising and promotion of the United Mileage Plus Program, and is
authorized to execute this Agreement on behalf of MPI.
NOW THEREFORE, in consideration of the foregoing and the mutual
consideration provided for herein, the MPI and Netcentives hereby agree as
follows:
S E C T I O N I
D E F I N I T I O N S
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Account" shall mean the Mileage Plus account of a Mileage Plus
-------
member who is also a Netcentives Member in which Miles balances are maintained
by MPI.
1.2 "ClickRewards Program" means the Netcentives Program located at
--------------------
www.clickrewards.com.
- --------------------
<PAGE>
1.3 "Confidential Information" means any information, technical data,
------------------------
or know-how, including, but not limited to, that which relates to research,
product plans, products, services, Netcentives Members, Mileage Plus Members,
customers, markets, software, developments, inventions, processes, designs,
drawings, engineering, hardware configuration information, marketing or finances
of a party, which is designated in writing to be confidential or proprietary, or
if given orally, is identified as confidential or proprietary at the time of
disclosure or is obviously confidential considering the context in which such
disclosure is made. Confidential Information does not include information,
technical data or know-how which (i) is rightfully in the possession of the
receiving party at the time of disclosure, (ii) prior to or after the time of
disclosure becomes part of the public knowledge or literature other than as a
result of any improper inaction or action of the receiving party hereunder, or
(iii) is approved by the disclosing party, in writing, for release by the
receiving party hereunder.
1.4 "Contract Year" means the twelve (12) month period following the
-------------
Effective Date, or any consecutive twelve (12) month period commencing on an
anniversary of the Effective Date thereafter for the duration of the Term.
1.5 "Direct Competitor of Netcentives" means any third party that
--------------------------------
has more than a 50% ownership of, or operates a, program whose primary purpose
is to reward Internet or online service activities where end-users may earn
points or credits, as a result of their online access to and use of such
services, which are redeemable for the incentive awards of more than one
company.
1.6 "Limited Exclusivity" means MPI's agreement not to sell the right
-------------------
to award Miles to any Direct Competitor of Netcentives. Limited Exclusivity may
be terminated under this Agreement in accordance with the provisions of Section
5.1(b).
1.7 "Mileage Plus Member" means, as of any date during the Term of
-------------------
this Agreement, an individual who is a member in good standing of the Mileage
Plus Program.
1.8 "Miles" means the points accrued under the Mileage Plus Program
-----
by Mileage Plus Members for travel on United or such other reasons as are
permitted by MPI.
1.9 "Netcentives Marks" means the trademarks and logos of Netcentives
-----------------
set forth on Exhibit A1 hereto, which exhibit may be changed by Netcentives from
----------
time to time upon notice to United.
1.10 "Netcentives Member" means, as of any date, an individual who is
------------------
a member in good standing of a Netcentives Program.
1.11 "United Marks" means the trademarks and logos of United
------------
reasonably necessary for use by Netcentives in connection with the promotion of
the Mileage Plus Program within the Netcentives Program, including without
limitation, the United logo, the Mileage Plus logo, and the terms United
Airlines and Mileage Plus.
1.12 "Term" has the meaning given it in Section 5.2(a) hereof.
----
S E C T I O N II
P U R C H A S E A N D S A L E
2.1 Orders.
------
-2-
<PAGE>
(a) General. Netcentives shall deliver instructions to United for
-------
Miles issuance rights in a format to be mutually agreed upon by the parties,
which orders (i) shall designate the aggregate number of Miles issuance rights
to be purchased, (ii) shall specify the Account or Accounts to which such Miles
are to be credited, and the number of Miles to be credited to each such Account,
and (iii) shall request a minimum of 500 Miles be credited to any Account for
which a credit is requested. United shall credit Accounts designated by
Netcentives within a reasonable time after receipt of an order from Netcentives,
but in any event within fourteen (14) business days thereof. As long as this
Agreement is in effect, United shall not reject any order for Miles crediting of
Netcentives for use as incentives in the ClickRewards Program, except in
accordance with the terms of Section 3.2 hereof and/or otherwise in accordance
with the published and generally applicable terms and conditions of the Mileage
Plus Program.
(b) Minimum Orders; Price. So long as MPI or United has not
---------------------
terminated or breached (without cure for 30 days) its relationship of Limited
Exclusivity under this Agreement, Netcentives agrees $0.016 during each year
of the Term in accordance with the schedule set forth below, provided however,
----------------
that in the event that Netcentives has not identified the Account or Accounts to
which all such Miles are to be credited, such Miles shall be reserved for future
credit to an Account or Accounts as requested by Netcentives in accordance with
this Agreement. Miles reserved for future credit shall expire upon the earlier
of (a) ninety (90) days following the third anniversary date of the purchase of
such Miles by Netcentives, and (b) such date as Netcentives is no longer
entitled to award Miles to Mileage Plus Members hereunder or under any
immediately subsequent agreement between Netcentives and MPI. Any orders
applied against Miles previously reserved for future credit will be credited on
a first-in, first-out basis.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year of Term Minimum Annual Purchase Purchase due no later than:
- ------------ ----------------------- ---------------------------
- ---------------------------------------------------------------------------------
<S> <C> <C>
1 $550,000 One year after Effective Date
- ---------------------------------------------------------------------------------
2 $500,000 Two years after Effective Date
- ---------------------------------------------------------------------------------
3 $500,000 Three years after Effective Date
- ---------------------------------------------------------------------------------
</TABLE>
2.2 Payment. All amounts due to MPI shall be paid to United and
-------
become due and payable: (a) in the case of the minimum payment obligations set
forth in Section 2.1(b), as of the date set forth therein to the extent not
already purchased, and (b) in the case of any additional orders, within thirty
(30) days of the receipt by Netcentives of an invoice for Miles which have been
credited to the appropriate Account. Any payments made by Netcentives to United
hereunder shall be non-refundable.
2.3 Taxes. Prices for Miles are net of any and all federal excise
-----
taxes imposed on the sale of Miles by MPI to Netcentives under this Agreement.
Netcentives is responsible for any and all such taxes.
S E C T I O N III
A D D I T I O N A L O B L I G A T I O N S A N D R E P R E S E N T A T I O N S
-3-
<PAGE>
3.1 Distribution to Netcentives Members. Netcentives shall only
-----------------------------------
request that Miles be credited to the Accounts of persons in exchange for their
participation in a Netcentives Program.
3.2 Distribution to Mileage Plus Members. Netcentives shall only
------------------------------------
request that Miles be credited to the Accounts of Netcentives Members whom
Netcentives believes in good faith to be Mileage Plus Members. To the extent
that Netcentives requests that Miles be credited to a person who is not a
Mileage Plus Member, MPI shall not be obligated to credit such Account, provided
--------
however, that Netcentives shall not be invoiced for any Miles which are not
- -------
credited to an Account.
3.3 No Resale Of Miles. At no time shall Netcentives offer Miles to
------------------
any person for resale, barter or redistribution to a third party.
3.4 Marketing Bounty Program.
------------------------
(a) New Members. For each Mileage Plus Member that has
-----------
enrolled in the ClickRewards Program as a result of United's active recruitment
efforts (e.g., through a registration page or ClickRewards link on United's web
site) other than those efforts for which Netcentives has paid United to perform
or the promotion efforts set forth in Section 4.3 herein, Netcentives shall
determine if the Mileage Plus Member has previously completed a qualifying
earning activity or otherwise signed up for the ClickRewards Program or any co-
branded variant thereof. In the event that such Mileage Plus Member has neither
previously completed a qualifying earning activity nor signed up for the
ClickRewards Program (whether at the ClickRewards web site, a third-party
partner site or otherwise), such Mileage Plus Member will be deemed to be a "New
----
ClickRewards Member".
- --------------------
(b) Bounty. Netcentives will pay to United a cash amount of $1.00
------
for each New Click Rewards Member (the "New Member Bounty").
-----------------
Member Bounty will be determined and paid on a quarterly basis within 30 days
after the end of each quarter.
3.5 Promotional Treatment.
---------------------
(a) Partner Representation. So long as Limited Exclusivity is
----------------------
in effect, United shall receive representation as a
redemption partner ("Partner Representation") in the
ClickRewards Program on a basis that is at least consistent
with the Partner Representation of any other airline partner
participating in the ClickRewards Program, provided that any
special limited-time promotions (of duration 3 months or
less) with an individual airline partner (e.g., a limited-
time offer for "double miles" on a particular airline) shall
not apply for the purposes of this Section 3.5.
(b) Representation Without Limited Exclusivity If Limited
-------------------------------------------
Exclusivity is terminated pursuant to Section 5.1(b),
Netcentives shall no longer have an obligation to feature
United as a redemption partner in the ClickRewards Program
effective at the conclusion of the forty-five (45) day
period following the Notice (as defined in Section 5.1(b));
provided, however, that if Netcentives, at its sole
discretion, continues to feature United as a redemption
partner in the ClickRewards Program, regardless of
exclusivity status, for as long as Netcentives chooses to
feature United as a redemption partner.
(c) Representation for Consideration. Netcentives may, from
--------------------------------
time to time and at its sole discretion, make available
promotional and/or marketing placement to the airline
partners participating in the ClickRewards Program (the
"Promotional Placements"). Promotional Placements may
require payments
-4-
<PAGE>
or additional consideration from airline partners to
Netcentives. For as long as Netcentives features United as
a redemption partner in the ClickRewards Program, United
shall have an opportunity to participate in Promotional
Placements on a basis at least consistent with the
opportunity afforded to other ClickRewards airline partners.
3.6 Representations of Netcentives. Netcentives represents and warrants to
------------------------------
MPI that: (a) it has the full corporate right, power, and authority to enter
into this Agreement and perform the acts required of it hereunder, (b) the
execution of this Agreement by Netcentives, and the performance by Netcentives
of its obligations and duties hereunder, do not and will not violate any
agreement to which Netcentives is a party or by which it is otherwise bound, (c)
when executed and delivered by Netcentives, this Agreement will constitute the
legal, valid and binding obligation of Netcentives, enforceable against
Netcentives in accordance with its terms, and (d) Netcentives will operate the
ClickRewards Program and perform its obligations under this Agreement in
accordance with all applicable laws, governmental regulations and court orders.
3.7 Representations of MPI. MPI represents and warrants to Netcentives
----------------------
that: (a) it has the full corporate right, power, and authority to enter into
this Agreement, perform the acts required of it hereunder, (b) the execution of
this Agreement by MPI, and the performance by MPI of its obligations and duties
hereunder, do not and will not violate any agreement to which MPI is a party or
by which it is otherwise bound, and (c) when executed and delivered by MPI, this
Agreement will constitute the legal, valid and binding obligation of MPI,
enforceable against MPI in accordance with its terms. MPI further represents
that it has the authority to allow Netcentives to use the United Marks in
accordance with the terms hereof.
S E C T I O N I V
P R O P R I E T A R Y I N F O R M A T I O N
4.1 Confidential Information. Each party agrees not to use any
------------------------
Confidential Information disclosed to it by the other party for its own use or
for any purpose other than to carry out its obligations under this Agreement.
Neither party will disclose any Confidential Information of the other party to
third parties or to employees of the party receiving Confidential Information,
other than employees who are required to have the information in order to carry
out such party's obligations under this Agreement. Each party agrees that it
will take all reasonable measures to protect the secrecy of and avoid disclosure
or use of Confidential Information of the other party in order to prevent it
from falling into the public domain or the possession of persons other than
those persons authorized under this Agreement to have any such information,
including (without limitation) ensuring that recipients of the disclosing
party's Confidential Information adhere to confidentiality terms in content
substantially similar to the terms in this Agreement. Such measures shall
include the highest degree of care that the receiving party utilizes to protect
its own Confidential Information of a similar nature. Each party agrees to
notify the other in writing of any misuse or misappropriation of Confidential
Information of the disclosing party which may come to the receiving party's
attention.
-5-
<PAGE>
4.2 Publicity. After the execution of this Agreement, Netcentives may, at
---------
its discretion, issue a press release, in consultation with MPI and United,
which may, among other things, confirm the existence of a relationship between
the parties and state that "Netcentives is the exclusive, Internet, points-based
rewards partner in the United Airlines Mileage Plus Program." MPI and United
may, at their sole discretion, also issue a press release, in a form similar to
that issued by Netcentives. Any such press releases shall be subject to the
prior approval of the non-releasing party, provided that (a) such approval shall
not be unreasonably withheld, and (b) any disapproval shall be provided to the
non-releasing party within two (2) business days of such request. Upon inquiry
from any other party, (a) MPI will and will cause United to confirm the accuracy
of information disclosed by Netcentives in any of its press releases, which
information was provided by MPI or United, and (2) Netcentives will confirm the
accuracy of information disclosed by MPI or United in any of its press releases,
which information was provided by Netcentives. Netcentives' status as "the
exclusive, Internet, points-based rewards partner in the United Airlines Mileage
Plus Program" shall be deemed to be information provided by both parties. Any
other proprietary, confidential, sensitive or competitive 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.
4.3 Promotion. During the term of this Agreement, and so long as (a)
---------
(a) Limited Exclusivity is in effect, or (b) Netcentives has purchased a total
of $250,000 worth of Miles during the applicable Contract Year, whether pursuant
to guaranteed purchase commitments as provided in Section 2.1(b) or otherwise,
United agrees to promote the ClickRewards Program by (a) running one newsletter
story in its Mileage Plus Member magazine per calendar year which features the
ClickRewards Program, (b) including the ClickRewards Program in all lists of
Mileage Plus partners and MPI, (c) providing Netcentives with one free insert
per calendar year to be placed in Mileage Plus Member statements (provided that
the cost of developing, producing and shipping such inserts shall be borne by
Netcentives), and (d) as soon as feasible, and at all times thereafter,
providing a link from the United Mileage Plus worldwide web site to the
ClickRewards worldwide web home page. During the term of this Agreement,
Netcentives agrees to promote the Mileage Plus program by providing a link from
the ClickRewards worldwide web site to the United Mileage Plus worldwide web
home page and featuring the United Airlines logo within the ClickRewards web
site.
4.4 Additional Marketing Programs. During the term of this Agreement, and
-----------------------------
so long as (a) Limited Exclusivity is in effect or (b) Netcentives has purchased
a total of $250,000 worth of Miles during the applicable Contract Year, whether
pursuant to guaranteed purchase commitments as provided in Section 2.1(b) or
otherwise, MPI agrees to offer Netcentives the opportunity to purchase inserts
in Mileage Plus Member statements and advertisements in any Mileage Plus Member
magazines on terms and conditions no less favorable than those offered to
similarly situated non-travel purchasers of Miles from MPI, subject to space
availability. Netcentives agrees to offer MPI the opportunity to purchase
advertising on the ClickRewards web site on terms and conditions no less
favorable than those offered to similarly situated purchasers of advertising
from Netcentives, as space is available.
4.5 Trademarks.
----------
-6-
<PAGE>
(a) Permission of United. MPI hereby confirms that, by Netcentives'
--------------------
signing of this Agreement, United thereby will permit Netcentives to duplicate,
transmit, display and use the United Marks in Netcentives Programs' promotional
materials and on its Internet Web site, during the Term of and in accordance
with this Agreement (as extended by Section 5.2(b)(iii), as appropriate),
provided however, that any use of the United Marks hereunder shall be only for
- ----------------
the purpose of promoting a Netcentives Program, shall only be used with regard
to the inclusion of Miles within a Netcentives Program and only after approval
by United of each different type of use proposed by Netcentives. United shall
provide notice of any disapproval of a use within two (2) business days of such
request, and shall not unreasonably disapprove of any such use.
(b) Permission of Netcentives. Netcentives hereby confirms that, by
-------------------------
MPI's signing of this Agreement, Netcentives thereby will permit MPI and United
to duplicate, transmit, display and use the Netcentives Marks in MPI's or
United's promotional materials and on its Internet Web site, during the Term of
and in accordance with this Agreement (as extended by Section 5.2(b)(iii), as
appropriate), provided however, that any use of the Netcentives Marks hereunder
----------------
shall be only for the purpose of promoting a Netcentives Program, shall only be
used with regard to the inclusion of Miles within a Netcentives Program and only
after approval by Netcentives of each different type of use proposed by MPI or
United. For all approvals pursuant to this Section 4.5(b), Netcentives shall
provide notice of any disapproval within one (1) business day of such request,
and shall not unreasonably disapprove of any such use.
(c) No Ownership. Nothing herein shall be deemed to grant either
------------
party any ownership interest in the Marks or the Internet web sites of the other
party.
S E C T I O N V
L I M I T E D E X C L U S I V I T Y; T E R M A N D T E R M I N A T I O N
5.1 Limited Exclusivity.
-------------------
(a) Relationship. The parties hereto acknowledge that they shall
------------
have a relationship of Limited Exclusivity (as defined in Section 1.5) during
the Term of this Agreement. As a result of such relationship:
(i) Following the execution of this Agreement, MPI will not,
and will cause United not to, renew any agreements with a Direct Competitor of
Netcentives for the sale of Miles to such party and will cease selling any
additional Miles to any such party; and
(ii) MPI will not, and will cause United not to, enter into an
agreement to sell any Miles to a Direct Competitor of Netcentives; and
(iii) Notwithstanding the foregoing, United shall be permitted
to sell travel vouchers that are not denominated in Miles (e.g. $25 off, free
ticket, etc.) to a Direct Competitor of Netcentives, provided, however, that the
-------- -------
Mileage Plus brand, logo, or trademarks are not used in any way in connection
with a Direct Competitor of Netcentives.
-7-
<PAGE>
(b) Termination of Limited Exclusivity. Beginning on the first
----------------------------------
anniversary of the Effective Date, either party may terminate the obligations of
the parties under the relationship of Limited Exclusivity upon provision of
forty-five (45) days written notice (the "Notice") to the non-terminating party,
------
which termination shall have the effects set forth in subsection (c) below.
During the forty-five (45) day period following the Notice, each of the parties
will negotiate with the other in good faith to determine on what terms and
conditions, if any, Limited Exclusivity may be maintained by the parties during
the full term of this Agreement.
(c) Effect of Termination of Limited Exclusivity. Termination of the
--------------------------------------------
relationship of Limited Exclusivity between MPI and Netcentives shall not affect
the obligations of the parties under this Agreement except that upon the
termination of the relationship of Limited Exclusivity: (i) effective forty-five
(45) days after receipt of the Notice, MPI shall be permitted to sell Miles to
any third party, including a Direct Competitor of Netcentives, (ii) effective on
and after forty-five (45) days after receipt of the Notice by Netcentives,
Netcentives shall no longer be required to meet any guaranteed purchase
commitments as set forth in Section 2.1(b) and (iii) effective on and after
forty-five (45) days after receipt of the Notice by Netcentives, the price paid
by Netcentives for Miles purchased thereafter shall be adjusted to $0.015 per
Mile. Any sales by United or MPI to a Direct Competitor of Netcentives prior to
the expiration of such Limited Exclusivity period shall be considered a material
breach of this Agreement by MPI, unless excepted in Section 5.1(a) in accordance
with the provisions of this Section 5.1(c).
(d) Consideration. As consideration for Limited Exclusivity, within
-------------
twenty (20) days of the execution of this Agreement and upon receipt of all
necessary regulatory approvals, Netcentives will issue to United a Common Stock
Purchase Warrant for eighty-five thousand (85,000) shares of Netcentives Common
Stock (the "Warrant"). The Warrant shall be in substantially the form attached
hereto as Exhibit B.
(e) Remedies. In the event that MPI or United breaches its
--------
obligations under Limited Exclusivity herein and such breach is uncured for a
period of 30 days after receipt of notice of such breach, each party agrees and
acknowledges 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 MPI or
United, without the necessity of proving actual damages.
5.2 Term and Termination.
--------------------
(a) Term and Termination.
--------------------
(i) The term of this Agreement shall be three (3) years from the
Effective Date (the "Term"), unless terminated earlier pursuant to this Section
----
5.2. This Agreement shall terminate upon the expiration of the Term unless
renewed by the parties hereto in writing.
(ii) If either party defaults in the performance of any material
provision of this Agreement then the non-defaulting party may give written
notice to the defaulting party
-8-
<PAGE>
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 at the end of that period unless otherwise agreed in
writing by the parties.
(b) Effect of Termination or Expiration. Upon termination of this
-----------------------------------
Agreement for any reason whatsoever: (i) MPI will credit all uncredited orders
to the Accounts originally designated by Netcentives; (ii) MPI will continue to
credit any Miles already purchased by Netcentives but not yet credited to
Accounts to such Accounts as are designated by Netcentives in accordance with
the terms of this Agreement until 240 days after termination of this Agreement;
and (iii) the term of the license granted to Netcentives under section 4.3(a)
shall be extended until the expiration of the period described in clause (ii)
above. During the period described in clause (ii) above, Netcentives will not
request that more than 100,000 Miles be credited to the Account of a Netcentives
Member other than in the ordinary course of business, consistent with past
practice (examples of such actions include, but are not limited to, the award of
Miles pursuant to sweepstakes). Any Miles not awarded by Netcentives as of the
end of the 240 day period shall become void and Netcentives shall forfeit any
such Miles without refund.
(c) Survival. MPI's obligations to credit Accounts in a timely
--------
manner and Netcentives' obligations to pay MPI all amounts due hereunder, as
well as Sections 4.1 (Confidential Information), 4.2 (Publicity), 4.5(a)
(Permission of United) to the extent provided in Section 5.2(b) above, 4.5(c)
(No Ownership), 5.2 (Termination), 6.2 (Indemnification), 6.3 (Notices) and 6.7
(Governing Law) shall survive termination of this Agreement.
S E C T I O N V I
M I S C E L L A N E O U S
6.1 Independent Contractors. The relationship of Netcentives and MPI
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to constitute the parties as
agents, partners, joint venturers, co-owners or otherwise as participants in a
joint or common undertaking.
6.2 Indemnification.
---------------
(a) MPI hereby agrees to indemnify, defend and hold harmless
Netcentives and its respective directors, officers, agents and employees, from
and against any and all third-party claims, losses, damages, suits, judgments,
costs and expenses (including reasonable attorneys' fees and costs) arising out
of or relating to (i) MPI's operation of the Mileage Plus Program including
without limitation, claims by participants in the Mileage Plus Program of MPI's
breach, violation or failure to comply with the terms of the Mileage Plus
Program and (ii) any allegation that Netcentives' permitted use of the United
Marks hereunder infringes a copyright or trademark existing or issued as of the
date of such use, provided in each case that Netcentives promptly notifies MPI
and United in writing of any such claim, gives MPI or United control of the
defense and all related settlement negotiations, and cooperates with MPI and
United in defending or settling any such claim.
-9-
<PAGE>
(b) Netcentives hereby agrees to indemnify, defend and hold harmless
MPI, United and their respective directors, officers, agents and employees, from
and against any and all third-party claims, losses, damages, suits, judgments,
costs and expenses (including reasonable attorneys' fees and costs) arising out
of or relating to (i) Netcentives' operation of the ClickRewards Program
including without limitation, claims by participants in the ClickRewards Program
of Netcentives' breach, violation or failure to comply with the terms of the
ClickRewards Program and (ii) any allegation that MPI's or United's use
(provided that such use is in accordance with the terms of the then current
style guide of Netcentives governing such use) of the Netcentives Marks licensed
hereunder infringes a copyright or trademark existing or issued as of the date
of such use, provided in each case that MPI or United promptly notifies
Netcentives in writing of any such claim, gives Netcentives sole control of the
defense and all related settlement negotiations, and cooperates with Netcentives
in defending or settling any such claim.
6.3 Notices. All notices and demands hereunder shall be in writing and
-------
shall be delivered by personal service or by facsimile, certified or registered
mail, or return receipt express courier to the address of the receiving party
set forth on the signature page of this Agreement, or to any other address of
the receiving party designated by written notice in accordance with this
paragraph.
6.4 Waiver, Amendment and Modification. No waiver, amendment or
----------------------------------
modification of any provision hereof shall be effective unless in writing and
signed by the party against whom such waiver, amendment or modification is
sought to be enforced. No failure by either party to exercise and no delay by
either party in exercising any right, power or remedy with respect to the
obligations secured hereby shall operate as a subsequent waiver of any such
right, power or remedy.
6.5 Assignment. Each of the parties agrees that its rights and
----------
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, provided
--------
however, that such consent shall not be required for an assignment of this
- -------
contract by MPI to its parent corporation or any subsidiary or affiliate of MPI,
or by either party pursuant to a merger, sale of substantially all of its
assets, or sale of all of its outstanding stock. 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. In the event of a valid
assignment of this Agreement, it shall be binding upon and inure to the benefit
of the parties hereto, their successors and assigns.
6.6 Severability. In the event that any of the provisions of this
------------
Agreement shall be held by a court of competent jurisdiction to be
unenforceable, such provision will be enforced to the maximum extent permissible
and the remaining portions of this Agreement shall remain in full force and
effect. The parties agree to negotiate in good faith a substitute, valid and
enforceable provision that most nearly effects the parties' intent and to be
bound by the mutually agreed substitute provision.
-10-
<PAGE>
6.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, without reference to
conflict of laws provisions thereof.
6.8 Force Majeure. Neither party shall be responsible for any failure to
-------------
perform (except for payment obligations) due to causes beyond its control,
including but not limited to acts of God, war, riot, embargoes, acts of civil or
military authorities, fire, floods, accidents, strikes, telecommunications
failures, power outages or shortages of transportation facilities, fuel, energy,
labor or materials. A party whose performance is affected by a force majeure
condition shall be excused from such performance to the extent required by the
force majeure condition so long as such party takes all reasonable steps to
avoid or remove such causes of nonperformance and immediately continues
performance whenever and to the extent such causes are removed.
6.9 Entire Agreement; Amendment. This Agreement and the Warrant
---------------------------
constitute the final and entire agreement between the parties and may not be
modified or amended except in writing signed by both of the parties.
6.10 Headings. The headings and captions used in this Agreement are for
--------
convenience of reference only, and shall not in any way affect the
interpretation of the provisions of this Agreement.
6.11 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original and all of which together shall constitute one
instrument.
6.12 Exclusion of Consequential Damages. Neither party will be liable to
----------------------------------
the other for any incidental or consequential damages, including lost revenues,
lost profits, or lost prospective economic advantage, arising from any
performance or failure to perform under this Agreement, and each party hereby
releases and waives any claims against the other party regarding such damages.
-11-
<PAGE>
The parties have executed this Supplementary Marketing Agreement as of the
Effective Date.
NETCENTIVES INC.
Address:
690 Fifth Street
San Francisco, CA 94107
/s/ Perryman K. Maynard Facsimile: (415) 538-1889
- -------------------------------------
Perryman K. Maynard, VP - Relationship Marketing
Date: 9/9/99
--------------------------------
MILEAGE PLUS MARKETING, INC. on behalf of
MILEAGE PLUS, INC.
Address:
World Headquarters - WHQAD
/s/ Patricia A. Marsh 1200 E. Algonquin Road
- ------------------------------------- Elk Grove Township, IL 60007
(Signature of Authorized Person) Facsimile: (847) 700-6038
Patricia A. Marsh
- -------------------------------------
(Print Name of Signatory)
President
- -------------------------------------
(Print Title of Signatory)
Date: 9/9/99
--------------------------------
-12-
<PAGE>
EXHIBIT10.13
MARKETING SERVICES AGREEMENT
BETWEEN
BRITISH AIRWAYS PLC
AND
NETCENTIVES INC.
AGREEMENT NUMBER MKTG 002
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. INTRODUCTION............................................... 3
2. PURPOSE.................................................... 3
3. DEFINITIONS................................................ 3
4. THE SERVICE................................................ 4
5. PRICE...................................................... 4
6. PAYMENT TERMS.............................................. 4
7. MILEAGE ADMINISTRATION AND USAGE........................... 4
8. ASSIGNMENT AND SUBCONTRACT................................. 5
9. LIMITED EXCLUSIVITY........................................ 5
10. AMENDMENTS................................................. 6
11. RIGHT OF AUDIT............................................. 6
12. DURATION AND TERMINATION................................... 6
13. INSURANCE.................................................. 7
14. INDEMNITY.................................................. 7
15. INTELLECTUAL PROPERTY RIGHTS............................... 8
16. CONFIDENTIALITY............................................ 8
17. ADVERTISING................................................ 9
18. FORCE MAJEURE.............................................. 9
19. OFFERS OF EMPLOYMENT....................................... 9
20. NO AGENCY OR PARTNERSHIP................................... 9
21. TAXATION................................................... 9
22. WAIVERS/AMENDMENTS......................................... 9
23. NOTICES.................................................... 10
24. GENERAL.................................................... 10
25. LAW........................................................ 11
Appendix A...................................................... 12
Appendix B...................................................... 13
</TABLE>
<PAGE>
1. INTRODUCTION
This Agreement is made this 4th day of April between Netcentives Inc. whose
corporate offices and operations are located at 2121 El Camino Real, Suite 615,
San Mateo, California 94403, (hereafter referred to as "NETCENTIVES") and
BRITISH AIRWAYS PLC whose registered address is at P0 Box 10, London Heathrow
Airport, Hounslow, Middlesex TW6 2JA England (hereinafter called "BA"), with
Regional offices at 75-20 Astoria Boulevard, Jackson Heights, NY 11370 United
States of America.
2. PURPOSE
This Agreement sets out the terms and conditions under which NETCENTIVES
will purchase BA Executive ClubUSA miles from BA and agrees to provide the
products and services as specified in the Appendices hereto to BA's Executive
ClubUSA members.
3. DEFINITIONS
"The NETCENTIVES Representative" Shall mean the designated
representative of NETCENTIVES
namely:
President
"BA Purchasing" Shall mean the designated
representative of BA Purchasing
Department namely:
Vice President Purchase
The Americas
or
Senior Buyer
Purchasing, The Americas
"BA Representative" Shall mean the designated
representative of BA USA Marketing
department namely:
Vice President Business Travel
Marketing or Manager Executive
Club and Partners
"Service" Shall mean all and/or any of the
elements of the services supplied
by NETCENTIVES to BA and BA to
NETCENTIVES pursuant to this
Agreement.
"Carlson Marketing Group" The administrator of BA's
Executive Club program.
Hereinafter referenced as CMG.
<PAGE>
"BA Executive Club USA" Shall mean British Airways'
frequent traveler program based in
the USA. Hereinafter referenced as
BA Executive Club.
"Netcentives Points" Any points or award system run by
NETCENTIVES as outlined in or
pursuant to this Agreement.
4. THE SERVICE
In accordance with the terms of this Agreement hereof Netcentives agrees to
purchase from BA and BA agrees to sell to NETCENTIVES BA Executive Club miles as
detailed in the Appendices of this agreement.
BA and NETCENTIVES agree to meet on an annual basis on or near the
effective date of this Agreement to review the business conducted between the
two parties and the results for the previous year. The business shall include a
price and volume review.
5. PRICE
The prices specific to the purchase of BA's Executive Club miles by
NETCENTIVES under this agreement are fixed for the first year of this agreement
and are contained in Appendix B hereto.
6. PAYMENT TERMS
6.1 NETCENTIVES will send to CMG on a monthly basis a tape, disk or EDI to
BA and CMG's specifications which will contain the BA Executive Club miles
purchased for that month (to be sent by the 15th of the following month) to the
following address:
Carlson Marketing Group
Carlson Parkway
PO Box 59159
Minneapolis, MN 55459-8262
6.2 BA will invoice NETCENTIVES on a monthly basis with payment due by
NETCENTIVES on a net 30 day basis.
6.3 All payments must be clearly marked with "in accordance with"
Agreement Number Mktg 002 and sent to:
British Airways
Business Marketing/Executive Club
75-20 Astoria Boulevard
-4-
<PAGE>
Jackson Heights, NY 11370
6.4 Appendix B contains the payment guarantees that NETCENTIVES is
committed to submitting to BA for the duration of this Agreement. It is agreed
and understood that the payment guarantees represent the minimum amount of
-------
Executive Club miles to be purchased by NETCENTIVES from BA on a per annum basis
and does not preclude NETCENTIVES from purchasing beyond the guaranteed minimum
and there shall be no maximum purchase.
7. MILEAGE ADMINISTRATION AND USAGE
7.1 It is agreed and understood that NETCENTIVES can utilize purchased
Executive Club miles for a period of 2.5 (two and a half) years from the date of
purchase. Any Executive Club mileage that is not utilized in the 2.5 year
period from date of purchase is returned to BA during the term of this
Agreement.
7.2 NETCENTIVES agrees to not transfer BA Executive Club miles to any
party for resale. All sales will be in the form of Netcentive Points to
eligible consumers for redemption of BA Executive Club USA awards.
7.3 For administrative purposes, the crediting of Executive Club mileage
purchased by NETCENTIVES from BA will be held in an account and managed by CMG.
NETCENTIVES may not return any miles purchased here for cash or other
considerations under any circumstances.
7.4 At the mutual discretion of BA and NETCENTIVES, NETCENTIVES will work
with BA to agree on terms under which BA can purchase Netcentive Points from
NETCENTIVES. Those terms will be under a separate agreement.
7.5 The method by which BA, NETCENTIVES and CMG administer and communicate
on the issuing an awardance of BA Executive Club miles are referenced in
Appendix A of this Agreement. It is understood by BA and NETCENTIVES that the
administration of such is critical to the success of this Agreement. It is
agreed that upon receipt of tape, EDI, or disk to CMG's and BA's specifications
containing purchased miles BA will use best efforts to credit member's accounts
with miles in a timely manner.
8. ASSIGNMENT AND SUBCONTRACT
This agreement is personal between NETCENTIVES and BA. Obligations
hereunder shall not be assigned, transferred or sub-contracted or otherwise
disposed of by either party whether in whole or part, except with the prior
written notice to the other party. It is clearly understood that NETCENTIVES
shall remain responsible at all times for the performance of their obligations
in this Agreement.
-5-
<PAGE>
9. LIMITED EXCLUSIVITY
9.1 BA grants NETCENTIVES limited exclusivity by agreeing not to sell its
Executive Club miles to any direct competitor of NETCENTIVES. A direct
competitor, for the purposes of this Agreement, shall be defined as any third
party provider of currency on the Internet that is redeemable for awards or any
program that awards more than one airline's mileage at more than one web site.
9.2 For the first year of this Agreement, NETCENTIVES grants BA limited
exclusivity by agreeing that it will not provide services or purchase Miles from
any other European (includes the United Kingdom) based or European (includes the
United Kingdom) flag carrying airlines who have operations from North America.
This exclusivity does not apply to United States, Asian, Latin/South/Central
American or Australian airlines. This limited exclusivity is valid only in
conjunction with the effective exclusivity terms in clause 9.1.
9.3 The exclusivity contained in this Agreement is strictly between BA USA
and NETCENTIVES USA.
9.4 The limited exclusivity does not prevent BA from pursuing its own
sales of Executive Club Miles on the Internet. BA is permitted to:
-Sales or awards of Executive Club miles to any web site that is not a
direct competitor of Netcentives as direct competitor is defined in this
Agreement.
-Have all current and future Executive Club partners offer Executive Club
Miles on their Web sites or as part of an Internet promotion and Award Executive
Club miles on BA's own Web site.
9.5 BA may at its option cancel the limited exclusivity restrictions
described within this Agreement. BA agrees to give NETCENTIVES ninety (90) days
notice of limited exclusivity cancellation. After ninety (90) days notice BA
will be entitled to work with any direct competitor of NETCENTIVES and the terms
relating to compensation to BA for limited exclusivity, as described in Appendix
B of this Agreement, will be void and will revert back to non-exclusive terms.
9.6 NETCENTIVES at its option can, upon ninety (90) days notice, free BA
from its limited exclusivity. After ninety (90) days notice BA will be entitled
to work with any direct competitor of NETCENTIVES and the terms relating to
compensation to BA for limited exclusivity, as described in Appendix B of this
Agreement, will be void and will revert back to non-exclusive terms.
10. AMENDMENTS
10.1 No change to this Agreement which affects price, delivery,
specification, functionality or any other term or condition herein shall be in
any way binding without the prior express agreement of both parties in the form
of a written amendment.
10.2 Amendments shall only be signed by a duly authorized representative
of BA on behalf of BA and a duly authorized representative of NETCENTIVES. Upon
execution the amendment shall constitute an amendment to this Agreement.
11. RIGHT OF AUDIT
NETCENTIVES shall permit access to and provide such assistance as BA may
require to the duly authorized representative of BA to inspect, audit, review
and take copies of all books,
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<PAGE>
time sheets, records, computer records, correspondence, instructions, receipts
and memoranda in relation to this agreement. BA agrees to give NETCENTIVES 14
(fourteen) days prior notice when BA requires to view such information. Any
expenses incurred by BA during the audit shall be paid by BA. Audits shall be
directly related to the terms of this Agreement.
This Right of Audit Clause is to be used only for the sole purpose of
ensuring compliance with the terms of this Agreement. The particular matter of
compliance that the audit is designed to determine must be presented to
NETCENTIVES prior to the audit.
12. DURATION AND TERMINATION
12.1 This Agreement is deemed to have commenced upon signature of this
Agreement and shall remain in full force and effect for three (3) years or
unless terminated sooner in accordance with the terms contained in this Clause.
12.2 This agreement may be terminated by either parry by the serving of
one hundred eighty (180) days written notice to the other party at any time for
any or no reason.
12.3 In addition to the circumstances set out elsewhere in this Agreement,
the non-defaulting party shall be entitled to terminate this Agreement
immediately by written notice to the other party as follows:
12.3.1 If either party fails to observe or perform any of its
material obligations and duties hereunder, provided if such failure is capable
of remedy, that it has not been remedied to the satisfaction of the non-
defaulting party within thirty (30) days of written notice of failure;
12.3.2 If the other party makes or offers to make any arrangement or
composition with or for the benefit of its creditors;
12.3.3 If the other party ceases or threatens to cease to carry on
business or suspends or threatens to suspend all or substantially all of its
operations (other than temporarily by reason of strike) or suspends payment of
its debt or is, or becomes, unable to pay its debts as they become due and
payable or commits any act of insolvency or bankruptcy;
12.3.4 If a petition or resolution for the making of any
administration order or for the bankruptcy, winding-up, or dissolution of the
other party (other than a winding-up for the purposes of reconstruction or
amalgamation of a solvent company) is presented or passed;
12.3.5 If the other party files a voluntary petition in bankruptcy or
insolvency and
12.3.6 If a liquidator, trustee, supervisor, receiver, administrator,
administrative receiver or encumbrancer takes possession of or is appointed over
the whole or any part of the assets of the other party.
12.4 Any such termination by a party shall be without prejudice to the
rights of the other patty in respect of the matter giving rise to such
termination or in respect of any accrued rights arising prior to such
termination.
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<PAGE>
12.5 Upon notice of termination of this Agreement due to the reasons
stated in Clause 12.2 the following will apply:
I. There will be a one (1) year period to complete redemption of
NETCENTIVES points to BA Executive Club miles.
II. NETCENTIVES will have a six (6) month period to continue to
purchase Executive Club miles from BA.
III. BA shall have the option to purchase any unused mileage at the
end of the one (1) year period back from NETCENTIVES at 40% of the original
purchase price.
IV. Any volume purchases agreed will terminate immediately.
13. INSURANCE
13.1 NETCENTIVES agrees to effect and to demonstrate such to BA if so
requested, public liability insurance for an amount of not less than one million
dollars ($l,000,000) per event in respect of loss, damage or injury to property
or persons.
14. INDEMNITY
14.1 NETCENTIVES agrees to fully defend, indemnify and hold BA, its
directors. officers and employees harmless from any and all liability, claims,
demands, damages, losses, legal costs and expenses arising out of, or in
connection with or as a consequence of:
- Any act or omission of NETCENTIVES, its servants, employees,
agents pursuant to or in breach of the Agreement;
- Any loss or damage to property belonging to NETCENTIVES or its
servants agents irrespective of the cause of such loss or damage save where due
to the gross negligence of BA or its employees;
- Any injury of whatsoever kind and however caused including but not
limited to property loss, personal injury or death to the third parties,
servants/agents of NETCENTIVES or BA in connection with this agreement save
where due to the gross negligence of BA or its employees;
- Any claim arising out of an allegation that BA's use of the
Netcentive's logo infringes a copyright or trademark existing or issued as of
the date of such use. The indemnification for BA of the Netcentive's logo is
limited to the United States, Canada and Europe.
14.2 BA agrees to fully defend, indemnify and hold NETCENTIVES, its
directors, officers and employees harmless from any and all liability, claims,
demands, damages, losses, legal costs and expenses arising out of, or in
connection with or as a consequence of:
-8-
<PAGE>
- Any act or omission of BA, its servants, employees, agents pursuant
to or in breach of the Agreement;
- Any loss or damage to property belonging to BA and/or its servants
agents irrespective of the cause of such loss or damage save where due to the
gross negligence of NETCENTIVES or its employees;
- Any injury of whatsoever kind and however caused including but not
limited to property loss, personal injury or death to the third parties,
servants/agents of NETCENTIVES or BA in connection with this agreement save
where due to the gross negligence of NETCENTIVES or its employees;
- Any claim arising out of an allegation that Netcentive's use of the
BA logo infringes a copyright or trademark existing or issued as of the date of
such use.
15. INTELLECTUAL PROPERTY RIGHTS
NETCENTIVES and BA warrants that the Service supplied in the course of this
Agreement does not and will not infringe any copyright, design right, registered
design, patent or any other intellectual property right of any third party.
16. CONFIDENTIALITY
This Agreement and all information regarding the business or activities of
either party made available to the other party under or as a result of this
Agreement shall at all times be treated by both parties as confidential on a
need to know basis and shall not be published, disclosed or circulated except
with the prior written consent of the other parry. BA shall, however, be
permitted to disclose information, on a need to know basis, regarding this
agreement and the business or activities of NETCENTIVES made available to BA
under or as a result of this agreement to its subsidiary or associated companies
including, but not limited to QANTAS Airways Limited, and any entities which BA
has or may form an affiliation with in connection with present or future
alliances.
17. ADVERTISING
17.1 Neither party nor any of its servants, agents or subsidiaries shall
mention the other party in any advertisement relating to or arising out of this
Agreement without the permission of the other party except as agreed in Clause
17.2 below. Such permission shall not be unreasonably withheld.
17.2 NETCENTIVES may utilize the BA and BA USA Executive Club logos for
the purpose of this Agreement. NETCENTIVES agrees to utilize BA's logos in
accordance with the terms and conditions of this Agreement. It is understood
that BA should never be advertised as a standalone award provider in any
advertising by NETCENTIVES without prior written permission from BA.
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<PAGE>
17.3 NETCENTIVES agrees, when utilizing the BA logo, to adhere to BA's
graphical standards. BA agrees to advise NETCENTIVES in a timely manner of any
changes to its logo.
18. FORCE MAJEURE
Neither party shall be entitled to terminate this Agreement for any breach
of any provision hereof or failure to perform any obligation hereunder where
such breach or failure results from some cause beyond the other party's control
(unless such breach extends for a period of 1 (one) month or more) and provided
that the party seeking to rely on the above shall have promptly notified the
other party of the cause and probable duration of the failure and shall have
used all reasonable commercial endeavors to remedy the matter giving rise to the
breach.
19. OFFERS OF EMPLOYMENT
Neither party shall be permitted to offer employment of any kind in any
capacity to such person(s) at any time during the period of this Agreement or
within 6 (six) months after its termination, howsoever rising, without the
express permission of the other party.
20. NO AGENCY OR PARTNERSHIP
Nothing in this Agreement shall constitute or be deemed to constitute a
partnership between the parties hereto or constitute NETCENTIVES as agents of BA
for any purpose whatsoever and NETCENTIVES shall have no authority or power to
bind BA or to contract in the name of or create a liability against BA in any
way or for any purpose.
21. TAXATION
NETCENTIVES shall be totally responsible for any taxation liability of any
kind which may arise on it pursuant to this Agreement, including any such
liabilities in respect of NETCENTIVES employees, servants or agents. BA however
agrees to pay sales tax on all invoices submitted by NETCENTIVES pursuant to
this Agreement if applicable.
22. WAIVERS/AMENDMENTS
22.1 No failure or neglect on the part of either party or its
representatives to enforce any of the terms and conditions of this Agreement or
terms and conditions relating to a design or promotion therefore shall insist
upon the strict performance or observance thereof shall be considered as a
waiver, unless specifically stated to be a waiver in writing and signed by the
that party. A waiver by either party on one occasion shall not automatically be
construed as permitting a waiver in the future.
22.2 The rights and remedies provided in this Agreement or in respect of a
design or promotion for the benefit or in favor of BA or NETCENTIVES are
cumulative and shall not exclude any other right or remedy provided for by law.
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<PAGE>
23. NOTICES
All demands, notices or other documents required to be given hereunder by
either party to the other shall be sent by facsimile transmission, registered
letter, first class mail or by hand to NETCENTIVES at the following address:
NETCENTIVES
Eric Tilenus
2121 El Camino Real
Suite 615
San Mateo, California 94403
Telephone: 415.577.3535
Fax: 415.572.5205
and any notices to be given to BA will be sent by facsimile transmission,
registered letter, first class mail, by hand or by telex to:
BRITISH AIRWAYS PLC
Vice President, Purchasing
75-20 Astoria Boulevard
Jackson Heights, NY, 11370
Telephone: 718.397.4276
Fax: 718.397.4746
A copy of such notices must also be sent to the BA Marketing Department at:
BRITISH AIRWAYS PLC
Vice President Business Marketing, USA
75-20 Astoria Boulevard
Jackson Heights, NY, 11370
Telephone: 718.397.4532
Fax: 718.397.4580
24. GENERAL
24.1 Where the terms and conditions of this Agreement conflict with the
terms and conditions of any previous correspondence of whatever nature then this
Agreement shall prevail.
24.2 All Appendices referred to in this Agreement and attached to this
Agreement form part of this Agreement provided that if there is any conflict
between the terms and conditions of this Agreement and the Appendices, the terms
and conditions of the Agreement shall prevail.
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<PAGE>
24. No failure on the part of either party at any time or from time to
time to enforce or to require the strict adherence and performance of any of the
terms or conditions shall affect or impair its right to enforce such terms or
conditions in any way.
24.4 The headings of this Agreement are for the convenience only and shall
not affect the construction of the provisions of this Agreement. The invalidity
or enforceability of any part of this Agreement shall not prejudice or affect
the validity or enforceability of the remainder. The masculine gender shall
include the feminine and vice versa.
24.5 The following clauses shall survive termination of this Agreement,
for whatever reason, and shall remain in full force and effect:
Clauses: 14, 15, 16, 17, 19, 24, 25.
25. LAW
This Agreement shall be governed and construed in all respects in
accordance with the laws of the State of New York courts.
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<PAGE>
In Witness whereof the parties have caused this Agreement to be duly
executed by their authorized representative the day and year first above
written.
FOR AND ON BEHALF OF
BRITISH AIRWAYS PLC.
SIGNED ./s/ Edith E. Peckl
-------------------
NAME: Edith E. Peckl
TITLE: Senior Buyer, Purchasing, The Americas
DATE: April 04, 1997
FOR AND ON BEHALF OF
BRITISH AIRWAYS PLC.
SIGNED /s/ Woody Harford
-----------------
NAME: Woody Harford
TITLE: Vice President Business Marketing
DATE: April 4, 1997
FOR AND ON BEHALF OF
NETCENTIVES
SIGNED /s/ Eric W. Tilenius
--------------------
NAME: Eric Tilenius
TITLE: President
DATE: April 30, 1997
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<PAGE>
APPENDIX A
SPECIFICATIONS
A. Netcentives Services and Executive Club Communication
-----------------------------------------------------
Netcentives will be awarding Netcentive Points to eligible consumers at
various websites on the Internet. These Netcentive Points, in turn, may be
redeemed with several award programs, including BA's Executive Club.
It is NETCENTIVE'S responsibility to ensure that any consumer
redeeming/converting Netcentive points for BA Executive Club miles is a member
of BA's Executive Club. A confirmation procedure will be set up between
NETCENTIVES, CMG and BA.
If a consumer eligible for Netcentives point redemption is not a BA
Executive Club member then Netcentives is responsible for advising the consumer
the method by which he/she can join BA's Executive Club. The method of
advisement is To Be Advised and to be discussed between BA, CMG and NETCENTIVES.
B. Marketing Support
-----------------
BA and NETCENTIVES both mutually agree to use best efforts to market the
Netcentives Points program and the BA Executive Club during the term of this
Agreement. It is agreed between BA and NETCENTIVES that within two months of
signature of this Agreement both parties will meet to discuss an annual
marketing plan.
<PAGE>
APPENDIX B
PRICING AND PAYMENTS
Pricing
- -------
Item Limited Exclusivity Non-Exclusive
- ---- ------------------- -------------
1 mile to 7,000,000 miles $0.0160 $0.0150
7,000,001 miles and up $0.0155 $0.0150
Guaranteed minimum miles
purchased per year 7 million no minimum
*It is understood that the payment and mileage guarantee is in effect while
limited exclusivity as per Clause 19.1 is effective.
Payment
- -------
Date Payment Guarantee Miles Credited
- ---- ----------------- --------------
April 30, 1997 $ 20,000 1,250,000
July 31, 1997 $ 25,000 1,562,500
October 31, 1997 $ 30,000 1,875,000
January 31, 1998 $ 37,000 2,312,500
Total $112,000 7,000,000
*All subsequent years of this Agreement will follow the same payment guarantee
and time schedule.
<PAGE>
CONFIDENTIAL
EXHIBIT 10.14
NETCENTIVES INC.
SUPPLY AGREEMENT
This Supply Agreement (the "Agreement") is entered into between Netcentives
---------
Inc., a California corporation ("Netcentives") and Trans World Airlines, Inc., a
-----------
Delaware corporation ("TWA") and shall be effective for all purposes as of
---
February 25, 1999 (the "Effective Date").
--------------
RECITALS
WHEREAS, Netcentives develops certain Internet-based programs which
provide for the grant of points which are redeemable for airline frequent flier
miles and other incentives to end-users (collectively, the "ClickRewards
------------
Program");
- -------
WHEREAS, TWA has established a travel awards program (the "Aviators
--------
Program") pursuant to which, among other things, certain persons may receive
frequent flier miles for travel on TWA and for such other reasons as are
permitted by TWA;
WHEREAS, Netcentives wishes to purchase Aviators Miles (as hereinafter
defined) from TWA and TWA wishes to sell Aviators Miles to Netcentives pursuant
to the terms of this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
consideration provided for herein, the parties hereto hereby agree as follows:
SECTION I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Account" shall mean the account of ClickRewards Members who are also
-------
Aviators Members in which Aviators Miles balances are maintained by TWA.
1.2 "Aviators Member" means, as of any date, an individual who is a member
---------------
in good standing of the Aviators Program.
1.3 "Aviators Miles" means the points accrued under the Aviators Program
by Aviators Members for travel on TWA or such other reasons as are permitted by
TWA.
1.4 "ClickRewards Member" means, as of any date, an individual who is a
-------------------
member in good standing of the ClickRewards Program.
1.5 "Confidential Information" means any information, technical data, or
know-how, including, but not limited to, that which relates to research, product
plans, products, services, ClickRewards Members, customers, markets, software,
developments, inventions, processes, designs, drawings, engineering, hardware
configuration information, marketing or finances of a party, which is designated
in writing to be confidential or proprietary, or if given orally, is identified
as confidential or proprietary at the time of disclosure or is obviously
confidential considering the context in which such disclosure is made.
Confidential Information does not include information, technical data or know-
how
<PAGE>
CONFIDENTIAL
which (i) is rightfully in the possession of the receiving party at the time of
disclosure, (ii) prior to or after the time of disclosure becomes part of the
public knowledge or literature other than as a result of any improper inaction
or action of the receiving party hereunder, or (iii) is approved by the
disclosing party, in writing, for release.
1.6 "Direct Competitor of Netcentives" means any third-party program or
--------------------------------
entity which rewards Internet, online, or e-mail activities, (a) where end-users
may earn points at multiple web sites, at multiple online service areas, or via
e-mail-based services, or (b) where end-users may redeem points for the
incentive awards of more that one company. Direct Competitors of Netcentives
include, without limitation, the companies listed in Exhibit B attached hereto.
1.7 "Limited Exclusivity" means TWA's agreement not to sell Aviators Miles
-------------------
to any Direct Competitor of Netcentives as defined above. TWA and Netcentives
shall have a relationship of Limited Exclusivity during the Term.
1.8 "Netcentives Marks" means the trademarks and logos of Netcentives set
-----------------
forth on Exhibit A1 hereto, as the same may be amended by Netcentives from time
----------
to time upon notice to TWA.
1.9 "Term" has the meaning given it in Section 6.2(a) hereof.
----
1.10 "TWA Marks" means the designated trademarks and logos of TWA set forth
---------
on Exhibit A2 hereto, as the same may be amended by TWA from time to time upon
----------
notice to Netcentives.
SECTION II
PURCHASE AND SALE; OBLIGATIONS OF BOTH PARTIES
2.1 Orders. Pursuant to this Agreement, Netcentives agrees to purchase
------
from TWA, and TWA agrees to sell to Netcentives, Aviators Miles. Netcentives
shall deliver orders to TWA for Aviators Miles, which orders shall designate the
aggregate number of Aviators Miles to be purchased, the Account or Accounts to
which such Aviators Miles are to be credited, and the number of Aviators Miles
to be credited to each such Account. TWA shall credit Accounts designated by
Netcentives within a reasonable time after receipt of an order from Netcentives,
but in any event within seven (7) business days thereof. As long as this
Agreement is in effect, TWA shall not reject any order of Netcentives, except in
accordance with the terms of Section 3.2 hereof.
2.2 Purchase Terms. Netcentives shall pay to TWA the price of $.014 per
--------------
Aviators Mile purchased pursuant to this Agreement.
2.3 Payment. All payments due to TWA pursuant to an order under this
-------
Section 2 shall become due and payable by check or wire transfer, at the option
of Netcentives, within thirty (30) days of transfer of Aviators Miles to the
appropriate Account or Accounts. Any payments made by Netcentives to TWA
hereunder shall be non-refundable.
2.4 Taxes. Prices for Aviators Miles do not include taxes. Netcentives
-----
is responsible for federal excise taxes on the sale of Aviators Miles to
Netcentives pursuant to this Agreement. Aviators Miles are currently taxed at a
rate of 7.5% (the "Taxes"). Netcentives shall not be responsible for taxes on
-----
TWA's net worth or income. Netcentives shall remit such Taxes to TWA, and TWA
shall be responsible for remitting such Taxes to the appropriate government
authority.
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<PAGE>
CONFIDENTIAL
2.5 Reporting. For all Aviators Miles credited to Accounts pursuant to
---------
Section 2.1, TWA shall provide Netcentives with reports on a monthly basis
confirming such credit. Such confirmation will include, at minimum, the
Accounts to which the Aviators Miles were credited, and the applicable number of
Aviators Miles so credited.
2.6 Customer Service and Operations. Both parties agree to respond to and
-------------------------------
resolve customer services inquiries addressed to it promptly. Each party shall
respond to customer service inquiries within no more than five (5) business days
of receipt of such inquiry. Each party shall designate a specific individual
employee of such party to be the contact person for any operations or customer
service issues which may arise during the Term.
SECTION III
OBLIGATIONS OF NETCENTIVES
3.1 Distribution to ClickRewards Members. Netcentives shall only request
------------------------------------
that Aviators Miles be credited to the accounts of persons in exchange for their
participation in the ClickRewards Program.
3.2 Distribution to Aviators Members. Netcentives shall only request that
--------------------------------
Aviators Miles be credited to the Accounts of ClickRewards Members whom
Netcentives believes in good faith to be Aviators Members. To the extent that
Netcentives requests that Aviators Miles be credited to a person who is not a
Aviators Member, TWA shall not be obligated to credit such Account and shall
treat such Aviators Miles as if they had never been ordered (in which case
Netcentives' payment obligation shall be reduced accordingly). In the event
that TWA rejects an Order, it shall notify Netcentives in writing of the reasons
for such rejection.
3.3 No Resale Of Aviators Miles. At no time shall Netcentives offer
---------------------------
Aviators Miles to any person for resale or redistribution to a third party. If
Netcentives discovers with reasonable certainty that any ClickRewards Member is
inappropriately redistributing Aviators Miles, Netcentives shall immediately
cease requesting that Aviators Miles be credited to the Account of such
ClickRewards Member, and shall notify TWA of the identity of such ClickRewards
Member and the nature of the potential infraction. If TWA discovers that any
ClickRewards Member has resold or redistributed Aviators Miles in violation of
this provision, TWA can, with notice to Netcentives, cease distributing any
additional Aviators Miles to such Aviators Member's Account.
3.4 Other Obligations.
------------------
(a) Inclusion in Promotional Materials. Netcentives shall include TWA
-----------------------------------
and/or the Aviators Program in printed and electronic ClickRewards Program
materials consistent with space constraints.
(b) Member Access. Netcentives shall, at its sole discretion, give
--------------
TWA the opportunity to be included in e-mails to the ClickRewards Member base in
order to make offers and invitations to such ClickRewards Members, provided that
such access does not violate the ClickRewards Privacy Policy (currently located
at www.clickrewards.com), nor any applicable rules and regulations.
---------------------
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<PAGE>
CONFIDENTIAL
(c) Promotion Participation. Netcentives may, from time to time, give
------------------------
TWA the opportunity to participate in promotions targeting the ClickRewards
Member base and other e-commerce consumers in the event that such promotions are
undertaken by Netcentives.
(d) Web Site Exposure. Netcentives shall place the TWA logo and a
-----------------
link to the Aviators Program home page on the ClickRewards web site.
Netcentives shall also place a link on the ClickRewards web site to the Consumer
Account information pages at the TWA web site, which allows consumers to access
their Account data from ClickRewards.
(e) Other Marketing Obligations. Netcentives shall:
----------------------------
(i) Include TWA in offline advertising from time to time;
(ii) Actively promote TWA's participation as a Netcentives
partner to the Netcentives Member base and in new Member acquisition efforts;
(iii) Give TWA access to Netcentives-sponsored online research
data, provided that the provision of such data does not conflict with the
Privacy Policy and other agreements of Netcentives, or any applicable laws and
regulations.
(iv) Give TWA the opportunity to work with Netcentives' merchant
partners for the purpose of running joint ClickRewards promotions, consistent
with the needs of the applicable merchant partners.
SECTION IV
OBLIGATIONS OF TWA
4.1 Marketing Access.
----------------
(a) During each calendar year during which this Agreement is in
effect, Netcentives shall have access to the entire Aviators Member base for one
targeted solicitation and ClickRewards offer communication. Netcentives shall
bear all costs associated with the fulfillment of such mailing, provided,
however, that TWA shall provide access to the names and addresses of the
Aviators Member base at no additional cost to Netcentives.
(b) During each year of the Term, TWA shall give Netcentives at least
one (1) Aviators newsletter for article space to promote membership in
Netcentives. TWA shall also provide an introductory article announcing the
addition of ClickRewards as a new way to earn Aviators Miles. The text of such
article shall be subject to Netcentives' prior approval, not to be unreasonably
withheld.
(c) At least twice during each year of the Term, TWA shall give
Netcentives insert space in at least two Aviators statement mailings at no
additional charge to Netcentives.
(d) TWA shall include ClickRewards in all Aviators Program materials
in which partners are listed (including, without limitation, print and
electronic materials), as an
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<PAGE>
CONFIDENTIAL
Aviators earning partner. When possible, such materials shall include a link to
the Netcentives web site at a URL to be specified by Netcentives. TWA shall also
include the ClickRewards logo and a link to an explanatory page on all TWA
Aviators "mileage earning opportunities" web pages and account information
pages, provided however, TWA shall not be required to include the ClickRewards
logo on the TWA home page.
4.2 Data Transmission. Orders pursuant to Section 2.1 shall be transmitted
------------------
in an electronic file format to be mutually agreed by the parties in writing.
SECTION V
PROPRIETARY INFORMATION
5.1 Confidential Information. Each party agrees not to use any
------------------------
Confidential Information disclosed to it by the other party for its own use or
for any purpose other than to carry out its obligations under this Agreement.
Neither party will disclose any Confidential Information of the other party to
third parties or to employees of the party receiving Confidential Information,
other than employees who are required to have the information in order to carry
out such party's obligations under this Agreement. Each party agrees that it
will take all reasonable measures to protect the secrecy of and avoid disclosure
or use of Confidential Information of the other party in order to prevent it
from falling into the public domain or the possession of persons other than
those persons authorized under this Agreement to have any such information,
including (without limitation) ensuring that recipients of the disclosing
party's Confidential Information adhere to confidentiality terms in content
substantially similar to the terms in this Agreement. Such measures shall
include the highest degree of care that the receiving party utilizes to protect
its own Confidential Information of a similar nature. Each party agrees to
notify the other in writing of any misuse or misappropriation of Confidential
Information of the disclosing party which may come to the receiving party's
attention.
5.2 Publicity. After the execution of this Agreement, Netcentives may
---------
issue a press release which may, among other things, confirm the existence of a
relationship between the parties and of the exclusive nature of such
relationship, and may request that TWA 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.
5.3 Trademarks.
----------
(a) TWA hereby grants Netcentives a limited, non-exclusive license to
duplicate, transmit and use the TWA Marks in Netcentives' promotional materials
and on its Internet Web site, during the Term of this Agreement (as extended by
Section 6.2(b)(iii), as appropriate), provided, however, that any use of the TWA
-----------------
Marks shall be for the purpose of promoting the ClickRewards Program, and shall
only be used with regard to the inclusion of Aviators Miles within the
ClickRewards Program. Netcentives shall also have the right to use the TWA Marks
on information pages about the ClickRewards Program housed at the sites of its
merchant partners. Each type of use of TWA Marks by Netcentives is subject to
prior written approval by TWA for each type of use. TWA shall provide notice of
any disapproval of any type of use within three (3) Business Days of such
request, and shall not unreasonably disapprove of any such use. Failure to
respond to a request for approval within three (3) Business Days shall be deemed
to be approval of such type of use.
-5-
<PAGE>
CONFIDENTIAL
(b) Netcentives hereby grants TWA a limited, non-exclusive license to
duplicate, transmit and use the Netcentives Marks in TWA's promotional materials
and on its Internet Web site, during the Term of this Agreement, provided,
--------
however, that any use of the Netcentives Marks shall be for the purpose of
- -------
promoting the Aviators Program or the ClickRewards Program and shall only be
used with regard to the inclusion of Aviators Miles within the ClickRewards
Program. Each type of use of Netcentives Marks by TWA is subject to prior
written approval by Netcentives for each type of use. Netcentives shall provide
notice of any disapproval of any type of use within three (3) Business Days of
such request, and shall not unreasonably disapprove of any such use. Failure to
respond to a request for approval within three (3) Business Days shall be deemed
to be approval of such type of use.
(c) Nothing herein shall be deemed to grant either party any ownership
interest in the Marks of the other party.
SECTION VI
LIMITED EXCLUSIVITY; TERM AND TERMINATION
6.1 Limited Exclusivity.
-------------------
(a) Relationship. The parties hereto acknowledge that they shall have
------------
a relationship of Limited Exclusivity during the Term of this Agreement.
Notwithstanding anything to the contrary in this Agreement, it is expressly
understood and agreed by the parties that the foregoing Limited Exclusivity is
intended solely to restrict TWA during the Term of this Agreement from entering
into any agreement with companies or entities meeting the definition of Direct
Competitor of Netcentives. It is further agreed that nothing in this Agreement
shall restrict or prohibit TWA from entering into any agreement with companies
or entities which are not Direct Competitors of Netcentives, for the award of
frequent flyer miles in TWA's Aviators Program in connection with the sale or
offer to sell any goods or services, provided that such companies or entities
will be subject to Section 6.1(B)(i) below.
(b) Obligations.
-----------
(i) TWA shall not sell or grant, or permit third parties to
sell or grant, Aviators Miles to any Direct Competitor of Netcentives during the
Term.
(ii) TWA shall not permit direct mail or e-mail access
(including, without limitation, access through regular or e-mail) to its
Aviators Members by any Direct Competitor of Netcentives.
(iii) Any violation of Sections 6.1(b)(i) and/or(ii) during the
Term shall be considered a material breach of this Agreement. 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 TWA 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 TWA, without the necessity of
proving actual damages.
-6-
<PAGE>
CONFIDENTIAL
6.2 Term and Termination.
--------------------
(a) Term and Termination.
--------------------
(i) The term of this Agreement shall be three (3) years from the
Effective Date (the "Term"), unless terminated pursuant to this Section 6.2.
----
This Agreement shall terminate upon the expiration of the Term unless renewed by
the parties hereto in writing. Notwithstanding the foregoing, at any time after
the first twelve (12) months after the Effective Date, either party may give
written notice of termination to the other party, which termination will take
effect on the later of (x) six (6) months after the date of such notice, or (y)
eighteen months after the Effective Date.
(ii) If either party defaults in the performance of any material
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.
(b) Effect of Termination or Expiration. Upon termination of this
-----------------------------------
Agreement for any reason whatsoever, a winding down period of six months (the
"Wind-Down Period") will begin, during which both TWA and Netcentives will let
----------------
TWA and Netcentives customers know that the relationship will be ending. During
such period, Netcentives customers may continue to redeem their points for TWA
Aviators Miles as set forth under this Agreement. During the Wind-Down Period,
the following Sections shall survive: Section 2 (Purchase and Sale), and Section
5.3 (Trademarks).
(c) Termination of Wind-Down Period. Upon termination of the Wind-
--------------------------------
Down Period, TWA will credit all uncredited orders to the Accounts originally
designated by Netcentives.
(d) Survival. TWA's obligations to credit Accounts in a timely manner
--------
and Netcentives' obligations to pay TWA all amounts due hereunder, as well as
Sections 5.1 (Confidentiality), 5.3 (a, b) (Trademarks) (to the extent provided
in Section 6.2(b) above), 5.3(c) (Ownership), 6.2 (b) (Effect of Termination or
Expiration), 6.2(c) (Termination of Wind-Down Period), 6.2(d) (Survival), and 7
(Miscellaneous) shall survive termination of this Agreement.
SECTION VII
MISCELLANEOUS
7.1 Independent Contractors. The relationship of Netcentives and TWA
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to constitute the parties as
agents, partners, joint venturers, co-owners or otherwise as participants in a
joint or common undertaking.
7.2 Indemnification.
---------------
(a) TWA hereby agrees to indemnify, defend and hold harmless
Netcentives 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) TWA' operation of the Aviators Program including without
limitation,
-7-
<PAGE>
CONFIDENTIAL
claims by participants in the Aviators Program of TWA's breach, violation or
failure to comply with the terms of the Aviators Program and (ii) any allegation
that Netcentives use of the TWA Marks licensed hereunder infringes a third party
U.S. copyright or trademark existing or issued as of the date of such use,
provided in each case that Netcentives promptly notifies TWA in writing of any
- --------
such claim, gives TWA sole control of the defense and all related settlement
negotiations, and cooperates with TWA in defending or settling any such claim.
(b) Netcentives hereby agrees to indemnify, defend and hold harmless
TWA 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) Netcentives' operation of the ClickRewards Program
including without limitation, claims by participants in the ClickRewards Program
of Netcentives' breach, violation or failure to comply with the terms of the
ClickRewards Program and (ii) any allegation that TWA's use of the Netcentives
Marks licensed hereunder infringes a third party U.S. copyright or trademark
existing or issued as of the date of such use, provided in each case that TWA
--------
promptly notifies Netcentives in writing of any such claim, gives Netcentives
sole control of the defense and all related settlement negotiations, and
cooperates with Netcentives in defending or settling any such claim.
7.3 Notices. All notices and demands hereunder shall be in writing and
-------
shall be delivered by personal service or by telex, facsimile, cable, telegram,
certified or registered mail, or return receipt express courier to the address
of the receiving party set forth on the signature page of this Agreement, or to
any other address of the receiving party designated by written notice in
accordance with this paragraph.
7.4 Waiver, Amendment and Modification. No waiver, amendment or
----------------------------------
modification of any provision hereof shall be effective unless in writing and
signed by the party against whom such waiver, amendment or modification is
sought to be enforced. No failure by either party to exercise and no delay by
either party in exercising any right, power or remedy with respect to the
obligations secured hereby shall operate as a subsequent waiver of any such
right, power or remedy.
7.5 Assignment. Each of the parties agrees that its rights and
----------
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, provided,
--------
however, that such consent shall not be required for an assignment of this
- -------
contract pursuant to a merger, sale of substantially all of the assets, or sale
of all of the outstanding stock of either party. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, their successors
and assigns.
7.6 Severability. In the event that any of the provisions of this
------------
Agreement shall be held by a court of competent jurisdiction to be
unenforceable, such provision will be enforced to the maximum extent permissible
and the remaining portions of this Agreement shall remain in full force and
effect. The parties agree to negotiate in good faith a substitute, valid and
enforceable provision that most nearly effects the parties' intent and to be
bound by the mutually agreed substitute provision.
7.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without reference to conflict
of laws provisions thereof.
7.8 Force Majeure. Neither party shall be responsible for any failure to
-------------
perform due to unforeseen circumstances or to causes beyond its control,
including but not limited to acts of God, war, riot, embargoes, acts of civil or
military authorities, fire, floods, accidents, strikes, or shortages of
transportation facilities, fuel, energy, labor or materials. A party whose
performance is affected by a force
-8-
<PAGE>
CONFIDENTIAL
majeure condition shall be excused from such performance to the extent required
by the force majeure condition so long as such party takes all reasonable steps
to avoid or remove such causes of nonperformance and immediately continues
performance whenever and to the extent such causes are removed.
7.9 Entire Agreement; Amendment. This Agreement constitutes the final and
---------------------------
entire Agreement between the parties and may not be modified or amended except
in writing signed by both of the parties.
7.10 Headings. The headings and captions used in this Agreement are for
--------
convenience of reference only, and shall not in any way affect the
interpretation of the provisions of this Agreement.
7.11 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original and all of which together shall constitute
one instrument.
[SIGNATURE PAGE TO FOLLOW]
-9-
<PAGE>
CONFIDENTIAL
The parties have executed this Supply Agreement as of the date set forth
below.
NETCENTIVES INC.
ADDRESS:
690 Fifth Street
San Francisco, CA 94107
/s/ Perryman Maynard Facsimile: (415) 538-1889
- ----------------------------------------
Signature
Perryman Maynard
- ----------------------------------------
Print Name
VP, Relationship Marketing
- ----------------------------------------
Title
TRANS WORLD AIRLINES, INC.
ADDRESS:
Trans World Airlines, Inc.
-----------------------------------
515 N. 6th Street
-----------------------------------
/s/ Craig Andersen St. Louis, MO 63101
- --------------------------------------- -----------------------------------
Signature Facsimile: (314) 589-3387
Craig Andersen
- ---------------------------------------
Print Name
Director, Frequent Traveler Marketing
- ---------------------------------------
Title
-10-
<PAGE>
CONFIDENTIAL
EXHIBIT A1
TRADEMARKS OF NETCENTIVES
NETCENTIVES
CLICKREWARDS
CLICKMILES
[LOGO OF NETCENTIVES APPEARS HERE]
[LOGO OF CLICKREWARDS(TM) APPEARS HERE]
[LOGO OF CLICKREWARDS(TM) ONLINE INCENTIVES NETWORK APPEARS HERE]
[LOGO]
-A1-
<PAGE>
CONFIDENTIAL
EXHIBIT A2
TRADEMARKS OF TWA
TWA
AVIATORS PROGRAM
AVIATOR MILES
TRANS WORLD AIRLINES
AVIATORS (SM)
- -----------------
-A2-
<PAGE>
CONFIDENTIAL
EXHIBIT B
DIRECT COMPETITORS OF NETCENTIVES
ALCONE MARKETING GROUP: NET PERKS AND OTHER PROGRAMS
AOL REWARDS
BIG BANG MEDIA
COOL SAVINGS
CYBERGOLD
EMAGINET
FREE RIDE
INCENTIVE WARE / INTERNET PERKS
INTELLIPOST: BONUSMAIL AND OTHER PROGRAMS
JUXTANET: PROLAUNCH AND OTHER PROGRAMS
MILENET
MOTIVATION NET: MY POINTS AND OTHER PROGRAMS
NETSTAKES
PLANET ALL
PLANET-U
PRODUCT PARTNERS
SMARTFLIER.COM
SPARK ONLINE
TRAVPASS
YOYODYNE
-B1-
<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 (i) any person or entity
--------------------------------
that has established or attempts to establish itself as a currency on the
Internet to be offered to any Member; or (ii) any person or entity, that awards
more that one airline's mileage at two or more companies' web sites to the
Member utilizing a common loyalty or promotional program name.
<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
<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 $0.18 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 agrees
that it will not distribute SkyMiles to its employees for use in
Netcentives' business travel. 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
$100,000 as consideration for the promotional materials and
advertising set forth in Section 10 herein. If Netcentives purchases
$750,000 worth of SkyMiles in contract year one, the administrative
fee will be waived for year two. If Netcentives purchases $750,000
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 $500,000 worth of
SkyMiles in contract year one and in each contract year thereafter, at
the price per SkyMile
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 $500,000 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 $.0165 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
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
agreeing not to (i) sell, grant, gift, assign SkyMiles to any Direct
Competitor of Netcentives, and (ii) grant the right to use its
trademarks, trade names, service marks, or logos to any Direct
Competitor of Netcentives. This exclusivity is limited in that
except for sales to a Direct Competitor of Netcentives, this
exclusivity shall in no way prevent Delta from: a) pursuing its own
sale of Mileage on the Internet; b) distributing SkyMiles to any
individual Web site or Web merchant for that site or merchant's
promotional or loyalty program; c) having SkyMiles Partners offer
SkyMiles on their Web sites or as part of an Internet promotion;
d) awarding SkyMiles on Delta's own Web site; e) selling Mileage to an
Internet company that in turn awards Delta Mileage as part of an
incentive to another company provided that neither the company buying
nor the company receiving such Mileage is a Direct Competitor of
Netcentives; or f) selling SkyMiles to SHC Ventures, Inc., for the
purpose of operating the SkyMiles shopping program.
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
<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, the guaranteed purchase commitments in Section 5(B) shall no
longer apply. 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
<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
two (2) SkyMiles mailings per year at no additional charge.
Netcentives is not limited to two (2) 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
<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:
- -----------
Awards associated with:
Gambling
Tobacco
Alcohol
Lotteries
Immoral and unethical merchants or products
17
<PAGE>
Attachment B
------------
Direct Competitors of Netcentives
- ---------------------------------
ALL ADVANTAGE
AOL REWARDS
BEENZ
COOL SAVINGS
CYBERGOLD
EMAGINET: E-CENTIVES
EBATES
FREE RIDE MEDIA
MYPOINTS.COM: BONUSMAIL, MYPOINTS AND OTHER PROGRAMS
JUXTANET: PROLAUNCH AND OTHER PROGRAMS
PASSPOINTS
SMART FROG
TRAVPASS
</PAGE>
<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
<PAGE>
"Direct Competitor of Netcentives" means any third-party program or entity
which rewards Internet, online, or e-mail activities, (a) where end-users
may earn points at multiple web sites, at multiple online service areas, or
via e-mail-based services, or (b) where end-users may redeem points for the
incentive awards of more than one company. 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
<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 one (1) 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 one (1) 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
<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 $.015 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 $10,000 in
any contract year, Participant shall pay to America West the
difference between the amount paid for such contract year and $10,000
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
<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
ALCONE MARKETING GROUP: NET PERKS AND OTHER PROGRAMS
AOL REWARDS
BIG BANG MEDIA
COOL SAVINGS
CYBERGOLD
EMAGINET
FREE RIDE
INCENTIVE WARE/INTERNET PERKS
INTELLIOPOST: BONUS MAIL AND OTHER PROGRAMS
JUXTANET: PROLAUNCH AND OTHER PROGRAMS
MOTIVATION NET: MY POINTS AND OTHER PROGRAMS
NETSTAKES
PLANET ALL
PLANET-U
PRODUCT PARTNERS
SMARTFLIER.COM
SPARK ONLINE
TRAUPASS
YOYODYNE
10
<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.
<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 $1,000/5,000 Billing Period - Monthly
Facility Fee $2,500/5,000 Billing Period - Monthly
# Access Cards (3 max) 1@$100/card
Other Charges Exo-ColNetBU-T1 - $500/$500
Exo-Mon-http $100/$100
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
<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. 4 to Registration Statement No.
333-83443 of Netcentives Inc. on Form S-1 of our report dated July 14, 1999
(September 9, 1999 as to the last two paragraphs of Note 15) 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
October 12, 1999
