-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/94RXB4xeHEeehZBKlKzLsDhKHt+Wg5TOQCwdYhR6lXtXhasasD5hAOqBB6ijwV t9TT/rZOhR9JH4HR2VjCLQ== 0000950149-99-002017.txt : 19991117 0000950149-99-002017.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950149-99-002017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEXTCARD INC CENTRAL INDEX KEY: 0001081015 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 680384606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26019 FILM NUMBER: 99753291 BUSINESS ADDRESS: STREET 1: 595 MARKET ST STREET 2: STE 1800 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4158369700 MAIL ADDRESS: STREET 1: 595 MARKET ST STREET 2: STE 1800 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: NEXT CARD INC DATE OF NAME CHANGE: 19990302 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED SEPT 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _________. 0-26019 (Commission File Number) NEXTCARD, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 68-0384-606 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 595 MARKET STREET, SUITE 1800, SAN FRANCISCO, CALIFORNIA 94105 (Address of Principal Executive Offices) (Zip Code) (415) 836-9700 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 31, 1999, there were 46,327,458 shares of the registrant's Common Stock, par value $.001 per share, outstanding, of which 3,660,110 were nonvoting. 2 NEXTCARD, INC. AND SUBSIDIARY FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 INDEX
PART I. FINANCIAL INFORMATION PAGE ITEM 1. Financial Statements (unaudited): Consolidated Balance Sheets ......................... 3 Consolidated Statements of Operations ............... 4 Consolidated Statements of Changes in Stockholders' Equity ........................... 5 Consolidated Statements of Cash Flows ............... 6 Notes to Condensed Consolidated Financial Statements ........................................ 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings ......................................... 35 Item 2. Changes in Securities and Use of Proceeds ................. 35 Item 3. Defaults Upon Senior Securities Holders ................... 35 Item 4. Submission of Matters to a Vote of Security Holders ....... 35 Item 5. Other Information ......................................... 35 Item 6. Exhibits and Reports on Form 8-K .......................... 35 Signatures ........................................................ 36
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEXTCARD, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)
SEPTEMBER 30, DECEMBER 31, 1999 1998 --------- --------- ASSETS: Cash and cash equivalents $ 85,541 $ 40,134 Cash and cash equivalents, restricted 13,993 -- Credit card loans receivable, less allowance for loan losses of $6,178 at September 30, 1999 261,836 -- Prepaid loan fees 5,145 2,100 Equipment and leasehold improvements, net 6,939 2,102 Prepaid and other assets 15,452 1,206 --------- --------- Total assets $ 388,906 $ 45,542 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Deposits $ 2,541 $ -- Secured borrowings 229,129 -- Other borrowings 11,879 504 Accounts payable 3,914 3,366 Accrued expenses and other liabilities 16,821 1,735 --------- --------- Total liabilities 264,284 5,605 --------- --------- Stockholders' equity Convertible preferred stock -- 33 Common stock 46 5 Additional paid-in capital 209,918 63,875 Deferred stock compensation (14,935) (6,000) Notes receivable from stockholders (13) (26) Accumulated deficit (70,394) (17,950) --------- --------- Total stockholders' equity 124,622 39,937 --------- --------- Total liabilities and stockholders' equity $ 388,906 $ 45,542 ========= =========
See notes to consolidated financial statements. 3 4 NEXTCARD, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------ ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Interest income: Cash and investments $ 1,400 $ 116 $ 2,585 $ 228 Credit card loans 5,486 -- 7,992 -- -------- -------- -------- -------- Total interest income 6,886 116 10,577 228 Interest expense 3,249 47 5,762 48 -------- -------- -------- -------- Net interest income 3,637 69 4,815 180 Provision for loan losses 3,185 -- 5,227 -- -------- -------- -------- -------- Net interest income (loss) after provision for loan losses 452 69 (412) 180 -------- -------- -------- -------- Non-interest income: Servicing and profit-and-loss sharing -- 137 341 301 Interchange fee 717 -- 1,130 -- Credit card fees and other 416 2 618 5 -------- -------- -------- -------- Total non-interest income 1,133 139 2,089 306 -------- -------- -------- -------- Non-interest expenses: Salaries and employee benefits 6,724 2,124 15,322 4,262 Marketing and advertising 8,813 1,056 16,364 2,201 Credit card activation and servicing costs 3,114 880 7,116 1,322 Occupancy and equipment 1,227 326 2,656 602 Professional fees 640 49 1,106 167 Amortization of deferred stock compensation 2,349 468 7,096 867 Amortization of loan structuring fee 655 -- 2,967 -- Other 835 106 1,494 310 -------- -------- -------- -------- Total non-interest expenses 24,357 5,009 54,121 9,731 -------- -------- -------- -------- Loss before income taxes (22,772) (4,801) (52,444) (9,245) Provision for income taxes -- -- -- -- -------- -------- -------- -------- Net loss $(22,772) $ (4,801) $(52,444) $ (9,245) ======== ======== ======== ======== Basic and diluted net loss per common share $ (0.50) $ (1.44) $ (2.11) $ (3.03) ======== ======== ======== ======== Weighted average common shares used in net loss per common share calculation 45,408 3,328 24,809 3,050 ======== ======== ======== ======== Pro forma basic and diluted net loss per common share $ (0.50) $ (0.22) $ (1.28) $ (0.54) ======== ======== ======== ======== Weighted average common shares used in computing pro forma basic and diluted net loss per common share 45,408 21,550 41,001 17,213 ======== ======== ======== ========
See notes to consolidated financial statements. 4 5 NEXTCARD, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data) (Unaudited)
CONVERTIBLE PREFERRED STOCK SERIES A-D COMMON STOCK ADDITIONAL ------------------------------------ ---------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL -------------------- --------------- ------------- ------------- ------------ BALANCES AT DECEMBER 31, 1997 9,110,250 $9 4,894,875 $5 $4,694 Issuance of convertible preferred stock Series C 9,132,660 9 11,662 Return of convertible preferred stock Series A in settlement of notes receivable (21,096) -- (9) Issuance of common stock upon exercise of options 26,249 -- 1 Deferred stock compensation 6,100 Amortization of deferred stock compensation Net loss -------------------- --------------- ------------- ------------- ------------ BALANCES AT SEPTEMBER 30, 1998 18,221,814 $18 4,921,124 $5 $22,448 ==================== =============== ============= ============= ============ BALANCES AT DECEMBER 31, 1998 32,625,734 $33 4,932,374 $5 $63,875 Issuance of common stock upon exercise of warrants and options 1,743,409 1 350 Issuance of common stock from IPO, net of expenses 6,900,000 7 126,969 Issuance of common stock warrants 2,693 Conversion of preferred stock to common stock (32,625,734) (33) 32,625,734 33 Settlement of notes receivable Deferred stock compensation 16,031 Amortization for deferred stock compensation Net loss ==================== =============== ============= ============= ============ BALANCES AT SEPTEMBER 30, 1999 -- $-- 46,201,517 $46 $209,918 ==================== =============== ============= ============= ============
DEFERRED NOTES TOTAL STOCK RECEIVABLE FROM ACCUMULATED STOCKHOLDERS' COMPENSATION STOCKHOLDERS DEFICIT EQUITY ------------------ ------------------- -------------- -------------- BALANCES AT DECEMBER 31, 1997 $-- $(35) $(1,886) $2,787 Issuance of convertible preferred stock Series C 11,671 Return of convertible preferred stock Series A in settlement of notes receivable 9 -- Issuance of common stock upon exercise of options 1 Deferred stock compensation (6,100) -- Amortization of deferred stock compensation 867 867 Net loss (9,245) (9,245) ------------------ ------------------- -------------- -------------- BALANCES AT SEPTEMBER 30, 1998 $(5,233) ($26) $(11,131) $6,081 ================== =================== ============== ============== BALANCES AT DECEMBER 31, 1998 ($6,000) ($26) ($17,950) $39,937 Issuance of common stock upon exercise of warrants and options 351 Issuance of common stock from IPO, net of expenses 126,976 Issuance of common stock warrants 2,693 Conversion of preferred stock to common stock -- Settlement of notes receivable 13 13 Deferred stock compensation (16,031) -- Amortization for deferred stock compensation 7,096 7,096 Net loss (52,444) (52,444) ================== =================== ============== ============== BALANCES AT SEPTEMBER 30, 1999 $(14,935) $(13) $(70,394) $124,622 ================== =================== ============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 6 NEXTCARD, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ 1999 1998 --------- --------- OPERATING ACTIVITIES: Net loss $ (52,444) $ (9,245) Adjustments to net loss to arrive at cash used in operating activities: Provision for loan losses 5,227 -- Deprecation and amortization 4,122 139 Amortization of deferred stock 7,096 867 Change in operating assets and liabilities: Increase in accounts payable 548 1,330 Increase in accrued expenses and other liabilities 15,086 589 (Increase) decrease in prepaid and other assets (9,994) 181 --------- --------- Net cash used in operating activities (30,359) (6,139) --------- --------- INVESTING ACTIVITIES: Net loans originated or collected (247,540) -- Loan portfolio acquisition (22,240) -- Acquisition of Textron National Bank, net of assumed liabilities (4,459) -- Purchase of equipment and leasehold improvements (5,846) (1,037) --------- --------- Net cash used in investing activities (280,085) (1,037) --------- --------- FINANCING ACTIVITIES: Net increase in deposits 2,000 -- Net change in secured borrowings 229,129 -- Proceeds from other borrowings 11,673 539 Payments made on other borrowings (298) -- Proceeds from issuance of convertible preferred stock -- 11,671 Proceeds from issuance of common stock, net 127,327 1 Proceeds from settlement of notes receivable 13 -- --------- --------- Net cash provided by financing activities 369,844 12,211 --------- --------- Net increase in cash and cash equivalents 59,400 5,035 Cash and cash equivalents at the beginning of the period 40,134 2,840 --------- --------- Cash and cash equivalents at the end of the period $ 99,534 $ 7,875 ========= ========= SUPPLEMENTAL DISCLOSURES: Cash paid during the period for interest $ 2,688 $ -- SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unearned stock based compensation $ 16,030 $ 6,100 Issuance of preferred stock warrants for loan structuring/origination fee $ 2,693 -- Return of convertible preferred stock Series A -- $ 9 Issuance of convertible preferred stock Series C -- $ 11,671
6 7 NEXTCARD, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements include NextCard, Inc. and its wholly owned subsidiary, NextBank, N.A. (collectively "the Company"). The Company is an Internet-based provider of consumer credit. INTERIM FINANCIAL STATEMENTS The unaudited interim consolidated financial statements and related unaudited financial information in the footnotes have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial statements. Such interim financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company and the results of its operations and its cash flows for the interim periods. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto contained in the Form S-1 Registration Statement, as amended, filed with the SEC in connection with the Company's initial public offering ("IPO"). The nature of the Company's business is such that the results of any interim period may not be indicative of the results to be expected for the entire year. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior year financial statements to conform to the 1999 presentation. 2. INITIAL PUBLIC OFFERING On May 19, 1999, the Company completed its IPO in which it sold 6.9 million shares of its common stock at a price of $20.00 per share, raising $138.0 million in gross proceeds. Offering proceeds to the Company, net of approximately $9.7 million in aggregate underwriters discounts and commissions and $1.3 million in related costs, were approximately $127.0 million. Immediately prior to the closing of the IPO, the Company's stock split 4.5 shares for every one share of common stock then outstanding. Simultaneously with the closing of the IPO, each outstanding share of the Company's preferred stock automatically converted into 4.5 shares of common stock. In addition, the Company reincorporated from California to Delaware. All share and per share data in the accompanying financial statements have been restated to reflect the conversion, the stock split and the reincorporation. 7 8 3. EARNINGS PER SHARE Basic net loss per common share and diluted net loss per common share are presented in conformity with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented. In accordance with FAS 128, basic and diluted net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Shares associated with stock options and convertible preferred stock are not included because their inclusion would be antidilutive (i.e., reduce the net loss per share). Pro forma basic and diluted net loss per common share has been computed as described above, and also gives effect, under SEC guidance, to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance.
Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ------------------------ (Dollars in thousands, except per share data) 1999 1998 1999 1998 -------- -------- -------- -------- Net loss available to common stockholders $(22,772) $ (4,801) $(52,444) $ (9,245) ======== ======== ======== ======== Basic and diluted: Weighted average shares of common stock outstanding 46,024 4,895 25,703 4,894 Less: Weighted average shares subject to repurchase (616) (1,567) (894) (1,844) -------- -------- -------- -------- Weighted average shares used in computing basic and diluted net loss per common shares 45,408 3,328 24,809 3,050 ======== ======== ======== ======== Basic and diluted net loss per shares $ (0.50) $ (1.44) $ (2.11) $ (3.03) ======== ======== ======== ======== Pro forma: Net loss $(22,772) $ (4,801) $(52,444) $ (9,245) ======== ======== ======== ======== Shares used above 45,408 3,328 24,809 3,050 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock -- 18,222 16,192 14,163 -------- -------- -------- -------- Shares used in computing pro forma basic and diluted net loss per common share 45,408 21,550 41,001 17,213 ======== ======== ======== ======== Pro forma basic and diluted net loss per common share $ (0.50) $ (0.22) $ (1.28) $ (0.54) ======== ======== ======== ========
8 9 4. ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses for the nine months ended September 30, 1999 is as follows:
(Dollars in thousands) 1999 ------- Balance at January 1 $ -- Provision for loan losses 5,227 Allowance acquired 1,900 Charge-offs (949) ------- Balance at September 30 $ 6,178 =======
5. CREDIT FACILITIES AND SECURED BORROWINGS Until January 12, 1999, Heritage Bank of Commerce ("Heritage") funded all of the credit card accounts and loans originated through the Company's website. Beginning January 1999, the Company began purchasing such credit card receivables from Heritage. Until May 21, 1999, the Company utilized a $100.0 million secured borrowing facility extended to NextCard Funding Corp., a wholly owned subsidiary of the Company, by Credit Suisse First Boston ("Credit Suisse") to fund the majority of those receivables. On May 21, 1999, the Company executed a $300.0 million commercial paper conduit facility through Barclays Bank PLC and began utilizing this facility to purchase credit card receivables. Borrowings under the facility are secured by the purchased receivables. The Company also used a portion of the Barclays facility to pay off the $87.8 million balance then outstanding under the Credit Suisse facility. As of September 30, 1999, $229.1 million was outstanding under this facility. In addition, on June 23, 1999 and November 12, 1999, the Company entered into similar facilities with ING Barings (U.S.) Capital Markets and First Union Securities. These facilities' amounts are $150.0 million and $222.0 million, respectively, and the Company's borrowings are secured by all credit card receivables that may be purchased by using funds from these facilities. As of September 30, 1999, there were no amounts outstanding under the ING Barings or First Union facility. In February and May 1999, the Company entered into two $5.0 million lines of credit with a finance company. Borrowings under the lines of credit accrue interest at 12.25% per year, are repayable in monthly installments and final payment is due in May 2000 and April 2002, respectively. These lines are secured by a subordinated security interests in all tangible and intangible assets. These lines of credit had an aggregate outstanding balance of $10.0 million at September 30, 1999. 9 10 6. PORTFOLIO ACQUISITIONS On July 15, 1999, the Company exercised its option to purchase all remaining credit card receivables from Heritage. The acquired credit card portfolio had $21.3 million in outstanding balances. The Company financed the acquisition with a combination of proceeds from its secured borrowing facility and operating cash. 7. BUSINESS COMBINATION On September 16, 1999, the Company acquired all of the outstanding common stock of Textron National Bank ("TNB"), a wholly owned, indirect subsidiary of Textron Corporation, for $7.0 million. TNB had not actively engaged in the banking business for several years, and on the acquisition date held $2.6 million of cash and cash-equivalents and a single deposit liability of approximately $540,000. Immediately prior to the closing of the acquisition, TNB converted into a national bank limited to credit card operations and changed its name to "NextBank, National Association" ("NextBank"). The $5.0 million excess purchase price over the estimated fair value of TNB's net assets represents goodwill and will be amortized on a straight-line basis over 15 years. In September 1999, NextBank became a member of the Visa system and in October 1999 commenced the issuance of NextCard Visa cards. 8. SUBSEQUENT EVENTS On November 8, 1999, the Company signed a five-year marketing agreement with Amazon.com whereby the Company and Amazon.com will join to deliver co-branded credit card accounts originated on a customized website. The Company will pay to Amazon.com an origination fee for each co-branded credit card account, and will pay certain additional compensation including per account renewal fees on each account's anniversary date. Minimum account origination payments of $85.0 million (subject to performance requirements) will be made by the Company to Amazon.com over the term of the agreement. In addition, based on the number of credit card accounts originated, the Company could pay up to an additional $17.5 million. Separately, the Company received $22.5 million from Amazon.com in exchange for a warrant to acquire up to 4.4 million common shares of the Company. This warrant has an exercise price per share of $39.20, is fully vested and expires on November 8, 2002. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding intent, belief or current expectations of the Company and its management. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Stockholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Among the factors that could cause actual results to differ materially from those indicated by such forward-looking statements are those factors discussed below. OVERVIEW The Company is a leading Internet-based provider of consumer credit. The Company was the first to offer an online approval system for a Visa(R) card and to provide interactive, customized offers for credit card applicants. The Company combines expertise in consumer credit, an exclusive Internet focus and sophisticated direct marketing techniques with the aim of attracting profitable customer segments on the Internet. The Company's product, the NextCard(R) Visa, which the Company calls the First True Internet Visa, is marketed to consumers exclusively through its website, www.nextcard.com. The Company offers credit card customers a unique combination of convenience, customization, shopping enhancements and online customer service. The NextCard Visa can be used for both online and offline purchases. EARNINGS SUMMARY Net loss for the three months ended September 30, 1999, was $22.8 million, or $0.50 per share, up 375% from $4.8 million, or $0.22 per pro forma share, for the third quarter of 1998. The increase in net loss is the result of increases in interest expense, the provision for loan losses and other operating expenses. These increases were partially offset by increases in net interest income and other operating income. These increases are largely attributable to the growth in average managed loans to $212.7 million for the third quarter 1999 from $20.7 million for the third quarter 1998. Net loss for the nine months ended September 30, 1999, was $52.4 million, or $1.28 per pro forma share, up 470% from $9.2 million, or $0.54 per pro forma share, for the nine months ended September 30, 1998. The increase in net loss is the result of increases in interest expense, the provision for loan losses and other operating expenses. These increases were partially offset by increases in net interest income and other operating 11 12 income. These increases are largely attributable to the growth in average managed loans to $142.8 million for the nine months ended September 30, 1999, from $9.5 million for the same period in 1998. MANAGED LOAN PORTFOLIO Until January 12, 1999, Heritage Bank of Commerce ("Heritage") funded and held all of the credit card accounts and loans originated through the Company's website pursuant to a Consumer Credit Card Program Agreement (the "First Heritage Agreement"). Under that agreement, the Company charged Heritage for origination and servicing of the accounts and shared 50% of the resulting net profits or losses, as defined. Beginning January 1999, the Company and Heritage terminated the First Heritage Agreement and entered into an Account Origination Agreement (the "Second Heritage Agreement"). Pursuant to the Second Heritage Agreement, the Company began purchasing credit card receivables utilizing secured lending facilities extended to its subsidiary, NextCard Funding Corp. Heritage funded newly originated credit card receivables, which were then purchased on a daily basis by NextCard Funding using borrowings from its secured lending facilities. The purchased receivables are pledged as collateral for the secured lending facilities. The Company's managed loan portfolio is comprised of all credit card loan receivables generated under the NextCard Visa and outstanding on Heritage's and the Company's balance sheets. On July 15, 1999, the Company exercised its option to purchase all remaining credit card receivables owned by Heritage. The acquired credit card portfolio had $21.3 million in outstanding balances. The Company financed the acquisition with a combination of proceeds from its secured borrowing facility and operating cash. Prior to this purchase, since Heritage had funded and owned a portion of the managed loan portfolio, that portion of the credit card loans were not an asset of the Company, and therefore, were not shown on the Company's consolidated balance sheets. The following table summarizes the Company's managed loan portfolio: 12 13
SEPTEMBER 30 ----------------------- (Dollars in thousands) 1999 1998 -------- -------- PERIOD-END BALANCES Credit card loans: On-balance sheet $268,014 $ -- Heritage owned -- 35,334 ======== ======== Total managed loan portfolio $268,014 $ 35,334 ======== ======== AVERAGE BALANCES Credit card loans: On-balance sheet $117,060 $ -- Heritage owned 25,780 9,492 -------- -------- Total managed loan portfolio $142,840 $ 9,492 ======== ========
NET INTEREST INCOME Net interest income consists of interest earned on the Company's credit card loan portfolio, cash and investment securities less interest expense on borrowings to fund these earning assets. Net interest income for the three and nine months ended September 30, 1999, was $3.6 million and $4.8 million, respectively, compared to $69,000 and $180,000 for the same periods in 1998. These increases were primarily due to $203.7 million and $117.1 million increases in on balance sheet average loans over the comparable periods in 1998 and $109.0 million and $70.5 million increases in average cash and investments over the comparable periods in 1998. The annualized net interest margin on average earning assets for the three months ended September 30, 1999 was 4.5% compared with 2.5% for the three months ended June 30, 1999. The third quarter net interest margin was favorably impacted by the introduction of fixed rate credit card products, the repricing of the Company's credit card loan portfolio due to the expiration of the introductory rate periods and a lower cost of funds. The third quarter net interest margin was negatively impacted by $234,000 of loan fee amortization expense related to $2.7 million of warrants paid to a finance company in 1999 in connection with a financing transaction. This loan fee is being amortized over a three year period. The annualized net interest spread for the three months ended September 30, 1999 was 1.2% compared with (1.1%) for the three months ended June 30, 1999. The net interest spread is the annualized yield on average interest-earning assets minus the annualized funding rate on average interest-bearing liabilities. The net interest spread is expected to continue to improve as the Company's loan portfolio seasons; however, their can be no assurances that such spread will improve. The following tables provide an analysis of interest income and expense, net interest spread, net interest margin and average balance sheet data for the three and nine month periods ended September 30, 1999. 13 14 STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (Dollars in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 -------------------------------------- -------------------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE --------- ------ ------ --------- ------ ------ ASSETS: Interest-Earning assets Consumer loans $ 203,652 $5,486 10.78% $ 117,060 $7,992 9.10% Interest-earning cash 118,826 1,400 4.71% 76,618 2,585 4.50% --------- ------ ------ --------- ------ ------ Total interest-earning assets 322,478 6,886 8.54% 193,678 10,557 7.28% Allowance for loan losses (4,134) (2,154) Other assets 19,250 12,570 --------- --------- Total assets $ 339,287 $ 204,771 ========= ========= LIABILITIES AND EQUITY Interest-bearing liabilities Borrowings $ 177,754 $3,249 7.31% $ 100,858 $5,762 7.62% Other liabilities 26,236 17,504 --------- --------- Total liabilities 203,990 118,362 Equity 135,298 86,408 --------- --------- Total liabilities and equity $ 339,287 $ 204,771 ========= ========= NET INTEREST SPREAD 1.23% (0.34%) ====== ====== Interest income to average interest-earning assets 8.54% 7.28% Interest expense to average interest-earning assets 4.03% 3.97% ------ ------ NET INTEREST MARGIN 4.51% 3.31% ====== ======
NON-INTEREST INCOME Interchange and other credit card fees consist of income from the Visa system for purchases made with the NextCard Visa and fees paid by the Company's cardholders, such as late fees, overlimit fees and program fees. Such income for the three and nine months ended September 30, 1999, was $1.1 million and $1.7 million, respectively. Interchange and other credit card fees are expected to continue to increase in the future as the credit card portfolio grows. 14 15 On July 15, 1999 the Company exercised its option to purchase all remaining credit card receivables from Heritage. As such, servicing and profit-and-loss sharing income, consisting of amounts arising under the First Heritage Agreement, for the three and nine months ended September 30, 1999 was $0 and $341,000 respectively, compared to $137,000 and $301,000 for the same periods in 1998. NON-INTEREST EXPENSE Total non-interest expense for the three and nine months ended September 30, 1999, increased $19.3 million and $44.4 million, respectively, over the comparable periods in 1998, primarily due to higher employee compensation, credit card activation and servicing costs and marketing expenses. Employee compensation increased due to staffing needs to support the increase in credit card accounts and other functions. In addition, the amortization of deferred stock compensation, which represents the difference between the exercise price of certain stock options grants and the estimated fair value of the Company's common stock at the time of such grants, for the three and nine months ended September 30, 1999, was $2.3 million and $7.1 million. The increase in credit card activation and servicing costs was largely due to the increased number of credit card accounts, transaction volumes and loan balances. The increase in other expenses is primarily due to general growth in the business and building an infrastructure to support the growth. ASSET QUALITY The Company's delinquency and net loan charge-off rates reflect, among other factors, the credit risk of loans, the average age of the Company's credit card account portfolio, the success of the Company's collection and recovery efforts and general economic conditions. Additionally, the credit risk of the loans is impacted by the underwriting criteria utilized by the Company to approve customers. The average age of the Company's credit card portfolio affects the level and stability of delinquency and loss rates of the portfolio. The Company continues to focus its resources on refining its credit underwriting standards for new accounts, as well as on collections and post charge-off recovery efforts, to minimize net losses. At September 30, 1999, the majority of the loan portfolio was less than twelve months old. Accordingly, the Company believes that its loan portfolio will experience increasing or fluctuating levels of delinquency and loan losses as the average age of the Company's accounts and balances increase. 15 16 For the quarter ended September 30, 1999, the Company's managed net charge-off ratio was 1.72% compared to 0.29% for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, the net charge-off ratio stood at 0.80% compared to 0.14% for the nine months ended September 30, 1998. The Company believes, consistent with its statistical models and other credit analyses, that this rate will continue to fluctuate but generally rise over the next year as the portfolio ages and becomes more seasoned. The Company's primary strategy for managing loan losses is the development of underwriting criteria and credit scoring algorithms to assess the creditworthiness of new customers and provide conservative customer credit-line assignments. In addition, the Company monitors credit lines closely, and has built a collections department, as well as using outside parties, to pursue delinquent customers. Under these strategies, interest rates and credit line assignments are established for each credit card account based on its perceived risk profile. Individual accounts and their related credit lines are also continually managed using various marketing, credit and other management processes in order to continue to maximize the profitability of accounts. DELINQUENCIES A credit card account is contractually delinquent if the minimum payment is not received by the specified date on the cardholder's statement. It is the Company's policy to continue to accrue interest and fee income on all credit card accounts, except in limited circumstances, until the account and all related loans, interest and other fees are reversed. Credit card loans are generally charged off when the loan becomes contractually past due 180 days, with the exception of bankrupt accounts, which are charged off no later that the month after formal notification of bankruptcy. The following table presents the delinquency trends of the Company's credit card loan portfolio on a managed portfolio basis:
(Dollars in thousands) SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ---------------------- ---------------------- LOANS % OF TOTAL LOANS % OF TOTAL -------- ------- -------- ------ Managed loan portfolio $268,014 100.00% $ 35,334 100.00% Loans delinquent: 31 - 60 days 1,482 0.55% 139 0.39% 61 - 90 days 677 0.25% 38 0.11% 91 or more 938 0.35% 27 0.08% -------- ------- -------- ------ Total $ 3,097 1.15% $ 204 0.58% ======== ====== ======== ======
16 17 NET CHARGE-OFFS Net charge-offs include the principal amount of losses from cardholders unwilling or unable to pay their loan balances, as well as bankrupt and deceased cardholders, less current period recoveries. Net charge-offs exclude finance charges and fees, which are charged against the related income at the time of charge-off. Losses from new account fraud and fraudulent cardholder activity are included in non-interest expense. The following table presents the Company's net charge-offs for the periods indicated as reported in the consolidated financial statements and on a managed portfolio basis:
(Dollars in thousands) THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 --------------------------- --------------------------- 1999 1998 1999 1998 -------- ---------- ---------- ---------- ON-BALANCE SHEET: Average loans outstanding $203,652 $ -- $ 117,060 $ -- Net charge-offs 915 -- 949 -- Net charge-offs as a percentage of average loans outstanding 1.80% 0.00% 1.08% 0.00% MANAGED: Average loans outstanding $212,659 $ 20,694 $ 142,840 $ 9,492 Net charge-offs 915 15 1,516 18 Net charge-offs as a percentage of average loans outstanding 1.72% 0.29% 1.42% 0.25%
PROVISION AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained for on-balance sheet loans. Provisions for loan losses are made in amounts necessary to maintain the allowance at a level estimated to be sufficient to absorb probable losses inherent in the existing on-balance sheet loan portfolio. For loans maintained on Heritage's balance sheet, anticipated losses and related reserves are reflected in the calculations of the servicing and profit-and-loss sharing income from Heritage. The provision for loan losses for on-balance sheet loans for the three and nine months ended September 30, 1999, totaled $3.2 million and $5.2 million, respectively. The Company anticipates that the provision for loan losses will increase as the credit card loan portfolio continues to increase and season. The following table presents the change in the Company's allowance for loan losses for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED (Dollars in thousands) SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 ------------------ ------------------ Balance at beginning of period $ 2,008 $ -- Provision for loan losses 3,185 5,227 Reserve acquired 1,900 1,900 Charge-offs (915) (949) ------- ------- Balance at end of period $ 6,178 $ 6,178 ======= =======
17 18 LIQUIDITY AND CAPITAL RESOURCES The Company finances the growth of its credit card loan portfolio primarily through secured bank financings, conduit facilities and equity issuances. Until January 12, 1999, Heritage funded all of the credit card accounts and loans originated through the Company's website. Beginning January 1999, the Company began purchasing such credit card receivables from Heritage. Until May 21, 1999, the Company utilized a $100.0 million secured borrowing facility extended to NextCard Funding Corp. by Credit Suisse to fund the majority of those receivable purchases. On May 21, 1999, the Company executed a $300.0 million commercial paper conduit facility through Barclays Bank PLC and began utilizing this facility to purchase credit card receivables. Borrowings under this facility are secured by the purchased receivables. The Company also used a portion of the Barclays facility to pay off the $87.8 million balance then outstanding under the Credit Suisse facility. As of September 30, 1999, $229.1 million was outstanding under this Barclay's facility. In addition, on June 23, 1999, the Company entered into similar facilities with ING Barings (U.S.) Capital Markets LLC and First Union Securities. These facilities' amounts are $150.0 and $220.0 million, respectively, and the Company's borrowings are secured by all credit card receivables that may be purchased by using funds from these facilities. As of September 30, 1999, there were no amounts outstanding under the ING Barings facility or First Union. The Company has the ability to fund new receivables during the revolving period of these structures. After the revolving period, principal collections generated by the receivables will be used to pay the principal amount owed. The revolving period ends in February 2003 for the First Union facility. June 2001 for the Barclays Capital facility and in January 2002 for the ING Barings facility. In February and May 1999, the Company entered into two $5.0 million lines of credit with a finance company. Borrowings under the lines of credit accrue interest at 12.25% per year, are repayable in monthly installments and final payment is due in May 2000 and April 2002, respectively. These lines are secured by a subordinated security interests in all tangible and intangible assets. These lines of credit had an aggregate outstanding balance of $10.0 million at September 30, 1999. 18 19 On September 16, 1999, the Company acquired all of the outstanding common stock of Textron National Bank ("TNB"), a wholly owned, indirect subsidiary of Textron Corporation, for $7.0 million. TNB had not actively engaged in the banking business for several years, and on the acquisition date held $2.6 million of cash and cash-equivalents and a single deposit liability of approximately $540,000. Immediately prior to the closing of the acquisition, TNB converted into a national bank limited to credit card operations and changed its name to "NextBank, National Association" ("NextBank"). In September 1999, NextBank became a member of the Visa system and in October 1999 commenced the issuance of NextCard Visa cards. NextBank is subject to capital adequacy guidelines adopted by the Office of the Comptroller of the Currency (the "OCC"). The capital adequacy guidelines and the regulatory framework for prompt corrective action require NextBank to maintain specific capital levels based upon quantitative measures of its assets, liabilities and off-balance sheet items. Core capital (Tier 1) consists principally of stockholders' equity less goodwill. Total risk-based capital (Tier 1 + Tier 2) includes a portion of the allowance for loan losses. Based on these classifications, the capital adequacy regulations establish three capital ratios that are used to measure whether a financial institution is "well capitalized". As of September 30, 1999, NextBank was "well capitalized" in all regulatory capital ratio categories, as set forth below:
ACTUAL TO BE "WELL CAPITAL RATIO RATIO CAPITALIZED" - ------------- ----- ------------ Tier 1 Capital 23.3% 6.0% Total Capital 24.6% 10.0% Tier 1 Leverage 22.2% 5.0%
In addition to the above capital ratios, the OCC requires that for the first three years of operations, NextBank maintain a ratio of stockholders' equity plus the allowance for loan losses to total managed assets of no less than 6.5%. As of September 30, 1999, NextBank was in compliance with this capital requirement. RECENT DEVELOPMENTS On November 8, 1999, the Company signed a five-year marketing agreement with Amazon.com whereby the Company and Amazon.com will join to deliver co-branded credit card accounts originated on a customized website. The Company will pay to Amazon.com an origination fee for each co-branded credit card account, and will pay certain additional compensation including per account renewal fees on each account's anniversary date. Minimum account origination payments of $85.0 million (subject to performance requirements) will be made by the Company to Amazon.com over the term of the agreement. In addition, based on the number of credit card accounts originated, the Company could pay up to an additional $17.5 million. Separately, the Company received $22.5 million from Amazon.com in exchange for a warrant to acquire up to 4.4 million common shares of the Company. This warrant has an exercise price per share of $39.20, is fully vested and expires on November 8, 2002. 19 20 YEAR 2000 COMPLIANCE Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. The Company uses internally developed software, as well as computer technology and other services provided by third-party vendors that may fail due to the year 2000 phenomenon. For example, the Company is dependent on a service bureau for account processing and other customer functions. The Company is also dependent on telecommunications vendors to maintain its network and a third party that hosts our servers. As the Company was formed less than four years ago, the Company developed its systems and technology in light of the year 2000 problem, as opposed to many older companies that rely on legacy systems designed before this problem was known. On April 30, 1999, the Company completed its initial review and testing of year 2000 compliance for all of its internally developed software, which include substantially all of the systems for the operation of its website, such as its instant online approval system, customer interaction and transaction systems and our security, monitoring and back-up capabilities. Based on such testing, the Company believes its internally developed software and systems are year 2000 compliant, which means that all date data will process without error, interruption or loss of functionality of any software or system due to the change in century. On April 16, 1999, the Company completed its assessment of the year 2000 readiness of its third-party supplied software and hardware, and of its vendors. During the assessment phase, eleven vendors were identified as critical to the Company, all of whom have provided the Company with certifications of year 2000 compliance or a readiness disclosure statement. Accordingly, based on the results of the responses the Company has received and the availability of alternate year 2000 compliant vendors, the Company does not believe further remediation planning is necessary to ensure seamless operation at and after January 1, 2000. If a year 2000 problem with one of the Company's vendor's systems causes such vendor to fail to provide the Company services it had agreed to provide the Company, the Company would seek to recover from such vendor damages for the amount it suffered due to such failure. The Company would base its suit on breach of the vendor's agreement with it and misrepresentation of such vendor's year 2000 representation to it. However, there can be no assurance that such agreements and such representations will be enforceable. Based on the results of its testing, the Company believes its worst-case scenario would be the failure of the Internet infrastructure due to a year 2000 problem. The year 2000 readiness of the general infrastructure necessary to support our operations is difficult to assess. For instance, the Company depends on the general availability of the Internet to provide its services. The Company also depends on the year 2000 compliance of the 20 21 computer systems and financial services used by consumers. A significant disruption in the ability of consumers to reliably access the Internet or portions of it or to use their credit cards would have an adverse effect on demand for the Company's services and could have a material adverse effect on the Company's growth. To date, the Company has incurred approximately $400,000 of expense relating to year 2000 analysis, testing and remediation efforts. The Company anticipates that, when all analysis, testing and remediation efforts are complete, it will have incurred approximately $450,000 of expenses, all of which will be recognized in 1999. However such expenses could be significantly higher than anticipated by the Company. 21 22 ADDITIONAL FACTORS WHICH MAY AFFECT FUTURE RESULTS As discussed in the Company's Registration Statement, as filed with the SEC in connection with the Company's IPO, the following additional risk factors could materially affect the Company's business, operating results and financial condition. RISKS RELATED TO THE COMPANY'S BUSINESS THE COMPANY'S LIMITED OPERATING HISTORY MAKES EVALUATION OF ITS BUSINESS AND PROSPECTS DIFFICULT. The Company was formed in June 1996. The Company introduced the NextCard Visa in December 1997. The Company has only a limited operating history on which to base an evaluation of the Company's business and prospects. The Company's business and prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as the market for Internet products and services. THE COMPANY HAS A HISTORY OF LOSSES AND IT ANTICIPATES SIGNIFICANT FUTURE LOSSES. The Company incurred net losses of $1.9 million for the period from the Company's inception through December 31, 1997, $16.1 million for the year ended December 31, 1998 and $52.4 million for the nine months ended September 30, 1999. As of September 30, 1999, the Company had an accumulated deficit of $70.4 million. To date, the Company has not achieved profitability and expects to incur significant and increasing net losses for the next three years. The Company intends to continue to invest significantly in marketing, operations, technology and the development of statistical analyses. As a result, the Company will need to generate significant revenues to achieve profitability. The Company cannot be certain that it will be able either to maintain the Company's recent revenue growth rates or to generate adequate revenues to achieve profitability. If the Company does achieve profitability, the Company cannot be certain that it can sustain or increase profitability on a quarterly or annual basis in the future. THE COMPANY'S LIMITED OPERATING HISTORY MAKES ITS FINANCIAL FORECASTING DIFFICULT. Due to the Company's limited operating history, it cannot forecast operating expenses based on its historical results. Accordingly, the Company bases its operating expenses, in part, on future revenue projections. Most of these expenses are fixed in the short term and the Company may not be able to quickly reduce spending if it achieves lower than anticipated revenues. The Company's ability to accurately forecast its revenues is limited. If the Company's revenues do not meet its internally developed projections, the Company's net losses will be even greater than anticipated and the Company's business, operating results and financial condition may be materially and adversely affected. 22 23 THE COMPANY'S CREDIT CARD PORTFOLIO MAKES ITS PREDICTION OF DELINQUENCY AND LOSS LEVELS DIFFICULT. As of September 30, 1999, over 95% of the Company's credit card accounts had been generated in the past eighteen months. As a result, the Company cannot accurately predict the levels of delinquencies and losses that can be expected from its loan portfolio over time. As the Company's portfolio of accounts becomes more seasoned, the level of losses may increase. Any material increase in delinquencies or losses above the Company's expectations could materially and adversely impact the Company's results of operations and financial condition. THE COMPANY MAY BE UNABLE TO RETAIN CUSTOMERS WHEN IT INCREASES ITS INTRODUCTORY INTEREST RATES. To attract new customers, the Company has offered and may continue to offer, low introductory interest rates that increase after expiration of the introductory period. Given the Company's limited operating history, it does not know what percentage of its customers will continue to use their NextCard Visa after the end of this period. If fewer customers than it expects continue to use their NextCard Visa after the expiration of an introductory offer, the Company's results of operations would be adversely affected. THE COMPANY MAY ENCOUNTER DIFFICULTIES DUE TO ITS UNTESTED CUSTOMER BASE. The Company targets its credit card products to Internet users. Lenders historically have not solicited this market to the same extent as more traditional market segments. As a result, there is less historical experience with respect to the credit risk and performance of these consumers. The Company may not be able to successfully target and evaluate the creditworthiness of such consumers to manage the expected delinquencies and losses or to appropriately price the Company's products. In addition, the Company may consider using additional internally developed criteria to enhance or replace its existing criteria. The Company has limited experience developing and implementing such credit criteria. As a result, as compared to issuers targeting traditional market segments, the Company could experience any or all of the following: - - a greater number of customer payment defaults or other unfavorable cardholder payment behavior; - - an increase in fraud by the Company's cardholders and third parties; and - - changes in the traditional patterns of cardholder loyalty and usage. 23 24 In addition, because the Company is targeting a new customer base, the Company has comparatively little information about the potential size of its target market, its customer usage patterns and other factors that could significantly affect the demand for the Company's products and services. Moreover, general economic factors, such as the rate of inflation, unemployment levels and interest rates may affect the Company's target market customers more severely than other market segments. FLUCTUATIONS IN THE COMPANY'S QUARTERLY REVENUES AND OPERATING RESULTS MAY AFFECT THE PRICE OF ITS COMMON STOCK. Quarterly fluctuations in the Company's earnings could adversely affect the market price of the Company's common stock. The Company's revenue consists of the finance charges paid by the Company's customers based on their outstanding balances, the amounts received through the Visa system based upon a percentage of the Company's customers' purchases and the fees paid by the Company's customers. As a result, the Company depends substantially on the level of customer balances, the level of interest rates on the Company's credit card portfolios and the volume of NextCard Visa purchases. Variations of such factors could affect the Company's quarterly revenues. Any shortfall in the Company's revenue would have a direct impact on the Company's operating results for a particular quarter. The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, many of which are outside the Company's control. These factors include: - - the volume of credit card loans generated from the Company's products and the Company's ability to successfully manage its credit card loan portfolio; - - the announcement or introduction of new websites, services and products by us or the Company's competitors and the level of price competition for the products and services we offer; - - the amount and timing of the Company's operating costs and capital expenditures relating to the expansion of the Company's business, operations and infrastructure; - - technical difficulties, system downtime, Internet service problems and the Company's ability to expand and upgrade the Company's computer systems to handle increased traffic; - - the success of the Company's brand building, advertising and marketing campaigns; and - - general economic conditions, including interest rate volatility, and economic conditions specific to the Internet, online commerce and the credit card industry. 24 25 THE COMPANY MAY BE UNABLE TO SATISFACTORILY FUND ITS WORKING CAPITAL REQUIREMENTS. If the Company's current funding becomes insufficient to support future operating requirements, the Company will need to obtain additional funding either by increasing the Company's lines of credit or by raising additional debt or equity from the public or private capital markets. There can be no assurance that such additional funding will be available on terms attractive to the Company, or at all. Failure by the Company to raise additional funding when needed could have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the ownership percentage of the Company's then-current stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to those of the Company's common stock. THE COMPANY MAY BE UNABLE TO SATISFACTORILY FUND ITS LOAN PORTFOLIO. The Company's primary source of funding is the securitization of its credit card loan portfolio through commercial paper conduit facilities. Securitization transactions involve the sale of beneficial interests in credit card loan balances. Until now, the Company has completed securitization transactions on terms that it believes are favorable. The availability of securitization funding, however, depends on how difficult and expensive such funding is. Securitizations can be affected by many factors, such as whether a third party will be willing to provide credit enhancement and the rates at which accountholders have repaid their balances in the past. In addition, legal, regulatory, accounting and tax changes can make securitization funding more difficult, more expensive or unavailable on any terms. Securitizations may not always offer the Company attractive funding, and the Company may have to seek other more expensive funding sources in the future. In general, the amount, type and cost of the Company's financing affect the Company's financial results. Changes within the Company's organization and changes in the activities of parties the Company has agreements or understandings could all make the financings available to the Company more difficult, more expensive or unavailable on any terms. Now that the Company has formed NextBank, its strategy will be to fund a portion of its loan portfolio through short-term deposits received by NextBank. NextBank may not be able to attract or retain sufficient deposits at attractive interest rates to fund its loan portfolio. Moreover, if adequate capital is not available, NextBank may be subject to an increased level of regulatory supervision that could have an adverse effect on the Company's operating results and financial condition. See "Management Discussion and Analysis - Liquidity and Capital Resources." 25 26 THE COMPANY'S CUSTOMERS MAY BECOME DISSATISFIED BY SYSTEM DISRUPTIONS. The Company's website has in the past experienced, and may in the future experience, slower than normal response times or other problems, such as system unavailability. Customers may become dissatisfied by any system failure that interrupts or delays the Company's ability to provide the Company's services to them. Any interruption or delay in the Company's operations could materially and adversely affect the Company's business. If the number of users of the Company's website increases substantially, the Company will need to significantly expand and upgrade the Company's technology, transaction processing systems and network infrastructure. The Company's website must accommodate a high volume of users and deliver frequently updated information. The number of visitors and credit card applicants to the Company's website has increased substantially since it introduced the NextCard Visa, and it anticipates that this traffic will further increase over time. However, it is difficult to predict the future traffic on the Company's website. Marketing efforts and other events could cause traffic to strain the site's capacity. The Company does not know whether it will be able to accurately project the rate or timing of any traffic increases, or expand and upgrade the Company's systems and infrastructure to accommodate such increases in a timely manner. The Company's systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, acts of vandalism and similar events. As the Company currently does not have back-up systems for most aspects of its operations, a failure of a single aspect of the Company's system could cause interruption or delay in the Company's entire operations. It does not carry sufficient business interruption insurance to compensate for losses that could occur. THE COMPANY DEPENDS ON A LIMITED NUMBER OF VENDORS FOR ESSENTIAL SERVICES. The Company relies on a number of services furnished by either a single vendor or a limited number of vendors. 26 27 The Company depends, directly and indirectly, on other key third party vendors to provide essential services. Any interruption, deterioration or termination in these third-party services could be disruptive to the Company's business. In the event that any of the Company's agreements with any of these third parties is terminated, it may not be able to find an alternative source of support on a timely or commercially reasonable basis, if at all. As a result, any such interruption, deterioration or termination would have a material adverse effect on the Company's results of operations and financial condition. THE COMPANY MAY BE ADVERSELY AFFECTED IF IT FAILS TO ATTRACT AND RETAIN KEY PERSONNEL. The Company's success depends largely on the skills, experience and performance of certain key members of the Company's management. If it loses one or more of these key employees, particularly Jeremy Lent, the Company's Chairman of the Board, President and Chief Executive Officer, the Company's business, operating results and financial condition would be materially adversely affected. The Company's success also depends on the Company's continued ability to attract, retain and motivate highly skilled employees. Competition for employees both for Internet-based businesses and for financial services businesses is intense, particularly for personnel with technical training and experience. The Company may be unable to retain its key employees or to attract, assimilate or retain other highly qualified employees in the future. The Company has from time to time in the past experienced, and it expects to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. THE COMPANY MAY BE UNABLE TO EFFECTIVELY MANAGE THE RAPID GROWTH IN ITS OPERATIONS. Since the introduction of the Company's NextCard Visa product in December 1997, it has experienced rapid growth in the Company's operations. From December 31, 1997 through September 30, 1999, we grew from approximately 18 to 244 employees, and the Company's loans under management increased from $0 to $268.0 million. The Company is planning for continued rapid growth of its operations. This growth requires the Company to expand its marketing, customer service and support, credit and technology organizations. There can be no assurance that it will be able to attract and retain sufficient numbers of personnel to satisfy the Company's anticipated growth. In particular, as the Company relies heavily on temporary personnel to satisfy its growing personnel demands, the Company may be unable to continue to attract and retain a sufficient number of temporary employees to support its future growth. Rapid growth places a significant strain on the Company's financial reporting, information and management systems and resources. The Company's business, results of operations and financial condition will be materially and adversely affected if it is unable to effectively manage its expanding operations. For example, if the Company is unable to maintain and scale the Company's financial reporting and information systems, it may not have access to adequate, accurate and timely financial information. 27 28 THE COMPANY MAY NOT SUCCESSFULLY DEVELOP NEXTCARD AS A BRAND. The dynamics of a brand name have traditionally worked differently in the credit card market than in many other industries. In the credit card market, consumers have responded more to the brand name of Visa or MasterCard(R) than to the identity of the issuer. The Internet may change the underlying market dynamics for brand recognition as compared to the offline market. Accordingly, the Company is aggressively implementing its marketing plan to establish brand recognition with Internet users to persuade customers to switch to the Company's products and services, particularly because it competes, or expects to compete, with larger financial institutions that have well-established brand names. The Company can provide no assurances that it will successfully develop the Company's brand name. If the brand name of online credit card issuers becomes important, and if other credit card issuers begin to compete with us for online brand name recognition, the Company's business, results of operations and financial condition could be materially adversely affected. RISKS RELATED TO THE COMPANY'S INDUSTRY THE COMPANY'S PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET AND INTERNET COMMERCE. The Company's future success depends heavily on the overall continued growth and acceptance of the Internet, including its use in electronic commerce. If Internet usage or commerce does not continue to grow or grows more slowly than expected, the Company's business, operating results and financial condition will be adversely affected. Consumers and businesses may reject the Internet as a viable medium for a number of reasons. These include potentially inadequate network infrastructure, slow development of enabling technologies and insufficient commercial support. The Internet infrastructure may not be able to support the demands placed on it by increased Internet usage and bandwidth requirements. In addition, delays in the development or adoption of new standards and procedures required to handle increased levels of Internet activity, or increased government regulation, could cause the Internet to lose its viability as a commercial medium. Even if the required infrastructure, standards, procedures or related products, services and facilities are developed, we may incur substantial expenses adapting the Company's solutions to changing or emerging technologies. 28 29 THE COMPANY'S PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH OF THE FINANCIAL SERVICES MARKET. The Company's business would be adversely affected if the growth in Internet financial products and services does not continue or is slower than expected. Although the Company believes the Internet has the potential to transform the delivery of consumer financial products, consumers' acceptance of recently introduced financial products and services is at an early stage and is subject to a high level of uncertainty. To date, there exist relatively few proven online financial institutions. Although the Company's long-term vision is to redefine the banking experience for the Internet consumer, presently it offers only a single product, the NextCard Visa, and it has no specific plans for additional products. In addition, as the online financial services industry matures, government-imposed regulations could become so stringent that the Company may be economically precluded from offering online financial products and services. INTENSE AND INCREASING COMPETITION IN FINANCIAL SERVICES COULD HARM ITS BUSINESS. The financial services market is rapidly evolving and intensely competitive. The Company operates in this intensely competitive environment with a number of other companies, many of whom have significantly longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Some of the Company's competitors may be able to obtain funding at a more favorable rate than it can obtain. The Company's business model anticipates that it will derive a large majority of the Company's revenue from the interest charged on credit card balances contained in the portfolio of loans it holds. Increased competition could require the Company to reduce the interest rates it charges on the Company's customers' balances. This could have a material adverse effect on the Company's business, results of operations and financial condition. Other credit card issuers and traditional commercial banks may increasingly compete in the online credit card market. In addition, existing Internet providers and new Internet entrants may launch new websites using commercially available software. While the credit card market traditionally has been very fragmented, the Internet could change traditional market dynamics and enable new competitors to rapidly acquire significant market share. The Company's competitors may respond more quickly than we can to new or emerging technologies and changes in customer requirements. They may be able to: - - devote greater resources than the Company can to the development, promotion and sale of their products and services; - - replicate the Company's products and services; - - engage in more extensive research and development; 29 30 - - undertake farther-reaching marketing campaigns; - - adopt more aggressive pricing policies; - - make more attractive offers to existing and potential employees and strategic partners; - - more quickly develop new products and services or enhance existing products and services; - - bundle consumer products and services in a manner that the Company cannot provide; and - - establish cooperative relationships among themselves or with third parties, including large Internet participants, to increase the ability of their products and services to address the needs of the Company's prospective customers. The Company cannot assure that it will be able to compete successfully or that competitive pressures will not materially and adversely affect the Company's business, results of operations or financial condition. OUR OPERATING RESULTS ARE SUBJECT TO INTEREST RATE FLUCTUATIONS. A majority of the Company's revenues are generated by the interest rates its charges on outstanding receivable balances. At the same time, the Company's borrowings costs under the Company's commercial paper conduit facilities are generally indexed to variable commercial paper rates. Thus, changes in the prevailing interest rates could materially adversely affect the Company's results of operations and financial condition. See "Quantitative and Qualitative Disclosures About Market Risk." THE COMPANY MAY BE UNABLE TO INTRODUCE NEW SERVICES, FEATURES AND FUNCTIONS. The Internet and related financial institutions marketplaces are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions and changing customer demands. The Company's future success will depend on the Company's ability to adapt to rapidly changing technologies and to enhance existing products and services, as well as to develop and introduce a variety of new products and services to address the Company's customers' changing demands. The Company may experience difficulties that delay or prevent the successful design, development, introduction or marketing of the Company's products and services. In addition, material delays in introducing new products and services and enhancements may cause customers to forego purchases of the Company's products and services and purchase instead those of the Company's competitors. 30 31 SECURITY BREACHES COULD DAMAGE THE COMPANY'S REPUTATION AND BUSINESS. The secure transmission of confidential information over the Internet is essential to maintain consumer and supplier confidence in the NextCard service. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer transaction data. A party that is able to circumvent the Company's security systems could steal proprietary information or cause interruptions in the Company's operations. Security breaches could damage the Company's reputation and expose us to a risk of loss or litigation. The Company's insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. The Company cannot guarantee that its security measures will prevent security breaches. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. The Company's ability to provide financial services over the Internet would be severely impeded if consumers become unwilling to transmit confidential information online. As a result, the Company's operations and financial condition would be materially adversely affected. THE COMPANY MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES. To date, communications and commerce on the Internet have not been highly regulated. However, Congress has held hearings on whether to regulate providers of services and transactions in the electronic commerce market. It is possible that Congress or individual states could enact laws regulating Internet banking that address issues such as user privacy, pricing and the characteristics and quality of products and services. Any restrictions on the collection and use of such consumer information over the Internet could adversely affect the Company's direct marketing efforts. In addition, several telecommunications companies have petitioned the Federal Communications Commission to regulate Internet service providers in a manner similar to long distance telephone carriers and to impose access fees on these companies. This could increase the cost of transmitting data over the Internet. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel and personal privacy are applicable to the Internet. Any new laws or regulations relating to the Internet could adversely affect the Company's business. 31 32 The Company's business is subject to extensive federal and state regulation, including regulation under consumer protection laws. NextBank is subject to regulation under federal and California banking laws as well as regulatory supervision from the Office of the Comptroller of the Currency, or OCC, and the Federal Deposit Insurance Corporation (the "FDIC"). As an affiliate of NextBank, the Company will also be subject to oversight by the OCC. Existing and future legislation and regulatory supervision could have a material adverse effect on the Company's business, including the Company's credit and authentication policies, pricing and products. NextBank also is subject to minimum capital, funding and leverage requirements prescribed by federal statute and OCC regulations or orders. If NextBank fails to meet these regulatory capital requirements, NextBank will be subject to additional restrictions that could have a material adverse effect on the Company's ability to conduct normal operations and possibly result in the seizure of NextBank by government regulators under certain circumstances. The Company's ability to maintain or increase NextBank's capital levels in the future will be subject to, among other things, general economic conditions, the Company's ability to raise new capital and the Company's ability and willingness to make additional capital contributions to NextBank or a related institution. THE COMPANY MAY FACE DIFFICULTIES PROTECTING AND ENFORCING ITS INTELLECTUAL PROPERTY RIGHTS. The Company's success and ability to compete are substantially dependent on the Company's proprietary technology and trademarks, which the Company attempts to protect through a combination of patent, copyright, trade secret and trademark laws as well as confidentiality procedures and contractual provisions. However, any steps the Company takes to protect the Company's intellectual property may be inadequate, time consuming and expensive. Furthermore, despite the Company's efforts, it may be unable to prevent third parties from infringing upon or misappropriating the Company's intellectual property. Any such infringement or misappropriation could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company may infringe upon the intellectual property rights of third parties, including third party rights in patents that have not yet been issued. Any such infringement, or alleged infringement, could have a material adverse effect on the Company's business, results of operations and financial condition. 32 33 The Company has filed three patent applications and applied to register several of the Company's trademarks in the United States and abroad. The Company cannot assure that the Company's patent applications or trademark registrations will be approved. Moreover, even if approved, they may not provide the Company with any competitive advantages or may be challenged by third parties. Legal standards relating to the validity, enforceability and scope of intellectual property rights in Internet-related industries are uncertain and still evolving, and the future viability or value of any of the Company's intellectual property rights is uncertain. Any litigation surrounding such rights could force the Company to divert important financial and other resources away from the Company's business operations. The Company collects and utilizes data derived from applications on the NextCard website and through transactions made using the Company's products. Although the Company believes that it has the right to use such data and compile such data in the Company's database, it cannot assure that any intellectual property protection will be available for such information. In addition, third parties may claim rights to such information. The Company has licensed, and may license in the future, elements of the Company's trademarks, trade dress and similar proprietary rights to third parties. While it attempts to ensure that the quality of the Company's brand is maintained by such business partners, such partners may take actions that could materially and adversely affect the value of the Company's proprietary rights or the Company's reputation. This could, in turn, have a material adverse effect on the Company's business, results of operations and financial condition. PROTECTION OF THE COMPANY'S DOMAIN NAME IS UNCERTAIN. The Company currently holds the domain name "nextcard.com." The regulations governing the acquisition and maintenance of domain names are subject to change. Governing bodies could, among other things, modify the requirements for holding domain names. Accordingly, the Company may be unable to acquire or maintain the Company's domain name in all jurisdictions in which it would otherwise seek to do so. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, the Company may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of the Company's domain name, trademarks and other proprietary rights. 33 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's principal market risk is due to changes in interest rates. This affects the Company directly in its lending and borrowing activities, as well as indirectly as interest rates may impact the payment performance of the Company's cardholders. The majority of the Company's revenues are generated by the interest rates it charges on outstanding receivable balances in the form of finance charges. The Company's receivables generally yield either a variable interest rate indexed to the prime rate, or a fixed interest rate, set independently of market interest rates. Accordingly, fluctuations in interest rates will affect the Company's revenues. At the same time, the Company's borrowing costs under the Company's commercial paper conduit facilities are generally indexed to variable commercial paper rates, and may also fluctuate based on general interest rate fluctuations. A rise in the Company's borrowing costs may not be met by a corresponding increase in revenues generated by finance charges. Likewise, a decrease in revenues generated by finance charges may not be met by a corresponding decrease in borrowing costs. Thus, either a rise or a fall in the prevailing interest rates could materially adversely affect the Company's results of operations and financial condition. To manage the Company's direct risk to market interest rates, management actively monitors the interest rates and the interest sensitive components of the Company's balance sheet to minimize the impact changes in interest rates have on the fair value of assets, liabilities, net income and cash flow. Management seeks to minimize the impact of changes in interest rates on the Company primarily by matching assets and liability repricings. The Company's fixed interest rate credit card receivables have no stated maturity or repricing period. However, the Company generally has the right to increase rates when the customer fails to comply with the terms of the account agreement. In addition, the Company's credit card receivables may be repriced by the Company upon providing the required prior notice to the customer, which is generally no more that 30 days. The Company may manage its interest rate risk through interest rate hedging techniques. However, the Company currently does not use such techniques and it may not be successful in reducing or eliminating the Company's interest rate risk in the future. 34 35 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any lawsuit that, taken separately or collectively, if decided adversely would be likely to have a material, adverse effect on its business, financial prospects or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description ------ ----------- 10.1 + Co-Branded Bankcard Agreement 10.2 Warrant to Purchase Common Stock 27.1 Financial Data Schedule
+ Portions redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. (b) Reports on Form 8-K Not applicable 35 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEXTCARD, INC. (Registrant) Date: November 15, 1999 /s/ Jeremy R. Lent ------------------------------------ Jeremy R. Lent Chairman of the Board, President and Chief Executive Officer Date: November 15, 1999 /s/ John V. Hashman ------------------------------------ John V. Hashman Chief Financial Officer 36 37 EXHIBIT INDEX
Exhibit Number Description ------ ----------- 10.1 + Co-Branded Bankcard Agreement 10.2 Warrant to Purchase Common Stock 27.1 Financial Data Schedule
+ Portions redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. 37 EX-10.1 2 CO-BRANDED BANKCARD AGREEMENT 1 EXHIBIT 10.1 CO-BRANDED BANKCARD AGREEMENT THIS CO-BRANDED BANKCARD AGREEMENT, incorporating any schedules or exhibits attached hereto (collectively the "Agreement"), dated as of November 8, 1999, ("Effective Date") is entered into between Amazon.com, L.L.C., a Delaware limited liability company and an affiliate of Amazon.com, Inc., a Delaware corporation, with its principal place of business at 1200 Twelfth Avenue South, Suite 1200, Seattle, Washington ("Amazon.com") and NextCard, Inc. a Delaware corporation with its principal place of business at 595 Market Street, San Francisco, California ("NextCard"). RECITALS Whereas, NextCard presently operates a VISA(R) credit card program under which bankcards are issued by NextBank, N.A. (the "Issuer"), a member of Visa International Service Association ("VISA"); Whereas, Amazon.com and its affiliates presently hold all worldwide right, title, and interest in and to the Amazon.com web site currently located at www.amazon.com (the "Property") including, but not limited to all worldwide copyrights therein (the "Amazon.com Copyrights") and trademarks, trade names and logos relating thereto (the "Amazon.com Marks") and all subsidiary rights therein and is engaged in the business of operating the Property, and NextCard presently holds all worldwide right, title, and interest in and to the Nextcard.com web site currently located at www.nextcard.com and its financial services operations (the "Business") including, but not limited to all worldwide copyrights therein (the "NextCard Copyrights") and trademarks, trade names and logos relating thereto (the "NextCard Marks") and all subsidiary rights therein and is engaged in the operating the Business; Whereas, Amazon.com and NextCard (each a "Party" or "party" or collectively the "Parties" or "parties") desire to market a bankcard issued by the Issuer and branded with the NextCard Copyrights and Amazon.com Copyrights (collectively, the "Copyrights") and NextCard Marks and Amazon.com Marks (collectively, the "Marks") and with the VISA trademarks, trade names and/or logos (the "VISA Marks") and; Whereas, this Agreement sets forth the terms and conditions under which the Parties shall participate in marketing the Co-Branded Card and the respective rights and obligations with respect to Co-Branded Accounts and to the individuals to whom Co-Branded Cards are issued. NOW, THEREFORE, NextCard and Amazon.com agree as follows: SECTION ONE DEFINITIONS 1.1. "Account Fee" is defined in Section 1 of Schedule C. Confidential 2 1.2. "Amazon.com Competitor" means any Company designated by Amazon.com on Schedule B hereto, as may be amended from time to time pursuant to Section 3.2.2. By agreement of the parties, Schedule B hereto is intentionally left blank as of the Effective Date, and will be supplied by Amazon.com to NextCard not later than six (6) weeks following the Effective Date, at which time it will be appended hereto and made a part hereof. 1.3. "Amazon.com Customer Information" means information provided to Amazon.com by an Amazon.com customer for storage and subsequent use by an Amazon.com customer on the Internet including an Amazon.com customer's identity, address, credit card number(s), personal information, purchasing preferences or history, or similar information. 1.4. "Applicable Law" means applicable federal, state and local statutes, regulations, regulatory guidelines and judicial or administrative interpretations as well as any rules or requirements established by VISA (or, should the Parties determine to issue a "MasterCard," those rules or requirements established by MasterCard). 1.5. "Business Day" means Monday through Friday, excluding Federal banking holidays. 1.6. "Cardholder Agreement" means the document in substantially the form included as Schedule D to this Agreement, and as may be amended from time to time, which governs the Co-Branded Accounts and use of the Co-Branded Cards. By agreement of the parties, Schedule D hereto is intentionally left blank as of the Effective Date, and will be drafted by NextCard and mutually approved by the parties not later than six (6) weeks following the Effective Date, at which time it will be appended hereto and made a part hereof. 1.7. "Co-Branded Account" means an unsecured, revolving, open-end credit account provided by NextCard for Amazon.com customers through the Issuer and established pursuant to this Agreement, which is accessed solely by a Co-Branded Card, the features and terms of which are further described on Schedule A to this Agreement. 1.8. "Co-Branded Card" means a bankcard issued pursuant to this Agreement that bears the Copyrights and Marks and the VISA Marks and that accesses a Co-Branded Account. 1.9. "Co-Branded Cardholder" means the holder of a Co-Branded Card issued pursuant to this Agreement. 1.10. "Confidential Information" means the terms of this Agreement, the Customer Data and all information, materials or reports provided to or in connection with either Party's performance under this Agreement, including without limitation, Registered Buyer information or other Amazon.com Customer Information, all names, address, demographic, behavioral, and credit information relating to Co-Branded Cardholders or potential Co-Branded Account cardholders, cardholder communication materials and issuance strategies or methods, business Confidential Page 2 of 42 3 objectives, assets and properties, marketing programs and methods; and programming techniques and technical, developmental, cost and processing information. 1.11. "Copyrights" is defined in the third paragraph of the Recitals. 1.12. "Customer Data" means all information, whether personally identifiable or in aggregate, that is submitted and/or obtained as a result of a Co-Branded Account relationship or an application (whether or not completed) for a Co-Branded Account relationship, including without limitation, NextCard Customer Information, credit information, financial standing and demographic data, and primary transactional data generated by a Co-Branded Cardholder's use of the Co-Branded Card (including Transaction Data). 1.13. "Customer Retention Fund" means that pool of monies used to fund certain retention efforts (other than the Co-Branded Loyalty Program) related to the Co-Branded Accounts. 1.14. "Fortnight" shall mean a period of fourteen (14) consecutive calendar days. 1.15. "Marketing Materials" means badges, links, sponsored e-mails, micro-sites, splash pages, other placements on the web sites, and trade, broadcast or banner advertisements, press communications, and any printed physical elements designed to promote the Co-Branded Card or a Party hereto. "Marketing Materials" shall also include [*] information on value-added products and services provided directly or indirectly by a marketing partner of NextCard, and delivered by NextCard to the Co-Branded Cardholders; provided that no [*] will be sent to any Co-Branded Cardholder who has opted out from the receipt of such messages. 1.16. "Minimums" is defined in Section 3 of Schedule C. 1.17. "New Co-Branded Account Goals" means those goals that are set forth in the table in Schedule C. 1.18. "NextCard Customer Information" means information provided by a NextCard customer to NextCard for storage and subsequent use by a NextCard customer including a NextCard customer's identity, address, credit card number, personal information, purchasing preferences or history, or similar information. 1.19. "Registered Buyers" means those visitors to the Property who have purchased at least one item or service from Amazon.com (not including the Co-Branded Card) through use of a unique and nonduplicative email address and for whom Amazon.com has a viable means to contact (either valid email address, Property visits, physical mailings or other means mutually agreed upon by the Parties). 1.20. "Shared Customer Data" means and is specifically limited to [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 3 of 42 4 [*] "Shared Customer Data" specifically excludes (i) information provided on application materials, such as social security number, income, debt or other personal financial information, (ii) credit bureau scores and other credit report information, and (iii) credit reference information obtained directly from other creditors or businesses. Notwithstanding the foregoing, "Shared Customer Data" may include application-level information (other than the information specifically described in clause (i), above) that the parties mutually agree to request from applicants, and shall exclude any Customer Data that NextCard reasonably determines, upon the written advice of outside counsel, would result in NextCard becoming a consumer reporting agency or, if provided by NextCard to Amazon.com, would constitute a violation under Applicable Law. 1.21. "Transaction Data" is defined as Merchant Category Code (MCC) as defined by Visa regulations, transaction amount, merchant description and transaction date, individually identifiable for each Co-Branded Cardholder purchase transaction. SECTION TWO CO-BRANDED CARD PROGRAM 2.1 Design of Card. The parties shall create mutually acceptable designs for the front of the Co-Branded Card, which will include the Copyrights and Marks and the VISA Marks and be subject to Applicable Law. The Amazon.com Mark will be in a primary position and the NextCard Mark will be in a secondary position on the front of the Co-Branded Card; provided that, the size of the NextCard Mark shall be no less than a percentage, expressed as the fraction "1(divided by)(square root of pi)" (expressed for convenience as fifty-six percent (56%)) of the size of the Amazon.com Mark. 2.2 MasterCard Program. At Amazon.com's request, NextCard will take all necessary steps to offer to Co-Branded Account applicants a Co-Branded Card through MasterCard within twelve (12) months following NextCard's receipt of such request, under such terms and conditions as mutually upon agreed by the Parties. 2.3 Features and Terms of Accounts. The features and terms of Co-Branded Accounts to be offered initially by NextCard are described on Schedule A to this Agreement. [*] Except for the foregoing requirement, NextCard shall have complete discretion to change any terms and conditions on existing Co-Branded Accounts and the terms on which new Co-Branded Accounts are originated, or to add additional terms and conditions; provided, however, that NextCard shall use its best efforts to give Amazon.com prior written notice of any material change. Notwithstanding the above, [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 4 of 42 5 measured by Bank Rate Monitor or, if Bank Rate Monitor no longer exists, a mutually acceptable proxy therefor. 2.4 Co-Branded Account Origination Web Site. No later than fourteen (14) days prior to the Launch Date, NextCard, at its sole cost and expense, shall create, and, at all times while this Agreement is in effect, operate, host and maintain a web site within the "nextcard.com" domain (the "Origination Web Site"), which may be accessed from any on-line location, for the purpose of soliciting Co-Branded Card applications, effecting online approvals, customized Co-Branded Card offers and automated balance transfers. The Origination Web Site will clearly indicate that NextCard and the Issuer, and not Amazon.com, are the entities granting credit and that the Issuer is the sole owner of the Co-Branded Accounts. The parties may mutually agree to add additional fields or pages to the application process. 2.5 Credit Decisions. NextCard shall have complete discretion to make all credit decisions regarding the Co-Branded Accounts. Nothing in this Agreement shall require NextCard to provide a Co-Branded Card to any person who NextCard determines does not meet NextCard's credit underwriting standards. Without limiting the foregoing, such discretion shall include decisions relating to approval of applicants for Co-Branded Accounts, choice of type of Co-Branded Card to be issued, including Platinum or Classic, credit limit adjustments upon application from a Co-Branded Cardholder, termination, suspension or reactivation of credit privileges on Co-Branded Accounts, and collection of amounts owing on the Co-Branded Accounts. NextCard shall be solely responsible for taking and reviewing applications for Co-Branded Accounts, issuing plastics, providing customer service and otherwise administering and operating the Co-Branded Accounts. NextCard or the Issuer, as the case may be, shall bear all risk of credit loss and program operating costs for the Co-Branded Accounts and Amazon.com shall have no responsibility for any such loss or costs. 2.6 Approvals. NextCard will use best efforts to maximize booking rates for Co-Branded Cards and Accounts by experimenting with various Co-Branded Account pricing terms. 2.7 Cardholder Agreement. Co-Branded Accounts and use of Co-Branded Cards will be governed by the terms of the Cardholder Agreement. Such Cardholder Agreement shall comply with Applicable Law. Notwithstanding any other limitations contained in this Agreement, NextCard may amend the Cardholder Agreement at any time to comply with Applicable Law. [*] 2.9 Ownership and Operation of Accounts. NextCard shall be the sole and absolute owner of, and Amazon.com shall have no right or title to, or interest in, the Co-Branded An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 5 of 42 6 Accounts and the Co-Branded Cards. NextCard shall be responsible for all aspects of operating and servicing the Co-Branded Accounts and for compliance with Applicable Laws relating to the solicitation, operation and servicing of the Co-Branded Accounts. 2.10 Co-Branded Account Customer Service. NextCard will develop, operate and maintain, at NextCard's sole cost and expense, a full service online customer service and support web site (the "Customer Service Web Site") for the servicing of only Co-Branded Accounts. The Customer Service Web Site shall be hosted by NextCard within the "nextcard.com" domain, shall be operational not less than fourteen (14) days prior to the Launch Date, and shall be branded and have a look and feel consistent with the Property no later than March 1, 2000; provided, that, until the Customer Service Web Site is fully operational, NextCard shall not display any marketing messages to any Co-Branded Cardholder other than those allowed by this Agreement. NextCard shall provide Amazon.com with a test account on the Customer Service Web Site. All users of the Customer Service Web Site will understand that they are interfacing and doing business with NextCard and/or the Issuer. In addition to the Customer Service Web Site and other customer support channels, and at the request of Amazon.com, Co-Branded Cardholders will have access to all other customer service channels provided by NextCard to its other cardholders. NextCard will meet or exceed the performance requirements set forth in Schedule E "Customer Service and Account Service Performance Requirements." 2.11 Marketing Materials. The Parties shall jointly agree to insert prominent and persistent Marketing Materials on appropriate Co-Branded customer materials (as described in Section 2.12). NextCard shall provide an easy process for Co-Branded Cardholders to opt out of receiving e-mail messages that are not required by Applicable Law. 2.12 Co-Branded Customer Materials. The parties will jointly review and approve, all Co-Branded customer materials (with the exception of insignificant materials as agreed by the Parties) featuring the Marks and Copyrights such as pages on the Customer Service Web Site or the Origination Web Site, official Co-Branded communications, and any other Co-Branded customer materials, regardless of media, that either of the parties reasonably believe constitutes a significant customer "touch point." All Co-Branded customer materials will have a look and feel consistent with the Property. The Origination and Customer Service Web Sites will include back buttons and links to the Property as appropriate. The parties will cooperate so that all materials relating to the Co-Branded program are made available with adequate time for advance review and modification of graphic design and text copy, as well as to ensure error-free functionality and pre-Launch user testing. 2.13 Customer Data. 2.13.1 Collection and Ownership. NextCard shall collect, maintain, and be the sole owner of all Customer Data. NextCard may use the Customer Data in a manner consistent with this Agreement for any legitimate business purpose, provided that no personally identifiable Customer Data may be disclosed or transferred to any Amazon.com Competitor or any third party (other than credit bureaus or as otherwise necessary or appropriate for administration, servicing and funding of the Co-Branded Accounts), and provided further that NextCard shall not Confidential Page 6 of 42 7 release any portfolio-level Customer Data pertaining to the Co-Branded Accounts unless required by Applicable Law or for the administration of the Co-Branded Accounts. Whenever NextCard is required to disclose such portfolio-level Customer Data it will request confidential treatment from the recipient. Amazon.com will not disclose or transfer any Shared Customer Data to any third party. 2.13.2 Opt-out and Data Sharing. The application form for the Co-Branded Card will contain the provision set forth in Schedule G that will permit each Co-Branded Account applicant to "opt-out" of having Shared Customer Data shared with Amazon.com. NextCard shall be solely responsible for tracking such election and, unless the applicant exercises such opt-out privilege, shall make available such Shared Customer Data to Amazon.com pursuant to Section 2.13.4. Each Co-Branded Cardholder will have the ability to change their data sharing option through the Co-Branded Customer Service Web Site. In the event a Co-Branded Cardholder who has not previously opted out decides to opt-out, that Co-Branded Cardholder's Shared Customer Data shall no longer be shared with Amazon.com and Amazon.com will purge all such data from its systems to the extent required by Applicable Law. [*] 2.13.3 Use by Amazon.com. Subject to Applicable Law, NextCard will make available to Amazon.com, and Amazon.com will receive and may use the Shared Customer Data only for the purposes of (i) selling goods and services, and (ii) for internal analysis of trends and performance. Amazon.com will not use or distribute the Shared Customer Data in any manner not specifically provided in the preceding sentence, including using it to screen referrals to third parties (except this restriction shall not preclude Amazon.com from marketing or promoting the products or services of a third party based on the Shared Customer Data in a manner that is otherwise consistent with this Agreement), using it to determine eligibility for credit, insurance, or employment, distributing or publishing it, or using it in a manner inconsistent with Applicable Law. 2.13.4 Within ten (10) Business Days from the Effective Date, the parties will agree on (i) the manner in which the Shared Customer Data is to be formatted, (ii) how frequently the Shared Customer Data will be transmitted from NextCard to Amazon.com. and (iii) a schedule for test transmissions of Shared Customer Data. At any time during the Term, and at Amazon.com's request and at its sole expense, NextCard will create and maintain a segregated, secure database for Shared Customer Data, which Amazon.com will access and download. 2.14 Periodic Statements and Inserts. 2.14.1 The periodic statement will include the Copyrights and the Marks. The Parties shall agree on all other elements of the periodic statement for the Co-Branded Accounts, except those required by Applicable Law, which shall be determined by NextCard. An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 7 of 42 8 2.14.2 At Amazon.com's request, NextCard shall include up to two marketing inserts per month on or with the periodic statements sent to Co-Branded Cardholders via U.S. mail in paper form, subject to Applicable Law and NextCard's right to review and approve such inserts. Amazon.com will pay for the design and production of such inserts, provided that NextCard will cooperate with Amazon.com to secure the most favorable design and production cost. NextCard will pay for all standard insertion and mailing costs. Amazon.com shall reimburse NextCard for any additional postage or other costs incurred as a result of including inserts with periodic statements only to the extent such costs are attributable to Amazon.com inserts. Except as set forth above, NextCard may impose reasonable limitations on the number or volume of such marketing inserts, or may delay the inclusion of such materials to accommodate requirements under Applicable Law. If Amazon.com declines to use such space in a particular statementing cycle, NextCard may use the space for other collateral marketing materials consistent with this Agreement. 2.14.3 At Amazon.com's request, any printed materials distributed to Co-Branded Cardholders pursuant to this Agreement will be printed in or disseminated from a State or a location as mutually agreed by the Parties. Amazon.com will pay for all expenses, including reasonable overhead costs, incurred, directly and indirectly, as a result of Amazon.com's request to utilize a state other than the one currently used by First Data Resources on behalf of NextCard. 2.15 Payments. If any Co-Branded Cardholder incorrectly makes a check, money order, draft or other form of payment for a Co-Branded Account payable to the order of Amazon.com rather than to the order of NextCard or its agents, Amazon.com hereby expressly authorizes NextCard to endorse the item on Amazon.com's behalf and to credit the payment to the appropriate Co-Branded Account. Amazon.com shall not accept payments from Co-Branded Cardholders for any Co-Branded Account. 2.16 Launch Date. The Parties shall use their best efforts to have the Co-Branded Card program operational by the calendar date that is no later than ten (10) weeks from the Effective Date. The date the Co-Branded Accounts are first offered shall be the "Launch Date". The Parties may begin joint marketing efforts prior to the Launch Date with mutual agreement. 2.17 Credit Card Issuer. Subject to Amazon.com's prior approval, which shall not be unreasonably withheld, NextCard may select which financial institution shall be the issuer of the Co-Branded Cards and may change such issuer at any time during this Agreement, provided, however, that any such issuer shall at all times be a member in good standing of VISA or MasterCard. SECTION THREE COMPENSATION, EXCLUSIVITY AND LICENSE 3.1 Compensation Paid by NextCard. During the Term of the Agreement, NextCard agrees to provide compensation to Amazon.com in the amounts and in the manner described in Schedule C to this Agreement, contingent upon Amazon.com's continuing to satisfy, in all Confidential Page 8 of 42 9 material respects, its obligations hereunder. All amounts owing to any party shall be sent via wire transfer to such account(s) as may be specified, in writing, not later than two (2) business days prior to the date such amounts are transmitted. NextCard shall pay Amazon.com interest on any late payment (as defined in Schedule C) at a rate of one and one half percent (1.5%) per month. 3.1.1 All accounting statements shall be sent by NextCard to the following address: Amazon.com Attn: [*] 1200 Twelfth Avenue South, Suite 1200 Seattle, WA 98144-2734 3.1.2 Any promotional payments or amounts, excluding Interchange fees, that NextCard or Amazon.com receives from VISA or MasterCard specifically attributable to the Co-Branded Cards or the Co-Branded Accounts will be itemized separately on the reconciliation statements referred to in the following paragraph, and, subject to any disbursement instructions from VISA or MasterCard, allocated [*]. 3.1.3 An appropriate reconciliation statement shall accompany each such payment. The receipt or acceptance by Amazon.com of any statements furnished pursuant to this Agreement, or the receipt or acceptance of any payments made, or the fact that Amazon.com has previously audited the periods covered by such statements, shall not preclude Amazon.com from questioning their accuracy at any time. If any inconsistencies or mistakes are discovered in such statements or payments, the parties shall make appropriate adjustments within thirty (30) days. During the Term and for two (2) years thereafter (or such other period of time as may be required by Applicable Law), NextCard shall keep full and accurate books of account and copies of all documents and other material relating to this Agreement at NextCard's principal office. Amazon.com, by its duly authorized agents and representatives, shall have the right on reasonable prior notice and at Amazon.com's sole cost and expense to audit or make copies of such books, documents, and other material during ordinary business hours. At Amazon.com's request, NextCard shall provide an authorized employee to assist in the examination of NextCard's records. If any audit of NextCard's books and records reveals that NextCard has failed properly to account for and pay amounts owing to Amazon.com, and the amount of any amounts which NextCard has failed properly to account for and pay for any quarterly accounting period exceeds, by ten percent (10%) or more, the amounts actually accounted for and paid to Amazon.com for such period, NextCard shall, in addition to paying Amazon.com such past due amounts, reimburse Amazon.com for professional fees and direct out-of-pocket expenses incurred in conducting such audit, in accordance with NextCard's normal expense guidelines. 3.2 Exclusivity. 3.2.1 By Amazon.com. During the Term of this Agreement, neither Amazon.com nor any entity controlled by Amazon.com or in common control with Amazon.com will on its own or in conjunction with others, directly or indirectly for any reason whatsoever An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 9 of 42 10 enter into an agreement to assist in the marketing in the United States or any of its territories or possessions of any application for any credit, debit or charge card, except for the Co-Branded Cards, or recommend or endorse the acquisition of any debit, credit or charge card, except as provided for in this Agreement. The restrictions set forth in this section shall not apply to co-branded individual bankcards offered solely to employees of Amazon.com through a credit union affiliated with Amazon.com. Nothing in this Agreement shall prevent Amazon.com from offering a private label credit facility (a "house" charge account) that the parties mutually agree shall not be competitive with the Co-Branded Card. 3.2.2 By NextCard. Amazon.com shall have the right to designate up to [*] companies (the "Restricted List") with which NextCard shall be prohibited from working to promote the sale of products or services to the Co-Branded Cardholder base. The initial Restricted List will be attached hereto as Schedule B not later than six (6) weeks from the Effective Date. Amazon.com shall have the right to substitute up to [*] of the companies on the Restricted List once every six months from the Effective Date, provided that Amazon.com must give not less than one month's advance written notice of such substitution; and provided further, that no company may be substituted in to the Restricted List that provides debit, credit or charge card-related products or services as a material part of their business, including facilitating purchasing activity (other than merchants) and the extension of credit; and provided further that no company may be added by Amazon.com to the Restricted List if NextCard has a current relationship, or is in significant discussions, with a company not primarily involved in the merchandise or consumer goods business to provide a free non-merchandise product or service to the Co-Branded Cardholders. In addition, NextCard shall not promote any other debit, credit, secured or other charge card or account without Amazon.com's prior written consent, nor shall NextCard promote the products or services of any company on the Restricted List, to declined Co-Branded Card applicants. 3.3 Ownership and License. 3.3.1 NextCard Marks and NextCard Copyrights. Amazon.com hereby acknowledges that as between the Parties the NextCard Marks and NextCard Copyrights shall be the property of NextCard and NextCard hereby grants Amazon.com a nonexclusive, nontransferable, restricted and royalty-free license to use the NextCard Marks and NextCard Copyrights only in a manner and at such times as are expressly authorized by this Agreement, as follows: 3.3.1.1 All materials produced by Amazon.com which utilize the NextCard Copyrights or the NextCard Marks, including advertising materials, will be submitted to NextCard not less than five (5) business days prior to its first intended use for its prior written approval. If NextCard does not object within the five-day period, NextCard shall be deemed to have consented to Amazon.com's use of such materials; 3.3.1.2 All NextCard-related materials created by Amazon.com will, at NextCard's election, contain an appropriate NextCard copyright or trademark notice and a visible printed reference or hyperlink, as appropriate, to the Origination Web Site. An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 10 of 42 11 3.3.2 Amazon.com Copyrights and Amazon.com Marks. NextCard hereby acknowledges that as between the Parties all rights in the Amazon.com Copyrights and the Amazon.com Marks shall be the property of Amazon.com, and Amazon.com hereby grants NextCard a nonexclusive, nontransferable, restricted and royalty-free license to use the Amazon.com Copyrights and Amazon.com Marks only in a manner and at such times as are expressly authorized by this Agreement, as follows: 3.3.2.1 All materials produced by NextCard which utilize the Amazon.com Copyrights or the Amazon.com Marks, including advertising materials, will be submitted to Amazon.com not less than five (5) business days prior to its first intended use for its prior written approval. If Amazon.com does not object within the five-day period, Amazon.com shall be deemed to have consented to NextCard's use of such materials; 3.3.2.2 All Amazon.com-related materials created by NextCard will, at Amazon.com's election, contain an appropriate Amazon.com copyright or trademark notice and a visible printed reference or hyperlink, as appropriate, to the Origination Web Site and/or the Property; 3.3.2.3 The physical Co-Branded Cards will display the URL for the Customer Service Web Site; and 3.3.2.4 All non-Internet ads must display the Origination Web Site URL. 3.3.3 Except as specified in this Agreement, all uses of the Marks will inure to the benefit of the Parties; provided that nothing in this Section shall be read to imply that Amazon.com shall have any right, title or interest in or to any Co-Branded Account receivable generated by any Co-Branded Account holder. 3.3.4 Each Party grants to the other a nonexclusive, nontransferable, restricted and royalty-free license: (i) to establish hyperlinks to its appropriate Internet web sites (in the case of Amazon.com, NextCard may link only to the Property) and, (ii) in connection with establishing such links, to use each graphical image file of the Party, including all Marks, contained therein (each an "Image") in conjunction with the Co-Branded Card program only as contemplated by this Agreement; provided, however, that neither Party shall add, subtract or in any way alter or edit any Image (including, for this purpose, any machine-readable code which may be a part of any Image) of the other Party, or make any use whatsoever of any Image of the other Party other than for the purposes of, and as expressly contemplated by, this Agreement. Each Party represents and warrants that it has the requisite power to grant such license. 3.3.5 Upon termination or expiration of this Agreement, each Party shall, except where authorized in writing by the other Party or under this Agreement, cease the use or reference to the other Party's name, Marks, Images, Copyrights and hyperlinks in any manner whatsoever, and destroy, at its own expense, all Marketing Materials or other publications and Confidential Page 11 of 42 12 promotional materials bearing the other Party's name, Marks, Images, Copyrights and hyperlinks in its possession and in the possession of its agents, employees, and independent contractors. Confidential Page 12 of 42 13 SECTION FOUR CUSTOMER RETENTION PROGRAMS 4.1. Establishment of Co-Branded Loyalty Program. The Co-Branded Card will include a customer loyalty program (the "Co-Branded Loyalty Program") designed by NextCard to promote use of the Co-Branded Card. Under the Co-Branded Loyalty Program, Cardholders will receive points for using the Co-Branded Card to purchase goods and services which points may be redeemed for rewards provided through the Co-Branded Loyalty Program. The number of points required to earn rewards under the Co-Branded Loyalty Program will be no greater than [*] times the number of points required to earn rewards under the current NextCard loyalty program. The rules and regulations governing the Co-Branded loyalty program offered to NextCard's account holders (the "Rules and Regulations") are attached hereto as Schedule H. By agreement of the parties, Schedule H hereto is intentionally left blank as of the Effective Date, and will be drafted by NextCard and mutually approved by the parties not later than six (6) weeks following the Effective Date, at which time it will be appended hereto and made a part hereof. Under the Co-Branded Loyalty Program, each Co-Branded Account holder shall be given an offer that will allow participation in a single-points reward program with no fees or balance transfers required. 4.2. NextCard's Rights and Responsibilities for the Loyalty Program. 4.2.1. NextCard shall be responsible for managing the Loyalty Program, and for all administrative costs related thereto. The Loyalty Program will be funded by NextCard at a rate of not less than [*] basis points [*] of net Co-Branded Cardholder spending (defined as purchases less returns and credits). 4.2.1.1. As soon as practicable following the Effective Date, Amazon.com will contact the third-party provider of the Co-Branded Loyalty Program rewards, [*], and commence negotiations to permit Amazon.com products to be offered to Co-Branded Cardholders redeeming points earned under the Loyalty Program If [*] does not accommodate Amazon.com's reasonable requests to (i) discontinue the participation of certain vendors of goods and services through the Co-Branded Loyalty Program that Amazon.com deems competitive to Amazon.com or, (ii) substitute a vendor of Amazon.com's choosing for vendors currently participating in the Co-Branded Loyalty Program, then NextCard will suppress such vendors' participation in the Co-Branded Loyalty Program; provided, however, that the parties must mutually agree on any Amazon.com suppression request for any vendor not on the Restricted List. 4.2.1.2. Co-branded Cardholders may be offered "double-points" for a fee not to exceed the fee charged from time to time by NextCard to its other account holders. 4.2.2. NextCard may in its sole and complete discretion change the terms or structure of the Co-Branded Loyalty Program, including the rules and regulations and the provider of the program, at any time; provided, however, that it shall give Amazon.com notice of any material change. Amazon.com hereby acknowledges that it shall have no rights or interests An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 13 of 42 14 in the relationships and agreements between NextCard and its designated affiliates or rewards provider. NextCard will provide a monthly report to Amazon.com detailing all actual expenditures attributable to the Co-Branded Loyalty Program, exclusive of overhead charges. 4.3. Amazon.com's Loyalty Program Option. Amazon.com may, at its sole option and expense, develop a loyalty program to be offered to the Co-Branded Cardholders (the "Amazon Program"). Following the development of the Amazon Program, the parties will conduct a test, not to exceed four (4) calendar months, whereunder the Amazon Program will be offered to a mutually agreed upon percentage of new applicants for a Co-Branded Card. During the test, Amazon.com will receive [*] basis points of net Co-Branded Cardholder spending for all Co-Branded Cardholders who elect the Amazon Program. At the conclusion of the test period, the parties will jointly evaluate the performance of the Amazon Program, as compared with the Co-Branded Loyalty Program, with the objective of choosing, in good faith, the program which, in the reasonable judgment of the parties, is more likely to stimulate balance build and purchase activity. 4.3.1 Funding for the Amazon Program. If the Parties choose to substitute the Amazon Program for the Co-Branded Loyalty Program, NextCard will provide to Amazon.com funding for the Amazon Program of [*] basis points [*] of net Co-Branded Cardholder spending. 4.4. Opportunities for Amazon.com. For Loyalty Programs offered to other NextCard cardholders in general, NextCard will, subject to the approval of any third-party operator of the such Loyalty Programs, provide Amazon.com with opportunities for itself, its affiliates and entities with which it has formed an alliance to have their goods and/or services included in the incentive offerings on terms and conditions at least as favorable as those provided to other vendors that participate in the Loyalty Programs. 4.5. Customer Retention Fund. NextCard shall establish, manage, and maintain the Customer Retention Fund, to be held by NextCard in a non-commingled bank account. The Customer Retention Fund shall be funded equally, dollar-for-dollar, by NextCard and Amazon.com, provided that Amazon.com shall determine when and in what amount funds shall be deposited, and provided further that the maximum amount to be contributed in to the Customer Retention Fund shall not exceed [*] per Co-Branded Account. Funds in the Customer Retention Fund may only be spent on promotions and activities that the parties shall mutually agree are designed to encourage Co-Branded Cardholders to retain and use their Co-Branded Cards. SECTION FIVE MARKETING AND PROMOTION 5.1 Reporting. Amazon.com will provide monthly reports to NextCard of the number of clicks. NextCard will provide monthly reports to Amazon.com of the number of new Co-Branded Accounts applied for and the number and type of Co-Branded Accounts accepted and opened. NextCard agrees to provide at least monthly reports to Amazon.com of the: (i) number An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 14 of 42 15 of active Co-Branded Cards, (ii) average monthly purchases on Co-Branded Cards, (iii) all operational reports related to the performance of NextCard's obligations under Schedule E, (iv) all reports related to the performance of NextCard's obligations under Schedule C, (v) average yield on the Co-Branded Account portfolio, (vi) average annual percentage rate charged to Co-Branded Accounts opened during the reporting period, (vii) percentage of Co-Branded Account applicants that exercise the "opt-out" privilege described in Schedule G, and (viii) data on the performance of each marketing tool (such as e-mail, banner ads, etc.) employed by Amazon.com to promote the Co-Branded Card program. NextCard will make reasonable efforts to automate such reporting and make it available to Amazon.com via email. 5.2 Monthly Program Review. At least once per month following the Effective Date of this Agreement and until termination or expiration of this Agreement, the Parties shall conduct a monthly Co-Branded Card program review. At a minimum, such review will include a report on the progress of the financial, operational and marketing aspects of the Co-Branded Card program and this Agreement and will review plans designed to achieve the New Co-Branded Account Goals and the other requirements of this Agreement. SECTION SIX CONFIDENTIALITY, PROMOTION AND NONSOLICITATION. 6.1. Confidential Information. Each Party acknowledges that it may acquire Confidential Information of the other Party in the course of exercising its rights and carrying out its obligations under this Agreement. Each Party agrees not to use Confidential Information of the other Party for its own benefit or to disclose such information to any third party, except as specifically authorized by this Agreement or reasonably necessary for the Party to carry out its obligations hereunder. Each Party further agrees that its employees, agents and independent contractors shall treat the other Party's Confidential Information in the same manner as such Party is required to treat such Confidential Information. Each Party to this Agreement shall not disclose any information about the relationships created by this Agreement or any information on the operation of the Co-Branded Card program, including but not limited to, amounts paid and reports and financial information provided pursuant to this Agreement, to any third party, except to the extent necessary to carry out the Party's respective obligations under this Agreement, or with the prior written consent of the other Party. In addition, either Party may disclose Confidential Information to the extent that, in the reasonable opinion of its legal counsel, it is legally required to be disclosed. The Party seeking to disclose the Confidential Information shall notify the other Party a reasonable time prior to disclosure and allow the other Party a reasonable opportunity to seek appropriate protective measures. 6.2 Nothing in this Section 6 shall be deemed to prohibit: 6.2.1. Use or disclosure of the Party's Confidential Information if a Party obtains such information from a source other than pursuant to the relationship created by this Agreement, or 6.2.2. Disclosure of information required by subpoena, court order or process, or governmental inquiry, provided that the Party from which such information is sought provides Confidential Page 15 of 42 16 the other Party with notice of the request of such information and a reasonable opportunity to prevent disclosure of the information or to seek appropriate protective measures. 6.3 Disposition of Confidential Information. Upon either Party's demand, or upon the termination or expiration of this Agreement, the Parties shall comply with each other's reasonable instructions regarding the disposition of Confidential Information, which may include the return or destruction of any and all Confidential Information (including any copies, extracts, compilations, or reproductions thereof). Upon request, such compliance shall be certified in writing, including a statement that no copies of Confidential Information have been kept. 6.4 Targeting. Except as specifically provided by this Agreement, NextCard will not target individuals for solicitation based solely on account of their Co-Branded Account holder status. Nothing in this Section 6.4 shall preclude NextCard from marketing products or services to a general population of potential customers, some of whom may be Registered Buyers or Co-Branded Account holders but are not targeted as such. NextCard shall not sell, license, disclose, distribute or transfer to any third party a list consisting of individuals known to NextCard to be Co-Branded Cardholders or any aggregate purchasing or demographic information about individuals known to NextCard to be Co-Branded Cardholders, that identifies the individuals as Co-Branded Cardholders, either expressly or by direct implication. For a period of [*] from the Launch Date, NextCard will not market the products and/or services of any Amazon.com Competitor to that subset of NextCard's general cardholder base that NextCard determines has purchased such products and/or services from Amazon.com and no other merchant. Amazon.com shall not sell, license, disclose, distribute or transfer to any third party a list consisting of individuals known to Amazon.com to be Co-Branded Cardholders or any aggregate purchasing or demographic information about individuals known to Amazon.com to be Co-Branded Cardholders, that identifies the individuals as Co-Branded Cardholders, either expressly or by direct implication. 6.5 Injunctive Relief. Each Party agrees that any unauthorized use or disclosure of Confidential Information or a breach of this Section 6 may cause immediate and irreparable harm to the affected Party for which money damages shall not constitute an adequate remedy. Therefore, each Party agrees that injunctive relief, including without limitation Ex Parte relief, without notice or the posting of bond, shall be warranted in addition to any other remedies the affected Party may have. In addition, the other Party agrees promptly to advise the affected Party in writing of any unauthorized misappropriation, disclosure or use by any person of the Confidential Information which may come to its attention and to take all steps at its own expense reasonably requested by the affected Party to limit, stop or otherwise remedy such misappropriation, disclosure or use. 6.6 Promotion. The parties understand that their participation in this relationship will be announced in a mutually agreed upon press release or press event in advance of the Launch Date, and that from time to time additional press releases will be required or deemed desirable by both parties. Amazon.com and NextCard will pool their media-relations resources, internal and external, as appropriate to develop a coordinated media plan and execute the desired or necessary public relations goals. Both parties will provide advance approval for inclusion of boilerplate An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 16 of 42 17 copy and for press releases and other public disclosures related to the Co-Branded Card program. For inclusion in the main copy section of a release, each Party's approval will be obtained in writing and not unreasonably withheld, at least two Business Days in advance of the release date. 6.6.1 If either Amazon.com or NextCard reasonably determines that the use of Shared Customer Data has resulted in a public protest (including a lawsuit filed against either party) that, in the reasonable judgment of such party, is reasonably likely to result in a material adverse effect on the business, prospects or financial condition of such party, then Amazon.com and NextCard will work together in good faith to respond to the protest, which may include the issuance of a mutually acceptable press release discussing [*]. SECTION SEVEN DURATION AND MODIFICATION OF THE AGREEMENT 7.1 Term. Subject to the provisions of this Section 7, this Agreement shall be effective as of the Effective Date and shall continue for a term of five (5) years from and after the Launch Date (the "Initial Term"). Following the Initial Term, this Agreement shall be renewed for successive renewal terms of [*] each (each, a "Renewal Term"), unless a Party provides written notice to the other at least [*] prior to the termination of the Initial Term or each then current Renewal Term stating that it does not wish to renew this Agreement. The Initial Term and the Renewal Terms, if any, may be collectively referred to herein as the "Term." 7.2 Default; Breach. If there is a material breach of any representation or warranty, or default in the performance of any covenant or obligation of this Agreement, by either Party, and such breach or default shall continue for a period of thirty (30) days after receipt by the breaching or defaulting Party of written notice thereof from the non-breaching or defaulting Party (setting forth in detail the nature of such default), then this Agreement may terminate at the option of the non-breaching or -defaulting Party as of the thirty-first (31st) day following the receipt of such written notice. If, however, the breach or default cannot be remedied within such thirty (30) day period, such time period shall be extended for an additional period of not more than a Fortnight, so long as the breaching or defaulting Party has notified the non breaching or - -defaulting Party in writing and in detail of its plans to initiate substantive steps to remedy the breach or default and diligently and continuously thereafter pursues the same to completion within such additional Fortnight. Notwithstanding the foregoing, any failure to perform by NextCard, as defined in Schedule E, constitutes a material default by NextCard of this Agreement, allowing for immediate termination by Amazon.com upon written notice to NextCard. 7.3 Insolvency. This Agreement shall be deemed immediately terminated, without the requirement of further action or notice by either Party, in the event that either Party, or a direct or indirect holding company of either Party, shall become subject to voluntary or involuntary bankruptcy, insolvency, receivership, conservatorship or like proceedings (including, but not limited to, the takeover of such Party by the applicable regulatory agency) pursuant to Applicable Law. An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 17 of 42 18 7.4 Change in Applicable Law. If there is a modification or other change in Applicable Law that has a material adverse effect on the ability of either NextCard or Amazon.com to continue the Co-Branded Card program contemplated by this Agreement, the parties shall meet or otherwise discuss whether it is possible to modify this Agreement to continue the Co-Branded Card program. If the parties are unable to agree to a modification to the Agreement, either Party may terminate this Agreement upon prior written notice to the other Party. A "material adverse effect" includes, among other things, any change in Applicable Law that has a significant impact on the financial or operational burdens or rewards of either Party under this Agreement. The Parties agree to modify the Co-Branded Card program as necessary from time to time to comply with all Applicable Law. 7.5 Change in Control. If either Party enters into any merger, acquisition, transfer of control, or sale of substantially all of its assets, or any similar transaction resulting in a change of control (the "Acquired Party"), then the other Party (the "Non-Acquired Party") shall have the right to terminate this Agreement without breach or penalty upon [*] days' notice; provided that, the foregoing provision shall not affect the sale, assignment, pledge or other hypothecation by the Issuer of any receivable(s), including any finance charge, fee or other obligation owed to the Issuer by any Co-Branded Account holder. Notwithstanding the foregoing, if the Non-Acquired Party exercises its right to terminate this Agreement and (a) the successor to the Acquired Party is not reasonably construed to be a competitor of the Non-Acquired Party, or (b) if continuation of this Agreement by the Non-Acquired Party with the successor to the Acquired Party would not constitute a material breach by the Non-Acquired Party of any contract existing at the time the Acquired Party entered into the change of control transaction, then, upon any purchase of the Co-Branded Account portfolio by Amazon.com, pursuant to Section 8 hereof, (y) if Amazon.com is the Non-Acquired Party, the purchase price for the Co-Branded Account portfolio shall be [*] of FMV, and (z) if NextCard is the Non-Acquired Party, the purchase price for the Co-Branded Account portfolio shall be [*] of FMV, in each case as FMV is defined and [*] calculated pursuant to Section 8.2 hereof. 7.6 Termination for Convenience. So long as Amazon.com does not exercise any of its rights under the Warrant (as defined below), Amazon.com shall have the right to terminate this Agreement without cause, for convenience, at the end of the [*] from the Launch Date upon delivery of at least [*] prior written notice to NextCard; provided, that NextCard shall have the right to reject unilaterally such termination if Amazon.com exercises the Warrant, in whole or in part, at any time following any notification of termination for convenience. 7.7 Process upon Termination. Upon termination, expiration or breach of this Agreement, the provisions of Section 8 shall apply and, consistent therewith: 7.7.1 Amazon.com and NextCard shall work together to ensure an orderly termination of the Co-Branded Card program; and An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 18 of 42 19 7.7.2 Each Party shall promptly return to the other Party any materials that have been supplied by such Party to the other, if any. 7.8 Warrant In Favor of Amazon.com. As soon as possible after the Effective Date, NextCard shall issue, execute and deliver a valid warrant, attached as Schedule F hereto, in favor of Amazon.com entitling Amazon.com to purchase up to 4,400,000 shares of common stock of NextCard at a purchase price of equal to one hundred and forty percent (140%) of the closing price of NextCard common stock on the Business Day preceding the Effective Date, as reported by the National Association of Securities Dealers Automated Quotation System (the "Warrant"). In consideration for the Warrant, Amazon.com will pay to NextCard, by wire transfer, twenty two million, five hundred thousand dollars ($22,500,000). If NextCard fails to issue, execute or deliver the Warrant, then this Agreement (including the payment obligations of Amazon.com set forth in this Section 7.8) shall fail of its essential purpose, and shall be null and void as if never executed by the parties. SECTION EIGHT SALE OF ACCOUNTS 8.1 Sale of Accounts. At such time as this Agreement is terminated, for whatever reason, Amazon.com shall have the option, subject to Applicable Law and approval from all applicable parties involved in NextCard receivables financing, as legally required, to purchase all of the Co-Branded Accounts (other than the intellectual property associated with NextCard's prior use of the Customer Data) by providing notice to NextCard of a desire to do so within five months prior to the date fixed for termination of this Agreement. In the event of a termination of this Agreement due to the breach of either party, then Amazon.com shall have seven (7) days in which to give notice to NextCard of its intention to purchase the portfolio. 8.2 Purchase Price; Appraisal Process. The purchase price for the Co-Branded Account portfolio shall be the fair market value ("FMV") of the portfolio as determined by appraisal; provided that, in the event of a termination of this Agreement resulting from a material breach by Amazon.com, the purchase price for the Co-Branded Account portfolio shall be [*] of the FMV; and provided further, that in the event of a termination of this Agreement resulting from (i) a material breach by NextCard or (ii) Amazon.com's termination for convenience pursuant to Section 7.6, the purchase price for the Co-Branded Account portfolio shall be FMV minus [*], provided that, if FMV is less than [*], NextCard shall not be obligated to pay the difference to Amazon.com. All third-party appraisal costs and expenses incurred during the appraisal process shall be shared equally by the Parties. The conclusion of the appraiser(s) shall be binding upon the Parties and conclusive for the purposes described herein. Any appraiser selected under this Section 8 must be a top tier United States investment bank with experience in credit card securitization. 8.2.1. If Amazon.com exercises its purchase option, the entire portfolio of Co-Branded Accounts (including all Co-Branded Accounts in charge-off or delinquent status) must be purchased and a purchase and sale agreement shall be executed and shall establish a closing An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 19 of 42 20 date that allows NextCard, upon the exercise of its best efforts in regard thereto, to remove the Co-Branded Accounts and associated balances from any applicable loan or asset securitization arrangement. The purchase and sale agreement shall also provide that upon payment of the purchase for the Co-Branded Accounts to NextCard NextCard's obligation to continue to fund the Co-Branded Loyalty Program shall cease. 8.2.2 The determination of FMV hereunder shall consider the value of the portfolio of Co-Branded Accounts as if they had remained serviced by NextCard, so as to fairly represent the portfolio's value, including customer servicing, active customer management, cross-selling, and up-selling. 8.2.3 During the term of this Agreement, and subject to Applicable Law, NextCard will take no action that would prevent the orderly transfer of the Co-Branded Accounts following any termination of this Agreement. 8.2.4 In the event of a termination of this Agreement due to either (i) Amazon.com's termination for convenience, or (ii) NextCard's termination due to Amazon.com's breach, then, as soon as possible following NextCard's receipt of Amazon.com's election to purchase, NextCard will choose an appraiser to determine the FMV of the portfolio, which appraisal shall be completed as soon as commercially reasonable. Should Amazon.com disagree with the FMV in good faith within seven (7) days of the initial appraisal, then, within an additional seven (7) days, each party will choose an additional appraiser (for a total of three appraisers) to determine FMV as soon as might be commercially reasonable thereafter, and the average of the three appraisals will be binding. In the event of Amazon.com's termination of this Agreement due to NextCard's breach, then, as soon as possible following NextCard's receipt of Amazon.com's election to purchase, Amazon.com will choose an appraiser to determine the FMV of the portfolio, which appraisal shall be completed as soon as might be commercially reasonable. Should NextCard disagree with the FMV in good faith within seven (7) days of the initial appraisal, then, within an additional seven (7) days, each party will choose an additional appraiser (for a total of three appraisers) to determine FMV as soon as might be commercially reasonable thereafter, and the average of the three appraisals will be binding. In the event of a termination of this Agreement at the end of the Term, then, as soon as possible following NextCard's receipt of Amazon.com's election to purchase, NextCard will choose an appraiser to determine the FMV of the portfolio, which appraisal shall be completed as soon as might be commercially reasonable. Should Amazon.com disagree with the FMV in good faith within seven (7) days of the initial appraisal, then, within an additional seven (7) days, Amazon.com will choose an additional appraiser (for a total of two appraisers) to determine FMV as soon as might be commercially reasonable thereafter, and the average of the two appraisals will be binding. 8.3 Termination Assistance. Upon notice of termination of this Agreement, NextCard will provide to Amazon.com an account file in industry-standard format for the Co-Branded Account portfolio as soon as commercially reasonable. In the event of termination, NextCard will assist in the transfer of the Co-Branded Accounts and Customer Data in a timely manner, and will, for a period of [*] [*], not target any Co-Branded Cardholder for a credit An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 20 of 42 21 card solicitation solely on the basis of their status as Co-Branded Cardholders. Upon payment by Amazon.com for the portfolio, NextCard shall provide whatever reasonable transitional assistance is requested at industry-standard rates for such assistance. 8.4 Run-off Period. If, five months prior to the end of the Term or, in the case of a termination for cause, within seven (7) days following NextCard's receipt of Amazon.com's termination notice, Amazon.com does not choose to purchase the existing portfolio of Co-Branded Accounts, then NextCard will immediately discontinue offering new Co-Branded Accounts and will continue servicing existing Co-Branded Accounts under the terms of this Agreement and any Loyalty Program until the expiration of each Co-Branded Card or Account. In such circumstances, replacement Co-Branded Cards will not be issued following their expiration. For a period of [*] from the end of the Term, Amazon.com will not target (for example, by use of email or welcome greeting) Co-Branded Cardholders with an offer for any other bankcard, and, where reasonable, will identify and exclude Co-Branded Cardholders from any such offer solicitation. 8.4.1 Following any event of termination, the Customer Retention Fund shall be immediately distributed equally to the parties, after payment of all outstanding or accrued costs, expense, charges or other liabilities. SECTION NINE REPRESENTATIONS, WARRANTIES, COVENANTS, AND INDEMNIFICATION 9.1 Representations, Warranties and Covenants of the Parties 9.1.1 By NextCard. NextCard represents and warrants that: (i) it is a duly organized, validly existing Delaware corporation and in good standing under the laws of Delaware; (ii) the execution and delivery by NextCard of this Agreement, and the performance by NextCard of it obligations contemplated hereunder, are within NextCard's corporate powers, have been duly authorized by all necessary corporate action, do not require any consent or other action by or in respect of, or filing with, any third party or governmental body or agency (other than informational filings, including approval of card design, as required by MasterCard or VISA), and do not contravene, violate or conflict with, or constitute a default under, any provision of Applicable Law, or of the charter or by-laws of NextCard or of any agreement, judgment, injunction, order, decree or other instrument binding upon NextCard, or of any applicable VISA or MasterCard rules or regulations; (iii) it is not currently aware of any claims, and is not currently involved in any litigation, challenging NextCard's ownership of NextCard Marks; (iv) all intellectual property used by NextCard (excluding the intellectual property being provided by Amazon.com) in connection with its obligations under this Agreement is either owned or properly licensed by NextCard for the uses contemplated hereby and that such intellectual property does not infringe the rights of any third parties (except that, as to patents, this representation is given only as to current knowledge); (v) the services to be provided by NextCard shall be performed in a diligent and professional manner in accordance with NextCard's obligations under this Agreement and to Amazon.com's reasonable satisfaction; (vi) all of NextCard's systems being used in connection with the services contemplated Confidential Page 21 of 42 22 hereunder are year 2000 compliant in that all systems will provide the following functions: (a) handle date information before, during and after January 1, 2000, including without limitation, to accepting date input, providing date output and performing calculations on dates or portions of dates; (b) function accurately and without interruption before, during and after January 1, 2000, without any change in operations associated with the advent of the new century and any subsequent leap years; (c) respond to two-digit year-date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; and (d) store and provide output of date information in ways that are unambiguous as to century; and (vii) NextCard will comply with all Applicable Laws related to the offering, approving, denying, operating and servicing and reporting of consumer credit products, services and accounts including the Co-Branded Accounts and Co-Branded Cards. NextCard covenants that it will not enter into an agreement with any party related to financing the receivables of the Co-Branded Account portfolio that would interfere with Amazon.com's ability to purchase the Co-Branded Account portfolio pursuant to this Agreement. 9.1.2 By Amazon.com. Amazon.com represents and warrants that: (i) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) the execution and delivery by Amazon.com of this Agreement, and the performance by Amazon.com of the transactions contemplated hereby, are within Amazon.com's powers, have been duly authorized by all necessary corporate action, do not require any consent or other action by or in respect of, filing with, any third party or any governmental body or agency, and do not contravene, violate or conflict with, or constitute a default under, any provision of applicable law, court decision, regulation, or under any governing documents, charter or bylaw, or any agreement, judgment, injunction, order, decree or other instrument binding on Amazon.com; (iii) it is not currently aware of any claims, and is not currently involved in any litigation, challenging Amazon.com's ownership of Amazon.com Marks, other than Amazon Bookstore Cooperative, Inc. v. Amazon.com; (iv) all intellectual property used by Amazon.com (excluding the intellectual property being provided by NextCard) in connection with its obligations under this Agreement is either owned or properly licensed by Amazon.com for the uses contemplated hereby and that such intellectual property does not infringe the rights of any third parties (except that, as to patents, this representation is given only as to current knowledge); (v) the services to be provided by Amazon.com shall be performed in a diligent and professional manner in accordance with Amazon.com's obligations under this Agreement and to NextCard's reasonable satisfaction; (vi) on or before December 31, 1999, all of Amazon.com's systems being used in connection with the services contemplated hereunder will be year 2000 compliant in that all systems will provide the following functions: (a) handle date information before, during and after January 1, 2000, including without limitation, to accepting date input, providing date output and performing calculations on dates or portions of dates; (b) function accurately and without interruption before, during and after January 1, 2000, without any change in operations associated with the advent of the new century and any subsequent leap years; (c) respond to two-digit year-date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; and (d) store and provide output of date information in ways that are unambiguous as to century; and (vii) Amazon.com will comply with all Applicable Laws related to its obligations hereunder. Amazon.com represents and warrants Confidential Page 22 of 42 23 that it has the right, power and authority to execute this Agreement and act in accordance herewith. 9.1.3 By Amazon.com, Inc. Amazon.com,Inc. guarantees to NextCard (but not to any third party) the performance of the obligations hereunder of Amazon.com, L.L.C. (the "Obligations"); provided, however, that: (a) Amazon.com, Inc. agrees only to act as a guarantor of the performance of the Obligations, and not as a party thereto; (b) NextCard will include Amazon.com, Inc. as a party to receive notice of breach of the Obligations pursuant to Section 7.2 of the Agreement; and (c) Amazon.com shall have no greater obligation to perform the Obligations than Amazon.com, L.L.C. with respect thereto. 9.2 Indemnification 9.2.1 NextCard shall not be responsible in any way for any misrepresentation, negligent act or omission or willful misconduct of Amazon.com, its affiliates, officers, directors, agents, or employees in connection with the entry into or performance of any obligation of Amazon.com under this Agreement. Further, Amazon.com shall indemnify, defend and hold NextCard harmless from and against all claims, actions, suits or other proceedings, and any and all losses, judgments, damages, expenses or other costs (including reasonable counsel fees and disbursements), arising from or in any way relating to: (i) any actual or alleged violation or inaccuracy of any representation or warranty of Amazon.com contained in Section 9.1 above, (ii) any actual or alleged infringement of any trademark, copyright, trade name or other proprietary ownership interest resulting from the use by NextCard of the Amazon.com Copyrights and the Amazon.com Marks as contemplated by this Agreement, (iii) any negligent act or omission or willful misconduct of Amazon.com or its directors, officers, employees, agents or assigns in connection with the entry into or performance of this Agreement, and (iv) any use or disclosure by Amazon.com of the Shared Customer Data in a manner not in accordance with Applicable Law. 9.2.2 Amazon.com shall not be responsible in any way for any misrepresentation, negligent act or omission or willful misconduct of NextCard, its affiliates, officers, directors, agents, subcontractors or employees in connection with the entry into or performance of any obligation of NextCard under this Agreement. Further, NextCard shall indemnify, defend and hold Amazon.com harmless from and against all claims, actions, suits or other proceedings, and any and all losses, judgments, damages, expenses or other costs (including reasonable counsel fees and disbursements), arising from or in any way relating to: (i) any actual or alleged violation or inaccuracy of any representation, warranty, or obligation of NextCard contained in this Agreement, (ii) any act or omission of NextCard in connection with the issuance of Co-Branded Card(s) and/or the administration of Co-Branded Accounts which constitutes a violation of State of California or federal banking or consumer credit laws or regulations or applicable VISA or MasterCard rules and regulations, (iii) any actual or alleged infringement of any trademark, copyright, trade name or other proprietary ownership interest resulting from the use by Amazon.com of the NextCard Copyrights and the NextCard Marks as contemplated by this Agreement, and (iv) any negligent act or omission or willful misconduct of Confidential Page 23 of 42 24 NextCard or its directors, officers, employees, agents or assigns in connection with the entry into or performance of this Agreement. SECTION 10 NOTICES All notices under this Agreement shall be in writing, and shall be deemed given when personally delivered, when sent by confirmed fax, when sent by confirmed e-mail, or one business day after being sent by reputable overnight courier to the address of the party to be notified as set forth in this section, or such other address as such party last provided to the other by written notice For NextCard: For Amazon: [*] [*] [*] [*] NextCard, Inc. Amazon.com 595 Market Street, 18th Floor 1200 Twelfth Avenue South, Suite 1200 San Francisco, CA 94105 Seattle, WA 98144-2734 Fax: 415-836-9701 FAX: 206.266.1355 With a copy to: With a copy to: [*] [*] [*] [*] NextCard, Inc. Amazon.com 595 Market Street, 18th Floor 1200 Twelfth Avenue South, Suite 1200 San Francisco, CA 94105 Seattle, WA 98144-2734 Fax: 415-836-9701 FAX: 206.834.7010 SECTION 11 SURVIVAL Sections 8, 9, 10, 11, and 12 will survive any termination of this Agreement. SECTION 12 MISCELLANEOUS 12.1 Subject to Applicable Law, neither party may disclose the terms of this Agreement to any third party other than its financial and legal advisors without the other party's prior written consent. For all purposes of this Agreement, each party shall be and act as an independent contractor and not as partner, joint venturer, or agent of the other and shall not bind nor attempt to bind the other to any contract. 12.2 Neither party shall have any right or ability to assign, transfer, or sublicense any obligations or benefit under this Agreement without the written consent of the other (and any such attempt shall be void), except that a party may assign and transfer this Agreement and its An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 24 of 42 25 rights and obligations hereunder to any third party who succeeds to substantially all its business or assets, in which case the provisions of this Agreement shall inure to the benefit of and be binding upon such third party and the consent of the non-assigning party shall not be required; provided that nothing herein shall be construed to prohibit the sale, assignment, pledge or other hypothecation by the Issuer, of any receivable(s), including any finance charge, fee or other obligation owed to the Issuer by any Co-Branded Account holder. 12.3 The failure of either party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. This Agreement supersedes all proposals, oral or written, any letters of intent, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom. No changes, modifications, or waivers are to be made to this Agreement unless evidenced in writing and signed for and on behalf of both parties. In the event that any provision of this Agreement shall be determined to be illegal or unenforceable, that provision will be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 12.4 This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law provisions thereof. Each party acknowledges that any breach of the provisions of this Agreement may cause the other party immediate and irreparable harm for which there are no adequate remedies at law and will entitle such party to seek immediate injunctive relief, in addition to any other remedies which may be available. Any litigation pertaining to the interpretation or enforcement of this Agreement shall be filed in and heard by the United States District Court for the District of Delaware, and the parties hereby submit to the jurisdiction of and waive any venue objections against such courts. 12.5 Headings herein are for convenience of reference only and shall in no way affect interpretation of the Agreement. Unless the context clearly requires otherwise, (a) the plural and singular members shall each be deemed to include the other; (b) the masculine, feminine, and neuter genders shall each be deemed to include the others; (c) "shall," "will," or "agrees" are mandatory, and "may" is permissive; (d) "or" is not exclusive; (e) "includes" and "including" are not limiting; and (f) "days" means calendar days unless specifically provided otherwise. No provision of this Agreement shall inure to the benefit of any third parties so as to constitute any such person a third-party beneficiary of this Agreement. This Agreement shall be construed without regard to any presumption or rule requiring construction against the drafting party. Each of the individuals executing this Agreement on behalf of a party individually represents and warrants that he or she has been authorized to do so and has the power to bind the party for whom he or she is signing. The parties hereby agree to execute such other documents and perform such other acts as may be necessary or appropriate to carry out the purposes of this Agreement. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Signatures executing this Agreement may be delivered by facsimile transmission. 12.6 Each party shall pay its own costs and expenses relating to the negotiation, execution, delivery and performance of this Agreement. Confidential Page 25 of 42 26 12.7 Force Majeure. Neither party will be liable for non-performance hereunder to the extent such performance is prevented by fire, earthquake, tornado, flood, explosion, embargo, war, riot, governmental regulation or act, act of God, act of public enemy, or by reason of any other cause beyond such party's reasonable control. A party's obligations to perform timely will be excused to the extent, but only to the extent, that such performance is prevented by a force majeure event. 12.8 Limitation on Damages. In no event will either party be entitled to recover special, punitive, incidental or consequential damages, including damages based on lost profits or lost business opportunities, arising out of a breach of the other party's obligations hereunder, even if the party in breach has been advised of the possibility of such damages. IN WITNESS WHEREOF, NextCard and Amazon.com have caused this Agreement to be executed by their duly authorized officers as of the date first written above. NextCard, Inc. By:_________________________ Name:_______________________ Title:______________________ Amazon.com, L.L.C. By:_________________________ Name:_______________________ Title:______________________ Amazon.com, Inc. By:_________________________ Name:_______________________ Title:______________________ Confidential Page 26 of 42 27 SCHEDULE A: PRODUCT DESIGN FEATURES BANKCARD OFFERING Co-Branded Classic, Classic VISA or MasterCard: unsecured revolving line Platinum and of credit. PictureCard Platinum VISA or MasterCard: Travel accident insurance, auto rental insurance, medical and legal referral and assistance, and toll-free access to the VISA Assistance Center 24 hours a day, 365 days a year. PictureCard VISA or MasterCard: Build your own Classic or Platinum card by uploading a digital image or choosing from the online photo gallery. No other types of Co-Branded Cards or Accounts shall be issued to any applicant who applies for a NextCard-branded credit card through the Origination Web Site without Amazon.com's prior written approval, which it may withhold in its sole discretion. Credit Line Classic and Platinum: [*] Interest rate The interest rates offered are based on each applicant's unique credit profile. Various price points will be offered including: Classic and Platinum: Fixed rates (between [*] and [*]) and low introductory rates (as low as [*]) going to fixed (as low as [*]) or variable (as low as [*] + [*]). Fees Classic and Platinum: No annual fee and tiered late fees (e.g. $7 if five days late, $10 if ten days late and $15 if fifteen days late); low over-limit charges (e.g. $10). Service Charges Service charges for cash advances and returned items to be charged in accordance with the standard fees charged by NextCard in its other card programs. Payment Terms Grace period of 25 days when previous balance is paid in full; No grace period for balance transfers or cash advances. Loyalty Program See Section 4 An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 27 of 42 28 SCHEDULE B AMAZON.COM COMPETITORS Refer to Section 1.2 for completion requirements for Schedule B Confidential Page 28 of 42 29 SCHEDULE C COMPENSATION BY NEXTCARD TO AMAZON.COM 1. Account Fee. During the Term, NextCard will pay [*] [*] for each Co-Branded Account opened during the Term (the "Account Fee"). Account Fees shall be paid within thirty (30) days after the end of each month during which the Co-Branded Account was opened. 2. Renewal Fee. During the Term, NextCard shall pay to Amazon.com a renewal fee of [*] for each existing Co-Branded Account in good standing within thirty (30) days after each such account's annual anniversary date (the "Renewal Fee"). For purposes of this paragraph, the term "good standing" shall mean any Co-Branded Account that on such anniversary date (i) is not [*] or more days past due, or (ii) has had purchase activity in the preceding [*] days. 3. Guaranteed Minimum Payments. NextCard shall make guaranteed minimum payments against the Account Fee within thirty (30) days after the end of each month in the amounts set forth in the table below (the "Minimums"). Of each Minimum, a dollar amount equal to [*] times the New Co-Branded Account Goal for the given month shall be paid directly to Amazon.com. If in any given month, the new Co-Branded Accounts opened exceed that month's New Account Goal, then NextCard shall pay Amazon.com the Minimum plus the Account Fee for each Co-Branded Account opened in excess of that month's New Account Goal. Payment of Minimums, but not the Account Fees, shall cease upon the earlier of (i) the termination of the Initial Term (unless the Parties agree otherwise), or (ii) the date on which the cumulative New Co-Branded Account Goals for the Initial Term are met (and, if such date occurs in the middle of a month during the Initial Term, a pro-rata Minimum shall apply for such month). No Account Fees above the monthly minimum shall be paid in any given month if the total of all payments made in connection with this Agreement by NextCard to Amazon.com divided by [*] is greater than the total of all Co-Branded Accounts originated up through the date on which such calculation is performed divided by [*]. As an example, if the monthly account goals for a four month period were [*] each month, and the actual accounts achieved were [*] then the payments would be for [*] accounts respectively. As an additional example, if the monthly account goals for a four month period were [*] each month, and the actual accounts achieved were [*] then the payments would be for [*] accounts respectively. 4. Performance. In return for the guaranteed payments received from NextCard, Amazon.com agrees to deliver new co-branded accounts not to be less than [*]% of the goal. If the actual number of new accounts achieved is less than [*]% of the cumulative account goal during four consecutive months, NextCard may suspend additional guaranteed payments to Amazon.com until the actual cumulative number of new accounts reaches [*]% of the original goal level. 5. Notwithstanding any termination for convenience by Amazon.com, on the business day following the third anniversary of the Launch Date, NextCard will pay to An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 29 of 42 30 Amazon.com a first incentive payment equal to the product of (i) [*] dollars [*] and (ii) a fraction, the numerator of which shall be [*], and the denominator of which shall be [*]. For example, if on the third anniversary, NextCard had booked [*] Co-Branded Accounts but the cumulative Co-Branded Account Goal for the first three years of the program was [*], Amazon.com would receive a payment of [*]. Under no circumstances may the first incentive payment by NextCard to Amazon.com, as calculated pursuant to the preceding formula, be greater than [*]. Thus, if in the preceding example, NextCard books [*] accounts, the first incentive payment would be capped at [*]. On the business day following the fifth anniversary of the Launch Date, NextCard will pay to Amazon.com a second incentive payment equal to the product of (i) [*] and (ii) a fraction, the numerator of which shall be [*], and the denominator of which shall be (A) [*] minus (B) [*]. For example, if for years [*] and [*], NextCard books [*] Co-Branded Accounts but the cumulative Co-Branded Account Goal for the [*] years of the program was [*], Amazon.com would receive a payment of [*]. Under no circumstances may the second incentive payment by NextCard to Amazon.com, as calculated pursuant to the preceding formula, be greater than [*] dollars [*]. Thus, if in the preceding example, NextCard books [*] accounts, the second incentive payment would be capped at [*]. No payment shall be made pursuant to this paragraph if Amazon.com has exercised its right to terminate this Agreement due to a breach by NextCard, as set forth in Section 7.2, and elects to purchase the Co-Branded Account portfolio. An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 30 of 42 31 New Account Marketing and Payment Schedule THE FIRST DAY OF MONTH ONE IS CONCURRENT WITH THE "LAUNCH DATE."
YEAR 1 Month 1 2 3 4 5 6 -------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 2 Month -------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 3 Month -------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 4 Month -------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 5 Month -------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*]
YEAR 1 Month 7 8 9 10 11 12 Total ---------------------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 2 Month ---------------------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 3 Month ---------------------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 4 Month ---------------------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*] YEAR 5 Month ---------------------------------------------------------------------------------------------------------- Acct Goal Cum. Goal Min. Pmt [*]
An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 2 of 42 32 SCHEDULE D CARDHOLDER AGREEMENT Refer to Section 1.6 for completion requirements for Schedule D Confidential 33 SCHEDULE E CUSTOMER SERVICE AND ACCOUNT SERVICE PERFORMANCE STANDARDS GENERAL REQUIREMENTS: [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 2 of 42 34 [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 3 of 42 35 [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 4 of 42 36 [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 5 of 42 37 [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 6 of 42 38 [*] An asterisk [*] indicates that certain information has been omitted from this agreement pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. Confidential Page 7 of 42 39 SCHEDULE F FORM OF WARRANT [ATTACHED SEPARATELY] Confidential Page 8 of 42 40 SCHEDULE G OPT OUT PROVISION You agree that NextCard will share certain information relating to your account with Amazon.com. This information will only be shared with Amazon.com and will not be shared with any other party by either NextCard or Amazon.com without your express consent, or as otherwise required by law or to administer your account. Use of this information by Amazon.com will be limited to the marketing of products and services, and will in no way be used in determining your credit worthiness or to evaluate you for any extension of credit. You can opt out of this information sharing by unchecking the checkbox adjacent to this paragraph. You can also change your election at any time in the future by visiting the Customer Service Web Site. Confidential Page 9 of 42 41 SCHEDULE H: TERMS AND CONDITIONS OF LOYALTY PROGRAM Refer to Section 4.1 for completion requirements for Schedule H Confidential Page 10 of 42 EX-10.2 3 WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 10.2 THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS, AND NO INTEREST MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THE SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. No. W- __________ WARRANT TO PURCHASE ISSUED: November 8, 1999 COMMON STOCK Void After November 8, 2002 NEXTCARD, INC. WARRANT THIS IS TO CERTIFY that, for twenty two million five hundred thousand dollars ($22,500,000.00) and other value received and subject to these terms and conditions, Amazon.com, Inc., or such person to whom this Warrant is transferred (the "HOLDER"), is entitled to exercise this Warrant to purchase 4,400,000 fully paid and nonassessable shares of NextCard, Inc., a Delaware corporation (the "COMPANY"), $0.001 par value per share, Common Stock (the "WARRANT STOCK") at a price per share of thirty nine dollars and twenty cents ($39.20) (the "EXERCISE PRICE") (such number of shares, type of security and the Exercise Price being subject to adjustment as provided below), subject to the conditions and terms set forth below. This Warrant is fully vested, non-forfeitable, and immediately exercisable upon issuance. 2 1. METHOD OF EXERCISE 1.1 CASH EXERCISE RIGHT Subject to the terms and conditions set forth herein, this Warrant may be exercised by the Holder, at any time after the date of issuance, but not later than November 8, 2002 (the "EXERCISE PERIOD"), in whole or in part, by delivering to the Company at 595 Market Street, Suite 1800, San Francisco, California 94105 (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company) (a) this Warrant agreement, (b) evidence of a wire transfer to such account as the Company may designate, in the amount of the Exercise Price multiplied by the number of shares for which this Warrant is being exercised (the "PURCHASE PRICE"), and (c) the Notice of Cash Exercise attached as EXHIBIT A duly completed and executed by the Holder. Upon exercise, the Holder shall be entitled to receive from the Company a stock certificate in proper form representing the number of shares of Warrant Stock purchased. 1.2 NET ISSUANCE RIGHT Subject to the terms and conditions set forth in Section 1.3 hereof, notwithstanding the payment provisions set forth above, the Holder may elect to convert this Warrant into shares of Warrant Stock by surrendering this Warrant at the office of the Company at the address set forth in Section 1.1 and delivering to the Company the Notice of Net Issuance Exercise attached as EXHIBIT B duly completed and executed by the Holder, in which case the Company shall issue to the Holder the number of shares of Warrant Stock of the Company equal to the result obtained by (a) subtracting B from A, (b) multiplying the difference by C, and (c) dividing the product by A as set forth in the following equation: (A - B) x C X = ----------- where: A X = the number of shares of Warrant Stock issuable upon net issuance exercise pursuant to the provisions of this Section 1.2. A = the Fair Market Value (as defined below) of one share of Warrant Stock on the date of net issuance exercise. B = the Exercise Price for one share of Warrant Stock under this Warrant. C = the number of shares of Warrant Stock as to which this Warrant is exercisable pursuant to the provisions of Section 1.1. -2- 3 If the foregoing calculation results in a negative number, then no shares of Warrant Stock shall be issued upon net issuance exercise pursuant to this Section 1.2. "FAIR MARKET VALUE" of a share of Warrant Stock shall mean: (a) if the Company's Common Stock (the "COMMON STOCK") is traded on an exchange or is quoted on the Nasdaq National Market, the average of the closing or last sale price reported for the five business days immediately preceding the date of net issuance exercise; (b) if the Company's Common Stock is not traded on an exchange or on the Nasdaq National Market, but is traded in the over-the-counter market, the mean of the closing bid and asked prices reported for the five market days immediately preceding the date of net issuance exercise; (c) if the net issuance exercise is in connection with a transaction specified in Section 4.1, the value of the consideration (determined, in the case of noncash consideration, in good faith by the Company's Board of Directors) to be received pursuant to such transaction by the holder of one share of Warrant Stock; and (d) if the Company is no longer traded on an exchange, the Nasdaq National Market or the over-the-counter market and the net issuance exercise is not in connection with a transaction specified in Section 4.1, the fair value as determined in good faith by the Company's Board of Directors. Upon net issuance exercise in accordance with this Section 1.2, the Holder shall be entitled to receive from the Company a stock certificate in proper form representing the number of shares of Warrant Stock determined in accordance with the foregoing. 2. DELIVERY OF STOCK CERTIFICATES; NO FRACTIONAL SHARES 2.1 Within five days after the payment of the Purchase Price following the exercise of this Warrant (in whole or in part) or after notice of net issuance exercise and compliance with Section 1.2, the Company at its expense shall issue in the name of and deliver to the Holder (a) a certificate or certificates for the number of fully paid and nonassessable shares of Warrant Stock to which the Holder shall be entitled upon such exercise, and (b) a new Warrant of like tenor to purchase up to that number of shares of Warrant Stock, if any, as to which this Warrant has not been exercised if this Warrant has not expired. The Holder shall for all purposes be deemed to have become the holder of record of such shares of Warrant Stock on the date this Warrant was exercised (the date the Holder has fully complied with the requirements of Section 1.1 or 1.2), irrespective of the date of delivery of the certificate or certificates representing the Warrant Stock; provided that, if the date such exercise is made is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of record of such shares of Warrant Stock at the close of business on the next succeeding date on which the stock transfer books are open. -3- 4 2.2 No fractional shares shall be issued upon the exercise of this Warrant. In lieu of fractional shares, the Company shall pay the Holder a sum in cash equal to the Fair Market Value of the fractional shares on the date of exercise. 3. COVENANTS AS TO WARRANT STOCK The Company covenants that at all times during the Exercise Period there shall be reserved for issuance and delivery upon exercise of this Warrant such number of shares of Warrant Stock as is necessary for exercise in full of this Warrant and, from time to time, it will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Warrant Stock. All shares of Warrant Stock issued pursuant to the exercise of this Warrant will, upon their issuance, be validly issued and outstanding, fully paid and nonassessable, free and clear of all liens and other encumbrances or restrictions on sale and free and clear of all preemptive rights, except restrictions arising under federal and state securities laws, or by agreement between the Company and the Holder or its successors. 4. ADJUSTMENTS; TERMINATION OF WARRANT UPON CERTAIN EVENTS 4.1 EFFECT OF REORGANIZATION Upon a merger, consolidation, acquisition of all or substantially all of the property or stock, liquidation or other reorganization of the Company (collectively, a "REORGANIZATION") during the Exercise Period, as a result of which the stockholders of the Company receive cash, stock or other property in exchange for their shares of stock, lawful provision shall be made so that the Holder shall thereafter be entitled to receive, upon exercise of this Warrant during the Exercise Period, the number of shares of securities of the successor corporation resulting from such Reorganization (and cash and other property) to which a holder of the Warrant Stock issuable upon exercise of this Warrant would have been entitled in such Reorganization if this Warrant had been exercised immediately prior to such Reorganization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Warrant with respect to the rights and interest of the Holder after the Reorganization to the end that the provisions of this Warrant (including adjustments of the Exercise Price and the number and type of securities purchasable pursuant to the terms of this Warrant) shall be applicable after that event, as near as reasonably may be, in relation to any shares deliverable after that event upon the exercise of this Warrant. 4.2 ADJUSTMENTS FOR STOCK SPLITS, DIVIDENDS If the Company shall issue any shares of the same class as the Warrant Stock as a stock dividend or subdivide the number of outstanding shares of such class into a greater number of shares, then, in either such case, the Exercise Price in effect before such dividend or subdivision shall be proportionately reduced and the number of shares of Warrant Stock at that time issuable pursuant to the exercise of this Warrant shall be proportionately increased; and, conversely, if the Company shall contract the number of outstanding shares of the same class as the Warrant Stock by combining such shares into a smaller number of shares, then -4- 5 the Exercise Price in effect before such combination shall be proportionately increased and the number of shares of Warrant Stock at that time issuable pursuant to the exercise or conversion of this Warrant shall be proportionately decreased. Each adjustment in the number of shares of Warrant Stock issuable shall be to the nearest whole share. 5. SECURITIES LAWS RESTRICTIONS; LEGEND ON WARRANT STOCK 5.1 This Warrant and the securities issuable upon exercise have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, and no interest in this Warrant or in the Warrant Stock may be sold, distributed, assigned, offered, pledged or otherwise transferred to other than a wholly owned subsidiary of Amazon.com, Inc. unless (a) there is an effective registration statement under such Act and applicable state securities laws covering any such transaction involving said securities, (b) the Company receives an opinion of legal counsel for the holder of the securities satisfactory to the Company stating that such transaction is exempt from registration, or (c) the Company otherwise satisfies itself that such transaction is exempt from registration. 5.2 A legend setting forth or referring to the above restrictions shall be placed on this Warrant, any replacement and any certificate representing the Warrant Stock, and a stop transfer order shall be placed on the books of the Company and with any transfer agent until such securities may be legally sold or otherwise transferred. 6. REGISTRATION RIGHTS The Company shall in good faith use commercially reasonable best efforts to add, within 90 days of the date hereof, the Holder as a party to Third Amended and Restated Investors' Rights Agreement, dated November 5, 1998, between the Company and certain investors of the Company (the "Investors' Rights Agreement"), such that the Warrant Stock shall constitute "Registrable Securities" and the Holder shall constitute an "Investor" (as such terms are defined in the Investors' Rights Agreement), provided, however, that Sections 2, 3 and 4 of the Investors' Rights Agreement shall not apply to the Holder. If after such 90 day period lapses, the Company has been unable to add the Holder as a party to the Investors' Rights Agreement, the Company shall enter into an agreement with the Holder to provide Holder with piggy-back rights as set forth in Section 1.6 of the Investors' Rights Agreement within 45 days of the expiration of such 90 day period. 7. EXCHANGE OF WARRANT; LOST OR DAMAGED WARRANT CERTIFICATE Upon receipt by the Company of satisfactory evidence of the loss, theft, destruction or damage of this Warrant and either (in the case of loss, theft or destruction) reasonable indemnification or (in the case of damage) the surrender of this Warrant for cancellation, the Company will execute and deliver to the Holder, without charge, a new Warrant of like denomination. -5- 6 8. NOTICES OF RECORD DATE, ETC. In the event of (a) any taking by the Company of a record of the holders of securities of the same class as the Warrant Stock for the purpose of determining the holders who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; (b) any reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, or any transfer of all or substantially all the assets of the Company to, or consolidation or merger of, the Company with or into any person; (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; (d) any proposed issue or grant by the Company to the holders of securities of the same class as the Warrant Stock of any shares of stock of any class or any other securities, or any right or warrant to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities; or (e) any other event as to which the Company is required to give notice to any holders of securities of the same class as the Warrant Stock, then and in each such event the Company will mail to the Holder a notice specifying (i) the date on which any such record is to be taken, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as to which the holders of record of securities of the same class as the Warrant Stock or securities into which the Warrant Stock is convertible shall be entitled to exchange their shares for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, (iii) the amount and character of any stock or other securities, or rights or warrants, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made, and (iv) in reasonable detail, the facts, including the proposed date, concerning any other such event. Such notice shall be delivered to the Holder at least 7 business days prior to the record date specified in the notice, unless a different date is proscribed by law. 9. INVESTMENT INTENT Holder makes the investment representations and warranties set forth on Exhibit A attached hereto, which exhibit has been signed by Holder. -6- 7 10. MISCELLANEOUS 10.1 HOLDER AS OWNER The Company may deem and treat the holder of record of this Warrant as the absolute owner for all purposes regardless of any notice to the contrary. 10.2 NO STOCKHOLDER RIGHTS This Warrant shall not entitle the Holder to any voting rights or any other rights as a stockholder of the Company or to any other rights except the rights stated herein; and no dividend or interest shall be payable or shall accrue in respect of this Warrant or the Warrant Stock, until this Warrant is exercised. 10.3 NOTICES Unless otherwise provided, any notice under this Warrant shall be given in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) upon confirmation of receipt by fax by the party to be notified, (c) one business day after deposit with a reputable overnight courier, prepaid for overnight delivery and addressed as set forth in (d), or (d) three days after deposit with the United States Post Office, postage prepaid, registered or certified with return receipt requested and addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by 10 days' advance written notice to the other party given in the foregoing manner. If to the Holder: To the address last furnished in writing to the Company by the Holder If to the Company: NextCard, Inc. Attention: General Counsel 595 Market Street, Suite 1800 San Francisco, California 94105 Facsimile: 415-836-9701 10.4 AMENDMENTS AND WAIVERS Any term of this Warrant may be amended only with the written consent of the Company and the Holder and the observance of any term may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the affected waiving party. Any amendment or waiver effected in accordance with this Section 9.4 shall be binding on each future Holder and the Company. -7- 8 10.5 GOVERNING LAW; JURISDICTION; VENUE This Warrant shall be governed by and construed under the laws of the State of Delaware without regard to principles of conflict of laws. The parties irrevocably consent to the jurisdiction and venue of the United States District Court for the District of Delaware in connection with any action relating to this Warrant. 10.6 SUCCESSORS AND ASSIGNS; TRANSFER Neither party shall have any right or ability to assign, transfer, or sublicense any obligations or benefit under this Warrant without the written consent of the other (and any such attempt shall be void), except that (i) a party will assign and transfer this Warrant and its rights and obligations hereunder to any third party who succeeds to substantially all its business or assets and (ii) the Holder may assign to any direct or indirect wholly-owned subsidiary of the Holder, in each such case the terms and conditions of this Warrant shall inure to the benefit of and be binding on such respective successors and assigns. IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. NEXTCARD, INC. By _________________________________ Name:_______________________________ Title:______________________________ -8- 9 EXHIBIT A NOTICE OF CASH EXERCISE To: NextCard, Inc. The undersigned hereby irrevocably elects to purchase ___________ shares of Common Stock of NextCard, Inc. (the "COMPANY") issuable upon the exercise of the attached Warrant and requests that certificates for such shares be issued in the name of and delivered to the address of the undersigned, at the address stated below and, if said number of shares shall not be all the shares that may be purchased pursuant to the attached Warrant, that a new Warrant evidencing the right to purchase the balance of such shares be registered in the name of, and delivered to, the undersigned at the address stated below. The undersigned agrees with and represents to the Company that said shares of the Common Stock of the Company are acquired for the account of the undersigned for investment and not with a view to, or for sale in connection with, any distribution or public offering within the meaning of the Securities Act of 1933, as amended. Payment enclosed in the amount of $___________. Company Debt canceled in the amount of $__________. Dated: ________________ Name of Holder of Warrant:______________________________________________ (please print) Address:________________________________________________________________ Signature:______________________________________________________________ 10 EXHIBIT B NOTICE OF NET ISSUANCE EXERCISE To: NextCard, Inc. The undersigned hereby irrevocably elects to convert the attached Warrant into such number of shares of common stock of NextCard, Inc. (the "COMPANY") as is determined pursuant to Section 1.2 of the attached Warrant. The undersigned requests that certificates for such net issuance shares be issued in the name of and delivered to the address of the undersigned, at the address stated below. The undersigned agrees with and represents to the Company that said shares of Common Stock of the Company are acquired for the account of the undersigned for investment and not with a view to, or for sale in connection with, any distribution or public offering within the meaning of the Securities Act of 1933, as amended. Dated: ____________________ Name of Holder of Warrant:______________________________________________ (please print) Address:________________________________________________________________ Signature:______________________________________________________________ 11 ASSIGNMENT For value received the undersigned sells, assigns and transfers to the transferee named below the attached Warrant, together with all right, title and interest, and does irrevocably constitute and appoint the transfer agent of NextCard, Inc. (the "COMPANY") as the undersigned's attorney, to transfer said Warrant on the books of the Company, with full power of substitution in the premises. Dated: __________________________ Name of Holder of Warrant:______________________________________________ (please print) Address:________________________________________________________________ Signature:______________________________________________________________ Name of transferee:_____________________________________________________ (please print) Address of transferee:__________________________________________________ 12 EXHIBIT A Investment Representations Amazon.com hereby makes the following certifications and representations with respect to the Warrant. 1. We acknowledge and agree that we will be bound by, and benefit from, all of the terms and conditions of the Warrant. 2. We are an "accredited investor," as that term is defined in Regulation D of the Securities Act of 1933, as amended (the "Securities Act"); 3. We have acquired the Warrant (and would, upon exercise acquire the Warrant Stock) solely for our own account for investment purposes and not with a view to or for the public resale or distribution (within the meaning of the Securities Act) of the Warrant or Warrant Stock or any part thereof. 4. We understand that the Warrant and the Warrant Stock have not been registered under the Securities Act, on the basis that no distribution or public offering of the Warrant or Warrant Stock is to be effected. We realize that the basis for the exemption may not be present if, notwithstanding my representations, we have a present intention of selling, granting a participation in, or otherwise disposing of the same. We have no such intention. 5. We recognize that the Warrant and the Warrant Stock are "restricted securities" as such term is defined in Rule 144 promulgated under the Securities Act ("Rule 144"), and must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. We recognize that the Company has no obligation to comply with any exemption from such registration. 6. We are aware that the Warrant or the Warrant Stock may not be sold pursuant to Rule 144 unless certain condition are met. 7. We acknowledge that we have had ample opportunity to review and analyze all public information, including financial statements, pertaining to the Company's business. -2- 13 8. We understand and agree that all certificates evidencing the Warrant Stock may bear the following legend: "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN TAKEN BY THE ISSUEE FOR INVESTMENT PURPOSES. SAID SHARES MAY NOT BE SOLD OR TRANSFERRED UNLESS (A) THEY HAVE BEEN REGISTERED UNDER SAID ACT, OR (B) THE TRANSFER AGENT (OR THE COMPANY IF THEN ACTING AS ITS OWN TRANSFER AGENT) IS PRESENTED WITH EITHER A WRITTEN OPTION OF COUNSEL SATISFACTORY TO THE COMPANY OR A "NO-ACTION" OR INTERPRETIVE LETTER FROM THE S.E.C. TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE CIRCUMSTANCES OF SUCH SALE OR TRANSFER." By:____________________________ Name:__________________________ Its: __________________________ -3- EX-27.1 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF NEXTCARD, INC. FOR THE QUARTER ENDED SEPTEMBER, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 0 99,534 0 0 0 0 0 268,014 6,178 388,906 2,541 229,129 37,556 11,879 0 0 46 124,576 388,906 7,992 2,585 0 10,577 0 5,762 4,815 5,762 0 54,121 (52,444) (52,444) 0 0 (52,444) (2.11) (2.11) 7.24 0 938 0 0 0 949 0 6,178 6,178 0 0
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